diff --git a/raw/aaer/2021/AAER-4205.txt b/raw/aaer/2021/AAER-4205.txt new file mode 100644 index 0000000000000000000000000000000000000000..11db5e98640a560f0b2f66738b9a3b44df863cf4 --- /dev/null +++ b/raw/aaer/2021/AAER-4205.txt @@ -0,0 +1,412 @@ + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 91186 / February 23, 2021 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4205 / February 23, 2021 + +ADMINISTRATIVE PROCEEDING +File No. 3-20230 + +In the Matter of + +JENNIFER M. STEWART, CPA, + +Respondent. + +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE PROCEEDINGS +PURSUANT TO SECTION 4C OF THE +SECURITIES EXCHANGE ACT OF +1934 AND RULE 102(e) OF THE +COMMISSION’S RULES OF +PRACTICE, MAKING FINDINGS, +AND IMPOSING REMEDIAL +SANCTIONS + + + +I. + The Securities and Exchange Commission (“Commission”) deems it appropriate and in the +public interest that public administrative proceedings be, and hereby are, instituted against Jennifer +M. Stewart (“Stewart” or “Respondent”) pursuant to Section 4C of the Securities Exchange Act of +1934 (“Exchange Act”) and Rule 102(e)(1)(ii) of the Commission’s Rules of Practice. +II. + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”), which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over them and the subject matter of these +proceedings, which are admitted, Respondent consents to the entry of this Order, as set forth +below. + + + +2 + +III. + On the basis of this Order and the Respondent’s Offer, the Commission finds1 that: +A. SUMMARY +1. Starting as early as 2013, the College of New Rochelle (the “College”) began +experiencing considerable financial challenges resulting from declining student enrollment and +decreasing tuition revenues. During fiscal year 2015, the College’s then current Controller, Keith +Borge (“Borge”), engaged in a fraudulent scheme that involved numerous fraudulent +misrepresentations and omissions in order to conceal the College’s financial challenges. +2. KPMG LLP (“KPMG”) was the College’s independent auditor during the relevant +period. For fiscal year 2015, Stewart was the engagement manager assigned to the College’s audit. +In that capacity, Stewart failed to comply with American Institute of Certified Public Accountants +(“AICPA”) auditing standards (“AICPA Standards”) during the College’s fiscal year 2015 audit. +Specifically, Stewart’s violations of the auditing standards stemmed from her failures to: (1) obtain +sufficient appropriate audit evidence; (2) properly prepare audit documentation; (3) properly +examine journal entries for evidence of fraud due to management override; (4) adequately assess +the risk of material misstatement; and, (5) exercise due professional care and professional +skepticism. These numerous and pervasive audit failures significantly reduced the audit team’s +ability to detect Borge’s fraud. +3. Notwithstanding these audit failures, Stewart authorized, and the engagement +partner provided final approval for, the issuance of an audit report for fiscal year 2015 stating that +the audit was performed in accordance with generally accepted auditing standards2 (“GAAS”). +This statement was false in that the audit was not performed in accordance with GAAS. +4. Pursuant to a 1999 bond offering, the College was contractually obligated to +provide annual continuing disclosure information to investors, including audited financial +statements. Stewart should have known that the audit report, along with the College’s fiscal year +2015 financial statements, would be submitted to the Municipal Securities Rulemaking Board +(“MSRB”) for posting in its Electronic Municipal Market Access (“EMMA”) system pursuant to +the College’s annual continuing disclosure requirements. + +1 The findings herein are made pursuant to the Respondent’s Offer of Settlement and are +not binding on any other person or entity in this or any other proceeding. +2 Generally accepted auditing standards for audits of entities not subject to the oversight authority of the +Public Company Accounting Oversight Board (PCAOB) are promulgated by the AICPA. +3 + +B. RESPONDENT +5. Jennifer M. Stewart, age 34, of North Hempstead, New York, is a Certified Public +Accountant (“CPA”) licensed to practice in New York. Stewart began her employment at KPMG +in 2008 as an Associate and was subsequently promoted to Senior Associate in 2010, Manager in +2013 and Senior Manager in 2015. Stewart’s employment with KPMG ended in March 2020. +Stewart served as the KPMG engagement manager on, and authorized the issuance of the audit +report for, the College’s fiscal year 2015 audit engagement. Stewart also served as the KPMG +engagement manager on the College’s audit engagements for fiscal years 2013 and 2014. +C. OTHER RELEVANT ENTITIES +6. KPMG LLP is a Delaware limited liability partnership headquartered in New York +City. KPMG is registered with the PCAOB and is the U.S. member firm of the KPMG global +network of independent member firms affiliated with KPMG International Limited, a private +English company limited by guarantee. KPMG was the College’s auditor for fiscal year 2015. +7. The College of New Rochelle was a private, not-for-profit education corporation +based in New Rochelle, New York, with additional locations in New York City. The College +ceased operations and filed for bankruptcy in September 2019 as a result of its financial challenges. +8. Keith Borge, age 64, of Brooklyn, New York, served as Controller of the College +during fiscal year 2015 and began employment with the College in 1979 as Assistant Controller. +Borge was responsible for perpetrating the fraud described herein. Borge pled guilty to criminal +securities fraud charges on March 28, 2019 and is currently serving a 3-year sentence in federal +prison. On the same day the SEC filed a complaint in the U.S. District Court for the Southern +District of New York against Borge which was subsequently settled on July 2, 2019. +D. FACTS + Borge’s Fraud +9. Starting as early as spring 2013, the College began experiencing financial +challenges resulting from decreases in student enrollment and tuition revenues. To bridge the +increasing gap between the College’s revenues and expenses, Borge began using funds in the +College’s endowment to pay for operating expenses. The consumption of these funds resulted in a +rapid decrease in the College’s net assets, from approximately $30.5 million at the conclusion of +fiscal year 2012 to negative $8.8 million at the conclusion of fiscal year 20153. +10. In order to conceal the precipitous decline in the College’s net assets, Borge +engaged in a fraudulent scheme, the result of which overstated assets and understated liabilities of +the College. For example, Borge intentionally withheld payroll tax remittances from federal, state +and local authorities starting as early as fiscal year 2013. However, instead of reporting the payroll +tax liabilities in the College’s financial statements, Borge recorded a series of improper and + +3 The College’s fiscal year ended on June 30. +4 + +unsupported journal entries, which concealed the payroll tax liabilities in the College’s general +ledger and financial statements. Borge also hid numerous past due vendor invoices in his office, +thereby preventing them from being recorded in the College’s financial statements, and allowed +receivables to be reported at inflated values. +11. As a result of Borge’s fraud, the College’s fiscal year 2015 net assets were +overstated by $33.8 million, an overstatement which impacted virtually every amount reported on +the College’s balance sheet. + KPMG’s Audit of the College’s Fiscal Year 2015 Financial Statements +12. KPMG performed the College’s financial statement audits during the relevant +period culminating with the fiscal year 2015 engagement. Stewart was the engagement manager +for the fiscal year 2015 audit responsible for the day-to-day supervision of the audit team and +executing the audit plan, with a focus on completing work papers and resolving open items. +Stewart was a member of KPMG’s Higher Education, Research and Other Not-For-Profit +(“HERON”) dedicated practice group and had extensive experience auditing higher education and +not-for-profit entities. +13. In the spring of 2015, the KPMG audit team assigned to complete the College’s +2015 audit, including Stewart, met with the College’s management team and presented the audit +plan to the College’s Audit Committee. KPMG’s presentation to the Audit Committee included, +among other things, an audit timeline with fieldwork scheduled to begin in August 2015 and an +expected audit report issuance date of September 2015. +14. Almost from inception, the KPMG audit team encountered significant challenges +primarily due to Borge’s untimely and inaccurate responses to the requests of the audit team. First, +when the audit team arrived to begin fieldwork in August 2015 they discovered large amounts of +information which was scheduled to be available, including the critical trial balance, was not yet +ready. In addition, the information that the College was able to provide, such as supporting +documentation for the College’s investment balances, contained reconciling issues and +contradictions. +15. The significant challenges encountered by the audit team worsened as the audit +progressed. For example, the reconciling issues with the College’s investment balances continued +to persist even after Stewart and the KPMG engagement partner unsuccessfully attempted to +resolve the issue. In other instances Borge, who was the audit team’s primary contact at the +College, took extended periods of leave during critical times in the audit leaving audit team +members without the information necessary to complete the audit. +16. On September 24, 2015, the KPMG engagement partner discussed a draft of the +College’s fiscal year 2015 financial statements with the Audit Committee. Included in the +presentation was a slide explaining that there were still open items and questions that needed to be +addressed prior to KPMG’s issuance of the audit report. Following the Audit Committee +5 + +presentation, Borge failed to provide the audit team with a timely response to the open items and +questions and, as a result, work on the audit stalled. +17. The significant challenges related to Borge’s untimely and inaccurate responses +continued throughout October and November 2015. The challenges to complete the audit became +so significant and pervasive throughout October and November 2015 that audit team members sent +emails to Stewart that Borge “just makes up numbers from his head” and that the financial +statements “are never going to get issued because [Borge] doesn’t care.” Stewart concluded that +these comments were not serious, but failed to communicate the audit team’s escalating concerns +to the engagement partner. +18. Despite the fact that he had not met the audit team’s requests for information, on +November 30, 2015, Borge emailed Stewart notifying her that the College had a deadline to +provide its audited financial statements to its bank and that the College needed KPMG to issue the +audit report that day. In response, Stewart informed Borge that the audit team was still waiting on +open items and questions and that the financial statements needed to be reviewed by the +engagement partner. Stewart also suggested that they schedule a time the following day to resolve +the outstanding issues. +19. Also during the morning of November 30, 2015, the engagement partner received a +telephone voicemail from the President of the College informing him of the bank deadline and the +need for KPMG to issue the College’s audit report that day. Following receipt of that voicemail, +the engagement partner approached Stewart to ask her what needed to be done in order for KPMG +to issue its audit report. During the next few hours Stewart and the engagement partner reviewed +the outstanding open items and unanswered questions and unreasonably concluded that none of the +outstanding items or questions should prevent KPMG from issuing its audit report. As a result, +KPMG issued its audit report containing an unmodified audit opinion on the College’s fiscal year +2015 financial statements by mid-afternoon on November 30, 2015. +20. Although KPMG issued its audit report on November 30, 2015, the audit evidence +at that time was not sufficient to support the audit opinion. The audit team, under Stewart’s +supervision, failed to verify the existence of assets or the completeness of liabilities. In addition, +KPMG’s electronic work paper repository (the “eAudit file”) did not contain any indication that +approximately a third of the work papers had been prepared or reviewed as of November 30, 2015. +21. KPMG’s work on the College’s financial statement audit continued through +January 2016. One audit team member spent 2 ½ days in December 2015 unsuccessfully trying to +locate work papers and address open items and questions. In early January 2016, a new senior +associate was assigned to take over the responsibility to clean-up the audit file but was also unable +to locate all of the missing work papers or address all of the open items and questions. Four +business days before the audit file was required to be closed pursuant to KPMG policies, the new +senior associate emailed Stewart a list of 39 open items as well as 81 additional work papers that +required Stewart’s review. Stewart then marked the work papers as “reviewed” and closed the +audit file on the last day. +6 + +22. A few months after the College’s audit file was closed, the new senior associate +exchanged text messages with Stewart concerning an unrelated audit, saying “at least they are +close to truly done too, and not fake done like the . . . CNR audit.” In November 2016, after +Borge’s fraud was discovered, KPMG withdrew its audit opinion on the College’s FY15 +financial statements. + Failure to Obtain Sufficient Appropriate Audit Evidence +23. GAAS require that auditors should design and perform audit procedures that are +appropriate in the circumstances for the purpose of obtaining sufficient appropriate audit evidence +(AU-C §500). Stewart failed to obtain sufficient appropriate audit evidence during the College’s +fiscal year 2015 audit in multiple areas. +24. For instance, Stewart failed to obtain sufficient appropriate audit evidence to +support the College’s investment balances. During fieldwork the audit team identified reconciling +issues where investment schedules provided by Borge did not tie to the College’s brokerage +statements or the financial statements. In response, Borge informed the audit team that the +reconciling issues were probably due to trades in transit at fiscal year-end. However, the audit +team, under Stewart’s supervision, was never able to successfully reconcile nor did it perform +alternative procedures to substantiate the College’s investment balances reported in the College’s +financial statements. +25. Stewart also failed to obtain sufficient appropriate audit evidence to confirm the +completeness of the College’s accounts payable balance. The College’s accounts payable balance +decreased by 59% in fiscal year 2015. This was due to Borge fraudulently preventing vendor +invoices from being recorded in the College’s accounts payable system. Despite this decrease, the +audit team determined the risk of material misstatement for the College’s accounts payables to be +low, based on its conclusion that “there was very little, if any, change to the characteristics of the +account compared to the prior year.” As a result, the audit team’s ability to detect the fact that +Borge was withholding vendor invoices was significantly reduced. +26. Finally, Stewart failed to obtain sufficient appropriate audit evidence to support the +College’s other accounts receivable balance. Notwithstanding annual increases in the College’s +other accounts receivable balance going back multiple years, KPMG did not test any of the other +accounts receivable to verify its existence during the fiscal year 2015 audit. Instead, KPMG’s +work papers document that $3.9 million of other accounts receivable had been tested in prior years +(some of which dated back to fiscal year 2011) and that the audit team passed on testing the +remaining $1.8 million because the amount was below the performance materiality threshold. It +was later determined that supporting documentation for most of the College’s $5.7 million other +accounts receivable reported in fiscal year 2015 did not exist. + Failure to Properly Prepare Audit Documentation +27. GAAS require that the auditor should prepare audit documentation on a timely +basis. An auditor is required to prepare audit documentation that is sufficient to enable an +7 + +experienced auditor, having no previous connection with the audit, to understand the nature, +timing, and extent of the audit procedures performed, the results of the procedures performed, the +audit evidence obtained and conclusions reached, who performed and reviewed the work and the +date such work was completed (AU-C §230). Finally, AICPA Standards require the auditor’s +opinion to be in written form and dated no earlier than the date on which the auditor has obtained +sufficient appropriate audit evidence on which to base the auditor’s opinion on the financial +statements, including evidence that the audit documentation has been reviewed (AU-C §700). +28. Stewart failed to prepare adequate audit documentation during the College’s fiscal +year 2015 engagement. KPMG manages and monitors the status of its audit documentation +through its eAudit program. As explained above, as of November 30, 2015, the date of the audit +report, approximately a third of the audit work papers were not documented as either being +prepared or reviewed in the eAudit program. In addition, there was no audit evidence outside of +the eAudit program that the work papers that were lacking documentation were in fact reviewed +prior to the date of the audit report. Instead, the process of preparing and reviewing the work +papers that lacked proper documentation as of November 30, 2015 was completed subsequent to +the audit report date. +Failure to Properly Examine Journal Entries for Evidence of Fraud Due to +Management Override +29. GAAS require that the auditor maintain professional skepticism throughout the +audit by recognizing that, regardless of the auditor’s prior experience with the client, the possibility +of a material misstatement due to fraud always exists. As such, the risk of a material misstatement +due to management override is present in all entities and is a significant risk. As a result, auditors +are required to, among other things, select and test journal entries and other adjustments made at +the end of a reporting period (AU-C §240). +30. Stewart failed to comply with this requirement. During the College’s fiscal year +2015 audit, the audit team did not obtain sufficient appropriate audit evidence with respect to +journal entries posted at the end of the fiscal year. As a result, the audit team’s ability to detect the +numerous fraudulent journal entries that Borge posted during the College’s year-end financial +closing process was significantly reduced. +Failure to Adequately Assess the Risks of Material Misstatement +31. GAAS require that the auditor perform risk assessment procedures to provide a +basis for the identification and assessment of risks of material misstatement. Additionally, auditors +are required to revise the risk assessment in circumstances in which the auditor obtains audit +evidence that is inconsistent with the audit evidence on which the auditor originally based the risk +assessment (AU-C §315). +32. Stewart failed to adequately assess and reassess the risks of material misstatement +during the College’s fiscal year 2015 audit. The audit team’s risk analysis appears to have been +performed during previous audits without taking into consideration the College’s current operating +8 + +environment. For example, as described above, despite a 59% decrease in the College’s accounts +payable balance, the audit team assessed a low risk of material misstatement based on its +assessment that “there was very little, if any, change to the characteristics of the account compared +to the prior year.” In addition, amidst increasing challenges primarily related to receiving timely +and credible information from Borge, the audit team never reassessed the risk of material +misstatement during the College’s fiscal year 2015 audit. +Failure to Exercise Due Professional Care and Professional Skepticism +33. GAAS require that the auditor exercise due professional care and professional +skepticism during the planning and performance of an audit (AU-C §200). Professional skepticism +is an attitude that includes a questioning mind, being alert to conditions that may indicate possible +misstatement due to fraud or error, and a critical assessment of audit evidence. +34. Stewart failed to maintain professional skepticism during the planning and +performance of the College’s audit. As previously discussed, Stewart failed to exercise +professional skepticism with respect to the numerous reconciling issues that the audit team had +encountered including the receipt of unreliable audit evidence from Borge. In addition, Stewart +failed to communicate the escalating concerns of the audit team to the engagement partner which +should have prompted additional inquiry, corroboration or analysis. As the audit progressed, and +the audit team continued to encounter challenges with the timing and reliability of the information +received from Borge, Stewart did not respond appropriately in order to obtain sufficient +appropriate audit evidence. +E. VIOLATIONS +35. Section 4C of the Exchange Act and Rule 102(e)(1)(ii) of the Commission’s Rules +of Practice provide, in pertinent part, that the Commission may censure or deny, temporarily or +permanently, the privilege of appearing or practicing before the Commission to any person who is +found by the Commission to have engaged in improper professional conduct. Section 4C(b)(2) +and Rule 102(e)(1)(iv)(B) define improper professional conduct to include the following two types +of negligent conduct: (1) a single instance of highly unreasonable conduct that results in a violation +of applicable professional standards in circumstances in which an accountant knows, or should +know, that heightened scrutiny is warranted; or (2) repeated instances of unreasonable conduct, +each resulting in a violation of applicable professional standards, that indicate a lack of competence +to practice before the Commission. +36. As a result of the conduct described above, Stewart engaged in improper +professional conduct under Section 4C(a)(2) of the Exchange Act and Rule 102(e)(1)(ii) as defined +in Rule 102(e)(1)(iv)(B) of the Commission’s Rules of Practice. + + + + +9 + +F. UNDERTAKING + +37. Stewart undertakes that she shall not serve as the engagement manager, engagement +partner or engagement quality control reviewer in connection with any audit expected to be posted +in EMMA until reinstated to appear before the Commission as an independent accountant. + +38. In determining whether to accept the Offer, the Commission has considered +Stewart’s undertaking. + +IV. + + In view of the foregoing, the Commission deems it appropriate and in the public interest to +impose the sanctions agreed to in Stewart’s Offer. + + Accordingly, it is hereby ORDERED that: + + A. Stewart is suspended from appearing or practicing before the Commission as an +accountant. + +1. After one year from the date of this order, Stewart may request that the +Commission consider her reinstatement by submitting an application (attention: Office of +the Chief Accountant) to resume appearing or practicing before the Commission as: + +a. a preparer or reviewer, or a person responsible for the preparation or +review, of any public company’s financial statements that are filed +with the Commission (other than as a member of an audit committee, +as that term is defined in Section 3(a)(58) of the Exchange Act). +Such an application must satisfy the Commission that Stewart’s work +in her practice before the Commission as an accountant will be +reviewed either by the independent audit committee of the public +company for which she works or in some other acceptable manner, as +long as she practices before the Commission in this capacity; and/or + +b. a preparer or reviewer, or a person responsible for the preparation or +review, of any public company’s financial statements that are filed +with the Commission as a member of an audit committee, as that term +is defined in Section 3(a)(58) of the Exchange Act. Such an +application will be considered on a facts and circumstances basis with +respect to such membership, and the applicant’s burden of +demonstrating good cause for reinstatement will be particularly high +given the role of the audit committee in financial and accounting +matters; and/or + +c. an independent accountant. +10 + + + Such an application must satisfy the Commission that: + +(1) Stewart, or the public accounting firm with which she is +associated, is registered with the PCAOB in accordance +with the Sarbanes-Oxley Act of 2002, and such registration +continues to be effective; + +(2) Stewart, or the registered public accounting firm with +which she is associated, has been inspected by the PCAOB +and that inspection did not identify any criticisms of or +potential defects in Stewart’s or the firm’s quality control +system that would indicate that Stewart will not receive +appropriate supervision; + +(3) Stewart has resolved all disciplinary issues with the +PCAOB, and has complied with all terms and conditions of +any sanctions imposed by the PCAOB (other than +reinstatement by the Commission); and + +(4) Stewart acknowledges her responsibility, as long as she +appears or practices before the Commission as an +independent accountant, to comply with all requirements of +the Commission and the PCAOB, including, but not limited +to, all requirements relating to registration, inspections, +concurring partner reviews and quality control standards. + +2. The Commission will consider an application by Stewart to resume +appearing or practicing before the Commission provided that her state CPA license is +current and she has resolved all other disciplinary issues with the applicable state boards +of accountancy. However, if state licensure is dependent on reinstatement by the +Commission, the Commission will consider an application on its other merits. The +Commission’s review may include consideration of, in addition to the matters referenced +above, any other matters relating to Stewart’s character, integrity, professional conduct or +qualifications to appear or practice before the Commission as an accountant. Whether an +application demonstrates good cause will be considered on a facts and circumstances +basis with due regard for protecting the integrity of the Commission’s processes. + By the Commission. + + + + Vanessa A. Countryman + Secretary \ No newline at end of file diff --git a/raw/aaer/2021/AAER-4206.txt b/raw/aaer/2021/AAER-4206.txt new file mode 100644 index 0000000000000000000000000000000000000000..a0f81116e15425b859eaf1374c8bdf6c3f5e5751 --- /dev/null +++ b/raw/aaer/2021/AAER-4206.txt @@ -0,0 +1,82 @@ + UNITED STATES OF AMERICA + before the + SECURITIES AND EXCHANGE COMMISSION +March 22, 2021 + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 91381 / March 22, 2021 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No.4206 / March 22, 2021 + +Admin. Proc. File No. 3-18292 + + + +In the Matter of + +GREGORY A. WAHL, CPA +MICHAEL DEUTCHMAN, CPA, and +GEORGIA CHUNG, CPA + + +ORDER +GRANTING +PETITION +FOR REVIEW +AND SCHEDULING +BRIEFS + + + + +Pursuant to Commission Rule of Practice 411, +1 the petition of Gregory A. Wahl, CPA, +Michael Deutchman, CPA, and Georgia Chung, CPA for review of the administrative law +judge's initial decision2 is granted. Pursuant to Rule of Practice 411(d),3 the Commission will +determine what sanctions, if any, are appropriate in this matter. +Accordingly, IT IS ORDERED, pursuant to Rule of Practice 450(a),4 that a brief in +support of the petition for review shall be filed by April 21, 2021. A brief in opposition + + +1 17 C.F.R. § 201.411. +2 Gregory A. Wahl, CPA, Michael Deutchman, CPA, and Georgia Chung, CPA , Initial +Decision Release No. 1407 (Feb. 8, 2021), 2021 WL 517421. +3 17 C.F.R. § 201.411(d). +4 17 C.F.R. § 201.450(a). +2 + +shall be filed by May 21, 2021, and any reply brief shall be filed by June 4, 2021.5 P ursuant to +Rule of Practice 180(c),6 failure to file a brief in support of the petition may result in dismissal +of this review proceeding. + +For the Commission, by the Office of the General Counsel, pursuant to delegated +authority. + + + + +Vanessa A. Countryman +Secretary + + +5 As provided by Rule 450(a), no briefs in addition to those specified in this schedule may be +filed without leave of the Commission. Attention is called to Rule of Practice 450(b) and (c), 17 +C.F.R. § 201.450(b) & (c), with respect to content and length limitations, and Rules of Practice +150–153, 17 C.F.R. § 201.150–153, with respect to form and service, as well as the +Commission’s March 18, 2020 order providing further instructions regarding the filing and +service of papers in appeals of initial decision. See In re: Pending Administrative Proceedings, +Exchange Act Release No. 88415, https://www.sec.gov/litigation/opinions/2020/33-10767.pdf +. +Also, the Commission’s Rules of Practice were recently amended to include new e-filing +requirements, which take effect on April 12, 2021. Amendments to the Commission’s Rules of +Practice, Exchange Act Release No. 90442, 2020 WL 7013370 (Nov. 17, 2020), 85 Fed. Reg. +86,464, 86,474 (Dec. 30, 2020), +https://www.govinfo.gov/content/pkg/FR-2020-12-30/pdf/2020- +25747.pdf; see also Instructions for Electronic Filing and Service of Documents in SEC +Administrative Proceedings and Technical Specifications, +https://www.sec.gov/efapdocs/instructions.pdf. The amendments al so impose other obligations +on parties to administrative proceedings such as a new redaction and omission of sensitive +personal information requirement. Amendments to the Commission’s Rules of Practice, 85 Fed. +Reg. at 86,465–81. +6 17 C.F.R. § 201.180(c). \ No newline at end of file diff --git a/raw/aaer/2021/AAER-4209.txt b/raw/aaer/2021/AAER-4209.txt new file mode 100644 index 0000000000000000000000000000000000000000..6a8517e3132ae11fdf33b6f24c3b62995a8c52a9 --- /dev/null +++ b/raw/aaer/2021/AAER-4209.txt @@ -0,0 +1,56 @@ +UNITED STATES OF AMERICA +before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 91540 / April 12, 2021 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4209 / April 12, 2021 + +Admin. Proc. File No. 3-20256 + + +In the Matter of + +CHRISTOPHER E. KNAUTH, CPA + + + + +ORDER REGARDING SERVICE + + +On April 5, 2021, t he Securities and Exchange Commission issued an order instituting an +administrative proceeding (“OIP”) against Christopher E. Knauth, CPA (“Respondent”), +pursuant to Sections 4C and 21C of the Securities Exchange Act of 1934 and Rules 102(e)(1)(ii) +and (iii) of the Commission’s Rules of Practice. 1 It appears that there have been no other filings +in this proceeding since issuance of the OIP, including as to whether the OIP was served upon +Respondent. Accordingly, IT IS ORDERED that the Division of Enforcement file a status report +concerning service of the OIP by April 19, 2021, and every 28 days thereafter until service is +accomplished. +The parties’ attention is called to the Commission’s March 18, 2020 order regarding the +filing and service of papers, which provides that pending further order of the Commission parties +to the extent possible shall submit all filings electronically at apfilings@sec.gov.2 Also, the +Commission’s Rules of Practice were recently amended to include new e -filing requirements, + +1 Christopher E. Knauth, CPA , Exchange Act Release No. 91475, 2021 WL 1297855 (Apr. +5, 2021). +2 Pending Administrative Proceedings , Exchange Act Release No. 88415, 2020 WL +1322001 (Mar. 18, 2020), https://www.sec.gov/litigation/opinions/2020/33-10767.pdf. +2 + +which take effect on April 12, 2021.3 For the Commission, by the Office of General Counsel, +pursuant to delegated authority. + + Vanessa A. Countryman + Secretary + +3 Amendments to the Commission’s Rules of Practice , 85 Fed. Reg. 86,464, 86,474 (Dec. +30, 2020); see also Amendments to the Commission’s Rules of Practice , Exchange Act Release +No. 90442, 2020 WL 7013370 (Nov. 17, 2020); Instructions for Electronic Filing and Service of +Documents in SEC Administrative Proceedings and Technical Specifications , +https://www.sec.gov/efapdocs/instructions.pdf. The amendments also impose other obligations +on parties to administrative proceedings such as a new redaction and omission of sensitive +personal information requirement. Amendments to the Commission’s Rules of Practice, 85 Fed. +Reg. at 86,465–81. \ No newline at end of file diff --git a/raw/aaer/2021/AAER-4210.txt b/raw/aaer/2021/AAER-4210.txt new file mode 100644 index 0000000000000000000000000000000000000000..08476c03ad2f9ecdb53c4fbe1ef59054d8ea0e08 --- /dev/null +++ b/raw/aaer/2021/AAER-4210.txt @@ -0,0 +1,133 @@ + + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +INVESTMENT ADVISERS ACT OF 1940 +Release No. 5723 / April 19, 2021 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4210 / April 19, 2021 + +ADMINISTRATIVE PROCEEDING +File No. 3-20263 + + + +In the Matter of + +Martin Silver, CPA + +Respondent. + + + + + + +ORDER INSTITUTING +ADMINISTRATIVE PROCEEDINGS +PURSUANT TO SECTION 203(f) OF THE +INVESTMENT ADVISERS ACT OF 1940 AND +RULE 102(e)(2) OF THE COMMISSION’S +RULES OF PRACTICE, MAKING FINDINGS, +AND IMPOSING REMEDIAL SANCTIONS + + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate and in the +public interest that public administrative proceedings be, and hereby are, instituted pursuant to +Section 203(f) of the Investment Advisers Act of 1940 (“Advisers Act”) against Martin Silver +(“Respondent”). The Commission also deems it appropriate to issue an order of forthwith +suspension of Respondent pursuant to Rule 102(e)(2) of the Commission’s Rules of Practice [17 +C.F.R. § 201.102(e)(2)].1 + +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer of +Settlement (the “Offer”) which the Commission has determined to accept. Solely for the purpose of +these proceedings and any other proceedings brought by or on behalf of the Commission, or to which +the Commission is a party, Respondent admits the Commission’s jurisdiction over him and the + +1 Rule 102(e)(2) provides in pertinent part: “Any…person who has been convicted of a felony or a +misdemeanor involving moral turpitude shall be forthwith suspended from appearing or practicing before the +Commission.” + 2 +subject matter of these proceedings, and the findings contained in paragraphs III(2) and (4) below, +and consents to the entry of this Order Instituting Administrative Proceedings Pursuant to Section +203(f) of the Investment Advisers Act of 1940 and Rule 102(e)(2) of the Commission’s Rules of +Practice, Making Findings, and Imposing Remedial Sanctions (“Order”), as set forth below. + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds that: + +1. Silver was the founder, chief operating officer, and a fifty-percent owner of +International Investment Group, LLC (“IIG”), a New York-based former registered investment +adviser. Silver has been a certified public accountant licensed in the State of New York. + +2. On April 16, 2021, a judgment was entered by consent against Silver, permanently +enjoining him from future violations of Sections 206(1) and 206(2) of the Advisers Act, Section +17(a) of the Securities Act of 1933, and Section 10(b) of the Securities Exchange Act of 1934 and +Rule 10b-5 thereunder in the civil action entitled Securities and Exchange Commission v. Martin +Silver, Civil Action Number 21-cv-3179 (DLC), in the United States District Court for the +Southern District of New York. + +3. The Commission’s complaint alleged that Silver engaged in a scheme to defraud +IIG’s investment advisory clients. Specifically, the complaint alleged that Silver concealed losses +in the portfolio of its flagship hedge fund by overstating the value of certain defaulted trade finance +loans and by replacing defaulted loans with fake loans. In addition, the complaint alleged that IIG +engaged in a pattern of selling overvalued and/or fake trade finance loans to other investment +advisory clients in order to generate liquidity to meet various payment obligations of the fund, +including redemption requests from earlier investors. + +4. On April 13, 2021, Silver pleaded guilty to one count of securities fraud (15 U.S.C. +§ 78j(b) and 78ff; 17 C.F.R. § 240.10b-5), one count of wire fraud (18 U.S.C. §§ 1343 and 2), and +one count of conspiracy to commit investment adviser fraud, securities fraud, and wire fraud (18 +U.S.C. § 371) in United States v. Martin Silver, Crim. No. 20-cr-360 (AKH) (S.D.N.Y.). + +5. The count of the criminal information to which Silver pled guilty alleged, inter alia, +that Silver engaged in a pattern of selling overvalued and/or fake trade finance loans to investment +advisory clients in order to generate liquidity to meet various payment obligations, including +redemption requests from earlier investors, and that Silver used the mails and other means and +instrumentalities of interstate commerce to execute his scheme. + + + 3 +IV. + + In view of the foregoing, the Commission deems it appropriate and in the public interest to +impose the sanctions agreed to in Respondent Silver’s Offer. + + Accordingly, it is hereby ORDERED pursuant to Section 203(f) of the Advisers Act, that +Respondent Silver be, and hereby is barred from association with any investment adviser, broker, +dealer, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized +statistical rating organization. + +Any reapplication for association by the Respondent will be subject to the applicable laws +and regulations governing the reentry process, and reentry may be conditioned upon a number of +factors, including, but not limited to, compliance with the Commission’s order and payment of any +or all of the following: (a) any disgorgement or civil penalties ordered by a Court against the +Respondent in any action brought by the Commission; (b) any disgorgement amounts ordered +against the Respondent for which the Commission waived payment; (c) any arbitration award +related to the conduct that served as the basis for the Commission order; (d) any self-regulatory +organization arbitration award to a customer, whether or not related to the conduct that served as +the basis for the Commission order; and (e) any restitution order by a self-regulatory organization, +whether or not related to the conduct that served as the basis for the Commission order. + + In view of the foregoing, the Commission also finds that Respondent has been convicted of +a felony within the meaning of Rule 102(e)(2) of the Commission’s Rules of Practice. + + Accordingly, it is hereby ORDERED that Respondent Silver is forthwith suspended from +appearing or practicing before the Commission pursuant to Rule 102(e)(2) of the Commission’s +Rules of Practice. + + By the Commission. + + +Vanessa A. Countryman +Secretary + + \ No newline at end of file diff --git a/raw/aaer/2021/AAER-4211.txt b/raw/aaer/2021/AAER-4211.txt new file mode 100644 index 0000000000000000000000000000000000000000..756372d0140b786087ec9caaa232bf250b68d008 --- /dev/null +++ b/raw/aaer/2021/AAER-4211.txt @@ -0,0 +1,53 @@ +UNITED STATES OF AMERICA +before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 91615 / April 20, 2021 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4211 / April 20, 2021 + +Admin. Proc. File No. 3-20256 + + +In the Matter of + +CHRISTOPHER E. KNAUTH, CPA + + + +ORDER + +On April 5, 2021, the Securities and Exchange Commission issued an order instituting an +administrative proceeding (“OIP”) against Christopher E. Knauth, CPA (“Respondent”), +pursuant to Sections 4C and 21C of the Securities Exchange Act of 1934 and Rules 102(e)(1)(ii) +and (iii) of the Commission’s Rules of Practice. 1 In compliance with the statutory provision +governing cease -and-desist proceedings, the OIP specified that a “public hearing before the +Commission for the purpose of taking evidence . . . shall be convened not earlier than 30 days +and not later than 60 days” from service of the OIP.2 The statute also provides that “an earlier or +later date” for the hearing may be “set by the Commission with the consent of any respondent so +served.”3 +Respondent was served with the OIP on April 13, 2021. As a consequence, in the +absence of Respondent’s consent regarding a later hearing date, a public hearing will be set for a +date on or before June 11, 2021.4 To facilitate the orderly and expeditious resolution of this +matter, it is ORDERED that the parties shall file a statement advising the Commission of any +agreement to a later hearing date (or a statement that no agreement could be reached) by April +27, 2021. In the event the parties do not reach an agreement by that date, this order does not + +1 Christopher E. Knauth, CPA , Exchange Act Release No. 91475, 2021 WL 1297855 (Apr. +5, 2021). +2 Id. at *9. +3 15 U.S.C. § 78u-3(b). +4 June 12, 2021 is a Saturday. +2 + +preclude the parties from reaching such an agreement subsequently. The Commission will +specify further proceedings by subsequent order. +For the Commission, by the Office of the General Counsel, pursuant to delegated +authority. + + + Vanessa A. Countryman + Secretary + \ No newline at end of file diff --git a/raw/aaer/2021/AAER-4213.txt b/raw/aaer/2021/AAER-4213.txt new file mode 100644 index 0000000000000000000000000000000000000000..68037d9342753f22cc3f11ce92fdd27678770079 --- /dev/null +++ b/raw/aaer/2021/AAER-4213.txt @@ -0,0 +1,224 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 91716 / April 29, 2021 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4213 / April 29, 2021 + +ADMINISTRATIVE PROCEEDING +File No. 3-20269 + + +In the Matter of + +TRUTANKLESS, INC., + +Respondent. + + + +ORDER INSTITUTING CEASE-AND- +DESIST PROCEEDINGS PURSUANT TO +SECTION 21C OF THE SECURITIES +EXCHANGE ACT OF 1934, MAKING +FINDINGS, AND IMPOSING A CEASE- +AND-DESIST ORDER + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate that cease- +and-desist proceedings be, and hereby are, instituted pursuant to Section 21C of the Securities +Exchange Act of 1934 (“Exchange Act”), against TruTankless, Inc. (“TruTankless” or +“Respondent”). + +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over it and the subject matter of these +proceedings, which are admitted, Respondent consents to the entry of this Order Instituting Cease- +and-Desist Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934, Making +Findings, and Imposing a Cease-and-Desist Order (“Order”), as set forth below. + + + + + + + 2 + + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds1 that: + +Summary + + 1. These proceedings arise out of the violation of Exchange Act Rule 12b-25, which +requires that issuers that fail to file timely a periodic report shall file a Form 12b-25 “Notification of +Late Filing,” commonly known as “Form NT,” which contains, among other things, reasonable +detail as to why the issuer’s periodic report could not be filed on time and an explanation of any +anticipated, significant changes in the issuer’s results of operations. + + 2. In August 2019, TruTankless violated Rule 12b-25 by filing a Form 12b-25 with the +Commission in which TruTankless failed to disclose why, in sufficient detail under the +circumstances presented, its second-quarter, fiscal year (“FY”) 2019 Form 10-Q could not be timely +filed. TruTankless’s Form 12b-25 also failed to acknowledge anticipated, significant changes in +TruTankless’s results of operations for the second quarter of FY2019, compared with TruTankless’s +operating results in the second quarter of FY2018, and to provide an explanation of the changes, as +required under the rule. Four days after filing its Form 12b-25, TruTankless filed its second-quarter +FY2019 Form 10-Q disclosing to investors and the market a restatement of its financial statements +for the first quarter of FY2019. TruTankless, however, had failed to include in its Form 12b-25 +any disclosure that the discovery, and ongoing correction, of errors in its first-quarter FY2019 +financial statements were among the principal reasons that it was unable to file timely the subject +second-quarter FY2019 Form 10-Q. + +Respondent + +3. TruTankless, a Nevada corporation based in Scottsdale, Arizona, manufactures and +sells whole-house, electric tankless water heaters. TruTankless common stock is registered under +Section 12(g) of the Exchange Act and is quoted on the OTCQB Venture Market. + +Legal Framework and Facts + + 4. Section 13(a) of the Exchange Act and Rules 13a-1 and 13a-13 thereunder require +issuers with a security registered pursuant to Section 12 of the Exchange Act to file with the +Commission annual reports on Form 10-K and quarterly reports on Form 10-Q. + + 5. Rule 12b-25 provides that if an issuer fails to file a Form 10-K or 10-Q within the +time period prescribed for such report, the issuer, no later than one business day after the due date + +1 The findings herein are made pursuant to Respondent's Offer of Settlement and are not binding on any +other person or entity in this or any other proceeding. + + 3 +for such report, shall file a Form 12b-25 with the Commission, disclosing the issuer’s inability +to file the report timely and the reasons therefore in reasonable detail.2 Form 12b-25 requires the +issuer to affirm, among other things, that the subject periodic report will be filed within fifteen +calendar days, for a Form 10-K, or within five calendar days, for a Form 10-Q, of the report’s +prescribed due date, and requires that the report actually be filed within such period. Form 12b-25 +also requires the issuer to confirm whether or not it anticipates that any significant change in +results of operations from the corresponding period for the prior fiscal year will be reflected by the +earnings statements to be included in the subject periodic report. If such change is anticipated, the +issuer must attach a narrative and quantitative explanation of the anticipated change and, if +appropriate, state the reasons why a reasonable estimate of the results cannot be made. + + 6. On August 15, 2019, TruTankless filed with the Commission a Form 12b-25 +disclosing that TruTankless could not file timely its Form 10-Q for its FY2019 second quarter, +ended June 30, 2019, because it had “encountered some difficulty in compiling necessary +disclosures and compilation of its financial statements for review by its independent public +accountant for the quarter ended June 30, 2019.” + + 7. Furthermore, in its Form 12b-25, TruTankless affirmed that it would file the subject +Form 10-Q within the five-calendar-day extension period and indicated that it did not anticipate +that any significant change in results of operations from the corresponding period for the prior +fiscal year would be reflected in the subject Form 10-Q. + + 8. On August 19, 2019, TruTankless filed with the Commission a Form 10-Q for its +FY2019 second-quarter, ended June 30, 2019, disclosing the following restatement: “[TruTankless] +has restated the financial statements for the three months ended March 31, 2019 to correct the +accounting for the conversion of the convertible promissory notes…. [T]he notes holders of +$110,000 of convertible notes originally convertible at $1.00 agreed to convert the notes and +accrued interest of the notes at $0.25. The Company evaluated the adjustment of the conversion +price under ASC 470, and recorded a loss on conversion of $126,813.” This materially increased +TruTankless’s net loss for the first quarter of FY2019 to $1,261,643. + +9. TruTankless’s inability to meet the filing deadline for its second-quarter FY2019 +Form 10-Q was due, in large part, to the discovery, and ongoing correction, of errors in its first- +quarter FY2019 financial statements. In its Form 12b-25, however, TruTankless failed to disclose +this information and failed to provide the detailed narratives and quantitative explanation +specifically called for by the form. The company anticipated that its second-quarter FY2019 +financial results, when reported, would differ significantly from its second-quarter FY2018 +financial results, including a 55% increase in quarterly loss versus second quarter FY2018. + + + + + + +2 Form 12b-25 specifies a “narrative” disclosure. (See Form 12b-25, Part III.) + 4 +Violations + + 10. As a result of the conduct described above, TruTankless violated Section 13(a) of +the Exchange Act and Rule 12b-25 thereunder. + +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent TruTankless’s Offer. + + Accordingly, it is hereby ORDERED that: + + A. Pursuant to Section 21C of the Exchange Act, Respondent TruTankless cease and +desist from committing or causing any violations and any future violations of Section 13(a) of the +Exchange Act and Rule 12b-25 thereunder. + +B. Respondent shall pay civil penalties of $25,000 to the Securities and Exchange +Commission for transfer to the general fund of the United States Treasury, subject to Exchange Act +Section 21F(g)(3). Payment shall be made in the following four installments: (1) $5,000 within 14 +days of entry of this order; (2) $7,500 within 180 days of entry of this order; (3) $6,250 within 270 +days of entry of this order; and (4) $6,250 within 360 days of entry of this order. Payments shall +be applied first to post order interest, which accrues pursuant to 31 U.S.C. 3717. Prior to making +the final payment set forth herein, Respondent shall contact the staff of the Commission for the +amount due. If Respondent fails to make any payment by the date agreed and/or in the amount +agreed according to the schedule set forth above, all outstanding payments under this Order, +including post-order interest, minus any payments made, shall become due and payable +immediately at the discretion of the staff of the Commission without further application to the +Commission. + +Payment must be made in one of the following ways: + +(1) Respondent may transmit payment electronically to the Commission, which +will provide detailed ACH transfer/Fedwire instructions upon request; + +(2) Respondent may make direct payment from a bank account via Pay.gov +through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or + +(3) Respondent may pay by certified check, bank cashier’s check, or United +States postal money order, made payable to the Securities and Exchange +Commission and hand-delivered or mailed to: + +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard + 5 +Oklahoma City, OK 73169 + +Payments by check or money order must be accompanied by a cover letter identifying +TruTankless as a Respondent in these proceedings, and the file number of these proceedings; a +copy of the cover letter and check or money order must be sent to Anita B. Bandy, Associate +Director, Division of Enforcement, Securities and Exchange Commission, 100 F St., NE, +Washington, DC 20549. + + C. Amounts ordered to be paid as civil money penalties pursuant to this Order shall be +treated as penalties paid to the government for all purposes, including all tax purposes. To +preserve the deterrent effect of the civil penalty, Respondent agrees that in any Related Investor +Action, it shall not argue that it is entitled to, nor shall it benefit by, offset or reduction of any +award of compensatory damages by the amount of any part of Respondent’s payment of a civil +penalty in this action (“Penalty Offset”). If the court in any Related Investor Action grants such a +Penalty Offset, Respondent agrees that it shall, within 30 days after entry of a final order granting +the Penalty Offset, notify the Commission's counsel in this action and pay the amount of the +Penalty Offset to the Securities and Exchange Commission. Such a payment shall not be deemed +an additional civil penalty and shall not be deemed to change the amount of the civil penalty +imposed in this proceeding. For purposes of this paragraph, a “Related Investor Action” means a +private damages action brought against Respondent by or on behalf of one or more investors based +on substantially the same facts as alleged in the Order instituted by the Commission in this +proceeding. + + + By the Commission. + + + +Vanessa A. Countryman +Secretary + + + \ No newline at end of file diff --git a/raw/aaer/2021/AAER-4215.txt b/raw/aaer/2021/AAER-4215.txt new file mode 100644 index 0000000000000000000000000000000000000000..c7451290b5fa2e8404237436dc7494d7de497ac1 --- /dev/null +++ b/raw/aaer/2021/AAER-4215.txt @@ -0,0 +1,217 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 91718 / April 29, 2021 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4215 / April 29, 2021 + +ADMINISTRATIVE PROCEEDING +File No. 3-20271 + + +In the Matter of + +ASTA FUNDING, INC., + +Respondent. + + + +ORDER INSTITUTING CEASE-AND- +DESIST PROCEEDINGS PURSUANT TO +SECTION 21C OF THE SECURITIES +EXCHANGE ACT OF 1934, MAKING +FINDINGS, AND IMPOSING A CEASE- +AND-DESIST ORDER + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate that cease- +and-desist proceedings be, and hereby are, instituted pursuant to Section 21C of the Securities +Exchange Act of 1934 (“Exchange Act”), against Asta Funding, Inc. (“Asta” or “Respondent”). + +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over it and the subject matter of these +proceedings, which are admitted, Respondent consents to the entry of this Order Instituting Cease- +and-Desist Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934, Making +Findings, and Imposing a Cease-and-Desist Order (“Order”), as set forth below. + + + + + + + + 2 + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds1 that: + +Summary + + 1. These proceedings arise out of the violation of Exchange Act Rule 12b-25, which +requires that issuers that fail to file timely a periodic report shall file a Form 12b-25 “Notification of +Late Filing,” commonly known as “Form NT,” which contains, among other things, reasonable +detail as to why the issuer’s periodic report could not be filed on time and an explanation of any +anticipated, significant changes in the issuer’s results of operations. + + 2. In May 2020, Asta violated Rule 12b-25 by filing a Form 12b-25 with the +Commission in which Asta failed to disclose why, in sufficient detail under the circumstances +presented, its second-quarter, fiscal year (“FY”) 2020 Form 10-Q could not be timely filed. Asta’s +Form 12b-25 also failed to acknowledge anticipated, significant changes in Asta’s results of +operations for the second quarter of FY2020, compared with Asta’s operating results in the second +quarter of FY2019, and to provide an explanation of the changes, as required under the rule. Eleven +days after filing its Form 12b-25, Asta filed a Form 10-Q disclosing to investors and the market that +the company’s previously issued FY2019 year-end financial statements required corrections. Asta, +however, had failed to include in its Form 12b-25 any disclosure that the discovery, and ongoing +correction, of errors in its FY2019 year-end financial statements were among the principal reasons +that it was unable to file timely the subject Form 10-Q for the second quarter of FY2020. Asta +further failed to file the subject Form 10-Q within the extension period provided by Rule 12b-25. + +Respondent + +3. Asta, a Delaware corporation based in Englewood Cliffs, New Jersey, engages in +the consumer receivables business in the United States, Puerto Rico, and South America. Prior to a +September 2020 going-private transaction, Asta common stock was registered under Section 12(b) +of the Exchange Act and traded on the NASDAQ Global Select Market. + +Legal Framework and Facts + + 4. Section 13(a) of the Exchange Act and Rules 13a-1 and 13a-13 thereunder require +issuers with a security registered pursuant to Section 12 of the Exchange Act to file with the +Commission annual reports on Form 10-K and quarterly reports on Form 10-Q. + + 5. Rule 12b-25 provides that if an issuer fails to file a Form 10-K or 10-Q within the +time period prescribed for such report, the issuer, no later than one business day after the due date + +1 The findings herein are made pursuant to Respondent's Offer of Settlement and are not binding on any +other person or entity in this or any other proceeding. + + 3 +for such report, shall file a Form 12b-25 with the Commission, disclosing the issuer’s inability +to file the report timely and the reasons therefore in reasonable detail.2 Form 12b-25 requires the +issuer to affirm, among other things, that the subject periodic report will be filed within fifteen +calendar days, for a Form 10-K, or within five calendar days, for a Form 10-Q, of the report’s +prescribed due date, and requires that the report actually be filed within such period. Form 12b-25 +also requires the issuer to confirm whether or not it anticipates that any significant change in +results of operations from the corresponding period for the prior fiscal year will be reflected by the +earnings statements to be included in the subject periodic report. If such change is anticipated, the +issuer must attach a narrative and quantitative explanation of the anticipated change and, if +appropriate, state the reasons why a reasonable estimate of the results cannot be made. + + 6. On May 18, 2020, Asta filed with the Commission a Form 12b-25 disclosing that +Asta could not file timely its Form 10-Q for its second fiscal quarter, ended March 31, 2020, “due +to delays experienced in the collection, compilation and analysis of certain information that may be +included in the Quarterly Report.” + + 7. Furthermore, in its Form 12b-25, Asta affirmed that it would file the subject Form +10-Q within the five-calendar-day extension period, i.e., by May 20, 2020, and indicated that it did +not anticipate that any significant change in results of operations from the corresponding period for +the prior fiscal year would be reflected in the subject Form 10-Q. + + 8. On May 29, 2020, i.e., nine days after the five-day extension period had ended, +Asta filed with the Commission its Form 10-Q for the second quarter of FY2020, disclosing that, +“[d]uring the preparation of its Quarterly Report on Form 10-Q for the three and six months ended +March 31, 2020, Asta … determined that certain adjustments were needed to correct the previously +issued September 30, 2019 consolidated financial statements. Specifically, management +determined that it had understated its income taxes payable and related income tax expense from +foreign operations and understated accrued professional fees and related professional fee expense +as of and for the year ended September 30, 2019.” + +9. Asta’s inability to meet the filing deadline for its second-quarter FY2020 Form +10-Q was due, in large part, to the discovery, and ongoing correction, of errors in its FY2019 year- +end financial statements. In its Form 12b-25, however, Asta failed to disclose this information and +failed to provide the detailed narratives and quantitative explanation specifically called for by the +form. The company anticipated that its second-quarter FY2020 financial results, when reported, +would differ significantly from its second-quarter FY2019 financial results, including a 26% +decrease in quarterly revenue and a 96% decrease in quarterly income before income tax versus +second quarter FY2019. + + 10. Additionally, although Asta affirmed in its May 18, 2020 Form 12b-25 that it +would file its third-quarter FY2019 Form 10-Q within five calendar days of the original due date, it +ultimately failed to do so. In fact, Asta did not file the subject Form 10-Q until fourteen calendar +days after the original due date, on May 29, 2020. + +2 Form 12b-25 specifies a “narrative” disclosure. (See Form 12b-25, Part III.) + 4 + +Violations + + 11. As a result of the conduct described above, Asta violated Section 13(a) of the +Exchange Act and Rule 12b-25 thereunder. + +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent Asta’s Offer. + + Accordingly, it is hereby ORDERED that: + + A. Pursuant to Section 21C of the Exchange Act, Respondent Asta cease and desist +from committing or causing any violations and any future violations of Section 13(a) of the +Exchange Act and Rule 12b-25 thereunder. + +B. Respondent shall, within 14 days of the entry of this Order, pay a civil money +penalty in the amount of $50,000.00 to the Securities and Exchange Commission for transfer to the +general fund of the United States Treasury, subject to Exchange Act Section 21F(g)(3). If timely +payment is not made, additional interest shall accrue pursuant to 31 U.S.C. §3717. + +Payment must be made in one of the following ways: + +(1) Respondent may transmit payment electronically to the Commission, which +will provide detailed ACH transfer/Fedwire instructions upon request; + +(2) Respondent may make direct payment from a bank account via Pay.gov +through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or + +(3) Respondent may pay by certified check, bank cashier’s check, or United +States postal money order, made payable to the Securities and Exchange +Commission and hand-delivered or mailed to: + +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + +Payments by check or money order must be accompanied by a cover letter identifying Asta +as a Respondent in these proceedings, and the file number of these proceedings; a copy of the +cover letter and check or money order must be sent to Anita B. Bandy, Associate Director, +Division of Enforcement, Securities and Exchange Commission, 100 F St., NE, Washington, DC +20549. + 5 + + C. Amounts ordered to be paid as civil money penalties pursuant to this Order shall be +treated as penalties paid to the government for all purposes, including all tax purposes. To +preserve the deterrent effect of the civil penalty, Respondent agrees that in any Related Investor +Action, it shall not argue that it is entitled to, nor shall it benefit by, offset or reduction of any +award of compensatory damages by the amount of any part of Respondent’s payment of a civil +penalty in this action (“Penalty Offset”). If the court in any Related Investor Action grants such a +Penalty Offset, Respondent agrees that it shall, within 30 days after entry of a final order granting +the Penalty Offset, notify the Commission's counsel in this action and pay the amount of the +Penalty Offset to the Securities and Exchange Commission. Such a payment shall not be deemed +an additional civil penalty and shall not be deemed to change the amount of the civil penalty +imposed in this proceeding. For purposes of this paragraph, a “Related Investor Action” means a +private damages action brought against Respondent by or on behalf of one or more investors based +on substantially the same facts as alleged in the Order instituted by the Commission in this +proceeding. + + + By the Commission. + + + +Vanessa A. Countryman +Secretary + + + \ No newline at end of file diff --git a/raw/aaer/2021/AAER-4216.txt b/raw/aaer/2021/AAER-4216.txt new file mode 100644 index 0000000000000000000000000000000000000000..3c48c524d1c7dc05a8bc9a2d83ad9fe618f609a7 --- /dev/null +++ b/raw/aaer/2021/AAER-4216.txt @@ -0,0 +1,218 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 91719 / April 29, 2021 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4216 / April 29, 2021 + +ADMINISTRATIVE PROCEEDING +File No. 3-20272 + + +In the Matter of + +IGEN NETWORKS CORP., + +Respondent. + + + +ORDER INSTITUTING CEASE-AND- +DESIST PROCEEDINGS PURSUANT TO +SECTION 21C OF THE SECURITIES +EXCHANGE ACT OF 1934, MAKING +FINDINGS, AND IMPOSING A CEASE- +AND-DESIST ORDER + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate that cease- +and-desist proceedings be, and hereby are, instituted pursuant to Section 21C of the Securities +Exchange Act of 1934 (“Exchange Act”), against Igen Networks Corp. (“Igen” or “Respondent”). + +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over it and the subject matter of these +proceedings, which are admitted, Respondent consents to the entry of this Order Instituting Cease- +and-Desist Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934, Making +Findings, and Imposing a Cease-and-Desist Order (“Order”), as set forth below. + + + + + + + + 2 + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds1 that: + +Summary + + 1. These proceedings arise out of the violation of Exchange Act Rule 12b-25, which +requires that issuers that fail to file timely a periodic report shall file a Form 12b-25 “Notification of +Late Filing,” commonly known as “Form NT,” which contains, among other things, reasonable +detail as to why the issuer’s periodic report could not be filed on time and an explanation of any +anticipated, significant changes in the issuer’s results of operations. + + 2. In May 2020, Igen violated Rule 12b-25 by filing a Form 12b-25 with the +Commission in which Igen failed to disclose why, in sufficient detail under the circumstances +presented, its fiscal year (“FY”) 2019 Form 10-K could not be timely filed. Igen’s Form 12b-25 +also failed to acknowledge anticipated, significant changes in Igen’s results of operations for the +fourth quarter of FY2019, compared with Igen’s operating results in the fourth quarter of FY2018, +and to provide an explanation of the changes, as required under the rule. Two weeks after filing its +Form 12b-25, Igen filed its FY2019 Form 10-K disclosing to investors and the market a restatement +of the company’s year-end financial statements for FY2018. Igen, however, had failed to include +in its Form 12b-25 any disclosure that the discovery, and ongoing correction, of errors in its +FY2018 year-end financial statements were among the principal reasons that it was unable to file +timely the subject FY2019 Form 10-K. + +Respondent + +3. Igen, a Nevada corporation based in Murrieta, California, provides cloud-based +automotive services that include stolen-vehicle protection and real-time updates on driver behavior. +Igen common stock is registered under Section 12(g) of the Exchange Act and is quoted on the +OTCQB Venture Market. + +Legal Framework and Facts + + 4. Section 13(a) of the Exchange Act and Rules 13a-1 and 13a-13 thereunder require +issuers with a security registered pursuant to Section 12 of the Exchange Act to file with the +Commission annual reports on Form 10-K and quarterly reports on Form 10-Q. + + 5. Rule 12b-25 provides that if an issuer fails to file a Form 10-K or 10-Q within the +time period prescribed for such report, the issuer, no later than one business day after the due date +for such report, shall file a Form 12b-25 with the Commission, disclosing the issuer’s inability + +1 The findings herein are made pursuant to Respondent's Offer of Settlement and are not binding on any +other person or entity in this or any other proceeding. + + 3 +to file the report timely and the reasons therefore in reasonable detail.2 Form 12b-25 requires the +issuer to affirm, among other things, that the subject periodic report will be filed within fifteen +calendar days, for a Form 10-K, or within five calendar days, for a Form 10-Q, of the report’s +prescribed due date, and requires that the report actually be filed within such period. Form 12b-25 +also requires the issuer to confirm whether or not it anticipates that any significant change in +results of operations from the corresponding period for the prior fiscal year will be reflected by the +earnings statements to be included in the subject periodic report. If such change is anticipated, the +issuer must attach a narrative and quantitative explanation of the anticipated change and, if +appropriate, state the reasons why a reasonable estimate of the results cannot be made. + + 6. On May 15, 2020, Igen filed with the Commission a Form 12b-25 disclosing that it +could not file timely its Form 10-K for its 2019 fiscal year, ended December 31, 2019, because +Igen was “unable to complete the required compilation, dissemination, and review of all +information required for filing its Form 10-K … within the prescribed time period without undue +hardship and expense.” + + 7. Furthermore, in its Form 12b-25, Igen affirmed that it would file the subject Form +10-K within the fifteen-calendar-day extension period and indicated that it did not anticipate that +any significant change in results of operations from the corresponding period for the prior fiscal +year would be reflected in the subject Form 10-K. + + 8. On May 29, 2020, Igen filed with the Commission its FY2019 Form 10-K, which +disclosed that Igen was restating its 2018 consolidated financial statements because, “[d]uring +2019, we discovered that an accounting error had been made related to the Company not properly +recording contract assets as required under the relevant accounting guidance for revenue +recognition.” The aforementioned restatement resulted in, among other things, material decreases +in Igen’s current and total liabilities. + +9. Igen’s inability to meet the filing deadline for its FY2019 Form 10-K was due, in +large part, to the discovery, and ongoing correction, of errors in its FY2018 year-end financial +statements. In its Form 12b-25, however, Igen failed to disclose this information and failed to +provide the detailed narratives and quantitative explanation specifically called for by the form. The +company anticipated that its fourth-quarter FY2019 financial results, when reported, would differ +significantly from its fourth-quarter FY2018 financial results, including a 158% reduction in +quarterly loss versus fourth quarter FY2018. + +Violations + + 10. As a result of the conduct described above, Igen violated Section 13(a) of the +Exchange Act and Rule 12b-25 thereunder. + + + +2 Form 12b-25 specifies a “narrative” disclosure. (See Form 12b-25, Part III.) + 4 +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent Igen’s Offer. + + Accordingly, it is hereby ORDERED that: + + A. Pursuant to Section 21C of the Exchange Act, Respondent Igen cease and desist +from committing or causing any violations and any future violations of Section 13(a) of the +Exchange Act and Rule 12b-25 thereunder. + +B. Respondent shall pay civil penalties of $25,000 to the Securities and Exchange +Commission for transfer to the general fund of the United States Treasury, subject to Exchange Act +Section 21F(g)(3). Payment shall be made in the following four installments: (1) $5,000 within 14 +days of entry of this order; (2) $7,500 within 180 days of entry of this order; (3) $6,250 within 270 +days of entry of this order; and (4) $6,250 within 360 days of entry of this order. Payments shall +be applied first to post order interest, which accrues pursuant to 31 U.S.C. 3717. Prior to making +the final payment set forth herein, Respondent shall contact the staff of the Commission for the +amount due. If Respondent fails to make any payment by the date agreed and/or in the amount +agreed according to the schedule set forth above, all outstanding payments under this Order, +including post-order interest, minus any payments made, shall become due and payable +immediately at the discretion of the staff of the Commission without further application to the +Commission. + +Payment must be made in one of the following ways: + +(1) Respondent may transmit payment electronically to the Commission, which +will provide detailed ACH transfer/Fedwire instructions upon request; + +(2) Respondent may make direct payment from a bank account via Pay.gov +through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or + +(3) Respondent may pay by certified check, bank cashier’s check, or United +States postal money order, made payable to the Securities and Exchange +Commission and hand-delivered or mailed to: + +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + +Payments by check or money order must be accompanied by a cover letter identifying Igen +as a Respondent in these proceedings, and the file number of these proceedings; a copy of the +cover letter and check or money order must be sent to Anita B. Bandy, Associate Director, + 5 +Division of Enforcement, Securities and Exchange Commission, 100 F St., NE, Washington, DC +20549. + + C. Amounts ordered to be paid as civil money penalties pursuant to this Order shall be +treated as penalties paid to the government for all purposes, including all tax purposes. To +preserve the deterrent effect of the civil penalty, Respondent agrees that in any Related Investor +Action, it shall not argue that it is entitled to, nor shall it benefit by, offset or reduction of any +award of compensatory damages by the amount of any part of Respondent’s payment of a civil +penalty in this action (“Penalty Offset”). If the court in any Related Investor Action grants such a +Penalty Offset, Respondent agrees that it shall, within 30 days after entry of a final order granting +the Penalty Offset, notify the Commission's counsel in this action and pay the amount of the +Penalty Offset to the Securities and Exchange Commission. Such a payment shall not be deemed +an additional civil penalty and shall not be deemed to change the amount of the civil penalty +imposed in this proceeding. For purposes of this paragraph, a “Related Investor Action” means a +private damages action brought against Respondent by or on behalf of one or more investors based +on substantially the same facts as alleged in the Order instituted by the Commission in this +proceeding. + + + By the Commission. + + + +Vanessa A. Countryman +Secretary + + + \ No newline at end of file diff --git a/raw/aaer/2021/AAER-4217.txt b/raw/aaer/2021/AAER-4217.txt new file mode 100644 index 0000000000000000000000000000000000000000..0d36647f784de96340bb4a945dc262e0bef96679 --- /dev/null +++ b/raw/aaer/2021/AAER-4217.txt @@ -0,0 +1,223 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 91721 / April 29, 2021 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4217 / April 29, 2021 + +ADMINISTRATIVE PROCEEDING +File No. 3-20273 + + +In the Matter of + +ROKK3R, INC., + +Respondent. + + + +ORDER INSTITUTING CEASE-AND- +DESIST PROCEEDINGS PURSUANT TO +SECTION 21C OF THE SECURITIES +EXCHANGE ACT OF 1934, MAKING +FINDINGS, AND IMPOSING A CEASE- +AND-DESIST ORDER + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate that cease- +and-desist proceedings be, and hereby are, instituted pursuant to Section 21C of the Securities +Exchange Act of 1934 (“Exchange Act”), against Rokk3r, Inc. (“Rokk3r” or “Respondent”). + +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over it and the subject matter of these +proceedings, which are admitted, Respondent consents to the entry of this Order Instituting Cease- +and-Desist Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934, Making +Findings, and Imposing a Cease-and-Desist Order (“Order”), as set forth below. + + + + + + + + 2 + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds1 that: + +Summary + + 1. These proceedings arise out of the violation of Exchange Act Rule 12b-25, which +requires that issuers that fail to file timely a periodic report shall file a Form 12b-25 “Notification of +Late Filing,” commonly known as “Form NT,” which contains, among other things, reasonable +detail as to why the issuer’s periodic report could not be filed on time and an explanation of any +anticipated, significant changes in the issuer’s results of operations. + + 2. In November 2019, Rokk3r violated Rule 12b-25 by filing a Form 12b-25 with the +Commission in which Rokk3r failed to disclose why, in sufficient detail under the circumstances +presented, its third-quarter, fiscal year (“FY”) 2019 Form 10-Q could not be timely filed. Rokk3r’s +Form 12b-25 also failed to acknowledge anticipated, significant changes in Rokk3r’s results of +operations for the third quarter of FY2019, compared with Rokk3r’s operating results in the third +quarter of FY2018, and to provide an explanation of the changes, as required under the rule. Four +days after filing its Form 12b-25, Rokk3r filed a Form 8-K disclosing to investors and the market +that the company’s financial statements for the first and second quarters of FY2019 could no +longer be relied upon and would be restated. Rokk3r, however, had failed to include in its Form +12b-25 any disclosure that the discovery, and ongoing correction, of errors in prior FY2019 +quarterly financial statements were among the principal reasons that it was unable to file timely the +subject Form 10-Q for the third quarter of FY2019. Additionally, Rokk3r failed to file its Form 8- +K within the required period for filing a Form 8-K under Exchange Act Rule 13a-11. + +Respondent + +3. Rokk3r, a Nevada corporation based in Miami, Florida, provides consulting +services to startup companies. Prior to a May 2020 going-private transaction, Rokk3r common +stock was registered under Section 12(g) of the Exchange Act and quoted on the Pink Open +Market. + +Legal Framework and Facts + + 4. Section 13(a) of the Exchange Act and Rules 13a-1 and 13a-13 thereunder require +issuers with a security registered pursuant to Section 12 of the Exchange Act to file with the +Commission annual reports on Form 10-K and quarterly reports on Form 10-Q. + + +1 The findings herein are made pursuant to Respondent's Offer of Settlement and are not binding on any +other person or entity in this or any other proceeding. + + 3 + 5. Rule 12b-25 provides that if an issuer fails to file a Form 10-K or 10-Q within the +time period prescribed for such report, the issuer, no later than one business day after the due date +for such report, shall file a Form 12b-25 with the Commission, disclosing the issuer’s inability +to file the report timely and the reasons therefore in reasonable detail.2 Form 12b-25 requires the +issuer to affirm, among other things, that the subject periodic report will be filed within fifteen +calendar days, for a Form 10-K, or within five calendar days, for a Form 10-Q, of the report’s +prescribed due date, and requires that the report actually be filed within such period. Form 12b-25 +also requires the issuer to confirm whether or not it anticipates that any significant change in +results of operations from the corresponding period for the prior fiscal year will be reflected by the +earnings statements to be included in the subject periodic report. If such change is anticipated, the +issuer must attach a narrative and quantitative explanation of the anticipated change and, if +appropriate, state the reasons why a reasonable estimate of the results cannot be made. + + 6. Section 13(a) and Rule 13a-11 of the Exchange Act require issuers with a security +registered pursuant to Section 12 of the Exchange Act to file or furnish, as applicable, current +reports with the Commission on Form 8-K. Issuers are required to file a Form 8-K within four +business days after the occurrence of certain events specified in the Form 8-K. Section 4, Item +4.02 of the Form 8-K specifies that if an issuer concludes, or is advised by its auditor, that any +previously issued financial statements required to have been provided should no longer be relied +upon, the issuer shall disclose the event and certain enumerated information on a Form 8-K. + + 7. On November 14, 2019, Rokk3r filed with the Commission a Form 12b-25 +disclosing that Rokk3r could not file timely its Form 10-Q for its third fiscal quarter, ended +September 30, 2019, “due to its delay in compiling financial information required to be included in +its Quarterly Report on Form 10-Q, which delay could not be eliminated by Registrant without +unreasonable effort and expense.” Rokk3r’s disclosure contained no further details regarding the +cited delay. + + 8. Furthermore, in its Form 12b-25, Rokk3r indicated that it did not anticipate that any +significant change in results of operations from the corresponding period for the prior fiscal year +would be reflected in the subject Form 10-Q. + + 9. On November 18, 2019, Rokk3r filed with the Commission a Form 8-K disclosing +that, “[o]n November 8, 2019, the Board of Directors of [Rokk3r] concluded, after review and +discussion with management, that [Rokk3r’s] unaudited condensed consolidated financial +statements for the periods ended March 31, 2019 and June 30, 2019 [i.e., the first and second +quarters of FY2019] … should no longer be relied upon” because Rokk3r had incorrectly +accounted, in those financial statements, for variable interest entities. The November Form 8-K +disclosed material changes to Rokk3r’s total assets, total revenues, net loss, and stockholders’ +equity. Rokk3r’s auditor, on November 5, 2019, had raised the issue which led to Rokk3r’s +restatement of financial results. Rokk3r failed to file its Form 8-K within the required statutory +period. + + +2 Form 12b-25 specifies a “narrative” disclosure. (See Form 12b-25, Part III.) + 4 +10. Rokk3r’s inability to meet the filing deadline for its third-quarter FY2019 Form +10-Q was due, in large part, to the discovery, and ongoing correction, of errors in its first-quarter +and second-quarter FY2019 financial statements. In its Form 12b-25, however, Rokk3r failed to +disclose this information and failed to provide the detailed narratives and quantitative explanation +specifically called for by the form. The company anticipated that its third-quarter FY2019 +financial results, when reported, would differ significantly from its third-quarter FY2018 financial +results, including a greater than 60% increase in quarterly loss versus third quarter FY2018. + +Violations + + 11. As a result of the conduct described above, Rokk3r violated Section 13(a) of the +Exchange Act and Rules 12b-25 and 13a-11 thereunder. + +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent Rokk3r’s Offer. + + Accordingly, it is hereby ORDERED that: + + A. Pursuant to Section 21C of the Exchange Act, Respondent Rokk3r cease and desist +from committing or causing any violations and any future violations of Section 13(a) of the +Exchange Act and Rules 12b-25 and 13a-11 thereunder. + +B. Respondent shall, within 14 days of the entry of this Order, pay a civil money +penalty in the amount of $50,000.00 to the Securities and Exchange Commission for transfer to the +general fund of the United States Treasury, subject to Exchange Act Section 21F(g)(3). If timely +payment is not made, additional interest shall accrue pursuant to 31 U.S.C. §3717. + +Payment must be made in one of the following ways: + +(1) Respondent may transmit payment electronically to the Commission, which +will provide detailed ACH transfer/Fedwire instructions upon request; + +(2) Respondent may make direct payment from a bank account via Pay.gov +through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or + +(3) Respondent may pay by certified check, bank cashier’s check, or United +States postal money order, made payable to the Securities and Exchange +Commission and hand-delivered or mailed to: + +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard + 5 +Oklahoma City, OK 73169 + +Payments by check or money order must be accompanied by a cover letter identifying +Rokk3r as a Respondent in these proceedings, and the file number of these proceedings; a copy of +the cover letter and check or money order must be sent to Anita B. Bandy, Associate Director, +Division of Enforcement, Securities and Exchange Commission, 100 F St., NE, Washington, DC +20549. + + C. Amounts ordered to be paid as civil money penalties pursuant to this Order shall be +treated as penalties paid to the government for all purposes, including all tax purposes. To +preserve the deterrent effect of the civil penalty, Respondent agrees that in any Related Investor +Action, it shall not argue that it is entitled to, nor shall it benefit by, offset or reduction of any +award of compensatory damages by the amount of any part of Respondent’s payment of a civil +penalty in this action (“Penalty Offset”). If the court in any Related Investor Action grants such a +Penalty Offset, Respondent agrees that it shall, within 30 days after entry of a final order granting +the Penalty Offset, notify the Commission's counsel in this action and pay the amount of the +Penalty Offset to the Securities and Exchange Commission. Such a payment shall not be deemed +an additional civil penalty and shall not be deemed to change the amount of the civil penalty +imposed in this proceeding. For purposes of this paragraph, a “Related Investor Action” means a +private damages action brought against Respondent by or on behalf of one or more investors based +on substantially the same facts as alleged in the Order instituted by the Commission in this +proceeding. + + + By the Commission. + + + +Vanessa A. Countryman +Secretary + + + \ No newline at end of file diff --git a/raw/aaer/2021/AAER-4219.txt b/raw/aaer/2021/AAER-4219.txt new file mode 100644 index 0000000000000000000000000000000000000000..644c68aaa6a501ef4589d21686105d62e0653660 --- /dev/null +++ b/raw/aaer/2021/AAER-4219.txt @@ -0,0 +1,252 @@ +UNITED STATES OF AMERICA +Bef or e the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 91723 / April 29, 2021 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4219 / April 29, 2021 + +ADMINISTRATIVE PROCEEDING +File No. 3-20275 + + +In the Matter of + +HQDA ELDERLY LIFE +NETWORK, CORP., + +Respondent. + + +CORRECTED ORDER INSTITUTING +CEASE-AND-DESIST PROCEEDINGS +PURSUANT TO SECTION 21C OF THE +SECURITIES EXCHANGE ACT OF 1934, +MAKING FINDINGS, AND IMPOSING A +CEASE-AND-DESIST ORDER + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate that cease- +and-desist proceedings be, and hereby are, instituted pursuant to Section 21C of the Securities +Exchange Act of 1934 (“Exchange Act”), against HQDA Elderly Life Network, Inc. (“HQDA” or +“Respondent”). + +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over it and the subject matter of these +proceedings, which are admitted, Respondent consents to the entry of this Order Instituting Cease- +and-Desist Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934, Making +Findings, and Imposing a Cease-and-Desist Order (“Order”), as set forth below. + + + + + + + 2 + + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds1 that: + +Summary + + 1. These proceedings arise out of the violation of Exchange Act Rule 12b-25, which +requires that issuers that fail to file timely a periodic report shall file a Form 12b-25 “Notification of +Late Filing,” commonly known as “Form NT,” which contains, among other things, reasonable +detail as to why the issuer’s periodic report could not be filed on time and an explanation of any +anticipated, significant changes in the issuer’s results of operations. + + 2. In November 2019 and again in February 2020, HQDA violated Rule 12b-25 by +filing a Form 12b-25 with the Commission in which HQDA failed to disclose why, in sufficient +detail under the circumstances presented, its Form 10-Q could not be timely filed. In both instances, +HQDA’s Form 12b-25 also failed to acknowledge anticipated, significant changes in HQDA’s +results of operations for the fiscal quarter covered by the Form 10-Q compared with HQDA’s +operating results in the same quarter of the prior fiscal year, and to provide an explanation of the +changes, as required under the rule. Also, in both instances, days after filing its Form 12b-25, +HQDA filed a Form 10-Q disclosing to investors and the market a restatement of the company’s +financial statements for a prior fiscal quarter. HQDA, however, had failed to include in its Form +12b-25 any disclosure that the discovery, and ongoing correction, of errors in prior quarterly +financial statements were among the principal reasons that it was unable to file timely the subject +Forms 10-Q. + +Respondent + +3. HQDA, a Nevada corporation based in Rosemead, California, focuses on senior +housing and retirement services and products in China. HQDA common stock is registered under +Section 12(g) of the Exchange Act and is quoted on the OTCQB Venture Market. + +Le gal Frame work and Facts + + 4. Section 13(a) of the Exchange Act and Rules 13a-1 and 13a-13 thereunder require +issuers with a security registered pursuant to Section 12 of the Exchange Act to file with the +Commission annual reports on Form 10-K and quarterly reports on Form 10-Q. + + 5. Rule 12b-25 provides that if an issuer fails to file a Form 10-K or 10-Q within the +time period prescribed for such report, the issuer, no later than one business day after the due date + +1 The findings herein are m ade pursuant to Respondent's Offer of Settlem ent and are not binding on any +other person or entity in this or any other proceeding. + + 3 +for such report, shall file a Form 12b-25 with the Commission, disclosing the issuer’s inability +to file the report timely and the reasons therefore in reasonable detail.2 Form 12b-25 requires the +issuer to affirm, among other things, that the subject periodic report will be filed within fifteen +calendar days, for a Form 10-K, or within five calendar days, for a Form 10-Q, of the report’s +prescribed due date, and requires that the report actually be filed within such period. Form 12b-25 +also requires the issuer to confirm whether or not it anticipates that any significant change in +results of operations from the corresponding period for the prior fiscal year will be reflected by the +earnings statements to be included in the subject periodic report. If such change is anticipated, the +issuer must attach a narrative and quantitative explanation of the anticipated change and, if +appropriate, state the reasons why a reasonable estimate of the results cannot be made. + + 6. On November 13, 2019, HQDA filed with the Commission a Form 12b-25 +disclosing that HQDA could not file timely its Form 10-Q for its fiscal quarter, ended September +30, 2019, because it “was unable to compile the necessary financial information required to prepare +a complete filing. Thus, the Company would be unable to file the periodic report in a timely +manner without unreasonable effort or expense.” + + 7. Furthermore, in its Form 12b-25, HQDA affirmed that it would file the subject +Form 10-Q within the five-calendar-day extension period and indicated that it did not anticipate +that any significant change in results of operations from the corresponding period for the prior +fiscal year would be reflected in the subject Form 10-Q. + + 8. On November 19, 2019, HQDA filed with the Commission a Form 10-Q for its +fiscal year (“FY”) 2020 first quarter, ended September 30, 2019, disclosing the following +restatement: “On September 4, 2018, the Company completed an issuance of 41,731,867 shares at +$0.15 per share for total proceeds of $6,259,780 to a Chinese company by a private placement. +Following the completion of the transaction, … the Company recorded $27,125,714 of stock-based +compensation…. However, since the private placement agreement was signed in April 2018 when +the share price value was $0.15 and could not be closed until September 2018 when the share price +was $0.80, this should not be a stock-based compensation. The Company also recorded $68,613 in +expenses for payments made to a vendor for development of the Company’s website for the three +months ended September 30, 2018. This should have been classified as prepaid asset and not an +expense. The Company determined that it would be appropriate to correct those errors.” + +9. HQDA’s inability to meet the filing deadline for its first-quarter FY2020 Form +10-Q was due, in large part, to the discovery, and ongoing correction, of errors in its first-quarter +FY2019 financial statements. In its Form 12b-25, however, HQDA failed to disclose this +information and failed to provide the detailed narratives and quantitative explanation specifically +called for by the form. The company anticipated that its first-quarter FY2020 financial results, +when reported, would differ significantly from its first-quarter FY2019 financial results, including +a 310% increase in revenue and a 97% decrease in loss versus the newly-restated first-quarter +FY2018 results. + + +2 Form 12b-25 specifies a “narrative” disclosure. (See Form 12b-25, Part III.) + 4 + 10. On February 14, 2020, HQDA filed with the Commission a second Form 12b-25, +disclosing that HQDA could not file timely its Form 10-Q for its fiscal quarter, ended September +30, 2019, because, using language identical to that used in the first Form 12b-25, HQDA “was +unable to compile the necessary financial information required to prepare a complete filing. Thus, +the Company would be unable to file the periodic report in a timely manner without unreasonable +effort or expense.” + + 11. Furthermore, in the second Form 12b-25, HQDA again affirmed that it would file +the subject Form 10-Q within the five-calendar-day extension period and indicated that it did not +anticipate that any significant change in results of operations from the corresponding period for the +prior fiscal year would be reflected in the subject Form 10-Q. + + 12. On February 19, 2020, HQDA filed with the Commission a Form 10-Q for its +FY2020 second quarter, ended December 31, 2019, disclosing the following restatement: “For +three and six months ended December 31, 2018, the Company did not record the loss generated +from foreign currency transactions in the amounts of $460,133. The Company determined that they +would be appropriate to correct those errors.” + + 13. HQDA’s inability to meet the filing deadline for its second-quarter FY2020 Form +10-Q was due, in large part, to the discovery, and ongoing correction, of errors in its second- +quarter FY2019 financial statements. In its Form 12b-25, however, HQDA failed to disclose this +information and failed to provide the detailed narratives and quantitative explanation specifically +called for by the form. The company anticipated that its second-quarter FY2020 financial results, +when reported, would differ significantly from its second-quarter FY2019 financial results, +including a 224% increase in revenue and an 87% decrease in loss versus the newly-restated +second-quarter FY2018 results. + +Violations + + 14. As a result of the conduct described above, HQDA violated Section 13(a) of the +Exchange Act and Rule 12b-25 thereunder. + +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent HQDA’s Offer. + + Accordingly, it is hereby ORDERED that: + + A. Pursuant to Section 21C of the Exchange Act, Respondent HQDA cease and desist +from committing or causing any violations and any future violations of Section 13(a) of the +Exchange Act and Rule 12b-25 thereunder. + +B. Respondent shall, within 14 days of the entry of this Order, pay a civil money +penalty in the amount of $50,000 to the Securities and Exchange Commission for transfer to the + 5 +general fund of the United States Treasury, subject to Exchange Act Section 21F(g)(3). Payment +shall be made in the following four installments: (1) $10,000 within 14 days of entry of this order; +(2) $15,000 within 180 days of entry of this order; (3) $12,500 within 270 days of entry of this +order; and (4) $12,500 within 360 days of entry of this order. Payments shall be applied first to +post order interest, which accrues pursuant to 31 U.S.C. 3717. Prior to making the final payment +set forth herein, Respondent shall contact the staff of the Commission for the amount due. If +Respondent fails to make any payment by the date agreed and/or in the amount agreed according to +the schedule set forth above, all outstanding payments under this Order, including post-order +interest, minus any payments made, shall become due and payable immediately at the discretion of +the staff of the Commission without further application to the Commission. + +Payment must be made in one of the following ways: + +(1) Respondent may transmit payment electronically to the Commission, which +will provide detailed ACH transfer/Fedwire instructions upon request; + +(2) Respondent may make direct payment from a bank account via Pay.gov +through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or + +(3) Respondent may pay by certified check, bank cashier’s check, or United +States postal money order, made payable to the Securities and Exchange +Commission and hand-delivered or mailed to: + +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + +Payments by check or money order must be accompanied by a cover letter identifying +HQDA as a Respondent in these proceedings, and the file number of these proceedings; a copy of +the cover letter and check or money order must be sent to Anita B. Bandy, Associate Director, +Division of Enforcement, Securities and Exchange Commission, 100 F St., NE, Washington, DC +20549. + + C. Amounts ordered to be paid as civil money penalties pursuant to this Order shall be +treated as penalties paid to the government for all purposes, including all tax purposes. To +preserve the deterrent effect of the civil penalty, Respondent agrees that in any Related Investor +Action, it shall not argue that it is entitled to, nor shall it benefit by, offset or reduction of any +award of compensatory damages by the amount of any part of Respondent’s payment of a civil +penalty in this action (“Penalty Offset”). If the court in any Related Investor Action grants such a +Penalty Offset, Respondent agrees that it shall, within 30 days after entry of a final order granting +the Penalty Offset, notify the Commission's counsel in this action and pay the amount of the +Penalty Offset to the Securities and Exchange Commission. Such a payment shall not be deemed + 6 +an additional civil penalty and shall not be deemed to change the amount of the civil penalty +imposed in this proceeding. For purposes of this paragraph, a “Related Investor Action” means a +private damages action brought against Respondent by or on behalf of one or more investors based +on substantially the same facts as alleged in the Order instituted by the Commission in this +proceeding. + + + By the Commission. + + + +Vanessa A. Countryman +Secretary + + + \ No newline at end of file diff --git a/raw/aaer/2021/AAER-4220.txt b/raw/aaer/2021/AAER-4220.txt new file mode 100644 index 0000000000000000000000000000000000000000..977c2a6cf37e0a8a2c5e81d1592f45e6e8d5e74d --- /dev/null +++ b/raw/aaer/2021/AAER-4220.txt @@ -0,0 +1,468 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES ACT OF 1933 +Release No. 10940 / May 3, 2021 + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 91741 / May 3, 2021 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4220 / May 3, 2021 + +ADMINISTRATIVE PROCEEDING +File No. 3-20278 + + +In the Matter of + +UNDER ARMOUR, INC., + +Respondent. + + + +ORDER INSTITUTING CEASE-AND- +DESIST PROCEEDINGS PURSUANT TO +SECTION 8A OF THE SECURITIES ACT +OF 1933 AND SECTION 21C OF THE +SECURITIES EXCHANGE ACT OF 1934, +MAKING FINDINGS, AND IMPOSING A +CEASE-AND-DESIST ORDER + +I. +The Securities and Exchange Commission (“Commission”) deems it appropriate that cease- +and-desist proceedings be, and hereby are, instituted pursuant to Section 8A of the Securities Act of +1933 (“Securities Act”) and Section 21C of the Securities Exchange Act of 1934 (“Exchange Act”) +against Under Armour, Inc. (“Under Armour” or “Respondent”). +II. +In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”), which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the +findings herein, except as to the Commission’s jurisdiction over it and the subject matter of these +proceedings, which is admitted, Respondent consents to the entry of this Order Instituting Cease- +and-Desist Proceedings Pursuant to Section 8A of the Securities Exchange Act of 1933 and +Section 21C of the Securities Exchange Act of 1934, Making Findings, and Imposing a Cease- +and-Desist Order (“Order”), as set forth below. + + 2 +III. +On the basis of this Order and Respondent’s Offer, the Commission finds1 that: +Summary +1. This matter concerns Under Armour’s failure to disclose material information +about its revenue management practices that rendered statements it made misleading. Since +becoming a publicly traded company, Under Armour has emphasized its consistent revenue +growth, and regularly reported revenue and revenue growth that exceeded analysts’ consensus +estimates (“analysts’ revenue estimates”). For 26 consecutive quarters, beginning in the second +quarter of 2010, Under Armour’s reported year-over-year revenue growth exceeded 20%, and +Under Armour repeatedly highlighted this growth streak in earnings calls and earnings releases. +2. By the second half of 2015, Under Armour’s internal revenue and revenue growth +forecasts for the third and fourth quarters of 2015 began to indicate shortfalls from analysts’ +revenue estimates. Concerned about the possible negative impact on the company’s stock price +that could result from missing these estimates, Under Armour sought to accelerate, or “pull +forward,” existing orders that customers had requested be shipped in future quarters that could be +completed in the current quarter to close the gap between its internal forecasts and analysts’ +revenue estimates. To effectuate this, Under Armour typically asked customers to accept +shipment of certain products in the current quarter that they had already ordered for delivery in +the next quarter. +3. For six consecutive quarters from the third quarter of 2015 through the fourth +quarter of 2016 (the “Relevant Period”), Under Armour used pull forwards to help it meet +analysts’ revenue estimates. During the Relevant Period, Under Armour pulled forward +approximately $408 million in orders. Under Armour’s failure to disclose to investors the impact +of its pull forward practices was misleading.2 Without these pull forwards each quarter, Under +Armour would have missed analysts’ revenue estimates throughout the Relevant Period, and +would have missed its better than 20% revenue growth streak in the fourth quarter of 2015 and +the third quarter of 2016. On January 31, 2017, the day Under Armour announced that it missed +analysts’ revenue estimates for the fourth quarter and full-year 2016, the company’s stock price +dropped by approximately 23%. Under Armour’s year-over-year growth rate for each quarter has +remained in the single digits or negative since that time. +4. As a result of Under Armour’s failure to disclose the impact of its pull forward +practice on revenue growth, Under Armour’s public statements were materially misleading. In +particular, throughout the Relevant Period, Under Armour made positive statements regarding its +revenue growth rate and the factors contributing to the revenue growth rate, without disclosing +the significant impact on revenue from its use of pull forwards. Under Armour also failed to + +1 The findings herein are made pursuant to Respondent’s Offer and are not binding on any other +person or entity in this or any other proceeding. +2 This Offer does not make any findings that revenue from these sales was not recorded in +accordance with generally accepted accounting principles (“GAAP”). + 3 +disclose that the sales that had been pulled forward were no longer available in the future quarter. +This practice raised significant uncertainty that Under Armour would meet its revenue guidance +in future quarters. +5. As a result of such conduct, and as described in more detail below, Under Armour +violated Sections 17(a)(2) and 17(a)(3) of the Securities Act and Section 13(a) of the Exchange +Act and Rules 13a-1, 13a-11, 13a-13, and 12b-20 thereunder. +Respondent +6. Under Armour, Inc., a Maryland corporation headquartered in Baltimore, is +primarily engaged in the development, marketing, and wholesale and retail distribution of +branded performance apparel, footwear, and accessories. Under Armour is a reporting company +with two classes of common stock registered with the Commission under Section 12(b) of the +Exchange Act. Both classes of common stock are listed on the New York Stock Exchange under +the current ticker symbols “UA” and “UAA.” +Under Armour Used Pull Forwards to Meet Analysts’ Revenue Estimates + +7. For 26 consecutive quarters, beginning in the second quarter of 2010 through the +third quarter of 2016, Under Armour reported year-over-year revenue growth in excess of 20%. + +8. However, by mid-2015, Under Armour’s Financial Planning & Analysis group +(“FP&A group”) identified that the revenue growth rate in the company’s largest market, North +America, was not as strong as in previous years. For example, in April and May 2015, the FP&A +group alerted senior management that sales projections for the year in wholesale apparel, which +was Under Armour’s largest product category in North America, had declined by $120 million +compared to the internal projections generated in late 2014. By the third quarter of 2015, Under +Armour’s senior management also understood that warmer weather was negatively impacting +sales of higher priced cold weather apparel within North America. + +9. Starting in the third quarter of 2015, Under Armour’s internally projected +company-wide revenue began to fall short of analysts’ revenue estimates. To close the emerging +revenue gap, Under Armour’s senior management directed the FP&A group and senior sales +personnel, among other things, to identify existing orders that customers had requested be +shipped in the next quarter that could instead be shipped in the current quarter. + +10. For each quarter during the Relevant Period, Under Armour’s projected revenue +growth from sales for which shipment was originally requested in the quarter continued to miss +analysts’ revenue estimates, and senior management reacted by directing the FP&A group and +sales personnel to execute additional pull forward sales to meet analysts’ revenue estimates. This +resulted in, among other things, Under Armour’s periodic use of sales incentives, such as +extended payment terms and discounts, to convince customers to agree to take Under Armour +product the quarter before the customer had requested shipment. + + 4 +11. During each quarter of the Relevant Period, Under Armour would have missed +analysts’ revenue estimates without its use of pull forwards. In addition, without the use of pull +forwards, Under Armour’s year-over-year revenue growth would not have exceeded 20% in the +fourth quarter of 2015, the first time this would have occurred since 2010, and the third quarter +of 2016. + +12. Under Armour used pull forwards in the following quarters, and in the following +ways: + +Third Quarter 2015 +13. By the third quarter of 2015, Under Armour knew that its full-year internal +projections for company-wide revenue had declined from its late 2014 forecast, including a $120 +million decline in sales projections for its largest market category, North American wholesale +apparel. In September 2015, senior management and the FP&A group decided to close the gap +between internally forecasted revenue and analysts’ revenue estimates, in part, by using pull +forwards, so the FP&A group directed sales personnel to reach out to customers to request that +they take delivery of product earlier than originally scheduled. +14. Ultimately, Under Armour pulled forward approximately $45 million in orders +from the fourth quarter of 2015 into the third quarter of 2015. On October 22, 2015, Under +Armour announced revenue of $1.204 billion for the third quarter of 2015, beating analyst +consensus by $29 million. +15. In its third quarter 2015 earnings call, earnings release (included in the Form 8-K +Under Armour filed with the Commission on October 22, 2015), and Form 10-Q, Under Armour +highlighted its reported 28% revenue growth that beat analysts’ revenue estimates, attributing the +growth primarily to innovative new product offerings, “a growing interest in performance +products and the strength of the Under Armour brand in the marketplace,” and increased sales in +footwear and apparel. +16. Under Armour did not disclose that it used pull forwards, despite the fact that +nearly 4% of its total revenue for the third quarter of 2015 (approximately $45 million) resulted +from the practice. Without the pull forwards from the fourth quarter of 2015, Under Armour’s +growth rate for the third quarter of 2015 would have been below analysts’ revenue estimates and +the lowest quarterly growth rate in more than two years. +Fourth Quarter 2015 +17. During the fourth quarter of 2015, Under Armour’s internal projections for +quarterly and full-year company-wide revenue continued to decline. Senior management knew +that this decline in projected revenue meant the company could fall below analysts’ revenue +estimates, and directed sales personnel to pull forward 2016 orders into 2015. +18. Ultimately, Under Armour pulled forward approximately $99 million in orders +from the first quarter of 2016 into the fourth quarter of 2015, again representing the largest + 5 +amount Under Armour had pulled forward in one quarter to date. On January 28, 2016, Under +Armour announced revenue of $1.171 billion for the fourth quarter of 2015, beating consensus +estimates by $53 million. +19. In its fourth quarter 2015 earnings call and earnings release, and 2015 Form 10-K, +Under Armour highlighted its 31% revenue growth that beat consensus estimates, attributing it +primarily to “growth in training, running, golf and basketball,” and increased sales and new +offerings in footwear and apparel, but did not mention the significant impact of pull forwards. In +its earnings call, Under Armour highlighted its streak of quarters with 20%-plus revenue growth, +stated that its growth drivers had not changed since it went public ten years prior, and denied that +warmer weather was materially impacting its revenue. Downplaying the revenue impact of +warmer weather in the earnings call, a senior Under Armour executive stated that weather had +only impacted the company’s business by a couple percentage points, while another senior +executive stated: “Did [weather] affect our business in the way some thought it would? No, it did +not. . . . Our business is more diversified than it has ever been, we do not let weather play a +decisive role in dictating our success.” These statements and omissions were misleading. In +December 2015, Under Armour senior management discussed internally that the company was +going to finish with lower-than-expected revenue for the year, and that warmer weather had +negatively impacted revenue. +20. Under Armour did not disclose the fact that it used pull forwards, despite the fact +that pull forwards accounted for nearly 8.5% of its total fourth quarter 2015 revenue +(approximately $99 million) and approximately 35% of its fourth quarter of 2015 revenue +growth. Without the pull forwards from the first quarter of 2016, Under Armour’s growth rate in +the fourth quarter of 2015 would have been less than 20% for the first time in more than five +years. +First Quarter 2016 +21. In January 2016, the FP&A group advised Under Armour senior management that +the company’s internal revenue forecast for the first quarter of 2016 was lower than analysts’ +revenue estimates due, in part, to the pull forwards into 2015. By February 2016, the gap +between internal forecasts and external revenue guidance was so significant that Under Armour +considered revising its public revenue guidance for the quarter – something the company had +never done before. An Under Armour senior executive acknowledged the challenges caused by +the 2015 pull forwards by stating in an email: “Let’s see how of [sic] this goes and if we can get +enough pull-forwards or extra business to close the Q1 gap. The issue is that we pulled forward a +lot in Q4 and there is not as much room in Q2 but we will see.” +22. Ultimately, Under Armour pulled forward $17.5 million in orders from the second +quarter of 2016 into the first quarter of 2016. On April 21, 2016, Under Armour announced +revenue of $1.048 billion for the first quarter of 2016, beating analyst consensus by $12 million. +Under Armour did not disclose that $17.5 million of its total first quarter 2016 revenue was +comprised of pull forwards. Without these pull forwards, Under Armour’s revenue and growth +rate would have been below analysts’ revenue estimates. + 6 +Second Quarter 2016 +23. Under Armour also pulled forward revenue into the second quarter of 2016 to +meet analysts’ revenue estimates. Under Armour senior management was aware as early as May +2016 that the forecasted revenue for the quarter had declined by $11 million, and that Under +Armour would likely need to use pull forwards to close the gap. +24. Under Armour pulled forward $10 million in orders from the third quarter of 2016 +into the second quarter 2016. On July 26, 2016, Under Armour announced revenue of $1.001 +billion for the second quarter of 2016 that met analysts’ revenue estimates. Under Armour did +not disclose that $10 million of its total second quarter 2016 revenue was comprised of pull +forwards. Without these pull forwards from the third quarter of 2016, Under Armour’s second +quarter 2016 revenue would have been below analysts’ revenue estimates. + +Third Quarter 2016 +25. Throughout the third quarter of 2016, Under Armour senior management directed +the FP&A group and sales personnel to use pull forwards to close an increasing gap between +internal revenue forecasts and analysts’ revenue estimates. In July 2016, the FP&A group +forecast that Under Armour would need to pull forward approximately $65 million in orders to +meet analysts’ revenue estimates and achieve a revenue growth rate of greater than 20%. At that +point, senior management emphasized that a growth rate of less than 20% “would be an +extremely difficult story,” and urged the FP&A group and sales personnel to continue to press +customers to accept shipment of product earlier than originally requested. +26. Under Armour’s increasing reliance on pull forwards often resulted in it making +multiple requests each quarter to its largest wholesale customers, and periodically offering sales +incentives such as price discounts and extended payment terms. For example, in September +2016, Under Armour requested additional pull forwards from a key customer, after already +having asked to move more than $30 million in sales from the fourth quarter of 2016 to the third +quarter of 2016. The customer responded by saying: “We just brought a bunch of your goods in +early to help out your quarter. . . Now you want more. . . More..More..more..30% [price +discount] please.” Under Armour ultimately agreed to a 25% price discount and an extra 30 days +to pay to secure an additional $6.7 million of pull forwards. +27. Under Armour pulled forward approximately $65 million in orders from the +fourth quarter of 2016 into third the quarter of 2016. On October 25, 2016, Under Armour +announced revenue of $1.472 billion for the third quarter of 2016, beating analysts’ revenue +estimates by $18 million. Under Armour did not disclose that $65 million of its total third quarter +2016 revenue was comprised of pull forwards. +28. In its third quarter 2016 earnings call, earnings release, and Form 10-Q, Under +Armour highlighted its reported 22% revenue growth that beat analysts’ revenue estimates, +attributing the growth primarily to “growth in men’s training, women’s training, golf and team +sports,” “strong growth in running and basketball,” “growing interest in performance products +and the strength of the Under Armour brand in the marketplace,” and increased sales in footwear + 7 +and apparel. In its earnings call, Under Armour highlighted its streak of 26 consecutive quarter +of 20%-plus revenue growth, and a senior Under Armour executive stated: “I want to be clear . . . +that the growth remains intact.” +29. Under Armour did not disclose the fact that it engaged in pull forwards, despite +the fact that nearly 4.5% of its total third quarter of 2016 revenue ($65 million) or approximately +25% of its third quarter of 2016 revenue growth was attributable to pull forwards. Without these +pull forwards from the fourth quarter of 2016, Under Armour’s growth rate in the third quarter of +2016 would have been less than 20%, and the company would not have reported revenue and +revenue growth that beat analysts’ revenue estimates. +Fourth Quarter 2016 +30. Anticipating a revenue shortfall in the fourth quarter 2016, in September 2016 +Under Armour senior management discussed a plan to ship a large dollar amount (ultimately +over $50 million) of orders to a new customer in December 2016, rather than in 2017 as the +customer had initially contemplated. An Under Armour senior executive acknowledged that the +desire to ship the product early was being driven by pressure to meet analysts’ revenue estimates, +saying that the customer “isn’t setting [Under Armour product in its stores] until February, so +whether we thought it was $20 or $53 [million] or whatever, really [the customer] doesn’t want +any of that product in December but we are shipping it and they are absolutely taking it from us +as a favor. If we were a privately held company, we would not ship that product to them in +December.” +31. By mid-October 2016, Under Armour’s senior management knew that a +significant and increasing revenue shortfall for both the fourth quarter and full-year of 2016 was +being met with an increasing amount of pull forwards. The FP&A group estimated to senior +management that the company would have to pull forward over $160 million of orders to close +this gap, and that the pull forwards would negatively impact first quarter 2017 revenue. +32. During the remainder of the fourth quarter, Under Armour’s sales increasingly +lagged prior forecasts. By mid-December 2016, despite having already pulled forward +approximately $170 million in sales, senior management realized the company would not be able +to meet analysts’ revenue estimates for the fourth quarter of 2016, or meet its full year revenue +guidance of $4.925 billion. Under Armour’s senior management also was becoming more +concerned about the negative impact additional pull forwards would have on revenue for the first +quarter of 2017. +33. Because Under Armour could not meet analysts’ revenue estimates even with the +$170 million in pull forward sales, a senior Under Armour executive made the decision to limit +additional pull forwards from 2017 into 2016. Notes from a December 15, 2016 meeting of the +company’s top executives reflect that, while discussing his decision, the senior executive stated +that the company had “been living in this bubble for a while,” that pulling forward revenue in +each quarter was not healthy, and that the company was “not going to compromise 2017 . . . +we’re not going to take from next year.” + 8 +34. After additional internal discussions, Under Armour senior management reversed +some planned pull forwards, (e.g., by pushing some apparel sales back to the first quarter of +2017), but moved ahead with pull forwards of footwear orders because it was a high visibility +product segment where the company sought to demonstrate strong revenue growth. This fine- +tuning of pull forwards was reflected in a December 2016 internal email between senior +management which noted that footwear, along with international sales, “are the big growth +drivers we have talked about over and over and are the only areas giving people confidence in +our future.” +35. Although Under Armour did not pull forward enough sales to meet analysts’ +revenue estimates and sustain its better than 20% year-over-year revenue growth streak, it still +pulled forward approximately $172 million (approximately 13% of its quarterly revenue) in +orders from the first quarter of 2017 into the fourth quarter of 2016. +36. On January 31, 2017, Under Armour announced revenue of $1.308 billion for the +fourth quarter of 2016, which reflected year-over-year revenue growth of 12%. Under Armour +did not meet analysts’ revenue estimates for the fourth quarter of 2016, and it did not report year- +over-year revenue growth of over 20%. That day, the company’s stock price dropped by +approximately 23%. +37. In its fourth quarter 2016 earnings call and earnings release, and 2016 Form 10-K, +Under Armour highlighted its 12% revenue growth, attributing it primarily to “growth in +training, running, golf and basketball,” growing interest in performance products, the strength of +the Under Armour brand in the marketplace, and increased sales and new offerings in footwear +and apparel. In its fourth quarter 2016 earnings call, a senior Under Armour executive stated: “I +want to be clear. Our growth story is intact. Our brand is truly stronger than it’s ever been.” +38. Under Armour did not disclose the fact that it engaged in pull forwards, despite +the fact that approximately 13% of its total fourth quarter of 2016 revenue ($172 million) was +derived from pull forwards. Moreover, Under Armour’s statements about its “growth story” +being intact and its brand being “stronger than it’s ever been” were made misleading by omitting +disclosure of pull forwards because without its aggressive use of pull forwards there would have +been no reportable growth in the fourth quarter of 2016. +Under Armour’s Use of Pull-Forwards Was Having or Was Reasonably Expected to Have +an Adverse Impact on Under Armour’s Future Revenue +39. Under Armour’s reliance on pull forwards to meet financial targets was +compromising the company’s future revenue and revenue growth rate. When Under Armour +convinced customers to accept shipment of product earlier than forecasted, Under Armour could +record the sale as occurring in the earlier quarter but, all things being equal, would lose that +particular sale in the later quarter when it had been originally scheduled. +40. The impact of these shifting sales was especially pronounced for Under Armour +because prior reported revenue, particularly in the third and fourth quarters of 2015, included a +significant amount of pull forwards. Therefore, to meet analysts’ revenue estimates for 2016, + 9 +Under Armour had to replace the sales it had previously taken from 2016 through additional +customer demand and new products, but also demonstrate the same percentage revenue growth +when compared to the 2015 revenue totals (which in turn had been enhanced with pull forwards). +In internal emails, Under Armour acknowledged this “double impact on the growth rate” +resulting from pull forwards because they “take the base up” in the earlier year and down in the +later year. Compared to the same quarters in 2015, Under Armour greatly increased pull +forwards during the third and fourth quarters of 2016 in an attempt to continue to meet analysts’ +revenue estimates. +41. Under Armour knew or should have known that its use of pull forwards concealed +its failure to meet analysts’ revenue estimates without such pull forward sales. Under Armour +also knew that its increasing reliance on pull forwards to meet analysts’ revenue estimates was +having, or was reasonably likely to have, a material negative impact on future revenue. Under +Armour’s reported financial results during the Relevant Period did not reflect its natural revenue +and revenue growth, and were not indicative of its future financial results. +Investors Were Misled by Under Armour +42. Under Armour reported its financial results for the Relevant Period in earnings +calls and in reports filed with the Commission, identifying various factors as responsible for its +sustained and consistent revenue growth, but without disclosing that a significant portion of its +revenue and revenue growth had resulted from the use of pull forwards. +43. By failing to disclose this information during the Relevant Period, investors were +left with a misleading impression of how Under Armour was meeting or beating analysts’ +revenue estimates. Internally, Under Armour knew that the company relied heavily on pull +forwards to meet analysts’ revenue estimates, and the company’s senior management implicitly +admitted the unsustainability of this practice by describing pull forward revenue as “bad,” +“unnatural,” and “unhealthy.” Without the same information, investors did not have the ability to +fully evaluate Under Armour’s financial results in context and compare results across periods. +44. Under Armour’s misleading statements and omissions were material. Investors +were unaware that Under Armour’s use of pull forwards was compromising its future revenue by +shifting revenue from future quarters to the current quarter, and causing the company to report +strong revenue growth results that Under Armour knew were increasingly difficult to replicate in +the future. Without this information, investors also lacked the ability to evaluate Under Armour’s +future revenue and ability to meet future guidance and analysts’ revenue expectations. Investors +also were unaware of the reasonable likely negative impact Under Armour’s pull forward +practices would have on future periods. +Under Armour Offered and Sold Securities During the Relevant Period +45. During the Relevant Period, Under Armour offered and sold securities, including +selling discounted stock under the company’s employee stock purchase plan and issuing shares +as compensation to certain employees under its employee incentive plan. + 10 +Violations +46. As a result of the conduct described above, Under Armour violated Section +17(a)(2) and (3) of the Securities Act, which prohibit any person from directly or indirectly +obtaining money or property by means of any untrue statement of a material fact or any omission +to state a material fact necessary in order to make the statements made, in light of the +circumstances under which they were made, not misleading, or engaging in any transaction, +practice, or course of business which operates or would operate as a fraud or deceit upon the +purchaser, in the offer or sale of securities. A violation of these provisions does not require +scienter and may rest on a finding of negligence. See Aaron v. SEC, 446 U.S. 680, 685, 701-02 +(1980). +47. Also as a result of the conduct described above, Under Armour violated Section +13(a) of the Exchange Act and Rules 13a-1, 13a-11, and 13a-13 thereunder, which require +reporting companies to file with the Commission complete and accurate annual, current, and +quarterly reports. Under Armour also violated Rule 12b-20 of the Exchange Act, which requires +an issuer to include in a statement or report filed with the Commission any information necessary +to make the required statements in the filing not materially misleading. +48. In addition, Section 13(a) of the Exchange Act requires issuers such as Under +Armour to file periodic reports with the Commission containing such information as the +Commission prescribes by rule. Form 10-K and Form 10-Q requires registrants to comply with +Regulation S-K Item 303. Item 303(a)(3)(ii) of Regulation S-K requires that reports describe, +among other things, “any known trends or uncertainties that have had or that the registrant +reasonably expects will have a material favorable or unfavorable impact on net sales or revenues +or income from continuing operations” in its annual report on Form 10-K. In addition, this Item +requires that reports describe “any other significant components of revenues or expenses that, in +the registrant’s judgment, should be described in order to understand the registrant’s results of +operations.” Instruction 3 to Item 303(a) of Regulation S-K requires that the “discussion and +analysis shall focus specifically on material events and uncertainties known to management that +would cause reported financial information not to be necessarily indicative of future operating +results or of future financial condition.” Item 303(b) of Regulation S-K requires discussion of +material changes in such known trends or uncertainties in quarterly reports on Form 10-Q. Under +Armour’s use of pull forwards created an uncertainty or event that was known to Under +Armour’s senior management and was reasonably expected to have a material effect on the +registrant’s future revenues. Under Armour’s failure to attribute growth in revenue to the use of +pull forwards did not provide investors with material information about its revenue necessary for +an understanding of its results of operations. As a consequence, Under Armour violated Section +13(a) of the Exchange Act and Rules 13a-1, 13a-13, and 12b-20 thereunder. +IV. +In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent’s Offer. +Accordingly, it is hereby ORDERED that: + 11 +A. Pursuant to Section 8A of the Securities Act and Section 21C of the Exchange Act, +Respondent shall cease and desist from committing or causing any violations and any future +violations of Section 17(a)(2) and (a)(3) of the Securities Act and Section 13(a) of the Exchange +Act and Rules 13a-1, 13a-11, 13a-13, and 12b-20 thereunder. +B. Respondent shall, within 10 days of the entry of this Order, pay a civil penalty of +$9,000,000.00 to the Securities and Exchange Commission for transfer to the general fund of the +United States Treasury, subject to Exchange Act Section 21F(g)(3). If timely payment is not made, +interest shall accrue pursuant to 31 U.S.C. § 3717. + +Payments must be made in one of the following ways: + +(1) Respondent may transmit payment electronically to the Commission, which +will provide detailed ACH transfer/Fedwire instructions upon request; + +(2) Respondent may make direct payment from a bank account via Pay.gov +through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or + +(3) Respondent may pay by certified check, bank cashier’s check, or United +States postal money order, made payable to the Securities and Exchange +Commission and hand-delivered or mailed to: + +Enterprise Service Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 +Payments by check or money order must be accompanied by a cover letter identifying +Under Armour, Inc. as a Respondent in these proceedings, and the file number of these proceedings. +A copy of the cover letter and check or money order must be sent to Associate Director Jason Burt, +Division of Enforcement, Denver Regional Office, Securities and Exchange Commission, 1961 +Stout Street, 17th Floor, Denver, CO 80294. +C. Amounts ordered to be paid as civil money penalties in this Order shall be treated as +penalties paid to the government for all purposes, including all tax purposes. To preserve the +deterrent effect of the civil penalty, Respondent agrees that in any Related Investor Action, it shall +not argue that it is entitled to, nor shall it benefit by, offset or reduction of any award of +compensatory damages by the amount of any part of Respondent’s payment of a civil penalty in this +action (“Penalty Offset”). If the court in any Related Investor Action grants such a Penalty Offset, +Respondent agrees that it shall, within 30 days after entry of a final order granting the Penalty +Offset, notify the Commission’s counsel in this action and pay the amount of the Penalty Offset to +the Commission. Such a payment shall not be deemed an additional civil penalty and shall not be +deemed to change the amount of the civil penalty imposed in this proceeding. For purposes of this +paragraph, a “Related Investor Action” means a private damages action brought against Respondent + 12 +by or on behalf of one or more investors based on substantially the same facts as alleged in the +Order instituted by the Commission in this proceeding. + +By the Commission. + + + + Vanessa A. Countryman + Secretary + \ No newline at end of file diff --git a/raw/aaer/2021/AAER-4221.txt b/raw/aaer/2021/AAER-4221.txt new file mode 100644 index 0000000000000000000000000000000000000000..eb6292f14d50805e964a1a450e64b756125d7955 --- /dev/null +++ b/raw/aaer/2021/AAER-4221.txt @@ -0,0 +1,76 @@ +UNITED STATES OF AMERICA +before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 91799 / May 7, 2021 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4221 / May 7, 2021 + +Admin. Proc. File No. 3-20256 + + +In the Matter of + +CHRISTOPHER E. KNAUTH, CPA + + + +ORDER + +On April 5, 2021, the Securities and Exchange Commission issued an order instituting an +administrative proceeding (“OIP”) against Christopher E. Knauth, CPA (“Respondent”), +pursuant to Sections 4C and 21C of the Securities Exchange Act of 1934 and Rules 102(e)(1)(ii) +and (iii) of the Commission’s Rules of Practice. 1 Respondent was served with the OIP on April +13, 2021.2 Absent Respondent’s consent regarding a later hearing date, a public hearing was to +be held on or before June 11, 2021.3 On April 20, 2021, the parties were directed to file a +statement advising the Commission of any agreement to a later hearing date.4 On April 27, +2021, the parties filed a joint statement in which Respondent consented to a hearing on February +7, 2022. On May 4, 2021, Respondent filed an answer to the allegations contained in the OIP. +The parties must conduct a prehearing conference within 14 days of service of the +answer.5 The subjects to be discussed at the prehearing conference include settlement of any + +1 Christopher E. Knauth, CPA , Exchange Act Release No. 91475, 2021 WL 1297855 (Apr. +5, 2021). +2 Christopher E. Knauth, CPA, Exchange Act Release No. 91615, 2021 WL 1579957 (Apr. +20, 2021). +3 Id. (citing 15 U.S.C. § 78u-3(b)). +4 Knauth, 2021 WL 1579957. +5 Id. at *9 (citing 17 C.F.R. § 201.221). +2 + +issues as well as the timing of discovery, the exchange of witness and exhibit lists and copies of +exhibits, expert witness disclosures and reports, and prehearing motions or briefs.6 +Accordingly, it is ORDERED that the parties file a joint prehearing conference statement +addressing a proposed prehearing schedule within 21 days of the answer’s service.7 If a +prehearing conference is not held, the parties shall file, jointly or separately, a statement advising +the Commission of that fact and of the efforts made to meet and confer. +The parties’ attention is called to the Commission’s March 18, 2020 order regarding the +filing and service of papers, which provides that pending further order of the Commission parties +to the extent possible shall submit all filings electronically at apfilings@sec.gov.8 Also, the +Commission’s Rules of Practice were recently amended to include new e-filing requirements, +which took effect on April 12, 2021.9 +For the Commission, by the Office of the General Counsel, pursuant to delegated +authority. + + + Vanessa A. Countryman + Secretary + + +6 17 C.F.R. § 201.221(c). +7 See, e.g. , PLS, CPA, Exchange Act Release No. 4148, 2020 WL 3397782 (June 18, 2020) +(reflecting that the parties informed the Commission about their discussion of and agreements on +a comprehensive list of procedural issues); LBB & Assocs. Ltd., Exchange Act Release No. +85796, 2019 WL 2005646 (May 7, 2019) (same). +8 See Pending Administrative Proceedings , Exchange Act Release No. 88415, 2020 WL +1322001, https://www.sec.gov/litigation/opinions/2020/33-10767.pdf. +9 Amendments to the Commission’s Rules of Practice , 85 Fed. Reg. 86,464, 86,474 (Dec. +30, 2020); see also Amendments to the Commission’s Rules of Practice, Exchange Act Release +No. 90442, 2020 WL 7013370 (Nov. 17, 2020); Instructions for Electronic Filing a nd Service of +Documents in SEC Administrative Proceedings and Technical Specifications, +https://www.sec.gov/efapdocs/instructions.pdf. The amendments also impose other obligations +on parties to administrative proceedings such as a new redaction and omission of sensitive +personal information requirement. Amendments to the Commission’s Rules of Practice , 85 Fed. +Reg. at 86,465–81. \ No newline at end of file diff --git a/raw/aaer/2021/AAER-4222.txt b/raw/aaer/2021/AAER-4222.txt new file mode 100644 index 0000000000000000000000000000000000000000..acbe9b9ae80096ea20f59c8fb5cfdddb8790f97d --- /dev/null +++ b/raw/aaer/2021/AAER-4222.txt @@ -0,0 +1,64 @@ +UNITED STATES OF AMERICA +before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 91983 / May 24, 2021 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4222 / May 24, 2021 + +Admin. Proc. File No. 3-19767 + + +In the Matter of + +PLS, CPA, A PROFESSIONAL CORPORATION, +A/K/A PLS CPAs; CHANG G. PARK, CPA, A/K/A +CHANGGEUN PARK; JOSEPH YONGYUN LEE, +CPA, A/K/A YONG YUN LEE; AND JUCHI LEE, +CPA, A/K/A JUCHI LEE FERNANDEZ, JUCHI LEE, +JU CHI LEE, SUE LEE + + + + + +ORDER +On April 24, 2020, the Securities and Exchange Commission issued an order instituting +an administrative proceeding against PLS, CPA, a Professional Corporation, a/k/a PLS CPAs; +Chang G. Park, CPA, a/k/a Changgeun Park; Joseph Yongyun Lee, CPA, a/k/a Yong Yun Lee; +and Juchi Lee, CPA, a/k/a Juchi Lee Fernandez, Ju-chi Lee, Ju Chi Lee, Sue Lee (collectively, +“Respondents”), pursuant to Sections 4C and 21C of the Securities Exchange Act of 1934 and +Rules 102(e)(1)(ii) and (iii) of the Commission's Rules of Practice.1 On March 29, 2021, the +Division of Enforcement and Respondents filed a joint motion for a stay based on the parties’ +agreement in principle to a settlement on all major terms. On April 1, 2021, we granted the +parties’ motion for a stay contingent on the submission to the Commission of Respondents’ +signed offer of settlement and the Division’s accompanying recommendation no later than May +27, 2021, and ordered the parties to file a joint status report if that deadline was not met.2 +On May 17, 2021, the parties filed a joint status report representing that they have made +good faith efforts to comply with the April 1, 2021 order and are in the process of finalizing the +settlement documentation. They request that the proceeding remain stayed until June 25, 2021, + +1 PLS, CPA, a Professional Corporation, a/k/a PLS CPAs, Exchange Act Release No. 88739, +2020 WL 2039958 (Apr. 24, 2020). +2 PLS, CPA, a Professional Corporation, a/k/a PLS CPAs, Exchange Act Release No. 91451, +2021 WL 1226197 (Apr. 1, 2021). +2 + + + +to afford them sufficient time to finalize the settlement documentation and submit Respondents’ +signed offer of settlement and the Division’s accompanying recommendation to the Commission. +Given these representations, it appears appropriate to extend the stay. +Accordingly, it is ORDERED that the joint request is GRANTED and that this +proceeding is stayed until June 25, 2021, to ensure that the parties have sufficient time to attempt +to finalize the settlement. The stay is contingent on the submission to the Commission of +Respondents’ signed offer of settlement and the Division’s accompanying recommendation no +later than June 25, 2021. If this deadline is not met or if the Commission rejects the offer of +settlement, the parties shall file another joint status report within 7 days of that event. +For the Commission, by the Office of the General Counsel, pursuant to delegated +authority. + + Vanessa A. Countryman + Secretary \ No newline at end of file diff --git a/raw/aaer/2021/AAER-4223.txt b/raw/aaer/2021/AAER-4223.txt new file mode 100644 index 0000000000000000000000000000000000000000..6ab49aaa750327c285e7cc5eee3dd4069d4f59d4 --- /dev/null +++ b/raw/aaer/2021/AAER-4223.txt @@ -0,0 +1,118 @@ +UNITED STATES OF AMERICA +before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 92076 / June 1, 2021 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4223 / June 1, 2021 + +Admin. Proc. File No. 3-20256 + +In the Matter of +CHRISTOPHER E. KNAUTH, CPA + + + + + +ORDER + +On April 5, 2021, the Securities and Exchange Commission issued an order instituting an +administrative proceeding (“OIP”) against Christopher E. Knauth, CPA (“Respondent”), +pursuant to Sections 4C and 21C of the Securities Exchange Act of 1934 and Rules 102(e)(1)(ii) +and (iii) of the Commission’s Rules of Practice. 1 In compliance with the statutory provision +governing cease -and-desist proceedings, the OIP specified that a “public hearing before the +Commission for the purpose of taking evidence . . . shall be convened not earlier than 30 days +and not later than 60 days” from service of the OIP.2 The statute also provides that “an earlier or +later date” for the hearing may be “set by the Commission with the consent of any respondent so +served.”3 +Respondent was served with the OIP on April 13, 2021, meaning that in the absence of +Respondent’s consent regarding a later hearing date, a public hearing was to be set for a date on +or before June 11, 2021.4 On April 20, 2021, the parties were directed to file a statement +advising the Commission of any agreement to a later hearing date (or a statement that no +agreement could be reached). On April 27, 2021, the parties filed a joint statement in which the +parties proposed a hearing starting on February 7, 2022 and by which Respondent consented to a + +1 Christopher E. Knauth, CPA , Exchange Act Release No. 91475, 2021 WL 1297855 (Apr. +5, 2021). +2 Id. at *9. +3 15 U.S.C. § 78u-3(b). +4 Christopher E. Knauth, CPA , Exchange Act Release No. 91615, 2021 WL 1579957 (Apr. +20, 2021). +2 + +hearing more than 60 days from service of the OIP. On May 3, 2021, Respondent filed an +answer to the OIP. On May 7, 2021, the parties were directed to conduct a prehearing +conference within 14 days of service of the answer and to file a joint prehearing conference +statement addressing a proposed prehearing schedule within 21 days of the answer’s service. +The parties filed another joint statement on May 18, 2021. They stated that, after a +prehearing conference, they had reached agreement on a proposed schedule with a hearing to +commence on February 7, 2022. The joint statement also represented that the Division had made +documents available for inspection or copying in accordance with Rule of Practice 230.5 +Accordingly, it is ORDERED, based on the parties’ representations, that the parties +adhere to the following procedural schedule: + +June 3, 2021 Parties exchange initial witness lists. + +September 8, 2021 Close of fact discovery. + +October 5, 2021 Last date to serve expert reports. + +November 5, 2021 Close of expert discovery. + +November 15, 2021 Last date to serve rebuttal expert reports. + +Last date to file any motions for summary disposition, if leave for any +such motions is granted. + +December 10, 2021 Last date to file oppositions to any motions for summary disposition. + +December 20, 2021 Last date to file replies to any motions for summary disposition. + +January 4, 2022 Parties exchange revised witness lists and initial exhibit lists. + +January 11, 2022 Parties to file objections to proposed witnesses and exhibits. + +Parties to file any motions in limine or other pre-hearing motions. + +Parties to file prehearing briefs. + +January 20, 2022 Parties to file any oppositions to motions in limine or other pre-hearing +motions. + + +5 17 C.F.R. § 201.230. +3 + +January 27, 2022 Parties to file any reply briefs for motions in limine or other pre-hearing +motions. + +February 1, 2022 Final prehearing conference including ruling on any motions in limine or +other pre-hearing motions. + +February 4, 2022 Parties exchange final witness lists and final exhibit lists. + + Parties exchange pre-marked exhibits. + +February 7, 2022 Hearing commences. + +It is further ORDERED that any party shall seek leave to file any motion for summary +disposition pursuant to Rule of Practice 250(c) by November 1, 2021, by filing a concise +statement not to exceed 500 words, addressing why that party believes that resolution of one or +more claims or defenses by summary disposition would be appropriate, and which also addresses +whether the parties consent to any modifications of the prehearing schedule as a result of such +motion for summary disposition.6 + +For the Commission, by the Office of the General Counsel, pursuant to delegated +authority. + + Vanessa A. Countryman + Secretary + +6 See 17 C.F.R. § 201.250(c) (requiring leave to be sought to file motions for summary +disposition in 120-day proceedings and articulating that summary disposition may be granted as +to a claim or defense when there is “no genuine issue with regard to any material fact” and “the +movant is entitled to summary disposition as a matter of law”); see also Knauth , 2021 WL +1297855, at * 10 (designating this proceeding one under the “120-day timeframe”). \ No newline at end of file diff --git a/raw/aaer/2021/AAER-4225.txt b/raw/aaer/2021/AAER-4225.txt new file mode 100644 index 0000000000000000000000000000000000000000..21500d8b32eb01568cffbe088c95791060b99ce1 --- /dev/null +++ b/raw/aaer/2021/AAER-4225.txt @@ -0,0 +1,737 @@ + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 92378 / July 13, 2021 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4225 / July 13, 2021 + +ADMINISTRATIVE PROCEEDING +File No. 3-20394 + + + +In the Matter of + +PAUL L. CHANCEY, +JR., CPA, + +Respondent. + + + + +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE AND CEASE- + AND-DESIST PROCEEDINGS PURSUANT TO +SECTIONS 4C AND 21C OF THE SECURITIES +EXCHANGE ACT OF 1934 AND RULE 102(e) +OF THE COMMISSION’S RULES OF +PRACTICE AND NOTICE OF HEARING + + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate that public +administrative and cease-and-desist proceedings be, and hereby are, instituted against Paul L. +Chancey, Jr., CPA (“Respondent” or “Chancey”) pursuant to Sections 4C1 and 21C of the +Securities Exchange Act of 1934 (“Exchange Act”) and Rule 102(e)(1)(ii) of the Commission’s +Rules of Practice.2 + +1 Section 4C provides, in relevant part, that: + +The Commission may censure any person, or deny, temporarily or permanently, to any +person the privilege of appearing or practicing before the Commission in any way, if that +person is found . . . (1) not to possess the requisite qualifications to represent others; (2) +to be lacking in character or integrity, or to have engaged in unethical or improper +professional conduct; or (3) to have willfully violated, or willfully aided and abetted the +violation of, any provision of the securities laws or the rules and regulations issued +thereunder. + +2 Rule 102(e)(1)(ii) provides, in pertinent part, that: +2 + +II. + +After an investigation, the Division of Enforcement and the Office of the Chief Accountant +allege that: + +A. SUMMARY + +1. Paul L. Chancey, Jr., a certified public accountant (“CPA”), engaged in improper +professional conduct, within the meaning of Section 4C of the Exchange Act and Rule 102(e) of the +Commission’s Rules of Practice, during the audits of the 2015 and 2016 financial statements of +MiMedx Group, Inc. (“MiMedx”). MiMedx later restated these financial statements. + +2. For both years, Chancey served as the lead audit engagement partner for Cherry +Bekaert, LLP (“CB”), the accounting firm performing these audits, but he ignored evidence +indicating that sales between MiMedx and one of its largest distributors (“Distributor”) were made +on a consignment basis, and that MiMedx had therefore prematurely recognized revenue for these +transactions at the time of shipment. For the 2015 audit, this evidence included written allegations +from MiMedx’s controller that highlighted the consignment nature of these transactions and +challenged MiMedx’s revenue recognition. For the 2016 audit, the Distributor itself explained the +contingent payment terms for these transactions, demonstrating their consignment nature, in a +confirmation response. + +3. However, rather than considering the consignment nature of these transactions or +performing additional audit procedures to determine if revenue on Distributor transactions was +reported in conformity with generally accepted accounting principles (“GAAP”), and without +documenting any analysis of the consignment issue in CB’s workpapers, Chancey improperly relied +on MiMedx executives’ false representations that revenue recognition was appropriate. Chancey’s +conduct violated several Public Company Accounting Oversight Board (“PCAOB”) standards, +including standards requiring Chancey to act with due professional care and obtain sufficient, +appropriate audit evidence. + +4. Chancey also caused CB to violate Rule 2-02(b) of Regulation S-X. In connection +with the 2015 and 2016 audits, CB issued audit reports in which it represented that CB had +conducted the audits in accordance with the standards of the PCAOB, and further represented that, +based on its opinion, MiMedx’s financial statements presented fairly, in all material respects, the +company’s financial condition and results of its operations in conformity with GAAP. Chancey +approved the issuance of CB’s audit reports that contained these unqualified opinions when he knew + + +The Commission may . . . deny, temporarily or permanently, the privilege of appearing or +practicing before it . . . to any person who is found . . . to have engaged in unethical or +improper professional conduct. + +3 +or should have known that CB’s representations were false because CB’s audits were not performed +in accordance with PCAOB standards. + +B. RESPONDENT + +5. Paul L. Chancey, Jr., age 57, resides in Fayetteville, Georgia, and is a CPA +licensed in Georgia and Mississippi. Chancey has been a partner at Cherry Bekaert, LLP, since +2006 and has less than a 5% ownership interest in the firm. Chancey was the lead engagement +partner on each audit and interim review of MiMedx’s financial statements from at least the first +quarter of 2013 through the second quarter of 2017. + +C. OTHER RELEVANT ENTITIES + +6. Cherry Bekaert, LLP is a limited liability company based in Richmond, Virginia, +and a public accounting firm registered with the PCAOB. CB has 13 offices in the United States +and more than 1,250 professional employees providing accounting, advisory, and consulting +services. CB acted as MiMedx’s independent auditor from June 9, 2008, to August 4, 2017. CB +issued audit reports on the financial statements of MiMedx for each fiscal year from 2008-2016. + +7. MiMedx Group, Inc. is a Florida corporation with its primary operations in +Marietta, Georgia. MiMedx’s stock is currently registered with the Commission under Section +12(g) of the Exchange Act and trades on the NASDAQ exchange under the symbol MDXG. The +Commission previously charged MiMedx for, among other things, fraudulently misstating its 2015 +and 2016 financial statements in violation of GAAP. The Commission accepted MiMedx’s offer +of settlement, whereby MiMedx consented to an order permanently enjoining future violations of +certain securities laws and imposing a civil penalty of $1.5 million. The district court entered final +judgment against MiMedx on December 4, 2019. See SEC v. MiMedx Group, In., et. al., No. 1:19- +cv-10927-NRB (S.D.N.Y.). + +D. FACTS + + Background + +8. MiMedx is a public company that sells medical products made from human +placental tissue. MiMedx’s 2015 and 2016 audited financial statements were included in filings +MiMedx made with the Commission on Form 10-K. MiMedx’s sales to customers in 2015 and +2016 included direct sales to distributors. MiMedx generally recognized revenue on those sales at +the time of shipment. + +9. CB was engaged by MiMedx as its independent auditor to conduct the annual +audits of the 2015 and 2016 financial statements. CB’s 2015 and 2016 audit reports contained +unqualified opinions in which CB represented that it had conducted the audits in accordance with +PCAOB audit standards, that MiMedx’s financial statements fairly presented the financial condition +and results of operations in all material respects, and that the financial statements had been prepared +in conformity with GAAP. +4 + +10. As the lead audit engagement partner, Chancey had responsibility for the conduct of +the audits, including planning, supervising team members, and ensuring compliance with PCAOB +standards. + +MiMedx Improperly Recognized Revenue on Transactions with Distributor + +11. Distributor arranged sales of MiMedx product to the U.S. Department of Veterans +Affairs and U.S. Department of Defense medical facilities (collectively, the “VA”). MiMedx and +Distributor had a written distribution agreement that provided that risk of loss passed to Distributor +upon shipment of product, that Distributor had a specific number of days to pay invoices, and that +Distributor could return product only if it was defective. + +12. When Distributor and MiMedx first entered into this distribution agreement, +Distributor purchased very limited quantities of MiMedx product and followed the terms of the +written distribution agreement. MiMedx issued an invoice to Distributor upon shipment of product +and recognized revenue at that time. + +13. However, in late 2012, MiMedx asked Distributor to make bulk orders of product +to stock at the VA. Distributor was willing to make bulk orders based on an arrangement that +ensured Distributor would not be liable for payment to MiMedx until the VA used the products and +committed to pay Distributor. As a result, MiMedx excused Distributor from payment until the +VA issued a purchase order (“PO”) to Distributor for the product, which occurred after the VA +used the product. This side arrangement was contrary to and replaced the terms of the written +distribution agreement. + +14. MiMedx also did not transfer risk of loss to Distributor until Distributor received a +PO from the VA. Instead, MiMedx managed the inventory held at VA facilities and credited +Distributor for any lost, dropped, or missing products stocked at the VA. + +15. The side agreement between MiMedx and Distributor effectively transformed +MiMedx’s arrangement with Distributor into one where the product was shipped on a consignment +basis. As a result, under GAAP, MiMedx should have delayed recognizing revenue until it was +realized or realizable and earned, which occurs only when each of the following conditions is met: +(i) persuasive evidence of an arrangement exists; (ii) delivery has occurred or services have been +rendered; (iii) the seller’s price to the buyer is fixed or determinable; and (iv) collectibility is +reasonably assured. However, MiMedx improperly continued recognizing revenue upon shipment +of the product, rather than delaying revenue recognition until Distributor was obligated to purchase +the product. + +16. The side arrangement, which lasted from at least late 2012 through 2017, was well +known at MiMedx. MiMedx had a “Reconciliation Group” that closely tracked Distributor’s +receipt of POs from the VA, which obligated the VA to pay Distributor for products used. Under +the side arrangement, Distributor’s obligation to pay arose later than the MiMedx invoice date, +which was contrary to the terms of the written distribution agreement. +5 + + +17. Every weekday from late 2012 to the end of the relationship between MiMedx and +Distributor in 2017, Distributor sent the Reconciliation Group a daily report listing each tissue for +which the VA submitted a PO to Distributor. The Reconciliation Group then sent a daily email to +MiMedx management providing the dollar value of the POs the VA had submitted to the +Distributor. The Reconciliation Group then compiled the daily figures into a “Weekly Revenue” +table circulated each Monday to MiMedx management and the accounting department. + +18. Approximately 10 days after the close of each week, Distributor paid MiMedx the +exact total cash amount identified in the Weekly Revenue table. The Reconciliation Group +confirmed that Distributor’s payment matched the anticipated amount. Distributor paid MiMedx +only the value of Distributor’s sales to the VA, its end customer. + +19. MiMedx and Distributor agreed that Distributor’s payments would be applied to the +oldest outstanding invoice, regardless of which specific products Distributor had sold through. + +20. As a result of the side arrangement, MiMedx prematurely recognized revenue on +transactions with Distributor for several years, including 2015 and 2016. Distributor was one of +MiMedx’s largest customers, and sales to Distributor represented roughly 24% and 9% of +MiMedx’s total revenue in 2015 and 2016, respectively. + +21. In 2020, MiMedx restated its financial statements for several reporting periods due +to its nonconformance with GAAP. MiMedx’s restatements included material changes for revenue +prematurely recognized on sales to Distributor in 2015 and 2016. + +Chancey Violated PCAOB Audit Standards When Conducting the 2015 and 2016 +Audits + +22. During the audits of MiMedx’s 2015 and 2016 financial statements, CB and +Chancey identified revenue as one of MiMedx’s most significant financial statement accounts and +an area with heightened risk of material misstatement due to both error and fraud. PCAOB +standards required CB to presume that improper revenue recognition was a fraud risk. Since +revenue recognition was an area that required heightened scrutiny, CB had enhanced obligations +under PCAOB standards to perform additional audit procedures. + +23. MiMedx management made false representations to CB during each audit, in +management representation letters and other documents, denying that MiMedx had a side +arrangement with Distributor. During both the 2015 and 2016 audits, Chancey improperly relied +on these management representations without appropriate corroboration, even though these +representations directly contradicted information Chancey had received from reliable sources, +including MiMedx’s controller and Distributor itself. + +24. Chancey did not perform additional substantive audit procedures or obtain +sufficient, appropriate audit evidence to reduce the risk of material misstatement to an +6 +appropriately low level as required by PCAOB standards. Chancey’s conduct demonstrated the +following audit failures in violation of PCAOB standards: (1) failure to exercise due professional +care; (2) failure to obtain an understanding of MiMedx’s business; (3) failure to plan the audits +based on assessment of risk; (4) failure to obtain sufficient appropriate audit evidence; (5) failure to +evaluate audit results; and (6) failure to document audit work. + +25. As a result of these violations, Chancey engaged in (1) a single instance of highly +unreasonable conduct in circumstances for which heightened scrutiny is warranted; and (2) +repeated instances of unreasonable conduct that indicate his lack of competence. +2015 Audit Failures + +26. Early in the 2015 audit, MiMedx’s chief financial officer showed Chancey and +MiMedx’s Audit Committee an email from MiMedx’s controller alleging improper revenue +recognition relating to transactions with Distributor and others. + +27. The controller alleged that Distributor “implicitly doesn’t pay MiMedx until the +tissue has been implanted, so revenue should be recognized on a consignment model.” The +controller referenced in his email “information[,]” “sales and collections data[,]” and “accounting +research” that he had collected to support his conclusions. + +28. Chancey read the email and knew about the controller’s specific allegations, but +Chancey made the decision not to obtain a copy of the controller’s email for inclusion in the CB +workpapers. Chancey also did not document, or ensure documentation of, the controller’s +allegations, or any related evaluation or resolution of the allegations, in the CB workpapers. + +29. Chancey also knew that the controller declined to sign the management +representation letter that CB had requested as part of its 2015 audit procedures. However, Chancey +also did not document, or ensure documentation of, this significant fact in the CB workpapers. + +30. Chancey never attempted to contact the controller to gain a better understanding of +the controller’s allegations, nor did Chancey request the supporting information the controller +referenced in his email, even though CB was in regular contact with the controller in the course of +performing 2015 audit procedures. + +31. Chancey also did not attempt to obtain information about the possible consignment +arrangement from Distributor, the VA, or even MiMedx personnel involved in collecting payments +from Distributor. + +32. While CB performed some testing during its audits, this testing was insufficient to +allow CB to conclude whether MiMedx was appropriately recognizing revenue for its sales to +Distributor. In particular, CB’s procedures to test sales transactions, accounts receivable, the Days +Sales Outstanding (“DSO”) metric, the sales returns allowance, and sales commissions either failed +to provide sufficient appropriate evidence that was relevant to the consignment issue or, instead, +raised additional red flags or contradictory evidence suggesting that the arrangement with +Distributor could be a consignment. +7 + +33. The DSO analysis, for example, reflected that Distributor was paying much later +than, and in a manner that was not consistent with, the terms of the written distribution agreement. +Additionally, the sales return allowance procedures reflected that the risk of loss had not +transferred to Distributor upon shipment because MiMedx incurred losses for tissue that was +subsequently lost, dropped, or missing. Further, the sales commissions procedures showed that +MiMedx paid commissions to sales personnel only after the VA had implanted tissue, suggesting +that the transaction was incomplete until that time. + +34. MiMedx’s Audit Committee conducted a limited review of the controller’s +allegations and concluded that MiMedx’s accounting was appropriate based largely on the written +distribution agreement, which MiMedx’s management misrepresented as controlling the terms of +the transactions with Distributor. Chancey attended an Audit Committee meeting where the Audit +Committee reported the conclusions of its review, but he did not know what investigative steps the +Audit Committee took in its review. Chancey did not implement any additional audit procedures +to verify or corroborate the Audit Committee’s work. Chancey also did not document, or ensure +documentation of, the Audit Committee’s review of the controller’s allegations. + +35. Despite the evidence he had, Chancey did not plan, perform, or document any +additional substantive procedures for the 2015 audit to test whether a side arrangement with +Distributor existed. + +36. CB’s 2015 workpapers did include a memo CB created as part of its audit +procedures to summarize sales to Distributor. However, rather than documenting evidence +obtained from substantive procedures performed to test the existence of a consignment +arrangement, the memo referenced amendments to the written agreement that were not relevant +and sales commission expense procedures that indicated a consignment arrangement might exist. +The memo concluded, without sufficient basis, that “[c]onsistent with prior years, CB considers all +four revenue recognition criteria to have been met on [Distributor’s] sales.” + +37. At the conclusion of the 2015 audit, Chancey caused CB to issue an audit report +that inaccurately stated that the audit was performed in accordance with PCAOB standards. +MiMedx filed CB’s inaccurate audit report with MiMedx’s 2015 Form 10-K on February 29, 2016. + +2016 Audit Failures + +38. During the 2016 audit, Chancey obtained new evidence, this time directly from +Distributor, that further demonstrated MiMedx’s consignment arrangement with Distributor. + +39. In its 2016 accounts receivable audit confirmation response to CB, Distributor +specifically stated that Distributor “does not pay MiMedx for tissues until such a time as the [VA] +issues a purchase order to [Distributor].” + +40. Also during the 2016 audit, Chancey learned that Distributor made the same +representation (of payment due to MiMedx only upon the issuance of a PO from the VA) during a +8 +MiMedx Audit Committee internal investigation into allegations of fictitious sales. As a result of +that investigation, Chancey also learned that Distributor further represented that: (1) MiMedx had +historically given Distributor credit for lost, dropped, and missing inventory; and (2) MiMedx +applied Distributor’s payments to the oldest invoices first, regardless of whether the VA made +payments to Distributor for the products reflected in those invoices. + +41. In addition, consistent with the evidence obtained in the 2015 audit, CB’s +procedures to test sales transactions, accounts receivable, the DSO metric, the sales returns +allowance, and sales commissions either failed to provide sufficient appropriate evidence that was +relevant to the consignment issue or, instead, raised additional red flags or contradictory evidence +suggesting that the arrangement with Distributor was a consignment. + +42. Despite this evidence, and the evidence from the 2015 audit, Chancey did not plan, +perform, or document any additional substantive procedures for the 2016 audit to test whether a +side arrangement existed. For example, he did not ask Distributor about the existence of a side +arrangement or for any evidence Distributor might have to support its position that its obligation to +pay MiMedx was contingent on a PO from the VA. Chancey also did not speak with anyone else +at MiMedx or the VA who was involved in the sales and collection processes. + +43. As part of its 2016 audit procedures, CB requested and obtained a revenue +recognition memo from MiMedx management that supported MiMedx’s revenue recognition for +transactions with Distributor at the time of shipment. However, that memo did not provide +sufficient appropriate evidence about revenue recognition considering the side agreement. +Chancey improperly relied on management’s representations that the written distribution +agreement established the terms of the transactions, rather than performing incremental audit +procedures specifically directed at testing the alleged side agreement. + +44. At the conclusion of the 2016 audit, Chancey again caused CB to issue an audit +report that inaccurately stated that the audit was performed in accordance with PCAOB standards. +MiMedx filed CB’s inaccurate audit report with MiMedx’s 2016 Form 10-K on March 1, 2017. + +PCAOB Audit Standards3 Chancey Violated During the 2015 and 2016 Audits + +Failure to Exercise Due Professional Care + +45. PCAOB AS 1015 (AU 230) Due Professional Care in the Performance of Work +states, “the exercise of due professional care allows the auditor to obtain reasonable assurance +about whether the financial statements are free of material misstatement, whether caused by error + +3 Effective after the 2015 audit of MiMedx’s financial statements, the PCAOB reorganized +the structure and numbering of auditing standards. The reorganized standards did not impose +new requirements or change the substance of the requirements on auditors. This document +references the reorganized PCAOB auditing standards in effect during the audit of MiMedx’s +2016 financial statements with the pre-reorganization references (related to the 2015 audit) +provided parenthetically. +9 +or fraud” and “[a]lthough not absolute assurance, reasonable assurance is a high level of +assurance.” The standard requires the auditor to: +a. exercise professional skepticism, “an attitude that includes a questioning mind and +a critical assessment of audit evidence”; +b. “consider the competency and sufficiency of the [audit] evidence”; +c. neither assume that management is dishonest nor assume “unquestioned honesty” +and “the auditor should not be satisfied with less than persuasive evidence because +of a belief that management is honest”; and +d. adhere to the standard during the planning and throughout the audit process. + +46. PCAOB AS 2401 (AU 316) Considera tion of Fraud in a Financial Statement Audit +requires that the auditor exercise professional skepticism when considering fraud risks and +“conduct the engagement with a mindset that recognizes the possibility that a material +misstatement due to fraud could be present, regardless of any past experience with the entity and +regardless of the auditor’s belief about management’s honesty and integrity. Furthermore, +professional skepticism requires an ongoing questioning of whether the information and evidence +obtained suggests that a material misstatement due to fraud has occurred.” + +47. During both the 2015 and 2016 audits, Chancey had evidence that contradicted +management representations about MiMedx’s transactions with Distributor. Yet , he improperly +relied on management representations when concluding that MiMedx’s financial statements were +free of material misstatement. Furthermore, Chancey failed to corroborate management +representations or perform any additional substantive procedures to reconcile the contradictory +evidence he had received from reliable sources and CB’s other audit procedures, and thus failed to +reduce the risk of material misstatement to an appropriately low level. + +48. As a result, Chancey failed to exercise due professional care, which was required by +PCAOB standards, during the audits of MiMedx’s 2015 and 2016 financial statements. + +Failure to Obtain an Understanding of MiMedx’s Business + +49. PCAOB AS 1015 (AU 230) Due Professional Care in the Performance of Work +requires that the engagement partner “be knowledgeable about the client.” + +50. PCAOB AS 2110 (AS 12) Identifying and Assessing Risks of Material +Misstatement requires the auditor to “obtain an understanding of the company and its environment +(‘understanding of the company’) to understand the events, conditions, and company activities that +might reasonably be expected to have a significant effect on the risks of misstatement.” + +51. Chancey failed to become knowledgeable about MiMedx’s relationship with +Distributor, which was one of MiMedx’s most significant customers. Among other things, +Chancey failed to obtain an understanding of the following significant events, conditions, and +activities impacting MiMedx’s transactions with Distributor: +a. During the 2015 audit, the controller’s allegations about MiMedx’s consignment +arrangement; +10 +b. During both the 2015 and the 2016 audits, Distributor’s practice of paying much +later than the contract terms allowed; +c. During both the 2015 and the 2016 audits, MiMedx’s practice of incurring losses +for sales of tissue to Distributor, contra ry to terms of the distribution agreement, +when tissues were lost, dropped, or missing after shipment; and +d. During the 2016 audit, Distributor’s representations that payment terms with +MiMedx were contingent on sales to the VA. + +52. As a result, Chancey failed to obtain an understanding of MiMedx’s business, +which was required by PCAOB standards, during the audits of MiMedx’s 2015 and 2016 financial +statements. + +Failure to Plan the Audits Based on Assessment of Risk + +53. PCAOB AS 2101 (AS 9) Audit Planning states that “[p]lanning the audit includes +establishing the overall audit strategy for the engagement and developing an audit plan, which +includes, in particular, planned risk assessment procedures and planned responses to the risks of +material misstatement. Planning is not a discrete phase of an audit but, rather, a continual and +iterative process that might begin shortly after (or in connection with) the completion of the +previous audit and continues until the completion of the current audit.” Moreover, “[t]he auditor +should modify the overall strategy and the audit plan as necessary if circumstances change +significantly during the course of the audit, including changes due to a revised assessment of the +risks of material misstatement or the discovery of a previously unidentified risk of material +misstatement.” + +54. PCAOB AS 2110 (AS 12) Identifying and Assessing Risks of Material +Misstatement requires the auditor to “presume that there is fraud risk involving improper revenue +recognition and evaluate which types of revenue, revenue transactions, or assertions may give +rise to such risks.” + +55. PCAOB AS 1101 (AS 8) Audit Risk provides that “reasonable assurance is obtained +by reducing audit risk to an appropriately low level through applying due professional care, +including obtaining sufficient appropriate audit evidence.” + +56. During both the 2015 and 2016 audits, Chancey learned of red flags and +contradictory evidence indicating that a side arrangement with Distributor existed, but CB did not +perform additional procedures to determine if revenue was misstated. Even after Chancey learned +during the 2015 audit that the controller had challenged MiMedx’s revenue recognition for +transactions with Distributor and that the controller would not sign the management representation +letter, and, during the 2016 audit, that Distributor had described its contingent payment terms with +MiMedx in its audit confirmation response, Chancey did not modify CB’s audit plan to respond to +the increased risk of material misstatement. This was true even though CB had previously +identified revenue as an area with heightened risk of material misstatement due to error or fraud. + +11 +57. As a result, Chancey failed to plan the audits and revise risk assessments +appropriately, as required by PCAOB standards, during the audits of MiMedx’s 2015 and 2016 +financial statements. + +Failure to Obtain Sufficient Appropriate Audit Evidence + +58. PCAOB AS 1105 (AS 15) Audit Evidence states that, “[t]o be appropriate, audit +evidence must be both relevant and reliable in providing support for the conclusions on which the +auditor’s opinion is based.” Relevance depends on “whether [the audit procedure] is designed to +(1) test the assertion or control directly and (2) test for understatement or overstatement and the +timing of the audit procedure used to test the assertion or control.” Additionally, “the reliability of +evidence depends on the nature and source of the evidence and the circumstances under which it is +obtained.…Evidence obtained from a knowledgeable source that is independent of the company is +more reliable than evidence obtained only from internal company sources.” Furthermore, the +standard requires the auditor to: +a. “plan and perform audit procedures to obtain sufficient appropriate audit evidence +to provide a reasonable basis for his or her opinion”; +b. “test the accuracy and completeness of the information” produced by the company; +and +c. “perform audit procedures necessary to resolve the matter” when “audit evidence +obtained from one source is inconsistent with that obtained from another, or if the +auditor has doubts about the reliability of information to be used as audit evidence” +(emphasis added). + +59. PCAOB AS 2805 (AU 333) Management Representations states that management +representations “are not a substitute for the application of auditing procedures necessary to afford a +reasonable basis for an opinion regarding the financial statements under audit” and, “[i]f a +representation made by management is contradicted by other audit evidence, the auditor should +investigate the circumstances and consider the reliability of the representation made” (emphasis +added). + +60. PCAOB AS 2310 (AU 330) The Confirmation Process explains that the purpose of +confirmation is to obtain evidence from “third parties about financial statement assertions made by +management.” The auditor should evaluate the evidence provided in the confirmation to obtain an +understanding about the existence and details of significant oral modifications to written +agreements and perform alternative procedures and additional testwork to obtain sufficient +evidence. Further, nonresponses “do not provide audit evidence about the financial statement +assertions being addressed.” + +61. PCAOB AS 2301 (AS 13) The Auditor’s Responses to the Risks of Material +Misstatement states that “assessed risks of material misstatement, particularly fraud risks, should +involve the application of professional skepticism in gathering and evaluating audit evidence[,]” +which includes “obtaining sufficient appropriate evidence to corroborate management’s +explanations or representations concerning important matters.” The standard also requires the +auditor to: +12 +a. design the audit procedures performed to “[o]btain more persuasive evidence the +higher the auditor’s assessment of risk [and] [t]ake into account the types of +potential misstatements that could result from the identified risks and the likelihood +and magnitude of potential misstatement”; +b. “perform substantive procedures for each relevant assertion of each significant +account”; +c. obtain more evidence from substantive procedures “as the assessed risk of material +misstatement increases”; and +d. modify the planned audit procedures, in response to fraud risk, “to obtain more +reliable evidence regarding relevant assertions.” + +62. PCAOB AS 2401 (AU 316) Consideration of Fraud in a Financial Statement Audit +indicates that, if there is a risk of improper revenue recognition, the auditor consider “[c]onfirming +with customers certain relevant contract terms and the absence of side agreements, because the +appropriate accounting often is influenced by such terms or agreements. For example, acceptance +criteria, delivery and payment terms, the absence of future or continuing vendor obligations, the +right to return product, guaranteed resale amounts, and cancellation or refund provisions often are +relevant in such circumstances.” + +63. Chancey obtained reliable evidence from MiMedx’s controller during the 2015 +audit, and from Distributor’s confirmation response during the 2016 audit, indicating that MiMedx +and Distributor had a side arrangement. Additionally, during both audits, CB’s procedures +concerning the DSO metric, the sales returns allowance, and sales commissions provided evidence +suggesting that the arrangement MiMedx had with Distributor could be a consignment. This +evidence contradicted MiMedx management’s representations claiming that the written distribution +agreement controlled the terms of the transactions with Distributor. + +64. Chancey failed to perform any incremental procedures to investigate the +circumstances of this contradictory evidence or appropriately test the reliability of the +representations made by MiMedx management. Chancey further failed to evaluate the +contradictory audit evidence to obtain sufficient appropriate evidence for CB’s audit conclusions. + +65. As a result, Chancey failed to obtain sufficient appropriate audit evidence, as +required by PCAOB standards, during the audits of MiMedx’s 2015 and 2016 financial +statements. + +Failure to Evaluate Audit Results + +66. PCAOB AS 2810 (AS 14) Evaluating Audit Results requires the auditor to “obtain +corroboration for management’s explanations regarding significant, unusual, or unexpected +transactions, events, amounts, or relationships. If management’s responses to the auditor’s +inquiries appear to be implausible, inconsistent with other audit evidence, imprecise, or not a +sufficient level of detail to be useful, the auditor should perform procedures to address the matter” +(emphasis added). + +13 +67. Because Distributor was one of MiMedx’s largest distributors at the time, +MiMedx’s transactions with Distributor were significant. Despite the significance of the +transactions, Chancey relied on management representations that were inconsistent with other audit +evidence, without obtaining appropriate corroboration from other sources, during the audits of +MiMedx’s 2015 and 2016 financial statements. Although Chancey obtained contradictory +evidence in two consecutive audits, he still failed to take action to reduce audit risk to an +appropriately low level. + +68. As a result, Chancey failed to evaluate audit results properly, as required by +PCAOB standards, during the audits of MiMedx’s 2015 and 2016 financial statements. + +Failure to Document Audit Work + +69. PCAOB AS 1215 (AS 3) Audit Documentation requires the auditor to document: +a. “significant findings or issues, actions taken to address them (including additional +evidence obtained), and the basis for the conclusions reached in connection with +each engagement”; +b. “information the auditor has identified relating to significant findings or issues that +is inconsistent with or contradicts the auditor’s final conclusions” (emphasis +added); and +c. “risks of material misstatement that are determined to be significant risks and the +results of the auditing procedures performed in response to those risks.” + +70. During both the 2015 and 2016 audits, CB had reliable information that was +inconsistent with CB’s audit conclusions and raised significant risks about material misstatements +in MiMedx’s financial statements. However, Chancey failed to document, or ensure the +documentation of, any analysis of the consignment issues raised and the basis for CB’s audit +conclusions in light of those issues. Notably, Chancey failed completely to document the +controller’s allegations and refusal to sign the management representation letter, much less any +audit response to these issues, in CB’s 2015 audit workpapers. He also failed to document in the +2016 audit workpapers any analysis or response to Distributor’s representations about contingent +sales terms. Futhermore, for both audits, he failed to document any analysis of the consignment +issues raised by additional red flags and contradictory evidence obtained from the DSO analysis, +the sales return allowance testwork, and the sales commission testwork. + +71. As a result, Chancey failed to document audit work, as required by PCAOB +standards, during the audits of MiMedx’s 2015 and 2016 financial statements. + +CB’s Inaccurate Audit Reports +72. Despite Chancey’s multiple departures from PCAOB audit standards, as described +above, CB, through Chancey, issued audit reports that contained unqualified opinions on +MiMedx’s 2015 and 2016 financial statements. Those reports contained CB’s opinion that +MiMedx’s financial statements presented fairly, in all material respects, the company’s financial +14 +position and results of operations in conformity with GAAP, and CB’s representation that its audits +were conducted in accordance with PCAOB audit standards. + +73. As the lead engagement partner on the audits, Chancey approved the issuance of +these audit reports. Chancey knew that MiMedx would file CB’s audit reports with the +Commission with MiMedx’s Forms 10-K. + +74. Chancey caused CB’s audit reports to inaccurately state that the audits were +conducted in accordance with PCAOB audit standards. + +E. VIOLATIONS +75. As a result of the conduct described above, Chancey engaged in improper +professional conduct within the meaning of Exchange Act Section 4C(a)(2) and Rule 102(e)(1)(ii) +of the Commission’s Rules of Practice. Section 4C(a)(2) and Rule 102(e)(1)(ii) provide, in +pertinent part, that the Commission may censure or deny, temporarily or permanently, the privilege +of appearing or practicing before the Commission to any person who is found by the Commission +to have engaged in improper professional conduct. Exchange Act Section 4C(b) and Rule +102(e)(1)(iv) define improper professional conduct with respect to persons associated with public +accounting firms and persons licensed to practice as accountants, respectively, as (1) a single +instance of highly unreasonable conduct in circumstances for which heightened scrutiny is +warranted; or (2) repeated instances of unreasonable conduct that indicate a lack of competence. + +76. As a result of the conduct described above, Chancey caused the violation of Rule 2- +02(b)(1) of Regulation S-X, which requires an audit report to accurately state whether the audit +was made in accordance with generally accepted auditing standards. The phrase “generally +accepted auditing standards” refers to the standards issued by the PCAOB. See Act Rel. No. 33- +8422. Under Exchange Act Section 21C, a person is a “cause” of another’s primary violation if the +person knew or should have known that his act or omission would contribute to the primary +violation. +III. + + In view of the allegations made by the Division of Enforcement and the Office of the Chief +Accountant, the Commission deems it necessary and appropriate in the public interest that public +administrative and cease -and-desist proceedings be instituted to determine: + +A. Whether the allegations set forth in Section II hereof are true and, in connection +therewith, to afford Respondent an opportunity to establish any defenses to such allegations; + +B. What, if any, remedial action is appropriate against Respondent pursuant to Section +4C of the Exchange Act and Rule 102(e)(1) of the Commission’s Rules of Practice; and + +C. Whether, pursuant to Section 21C of the Exchange Act, Respondent should be +ordered to cease and desist from committing or causing violations of and any future violations of +15 +Rule 2-02(b)(1) of Regulation S-X, and whether Respondent should be ordered to pay a civil +penalty pursuant to Section 21B(a) of the Exchange Act. + +IV. + +IT IS ORDERED that a public hearing before the Commission for the purposes of taking +evidence on the questions set forth in Section III hereof shall be convened not earlier than 30 days +and not later than 60 days from service of this Order at a time and place to be fixed by further order +of the Commission, pursuant to Rule 110 of the Commission’s Rules of Practice, 17 C.F.R. +§ 201.110. + +IT IS FURTHER ORDERED that Respondent shall file an Answer to the allegations +contained in this Order within twenty (20) days after service of this Order, as provided by Rule +220(b) of the Commission’s Rules of Practice, 17 C.F.R. § 201.220(b). + +IT IS FURTHER ORDERED that the Division of Enforcement and Respondent shall +conduct a prehearing conference pursuant to Rule 221 of the Commission’s Rules of Practice, 17 +C.F.R. § 201.221, within fourteen (14) days of service of the Answer. The parties may meet in +person or participate by telephone or other remote means; following the conference, they shall file +a statement with the Office of the Secretary advising the Commission of any agreements reached at +said conference. If a prehearing conference was not held, a statement shall be filed with the Office +of the Secretary advising the Commission of that fact and of the efforts made to meet and confer. + +If Respondent fails to file the directed Answer, or fails to appear at a hearing or conference +after being duly notified, the Respondent may be deemed in default and the proceedings may be +determined against him upon consideration of this Order, the allegations of which may be deemed +to be true as provided by Rules 155(a), 220(f), 221(f) and 310 of the Commission’s Rules of +Practice, 17 C.F.R. §§ 201.155(a), 201.220(f), 201.221(f), and 201.310. + +This Order shall be served forthwith upon Respondent by any means permitted by the +Commission’s Rules of Practice. + +The Commission finds that it would serve the interests of justice and not result in prejudice +to any party to provide, pursuant to Rule 100(c) of the Commission’s Rules of Practice, 17 C.F.R. +§ 201.100(c), that notwithstanding any contrary reference in the Rules of Practice to service of +paper copies, service to the Division of Enforcement of all opinions, orders, and decisions +described in Rule 141, 17 C.F.R. § 201.141, and all papers described in Rule 150(a), 17 C.F.R. +§ 201.150(a), in these proceedings shall be by email to the attorneys who enter an appearance on +behalf of the Division, and not by paper service . + +Attention is called to Rule 151(a), (b) and (c) of the Commission’s Rules of Practice, 17 +C.F.R. § 201.151(a), (b) and (c), providing that when, as here, a proceeding is set before the +Commission, all papers (including those listed in the following paragraph) shall be filed +electronically in administrative proceedings using the Commission’s Electronic Filings in +Administrative Proceedings (eFAP) system access through the Commission’s website, +16 +www.sec.gov, at http://www.sec.gov/eFAP. Respondent also must serve and accept service of +documents electronically. All motions, objections, or applications will be decided by the +Commission. + +The Commission finds that it would serve the interests of justice and not result in prejudice +to any party to provide, pursuant to Rule 100(c) of the Commission’s Rules of Practice, 17 C.F.R. +§ 201.100(c), that notwithstanding any contrary reference in the Rules of Practice to filing with or +disposition by a hearing officer, all filings, including those under Rules 210, 221, 222, 230, 231, +232, 233, and 250 of the Commission’s Rules of Practice, 17 C.F.R. §§ 201.210, 221, 222, 230, +231, 232, 233, and 250, shall be directed to and, as appropriate, decided by the Commission. This +proceeding shall be deemed to be one under the 120-day timeframe specified in Rule of Practice +360(a)(2)(i), 17 C.F.R. § 201.360(a)(2)(i), for the purposes of applying Rules of Practice 233 and +250, 17 C.F.R. §§ 201.233 and 250. + +The Commission finds that it would serve the interests of justice and not result in prejudice +to any party to provide, pursuant to Rule 100(c) of the Commission’s Rules of Practice, 17 C.F.R. +§ 201.100(c), that the Commission shall issue a decision on the basis of the record in this +proceeding, which shall consist of the items listed at Rule 350(a) of the Commission’s Rules of +Practice, 17 C.F.R. § 201.350(a), and any other document or item filed with the Office of the +Secretary and accepted into the record by the Commission. The provisions of Rule 351 of the +Commission’s Rules of Practice, 17 C.F.R. § 201.351, relating to preparation and certification of a +record index by the Office of the Secretary or the hearing officer are not applicable to this +proceeding. + +The Commission will issue a final order resolving the proceeding after one of the +following: (A) The completion of post-hearing briefing in a proceeding where the public hearing +has been completed; (B) The completion of briefing on a motion for a ruling on the pleadings or a +motion for summary disposition pursuant to Rule 250 of the Commission’s Rules of Practice, 17 +C.F.R. § 201.250, where the Commission has determined that no public hearing is necessary; or +(C) The determination that a party is deemed to be in default under Rule 155 of the Commission’s +Rules of Practice, 17 C.F.R. § 201.155, and no public hearing is necessary. + +In the absence of an appropriate waiver, no officer or employee of the Commission engaged +in the performance of investigative or prosecuting functions in this or any factually related +proceeding will be permitted to participate or advise in the decision of this matter, except as witness +or counsel in proceedings held pursuant to notice. Since this proceeding is not “rule making” within +the meaning of Section 551 of the Administrative Procedure Act, it is not deemed subject to the +provisions of Section 553 delaying the effective date of any final Commission action. + + By the Commission. + + + +Vanessa A. Countryman +Secretary \ No newline at end of file diff --git a/raw/aaer/2021/AAER-4227.txt b/raw/aaer/2021/AAER-4227.txt new file mode 100644 index 0000000000000000000000000000000000000000..785fd38e504cfdc707c48bedd790667a2f3d54af --- /dev/null +++ b/raw/aaer/2021/AAER-4227.txt @@ -0,0 +1,86 @@ + + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 92447 / July 20, 2021 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4227 / July 20, 2021 + +ADMINISTRATIVE PROCEEDING +File No. 3-20402 +______________________________ +: +In the Matter of : + : ORDER OF SUSPENSION PURSUANT +Shaun Greenwald, CPA : TO RULE 102(e)(2) OF THE +: COMMISSION’S RULES OF PRACTICE +Respondent. : +______________________________: + + + I. + +The Securities and Exchange Commission deems it appropriate to issue an order of +forthwith suspension of Shaun Greenwald (“Greenwald”) pursuant to Rule 102(e)(2) of the +Commission’s Rules of Practice [17 C.F.R. § 201.102(e)(2)].1 + + II. + +The Commission finds that: + +1. Greenwald, age 44, is a certified public accountant licensed to practice in the +State of New York. + +2. On February 20, 2018, Greenwald pled guilty to one count of conspiracy to +commit securities fraud, in violation of 18 U.S.C. § 371, and one count of conspiracy to defraud +the United States, also in violation of 18 U.S.C. § 371, before the United States District Court for +the District of New Jersey in United States v. Shaun Greenwald, Crim. No. 18-78 (D.N.J.). In + +1 Rule 102(e)(2) provides in pertinent part: “[A]ny ... person who has been convicted of a felony or a +misdemeanor involving moral turpitude shall be forthwith suspended from appearing or practicing before the +Commission.” + + + + +2 + +connection with the plea, Greenwald admitted that he made misrepresentations and omissions on +account opening forms for certain brokerage accounts that he opened to hide Joseph Taub’s +connection to the accounts and that he intended to trick and deceive brokerage firms into +believing that Joseph Taub was not associated with the accounts, despite the fact that he, +Greenwald, provided log-in and password information to Joseph Taub so that Taub and others +could trade in the accounts. + +3. On February 23, 2021, a criminal judgment was entered against Greenwald. He +was sentenced to probation for a term of three years, ordered to submit to home detention for a +period of eight months, ordered to forfeit all right, title and interest in the contents of a specified +bank account, and ordered to pay restitution in the amount of $394,424.00. + +III. + +In view of the foregoing, the Commission finds that Greenwald has been convicted of a +felony within the meaning of Rule 102(e)(2) of the Commission’s Rules of Practice. + +Accordingly, it is ORDERED, that Shaun Greenwald is forthwith suspended from +appearing or practicing before the Commission pursuant to Rule 102(e)(2) of the Commission’s +Rules of Practice. + + +By the Commission. + + + +Vanessa A. Countryman +Secretary + + + + + + \ No newline at end of file diff --git a/raw/aaer/2021/AAER-4229.txt b/raw/aaer/2021/AAER-4229.txt new file mode 100644 index 0000000000000000000000000000000000000000..8e1bbe884f00d6dac1ce0b61eaa124659ecf9a94 --- /dev/null +++ b/raw/aaer/2021/AAER-4229.txt @@ -0,0 +1,57 @@ +UNITED STATES OF AMERICA +before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 92458 / July 21, 2021 + +INVESTMENT ADVISERS ACT OF 1940 +Release No. 5784 / July 21, 2021 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4229 / July 21, 2021 + +Admin. Proc. File No. 3-20395 + + +In the Matter of + +STOCKMAN KAST RYAN & CO. LLP; +ELLEN S. FISHER, CPA; AND +DAVID H. KAST, CPA + + +ORDER REGARDING SERVICE + +On July 13, 2021, the Securities and Exchange Commission issued an order instituting an +administrative proceeding (“OIP”) against Stockman Kast Ryan & Co. LLP, Ellen S. Fisher, +CPA, and David H. Kast, CPA (collectively, “Respondents”), pursuant to Section 4C of the +Securities Exchange Act of 1934, Section 203(k) of the Investment Advisers Act of 1940, and +Rule 102(e)(1)(ii) of the Commission’s Rules of Practice.1 It appears that since issuance of the +OIP, there have been no filings regarding whether the OIP was served upon Respondents. +Accordingly, IT IS ORDERED that the Division of Enforcement file a status report concerning +service of the OIP by July 27, 2021, and every 28 days thereafter until service is accomplished. +The parties’ attention is directed to the most recent amendments to the Commission’s +Rules of Practice, which took effect on April 12, 2021, and which include new e-filing +requirements.2 + +1 Stockman Kast Ryan & Co., Exchange Act Release No. 92382, 2021 WL 2953521 (July +13, 2021). +2 Amendments to the Commission’s Rules of Practice, Exchange Act Release No. 90442, +2020 WL 7013370 (Nov. 17, 2020), 85 Fed. Reg. 86,464, 86,474 (Dec. 30, 2020), +https://www.sec.gov/rules/final/2020/34-90442a.pdf; Instructions for Electronic Filing and +Service of Documents in SEC Administrative Proceedings and Technical Specifications, +2 + +For the Commission, by the Office of the General Counsel, pursuant to delegated +authority. + + + Vanessa A. Countryman + Secretary + +https://www.sec.gov/efapdocs/instructions.pdf. The amendments impose other obligations such +as a new redaction and omission of sensitive personal information requirement. Amendments to +the Commission’s Rules of Practice, 85 Fed. Reg. at 86,465-81. And the amendments provide +further requirements if a person cannot reasonably comply with the electronic filing requirements +due to lack of access to electronic transmission devices. Id. at 86,478-79. \ No newline at end of file diff --git a/raw/aaer/2021/AAER-4235.txt b/raw/aaer/2021/AAER-4235.txt new file mode 100644 index 0000000000000000000000000000000000000000..19d9bf8d635231cac8bd7a7480a3a3f318a03cfe --- /dev/null +++ b/raw/aaer/2021/AAER-4235.txt @@ -0,0 +1,383 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 92514 / July 28, 2021 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4235 / July 28, 2021 + +ADMINISTRATIVE PROCEEDING +File No. 3-18346 + + + +In the Matter of + +David Britt, CPA, + +Respondent. + + + + + +ORDER MAKING FINDINGS AND +IMPOSING REMEDIAL SANCTIONS +AND AND- AND A CEASE-AND-DESIST ORDER +PURSUANT TO SECTIONS 4C AND 21C OF +THE SECURITIES EXCHANGE ACT OF 1934 +AND RULE 102(e) OF THE COMMISSION’S +RULES OF PRACTICE + + +I. + + On January 22, 2018, the Securities and Exchange Commission (“Commission”) deeming +it appropriate instituted public administrative and cease-and-desist proceedings against David Britt +(“Britt” or “Respondent”) pursuant to Sections 4C1 and 21C of the Securities Exchange Act of +1934 (“Exchange Act”) and Rule 102(e)(1)(ii) and 102(e)(1)(iii) of the Commission’s Rules of +Practice.2 + +1 Section 4C provides, in relevant part, that: + +The Commission may censure any person, or deny, temporarily or permanently, to any person the +privilege of appearing or practicing before the Commission in any way, if that person is found . . . +(1) not to possess the requisite qualifications to represent others; (2) to be lacking in character or +integrity, or to have engaged in unethical or improper professional conduct; or (3) to have willfully +violated, or willfully aided and abetted the violation of, any provision of the securities laws or the +rules and regulations issued thereunder. + +2 Rule 102(e)(1)(ii) provides, in pertinent part, that: + +2 +II. + +Respondent has submitted an Offer of Settlement (the “Offer”), which the Commission has +determined to accept. Solely for the purpose of these proceedings and any other proceedings +brought by or on behalf of the Commission, or to which the Commission is a party, Respondent +admits the Commission’s jurisdiction over him and the subject matter of these proceedings, and +consents to the entry of this Order Making Findings and Imposing Remedial Sanctions and a Cease- +and-Desist Order Pursuant to Sections 4C and 21C of the Securities Exchange Act of 1934 and Rule +102(e) of the Commission’s Rules of Practice (“Order”), as set forth below. + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds3 that: + +SUMMARY + +1. This case involves the unauthorized disclosures of confidential information from +the Public Company Accounting Oversight Board (“PCAOB” or “Board”) and a concerted effort +by now-former members of KPMG’s Audit Quality and Professional Practice group (“AQPP” or +“National Office”) – including David Britt – to use that information to improve the results of the +PCAOB’s annual inspections of KPMG audits. +2. In 2015, KPMG hired Brian Sweet from the PCAOB to work in its National Office. +On his last day at the PCAOB, Brian Sweet took sensitive inspections-related documents to use as +a resource in his new job. After starting at KPMG, Sweet received additional confidential PCAOB +materials from Cynthia Holder, then a PCAOB employee. In 2016 and 2017, a third PCAOB +employee, Jeffrey Wada, leaked confidential information relating to the PCAOB’s planned +inspections of KPMG to Holder after she had left the PCAOB and joined KPMG. +3. Shortly after joining the firm, Sweet provided Britt the names of several KPMG +banking clients the PCAOB planned to inspect in 2015, but had not yet announced to the firm. +This was valuable information to KPMG, which had experienced a high rate of audit deficiency +findings and had made a priority of improving its PCAOB inspection results. + +The Commission may . . . deny, temporarily or permanently, the privilege of appearing or +practicing before it . . . to any person who is found to be lacking in character or integrity or to have +engaged in unethical or improper professional conduct. + + Rule 102(e)(1)(iii) provides, in pertinent part, that: + +The Commission may . . . deny, temporarily or permanently, the privilege of appearing or +practicing before it . . . to any person who is found…to have willfully violated, or willfully aided +and abetted the violation of any provision of the Federal securities laws or the rules and +regulations thereunder. + +3 The findings herein are made pursuant to Respondent’s Offer of Settlement and are not binding on any +other person or entity in this or any other proceeding. +3 +4. After Wada sent Holder the list of the PCAOB’s planned inspections for 2016, Britt +facilitated an effort by other now-former KPMG personnel to review and revise certain audit +workpapers after the audit reports had been issued to reduce the likelihood that the PCAOB would +find deficiencies in those audits. This effort resulted in a substantial improvement to KPMG’s +2016 inspection results. +5. In 2017, Britt and the now-former KPMG personnel again obtained the list of audit +engagements that the PCAOB planned to inspect after Wada leaked the information to Holder. +However, the misconduct was discovered by others within the firm and reported to KPMG +leadership before relevant workpapers could be changed. +RESPONDENT + +6. David Britt, 57, of Salvo, North Carolina, was a Partner in KPMG’s Department of +Professional Practice within AQPP, in which he was the Banking and Capital Markets Group Co- +Leader until March 2017, and was separated from the firm the following month. Britt was +previously licensed as a CPA in California, the District of Columbia, and New York. +OTHER RELEVANT PERSONS AND ENTITY + +7. Brian Sweet, 43, of Fresno, California, was a Partner in KPMG’s Department of +Professional Practice-Inspections group until March 2017. He was separated from the firm at the +end of March 2017. Prior to joining KPMG, Sweet was an Associate Director in the PCAOB’s +inspections group from March 2014 until April 2015. Sweet was previously licensed as a CPA in +California, Illinois, and New York. The Commission has charged Sweet for his role in the +misconduct described in this Order. +8. Cynthia Holder, 55, of Houston, Texas was an Executive Director in KPMG’s +Department of Professional Practice-Inspections group from August 2015 until April 2017, when +she was separated from the firm. Prior to joining KPMG, Holder was an Inspections Specialist and +Inspections Leader at the PCAOB from December 2011 until August 2015. Holder was previously +licensed as a CPA in New Jersey and Texas. The Commission has charged Holder for her role in +the misconduct described in this Order. +9. Jeffrey Wada, 45, of Tustin, California was an Inspections Leader at the PCAOB +from February 2012 until February 2017. Wada is no longer at the PCAOB. Wada was previously +licensed as a CPA in California. The Commission has filed litigated administrative and cease-and- +desist proceedings against Wada alleging misconduct related to the events described in this Order. +10. David Middendorf, 57, of Marietta, Georgia, was KPMG’s National Managing +Partner for AQPP until March 2017, and was separated from the firm the following month. +Middendorf was previously licensed as a CPA in Georgia, New York, Ohio, and Texas. The +Commission has filed litigated administrative and cease-and-desist proceedings against +Middendorf alleging misconduct related to the events described in this Order. +4 +11. Thomas Whittle, 57, of Gladstone, New Jersey, was KPMG’s National Partner-In- +Charge for Quality Measurement until March 2017, and was separated from the firm the following +month. Whittle was previously licensed as a CPA in Connecticut, New Jersey, New York and +Pennsylvania. The Commission has charged Whittle for his role in the misconduct described in +this Order. +12. KPMG LLP is a Delaware limited liability partnership and PCAOB-registered +accounting firm. Headquartered in New York, New York, KPMG is the U.S. member firm of +KPMG International Cooperative, a Swiss entity. The Commission has charged KPMG for its role +in the misconduct described in this Order.4 +FACTS + +The PCAOB’s Inspections Process and KPMG’s Efforts to Improve Its Results + +13. The PCAOB was created as part of the Sarbanes-Oxley Act of 2002 to oversee the +audits of public companies that are subject to the federal securities laws in order to protect the +interests of investors and further the public interest in the preparation of informative, accurate, and +independent audit reports. +14. One of the essential ways in which the PCAOB fulfills this mission is by inspecting +audits of public companies conducted by registered public accounting firms. Through these +inspections, the PCAOB assesses the audit firms’ compliance with the statutes, regulations, and +professional standards governing the accounting profession. The PCAOB typically selects the +audit engagements it will inspect based on confidential internal analyses and thereafter notifies +firms of which audits it will inspect. The PCAOB typically issues inspection reports, only parts of +which are made public, after all the inspections for a firm in a given cycle are complete. To ensure +the integrity of the inspection process, the PCAOB closely guards the confidentiality of both its +inspection targets prior to firm notification and its methodology for selecting those targets. +15. In September 2014, the PCAOB issued a report regarding its 2013 inspections of +KPMG audits. The report found that out of 50 audits the PCAOB inspected, 23 had deficiencies. +This 46 percent deficiency rate reflected a significant increase from KPMG’s 34 percent deficiency +rate the previous year. +The Use of Confidential PCAOB Information Sweet Misappropriated in 2015 + +16. As part of its efforts to improve its PCAOB inspection results, KPMG hired Brian +Sweet, an Associate Director at the PCAOB who had worked on the team inspecting KPMG +audits. Sweet joined KPMG as a partner in the group within the firm’s National Office responsible +for PCAOB inspections. Sweet reported to Thomas Whittle, who was then the KPMG partner +responsible for overseeing the PCAOB’s inspections of the firm. Whittle, in turn, reported to + +4 KPMG LLP, Exchange Act Release No. 86118 (June 17, 2019). + +5 +David Middendorf, who then oversaw the National Office’s audit quality and professional practice +work. +17. In April 2015, shortly before leaving the PCAOB, Sweet copied from an internal +database to his office computer various confidential inspection-related materials he believed might +be of use to him when he joined KPMG. On his final day at the PCAOB, Sweet transferred these +materials, along with the other files on his PCAOB computer, to a personal hard drive that he took +with him. Sweet also took from the PCAOB hard copy documents and retained other confidential +PCAOB documents he had previously brought home. +18. The documents Sweet improperly took included PCAOB inspection planning +information, inspection guides and manuals, and drafts of confidential inspection comment forms. +The planning materials included the confidential list of KPMG audit engagements the PCAOB +intended to inspect in 2015, the focus areas for each inspection, and a list of all the quantitative and +qualitative criteria the Board used in deciding which KPMG audit engagements to inspect. +19. Upon joining KPMG in May 2015, Sweet transferred the PCAOB documents from +his personal hard drive to his computer at the firm. +20. On his first day at the firm in May 2015, Sweet had lunch with Middendorf and +other partners in KPMG’s National Office, including Britt, who was then a Partner in the National +Office’s Department of Professional Practice and co-leader of KPMG’s Banking and Capital +Markets Group. Over lunch, Sweet’s new colleagues asked him various questions about the +PCAOB’s inspections of KPMG. Sweet testified that one of the questions Middendorf asked +Sweet was whether the PCAOB intended to inspect a specific KPMG banking client that year. +Without answering directly, Sweet indicated the PCAOB planned to do so. Sweet testified that +Middendorf told him the next day that Sweet needed “to share insight and add value and be fully +open when it came to that type of information,” and to “remember where [your] paycheck came +from” and that Sweet had to be “completely loyal to KPMG and KPMG only.” +21. On June 15, 2015, Sweet met with Britt and identified a number of KPMG banking +clients the PCAOB planned to inspect in 2015, but had not yet announced to the firm. The next +day, Britt asked Sweet to review his notes so he could give Britt the “last 3 Bank names” that +Sweet could not recall during their meeting. After consulting the confidential information Sweet +had taken from the PCAOB, Sweet shared this information with Britt later that day, asking Britt to +note its sensitivity and to “use your discretion with this info.” +The Use of Confidential PCAOB Information Obtained from Wada in 2016 + +22. On March 28, 2016, Jeffrey Wada, an Inspections Leader at the PCAOB who had +previously performed work on KPMG inspections but was then assigned to inspect another audit +firm, called Cynthia Holder – a friend and former PCAOB Inspections Leader whom Sweet had +recruited to join KPMG’s National Office – and read to her the names of thirteen KPMG clients +6 +the Board planned to inspect.5 Holder provided this information to Sweet, who then immediately +relayed the list to Middendorf, Whittle, and Britt, informing them that it had come from a former +colleague at the PCAOB. +23. Wada sent the list of the PCAOB’s planned inspections at a critical time. In early +February 2016, Middendorf and other members of KPMG’s leadership team had met with staff +from the Commission’s Office of the Chief Accountant. During that meeting, Commission +personnel expressed significant concerns about the firm’s audit quality and questioned whether +KPMG was adequately addressing these issues. Middendorf told Whittle, Sweet, and Britt they +should use the list of inspection targets Wada had sent to protect KPMG from further criticism by +its regulators. +24. Middendorf, Whittle, Britt, and Sweet believed they could use Wada’s list in this +way because they had learned of the audits that would be inspected at a time when firm personnel +were still able to access and revise audit workpapers. Though KPMG had already issued audit +reports for each of these engagements, it was within the 45-day period in which professional audit +standards and firm policy allowed audit teams to complete the administrative process of +assembling final audit files.6 At the end of this 45-day period, KPMG locked audit workpapers +from editing absent special circumstances.7 +25. Recognizing that the workpapers had not yet been locked per KPMG’s policy, +Middendorf, Whittle, and Britt agreed to have Sweet and others conduct an additional review of +the audit workpapers for the seven banks on the list Wada had provided that were part of a key +monitoring program run by the National Office to determine whether anything could be done to +minimize the risk of receiving inspection comments from the PCAOB.8 Middendorf and Whittle + +5 Of the 13 clients, 11 were bank holding or other financial services companies and 2 were other issuers that +Wada appears to have thought were also bank holding or other financial services companies. It appears that Wada +identified these engagements for Holder because her responsibilities at KPMG included advising banking +engagement teams. + +6 See Auditing Standard No. 3, Audit Documentation, paragraph 15. “Prior to the report release date, the +auditor must have completed all necessary auditing procedures and obtained sufficient evidence to support the +representations in the auditor’s report. A complete and final set of audit documentation should be assembled for +retention as of a date not more than 45 days after the report release date (documentation completion date).” +References to PCAOB standards are to those that were in effect at the time of the relevant conduct. + +7 KPMG has since revised its audit documentation policies, requiring electronic workpapers to be assembled +and locked within two business days of issuance of the report. + +8 As the PCAOB found an increasing number of audit deficiencies by KPMG beginning in 2013, KPMG’s +National Office implemented “monitoring programs” that worked with audit engagement teams and reviewed +workpapers to improve compliance with professional standards. One of these programs focused on the audits of +certain banking clients’ Allowance for Loan and Lease Losses. KPMG further developed this monitor ing program +in 2015 in response to numerous deficiencies the PCAOB had identified in this area. The success of this program +was especially important to KPMG because the firm had promoted it as proof of the seriousness with which the firm +was working to improve its audit quality. + +7 +instructed that no one in the briefing should disclose that they had obtained confidential PCAOB +information. +26. To conceal the true purpose of their efforts, Britt falsely told others at KPMG that +they were performing work in the ordinary course of business on all 35 banking engagements in +the Allowance for Loan and Lease Losses (“ALLL”) monitoring program. On March 28, 2016, +Britt sent the engagement partners for these audits an email stating that, “[a]s part of our wrap up +and reporting of the results of the ALLL monitoring program we need to gather some additional +information” from the audit workpapers.9 +27. Over the next few weeks, Sweet, Holder, and various partners and managing +directors in the National Office engaged in a review of the audit workpapers of the seven banks in +the monitoring program that were on the list Wada provided. The National Office professionals +suggested edits and proposed revisions to the engagement teams, which then decided what +revisions to incorporate into the final audit workpapers.10 +28. In contrast to prior years, KPMG’s 2016 inspection results did not include any +comments related to the general Allowance for Loan and Lease Losses – an area where KPMG had +historically received criticism related to financial services audits. The PCAOB did not publish the +results because KPMG reported the misconduct to the PCAOB before the PCAOB issued the 2016 +report. However, the PCAOB had designated two of the bank audits in the ALLL monitoring +program whose workpapers Sweet had reviewed as “positive quality events,” which meant they +were so successful the PCAOB wanted to understand the factors driving the audit’s quality. +Indeed, the level of improvement in the inspection results led Whittle to be concerned that if +KPMG could not obtain confidential PCAOB information for the next inspection cycle, there could +be a return of audit deficiencies that would be difficult to explain. +29. After the misconduct was discovered, the PCAOB conducted inspections of ten +additional banks for the 2016 inspection cycle to replace the ones for which improper advance +notice had been obtained. The PCAOB found that six of these audits had deficiencies with respect +to auditing the ALLL. +The Use of Confidential PCAOB Information Obtained from Wada in 2017 + +30. In early January 2017, Wada provided Holder a “preliminary” list of PCAOB +inspection targets for 2017. On January 9, Holder relayed the names of the clients on the list to +Sweet. That night, Sweet, Whittle, and Britt discussed this information. Whittle instructed Sweet + +9 Britt also asked a subordinate who previously had been in the Department of Professional Practice and was +then assigned to an audit engagement on the list to conduct his own “stealth” review of workpapers for one KPMG +audit client. + +10 Middendorf, Whittle, Sweet, and Britt had agreed that Sweet would lead a team of National Office +professionals to review the workpapers of the banks in the monitoring program, and that Middendorf, Whittle, and +Britt would handle the other issuers on the list they received from Wada. + +8 +to warn certain engagement partners about the potential inspections, but to be circumspect in how +he communicated these matters with KPMG colleagues. After that meeting, Sweet contacted the +engagement partners for two of the audits on the January 2017 list to warn them about the potential +inspections. Whittle also discussed the January 2017 list with Middendorf. As a result of that +discussion, Middendorf and Whittle assigned additional National Office resources to assist with +two of the active audits on that list.11 +31. In early February 2017, Wada conveyed to Holder a list of 47 ticker symbols that +Holder understood to be the final list of KPMG audits the PCAOB would inspect that year. Sweet +testified that Wada also provided Holder the inspection focus areas for the banks on the list (as well +as for another KPMG engagement), and the PCAOB’s list of KPMG engagement partners with +“poor performance evaluations.” +32. Holder relayed the information to Sweet, who then shared it with Middendorf, +Whittle, and Britt. Though Sweet questioned what to do with that information, Middendorf +replied, “this is information that’s too good not to use.” Unlike the prior lists of PCAOB +inspection targets, the audits on the February 2017 list were ongoing, thus providing substantially +greater ability to improve the audit workpapers. +33. Sweet’s notice to one KPMG engagement partner that her engagement was on the +final list caused her to suspect that the firm may have received confidential PCAOB information. +These concerns were subsequently reported to the firm’s management, which then reported the +matter to the PCAOB, and KPMG began an investigation. +VIOLATIONS + +34. As a result of the conduct described above, Respondent willfully violated PCAOB +Rule 3500T, which requires members to maintain integrity when performing any professional +service in connection with the preparation or issuance of any audit report, within the meaning of +Section 4C(a)(3) of the Exchange Act and Rule 102(e)(1)(iii) of the Commission’s Rules of +Practice. +35. As a result of the conduct described above, Respondent willfully aided and abetted +and caused Sweet’s violation of PCAOB Ethics Code Section EC3, which prohibits PCAOB staff +from acting in a manner which might reasonably result in or reasonably create the appearance that +the employee is using confidential information obtained through service for the Board for the +private gain of any person, within the meaning of Section 4C(a)(3) of the Exchange Act and Rule +102(e)(1)(iii) of the Commission’s Rules of Practice. +36. As a result of the conduct described above, Respondent willfully aided and abetted +and caused Sweet’s violation of PCAOB Ethics Code Section EC9, which prohibits PCAOB staff +from disseminating or otherwise disclosing any information obtained in the course and scope of his + +11 Middendorf was the Engagement Quality Review partner on one of those audits. In this role, he was +responsible for evaluating the significant judgments and related conclusions the audit team made in reaching the +overall conclusion reflected in the audit report. + +9 +or her employment, and which has not been released, announced, or otherwise made available +publicly, within the meaning of Section 4C(a)(3) of the Exchange Act and Rule 102(e)(1)(iii) of +the Commission’s Rules of Practice. +FINDINGS + +37. Based on the foregoing, the Commission finds that Britt willfully violated PCAOB +Rule 3500T, and willfully aided and abetted and caused Sweet’s violations of PCAOB Ethics Code +Sections EC3 and EC9 within the meaning of Section 4C(a)(3) of the Exchange Act and Rule +102(e)(1)(iii) of the Commission’s Rules of Practice. +38. Based on the foregoing, the Commission finds that Britt lacks integrity pursuant to +Section 4C(a)(2) of the Exchange Act and Rule 102(e)(1)(ii) of the Commission’s Rules of +Practice. +39. Based on the foregoing, the Commission finds that Britt engaged in improper +professional conduct pursuant to Section 4C(a)(2) of the Exchange Act and Rule 102(e)(1)(ii) of +the Commission’s Rules of Practice. +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent Britt’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + +A. Britt shall cease and desist from committing or causing any violations and any +future violations of PCAOB Rule 3500T and PCAOB Ethics Code Sections EC3 and EC9. + + B. Britt is denied the privilege of appearing or practicing before the Commission as an +accountant. + + By the Commission. + + + + Vanessa A. Countryman + Secretary \ No newline at end of file diff --git a/raw/aaer/2021/AAER-4237.txt b/raw/aaer/2021/AAER-4237.txt new file mode 100644 index 0000000000000000000000000000000000000000..9607ec68174458e371d0882dd46f347ff10a420d --- /dev/null +++ b/raw/aaer/2021/AAER-4237.txt @@ -0,0 +1,70 @@ +UNITED STATES OF AMERICA +before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 92534 / July 30, 2021 + +INVESTMENT ADVISERS ACT OF 1940 +Release No. 5811 / July 30, 2021 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4237 / July 30, 2021 + +Admin. Proc. File No. 3-20395 + + +In the Matter of + +STOCKMAN KAST RYAN & CO. LLP; +ELLEN S. FISHER, CPA; AND +DAVID H. KAST, CPA + + +ORDER + +On July 13, 2021, t he Securities and Exchange Commission issued an order instituting an +administrative proceeding (“OIP”) against Stockman Kast Ryan & Co. LLP, Ellen S. Fisher, +CPA, and David H. Kast, CPA (collectively, “Respondents”), pursuant to Section 4C of the +Securities Exchange Act of 1934, Section 203(k) of the Investment Advisers Act of 1940, and +Rule 102(e)(1)(ii) of the Commission’s Rules of Practice. 1 In compliance with the statutory +provision governing cease-and-desist proceedings, the OIP specified that a “public hearing +before the Commission for the purpose of taking evidence . . . shall be convened not earlier than +30 days and not later than 60 days” from service of the OIP.2 The statute also provides that “an +earlier or later date” for the hearing may be “set by the Commission with the consent of any +respondent so served.”3 + +1 Stockman Kast Ryan & Co. , Exchange Act Release No. 92382, 2021 WL 2953521 (July +13, 2021). +2 Id. at *35. +3 15 U.S.C. § 78u-3(b). +2 + +Respondents were served with the OIP on July 19, 2021.4 As a consequence, in the +absence of consent by Respondents regarding a later hearing date, a public hearing will be set for +a date on or before September 17, 2021. To facilitate the orderly and expeditious resolution of +this matter, it is ORDERED that the parties shall file a statement advising the Commission of +any agreement to a later hearing date (or a statement that no agreement could be reached) by +August 6, 2021. In the event the parties do not reach an agreement by that date, this order does +not preclude the parties from reaching such an agreement subsequently. The Commission will +specify further proceedings by subsequent order. +The parties’ attention is directed to the most recent amendments to the Commission’s +Rules of Practice, which took effect on April 12, 2021, and which include new e-filing +requirements.5 +For the Commission, by the Office of the General Counsel, pursuant to delegated +authority. + + + Vanessa A. Countryman + Secretary + +4 The Division of Enforcement sent a copy of its notice of service to the Office of +Administrative Law Judges. We remind the parties that the OIP set the matter down for a +hearing before the Commission. Stockman Kast Ryan , 2021 WL 2953521, at *35. +5 Amendments to the Commission’s Rules of Practice , Exchange Act Release No. 90442, +2020 WL 7013370 (Nov. 17, 2020), 85 Fed. Reg. 86,464, 86,474 (Dec. 30, 2020), +https://www.sec.gov/rules/final/2020/34-90442a.pdf; Instructions for Electronic Filing and +Service of Documents in SEC Administrative Proceedings and Technical Specifications , +https://www.sec.gov/efapdocs/instructions.pdf. The amendments impose other obligations such +as a new redaction and omission of sensitive personal information requirement. Amendments to +the Commission’s Rules of Practice , 85 Fed. Reg. at 86,465-81. \ No newline at end of file diff --git a/raw/aaer/2021/AAER-4241.txt b/raw/aaer/2021/AAER-4241.txt new file mode 100644 index 0000000000000000000000000000000000000000..5e59d237bfb3490bd4f87d24e9c1bc0109d01217 --- /dev/null +++ b/raw/aaer/2021/AAER-4241.txt @@ -0,0 +1,373 @@ + + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 92611 / August 9, 2021 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4241 / August 9, 2021 + +ADMINISTRATIVE PROCEEDING +File No. 3-20456 + + +In the Matter of + +GARY S. KLEIN + +Respondent. + + +ORDER INSTITUTING CEASE-AND- +DESIST PROCEEDINGS, PURSUANT TO +SECTION 21C OF THE SECURITIES +EXCHANGE ACT OF 1934, MAKING +FINDINGS, AND IMPOSING A CEASE- +AND-DESIST ORDER + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate that cease- +and-desist proceedings be, and hereby are, instituted pursuant to 21C of the Securities Exchange +Act of 1934 (“Exchange Act”) against Gary S. Klein (“Klein” or “Respondent”). + +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer of +Settlement (the “Offer”) which the Commission has determined to accept. Solely for the purpose of +these proceedings and any other proceedings brought by or on behalf of the Commission, or to which +the Commission is a party, and without admitting or denying the findings herein, except as to the +Commission’s jurisdiction over him and the subject matter of these proceedings, which are admitted, +and except as provided herein in Section V, Respondent consents to the entry of this Order Instituting +Cease-and-Desist Proceedings, Pursuant to Section 21C of the Securities Exchange Act of 1934, +Making Findings, and Imposing a Cease-and-Desist Order (“Order”), as set forth below. + + + 2 +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds1 that: + +Summary + +1. From the fourth quarter of 2016 through his departure from the Company on August +31, 2017 (the “Relevant Period”), Gary S. Klein, the former Chief Financial Officer (“CFO”) of +Sequential Brands Group, Inc. (“Sequential” or the “Company”), caused Sequential to file +materially inaccurate disclosures in its current and periodic reports and to maintain inaccurate books +and records regarding goodwill. By the fourth quarter of 2016, Sequential’s goodwill was more +likely than not impaired, but impairment was not recognized until the fourth quarter of 2017, when +Sequential belatedly impaired $304.1 million of goodwill. + +2. During the Relevant Period and in accordance with GAAP, Sequential was required +to test its goodwill for impairment at least annually. Sequential was also required to conduct +interim goodwill impairment tests to the extent an event occurred or circumstances arose that +indicated that it was more likely than not that a goodwill impairment existed. Accounting guidance +references a sustained decrease in stock price as one such event or circumstance to be considered. +Sequential passed its annual goodwill impairment test as of October 1, 2016. However, after the +Company lowered its 2016 and 2017 earnings guidance on November 3, 2016, its stock price, +which had been declining since at least mid-2015, dropped by approximately 40 percent. +Sequential subsequently conducted two internal fair value calculations, as of mid-December 2016 +and year-end 2016, which showed that the Company’s market capitalization (including a control +premium) had declined below its carrying amount. These internal calculations used the same +methodology that Sequential had disclosed in its SEC filings and had used in connection with its +annual goodwill impairment testing. Sequential, however, did not appropriately account for this +quantitative evidence of likely impairment and instead performed a qualitative analysis, which +omitted consideration of its internal fair value calculations and did not give sufficient consideration +to other negative factors relevant to the Company’s business. As a result, the Company +unreasonably concluded that goodwill was not impaired. + +3. As CFO, Respondent oversaw Sequential’s assessments of whether its goodwill +should be impaired. During this period, Respondent was aware of information indicating that +Sequential’s goodwill was more likely than not impaired and, as a consequence, he should have +known that Sequential’s financial disclosures and books and records did not accurately reflect its +goodwill. Respondent also caused Sequential’s failure to implement and maintain adequate +internal accounting controls regarding interim assessments of goodwill impairment. + + +1 The findings herein are made pursuant to Respondent’s Offer of Settlement and are not +binding on any other person or entity in this or any other proceeding. + + 3 +4. As a result of the conduct described in this Order, Respondent caused Sequential’s +violations of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, +13a-1, 13a-11, and 13a-13 promulgated thereunder. + +Respondent + +5. Gary S. Klein, age 45, is a resident of New Jersey, and served as Sequential’s CFO +from November 29, 2012 through August 31, 2017. Klein is not a Certified Public Accountant and +does not hold any securities licenses. + +Relevant Entity + +6. Sequential Brands Group, Inc. is a Delaware corporation headquartered in New +York, New York. Sequential owns a portfolio of consumer brands and promotes, markets, and +licenses those brands through retailers, wholesalers and distributors in the United States and +abroad. Sequential’s common stock is registered with the Commission under Section 12(b) of the +Exchange Act and traded on the Nasdaq Capital Market under the ticker symbol “SQBG” at all +times during the Relevant Period. + +Facts + +Sequential’s Business, its Declining Stock Price, and its Goodwill + +7. During the Relevant Period, Sequential owned and managed a portfolio of +consumer brands and promoted, marketed, and licensed those brands through retailers, +wholesalers, and distributors in the United States and abroad. + +8. While Respondent was Sequential’s CFO, Sequential acquired consumer brands, +which created substantial goodwill on its balance sheet. During the Relevant Period, Sequential’s +indefinite-lived intangible assets, including goodwill, constituted the overwhelming majority of the +Company’s assets. As of December 31, 2016, intangible assets, including goodwill, represented +$1.3 billion, or 93 percent, of Sequential’s total assets, and goodwill represented $307.7 million, or +21.4 percent, of Sequential’s total assets. + +9. Sequential’s stock price steadily declined during this period, beginning no later than +mid-2015, and continuing through 2017. Sequential’s stock price was a particularly important +consideration in Sequential’s goodwill impairment testing, since the Company’s goodwill +impairment testing policy, disclosed throughout 2016 in Sequential’s quarterly and annual reports +on Forms 10-Q and 10-K, expressly stated that Sequential considered its market capitalization +(calculated as total common shares outstanding multiplied by the common equity price per share, +as adjusted for a control premium factor) to represent its estimated fair value. + +10. Accounting Standard Codification (“ASC”) 350, Intangibles —Goodwill and Other, +addresses the measurement of goodwill subsequent to its acquisition, including testing for +impairment to goodwill, which must be conducted at least annually. ASC 350 also requires entities + 4 +to conduct interim goodwill impairment testing when certain indicators, or “triggering events,” are +present, such as adverse changes in the business climate or market that might negatively affect the +value of a reporting unit. Interim goodwill impairment testing is therefore required “if an event +occurs or circumstances exist that indicate that it is more likely than not that a goodwill impairment +exists.” See ASC 350-20-35-30. A sustained decrease in stock price may be an indicator of +impairment under ASC 350. See ASC 350-20-35-3C. + +Sequential’s Annual Goodwill Impairment Testing for 2016 + +11. Sequential performed its annual goodwill impairment test as of October 1, 2016. In +connection with its annual testing, Sequential retained an external valuation consultant (the +“Consultant”) to conduct a quantitative assessment of the Company’s fair value, using Sequential’s +market capitalization (number of shares of stock outstanding, times stock price), adjusted for a +control premium factor.2 + +12. Sequential’s stock price continued to decline in 2016. By the end of 2016, +Sequential’s stock price was approximately 40 percent lower than its price on October 1, the date +of its annual goodwill impairment test. + +13. On December 6, 2016, the Consultant provided Sequential with a report showing +that its calculation of the Company’s estimated fair value indicated that Sequential’s goodwill was +not impaired as of the testing date, October 1, 2016. At Respondent’s direction, Sequential +incorporated the Consultant’s findings into a memorandum documenting its annual impairment +testing (the “Goodwill Memorandum”) and concluded that its goodwill was not impaired as of +October 1, 2016. + +14. On December 14, 2016, Respondent directed senior accounting and finance +personnel who reported to him to conduct an analysis using the same quantitative methodology as +used by the Consultant in connection with the annual goodwill impairment test. This analysis +showed that Sequential’s estimated fair value as determined by that methodology had fallen below +the Company’s carrying amount by approximately $63 million. + +15. During the preparation of the Company’s 2016 financial statements, Respondent +again directed senior accounting and finance personnel who reported to him to perform this same +calculation, this time applying Sequential’s stock price as of December 31, 2016. This result +showed that, as of year-end 2016, Sequential’s estimated fair value as determined by that +methodology had fallen below the Company’s carrying amount by approximately $96 million. + +16. Under ASC 350, Sequential could not reasonably ignore the objective, quantitative, +observable evidence from the December 14 and December 31 calculations that goodwill was more +likely than not impaired as of December 2016. Sequential violated GAAP and the federal + +2 A “control premium” represents the amount that a buyer would be willing to pay over the +current market price of a publicly traded company to acquire a controlling share in that company. + + 5 +securities laws by neither conducting a quantitative assessment to confirm the impairment and to +determine its magnitude, nor considering this objective evidence in a qualitative assessment. +Rather, in connection with the preparation of the Company’s year-end 2016 financial statements, +senior accounting and finance staff documented a qualitative analysis as of December 31, 2016 to +“supplement” the Goodwill Memorandum that they had prepared to memorialize the Company’s +annual goodwill impairment testing as of October 1, 2016. + +17. This qualitative analysis, prepared under Respondent’s oversight and with his +approval, omitted consideration of the results of the two goodwill impairment analyses conducted +for the fourth quarter of 2016 and did not give sufficient consideration to other negative factors +relevant to the Company’s business that pertained specifically to fair value, which were required, +under ASC 350-20-35-3F, to be evaluated as potential indicators of impairment in the assessment +of impairment under ASC 350. + +18. Based on the foregoing, Sequential unreasonably concluded that goodwill was not +likely impaired and therefore no further quantitative goodwill impairment testing of goodwill was +required. + +Sequential Unreasonably Disregarded Triggering +Events and Changes in Circumstances in Q1 and Q2 of 2017 + +19. ASC 350 requires entities to conduct interim goodwill impairment testing when +certain indicators, or “triggering events,” are present, such as adverse changes in the business +climate or market that might negatively affect the value of a reporting unit. Interim goodwill +impairment testing is therefore required “if an event occurs or circumstances exist that indicate that +it is more likely than not that a goodwill impairment exists.” See ASC 350-20-35-30. + +20. Between January 1, 2017 and June 30, 2017, additional indicators, or triggering +events, suggested that Sequential’s goodwill was more likely than not impaired, including: + +a. Sequential issued downward revised earnings guidance for a second time in a +period of three months; + +b. Sequential’s stock price declined by another 16 percent in the first quarter of 2017; +and + +c. Sequential’s Chief Executive Officer was removed. + +21. As Sequential’s CFO, Respondent oversaw the Company’s goodwill impairment +testing and monitoring for triggering events in interim periods. Despite the presence of these +indicators of impairment in the first half of 2017, Sequential concluded that no interim goodwill +impairment testing was necessary and continued to carry over $300 million of goodwill on its +financial statements as non-impaired during the first two quarters of 2017. + + + 6 +Sequential’s Internal Accounting Control Failures + +22. During the Relevant Period, Sequential lacked adequate internal accounting +controls to provide reasonable assurance that the Company would perform and record its interim +and annual assessments of goodwill for impairment as necessary to permit preparation of financial +statements in conformity with GAAP. + +23. Sequential failed to implement internal accounting controls, policies and procedures +reasonably designed to identify potential indicators or triggers for impairment and to cause the +Company to conduct appropriate interim goodwill impairment testing where, pursuant to ASC 350, +indicators of impairment were present. + +24. Sequential also failed to implement internal accounting controls, policies and +procedures reasonably designed to cause the Company to conduct appropriate impairment testing +where, pursuant to ASC 350, it was more likely than not that the carrying amount of Sequential’s +reporting unit exceeded its fair value. + +Sequential’s Material Misstatements and Omissions in SEC Filings and +Financial Statements + +25. As a result of the Company’s failure to timely impair goodwill, its financial +statements for 2016 contained several material accounting errors, including: (i) an overstatement of +income from operations; (ii) an understatement of operating expenses; (iii) an understatement of +net loss; (iv) an overstatement of goodwill; and (v) an overstatement of total assets. + +26. Sequential carried these errors forward into the first two quarters of 2017. Its +financial statements for the first two quarters of 2017 contained several material accounting errors, +including: (i) an overstatement of goodwill; (ii) an overstatement of total assets; (iii) an +understatement of accumulated deficit; and (iv) an overstatement of stockholders’ equity. + +27. Sequential made additional misstatements and omissions related to its goodwill +impairment testing in its periodic and current reports. These included its failure to disclose that it +had conducted objective market capitalization analyses for the fourth quarter of 2016, using the +same methodology as used in connection with its annual testing, which showed that its carrying +amount likely exceeded fair value. Sequential also failed to disclose that it omitted the unfavorable +results of these calculations from its qualitative goodwill impairment assessment conducted at +year-end 2016. + +28. These material misstatements and omissions occurred in Sequential’s 2016 annual +report on Form 10-K, filed on March 14, 2017, its current reports on Form 8-K reporting its +earnings results for 2016 and the first two quarters of 2017, furnished on March 2, May 4 and July +27, 2017, respectively, and its quarterly reports on Form 10-Q for the first two quarters of 2017, +filed May 10 and August 9, 2017, respectively. Except for the Form 8-K furnished on July 27, +2017, Respondent also signed each of these reports as Sequential’s CFO. + + 7 + +Violations + +As a result of the conduct described above, Respondent caused Sequential’s violations of +Section 13(a) of the Exchange Act and Rules 13a-1, 13a-11, 13a-13, and 12b-20 thereunder, which +require every issuer of a security registered pursuant to Section 12 of the Exchange Act file with +the Commission information, documents, and annual, quarterly, and current reports as the +Commission may require and such further material information as may be necessary to make the +required statements not misleading. + + As a result of the conduct described above, Respondent caused Sequential’s violations of +Section 13(b)(2)(A) of the Exchange Act, which requires reporting companies to make and keep +books, records, and accounts which, in reasonable detail, accurately and fairly reflect their +transactions and dispositions of their assets. + + Lastly, as a result of the conduct described above, Respondent caused Sequential’s +violations of Section 13(b)(2)(B) of the Exchange Act, which requires all reporting companies to +devise and maintain a system of internal accounting controls sufficient to provide reasonable +assurances that transactions are recorded as necessary to permit preparation of financial statements +in accordance with generally accepted accounting principles. + + +IV. + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent’s Offer. + + Accordingly, pursuant to Section 21C of the Exchange Act, it is hereby ORDERED that: + + A. Respondent cease and desist from committing or causing any violations and any +future violations of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules +12b-20, 13a-1, 13a-11 and 13a-13 promulgated thereunder. + +B. Respondent shall, within 21 days of the entry of this Order, pay a civil money +penalty in the amount of $20,000 to the Securities and Exchange Commission for transfer to the +general fund of the United States Treasury, subject to Exchange Act Section 21F(g)(3). If timely +payment is not made, additional interest shall accrue pursuant to 31 U.S.C. § 3717. + +Payment must be made in one of the following ways: + +(1) Respondent may transmit payment electronically to the Commission, which +will provide detailed ACH transfer/Fedwire instructions upon request; + +(2) Respondent may make direct payment from a bank account via Pay.gov +through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or + + 8 +(3) Respondent may pay by certified check, bank cashier’s check, or United +States postal money order, made payable to the Securities and Exchange +Commission and hand-delivered or mailed to: + +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + +Payments by check or money order must be accompanied by a cover letter identifying Gary +S. Klein as Respondent in these proceedings, and the file number of these proceedings; a copy of +the cover letter and check or money order must be sent to Jennifer Leete, Associate Director, +Division of Enforcement, Securities and Exchange Commission, 100 F St., NE, Washington, DC +20549. + + C. Amounts ordered to be paid as civil money penalties pursuant to this Order shall be +treated as penalties paid to the government for all purposes, including all tax purposes. To +preserve the deterrent effect of the civil penalty, Respondent agrees that in any Related Investor +Action, he shall not argue that he is entitled to, nor shall he benefit by, offset or reduction of any +award of compensatory damages by the amount of any part of Respondent’s payment of a civil +penalty in this action (“Penalty Offset”). If the court in any Related Investor Action grants such a +Penalty Offset, Respondent agrees that he shall, within 30 days after entry of a final order granting +the Penalty Offset, notify the Commission’s counsel in this action and pay the amount of the +Penalty Offset to the Securities and Exchange Commission. Such a payment shall not be deemed +an additional civil penalty and shall not be deemed to change the amount of the civil penalty +imposed in this proceeding. For purposes of this paragraph, a “Related Investor Action” means a +private damages action brought against Respondent by or on behalf of one or more investors based +on substantially the same facts as alleged in the Order instituted by the Commission in this +proceeding. + + 9 +V. + +It is further Ordered that, solely for purposes of exceptions to discharge set forth in Section +523 of the Bankruptcy Code, 11 U.S.C. § 523, the findings in this Order are true and admitted by +Respondent, and further, any debt for disgorgement, prejudgment interest, civil penalty or other +amounts due by Respondent under this Order or any other judgment, order, consent order, decree +or settlement agreement entered in connection with this proceeding, is a debt for the violation by +Respondent of the federal securities laws or any regulation or order issued under such laws, as set +forth in Section 523(a)(19) of the Bankruptcy Code, 11 U.S.C. §523(a)(19). + + + By the Commission. + + + +Vanessa A. Countryman + Secretary \ No newline at end of file diff --git a/raw/aaer/2021/AAER-4243.txt b/raw/aaer/2021/AAER-4243.txt new file mode 100644 index 0000000000000000000000000000000000000000..2bfd6916d4060481e0c33cc0ed249c5ab130bae4 --- /dev/null +++ b/raw/aaer/2021/AAER-4243.txt @@ -0,0 +1,238 @@ +UNITED STATES OF AMERICA +before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 92734 / August 23, 2021 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4243 / August 23, 2021 + +Admin. Proc. File No. 3-20394 + +In the Matter of +PAUL L. CHANCEY, JR., CPA + + + + +PROTECTIVE ORDER +On July 13, 2021, the Securities and Exchange Commission issued an order instituting an +administrative proceeding (“OIP”) against Paul L. Chancey, Jr., CPA (“Respondent”), pursuant +to Sections 4C and 21C of the Securities Exchange Act of 1934 and Rule 102(e)(1)(ii) of the +Commission’s Rules of Practice. 1 On August 16, 2021, Respondent and the Division of +Enforcement jointly moved for entry of a protective order concerning the use and disclosure of +nonpublic sensitive information that Respondent and the Division will disclose in connection +with discovery in this proceeding. The parties represented that they had stipulated to terms and +submitted a proposed order with their motion. +Commission Rule of Practice 322 provides that a party may seek a protective order +limiting disclosure of a document or testimony that contains confidential information.2 We will +grant such a motion “only upon a finding that the harm resulting from disclosure would outweigh +the benefits of disclosure.”3 Because the parties represent that portions of the Division’s +investigative file to be produced to Respondent, as well as other documents to be produced in + +1 Paul L. Chancey, Jr., CPA , Exchange Act Release No. 92378, 2021 WL 2953721 (July 13, +2021). +2 17 C.F.R. § 201.322(a). +3 17 C.F.R. § 201.322(b). +2 + + + +discovery, contain personal identifying information or reflect proprietary sales practices or +contain business or confidential information, we grant the parties’ motion for a protective order.4 +Accordingly, it is ORDERED, based on the parties’ stipulated language, but with some +minor revisions to that stipulated language throughout, and with alternate redaction procedures +from the parties’ proposed procedures, that: +1. Persons subject to this order (“Protective Order”) will include, without limitation, +(i) Respondent and the Division (together, the “Stipulating Parties”), as well as (ii) the +Stipulating Parties’ representatives, agents, counsel, experts, and consultants, (iii) any third +parties providing discovery in this proceeding (“Third Parties”), and (iv) all other interested +persons with actual or constructive notice of this order. +2. Persons subject to this order may be subject to sanctions under Rule of Practice +180, 17 C.F.R. § 201.180, for any breach of the terms of this Protective Order. +3. Counsel for the Stipulating Parties or any Third Party may designate any +document or other material or information (including interrogatory responses or admissions), +regardless of who produced the material, or any deposition testimony given in this proceeding by +or on behalf of a Stipulating Party or Third Party (including any transcripts or video recordings +thereof and exhibits used in the deposition), as “Confidential” if counsel determines, in good +faith, that such material constitutes technical know-how; confidential research, development or +commercial information; purchase and/or sales data; proprietary commercial, financial, technical, +research, development, or business information; non-public contracts or agreements; or any other +confidential, private, or proprietary information such that the designation of that material as +confidential is necessary to protect the interests of the client or other third parties such as +MiMedx, and its former or current employees, auditors, accountants, and lawyers. Information, +documents, and deposition testimony designated by a Stipulating Party or Third Party as +confidential will be labeled “CONFIDENTIAL. PRODUCED PURSUANT TO PROTECTIVE +ORDER.” Information or documents that have been designated as Confidential under this order +may be referred to collectively as “Confidential Information.” +4. Regardless of the designation and label provided by the producing Stipulating or +Third Party, no information, document, or deposition testimony shall qualify as Confidential +Information if that document already has been introduced not under seal in any public +proceeding, including but not limited to U.S. v. Parker H. Petit and William Taylor, No. 19-cr- +850 (S.D.N.Y.) and SEC v. MiMedx , et al., No. 1:19-cv-10927 (S.D.N.Y.). + +4 See, e.g. , Christopher E. Knauth, CPA, Exchange Act Release No. 92482, , 2021 WL +3128191 (July 23, 2021) (granting request for a protective order against the disclosure of +personal identifiable information and preventing use of such information for business or +commercial purposes); LBB & Assocs. Ltd., Exchange Act Release No. 85569, 2019 WL +1531832 (Apr. 9, 2019) (same). +3 + + + +5. Unless ordered by the Commission, or otherwise provided for herein, all +documents and other materials disclosed in this proceeding (including, but not limited to +Confidential Information), will be held and used by the person receiving such information solely +for use in connection with this proceeding. However, nothing in this Protective Order shall +prevent the Division from complying with its obligations under law concerning disclosure of +documents, including but not limited to its published Routine Uses of Information in Forms 1661 +and 1662,5 the Freedom of Information Act, 5 U.S.C. § 552 et seq., and any other statutes or +rules applicable to the Division, or interfere with the Division’s use of information for law +enforcement activities and to otherwise regulate, administer, and enforce the federal securities +laws. +6. In the event a party challenges another Stipulating Party’s or Third Party’s +Confidential designation, counsel shall make a good faith effort to resolve the dispute, and in the +absence of a resolution, the challenging party may thereafter seek resolution by the Commission +or by an assigned hearing officer. Nothing in this Protective Order operates as a waiver of any +claim or defense in this proceeding or creates an admission by any party that Confidential +Information disclosed in this case is or is not (i) confidential, (ii) privileged, (iii) discoverable, +(iv) relevant, or (v) admissible in evidence. Each party specifically reserves the right to object to +the use or admissibility of all Confidential Information disclosed, in accordance with applicable +law and Commission rules. +7. Subject to Paragraph 5, above, information or documents designated as +Confidential Information shall not be disclosed to any person, except: +A. The Stipulating Parties and counsel of record; +B. Employees of such counsel assigned to and assisting in this proceeding; +C. Outside vendors or service providers (such as copy-service providers and +document-management consultants) that counsel engage to assist in this +proceeding; +D. Mock jurors and related service providers that counsel engage to assist in +this proceeding; +E. As to any document, its author, its addressee, and any other person +indicated on the face of the document as having received a copy; + +5 See https://www.sec.gov/files/sec1661.pdf (describing principal and routine uses of +information obtained other than pursuant to Commission subpoena); +https://www.sec.gov/files/sec1662.pdf (same as to information obtained voluntarily or pursuant +to Commission subpoena). +4 + + + +F. Stenographers and videographers engaged to transcribe depositions the +Stipulating Parties conduct in this proceeding; +G. Consultants or experts to the extent deemed necessary by counsel to assist +in this proceeding; +H. Any person who counsel for a Stipulating Party in good faith believes may +be called to testify at trial or deposition in this proceeding (as well as +counsel for such person). Such persons and/or their counsel may retain +Confidential Information that counsel for a Stipulating Party in good faith +believes is necessary for such persons to prepare for testimony; such +retention is subject to Paragraph 14, below; +I. The Commission or an assigned hearing officer, at the hearing or as +exhibits to motions; +J. Any other person to whom the Stipulating Parties have agreed in writing +disclosure may be made or to whom disclosure has been authorized by +order of the Commission. +8. Subject to Paragraph 5, above, prior to disclosing or displaying Confidential +Information to any person, counsel shall: +A. inform the person of the confidential nature of the information or +documents; and +B. inform the person that the Commission has enjoined the use of the +information or documents by him/her for any purpose other than in +connection with this proceeding and has enjoined the disclosure of that +information or documents to any other person except as permitted by this +Protective Order. +9. Subject to Paragraph 5, above, Confidential Information may be displayed to and +discussed with the persons identified in Paragraphs 7.D and 7.H, above, only on the condition +that, prior to any such display or discussion, each such person shall be asked to sign an +agreement to be bound by this Protective Order in the form attached to this Protective Order as +“Model Non-Disclosure Agreement.” In the event such person refuses to sign an agreement in +the form of this Model Non-Disclosure Agreement, the party desiring to disclose the +Confidential Information may seek appropriate relief from the Commission or from a hearing +officer, if the proceeding has been assigned to a hearing officer. +10. In making any Commission filings, the Stipulating Parties may describe or attach +as exhibits any documents or information produced in this matter, regardless of whether such +materials are designated Confidential. Such a filing shall not constitute a violation of this +5 + + + +Protective Order. A filing that contains Confidential Information will be filed under the sealing +and redaction procedures of Rule of Practice 322(b), 17 C.F.R. § 201.322(b).6 +11. Any Stipulating Party who discovers that it inadvertently produced material +containing Confidential Information without designating that information as Confidential may, +within a reasonable time following its discovery of the inadvertent production, retroactively +designate that material as Confidential Information, by providing notice of its designation in +writing to all Stipulating Parties. +12. During the course of deposition testimony in this proceeding, the transcript of +such deposition may be designated on the record as Confidential Information. Alternatively, +within 30 days of receiving a transcript of deposition testimony taken in this proceeding, any +Stipulating Party or Third Party (where applicable) providing the testimony may designate the +transcript as Confidential Information by notifying all Stipulating Parties in writing that the +transcript is to be designated as Confidential Information. +13. The foregoing is entirely without prejudice to the right of any party to apply to the +Commission or to an assigned hearing officer for any further protective order relating to +Confidential Information; or to object to the production of documents or information; or to apply +to the Commission or to an assigned hearing officer for an order compelling production of +documents or information; or for modification of this Protective Order; or to seek any other relief +from the Commission or from an assigned hearing officer. +14. Within 60 days of the final disposition (including all appeals) of this proceeding, +whichever is later, all recipients of Confidential Information must either return it, including all +copies thereof, to the producing party, or destroy such material, including all copies thereof. +Notwithstanding this provision, attorneys that the Stipulating Parties have specifically retained +for this proceeding may retain an archival copy of all pleadings, motion papers, transcripts, +expert reports, legal memoranda, correspondence, or attorney work product, even if such +materials contain Confidential Information. Any such archival copies that contain or constitute +Confidential Information remain subject to this Protective Order. +15. This Protective Order will survive the termination of the proceeding and will +continue to be binding upon all persons to whom Confidential Information is produced or +disclosed. + + +6 See also https://www.sec.gov/efapdocs/instructions.pdf at §§ 4.1.4, 5.2 (addressing the +submission of sealed and redacted materials to the Commission’s Office of the Secretary through +the Electronic Filings in Administrative Proceedings (eFAP) system). +6 + + + +16. The Commission or an assigned hearing officer will retain jurisdiction over all +persons subject to this Protective Order to the extent necessary to enforce any obligations arising +hereunder or to impose sanctions for any contempt thereof. +For the Commission, by the Office of the General Counsel, pursuant to delegated +authority. + + + Vanessa A. Countryman + Secretary + +UNITED STATES OF AMERICA +before the +SECURITIES AND EXCHANGE COMMISSION + +Admin. Proc. File No. 3-20394 + +In the Matter of +PAUL L. CHANCEY, JR., CPA + +MODEL NON-DISCLOSURE AGREEMENT + + +I, [_______ full name_______ ], of [_______ full address_______ ], declare under penalty +of perjury that I have read in its entirety and understand the Protective Order that was issued in +the above captioned Administrative Proceeding of the U.S. Securities and Exchange +Commission. +I agree to comply with and be bound by all the terms of the Protective Order and I +understand and acknowledge that failure to so comply could expose me to sanctions. I will not +disclose in any manner any information or item that is subject to the Protective Order to any +person or entity except in strict compliance with the provisions of the Protective Order. I will +not use any information or item that is subject to the Protective Order for any purpose except in +strict compliance with the terms of the Protective Order. +I further agree to submit to the Commission’s jurisdiction, including to that of an +assigned hearing officer, for the limited purpose of enforcing the terms of the Protective Order, +even if such proceedings occur after termination of this action. +Signature: ____________________________ +Printed name: __________________________ +Date: ________________________________ \ No newline at end of file diff --git a/raw/aaer/2021/AAER-4246.txt b/raw/aaer/2021/AAER-4246.txt new file mode 100644 index 0000000000000000000000000000000000000000..d0566b859d7776e1c94eb072b54c4980e3447785 --- /dev/null +++ b/raw/aaer/2021/AAER-4246.txt @@ -0,0 +1,66 @@ +UNITED STATES OF AMERICA +before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 92859 / September 2, 2021 + +INVESTMENT ADVISERS ACT OF 1940 +Release No. 5844 / September 2, 2021 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4246 / September 2, 2021 + +Admin. Proc. File No. 3-20395 + + +In the Matter of + +STOCKMAN KAST RYAN & CO. LLP; +ELLEN S. FISHER, CPA; AND +DAVID H. KAST, CPA + + +ORDER + +On July 13, 2021, the Securities and Exchange Commission issued an order instituting an +administrative proceeding (“OIP”) against Stockman Kast Ryan & Co. LLP, Ellen S. Fisher, +CPA, and David H. Kast, CPA (collectively, “Respondents”), pursuant to Section 4C of the +Securities Exchange Act of 1934, Section 203(k) of the Investment Advisers Act of 1940, and +Rule 102(e)(1)(ii) of the Commission’s Rules of Practice.1 Respondents were served with the +OIP on July 19, 2021.2 On August 5, 2021, the parties filed a joint statement in which +Respondents consented to a hearing date no earlier than March 2022. On August 6, 2021, +Respondents filed an answer to the allegations contained in the OIP. +The OIP ordered the parties to conduct a prehearing conference within 14 days of service +of the answer and required that they report on such a conference after its completion.3 The + +1 Stockman Kast Ryan & Co., Exchange Act Release No. 92382, 2021 WL 2953521 (July +13, 2021). +2 See Stockman Kast Ryan & Co., Exchange Act Release No. 92534, 2021 WL 3265873 +(July 30, 2021). +3 Stockman Kast Ryan & Co, 2021 WL 2953521, at *36 (citing 17 C.F.R. § 201.221) +(“[F]ollowing the conference, they shall file a statement with the Office of the Secretary advising +the Commission of any agreements reached at said conference. If a prehearing conference was +2 + +subjects to be discussed at the prehearing conference include settlement of any issues as well as +the timing of discovery, the exchange of witness and exhibit lists and copies of exhibits, expert +witness disclosures and reports, and prehearing motions or briefs.4 +Accordingly, it is ORDERED that the parties file a joint prehearing conference statement +addressing a proposed prehearing schedule within 14 days of the date of this order.5 If a +prehearing conference is not held, the parties shall file, jointly or separately, a statement advising +the Commission of that fact and of the efforts made to meet and confer. +For the Commission, by the Office of the General Counsel, pursuant to delegated +authority. + + + Vanessa A. Countryman + Secretary + +not held, a statement shall be filed with the Office of the Secretary advising the Commission of +that fact and of the efforts made to meet and confer.”). +4 17 C.F.R. § 201.221(c). +5 See, e.g., Christopher E. Knauth, CPA, Exchange Act Release No. 92076, 2021 WL +2210578 (Apr. 5, 2021) (reflecting that the parties informed the Commission about their +discussion of and agreements on a comprehensive list of procedural issues); PLS, CPA, +Exchange Act Release No. 4148, 2020 WL 3397782 (June 18, 2020) (same). \ No newline at end of file diff --git a/raw/aaer/2021/AAER-4248.txt b/raw/aaer/2021/AAER-4248.txt new file mode 100644 index 0000000000000000000000000000000000000000..389b1407bffb9b386dc370d2c57ad20924a8d1fa --- /dev/null +++ b/raw/aaer/2021/AAER-4248.txt @@ -0,0 +1,660 @@ + + + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES ACT OF 1933 +Release No. 10977 / September 3, 2021 + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 92874 / September 3, 2021 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4248 / September 3, 2021 + +ADMINISTRATIVE PROCEEDING +File No. 3-20523 + + +In the Matter of + +THE KRAFT HEINZ CO., +and +EDUARDO PELLEISSONE, + +Respondents. + +CORRECTED ORDER INSTITUTING CEASE- +AND-DESIST PROCEEDINGS, PURSUANT +TO SECTION 8A OF THE SECURITIES ACT +OF 1933 AND SECTION 21C OF THE +SECURITIES EXCHANGE ACT OF 1934, +MAKING FINDINGS AND IMPOSING A +CEASE-AND-DESIST ORDER + +I. + +The Securities and Exchange Commission (“Commission”) deems it appropriate that +cease-and-desist proceedings be, and hereby are, instituted against The Kraft Heinz Co. +(“KHC”) and against Eduardo Pelleissone (“Pelleissone”), pursuant to Section 8A of the +Securities Act and Section 21C of the Exchange Act. + +II. + +In anticipation of the institution of these proceedings, KHC and Pelleissone (collectively +“Respondents”) have submitted Offers of Settlement (the “Offers”) which the Commission has +determined to accept. Solely for the purpose of these proceedings and any other proceedings +brought by or on behalf of the Commission, or to which the Commission is a party, and without +admitting or denying the findings herein, except as to the Commission’s jurisdiction over them and +the subject matter of these proceedings, which are admitted, and except as provided herein in +Section V, Respondents consent to the entry of this Order Instituting Cease- And-Desist +Proceedings Pursuant to Section 8A of the Securities Act and Section 21C of the Exchange Act, +Making Findings and Imposing a Cease-And-Desist Order (“Order”), as set forth below. + + +2 + +III. + +On the basis of this Order and Respondents’ Offers, the Commission finds1 that: + +Summary + +1. This matter concerns a multi-year expense management scheme by KHC’s +procurement division to improperly reduce KHC’s cost of goods sold and achieve cost savings that +were externally touted to the market and internally tied to performance-based targets. The +misconduct resulted in KHC reporting inflated earnings before interest, taxes, depreciation and +amortization (“EBITDA”), a key performance metric for investors. From the fourth quarter of +2015 through the end of 2018 (the “Relevant Period”), procurement employees negotiated +agreements with numerous suppliers to obtain upfront cash payments and discounts, in exchange +for future commitments to be undertaken by KHC, while improperly documenting the agreements +in ways that caused the company to prematurely and improperly recognize the expense savings. + +2. In accordance with accounting principles generally accepted in the United States +(“Generally Accepted Accounting Principles” or “U.S. GAAP”), if the upfront cash and +discounts are tied to future commitments, then the expense savings must be recognized over the +period the future obligations are satisfied. Procurement division employees, however, negotiated +and maintained false and misleading supplier contracts that made it appear as if expense savings +were provided in exchange for past or same-year events performed by KHC, when, in reality, +they were upfront payments in exchange for a future benefit from KHC, in order to improperly +recognize costs savings prematurely. + +3. Over the Relevant Period, KHC entered into approximately 59 transactions which +were improperly recognized as a result of the false and misleading documentation negotiated and +generated by procurement division employees. Had these transactions been properly documented +and accounted for, KHC’s cost of goods sold during that period would have been approximately +$50 million higher than reported. + +4. These misleading transactions, along with numerous other misstated accounting +entries, led KHC, in June 2019, to restate its financial statements on Form 10-K. The restatement +included financial data reported for fiscal year (“FY”) 2015, as well as the financial statements +contained in Forms 10-Q and 10-K for FYs 2016 and 2017 and the first three quarters of FY 2018 +that were filed with the Commission. KHC corrected a total of $208 million in cost savings +arising from 295 transactions, and also corrected its Adjusted EBITDA during the relevant +period, as reflected in the restatement. + +5. Pelleissone, KHC’s then Chief Operating Officer and Global Head of Operations, +was presented with several warning signs indicating that expenses were being managed through +manipulating supplier agreements, imposed pressures on the procurement division to deliver +unrealistic savings targets, and, as a member of the company’s disclosure committee, + +1 The findings herein are made pursuant to Respondents’ Offers of Settlement and are not binding on any other person +or entity in this or any other proceeding. + +3 + +unreasonably approved KHC financial statements that he should have known were materially false +and misleading. + +6. A procurement executive who reported to Pelleissone (“Procurement Executive”), +managed the procurement division, approved certain of KHC contracts with suppliers, and had +sub-certification responsibilities in 2018. Despite numerous warning signs that should have +alerted him that procurement division employees were circumventing KHC’s internal controls in +order to achieve cost savings targets, the Procurement Executive approved and failed to prevent +several supplier contracts that masked the true nature of the underlying transactions. The +Procurement Executive also should have known that this false and misleading contract +documentation was provided to KHC’s finance and controller groups, thus causing KHC to +prematurely recognize cost savings in contravention of U.S. GAAP. + +RESPONDENTS + +7. KHC is a food and beverage manufacturing company co-headquartered in +Chicago, Illinois, and Pittsburgh, Pennsylvania. The company has a class of shares registered +with the Commission pursuant to Exchange Act Section 12(b), which trades on NASDAQ under +the symbol “KHC.” KHC was created in July 2015 through the merger of public company Kraft +Foods Group Inc. (“Kraft”) with and into private company H.J. Heinz Co. (“Heinz”). + +8. Pelleissone, age 47, resides in Chicago, Illinois. Pelleissone was KHC’s Global +Head of Operations and Chief Operating Officer between July 2015 and November 2018, and its +Head of Strategic Projects from November 2018 until June 2019, when he left the company. +During the period of 2016 through 2018, Pelleissone served as a member of KHC’s disclosure +committee, which was tasked with reviewing and affirming the accuracy and completeness of the +company’s quarterly and annual filings. Before the merger with Kraft, Pelleissone was the +Global Head of Operations for Heinz. Pelleissone is currently the president of operations in a +regional subsidiary of a different publicly traded company. + +FACTS +Background + +9. Following the Kraft-Heinz merger in July 2015, newly-formed KHC made +concerted efforts to eliminate redundancies and reduce operational costs. As part of its merger +strategy, KHC disclosed to investors that the company would deliver on certain cost savings +results throughout the company, including in the procurement division, a large cost center for +KHC. The cost savings strategy, including its impact on costs of goods sold, was widely covered +by analysts at the time. Although the company achieved the promised cost savings, individual +procurement employees had key performance targets tied to additional cost savings from the +procurement division. + +10. To implement this cost savings strategy, the company set performance targets for +procurement division employees tied to savings realized through negotiations with suppliers. +For a period immediately following the merger between Kraft and Heinz, these targets were + +4 + +generally achieved, due to, among other things, synergies from renegotiating supplier contracts +in light of the newly-combined company’s increased purchasing power. + +11. By 2017, however, the procurement division had largely exhausted its ability to +extract synergies from the merger. In addition, the cost of many ingredient and packaging +supplies increased significantly due to adverse inflation and unfavorable foreign exchange rates. + +12. The combined impact of the increased raw material costs and savings already +realized in prior years made it more difficult for procurement division employees to achieve +additional, incremental savings in 2017 and 2018. The procurement division, under the +Procurement Executive’s direction and with Pelleissone’s oversight, implemented overly +ambitious annual budget and division-level savings targets, based on corporate KHC targets. +They, in turn, pushed procurement division employees to come up with ideas to generate +additional immediate, same-year, savings, and did not adjust the internal targets. + +Expense Management Misconduct + +13. The expense management misconduct was carried out by KHC’s procurement +division employees, across multiple geographic zones, and involved several strategies employed to +misrepresent the true nature of transactions, resulting in accounting errors and misstatements. Out +of the 295 transactions that KHC ultimately corrected in connection with the restatement, +approximately 59 were part of the procurement division’s expense management misconduct, +including the following types of transactions: + +• “Prebate Transactions” – KHC procurement division employees agreed to future- +year commitments, like contract extensions and future-year volume purchases, in +exchange for savings discounts and credits by suppliers (“Prebates”), but +mischaracterized the savings in contract documentation, which stated that they +were for past or same-year purchases made by KHC (“Rebates”); + +• “Clawback Transactions” – KHC procurement division employees agreed to take +upfront payments subject to repayment through future price increases or volume +commitments, but documented the transaction in ways which obscured the +repayment obligation; and + +• “Price Phasing Transactions” – Suppliers agreed to reduce their prices during a +certain period in exchange for an offsetting price increase in a future period, but +the full nature of the arrangement was not communicated by KHC procurement +division employees to KHC controller group employees. +14. In accordance with U.S. GAAP,2 KHC should have recognized the savings + +2 GAAP requires that a “rebate or refund of a specified amount of cash consideration that is payable pursuant to a +binding arrangement only if the entity completes a specified cumulative level of purchases or remains a customer +for a specified time period shall be recognized as a reduction of the cost of sales based on a systematic and rational + +5 + +provided in exchange for future commitments over the period of time that KHC performed the +commitments. Accordingly, when a prebate was provided in exchange for a contract extension +or future-year volume commitment, the savings should have been recognized over the life of the +extension, or the future period in which KHC purchased the goods from the supplier. +Conversely, rebate savings from past or same-year commitments should have been recognized +ratably over the period in which they were earned. Finally, clawback transactions should have +been recognized ratably over the clawback period—when it was reasonably estimable that KHC +would satisfy its repayment obligation. +2014-2015: Early Expense Management Misconduct +15. In the months leading up to the merger with Kraft, the procurement division of +Heinz was faced with a $10 million year-end cost savings gap. This gap created pressure for the +division to come up with ideas to generate additional same-year savings. As a result, the +Procurement Executive, who worked at Heinz at the time, took steps with regard to a previously- +negotiated transaction with a packaging supplier to improperly recognize additional cost savings +in 2015. Pelleissone received monthly performance reports of these negotiations. +16. The original agreement, which the Procurement Executive signed the year earlier +on behalf of Heinz, provided that the supplier would make a $3.5 million upfront payment +(commonly referred to as a “prebate”) to Heinz in exchange for the parties’ signing a new three- +year contract in 2015. The letter of intent further stated that the supplier was not obligated to +provide the $3.5 million prebate payment if the parties failed to execute the new contract. +Consistent with this contract language, the Procurement Executive delivered a presentation to +Pelleissone which communicated that the cost savings from the $3.5 million prebate transaction +was linked to the three-year period covered by the new contract. + +17. In late 2015, following the merger, KHC renegotiated the language describing the +$3.5 million prebate, entered into a new contract which stated the payment was “a non-refundable +2015 payment . . . for purchases made in 2015,” and prematurely recognized the cost savings in +2015. + +18. This accounting treatment was improper because the final contract, which the +Procurement Executive approved and signed, mischaracterized the true nature of the supplier +payment by concealing the fact that the $3.5 million prebate payment remained linked to a three- +year contract. + +19. Planning documents that the Procurement Executive presented to Pelleissone +acknowledged that Heinz was in the process of negotiating a new supplier contract for the +purpose of generating “improved, backdated impact for CY15” in the form of a “rebate.” The + +allocation of the cash consideration offered to each of the underlying transactions that results in progress by the +entity toward earning the rebate or refund provided the amounts are probable and can be re asonably estimated. If +the rebate or refund is not probable and cannot be reasonably estimated, it shall be recognized as the milestones are +achieved.” Accounting Standards Codification (“ASC”) 705-20 Accounting for Certain Consideration Received +from a Vendor. + + +6 + +document stated that the parties needed to “align on wording,” without which, the company +could “book only 1/3 of benefit” in 2015. The Procurement Executive also met with the CEO of +the supplier in order to determine if the supplier would be “open to reword” the description of +the payment to “allow [Heinz] to book” the full “3,5 Mi[llio]n USD into 2015”, and discussed +internally that wording of the $3.5 million payment would enable Heinz to book the amount in +2015. Finally, Pelleissone and the Procurement Executive understood that a final board +presentation regarding procurement, unlike prior drafts, did not contain the details surrounding +the $3.5 million prebate payment from the supplier. + +20. In a separate transaction involving the same supplier, the Procurement Executive +and Pelleissone discussed the restructuring of a $2 million retention bonus that the supplier had +awarded to legacy Kraft before the merger, in order for newly merged KHC to recognize the full +amount in 2015, resulting in a credit to the savings targets of Heinz procurement personnel. The +Procurement Executive and Pelleissone had access to information that was not communicated to +the controller group that would have caused the controller group to question whether immediate +recognition of the $2 million was appropriate. In this transaction, procurement division +employees negotiated two new contracts with the supplier—one in which legacy Kraft returned +the bonus back to the supplier, and another, in which the supplier re-conveyed the $2 million +rebate, but this time, to legacy Heinz, and purportedly in exchange for purchase volumes in +2015. Recharacterizing the $2 million retention bonus as a supposed purchase volume rebate +enabled KHC to improperly recognize the full $2 million in 2015. The Procurement Executive +and Pelleissone were provided a global operations presentation that discussed the transaction as +part of a plan to recognize cost savings in 2015, but did not take steps to address whether the +rebate was accurately reflected in the new contract with legacy Heinz. + +21. These rebate transactions at legacy Heinz and KHC following the merger should +have placed Pelleissone and the Procurement Executive on notice of the appropriate accounting +treatment for these types of transactions, that procurement division employees misrepresented +the true economic nature of rebate transactions, and the importance placed on not linking +payments from suppliers to future contract obligations in order to achieve premature costs +savings. For instance, in a pre-merger transaction involving a potato supplier, Heinz’s +procurement division tried to improperly recognize $10 million in cost savings in 2014 by +drafting side credit notes which improperly stated that a total of $10 million was being provided +in exchange for 2014 purchases of potatoes and other vegetables, rather than for the new multi- +year contract (the real reason for the $10 million payment). Although this payment was +ultimately recorded correctly—and spread over the life of the contract — the Procurement +Executive and Pelleissone should have understood through this transaction that pre-merger +Heinz’s controllers were being presented agreements with suppliers that mischaracterized the +true nature of the transactions. In an email communication, for example, the Procurement +Executive informed Pelleissone of the need to align on a “story” for the Heinz global controller +regarding the purpose of the supplier payments and the importance of not linking payments from +suppliers to future obligations. + + + + +7 + +2017-2018 Expense Management Misconduct + +22. Beginning in 2017 and continuing into 2018, KHC encountered significant +headwinds in its effort to meet annual budget and savings targets, principally due to inflation and +unfavorable foreign exchange rates, the exhaustion of merger-related savings, and the +incremental, year-over-year nature of the procurement division savings targets. The expense +management misconduct was more limited in 2016 because the procurement division exceeded its +gross savings targets that year. + +23. However, from 2017 on, as market conditions deteriorated, Pelleissone should +have known that continued incremental savings were unrealistic, but he failed to adjust expense +reduction expectations for the procurement division, creating a high-pressure environment +focused on obtaining same-year cost savings. Procurement division employees discussed +internally that Pelleissone “push[ed] like crazy” for them to meet cost savings goals, and +increased cost savings targets to unreasonable levels. At least in part due to this pressure, in 2017 +and 2018, members of the procurement division—across multiple geographic zones— +manipulated 54 supplier transactions (out of approximately 59 during the Relevant Period) to +improperly obtain premature recognition of cost savings. + +24. Pelleissone and the Procurement Executive had access to information, including +from their involvement in the earlier transactions described above, that should have alerted them +to the fact that certain contracts with suppliers submitted by procurement division employees to +KHC’s controllers did not reflect the true nature of the underlying agreements and would result +in improper accounting treatment. Similarly, the Procurement Executive and Pelleissone also +should have known that certain agreements with suppliers did not generate any new costs +savings, despite purported cost savings being reflected in the company’s accounting books and +records and public disclosures. + +25. In 2017, for example, procurement division employees negotiated a $2 million +prebate to KHC from a sugar supplier in exchange for a three-year contract extension and future +sugar purchases. In addition, the agreement called for KHC to return the $2 million back to the +supplier, in the form of paying higher prices for sugar over the three-year period. Thus, the +agreement did not produce any actual cost savings. The Procurement Executive and Pelleissone +should have known the true structure of the transaction, including through their participation in +monthly performance reviews, during which it was disclosed that the $2 million was tied to a +contract extension and future volume purchases, but that KHC planned to recognize the full cost +savings in August 2017. + +26. The Procurement Executive also provided Pelleissone with a “risk mitigation +plan,” which listed $2 million in 2017 savings from the transaction and identified three other +transactions that were part of the expense management misconduct. The Procurement Executive +highlighted in the email attaching the plan that he would “need to find a way to make them count +in 2017 by getting them signed off by the controllers.” Nonetheless, Pelleissone, as a member of +KHC’s disclosure committee, raised no questions or concerns, and affirmed the accuracy and +completeness of KHC’s quarterly filings spanning the recognition of this transaction. + + +8 + +27. During the Relevant Period, as a member of the disclosure committee, Pelleissone +failed to review the quarterly and annual SEC filings provided to him as part of his disclosure +committee responsibilities, yet he still certified that he was unaware of inaccuracies or omissions +in those filings. Pelleissone, thus, failed to implement the internal accounting control of +disclosure committee review of SEC filings. + +28. In 2018, the agreement with the sugar supplier was extended to provide KHC with +more time to repay the supplier for the 2017 prebate, through inflated sugar prices. To accomplish +this, KHC was given an immediate sugar price reduction, but later in the year, the inflated prices +resumed, and thereafter, continued over a longer future period in order to effectuate full +repayment. However, KHC recognized an immediate price reduction of $500,000 as purported +new cost savings. In an email message from a procurement division employee to colleagues +(though not Pelleissone), the employee stated that Pelleissone proposed procurement “re-open [the +sugar supplier] deal and extend contract in exchange for longer amortization of pre-payment.” +Thereafter, the Procurement Executive was informed of the deal’s structure, and both Pelleissone +and the Procurement Executive received presentations communicating the anticipated and +improper 2018 savings recognition. + +29. In 2017 and 2018, KHC’s procurement division entered into additional agreements +with suppliers which provided KHC with upfront payments that were recognized prematurely, +even though they were tied to future commitments and allowed the suppliers to “clawback” an +agreed-upon percentage of the upfront prebate. In one such transaction, the Procurement +Executive was sent a presentation reflecting that KHC obtained a $4 million price reduction and +$7.5 million in other efficiencies in exchange for committing to a new contract with a “5 year +term” for the purchase of new cardboard grades from the supplier, and the supplier could “claw +back a portion if any of the implementation is delayed after 2018.” According to the presentation +provided to the Procurement Executive, the supplier could recoup the prebate through increased +pricing on 2019 KHC purchases. + +30. The Procurement Executive acknowledged that the cost savings from the +agreement would be “booked in July [2018]” in his self-evaluation that he provided to +Pelleissone in connection with his performance review. He also was informed by one of his +subordinates that there was potential “upside in the year [] if we get the wording correct[].” +Thereafter, the Procurement Executive had a call with the CEO of the supplier, during which they +discussed contract wording for the two supplier payments which did not link either of the +prebates to a contract extension or a clawback obligation. The Procurement Executive approved +the final contract, which did not reflect the true nature of the transaction, while understanding that +KHC’s controllers would rely on the contract to make an accounting determination. + +31. Thereafter, the Procurement Executive signed, and along with Pelleissone, +submitted, a sub-certification of the accuracy and completeness of the financial statements +generated by global procurement over the first three quarters of 2018, during which the majority +of the savings from this transaction were improperly recognized. KHC then relied on this sub- +certification in making representations to its auditor regarding the completeness and accuracy of +its financial statements. + + +9 + +32. The Procurement Executive also approved “price phasing” transactions, which +created the illusion of immediate cost savings through price decreases from suppliers, but, in +reality, were structured to include an offsetting price increase later in time. These “price +phasing” transactions violated GAAP because they purported to generate cost savings that did +not exist. + +33. In 2017, for example, KHC improperly reduced its costs by $600,000 in earlier +quarters through a price phasing deal with a sugar supplier. The transaction produced no real +savings, however, because it required KHC to remit the same amount back to the supplier in the +form of higher pricing in later quarters within the same year. In connection with this deal, the +Procurement Executive was aware that his team was contemplating sugar pricing strategies to +address pressures from Pelleissone to narrow the gap between forecasted and actual expenses to +date, and approved the transaction. The Procurement Executive and Pelleissone reviewed +presentations highlighting that the $600,000 in positive impact to KHC’s P&L was tied to “sugar +price phasing.” Similarly a draft presentation that the Procurement Executive reviewed in +advance of a trip he and Pelleissone took to visit the supplier highlighted that the deal would +“[m]ove some negative impact from Q1 CY17 through price phasing.” + +KHC’s Internal Controls Deficiencies + +34. Throughout the Relevant Period, the company did not design or maintain effective +controls for the procurement division, including those implemented by the finance and controller +groups, in connection with the accounting for supplier contracts and related arrangements. The +company reported this material weakness in its annual report on Form 10-K filed on June 7, 2019. +For example, on the Friday after the close of the August 2017 books, the controller group allowed +KHC to recognize fully in 2017 a rebate that it had previously determined correctly to spread over +a future-year period. The changed decision by that Monday to allow immediate recognition was +not adequately documented nor explained to internal stakeholders, and it was made after +procurement employees were instructed by a superior in operations to “find a way . . . to get +back” the payments into the August books. + +35. During the Relevant Period, finance personnel in gatekeeping roles also +overlooked indications that some expenses were potentially being improperly managed and +accounted for in the procurement division. In one internal communication, for example, a +member of KHC’s controller group acknowledged a procurement buyer’s effort to “jam [a] +rebate in to help [KHC’s] results in 2017.” That member of the controller group took no steps to +report this conduct to legal or compliance, nor to determine whether it was part of a larger +practice within procurement. + +36. During the Relevant Period, KHC also tied internal performance metrics and +compensation of the procurement legal group staff to assisting the procurement division’s efforts +to reduce costs. Additionally, prior to 2018, KHC failed to provide the legal group with adequate +staffing and resources for reviewing numerous global supply contracts, many of which were +under negotiation at the same time. Under these conditions, the part of the legal group in charge +of reviewing procurement contracts overlooked facts indicating that contract documentation was +inconsistent with the underlying negotiated transaction, and the group failed to have reasonably + +10 + +sufficient controls over the procurement contracting process. + +37. Pelleissone should have known that, in not properly addressing several indicia that +supplier contracts were being used to manage expenses, he caused KHC’s internal accounting +controls failures, including those relating to: (i) its accounting-related policies and procedures, (ii) +the preparation and signing of contract approval forms which were to communicate the key +commercial terms of procurement transactions to the controllers, (iii) the review of contract +documentation and contract approval forms by KHC’s controllers, (iv) the completion and +approval of management representation letters affirming the accuracy and completeness of the +financial records of KHC’s Zones, business units, and procurement division, and (v) a disclosure +committee whose function was to review and confirm the accuracy and completeness of KHC’s +draft periodic filings. + +* * * * * * + +38. KHC issued debt in securities offerings during the relevant period, the offerings for +which incorporated by reference the inaccurate financial reports that were later restated, and +offered the Procurement Executive and Pelleissone, among other employees, stock options and +other stock-based compensation during the Relevant Period, and bonus compensation that was +tied to their success at generating supply chain and operational cost savings. Specifically, the +bonus criteria given the largest weight for the Procurement Executive was reaching a metric +referred to as a purchase price variance target that was based on the amount of year-over-year +savings the procurement division obtained from its supplier contracts. Similarly, Pelleissone was +assigned responsibility for operational costs, which not only were a key factor in determining the +company’s annual budget, but were also directly impacted by the year-over-year savings achieved +by the procurement division. + +39. Additionally, during the period of the misconduct, Pelleissone exercised options in +August 2018 on 35,000 shares of KHC common stock and then sold the shares at a profit. + +VIOLATIONS + +40. Section 17(a)(2) of the Securities Act proscribes the receipt of “money or property +by means of any untrue statement of a material fact or any omission to state a material fact +necessary in order to make the statements made, in light of the circumstances under which they +were made, not misleading.” Section 17(a)(3) of the Securities Act proscribes engaging “in any +transaction, practice, or course of business which operates or would operate as a fraud or deceit +upon the purchaser.” A violation of these provisions does not require scienter and may rest on a +finding of negligence. See Aaron v. SEC, 446 U.S. 680, 685, 701-02 (1980). + +41. Section 13(a) of the Exchange Act requires issuers to file such periodic and other +reports as the Commission may prescribe and in conformity with such rules as the Commission +may promulgate. Exchange Act Rules 13a-1, 13a-11, and 13a-13 require the filing of annual, +current, and quarterly reports, respectively. The obligation to file such reports embodies the +requirement that they be true and correct. See, e.g., SEC v. Savoy Indus., Inc., 587 F.2d 1149, + +11 + +1165 (D.C. Cir. 1978), cert. denied, 440 U.S. 913 (1979). In addition to the information +expressly required to be included in such reports, Rule 12b-20 of the Exchange Act requires +issuers to add such further material information, if any, as may be necessary to make the required +statements, in the light of the circumstances under which they are made not misleading. A +violation of these reporting provisions does not require scienter and may rest on a finding of +negligence. See SEC v. Wills, 472 F. Supp. 1250, 1268 (D.D.C. 1978). + +42. Section 13(b)(2)(A) of the Exchange Act requires Section 12 registrants to make +and keep books, records, and accounts that accurately and fairly reflect the transactions and +dispositions of their assets. Section 13(b)(2)(B) of the Exchange Act requires all reporting +companies to devise and maintain a system of internal accounting controls sufficient to provide +reasonable assurances that transactions are recorded as necessary to permit preparation of +financial statements in accordance with generally accepted accounting principles. Scienter is not +an element of the books and records and internal control provisions. See Ponce v. SEC, 345 F.3d +722, 737 n.10 (9th Cir. 2003) (noting that a “plain reading of Section 13(b) reveals that it also +does not impose a scienter requirement”). + +43. Section 13(b)(5) of the Exchange Act provides: “No person shall knowingly +circumvent or knowingly fail to implement a system of internal accounting controls or knowingly +falsify any book, record, or account described in paragraph (2) [of the statute].” + +44. Rule 13b2-1 also prohibits any person from directly or indirectly, falsifying or +causing to be falsified, any book, record, or account subject to Section 13(b)(2)(A). Rule 13b2- +2(a) prohibits an officer or director of an issuer from, among other things, making or causing to +be made a materially false or misleading statement to an accountant in connection with any +required audit of the issuer’s financial statements or the preparation of a report required to be +filed with the Commission. Scienter is not required to establish a violation of either of these +rules. See World-Wide Coin Investments, 567 F. Supp. 724, 749 (N.D. Ga. 1983) (addressing +Rule 13b2-1); SEC v. McNulty, 137 F.3d 732, 740-41 (2d. Cir. 1997) (addressing Rule 13b2-2). + +FINDINGS + +45. Based on the foregoing, the Commission finds that Respondent KHC violated +Securities Act Sections 17(a)(2) and 17(a)(3), Exchange Act Sections 13(a), 13(b)(2)(A), and +13(b)(2)(B), and Exchange Act Rules 12b-20, 13a-1, 13a-11, and 13a-13 promulgated +thereunder. + +46. Based on the foregoing, the Commission finds that Respondent Pelleissone (a) +violated Securities Act Sections 17(a)(2) and 17(a)(3), Exchange Act Section 13b-5, and +Exchange Act Rules 13b2-1 and 13b2-2(a); and (b) caused KHC’s violations of Sections 13(a), +13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act, and Rules 12b-20, 13a-1, 13a-11, and 13a-13 +promulgated thereunder. + +DISGORGEMENT AND CIVIL PENALTIES + +47. The disgorgement and prejudgment interest ordered in Section IV, paragraph D + +12 + +below is consistent with equitable principles and does not exceed Respondent’s net profits from +his violations, and will be distributed to harmed investors to the extent feasible. The +Commission will hold funds paid pursuant to paragraph D in an account at the United States +Treasury pending distribution. Upon approval of the distribution final accounting by the +Commission, any amounts remaining that are infeasible to return to investors, and any amounts +returned to the Commission in the future that are infeasible to return to investors, may be +transferred to the general fund of the U.S. Treasury, subject to Section 21F(g)(3) of the +Exchange Act. + +KHC’S COOPERATION AND REMEDIAL EFFORTS + +48. In determining to accept Respondent KHC’s Offer, the Commission considered +the cooperation and remedial acts promptly undertaken by KHC. Among other efforts, KHC +proactively expanded the scope of its internal investigation, provided timely updates to the +Commission staff regarding KHC’s investigation findings, and provided courtesy translations of +foreign language documents. KHC has taken disciplinary action, enhanced review of its finance, +controllership, and legal functions, and instituted enhanced training, policies and procedures to +prevent and detect future misconduct of the type described in the Order. + +IV. + +In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondents’ Offers. + +Accordingly, it is hereby ORDERED, effective immediately, that: + +A. KHC shall cease and desist from committing or causing any violations and any +future violations of Securities Act Sections 17(a)(2) and 17(a)(3) and Exchange Act Sections 13(a), +13(b)(2)(A), and 13(b)(2)(B), and Exchange Act Rules 12b-20, 13a-1, 13a-11, and 13a-13 +promulgated thereunder. + +B. KHC shall, within ten (10) days of the entry of this Order, pay a civil money +penalty in the amount of $62,000,000 to the Securities and Exchange Commission. If timely +payment is not made, additional interest shall accrue pursuant to 31 U.S.C. §3717. + +C. Pelleissone shall cease and desist from committing or causing any violations and any +future violations of Securities Act Sections 17(a)(2) and 17(a)(3), Exchange Act Sections 13b-5, +13(a), 13(b)(2)(A), and 13(b)(2)(B), and Exchange Act Rules 13b2-1, 13b2-2(a), 12b-20, 13a-1, +13a-11, and 13a-13 promulgated thereunder. + +D. Pelleissone shall, within ten (10) days of the entry of this Order, pay a civil money +penalty in the amount of $300,000, disgorgement of $12,500, and prejudgment interest of +$1,711.31 to the Securities and Exchange Commission. If timely payment of the civil money +penalty is not made, additional interest shall accrue pursuant to 31 U.S.C. §3717, and if timely +payment of disgorgement and prejudgment interest is not made, additional interest shall accrue + +13 + +pursuant to SEC Rule of Practice 600. + +Payment must be made in one of the following ways: + +(1) Respondents may transmit payment electronically to the Commission, which will +provide detailed ACH transfer/Fedwire instructions upon request; + +(2) Respondents may make direct payment from a bank account via Pay.gov through +the SEC website at http://www.sec.gov/about/offices/ofm.htm; or + +(3) Respondents may pay by certified check, bank cashier’s check, or United States +postal money order, made payable to the Securities and Exchange Commission +and hand-delivered or mailed to: + +Enterprise Services Center Accounts Receivable Branch HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard Oklahoma City, OK 73169 + +Payments by check or money order must be accompanied by a cover letter identifying the +Respondents in these proceedings, and the file number of these proceedings; a copy of the cover +letter and check or money order must be sent to Anita B. Bandy, Associate Director, Division of +Enforcement, Securities and Exchange Commission, 100 F St., NE, Washington, DC 20549. + +E. Pursuant to Section 308(a) of the Sarbanes-Oxley Act of 2002, a Fair Fund is created +for disgorgement, prejudgment interest and penalties referenced in paragraphs B and D +above. Amounts ordered to be paid as civil money penalties pursuant to this Order shall be +treated as penalties paid to the government for all purposes, including all tax purposes. To +preserve the deterrent effect of the civil penalties, Respondents agree that in any Related Investor +Action, Respondents shall not argue that Respondents are entitled to, nor shall Respondents +benefit by, offset or reduction of any award of compensatory damages by the amount of any part +of Respondents’ payment of a civil penalty in this action ("Penalty Offset"). If the court in any +Related Investor Action grants such a Penalty Offset, Respondents agree that Respondents shall, +within 30 days after entry of a final order granting the Penalty Offset, notify the Commission's +counsel in this action and pay the amount of the Penalty Offset to the Securities and Exchange +Commission. Such a payment shall not be deemed an additional civil penalty and shall not be +deemed to change the amount of the civil penalties imposed in this proceeding. For purposes of +this paragraph, a "Related Investor Action" means a private damages action brought against +Respondents by or on behalf of one or more investors based on substantially the same facts as +alleged in the Order instituted by the Commission in this proceeding. + +F. Respondent KHC acknowledges that the Commission is not imposing a civil +penalty in excess of $62,000,000 based upon its cooperation in a Commission investigation and +related enforcement action. If at any time following the entry of the Order, the Division of +Enforcement (“Division”) obtains information indicating that KHC knowingly provided +materially false or misleading information or materials to the Commission, or in a related +proceeding, the Division may, at its sole discretion and with prior notice to KHC, petition the +Commission to reopen this matter and seek an order directing that KHC pay an additional civil + +14 + +penalty. KHC may contest by way of defense in any resulting administrative proceeding whether +it knowingly provided materially false or misleading information, but may not: (1) contest the +findings in the Order; or (2) assert any defense to liability or remedy, including, but not limited +to, any statute of limitations defense. + +V. + +It is further Ordered that, solely for purposes of exceptions to discharge set forth in +Section 523 of the Bankruptcy Code, 11 U.S.C. §523, the findings in this Order are true and +admitted by Respondent Pelleissone, and further, any debt for disgorgement, prejudgment +interest, civil penalty or other amounts due by Pelleissone under this Order or any other +judgment, order, consent order, decree or settlement agreement entered in connection with this +proceeding, is a debt for the violation by Pelleissone of the federal securities laws or any +regulation or order issued under such laws, as set forth in Section 523(a)(19) of the Bankruptcy +Code, 11 U.S.C. §523(a)(19). + + +By the Commission. + + +Vanessa A. Countryman +Secretary \ No newline at end of file diff --git a/raw/aaer/2021/AAER-4249.txt b/raw/aaer/2021/AAER-4249.txt new file mode 100644 index 0000000000000000000000000000000000000000..89a912be4075af6fe6064fa63ad0e5e76ebc93de --- /dev/null +++ b/raw/aaer/2021/AAER-4249.txt @@ -0,0 +1,56 @@ +UNITED STATES OF AMERICA +before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 92939 / September 10, 2021 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4249 / September 10, 2021 + +Admin. Proc. File No. 3-20394 + +In the Matter of + +PAUL L. CHANCEY, JR., CPA + + +POSTPONEMENT ORDER +On July 13, 2021, the Securities and Exchange Commission issued an order instituting an +administrative proceeding (“OIP”) against Paul L. Chancey, Jr., CPA (“Respondent”), pursuant +to Sections 4C and 21C of the Securities Exchange Act of 1934 and Rule 102(e)(1)(ii) of the +Commission’s Rules of Practice. 1 On August 31, 2021, Respondent filed an unopposed motion +to postpone the proceeding pending the lifting of a stay entered in a related civil proceeding, SEC +v. MiMedx Grp., Inc. , No. 1:19-cv-10927 (S.D.N.Y.) (the “Related Civil Proceeding”). +Rule of Practice 161(b) provides that the Commission may “postpone” a proceeding on a +party’s motion “in circumstances where the requesting party makes a strong showing that the +denial of the . . . motion would substantially prejudice their case. ”2 In assessing such a motion, +the Commission must “consider, in addition to any other relevant factors: (i) The length of the +proceeding to date; (ii) The number of postponements, adjournments or extensions already +granted; (iii) The stage of the proceedings at the time of the request; (iv) The impact of the +request on the hearing officer’s ability to complete the proceeding in the time specified by the +Commission; and (v) Any other such matters as justice may require.”3 +Respondent represents that the stay in the Related Civil Proceeding prevents him from +obtaining discovery in this proceeding relevant to his defense of the proceeding. The Division of +Enforcement does not oppose Respondent’s request to postpone this proceeding. For those + +1 Paul L. Chancey, Jr., CPA , Exchange Act Release No. 92378, 2021 WL 2953721 (July 13, +2021). +2 17 C.F.R. § 201.161(b). +3 Id. +2 + + + +reasons, and in consideration of the Rule 161(b) factors outlined above, we conclude that a +postponement of this proceeding is warranted. +Accordingly, it is ORDERED that the motion is GRANTED and that this proceeding and +any previously prescribed deadlines are postponed indefinitely. The postponement is contingent +on the stay of the Related Civil Proceeding. Within seven days of the lifting of the stay in the +Related Civil Proceeding, the parties shall file a notice informing the Commission of such event. +For the Commission, by the Office of the General Counsel, pursuant to delegated +authority. + + + Vanessa A. Countryman + Secretary \ No newline at end of file diff --git a/raw/aaer/2021/AAER-4250.txt b/raw/aaer/2021/AAER-4250.txt new file mode 100644 index 0000000000000000000000000000000000000000..0b9f692f578385108bde71cf2a827c121ee35077 --- /dev/null +++ b/raw/aaer/2021/AAER-4250.txt @@ -0,0 +1,114 @@ + + + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 92944 / September 13, 2021 + +ACOUNTING AND AUDITING ENFORCEMENT +Release No. 4250 / September 13, 2021 + +ADMINISTRATIVE PROCEEDING +File No. 3-20538 + + + +In the Matter of + +Leonard R. Barr, + +Respondent. + + + +ORDER INSTITUTING +ADMINISTRATIVE PROCEEDINGS +PURSUANT TO SECTION 102(e) OF THE +COMMISSION’S RULES OF PRACTICE, +MAKING FINDINGS, AND IMPOSING +REMEDIAL SANCTIONS + + + + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate and in the +public interest that public administrative proceedings be, and hereby are, instituted pursuant to +102(e)(3)(i) the Commission’s Rules of Practice against Leonard R. Barr (“Respondent” or +“Barr”).1 + +1 Rule 102(e)(3)(i) provides, in relevant part that: + The Commission, with due regard to the public interest and without preliminary hearing, may, by order, . . , +suspend from appearing or practicing before it any . . . accountant . . . who has been by name . . . permanently enjoined +by any court of competent jurisdiction, by reason of his or her misconduct in an action brought by the Commission, +from violation or aiding and abetting the violation of any provision of the Federal securities laws or of the rules and +regulations thereunder. + 2 +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brough t by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over him and the subject matter of these +proceedings and the findings contained in Section III.3 below, which are admitted, Respondent +consents to the entry of this Order Instituting Administrative Proceedings Pursuant to Section +102(e) of the Commission’s Rules of Practice, Making Findings, and Imposing Remedial +Sanctions (“Order”), as set forth below. +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds that: + +1. Leonard R. Barr, age 51, resides in Dexter, Michigan. Barr worked as an +accountant at Domino’s Pizza, Inc. (“Domino’s”) from 1996 to 2020 and held the position of Unit +Controller from at least 2016 to 2020. Barr does not hold a CPA license. + +2. Domino’s was, at all relevant times, a publicly-traded company incorporated in +Delaware and headquartered in Ann Arbor, Michigan. At all relevant times, Domino’s common +stock was registered with the Commission pursuant to Section 12(b) of the Securities Exchange +Act of 1934 and was quoted on the New York Stock Exchange under the ticker symbol “DPZ.” + +3. On September 3, 2021, a final judgment was entered by consent against Barr, +permanently enjoining him from future violations of Section 10(b) of the Securities Exchange Act +of 1934 (“Exchange Act”) and Rule 10b-5 thereunder in the civil action entitled Securities and +Exchange Commission v. Leonard R. Barr, Civil Action Number 2:21-cv-11831-LJM-APP, in the +United States District Court for the Eastern District of Michigan, Southern Division. + +4. The Commission’s complaint alleged, among other things, that in advance of two of +Domino’s earnings announcements in 2016 and 2020, Barr traded Domino’s stock and options on +the basis of material non-public information with which he was entrusted. The complaint +specifically alleged that Barr traded shortly after reviewing Domino’s draft Forms 10-Q and 10-K, +which contained confidential financial data that had not yet been released to the public in +Domino’s periodic filings with the Commission and regularly held earnings announcements. In +addition, the complaint alleged that Barr’s illegal trades resulted in profits of $34,180.00. + + + 3 +IV. + + In view of the foregoing, the Commission deems it appropriate and in the public interest to +impose the sanctions agreed to in Respondent Barr’s Offer. + +Accordingly, it is hereby ORDERED, effective immediately, that: + +A. Barr is suspended from appearing or practicing before the Commission as an +accountant. + +B. After five (5) years from the date of this order, Barr may request that the +Commission consider his reinstatement by submitting an application (attention: Office of the +Chief Accountant) to resume appearing or practicing before the Commission. + + + + By the Commission. + + + +Vanessa A. Countryman +Secretary + + \ No newline at end of file diff --git a/raw/aaer/2021/AAER-4251.txt b/raw/aaer/2021/AAER-4251.txt new file mode 100644 index 0000000000000000000000000000000000000000..4a854c8c405bfe89ab98f61c299067332f6294e7 --- /dev/null +++ b/raw/aaer/2021/AAER-4251.txt @@ -0,0 +1,41 @@ +UNITED STATES OF AMERICA +before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 93005 / September 15, 2021 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4251 / September 15, 2021 + +Admin. Proc. File No. 3-18347 + + +IN THE MATTER OF + +BRIAN SWEET, CPA + + +NOTICE THAT INITIAL DECISION HAS BECOME FINAL + + The time for filing a petition for review of the initial decision in this proceeding has +expired. No such petition has been filed by Brian Sweet, CPA, or the Division of Enforcement, +and the Commission has not chosen to review the decision on its own initiative. + + Accordingly, notice is hereby given, pursuant to Rule 360(d) of the Commission's Rules +of Practice,1 that the initial decision of the administrative law judge has become the final +decision of the Commission with respect to Brian Sweet, CPA.2 The order contained in that +decision is hereby declared effective. The initial decision ordered that the additional proceedings +ordered by the order instituting proceedings in this proceeding be dismissed. + + For the Commission, by the Office of the General Counsel, pursuant to delegated +authority. + + + + + Vanessa A. Countryman + Secretary + +1 17 C.F.R. § 201.360(d). +2 Brian Sweet, CPA, Initial Decision Release No. 1409, 2021 WL 3501213 (Aug. 2, 2021). \ No newline at end of file diff --git a/raw/aaer/2021/AAER-4255.txt b/raw/aaer/2021/AAER-4255.txt new file mode 100644 index 0000000000000000000000000000000000000000..f0b055575f8fb0e846dc48629024ce2ac74b43c9 --- /dev/null +++ b/raw/aaer/2021/AAER-4255.txt @@ -0,0 +1,96 @@ +UNITED STATES OF AMERICA +before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 93092 / September 21, 2021 + +INVESTMENT ADVISERS ACT OF 1940 +Release No. 5870 / September 21, 2021 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4255 / September 21, 2021 + +Admin. Proc. File No. 3-20395 + + +In the Matter of + +STOCKMAN KAST RYAN & CO. LLP; +ELLEN S. FISHER, CPA; AND +DAVID H. KAST, CPA + + +ORDER + +On July 13, 2021, t he Securities and Exchange Commission issued an order instituting an +administrative proceeding (“OIP”) against Stockman Kast Ryan & Co. LLP, Ellen S. Fisher, +CPA, and David H. Kast, CPA (collectively, “Respondents”), pursuant to Section 4C of the +Securities Exchange Act of 1934, Section 203(k) of the Investment Advisers Act of 1940, and +Rule 102(e)(1)(ii) of the Commission’s Rules of Practice. 1 Respondents filed an answer to the +allegations contained in the OIP on August 6, 2021. On September 2, 2021, the parties were +directed to conduct a prehearing conference and to file a joint prehearing conference statement +addressing a proposed prehearing schedule.2 +The parties filed a joint statement on September 15, 2021. They stated that, after a +prehearing conference, they had reached agreement on a proposed schedule with an +approximately five-day hearing to commence on April 25, 2022. Accordingly, it is ORDERED, +based on the parties’ representations, that the parties adhere to the following schedule: + +1 Stockman Kast Ryan & Co. , Exchange Act Release No. 92382, 2021 WL 2953521 (July +13, 2021). +2 Stockman Kast Ryan & Co. , Exchange Act Release No. 92859, 2021 WL 4031162 (Sept. +2, 2021). +2 + +September 17, 2021 Parties exchange initial witness lists. +December 23, 2021 Close of fact discovery. +January 14, 2022 Last date to serve expert reports. +February 4, 2022 Last date to serve rebuttal expert reports. +February 28, 2022 Close of expert discovery. +March 7, 2022 Last date to file any motions for summary disposition, if +leave for any such motions is granted. +March 7, 20223 Parties exchange revised witness lists and initial exhibit +lists. +March 21, 2022 Parties to file objections to proposed witnesses and + exhibits. + Parties to file any motions in limine or other pre-hearing + motions. + Parties to file prehearing briefs. +April 4, 2022 Deadline to request subpoenas for witnesses to appear at + the hearing. + Parties to file any oppositions to motions in limine or other + pre-hearing motions. +April 8, 2022 Last date to file oppositions to any motions for summary + disposition. +April 15, 2022 Last date to file replies to any motions for summary + disposition. + +3 This deadline is either March 7, 2022 or 49 days before the hearing commences. For this +event, as well as for some subsequent events, the parties agreed that the event should occur at a +certain amount of time before the hearing commences. Thus, if the hearing date should be +moved by subsequent order, then the due date for the event will also shift. +3 + +April 18, 2022 Final prehearing conference including ruling on any + motions in limine or other pre-hearing motions. +April 20, 2022 Parties exchange final witness lists and final exhibit lists. + Parties exchange pre-marked exhibits. +April 25, 2022 Hearing commences. +It is further ORDERED that the parties shall seek leave to file any motions for summary +disposition pursuant to Rule of Practice 250(c) by January 7, 2022, by filing a concise statement, +which also addresses whether the parties consent to any modifications of the prehearing schedule +as a result of such motion for summary disposition.4 + +For the Commission, by the Office of the General Counsel, pursuant to delegated +authority. + + + Vanessa A. Countryman + Secretary + +4 See 17 C.F.R. § 201.250(c) (requiring leave to be sought to file motions for summary +disposition in 120-day proceedings and articulating that summary disposition may be granted as +to a claim or defense when there is “no genuine issue with regard to any material fact” and “the +movant is entitled to summary disposition as a matter of law”); see also Stockman Kast Ryan & +Co., 2021 WL 2953521, at * 37 (designating this proceeding one under the “120-day +timeframe”). \ No newline at end of file diff --git a/raw/aaer/2021/AAER-4256.txt b/raw/aaer/2021/AAER-4256.txt new file mode 100644 index 0000000000000000000000000000000000000000..2d7f1fa78872d8f4a3d37e81ceb092af6e14ff00 --- /dev/null +++ b/raw/aaer/2021/AAER-4256.txt @@ -0,0 +1,239 @@ + + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 93101 / September 21, 2021 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4256 / September 21, 2021 + +ADMINISTRATIVE PROCEEDING +File No. 3-20591 + + : + : + : +In the Matter of : ORDER INSTITUTING ADMINISTRATIVE + : PROCEEDINGS PURSUANT TO RULE + PETER DICHIARA, : 102(e) OF THE COMMISSION’S RULES OF + : PRACTICE, MAKING FINDINGS, AND + Respondent. : IMPOSING REMEDIAL SANCTIONS + : + : +____________________________________ : + + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate and in the +public interest that public administrative proceedings be, and hereby are, instituted against Peter +DiChiara (“Respondent” or “DiChiara”) pursuant to Rule 102(e)(3)(i) of the Commission’s Rules +of Practice.1 + + + +1 Rule 102(e)(3)(i) provides, in relevant part, that: + + The Commission, with due regard to the public interest and without preliminary hearing, may, by order, . . . +suspend from appearing or practicing before it any attorney, accountant, engineer, or other professional or expert +who has been by name (A) [p]ermanently enjoined by any court of competent jurisdiction, by reason of his or her +misconduct in an action brought by the Commission, from violating or aiding and abetting the violation of any +provision of the Federal securities laws or of the rules and regulations thereunder; or (B) [f]ound by any court of +competent jurisdiction in an action brought by the Commission to which he or she is a party … to have violated +(unless the violation was found not to have been willful) or aided and abetted the violation of any provision of the +Federal securities laws or of the rules and regulations thereunder. + 2 +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over him and the subject matter of these +proceedings, and the findings contained in Section III.2. below, which are admitted, Respondent +consents to the entry of this Order Instituting Administrative Proceedings Pursuant to Rule 102(e) +of the Commission’s Rules of Practice, Making Findings, and Imposing Remedial Sanctions +(“Order”), as set forth below. + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds that: + + 1. DiChiara, age 57, resides in Mount Kisco, New York. DiChiara is a member of the +New York State Bar. DiChiara provided advice to individuals and entities regarding compliance +with the federal securities laws. DiChiara is also licensed as a certified public accountant (“CPA”) +in New York. His certified public accounting license is Not Registered as of July 31, 2018. +DiChiara has never held any securities licenses and is not registered with the Commission in any +capacity. + + 2. On September 3, 2020, the Commission filed a complaint against DiChiara in SEC +v. DiChiara (Civil Action No. 20-CV-11645-DPW), in the United States District Court for the +District of Massachusetts. The complaint alleged that DiChiara violated Sections 5(a), 5(c), +17(a)(2), and 17(a)(3) of the Securities Act of 1933 (“Securities Act”) and aided and abetted +violations of Section 17(a)(1) and the Securities Act and Section 10(b) of the Securities Exchange +Act of 1934 (“Exchange Act”) and Rule 10b-5 thereunder. On September 2, 2021, the court entered +an order permanently enjoining DiChiara by consent, from future violations of Sections 5(a), 5(c), +and 17(a) of the Securities Act, and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. + + 3. The Commission’s complaint alleged, among other things, that DiChiara assisted a +group of individuals engaged in a scheme to defraud investors by concealing their ownership and +control of substantially all of the purportedly unrestricted shares in Environmental Packaging +Technologies Holdings, Inc. (“Environmental Packaging”), in order to sell those shares in bulk in +violation of restrictions on stock sales by affiliates. The complaint also alleged that DiChiara +assisted Environmental Packaging in making misstatements in certain Forms 8-Ks filed with the +Commission, and that DiChiara authored attorney opinion letters to Environmental Packaging’s +transfer agent and to the Depository Trust Company which falsely stated that certain individuals +and entities were not affiliates of Environmental Packaging. + + + 3 + +IV. + + In view of the foregoing, the Commission deems it appropriate and in the public interest to +impose the sanction agreed to in Respondent DiChiara’s Offer. + + Accordingly, it is hereby ORDERED pursuant to Rule 102(e)(3)(i) of the Commission’s +Rules of Practice, effective immediately, that: + + A. Respondent is suspended from appearing or practicing before the Commission as +an attorney for 3 years from the date of the Order. + + B. After 3 years from the date of the Order, Respondent may request that the +Commission consider his application to resume appearing and practicing before the Commission +as an attorney. The application should be sent to the attention of the Office of the General +Counsel. + +C. In support of such an application, Respondent must provide a certificate of good +standing from each state bar where Respondent is a member. + +D. In support of such an application, Respondent must also submit an affidavit +truthfully stating, under penalty of perjury: + +1. that Respondent has complied with the Order, and with any orders in SEC +v DiChiara, including any orders requiring payment of disgorgement or +penalties; + +2. that Respondent: + +a. is not currently suspended or disbarred as an attorney by a court of +the United States (or any agency of the United States) or the bar or +court of any state, territory, district, commonwealth, or possession; +and + +b. since the entry of the Order, has not been suspended as an attorney +for an offense involving moral turpitude by a court of the United +States (or any agency of the United States) or the bar or court of +any state, territory, district, commonwealth, or possession, except +for any suspension concerning the conduct that was the basis for +the Order; + +3. that Respondent, since the entry of the Order, has not been convicted of a +felony or misdemeanor involving moral turpitude as set forth in Rule +102(e)(2) of the Commission’s Rules of Practice; and + + 4 +4. that Respondent, since the entry of the Order: + +a. has not been found by the Commission or a court of the United +States to have committed a violation of the federal securities laws, +except for any finding concerning the conduct that was the basis +for the Order; + +b. has not been charged by the Commission or the United States with +a violation of the federal securities laws, except for any charge +concerning the conduct that was the basis for the Order; + +c. has not been found by a court of the United States (or any agency +of the United States) or any state, territory, district, +commonwealth, or possession, or any bar thereof, to have +committed an offense involving moral turpitude, except for any +finding concerning the conduct that was the basis for the Order; +and + +d. has not been charged by the United States (or any agency of the +United States) or any state, territory, district, commonwealth, or +possession, or any bar thereof, with having committed an offense +involving moral turpitude, except for any charge concerning the +conduct that was the basis for the Order. + +E. If Respondent provides the documentation required in Paragraphs C and D, and +the Commission determines that he truthfully attested to each of the items required in his +affidavit, he shall by Commission order be permitted to resume appearing and practicing before +the Commission as an attorney. + +F. If Respondent is not able to truthfully attest to the statements required in +Subparagraphs D(2)(b) or D(4), Respondent shall provide an explanation as to the facts and +circumstances pertaining to the matter and the Commission may hold a hearing to determine +whether there is good cause to permit him to resume appearing and practicing before the +Commission as an attorney. + +G. Respondent is suspended from appearing or practicing before the Commission +as an accountant. + +H. After 3 years from the date of this order, Respondent may request that the +Commission consider his reinstatement by submitting an application (attention: Office of the +Chief Accountant) to resume appearing or practicing before the Commission as: + + 1. a preparer or reviewer, or a person responsible for the preparation or +review, of any public company’s financial statements that are filed with the Commission (other +than as a member of an audit committee, as that term is defined in Section 3(a)(58) of the + 5 +Securities Exchange Act of 1934). Such an application must satisfy the Commission that +Respondent’s work in his practice before the Commission as an accountant will be reviewed +either by the independent audit committee of the public company for which he works or in some +other acceptable manner, as long as he practices before the Commission in this capacity; and/or + + 2. a preparer or reviewer, or a person responsible for the preparation or +review, of any public company’s financial statements that are filed with the Commission as a +member of an audit committee, as that term is defined in Section 3(a)(58) of the Securities Act +of 1934. Such an application will be considered on a facts and circumstances basis with +respect to such membership, and the applicant’s burden of demonstrating good cause for +reinstatement will be particularly high given the role of the audit committee in financial and +accounting matters; and/or + +3. an independent accountant. + +Such an application must satisfy the Commission that: + + (a) Respondent, or the public accounting firm with which he is +associated, is registered with the Public Company Accounting Oversight Board (“Board”) in +accordance with the Sarbanes-Oxley Act of 2002, and such registration continues to be effective; + + (b) Respondent, or the registered public accounting firm with which he +is associated, has been inspected by the Board and that inspection did not identify any criticisms +of or potential defects in the Respondent’s or the firm’s quality control system that would +indicate that the respondent will not receive appropriate supervision; + (c) Respondent has resolved all disciplinary issues with the Board, and +has complied with all terms and conditions of any sanctions imposed by the Board (other than +reinstatement by the Commission); and + + (d) Respondent acknowledges his responsibility, as long as he appears +or practices before the Commission as an independent accountant, to comply with all +requirements of the Commission and the Board, including, but not limited to, all requirements +relating to registration, inspections, concurring partner reviews and quality control standards. + +I. The Commission will consider an application by Respondent to resume appearing +or practicing before the Commission as an accountant provided that his state CPA license is +current and he has resolved all other disciplinary issues with the applicable state boards of +accountancy. However, if state licensure is dependent on reinstatement by the Commission, the +Commission will consider an application on its other merits. The Commission’s review may +include consideration of, in addition to the matters referenced above, any other matters relating +to Respondent’s character, integrity professional conduct, or qualifications to appear or practice +before the Commission as an accountant. Whether an application demonstrates good cause will +be considered on a facts and circumstances basis with due regard for protecting the integrity of +the Commission’s processes. + + 6 + + By the Commission. + + + +Vanessa A. Countryman +Secretary + \ No newline at end of file diff --git a/raw/aaer/2021/AAER-4257.txt b/raw/aaer/2021/AAER-4257.txt new file mode 100644 index 0000000000000000000000000000000000000000..359152d83b3af2e7d1d05ef8300b3205eeb07d84 --- /dev/null +++ b/raw/aaer/2021/AAER-4257.txt @@ -0,0 +1,446 @@ + + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 93117 / September 24, 2021 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4257 / September 24, 2021 + +ADMINISTRATIVE PROCEEDING +File No. 3-20595 +ORDER INSTITUTING CEASE-AND- +DESIST PROCEEDINGS PURSUANT TO +SECTION 21C OF THE SECURITIES +EXCHANGE ACT OF 1934, MAKING +FINDINGS, AND IMPOSING A CEASE- +AND-DESIST ORDER + + + + + + + + + +I. +The Securities and Exchange Commission (“Commission”) deems it appropriate that +cease-and-desist proceedings be, and hereby are, instituted pursuant to Section 21C of the +Securities Exchange Act of 1934 (“Exchange Act”), against WPP plc (“WPP” or +“Respondent”). +II. +In anticipation of the institution of these proceedings, WPP has submitted an Offer of +Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the +findings herein (except as to the Commission’s jurisdiction over it and the subject matter of +these proceedings), which are admitted, WPP consents to the entry of this Order Instituting +Cease-and-Desist Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934, +Making Findings, and Imposing a Cease-and-Desist Order (“Order”), as set forth below. + +In the Matter of + +WPP PLC + +Respondent. + + +III. +On the basis of this Order and WPP’s Offer, the Commission finds1 that: +SUMMARY +1. This matter concerns violations of the anti-bribery, books and records, and +internal accounting controls provisions of the Foreign Corrupt Practices Act (“FCPA”) by +WPP, the world’s largest advertising group. The bribery scheme took place at a WPP +majority-owned subsidiary in India, which, through intermediaries, paid as much as a +million dollars in bribes to Indian officials to obtain and retain government business, +resulting in over $5 million in net profit from 2015 – 2017. Additionally, WPP benefited +from other illicit schemes at its subsidiaries such as: (1) a subsidiary in China making +unjustified payments to a vendor in connection with a Chinese tax audit, resulting in +significant tax savings to WPP’s subsidiary; (2) a subsidiary in Brazil making improper +payments to purported vendors in connection with government contracts in 2016-2018; and +(3) in 2013, a Peruvian subsidiary funneling funds through other WPP entities to disguise +the source of funding for a political campaign in Peru . +2. WPP failed to devise and maintain a sufficient system of internal accounting +controls necessary to detect and prevent the bribe payments at this Indian subsidiary or +properly account for the true nature of payments and income at all four subsidiaries. +Specifically, WPP failed to implement and maintain sufficient internal accounting controls +over vendor management, and accounts payable at these subsidiaries, failed to provide +reasonable assurances that these subsidiaries were adhering to WPP’s anti-corruption +policy, and lacked sufficient entity level controls over these subsidiaries. As a result, it also +failed to make and keep accurate books and records. Finally, despite WPP’s size and +geographical reach, it failed to timely and properly manage the company’s response to red +flags indicating corruption risks or remediate identified control deficiencies. +RESPONDENT +3. WPP plc is a Jersey multinational marketing communications group with dual- +headquarters in London and New York City. WPP’s American depositary shares are registered +with the Commission pursuant to Section 12(b) of the Exchange Act and trade on the New York +Stock Exchange under the Ticker “WPP.” WPP operates through agencies operating in various +international locations, referred to as “Networks.” +FACTS +Background +4. Until 2018, WPP implemented an aggressive acquisition strategy in order to grow +its business. As part of its acquisition strategy, WPP acquired a controlling interest in small, + +1 Pursuant to Respondent’s Offer of Settlement, the SEC makes these findings in this proceeding. The findings are not +binding on any other person or entity or in any other proceeding. + + +localized agencies in high-risk markets, such as India, China, and South America that were +previously majority-owned by the local agency’s founder. WPP often structured these +acquisitions to include an earn-out provision. Under these earn-out provisions, the parties +agreed to defer a portion of the purchasing price until the agency’s founder met future financial +goals. In some cases, WPP agreed that the agency’s founder would continue as the Chief +Executive Officer of the WPP controlled entity (hereinafter Founder-in-Control or “FIC” +entities). WPP placed the FIC entities within a WPP Network and consolidated the FIC +entities’ financial statements into WPP’s financial statements. +5. WPP centrally coordinated the group’s financial matters, reporting, control, +treasury, tax, mergers, acquisitions, investor relations, legal affairs and internal audit from its +headquarters. In larger markets, such as India and China, WPP appointed a regional Financial +Director to work more closely with the Networks, which were primarily responsible for +servicing WPP’s clients and overseeing the FIC entities. While WPP mandated that all +companies follow WPP global policies and internal accounting control requirements, in reality, +the founders and/or CEOs of the FIC entities exercised wide autonomy and outsized influence. +6. Following this growth strategy, WPP operated in 112 countries and employed +approximately 100,000 people over 3,000 locations during the relevant period. WPP sourced +86% of its revenue from 10 companies and 88% of its revenue was from operations in 20 +countries. +7. Despite the known corruption and fraud risks inherent in WPP’s FIC +acquisitions, WPP lacked sufficient internal accounting controls with respect to its expansive +international network. Additionally, WPP had no compliance department during the relevant +period, and it lacked meaningful coordination between its legal and internal audit departments +and Network management. While WPP charged Network management with remediating +deficiencies identified by WPP’s legal and internal audit departments, in practice, neither WPP +nor the Networks provided adequate oversight of the FIC entities to ensure that the FIC entities +implemented WPP’s internal accounting controls and compliance policies. As a result of these +structural deficiencies, WPP failed to promptly or adequately respond to repeated warning signs +of corruption or identified control failures at certain FIC entities. Described below are +examples of the schemes and circumvention of WPP’s internal accounting controls and +compliance policies that occurred at FIC entities. +Indian Subsidiary +8. In July 2011, WPP obtained a majority interest in an agency located in +Hyderabad, India, which became a FIC entity within a WPP Network (“India Subsidiary”). +WPP’s acquisition agreement contained an earn-out provision, and WPP appointed +Subsidiary’s co-founder as the CEO of India Subsidiary (“CEO A”). From 2015 – 2017, +approximately half of India Subsidiary’s revenue was attributable to the Indian States of +Telangana and Andhra Pradesh’s Departments of Information and Public Relations (“DIPR”), +which were responsible for retaining media agencies to conduct advertising and public relations +campaigns for their respective state governments. +9. From July 7, 2015 through September 2, 2017, WPP received seven anonymous + + +complaints alleging – with increasing specificity – two bribery schemes related to India +Subsidiary’s work for DIPR. The first scheme involved the use of a third-party agency +(“Vendor A”) that India Subsidiary used to purchase media for DIPR to create an off-the-books +fund. The second scheme involved India Subsidiary fabricating an entire advertising campaign +in order to create an off-the-books fund at a third-party agency (“Vendor B”) that was used to +compensate DIPR officials for awarding campaigns to India Subsidiary and for the personal +benefit of CEO A. + The Vendor A Bribery Scheme +10. With the relevant Network’s knowledge, India Subsidiary and Vendor A entered +an agreement under which Vendor A would pay for media purchases when due and India +Subsidiary would pay Vendor A upon receipt of payment from the government client. Pursuant +to the contract, Vendor A kept the profits from the media purchases (minus a 10% fee +remaining with India Subsidiary). India Subsidiary reserved audit rights in the agreement and +required Vendor A to submit its media invoices prior to receiving payment. In practice though, +India Subsidiary paid Vendor A without ever receiving the media invoices to justify the +payments. +11. The Vendor A bribery scheme worked as follows: (1) DIPR awarded India +Subsidiary a contract under which India Subsidiary created an advertisement and then +purchased space in newspapers to display the advertisement; (2) DIPR paid a set publicly- +available fee to media agencies for purchasing advertisement space (the “card rate”); (3) CEO +A was able to negotiate rates with the newspapers that were significantly less than DIPR’s card +rate; (4) to utilize the delta between DIPR’s card rate and the actual price paid to the +newspapers for bribes to DIPR officials, India Subsidiary entered into the agreement with +Vendor A to purchase the advertising space on DIPR’s behalf; and (5) after paying the +newspapers and taking its cut of the scheme, Vendor A facilitated payments to DIPR officials. +This same mechanism was used to make payments to CEO A. +12. Following the receipt of the original complaint in July 2015, which identified +CEO A by name as the architect of the scheme, WPP tasked its Financial Director for the India +region (“WPP India FD”) to oversee a review of the allegations. The WPP India FD retained +an Indian partner firm of an international accounting firm (“Accounting Firm”) ostensibly to +investigate the allegations and review India Subsidiary’s processes regarding government +contracts and transactions involving government clients. However, the Accounting Firm relied +on information provided by CEO A and India Subsidiary CFO (“CFO A”), did not contact third +parties, and ultimately provided a report to WPP, which contained no conclusions related to the +bribery allegations. Instead, the Accounting Firm noted several red flags regarding Vendor A, +such as the India Subsidiary failing to obtain comparative quotes from other vendors or +properly vetting Vendor A. After receipt of the Accounting Firm’s report, WPP allowed India +Subsidiary to continue routing DIPR’s media purchases through Vendor A. +13. In the spring of 2016, WPP received three additional anonymous complaints +related to the Vendor A bribery scheme. These complaints again specifically identified CEO A +as the architect of the scheme and described documents CFO A falsified to facilitate the +scheme. In response, WPP forwarded some of the complaints to the Accounting Firm and + + +requested that the Accounting Firm conduct a transactional review of India Subsidiary’s +business with Vendor A as part of a compliance review. +14. As part of its review, the Accounting Firm asked Vendor A to produce the +relevant media invoices. Despite being contractually obligated to provide supporting +documentation, Vendor A refused. As a result, the Network India CFO terminated the +relationship, while still authorizing India Subsidiary to pay Vendor A for past media purchases. +WPP did nothing further with respect to the multiple allegations that CEO A was engaged in a +bribe scheme with the FIC entity’s significant client. + Indian Subsidiary’s Bribery Scheme involving Vendor B +15. The second bribery scheme involved Indian Subsidiary paying DIPR officials +through an intermediary. In this scheme, DIPR paid India Subsidiary $1,588,480 to supposedly +execute a campaign related to the celebration of the anniversary of the formation of the Indian +state of Telangana in June 2015. In reality, no such campaign occurred. Instead, CFO A +requested that Vendor B falsify documents indicating that Vendor B provided services for the +supposed campaign as justification for India Subsidiary paying the bulk of the money it +received from DIPR to Vendor B. +16. As reflected in spreadsheets maintained by CFO A, Vendor B then paid over +$1,000,000 to a third-party intermediary responsible for making payments to DIPR officials. +With the remaining funds, Vendor B made cash payments to CEO A and routed money back to +India Subsidiary. India Subsidiary used the money it received back from Vendor B to pay +overdue account receivables from clients unrelated to DIPR. Therefore, the entire purpose of +the fake campaign was to enrich DIPR officials, CEO A, and benefit India Subsidiary by +cancelling out old receivable balances. +17. Despite having notice of these potential problems with Vendor B in early 2016 +through the same anonymous complaints described above, WPP failed to uncover that the +supposed June 2015 DIPR campaign was, in actuality, a mechanism for bribery. + WPP ultimately acts on the bribery allegations at Indian Subsidiary +18. In 2017, WPP continued to receive warning signs about India Subsidiary in the +form of anonymous complaints citing CEO A, Vendor A, and Vendor B. One of these +complaints named the specific DIPR official (“DIPR Official”) that allegedly received bribes in +return for awarding India Subsidiary contracts. +19. In August 2017, WPP directed a member of its legal team to conduct an +investigation. Unlike the earlier reviews in response to the various allegations of bribery, WPP +conducted third-party due diligence of CEO A, DIPR Official, and Vendor A and a review of +CEO A’s and CFO A’s email accounts, which were stored on servers in the United States. The +third-party due-diligence report revealed that CEO A and DIPR Official had a close +relationship and DIPR Official had a reputation for demanding kickbacks for contracts awarded +under his supervision. Additionally, WPP identified email communication dating back to 2015, +in which CEO A and CFO A tracked the off-the-books funds India Subsidiary maintained at + + +Vendors A and B that were used for bribe payments. Ultimately, CEO A admitted that he was +aware that third parties made payments to government officials on behalf of India Subsidiary, +and WPP terminated both CEO A and CFO A. +20. As a result of the bribery schemes at India subsidiary, WPP was unjustly +enriched by $5,669,596. +Chinese Subsidiary +21. In 2014, WPP obtained a majority interest in an agency headquartered in +Shanghai, China, which focused on celebrity branding and endorsement. China Subsidiary was +a FIC entity because WPP’s acquisition agreement contained an earn-out provision and WPP +agreed that the China Subsidiary’s co-founder would serve as the CEO of China Subsidiary +(“CEO B”). WPP placed it within a WPP Network (“China Subsidiary”), and China +Subsidiary’s annual revenues during the years 2017 and 2018 were $9.4 million and $7.6 +million, respectively. +22. In November 2018, China Subsidiary was able to avoid paying $3,261,437 in +taxes to a Chinese tax authority by making payments to a vendor identified by tax officials and +providing $2,000 worth of gifts and entertainment to tax officials during the same time period. +Specifically, China Subsidiary paid approximately $107,000 to the tax official’s chosen vendor +in the two months before a tax audit finalized. The vendor kept a small percentage of the +money and transmitted the rest to an unknown recipient. Although China Subsidiary’s books +and records reflected that the vendor performed services for a client, a China Subsidiary +employee falsified documentation to justify the transaction. Despite the presence of red flags +that, if properly investigated, could have led to the prevention or detection of China +Subsidiary’s improper payments, WPP did not uncover the scheme until early 2019 while +conducting an unrelated review. +23. In 2017 and 2018, WPP was aware of significant red flags related to China +Subsidiary and CEO B. First, an internal audit in 2017 determined that China Subsidiary was +employing tax avoidance schemes and other significant violations of WPP’s internal accounting +controls resulting from CEO B’s actions. Second, in May 2018, a China Subsidiary employee +informed the Network CFO in charge of APAC (“Network APAC CFO”) and WPP’s regional +tax director in China (“WPP China Tax Director”) that China Subsidiary was in the midst of a +tax audit and China Subsidiary management could face criminal charges for its tax avoidance +schemes. In the same communication, the China Subsidiary employee informed –without +additional context – that the tax officials recommended that China Subsidiary engage a third- +party vendor. After receiving the email, neither WPP nor the Network attempted to determine +why the tax officials recommended that the China Subsidiary retain a specific vendor or to +otherwise follow-up on the information. +24. In June 2018, WPP and the Network overlooked another warning sign, when, , +CEO B told WPP China Tax Director and Network APAC CFO that he was “comb[ing] +through a lot of [his] personal social connections,” in an attempt to control the direction of the +tax audit. Again, neither WPP nor the Network inquired further to clarify CEO B’s statement. +During a mid-2018 phone call, CEO B reported to Network APAC CFO that he had resolved + + +Network Subsidiary’s tax exposure for $43,000 in back-owed stamp duty taxes and the tax +bureau was unwilling to provide any documentation explaining its determination. WPP China +Tax Director met with the tax official in charge of the audit who verbally confirmed that the +investigation was concluded with no major issues. Despite the fact that the information CEO B +and the tax official provided was inconsistent with the tax liabilities WPP’s internal audit had +uncovered and the presence of other red flags, WPP did not investigate the issue further. +25. While responding to allegations unrelated to the tax issue, WPP uncovered an +off-the-books account maintained by China Subsidiary reflecting the payments to the vendor +recommended by the tax officials. As a result, CEO B finally resigned in April 2019 – a year +and a half after WPP and the Network first became aware of the significant issues at China +Subsidiary. +Brazilian Subsidiary +26. In 2016, WPP obtained a majority interest in a public relations agency +headquartered in São Paulo, Brazil that WPP placed within a WPP Network (“Brazil +Subsidiary”). Brazil Subsidiary was a FIC entity because WPP’s acquisition agreement +contained an earn-out provision and WPP agreed that Brazil Subsidiary’s minority owner +would serve as the CEO of Brazil Subsidiary (“CEO C”). Brazil Subsidiary’s annual revenue +in 2017 was approximately 26 million dollars. +27. WPP had an adviser payment policy that prohibited its companies from paying +third parties to assist in obtaining or retaining government contracts without WPP’s approval. +Despite the policy, Brazil Subsidiary made improper payments to vendors in connection with +securing government contracts at CEO C’s direction. These payments directly violated WPP’s +adviser payment policies and were made in circumstances in which there was a high probability +that a portion of the payments may have been passed to the government officials with the +authority to award the contracts. To disguise the fact that Brazil Subsidiary’s payments to the +vendors related to obtaining or retaining government contracts, Brazil Subsidiary falsified its +books and records to reflect that the vendors performed bonafide services, such as marketing or +IT related services. As a result of this misconduct, WPP was unjustly enriched by $891,457. +Peruvian Subsidiary +28. In 1996, WPP obtained a majority interest in a creative services agency +headquartered in Lima, Peru that WPP placed within a Network (“Peru Subsidiary”). Peru +Subsidiary was a FIC entity because WPP agreed that Peru Subsidiary’s founder and CEO +would remain as CEO of the company post-acquisition (“CEO D”) and retain a 30% stake in +the company. Peru Subsidiary’s total revenue during the years 2013 and 2014 was +approximately $5.6 million. CEO D continued to manage Peru Subsidiary until WPP +terminated him in 2018 for participating in a scheme to manipulate Peru Subsidiary’s earnings. +29. In 2013, WPP was unjustly enriched by $291,935 as a result of Peru Subsidiary +acting as a conduit for a bribery scheme. The bribery scheme involved a construction company +funding the mayor of Lima’s political campaigns in exchange for contract awards. At CEO D’s +direction, Peru Subsidiary agreed to be a conduit for the construction company’s bribe to the + + +mayor of Lima. Also, CEO D disguised the corrupt source of the funds used for the mayor of +Lima’s political campaign by funneling the construction company’s payments to Peru +Subsidiary through WPP subsidiaries in Colombia and Chile. Consequently, the WPP +subsidiaries in Colombia and Chile falsely recorded that they received money in return for +services performed for the construction company, and Peru Subsidiary maintained no records +indicating that the construction company paid for a portion of the mayor of Lima’s political +campaigns. +30. WPP did not uncover Peru Subsidiary’s role in the bribery scheme until a +Peruvian criminal proceeding highlighted the conduct in 2019. +LEGAL STANDARDS AND FCPA VIOLATIONS +31. Under Section 21C(a) of the Exchange Act, the Commission may impose a +cease-and-desist order upon any person who is violating, has violated, or is about to violate any +provision of the Exchange Act or any rule or regulation thereunder, and upon any other person +that is, was, or would be a cause of the violation, due to an act or omission the person knew or +should have known would contribute to such violation. +WPP Violated Exchange Act Section 30A +32. The anti-bribery provisions of the FCPA, Section 30A of the Exchange Act, +make it unlawful for any issuer with a class of securities registered pursuant to Section 12 of +the Exchange Act, or any employee or agent of such issuer, to make use of the mails or any +means or instrumentality of interstate commerce corruptly in furtherance of an offer, payment, +promise to pay, or authorization of the payment of any money, or offer, gift or promise to give +anything of value to any foreign official for purposes of influencing any act or decision of such +foreign official in his official capacity in order to assist such issuer in obtaining or retaining +business for or with any person. 15 U.S.C. § 78dd-1. As a result of the conduct described above +regarding India Subsidiary’s payments to government officials, WPP violated Exchange Act +Section 30A. +WPP Violated Exchange Act Section 13(b)(2)(A) +33. The books and records provision of the FCPA, Section 13(b)(2)(A) of the +Exchange Act, requires every issuer with a class of securities registered pursuant to Section 12 +of the Exchange Act to make and keep books, records, and accounts, which, in reasonable +detail, accurately and fairly reflect the transactions and dispositions of the assets of the issuer. +15 U.S.C. § 78m(b)(2)(A). As described above, WPP’s books and records did not accurately +reflect the true purpose of outgoing and incoming transactions. Therefore, WPP violated +Exchange Act Section 13(b)(2)(A). +WPP Violated Exchange Act Section 13(b)(2)(B) +34. Section 13(b)(2)(B) of the Exchange Act requires companies with a class of +securities registered under Section 12 of the Exchange Act to devise and maintain a system of +internal accounting controls sufficient to provide reasonable assurances that (i) transactions are + + +executed in accordance with management’s general or specific authorization; (ii) transactions +are recorded as necessary (I) to permit preparation of financial statements in conformity with +generally accepted accounting principles or any other criteria applicable to such statements, and +(II) to maintain accountability for assets; (iii) access to assets is permitted only in accordance +with management’s general or specific authorization; and (iv) the recorded accountability for +assets is compared with the existing assets at reasonable intervals and appropriate action is +taken with respect to any differences. 15 U.S.C. § 78m(b)(2)(B). As described above, WPP +failed to implement a system of internal accounting controls sufficient to provide reasonable +assurances that transactions were executed in accordance with management’s general or +specific authorization and that access to assets was permitted only in accordance with +management’s general or specific authorization. By this conduct, WPP violated Exchange Act +Section 13(b)(2)(B). +WPP’s Remedial Actions and Cooperation +35. In determining to accept the Offer, the Commission considered remedial acts +undertaken by WPP and cooperation afforded the Commission Staff. +36. WPP’s cooperation included sharing facts developed in the course of its own +internal investigations and forensic accounting reviews, translating key documents, and making +current and former employees located abroad available for interviews at the Commission’s +Regional Office in Fort Worth. +37. WPP’s remediation includes (i) terminating senior executives and other +employees involved in the misconduct and separating from employees with supervisory +responsibilities over the misconduct; (ii) strengthening and expanding its global compliance, +internal investigations, risk and controls functions, including the creation of 36 new positions +globally; (iii) enhancing its internal audit function; (iv) creating Network risk committees to +prevent, detect, and remediate corruption risk, among other risks; (v) conducting global, annual +compliance risk assessments; (vi) conducting proactive reviews of remaining FIC entities in +Brazil, China, and India; (vii) streamlining businesses and back-office functions, including that +three of the Networks in which the subsidiaries in this Order were incorporated have since been +merged with other networks; (viii) enhancing the procedures for engagement of third parties; +and (ix) enhancing training provided to employees regarding anti-corruption, controls, and +other compliance issues. +DISGORGEMENT AND CIVIL PENALTIES +38. The disgorgement and prejudgment interest ordered in section IV. is consistent +with equitable principles, does not exceed Respondent’s net profits from its violations, and +allowing Respondent to retain such funds would be inconsistent with equitable principles. +Therefore, in these circumstances, distributing disgorged funds to the U.S. Treasury is the most +equitable alternative. The disgorgement and prejudgment interest ordered in section IV. shall +be transferred to the general fund of the U.S. Treasury, subject to Section 21F(g)(3) of the +Exchange Act. + + +IV. +In view of the foregoing, the Commission deems it appropriate to impose the +sanctions agreed to in Respondent’s Offer. +Accordingly, pursuant to Section 21C of the Exchange Act it is hereby ORDERED that: +A. Respondent shall cease and desist from committing or causing any +violations and any future violations of Sections 30A, 13(b)(2)(A) and +13(b)(2)(B) of the Exchange Act [15 U.S.C. §§ 78m(b)(2)(A), +78m(b)(2)(B), and 78dd-1]. +B. Respondent shall, within 14 days of entry of this Order, pay disgorgement +of $10,114,424.86 and prejudgment interest of $1,110,234.68 for a total of +$11,224,659.54 and a civil money penalty in the amount of $8,000,000 to +the Securities and Exchange Commission for transfer to the general fund of +the United States Treasury, subject to Exchange Act Section 21F(g)(3). If +timely payment is not made, additional interest shall accrue pursuant to +SEC Rule of Practice 600 and 31 U.S.C 3717. +C. Payment must be made in one of the following ways: +(1) Respondent may transmit payment electronically to the +Commission, which will provide detailed ACH +transfer/Fedwire instructions upon request; +(2) Respondent may make direct payment from a bank account +via Pay.gov through the SEC Web site at +http://www.sec.gov/about/offices/ofm.htm; or +(3) Respondent may pay by certified check, bank cashier’s check, +or United States postal money order, made payable to the +Securities and Exchange Commission and hand-delivered or +mailed to: + Enterprise Services Center + Accounts Receivable Branch + HQ Bldg., Room 181, AMZ- 341 + 6500 South MacArthur Boulevard Oklahoma City, OK 73169 + Payments by check or money order must be accompanied by a cover letter +identifying W P P as the Respondent in these proceedings, and the file number of +these proceedings; a copy of the cover letter and check or money order must be sent to +Charles Cain, Unit Chief, FCPA Unit, Division of Enforcement, Securities and +Exchange Commission, 100 F St., NE, Washington, DC 20549. + + + +D. Amounts ordered to be paid as civil money penalties pursuant to this +Order shall be treated as penalties paid to the government for all purposes, +including all tax purposes. To preserve the deterrent effect of the civil +penalty, Respondent agrees that in any Related Investor Action, it shall not +argue that it is entitled to, nor shall it benefit by, offset or reduction of any +award of compensatory damages by the amount of any part of +Respondent’s payment of a civil penalty in this action (“Penalty Offset”). +If the court in any Related Investor Action grants such a Penalty Offset, +Respondent agrees that it shall, within 30 days after entry of a final order +granting the Penalty Offset, notify the Commission’s counsel in this action +and pay the amount of the Penalty Offset to the Securities and Exchange +Commission. Such a payment shall not be deemed an additional civil +penalty and shall not be deemed to change the amount of the civil penalty +imposed in this proceeding. For purposes of this paragraph, a “Related +Investor Action” means a private damages action brought against +Respondent by or on behalf of one or more investors based on +substantially the same facts as alleged in the Order instituted by the +Commission in this proceeding. +By the Commission. + + +Vanessa A. Countryman +Secretary \ No newline at end of file diff --git a/raw/aaer/2021/AAER-4258.txt b/raw/aaer/2021/AAER-4258.txt new file mode 100644 index 0000000000000000000000000000000000000000..e488be157884fdff3d583aca3c83b0831478db11 --- /dev/null +++ b/raw/aaer/2021/AAER-4258.txt @@ -0,0 +1,928 @@ + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 93133 / September 27, 2021 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4258 / September 27, 2021 + +ADMINISTRATIVE PROCEEDING +File No. 3-20600 + +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE AND CEASE-AND- +DESIST PROCEEDINGS PURSUANT TO +SECTIONS 4C AND SECTION 21C OF +THE SECURITIES EXCHANGE ACT OF +1934 AND RULE 102(e) OF THE +COMMISSION’S RULES OF PRACTICE, +MAKING FINDINGS, AND IMPOSING +REMEDIAL SANCTIONS AND A +CEASE-AND-DESIST ORDER + + +I. + +The Securities and Exchange Commission (“Commission”) deems it appropriate that +public administrative and cease-and-desist proceedings be, and hereby are, instituted pursuant to +Sections 4C1 and 21C of the Securities Exchange Act of 1934 (“Exchange Act”), and Rule +102(e)(1)(ii) of the Commission’s Rules of Practice 2 against Respondents, Ravindranathan +Raghunathan, CPA (“Raghunathan”) and Craig A. Golding, CPA (“Golding”), (collectively, +“Respondents”). + + + +1 Section 4C provides, in relevant part, that: +The Commission may censure any person, or deny, temporarily or permanently, to any person the +privilege of appearing or practicing before the Commission in any way, if that person is found . . .(1) not +to possess the requisite qualifications to represent others; (2) to be lacking in character or integrity, or to +have engaged in unethical or improper professional conduct; or (3) to have willfully violated, or willfully +aided and abetted the violation of, any provision of the securities laws or the rules and regulations +thereunder. + +2 Rule 102(e)(1)(ii) provides, in pertinent part, that: +The Commission may . . . deny, temporarily or permanently, the privilege of appearing or practici ng +before it . . . to any person who is found . . . to have engaged in unethical or improper professional +conduct. + +In the Matter of + +Ravindranathan Raghunathan, +CPA +and +Craig A. Golding, CPA, +Respondents. +2 + +II. + +In anticipation of the institution of these proceedings, Respondents have submitted Offers +of Settlement (“Offers”) which the Commission has determined to accept. Solely for the purpose +of these proceedings and any other proceedings brought by or on behalf of the Commission, or to +which the Commission is a party, and without admitting or denying the findings herein, except as +to the Commission’s jurisdiction over them and the subject matter of these proceedings, which +are admitted, and except as provided herein in Section V, Respondents consent to the entry of +this Order Instituting Public Administrative and Cease-and-Desist Proceedings Pursuant to +Sections 4C and 21C of the Securities Exchange Act of 1934 and Rule 102(e) of the +Commission’s Rules of Practice, Making Findings, and Imposing Remedial Sanctions and a +Cease-and-Desist Order (“Order”), as set forth below. + +III. + +On the basis of this Order and Respondents’ Offers, the Commission finds3 that: + +SUMMARY + +1. These proceedings involve improper professional conduct regarding the 2017 audit +of Longfin Corp. (“Longfin”) by Ravindranathan Raghunathan and Craig A. Golding, both +partners in a Public Company Accounting Oversight Board (“PCAOB”) registered audit firm +(“audit firm”). Over the course of the audit, Raghunathan, who served as the engagement +partner, did not adhere to numerous PCAOB standards, resulting in audit failures in three critical +areas, including recognition of revenue and related party transactions. Golding served as the +engagement quality review (“EQR”) partner and did not adequately conduct his review of two of +these areas in accordance with the applicable PCAOB standard. + +2. The audit deficiencies included, among other things, the failure to: (i) properly plan +the audit and assess and respond to the risks of material misstatements in Longfin’s financial +statements; (ii) conduct appropriate procedures to obtain reasonable assurance that Longfin’s +financial statements were free of material misstatements caused by fraud; (iii) obtain sufficient +appropriate audit evidence; (iv) identify and properly audit related party transactions; and (v) +exercise due professional care and skepticism, in connection with related-party transactions, +revenue recognition, and the valuation of intangible assets. Notwithstanding these deficiencies +in these three areas, Raghunathan approved the issuance of the audit report, which was +inaccurate because it stated that the firm’s audit was conducted in accordance with PCAOB +standards. + +RESPONDENTS AND RELEVANT ENTITIES + +Respondents + + +3 The findings herein are made pursuant to Respondents’ Offers of Settlement and are not binding on any other +person or entity in this or any other proceeding. +3 +3. Ravindranathan Raghunathan, age 49, who resides in Edison, New Jersey, is a +licensed certified public accountant (“CPA”) in New Jersey since 2004. Raghunathan is a +partner of a PCAOB registered audit firm. Raghunathan served as the audit partner for the audit +of Longfin’s 2017 financial statements. + +4. Craig A. Golding, age 50, who resides in San Diego, California, is a licensed CPA +in California since 1999. Golding is a partner of a PCAOB registered audit firm. Golding +served as the EQR partner for the audit of Longfin’s 2017 financial statements. + +Relevant Entities + +5. Longfin was a Delaware corporation formed in February 2017 and headquartered in +New York, New York. Longfin’s Class A common stock was previously registered with the +Commission pursuant to Section 12(b) of Exchange Act. Between December 13, 2017 and its +voluntary delisting from Nasdaq in May 2018, Longfin’s Class A common stock traded on the +Nasdaq Capital Market under the symbol “LFIN.” On May 24, 2018, Longfin’s Class A +common stock began trading over the counter. On November 21 and November 27, 2018, +Longfin filed Forms 8-K announcing that the company had entered into an Assignment for the +Benefit of Creditors on November 14, 2018 in New Jersey state court and, as a result, had +terminated all of its employees and disbanded its Board of Directors. + +FACTS + +Longfin Background + +6. Longfin was formed in February 2017 as a purported finance and technology +company specializing in structured trade finance solutions and physical commodities solutions. +From its formation and throughout the relevant period, Venkata Meenavalli, an Indian citizen +who owned a majority of shares of Longfin’s common stock, served as Longfin’s Chairman and +Chief Executive Officer. For the one-month fiscal period from February 1, 2017 ending +February 28, 2017, Longfin reported total assets of approximately $300,000 and net income of +approximately $5,000. + +7. In a June 2017 share exchange, Longfin acquired Stampede Tradex (“Stampede”), a +purported global trade finance solutions provider in which Meenavalli held a 45% interest, +ascribing a fair value of the consideration transferred of $134.4 million. At or around the same +time, Longfin began selling shares pursuant to Regulation A+ of the Securities Act of 1933 +(“Securities Act”), and in December 2017, Longfin’s shares began trading on the Nasdaq Capital +Market. + +8. Longfin reportedly had a total of 18 employees, and conducted almost all of its +operations from India and Singapore. Other than a dedicated office space in a shared workspace +facility and two corporate bank accounts, Longfin had no presence in the United States. +Longfin’s purported business model involved purchasing physical commodities in-transit aboard +ships at sea and then immediately reselling the commodities for a small profit. Because these +transactions occurred in-transit at sea, the nature of the commodity purchases and sales was such +4 +that they could not be physically verified. Longfin exchanged commodities with certain entities +owned or controlled by Meenavalli. Longfin reported $75 million of revenue in 2017, +purportedly derived principally from “structured trade finance, principally the sale of physical +commodities,” including $66.6 million “related to the sale of physical commodities.” Longfin +reported a net loss of $26 million in 2017. The documents Longfin maintained to record +commodities sales transactions often lacked information substantiating critical information to +support the validity of the transactions, such as the passage of title and transfer of the risk of loss. + +9. On February 7, 2018, Longfin engaged an audit firm as its independent auditor. + +10. On March 29, 2018, the audit firm learned that Longfin had received a voluntary +document request from the Commission’s Division of Enforcement a few weeks earlier. + +11. On April 2, 2018, the audit firm issued an audit report containing an unqualified +opinion on Longfin’s 2017 financial statements with an explanatory paragraph regarding +substantial doubt about the ability of the Company to continue as a going concern. + +12. The audit firm resigned from the Longfin engagement on April 5, 2018. + +13. On April 6, 2018, an emergency action filed under seal two days earlier by the +Commission against Longfin and four Longfin-affiliated individuals, including Meenavalli, was +made public. The Commission alleged that Longfin and Meenavalli participated in unregistered +offerings in violation of Section 5 of the Securities Act. + +14. On April 6, 2018, Nasdaq suspended trading of Longfin’s shares. + +15. More than a year later, on June 5, 2019, the Commission filed another complaint +against Longfin and Meenavalli, alleging that Longfin and Meenavalli engaged in a scheme to +obtain a Nasdaq listing through a fraudulent public offering under Regulation A+. The +Commission further alleged that, in 2017 and 2018, Meenavalli perpetrated an accounting fraud +by publicly reporting fictitious revenue from commodity transactions in its 2017 annual report +and a quarterly report for the first quarter of 2018. Longfin’s scheme allegedly involved +numerous round-trip transactions between Longfin and Meenavalli-controlled entities. Longfin +also allegedly used several deceptive means to make transactions appear legitimate by including +in its books and records forged contracts and phony bills of lading for purported physical +commodities. According to the Commission’s complaint, Longfin fraudulently reported over +$66 million of fictitious revenue, constituting over 89% of Longfin’s total revenue in 2017. +Meenavalli is further alleged to have concealed the revenue recognition scheme by making false +and misleading misrepresentations to the audit firm. In January 2020, Meenavalli agreed to +resolve the Commission's fraud action against him. + +Failure to Properly Plan the Audit and Assess and Respond to Risks o f Material +Misstatement + +16. In late December 2017, audit firm personnel had an initial meeting with Meenavalli +to discuss the audit firm’s potential engagement as Longfin’s independent auditor. After +5 +performing its client acceptance procedures, the audit firm was formally engaged by Longfin as +its independent auditor on February 7, 2018. + +17. During the client acceptance process, Raghunathan learned that Longfin did not have +effective Internal Control over Financial Reporting (“ICFR”) and that it had several material +weaknesses in its ICFR that impacted multiple aspects of its financial statement accounts. The +audit firm ultimately issued a material weakness letter to Longfin identifying seven internal +control deficiencies that were determined to be material weaknesses. These material weaknesses +were also disclosed in the Form 10-K. + +18. Raghunathan also learned that Longfin’s former CFO and COO had resigned just +prior to Longfin’s IPO, giving rise to another potential audit risk factor. Apart from making +inquiries of Meenavalli, Raghunathan took no additional steps to obtain an understanding of the +circumstances of the resignations. In addition, Raghunathan learned that Longfin’s financial +statements for the one-month period, beginning February 1, 2017 and ending February 28, 2017, +were audited by another accounting firm. Raghunathan did not communicate with or make +inquiries of the predecessor auditor as required by PCAOB Audit Standard (“AS”) 2101 ¶18 and +AS 2610 ¶07. + +19. During the planning phase of the audit, Raghunathan learned that Longfin had a +limited operating history, low cash balances and operating losses, and that Longfin’s ability to +continue as a going concern was dependent on obtaining additional financing and generating +profits. + +20. Raghunathan did not adequately identify or consider the overall fraud risks to the +2017 Longfin audit and, in doing so, did not appropriately address and respond to the risk of +material misstatement to the financial statements. Longfin’s ineffective ICFR, combined with its +precarious financial position, created pressure and opportunity for the company to manipulate its +financial statements. + +21. In addition to the overall fraud risks, Raghunathan should have given greater +consideration to a number of other facts that should have raised red flags concerning the risk of +material misstatement to Longfin’s recorded revenue, including: (i) the nature of Longfin’s +commodity sales was such that they could not be physically verified, (ii) Longfin was unable to +provide reliable documentation memorializing key aspects of its commodities sales, and (iii) +Longfin entered into transactions where related parties were involved in both sides of the +purchase and sale of commodities. + +22. Despite these red flags, in planning the audit Raghunathan did not adequately design +the audit in a manner that appropriately addressed and responded to the risk of material +misstatement to the financial statements and did not adequately consider the opportunity and +pressures to commit fraud (AS 2301 ¶07-09). Raghunathan did not obtain reasonable assurance +about whether Longfin’s financial statements were free of material misstatement, whether caused +by error or fraud (AS 1101 ¶03), identify and appropriately assess the risks of material +misstatement (AS 2110 ¶03), and design and implement audit responses that addressed the risks +of material misstatement (AS 2301 ¶03). +6 + +Failure to Identify Undisclosed Related Parties + +23. Raghunathan identified related party transactions as both a significant and fraud risk +due in part to the volume of related party transactions and the large number of Longfin affiliated +companies.4 Related party transactions were also described in the work papers as a “significant +high-risk area,” a “complex or troublesome engagement ar ea,” and an “overall risk” to the audit. +The audit firm’s material weakness letter to Longfin also included a finding that Longfin lacked +formal or documented accounting policies and procedures with respect to monitoring related +parties. + +24. Despite the identified risks, Raghunathan did not exercise appropriate due +professional care and skepticism (AS 1015) and implement appropriate audit responses to those +risks associated with related party transactions (AS 2410). He also did not adequately perform +procedures necessary to determine whether previously undisclosed relationships or transactions +with related parties, in fact, existed (AS 2410 ¶15) and to design and perform appropriate audit +procedures in a manner that addressed the risks of material misstatement associated with related +parties and relationships and transactions with related parties (AS 2410 ¶11). + +Failure to Audit Disclosed Related Party Transactions + +25. Longfin engaged in transactions in which it purchased a commodity from a related +party and then sold that same commodity to a different related party on the same day. Longfin’s +related party purchases and sales were a significant risk, and were therefore subject to the audit +procedures articulated in AS 2410 ¶12, which require the auditor to (i) read the underlying +documentation and evaluate whether the terms and other information about the transaction were +consistent with explanations from inquiries and other audit evidence about the business purpose +(or the lack thereof) of the transaction, and (ii) determine whether the transaction were +authorized and approved in accordance with the company's established policies and procedures +regarding the authorization and approval of transactions with related parties. Despite the +increased risks associated with these transactions, Raghunathan did not ensure that adequate +procedures were performed with respect to the sale or purchase of commodities with disclosed +related parties. + +26. In addition to not ensuring that adequate procedures were performed, Raghunathan +also did not adequately follow up on red flags concerning the commodities transactions with +related parties. After learning that the Commission’s Division of Enforcement had issued an +investigative request to Longfin, senior management at the audit firm directed a Director in the +firm’s National Office to review the Longfin audit work papers. During her review, the Director +flagged a June 9, 2017 commodity purchase by Longfin from a related party and the subsequent +sale of that same commodity by Longfin to a different related party on the same day (the “June 9 +transaction”). Longfin had engaged in numerous similar transactions, and the Director asked +Raghunathan whether the audit team understood their substance to ensure that they were valid +transactions. + +4 AS 2401, Appendix 2 states that opportunities to engage in fraudulent financial reporting can arise from significant +transactions with related parties whose financial statements are not audited or are audited by another firm. +7 + +27. In response to the Director’s question, Raghunathan obtained invoices and contracts +for the June 9 transaction and a written explanation for the transaction from a Longfin employee. +Raghunathan neither challenged nor questioned the explanation he received and did not direct or +perform any further audit procedures with respect to these types of transactions. + +28. The June 9 transaction identified by the Director was in fact a sham. Raghunathan +obtained supporting documents for the June 9 transaction but did not adequately review them. +Raghunathan also did not obtain a sufficient understanding or appropriately evaluate the business +purpose (or lack thereof) of any of the other related party transactions in which both the buyer +and seller were related parties. + +29. In addition to not exercising appropriate due professional care and heightened +professional skepticism for the related-party transactions (AS 1015), Raghunathan did not +perform adequate procedures to obtain an understanding of the company’s relationships and +transactions with its related parties that might reasonably be expected to affect the risks of +material misstatement of the financial statements (AS 2410 ¶03), perform audit procedures in a +manner that addresses the risks of material misstatement associated with related parties and +relationships and transactions with related parties (AS 2410 ¶11), read underlying documentation +and evaluating whether information about the related party transactions are consistent with audit +evidence about the business purpose (or the lack thereof) of the transactions (AS 2410 ¶12), and +obtain sufficient appropriate audit evidence for the related-party transactions (AS 1105 ¶4). + +Failure to Appropriately Audit Revenues and Accounts Receivables +30. Raghunathan primarily relied on third party confirmation of revenues and related +receivables as audit evidence. Many of the confirmations were not relevant, reliable audit +evidence because their source was unknown and unverified. Other substantive procedures +performed – such as cash receipt testing and vouching of transactions to invoices and contracts – +also did not provide sufficient reliable audit evidence to support the auditors’ conclusions that +revenue and related accounts receivable were not materially misstated. + +31. The audit procedures with respect to the confirmation process were inadequate +despite the existence of red flags. Longfin supplied the audit staff with: (i) the same contact +person for three different entities; (ii) an address in the same office building for different entities; +(iii) the same email address provided for two different customers or suppliers; and (iv) non- +company network domain email accounts (e.g., @gmail.com domains) as the contact for four +customers. + +32. The audit staff sent and received confirmations to and from several of the non- +company network domain email accounts. Raghunathan did not implement adequate procedures +to understand what persons and/or entities were associated with these non-company network +domain email addresses, and thus could not reasonably expect that the results from the +confirmation responses would not be biased because of interception and alteration of the +confirmation requests or responses (AS 2310 ¶28). Because Raghunathan did not know the +recipients of the confirmations, he could not direct the confirmation request to a third party who +he believed to be knowledgeable about the information to be confirmed (AS 2310 ¶26), and he +8 +lacked a sufficient basis for concluding that the confirmation requests were sent to a respondent +from whom he could expect the response to provide meaningful and appropriate evidence (AS +2310 ¶27). + +33. These matters undermined the audit of Longfin’s revenues. In addition to having +reviewed a selection of underlying transaction documentation, the audit staff and Raghunathan +relied on confirmations from non-company network domain email accounts as audit evidence to +support $22.6 million in revenue – approximately one-third of Longfin’s total commodity +revenue – without otherwise obtaining other sufficient appropriate evidence to substantiate that +revenue. Raghunathan’s reliance on these confirmations was inconsistent with the guidance +published by the PCAOB in “Staff Audit Practice Alert No. 8” which states that “the auditor +might determine that confirmation responses cannot be relied upon if it appears that management +interfered with the process because responses to confirmation requests were received from a +personal e-mail account rather than a company network domain ….” + +34. The audit staff did not adequately document that it performed certain procedures +contained in the accounts receivable audit program related to the confirmation process. The +audit program called for the auditors to “verify the source and content of the replies by +telephoning the respondent and requesting that the respondent mail the original confirmation +directly to the auditor” for those replies that were received by email. The audit staff received +confirmation responses via email but in contravention of their own audit program and audit +standards (AS 2310 ¶29) either did not adequately document or did not obtain additional +evidence to support their validity, such as telephoning the respondents or requesting that original +confirmations be mailed to the audit firm. + +35. The other substantive audit procedures performed with respect to commodity +revenues – cash receipt testing and vouching to invoices and contracts – also did not provide +sufficient audit evidence to conclude that commodity revenue was not materially misstated. +Cash receipts accounted for approximately $8 million of the $52 million in revenues that Longfin +recorded for commodity sales to unrelated third parties. The audit staff randomly selected eight +transactions representing 27% of the unrelated third party commodity revenue that were vouched +to source documents. But the source documents provided insufficient reliability because they +were not obtained from an independent source, the internal controls related to the creation and +recording of those documents were non-existent, the accuracy and completeness of the source +documents was not subject to testing, and only copies and/or digitized documents were available +for the auditor’s examination (AS 1105 ¶8). + +36. Raghunathan did not appropriately evaluate whether the objectives of the procedures +were achieved and the results of the work adequately supported the conclusions reached +concerning revenues and accounts receivables (AS 1201 ¶5) or to ensure that audit procedures +were planned and performed to obtain sufficient appropriate audit evidence concerning revenues +and accounts receivables (AS 1105 ¶4). Raghunathan also did not appropriately ensure that the +audit team was complying with PCAOB standards with respect to the confirmation process and +did not adequately assess whether the confirmations and other evidence to substantiate revenues +were sufficient reliable audit evidence. Additionally, Raghunathan did not design and implement +audit responses that adequately address the risks of material misstatement of revenues or +9 +accounts receivables (AS 2301 ¶03). + +Failure to Appropriately Audit Longfin’s Technology Assets +37. Longfin’s 2017 balance sheet reported a $32 million developed technology asset,5 +which it acquired through Longfin’s acquisition of Stampede in June 2017. The audit work +papers characterized the Stampede acquisition as a “significant risk” and “material event,” and +identified acquisition accounting as a “complex or troublesome engagement area.” Valuations +related to acquisition were also identified as a “significant estimate.” Further, several relevant +material weaknesses were identified as impacting the recording of transactions such as the +developed technology asset. + +38. Raghunathan knew of the material weaknesses and identified the valuation as a +significant estimate and, therefore, should have been highly skeptical of management’s +projections, which were incorporated into a valuation of the developed technology asset prepared +by Longfin’s outside third party valuation specialist and reviewed by the audit firm’s valuation +advisory services group. Although the financial projections were subject to testing by the audit +team, the testing performed did not provide sufficient appropriate evidence to conclude that those +projections were reasonable (AS 2502 ¶11-13 and ¶31-32). + +39. In connection with the audit of intangible assets, Raghunathan did not adequately +evaluate the reasonableness of accounting estimates made by management for the intangible +asset (AS 2501 ¶04), obtain sufficient appropriate evidential matter to provide reasonable +assurance that all accounting estimates that could be material to the financial statements have +been developed and those accounting estimates are reasonable in the circumstances concerning +the intangible asset (AS 2501 ¶07), and adequately evaluate the sufficiency and competence of +the audit evidence obtained from auditing fair value measurements and disclosures as well as the +consistency of that evidence with other audit evidence obtained and evaluated during the audit of +the intangible asset (AS 2502 ¶47). + +Failure to Conduct a Proper Engagement Quality Review + +40. Golding did not perform an adequate EQR in connection with the 2017 audit of +Longfin’s related party transactions and intangible assets. Golding knew that significant and +fraud risks were identified in the areas of related party transactions and intangible assets. +Golding did not appropriately evaluate whether the documentation reviewed for those audit areas +indicated that the engagement team responded appropriately to the identified risks and supported +the conclusions reached by the engagement team (AS 1220 ¶11). The work papers reviewed by +Golding did not provide sufficient information to enable him to evaluate whether the engagement +team’s audit testing had appropriately responded to the identified risks in these areas (AS 1220 +¶10). + +41. Golding reviewed all relevant audit planning work papers that identified related party +transactions and intangible assets as either a significant or fraud risk. Golding also reviewed the + +5 This was Longfin’s third largest asset behind $90 million in goodwill and $36.8 million of accounts receivable. +10 +relevant audit testing work papers related to these two areas. Golding did not sufficiently +recognize that related party audit procedures performed did not sufficiently address the identified +risk of fraud or that significant and unusual related party transactions were not agreed to +supporting documents. + +42. Golding also did not sufficiently evaluate whether the engagement team responded +appropriately to the significant risk associated with Longfin’s intangible asset. Golding did not +appropriately identify that the engagement team did not obtain sufficient appropriate audit +evidence to conclude that the projections used in the valuation of the intangible asset were +reasonable. + +43. As a result of the foregoing, Golding did not sufficiently fulfill his responsibilities as +EQR under AS 1220, Engagement Quality Review. + +Failure to Issue Accurate Audit Reports + +44. AS 3101, Report on Audited Financial Statements, requires that the auditor’s report +contain an opinion on the financial statements taken as a whole and contain a clear indication of +the character of the auditor’s work. The auditor is in a position to express an unqualified opinion +on the financial statements when the auditor conducted an audit in accordance with the standards +of the PCAOB and concludes that the financial statements, taken as a whole, are presented fairly, +in all material respects, in conformity with the applicable financial reporting framework. +Additionally, Regulation S-X, 17 CFR § 210 et seq., prescribes the qualifications of accountants +and the contents of the accountants’ reports that must be submitted with corporate financial +statements. + +45. The sum total of Raghunathan’s audit deficiencies rendered any representations that +the audits were conducted in accordance with PCAOB standards materially false and misleading +because the audits were out of compliance. Raghunathan made such representations in the audit +report for Longfin, inaccurately certifying that the audit of Longfin’s financial statements was +conducted in accordance with the standards of the PCAOB. + +VIOLATIONS + +46. During the time period at issue herein, Rule 2-02(b)(1) of Regulation S-X required +an accountant’s report to state “whether the audit was made in accordance with generally +accepted auditing standards” (“GAAS”). “[R]eferences in Commission rules and staff guidance +and in the federal securities laws to GAAS or to specific standards under GAAS, as they relate to +issuers, should be understood to mean the standards of the PCAOB plus any applicable rules of +the Commission.” See SEC Release No. 34-49708 (May 14, 2004). Through the conduct +described above, Raghunathan and Golding caused the audit firm to violate Regulation S -X Rule +2-02(b)(1) when the audit firm issued the Longfin audit report stating that it had conducted the +audit in accordance with PCAOB standards when, in fact, it had not. + +47. Section 4C of the Exchange Act and Rule 102(e)(1)(ii) of the Commission’s Rules of +Practice provide, in part, that the Commission may censure or deny, temporarily or permanently, +11 +the privilege of appearing or practicing before the Commission to any person who is found by +the Commission to have engaged in improper professional conduct. Exchange Act Section 4C(b) +and Rule 102(e)(1)(iv) of the Commission’s Rules of Practice define improper professional +conduct with respect to persons associated with public accounting firms and persons licensed to +practice as accountants, respectively, as (1) a single instance of highly unreasonable conduct in +circumstances for which heightened scrutiny is warranted; or (2) repeated instances of +unreasonable conduct that indicate a lack of competence. + +48. An issuer violates Section 13(a) of the Exchange Act and Rule 13a-1 thereunder +when such issuer files with the Commission annual reports that contain materially false or +misleading information. Scienter is not required for a violation of Section 13(a). In +administrative proceedings, the Commission may impose sanctions upon any person that is, was, +or would be a cause of a violation, due to an act or omission the person knew or should have +known would contribute to such violation. In order to establish that a person caused a non- +scienter based violation, a showing of negligence will suffice. By not conducting the audits of +Longfin’s financial statements in accordance with PCAOB standards, yet allowing the audit firm +to issue an audit report falsely stating that it had conducted the audit in accordance with PCAOB +standards, Raghunathan and Golding were a cause of Longfin’s violations of Section 13(a) and +Rule 13a-1. + +FINDINGS + +49. Based on the foregoing, the Commission finds that Raghunathan and Golding caused +the audit firm’s violations of Regulation S-X Rule 2-02(b)(1). + +50. Based on the foregoing, the Commission finds that Respondents engaged in +improper professional conduct pursuant to Section 4C(a)(2) of the Exchange Act and Rule +102(e)(1)(ii) of the Commission’s Rules of Practice. + +51. Based on the foregoing, the Commission finds that Respondents were a cause of +Longfin’s violations of Section 13(a) of the Exchange Act and Rule 13a-1 thereunder. + +IV. + +In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in the Respondents’ Offers. + +Accordingly, it is hereby ORDERED, effective immediately, that: + +A. Respondents, Raghunathan and Golding, shall cease and desist from committing +or causing any violations and any future violations of Regulation S-X Rule 2-02(b)(1) and +Section 13(a) of the Exchange Act and Rule 13a-1 promulgated thereunder. + +B. Respondent Raghunathan is denied the privilege of appearing or practicing before +the Commission as an accountant. +12 +C. After three years from the date of the Order, Raghunathan may request that the +Commission consider Raghunathan’s reinstatement by submitting an application to the attention +of the Office of the Chief Accountant. + +D. In support of any application for reinstatement to appear and practice before the +Commission as a preparer or reviewer, or a person responsible for the preparation or review, of +financial statements of a public company to be filed with the Commission, other than as a +member of an audit committee, as that term is defined in Section 3(a)(58) of the Exchange Act, +Raghunathan shall submit a written statement attesting to an undertaking to have Raghunathan’s +work reviewed by the independent audit committee of any public company for which +Raghunathan works or in some other manner acceptable to the Commission, as long as +Raghunathan practices before the Commission in this capacity and will comply with any +Commission or other requirements related to the appearance and practice before the Commission +as an accountant. + +E. In support of any application for reinstatement to appear and practice before the +Commission as a member of an audit committee, as that term is defined in Section 3(a)(58) of +the Exchange Act, as a preparer or reviewer, or as a person responsible for the preparation or +review, of any public company’s financial statements that are filed with the Commission, +Raghunathan shall submit a statement prepared by the audit committee(s) with which +Raghunathan will be associated, including the following information: + +1. A summary of the responsibilities and duties of the specific audit committee(s) +with which Raghunathan will be associated; + +2. A description of Raghunathan’s role on the specific audit committee(s) with +which Raghunathan will be associated; + +3. A description of any policies, procedures, or controls designed to mitigate any +potential risk to the Commission by such service; + +4. A description relating to the necessity of Raghunathan’s service on the specific +audit committee; and + +5. A statement noting whether Raghunathan will be able to act unilaterally on +behalf of the Audit Committee as a whole. + +F. In support of any application for reinstatement to appear and practice before the +Commission as an independent accountant (auditor) before the Commission, Raghunathan must +be associated with a public accounting firm registered with PCAOB and Raghunathan shall +submit the following additional information: + +1. A statement from the public accounting firm (the “Firm”) with which +Raghunathan is associated, stating that the firm is registered with the PCAOB in +accordance with the Sarbanes-Oxley Act of 2002; +13 +2. A statement from the Firm with which Raghunathan is associated that the Firm +has been inspected by the PCAOB and that the PCAOB did not identify any +criticisms of or potential defects in the Firm’s quality control system that would +indicate that Raghunathan will not receive appropriate supervision; and + +3. A statement from Raghunathan indicating that the PCAOB has taken no +disciplinary actions against Raghunathan since seven (7) years prior to the date +of the Order other than for the conduct that was the basis for the Order. + +G. In support of any application for reinstatement, Raghunathan shall provide +documentation showing that Raghunathan is currently licensed as a CPA and that Raghunathan +has resolved all other disciplinary issues with any applicable state boards of accountancy. If +Raghunathan is not currently licensed as a CPA, Raghunathan shall provide documentation +showing that Raghunathan’s licensure is dependent upon reinstatement by the Commission. + +H. In support of any application for reinstatement, Raghunathan shall also submit a +signed affidavit truthfully stating, under penalty of perjury: + +1. That Raghunathan has complied with the Commission suspension Order, +and with any related orders and undertakings, including any orders in SEC +v. Longfin Corp., et al. , Case No. 19-cv-5296-DLC (S.D.N.Y.), or any +related Commission proceedings, including any orders requiring payment of +disgorgement or penalties; + +2. That Raghunathan undertakes to notify the Commission immediately in +writing if any information submitted in support of the application for +reinstatement becomes materially false or misleading or otherwise changes +in any material way while the application is pending; + +3. That Raghunathan, since the entry of the Order, has not been convicted of a +felony or a misdemeanor involving moral turpitude that would constitute a +basis for a forthwith suspension from appearing or practicing before the +Commission pursuant to Rule 102(e)(2); + +4. That Raghunathan, since the entry of the Order: + +a. has not been charged with a felony or a misdemeanor involving moral +turpitude as set forth in Rule 102(e)(2) of the Commission’s Rules of +Practice, except for any charge concerning the conduct that was the +basis for the Order; + +b. has not been found by the Commission or a court of the United States to +have committed a violation of the federal securities laws, and has not +been enjoined from violating the federal securities laws, except for any +finding or injunction concerning the conduct that was the basis for the +Order; +14 + +c. has not been charged by the Commission or the United States with a +violation of the federal securities laws, except for any charge concerning +the conduct that was the basis for the Order; + +d. has not been found by a court of the United States (or any agency of the +United States) or any state, territory, district, commonwealth, or +possession, or any bar thereof to have committed an offense (civil or +criminal) involving moral turpitude, except for any finding concerning +the conduct that was the basis for the Order; and + +e. has not been charged by the United States (or any agency of the United +States) or any state, territory, district, commonwealth, or possession, +civilly or criminally, with having committed an act of moral turpitude, +except for any charge concerning the conduct that was the basis for the +Order. + +5. That Raghunathan’s conduct is not at issue in any pending investigation of +the Commission’s Division of Enforcement, the PCAOB’s Division of +Enforcement and Investigations, any criminal law enforcement +investigation, or any pending proceeding of a State Board of Accountancy, +except to the extent that such conduct concerns that which was the basis +for the Order. + +6. That Raghunathan has complied with any and all orders, undertakings, or +other remedial, disciplinary, or punitive sanctions resulting from any action +taken by any State Board of Accountancy, or other regulatory body. + +I. Raghunathan shall also provide a detailed description of: + +1. Raghunathan’s professional history since the imposition of the Order, +including + +a. all job titles, responsibilities and role at any employer; + +b. the identification and description of any work performed for entities +regulated by the Commission, and the persons to whom Raghunathan +reported for such work; and + +2. Raghunathan’s plans for any future appearance or practice before the +Commission. +J. The Commission may conduct its own investigation to determine if the foregoing +attestations are accurate. + +K. If Raghunathan provides the documentation and attestations required in this Order +and the Commission (1) discovers no contrary information therein, and (2) determines that +15 +Raghunathan truthfully and accurately attested to each of the items required in Raghunathan’s +affidavit, and the Commission discovers no information, including under Paragraph J, indicating +that Raghunathan has violated a federal securities law, rule or regulation or rule of professional +conduct applicable to Raghunathan since entry of the Order (other than by conduct underlying +Raghunathan’s original Rule 102(e) suspension), then, unless the Commission determines that +reinstatement would not be in the public interest, the Commission shall reinstate Raghunathan +for cause shown. + +L. If Raghunathan is not able to provide the documentation and truthful and accurate +attestations required in this Order or if the Commission has discovered contrary information, +including under Paragraph J, the burden shall be on Raghunathan to provide an explanation as to +the facts and circumstances pertaining to the matter setting forth why Raghunathan believes +cause for reinstatement nonetheless exists and reinstatement would not be contrary to the public +interest. The Commission may then, in its discretion, reinstate Raghunathan for cause shown. + +M. If the Commission declines to reinstate Raghunathan pursuant to Paragraphs K +and L, it may, at Raghunathan’s request, hold a hearing to determine whether cause has been +shown to permit Raghunathan to resume appearing and practicing before the Commission as an +accountant. + +N. Respondent Golding is denied the privilege of appearing or practicing before the +Commission as an accountant. + +O. After one year from the date of the Order, Golding may request that the +Commission consider Golding’s reinstatement by submitting an application to the attention of the +Office of the Chief Accountant. + +P. In support of any application for reinstatement to appear and practice before the +Commission as a preparer or reviewer, or a person responsible for the preparation or review, of +financial statements of a public company to be filed with the Commission, other than as a member +of an audit committee, as that term is defined in Section 3(a)(58) of the Exchange Act, Golding +shall submit a written statement attesting to an undertaking to have Golding’s work reviewed by +the independent audit committee of any public company for which Golding works or in some other +manner acceptable to the Commission, as long as Golding practices before the Commission in this +capacity and will comply with any Commission or other requirements related to the appearance +and practice before the Commission as an accountant. + +Q. In support of any application for reinstatement to appear and practice before the +Commission as a member of an audit committee, as that term is defined in Section 3(a)(58) of the +Exchange Act, as a preparer or reviewer, or as a person responsible for the preparation or review, +of any public company’s financial statements that are filed with the Commission, Golding shall +submit a statement prepared by the audit committee(s) with which Golding will be associated, +including the following information: + +1. A summary of the responsibilities and duties of the specific audit +committee(s) with which Golding will be associated; +16 + +2. A description of Golding’s role on the specific audit committee(s) with +which Golding will be associated; + +3. A description of any policies, procedures, or controls designed to mitigate +any potential risk to the Commission by such service; + +4. A description relating to the necessity of Golding’s service on the specific +audit committee; and + +5. A statement noting whether Golding will be able to act unilaterally on +behalf of the Audit Committee as a whole. +R. In support of any application for reinstatement to appear and practice before the +Commission as an independent accountant (auditor) before the Commission, Golding must be +associated with a public accounting firm registered with the PCAOB and Golding shall submit the +following additional information: + +1. A statement from the public accounting firm (the “Firm”) with which +Golding is associated, stating that the firm is registered with the PCAOB in +accordance with the Sarbanes-Oxley Act of 2002; + +2. A statement from the Firm with which Golding is associated that the Firm +has been inspected by the PCAOB and that the PCAOB did not identify any +criticisms of or potential defects in the Firm’s quality control system that +would indicate that Golding will not receive appropriate supervision; and + +3. A statement from Golding indicating that the PCAOB has taken no +disciplinary actions against Golding since seven (7) years prior to the date +of the Order other than for the conduct that was the basis for the Order. + +S. In support of any application for reinstatement, Golding shall provide +documentation showing that Golding is currently licensed as a CPA and that Golding has resolved +all other disciplinary issues with any applicable state boards of accountancy. If Golding is not +currently licensed as a CPA, Golding shall provide documentation showing that Golding’s +licensure is dependent upon reinstatement by the Commission. + +T. In support of any application for reinstatement, Golding shall also submit a signed +affidavit truthfully stating, under penalty of perjury: + +1. That Golding has complied with the Commission suspension Order, and +with any related orders and undertakings, including any orders in SEC v. +Longfin Corp., et al., Case No. 19-cv-5296-DLC (S.D.N.Y.), or any related +Commission proceedings, including any orders requiring payment of +disgorgement or penalties; +17 +2. That Golding undertakes to notify the Commission immediately in writing +if any information submitted in support of the application for reinstatement +becomes materially false or misleading or otherwise changes in any material +way while the application is pending; + +3. That Golding, since the entry of the Order, has not been convicted of a +felony or a misdemeanor involving moral turpitude that would constitute a +basis for a forthwith suspension from appearing or practicing before the +Commission pursuant to Rule 102(e)(2); + +4. That Golding, since the entry of the Order: + +a. has not been charged with a felony or a misdemeanor involving moral +turpitude as set forth in Rule 102(e)(2) of the Commission’s Rules of +Practice, except for any charge concerning the conduct that was the +basis for the Order; + +b. has not been found by the Commission or a court of the United States to +have committed a violation of the federal securities laws, and has not +been enjoined from violating the federal securities laws, except for any +finding or injunction concerning the conduct that was the basis for the +Order; + +c. has not been charged by the Commission or the United States with a +violation of the federal securities laws, except for any charge concerning +the conduct that was the basis for the Order; + +d. has not been found by a court of the United States (or any agency of the +United States) or any state, territory, district, commonwealth, or +possession, or any bar thereof to have committed an offense (civil or +criminal) involving moral turpitude, except for any finding concerning +the conduct that was the basis for the Order; and + +e. has not been charged by the United States (or any agency of the United +States) or any state, territory, district, commonwealth, or possession, +civilly or criminally, with having committed an act of moral turpitude, +except for any charge concerning the conduct that was the basis for the +Order. + +5. That Golding’s conduct is not at issue in any pending investigation of the +Commission’s Division of Enforcement, the PCAOB’s Division of +Enforcement and Investigations, any criminal law enforcement +investigation, or any pending proceeding of a State Board of Accountancy, +except to the extent that such conduct concerns that which was the basis +for the Order. +18 +6. That Golding has complied with any and all orders, undertakings, or other +remedial, disciplinary, or punitive sanctions resulting from any action taken +by any State Board of Accountancy, or other regulatory body. +U. Golding shall also provide a detailed description of: + +1. Golding’s professional history since the imposition of the Order, including + +a. all job titles, responsibilities and role at any employer; + +b. the identification and description of any work performed for entities +regulated by the Commission, and the persons to whom Golding +reported for such work; and + +2. Golding’s plans for any future appearance or practice before the +Commission. +V. The Commission may conduct its own investigation to determine if the foregoing +attestations are accurate. + +W. If Golding provides the documentation and attestations required in this Order and +the Commission (1) discovers no contrary information therein, and (2) determines that Golding +truthfully and accurately attested to each of the items required in Golding’s affidavit, and the +Commission discovers no information, including under Paragraph V, indicating that Golding has +violated a federal securities law, rule or regulation or rule of professional conduct applicable to +Golding since entry of the Order (other than by conduct underlying Golding’s original Rule 102(e) +suspension), then, unless the Commission determines that reinstatement would not be in the public +interest, the Commission shall reinstate Golding for cause shown. + +X. If Golding is not able to provide the documentation and truthful and accurate +attestations required in this Order or if the Commission has discovered contrary information, +including under Paragraph V, the burden shall be on Golding to provide an explanation as to the +facts and circumstances pertaining to the matter setting forth why Golding believes cause for +reinstatement nonetheless exists and reinstatement would not be contrary to the public interest. +The Commission may then, in its discretion, reinstate Golding for cause shown. + +Y. If the Commission declines to reinstate Golding pursuant to Paragraphs W and X, it +may, at Golding’s request, hold a hearing to determine whether cause has been shown to permit +Golding to resume appearing and practicing before the Commission as an accountant. + +Z. Respondent Raghunathan shall, within 21 days of the entry of this Order, pay a +civil money penalty in the amount of $25,000 to the Securities and Exchange Commission. The +Commission may distribute civil money penalties collected in this proceeding if, in its discretion, +the Commission orders the establishment of a Fair Fund pursuant to 15 U.S.C. § 7246, Section +308(a) of the Sarbanes-Oxley Act of 2002. The Commission will hold funds paid pursuant to +this paragraph in an account at the United States Treasury pending a decision whether the +Commission, in its discretion, will seek to distribute funds or transfer them to the general fund of +19 +the United States Treasury, subject to Exchange Act Section 21F(g)(3). If timely payment is not +made, additional interest shall accrue pursuant to 31 U.S.C. § 3717. + +AA. Respondent Golding shall, within 21 days of the entry of this Order, pay a civil +money penalty in the amount of $10,000 to the Securities and Exchange Commission. The +Commission may distribute civil money penalties collected in this proceeding if, in its discretion, +the Commission orders the establishment of a Fair Fund pursuant to 15 U.S.C. § 7246, Section +308(a) of the Sarbanes-Oxley Act of 2002. The Commission will hold funds paid pursuant to +this paragraph in an account at the United States Treasury pending a decision whether the +Commission, in its discretion, will seek to distribute funds or transfer them to the general fund of +the United States Treasury, subject to Exchange Act Section 21F(g)(3). If timely payment is not +made, additional interest shall accrue pursuant to 31 U.S.C. § 3717. + +BB. Payment must be made in one of the following ways: + +(1) Respondents may transmit payment electronically to the Commission, +which will provide detailed ACH transfer/Fedwire instructions upon +request; + +(2) Respondents may make direct payment from a bank account via +Pay.gov through the SEC website at +http://www.sec.gov/about/offices/ofm.htm; or + +(3) Respondents may pay by certified check, bank cashier’s check, or +United States postal money order, made payable to the Securities and +Exchange Commission and hand-delivered or mailed to: + +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + +CC. Payments by check or money order must be accompanied by a cover letter +identifying each Respondent in these proceedings, and the file number of these proceedings. A +copy of the cover letter and check or money order must be simultaneously sent to Anita Bandy, +Associate Director, Division of Enforcement, Securities and Exchange Commission, 100 F St., +N.E., Washington, DC 20549. + +DD. Regardless of whether the Commission in its discretion orders the creation of a +Fair Fund for the penalties ordered in this proceeding, amounts ordered to be paid as civil money +penalties pursuant to this Order shall be treated as penalties paid to the government for all +purposes, including all tax purposes. To preserve the deterrent effect of the civil penalty, +Respondents agree that in any Related Investor Action, they shall not argue that they are entitled +to, nor shall they benefit by, offset or reduction of any award of compensatory damages by the +amount of any part of Respondents’ payment of a civil penalty in this action (“Penalty Offset”). +20 + +If the court in any Related Investor Action grants such a Penalty Offset, Respondents +agree that they shall, within 30 days after entry of a final order granting the Penalty +Offset, notify the Commission’s counsel in this action and pay the amount of the Penalty +Offset to the Securities and Exchange Commission. Such a payment shall not be deemed +an additional civil penalty and shall not be deemed to change the amount of the civil +penalty imposed in this proceeding. For purposes of this paragraph, a “Related Investor +Action” means a private damages action brought against Respondents by or on behalf of +one or more investors based on substantially the same facts as alleged in the Order +instituted by the Commission in this proceeding. + +V. +It is further Ordered that, solely for purposes of exceptions to discharge set +forth in Section 523 of the Bankruptcy Code, 11 U.S.C. §523, the findings in this +Order are true and admitted by Respondents Raghunathan and Golding, and further, +any debt for disgorgement, prejudgment interest, civil penalty or other amounts due by +Respondents under this Order or any other judgment, order, consent order, decree or +settlement agreement entered in connection with this proceeding, is a debt for the +violation by Respondents of the federal securities laws or any regulation or order +issued under such laws, as set forth in Section 523(a)(19) of the Bankruptcy Code, 11 +U.S.C. §523(a)(19). + + +By the Commission. + + +Vanessa A. Countryman +Secretary + \ No newline at end of file diff --git a/raw/aaer/2021/AAER-4265.txt b/raw/aaer/2021/AAER-4265.txt new file mode 100644 index 0000000000000000000000000000000000000000..f60bb999a37d0f0e1cc9341de09ef8f3bcee0265 --- /dev/null +++ b/raw/aaer/2021/AAER-4265.txt @@ -0,0 +1,114 @@ + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 93544 / November 9, 2021 +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4265 / November 9, 2021 +ADMINISTRATIVE PROCEEDING +File No. 3-18292 + +In the Matter of +Tommy Shek, CPA + +: +: +: +: +: +: +ORDER GRANTING APPLICATION FOR +REINSTATEMENT TO APPEAR AND PRACTICE +BEFORE THE COMMISSION AS AN +INDEPENDENT ACCOUNTANT +On July 12, 2018, the Commission issued an Order Making Findings and Imposing +Remedial Sanctions Pursuant to Section 4C of the Securities Exchange Act of 1934 (“Exchange +Act”) and Rule 102(e) of the Commission’s Rules of Practice (the “Suspension Order”) as to +Respondent Tommy Shek, CPA (“Shek”).1 The Suspension Order denied Shek the privilege of +appearing or practicing before the Commission as an accountant but permitted Shek, after one +year from the date of the Suspension Order and if certain conditions were met, to request that the +Commission consider his reinstatement to resume appearing or practicing before the +Commission as: (1) a preparer or reviewer, or a person responsible for the preparation or review, +of any public company’s financial statements that are filed with the Commission, other than as a +member of an audit committee, as that term is defined in Section 3(a)(58) of the Exchange Act; +(2) a preparer or reviewer, or a person responsible for the preparation or review, of any public +company’s financial statements that are filed with the Commission as a member of an audit +committee, as that term is defined in Section 3(a)(58) of the Exchange Act; or (3) an independent +accountant. +On August 4, 2020, Shek was reinstated to appear and practice before the Commission as +a preparer or reviewer, or a person responsible for the preparation or review, of any public +company’s financial statements that are filed with the Commission, other than as a member of an +audit committee as that term is defined in Section 3(a)(58) of the Exchange Act.2 + +1 See Accounting and Auditing Enforcement Release No. 3951 dated July 12, 2018. + +2 See Accounting and Auditing Enforcement Release No. 4156 dated August 4, 2020. + 2 +This order is issued in response to Shek’s application for reinstatement to appear and +practice before the Commission as an independent accountant. + The Commission previously found that Shek, an audit manager at Anton & Chia LLP, +engaged in improper professional conduct with respect to his work on the interim reviews of the +financial statements of CannaVEST Corp. (“CannaVEST”) for the first through third quarters of +2013. In performing the interim reviews of CannaVEST’s financial statements, Shek engaged in +improper professional conduct by failing to adhere to standards of the Public Company +Accounting Oversight Board and ignoring a number of red flags that indicated that +CannaVEST’s financial information contained material misstatements. + +Shek has met all of the conditions set forth in the Suspension Order to be reinstated to +appear and practice before the Commission as an independent accountant and, in his capacity as +an independent accountant, has stated that he will comply with all requirements of the +Commission and the Public Company Accounting Oversight Board, including, but not limited to, +all requirements relating to registration, inspections, concurring partner reviews, and quality +control standards. Shek is not, at this time, seeking to appear or practice before the Commission +as a preparer or reviewer, or a person responsible for the preparation or review, of any public +company’s financial statements that are filed with the Commission as a member of an audit +committee. If, in the future, he should wish to resume appearing and practicing before the +Commission in such capacity he will be required to submit an application to the Commission +showing, among other things, that he has complied and will comply with the terms of the +Suspension Order. + +Rule 102(e)(5) of the Commission’s Rules of Practice governs applications for +reinstatement, and provides that the Commission may reinstate the privilege to appear and +practice before the Commission “for good cause shown.”3 This “good cause” determination is +necessarily highly fact specific. + +Shek is currently subject to probation under the California State Board of Accountancy. +Failure to abide by the terms of his probation could result in the suspension of Shek’s CPA +license. Shek has attested that he will notify the Commission if he is found to have violated the +terms of the probation. He also has attested that he understands that the suspension of his CPA +license could result in the revocation of the reinstatement of his privilege to appear or practice +before the Commission as an accountant. + +On the basis of information supplied, representations made, and undertakings agreed to +by Shek, it appears that he has complied with the terms of Suspension Order denying him the +privilege of appearing or practicing before the Commission as an accountant. No information + + +3 Rule 102(e)(5)(i) provides: + +“An application for reinstatement of a person permanently suspended or disqualified under paragraph (e)(1) or (e)( 3) +of this section may be made at any time, and the applicant may, in the Commission’s discretion, be afforded a +hearing; however, the suspension or disqualification shall continue unless and until the applicant has been reinstated +by the Commission for good cause shown.” 17 C.F.R. § 201.102(e)(5)(i). + + 3 +has come to the attention of the Commission relating to his character, integrity, professional +conduct or qualifications to practice before the Commission that would be a basis for adverse +action against him pursuant to Rule 102(e) of the Commission's Rules of Practice. In addition, +Shek has undertaken to comply with all requirements of the Commission and the Public +Company Accounting Oversight Board, including, but not limited to, all requirements relating to +registration, inspections, concurring partner reviews, and quality control standards in his practice +before the Commission as an independent accountant. As a result, Shek has shown good cause +for reinstatement. Therefore, it is accordingly, + +ORDERED pursuant to Rule 102(e)(5)(i) of the Commission's Rules of Practice that +Tommy Shek, CPA is hereby reinstated to appear and practice before the Commission as an +independent accountant. + +By the Commission. + + +Vanessa A. Countryman +Secretary \ No newline at end of file diff --git a/raw/aaer/2021/AAER-4267.txt b/raw/aaer/2021/AAER-4267.txt new file mode 100644 index 0000000000000000000000000000000000000000..dd5d533db5471e655c5b556d274517b51980a6fd --- /dev/null +++ b/raw/aaer/2021/AAER-4267.txt @@ -0,0 +1,260 @@ + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 93568 / November 12, 2021 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4267 / November 12, 2021 + +ADMINISTRATIVE PROCEEDING +File No. 3-20652 + +In the Matter of +William Wright, CPA +Respondent. + +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE PROCEEDINGS + PURSUANT TO RULE 102(e) OF THE +COMMISSION’S RULES OF PRACTICE, +MAKING FINDINGS, AND IMPOSING +REMEDIAL SANCTIONS + + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate and in the +public interest that public administrative proceedings be, and hereby are, instituted against William +Wright (“Respondent” or “Wright”) pursuant to Rule 102(e)(3)(i) of the Commission’s Rules of +Practice.1 +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over him and the subject matter of these +proceedings, and the findings contained in Section III.3. below, which are admitted, Respondent +consents to the entry of this Order Instituting Public Administrative Proceedings Pursuant to Rule + +1 Rule 102(e)(3)(i) provides, in relevant part, that: + + The Commission, with due regard to the public interest and without preliminary hearing, +may, by order, . . . suspend from appearing or practicing before it any . . . accountant . . . who has +been by name . . . permanently enjoined by any court of competent jurisdiction, by reason of his +or her misconduct in an action brought by the Commission, from violating or aiding and abetting +the violation of any provision of the Federal securities laws or of the rules and regulations +thereunder. + 2 +102(e) of the Commission’s Rules of Practice, Making Findings, and Imposing Remedial +Sanctions (“Order”), as set forth below. + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds that: + +1. Wright, age 47, is a resident of Arlington, VA. Wright was the Corporate +Controller at CEB Inc. from July 2015 through August 2017, and prior to that served as CEB’s +Managing Director in Accounting and Reporting from 2004 to June 2015. Wright was a licensed +Certified Public Accountant in Virginia from 2003 until 2015 when his license expired. + +2. CEB Inc. (“CEB”) was a Delaware corporation headquartered in Arlington, VA that +provided best practice and talent management products and services. CEB’s common stock was +registered with the Commission pursuant to Section 12(b) of the Securities Exchange Act of 1934 +(“Exchange Act”) and traded on the New York Stock Exchange (“NYSE”) under ticker symbol +CEB. CEB filed periodic reports, including Forms 10-K and 10-Q, with the Commission pursuant +to Section 13(a) of the Exchange Act and related rules thereunder until April 2017, when it +voluntarily delisted from NYSE and terminated its reporting obligations with the Commission in +connection with its acquisition by another company. + +3. On December 11, 2020, the Commission filed a complaint against Wright in SEC v. +Clark, et al., No. 1:20-cv-01529 (E.D. Va.). On October 18, 2021, the court entered an order +permanently enjoining Wright, by consent, from future violations of Section 10(b) of the Exchange +Act and Rule 10b-5 thereunder; Wright was also ordered to pay a civil penalty of $240,934. + +4. The Commission’s complaint alleged, among other things, that Wright tipped his +brother-in-law, Defendant Christopher Clark, material non-public information concerning the +impending acquisition of Wright’s employer, CEB, by another company. Based on the +information, as further alleged in the complaint, Wright’s brother-in-law traded in CEB securities +in advance of the merger announcement generating profits of $240,934. + +IV. + + In view of the foregoing, the Commission deems it appropriate and in the public interest to +impose the sanction agreed to in Respondent Wright’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + + A. Respondent is suspended from appearing or practicing before the Commission as an +accountant. + +B. After two years from the date of the Order, Respondent may request that the +Commission consider Respondent’s reinstatement by submitting an application to the attention of +the Office of the Chief Accountant. + 3 + +C. In support of any application for reinstatement to appear and practice before the +Commission as a preparer or reviewer, or a person responsible for the preparation or review, of +financial statements of a public company to be filed with the Commission, other than as a member +of an audit committee, as that term is defined in Section 3(a)(58) of the Exchange Act, Respondent +shall submit a written statement attesting to an undertaking to have Respondent’s work reviewed +by the independent audit committee of any public company for which Respondent works or in +some other manner acceptable to the Commission, as long as Respondent practices before the +Commission in this capacity and will comply with any Commission or other requirements related +to the appearance and practice before the Commission as an accountant. + +D. In support of any application for reinstatement to appear and practice before the +Commission as a member of an audit committee, as that term is defined in Section 3(a)(58) of the +Exchange Act, as a preparer or reviewer, or as a person responsible for the preparation or review, +of any public company’s financial statements that are filed with the Commission, Respondent shall +submit a statement prepared by the audit committee(s) with which Respondent will be associated, +including the following information: + +1. A summary of the responsibilities and duties of the specific audit committee(s) +with which Respondent will be associated; + +2. A description of Respondent’s role on the specific audit committee(s) with +which Respondent will be associated; + +3. A description of any policies, procedures, or controls designed to mitigate any +potential risk to the Commission by such service; + +4. A description relating to the necessity of Respondent’s service on the specific +audit committee; and + +5. A statement noting whether Respondent will be able to act unilaterally on behalf +of the Audit Committee as a whole. + +E. In support of any application for reinstatement to appear and practice before the +Commission as an independent accountant (auditor) before the Commission, Respondent must be +associated with a public accounting firm registered with the Public Company Accounting +Oversight Board (the “PCAOB”) and Respondent shall submit the following additional +information: + +1. A statement from the public accounting firm (the “Firm”) with which +Respondent is associated, stating that the firm is registered with the PCAOB in +accordance with the Sarbanes-Oxley Act of 2002; + +2. A statement from the Firm with which the Respondent is associated that the +Firm has been inspected by the PCAOB and that the PCAOB did not identify + 4 +any criticisms of or potential defects in the Firm’s quality control system that +would indicate that Respondent will not receive appropriate supervision; and + +3. A statement from Respondent indicating that the PCAOB has taken no +disciplinary actions against Respondent since seven (7) years prior to the date of +the Order other than for the conduct that was the basis for the Order. + +F. In support of any application for reinstatement, Respondent shall provide +documentation showing that Respondent is currently licensed as a certified public accountant +(“CPA”) and that Respondent has resolved all other disciplinary issues with any applicable state +boards of accountancy. If Respondent is not currently licensed as a CPA, Respondent shall provide +documentation showing that Respondent’s licensure is dependent upon reinstatement by the +Commission. + +G. In support of any application for reinstatement, Respondent shall also submit a +signed affidavit truthfully stating, under penalty of perjury: + +1. That Respondent has complied with the Commission suspension Order, and +with any related orders and undertakings, including any orders in SEC v. +Clark, et al., No. 1:20-cv-01529 (E.D. Va.), or any related Commission +proceedings, including any orders requiring payment of disgorgement or +penalties; + +2. That Respondent undertakes to notify the Commission immediately in +writing if any information submitted in support of the application for +reinstatement becomes materially false or misleading or otherwise changes +in any material way while the application is pending; + +3. That Respondent, since the entry of the Order, has not been convicted of a +felony or a misdemeanor involving moral turpitude that would constitute a +basis for a forthwith suspension from appearing or practicing before the +Commission pursuant to Rule 102(e)(2); + +4. That Respondent, since the entry of the Order: + +a. has not been charged with a felony or a misdemeanor involving moral +turpitude as set forth in Rule 102(e)(2) of the Commission’s Rules of +Practice, except for any charge concerning the conduct that was the +basis for the Order; + +b. has not been found by the Commission or a court of the United States to +have committed a violation of the federal securities laws, and has not +been enjoined from violating the federal securities laws, except for any +finding or injunction concerning the conduct that was the basis for the +Order; + 5 + +c. has not been charged by the Commission or the United States with a +violation of the federal securities laws, except for any charge concerning +the conduct that was the basis for the Order; + +d. has not been found by a court of the United States (or any agency of the +United States) or any state, territory, district, commonwealth, or +possession, or any bar thereof to have committed an offense (civil or +criminal) involving moral turpitude, except for any finding concerning +the conduct that was the basis for the Order; and + +e. has not been charged by the United States (or any agency of the United +States) or any state, territory, district, commonwealth, or possession, +civilly or criminally, with having committed an act of moral turpitude, +except for any charge concerning the conduct that was the basis for the +Order. + +5. That Respondent’s conduct is not at issue in any pending investigation of +the Commission’s Division of Enforcement, the PCAOB’s Division of +Enforcement and Investigations, any criminal law enforcement +investigation, or any pending proceeding of a State Board of Accountancy, +except to the extent that such conduct concerns that which was the basis for +the Order. + +6. That Respondent has complied with any and all orders, undertakings, or +other remedial, disciplinary, or punitive sanctions resulting from any action +taken by any State Board of Accountancy, or other regulatory body. + +H. Respondent shall also provide a detailed description of: + +1. Respondent’s professional history since the imposition of the Order, including + +(a) all job titles, responsibilities and role at any employer; + +(b) the identification and description of any work performed for entities +regulated by the Commission, and the persons to whom Respondent reported for +such work; and + +2. Respondent’s plans for any future appearance or practice before the +Commission. + + I. The Commission may conduct its own investigation to determine if the foregoing +attestations are accurate. + + 6 +J. If Respondent provides the documentation and attestations required in this Order +and the Commission (1) discovers no contrary information therein, and (2) determines that +Respondent truthfully and accurately attested to each of the items required in Respondent’s +affidavit, and the Commission discovers no information, including under paragraph I, indicating +that Respondent has violated a federal securities law, rule or regulation or rule of professional +conduct applicable to Respondent since entry of the Order (other than by conduct underlying +Respondent’s original Rule 102(e) suspension), then, unless the Commission determines that +reinstatement would not be in the public interest, the Commission shall reinstate the respondent for +cause shown. + +K. If Respondent is not able to provide the documentation and truthful and accurate +attestations required in this Order or if the Commission has discovered contrary information, +including under Paragraph I, the burden shall be on the Respondent to provide an explanation as to +the facts and circumstances pertaining to the matter setting forth why Respondent believes cause +for reinstatement nonetheless exists and reinstatement would not be contrary to the public interest. +The Commission may then, in its discretion, reinstate the Respondent for cause shown. + +L. If the Commission declines to reinstate Respondent pursuant to Paragraphs J and K, +it may, at Respondent’s request, hold a hearing to determine whether cause has been shown to +permit Respondent to resume appearing and practicing before the Commission as an accountant. + + By the Commission. + + + +Vanessa A. Countryman + Secretary \ No newline at end of file diff --git a/raw/aaer/2021/AAER-4268.txt b/raw/aaer/2021/AAER-4268.txt new file mode 100644 index 0000000000000000000000000000000000000000..b6bc2dfd2e890950ce5c54f00306cfd5fe855ec3 --- /dev/null +++ b/raw/aaer/2021/AAER-4268.txt @@ -0,0 +1,443 @@ + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES ACT OF 1933 +Release No. 11008 / November 22, 2021 + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 93645 / November 22, 2021 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4268 / November 22, 2021 + +ADMINISTRATIVE PROCEEDING +File No. 3-20661 + + +In the Matter of + +ProPetro Holding Corp. + and Dale Redman, + +Respondents. + + + +ORDER INSTITUTING CEASE-AND- +DESIST PROCEEDINGS PURSUANT TO +SECTION 8A OF THE SECURITIES ACT +OF 1933 AND SECTION 21C OF THE +SECURITIES EXCHANGE ACT OF 1934, +MAKING FINDINGS AND IMPOSING A +CEASE-AND-DESIST ORDER + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate and in the +public interest that public cease-and-desist proceedings be, and hereby are, instituted pursuant to +Section 8A of the Securities Act of 1933 (“Securities Act”) and Section 21C of the Securities +Exchange Act of 1934 (“Exchange Act”) against ProPetro Holding Corp. (“ProPetro”) and Dale +Redman (“Redman”) (collectively, “Respondents”). + +II. + + In anticipation of the institution of these proceedings, Respondents have submitted Offers of +Settlement (the “Offers”) which the Commission has determined to accept. Solely for the purpose +of these proceedings and any other proceedings brought by or on behalf of the Commission, or to +which the Commission is a party, and without admitting or denying the findings herein, except as to +the Commission’s jurisdiction over them and the subject matter of these proceedings, which are +admitted, and except as provided herein in Section V, Respondents consent to the entry of this Order +Instituting Cease-and-Desist Proceedings pursuant to Section 8A of the Securities Act of 1933 and +Section 21C of the Securities Exchange Act of 1934, Making Findings and Imposing a Cease-and- +Desist Order (“Order”), as set forth below. + 2 +III. + + On the basis of this Order and Respondents’ Offers, the Commission finds1 that + +Summary + +1. These proceedings arise from: (a) ProPetro’s failure to disclose certain perquisites and +stock pledges concerning its co -founder and former CEO Dale Redman in its definitive proxy +statements and annual reports for the fiscal years end ed December 31, 2017 and 2018 ; and (b) +Redman’s role in ProPetro’s failure to disclose the perquisites paid to him and his pledges of ProPetro +stock while he was CEO and a member of ProPetro’s Board of Directors. +2. From January 2017 to December 2018 , Redman: (a ) caused ProPetro to incur +approximately $252,896 in charges relating to travel on his personal aircraft for trips that were not +directly related to the performance of his duties as CEO ; (b) used ProPetro credit cards to charge +$127,698 of personal expenses; and (c) pledged all of his personal stock in ProPetro in two real estate +transactions in violation of the company’s shareholder agreement and insider trading policy. During +the same period, ProPetro failed to properly disclose $47,591 in additional perquisites for Redman +that were authorized and paid for directly by the company. +3. From January 2017 to January 2019, Redman failed to provide information required +by ProPetro policies to enable ProPetro to adequately disclose these perquisites and stock pledges. As +a result, ProPetro made material misstatements regarding executive perquisites and stock ownership +in its annual reports, definitive proxy statements , and a registration statement . Additionally, +ProPetro’s deficient internal accounting controls resulted in the company’s failure to accurately +record Redman’s perquisites in its books and records. +4. As a result of the conduct described herein, ProPetro violated Sections 13(a), +13(b)(2)(A), 13(b)(2)(B), and 14(a) of the Exchange Act and Rules 12b-20, 13a-1, 14a-3, and 14a-9 +thereunder. Redman violated Section 17(a)(3) of the Securities Act and Section 14(a) of the +Exchange Act and Rules 13b2-1, 14a-3, and 14a-9 thereunder and caused ProPetro’s violations of +Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchan ge Act and Rules 12b -20 and 13a -1 +thereunder. +Respondents +5. ProPetro Holding Corp., a Delaware corporation headquartered in Midland, Texas, is +an oilfield services company. ProPetro was founded as a private entity in September 2005 by former +CEO Redman and another individual. Beginning in March 2017, ProPetro’s common stock became +registered with the Commission pursuant to Section 12(b) of the Exchange Act and began trading +on the New York Stock Exchange under the ticker PUMP. +6. Dale Redman, age 60, is a resident of Midland, Texas. Redman co-founded ProPetro +in September 2005 and became CEO in August 2006, a position he held until he resigned on March + +1 The findings herein are made pursuant to Respondents’ Offers of Settlement and are not binding on any other +person or entity in this or any other proceeding. + 3 +13, 2020. Redman was a member of ProPetro’s Board of Directors from September 2005 until his +resignation in March 2020. + +Background on Perquisite Disclosures + +7. Section 14(a) of the Exchange Act makes it unlawful to solicit any proxy in respect of +any security (other than an exempted security) registered pursuant to Section 12 of the Exchange Act +in contravention of such rules and regulations as the Commission may prescribe. Rule 14a-3 prohibits +the solicitation of a proxy without furnishing information specified by Schedule 14A, including +executive compensation pursuant to Item 402 of Regulation S-K. Rule 14a-9 prohibits the use of +proxy statements containing any statement that is false or misleading with respect to any material fact, +or omitting to state any material fact necessary in order to make the statements therein not false or +misleading. Misstatements and omissions are material under Rule 14a-9 if they would alter the “total +mix of information” considered by a shareholder in making a voting decision. TSC Indus., Inc. v. +Northway, Inc., 426 U.S. 438, 449 (1976). + +8. Item 402 of Regulation S-K requires disclosure of the total value of all perquisites and +other personal benefits provided to named executive officers who receive at least $10,000 worth of +such items in a given year. Item 402 of Regulation S-K also requires identification of all perquisites +and personal benefits by type, and quantification of any perquisite or personal benefit that exceeds +the greater of $25,000 or 10% of total perquisites. + +9. Item 403 of Regulation S-K requires disclosure of the security ownership of certain +beneficial owners and management. Item 403(b) details the categories of information required for +each class of equities offered by the registrant that must be furnished in substantially tabular form to +reflect the equity ownership of all directors and nominees and each named executive officer. Item +403(b) directs issuers to disclose, by footnote or otherwise, the number of shares beneficially owned +that are pledged as security. A negative pledge is subject to this disclosure. + +ProPetro’s Undisclosed Perquisites Related to +Redman’s Use of Private Aircraft + +10. From at least 2014 through 2019, Redman owned a 50% interest in a private aviation +company (“Aviation Co.”), which owned a 2008 Learjet 45XR. Redman principally used the Learjet +for business-related travel, and Aviation Co. invoiced ProPetro for its expenses associated with +Redman’s use of the aircraft. Additionally, because Redman frequently used his personal plane for +business travel, ProPetro employed two pilots to fly the Learjet in 2017 and 2018. + +11. ProPetro did not have a formal policy regarding approval and use of non- +commercial aircraft or a process for reimbursement of private aviation expenses. Even without a +formal policy or process, Aviation Co. had a practice of sending monthly invoices to ProPetro for +Redman’s flights. Redman initialed the invoices to signify his approval and then passed them on +to the accounts payable supervisor who processed them in the same manner as all other vendor +invoices. + + 4 +12. From January 2 017 through December 2018, approximately 10% of Redman’s +Aviation Co.-invoiced travel was for personal trips ($42,519 in 2017 and $117,279 in 2018 ). +Additionally, the pilots on ProPetro’s payroll flew Aviation Co.’s plane for both Redman’s personal +and business flights. Redman’s personal trips cost the company $52,665 in 2017 and $40,433 in +2018 for pilot -related expenses. In total, ProPetro paid approximately $252,896 in Aviation Co. +invoices and pilot flight time for Redman’s travel that was not integrally and directly related to the +performance of his duties as CEO. + +ProPetro’s Undisclosed Perquisites Related to +Redman’s Use of the Corporate Credit Card + +13. ProPetro authorized Redman to use company credit cards for work-related expenses. +From January 2017 to December 2018, ProPetro’s Employee Handbook included written policies +regarding the use of company credit cards. According to ProPetro’s Employee Handbook Policy +No. 518, “Credit Card Policy,” credit card holders were “required to turn in a Credit Card Expense +Form” and “detailed receipts.” The policy included a list of examples of authorized and unauthorized +purchases, and added that “the card is not to be used for any product, service or with any merchant +considered to be inappropriate for company funds.” + +14. Despite this policy, Redman and his family members used his company credit cards +for personal purchases that were not integrally and directly related to the performance of his duties +as CEO of ProPetro. + +15. In total, from January 2017 through December 2018 , Redman and his family +members used his ProPetro corporate cards for approximately $ 127,698 in undocumented and/or +personal expenses ($27,247 in 2017 and $100,451 in 2018). The company paid for all these charges +by paying the bills for Redman’s corporate cards. ProPetro failed to timely disclose the 2017 and +2018 charges as additional executive compensation in the form of perquisites. + +ProPetro’s Additional Undisclosed Perquisites Related to Redman + +16. Between January 2017 and December 2018, ProPetro spent $47,591 on additional +perquisites for Redman, which the company failed to disclose as additional executive compensation. +These expenses were appropriately incurred as perquisites and were paid for directly by the +company. However, failures in the company’s internal accounting controls caused them to not be +recorded and disclosed properly. + +17. These expenses consisted of charitable donations and event tickets ($20,139 in 2017 +and $27,452 in 2018). + + + + + + + 5 +18. In total, ProPetro failed to disclose the following perquisites for Redman: + + 2017 2018 +Aviation Expenses $95,184 + +$157,712 +Personal Credit Card +Charges +$27,247 $100,451 +Authorized, Undisclosed +Perquisites +$20,139 $27,452 +Total $142,570 + +$285,615 + +Redman’s Undisclosed Stock Pledges + +19. In January 2017, Redman borrowed money from a bank to purchase real estate. As +a condition of the loan, Redman pledged all of his ProPetro stock as collateral to secure the debt. +However, the Shareholders Agreement in place at the time, which Redman signed, stated that +stockholders may not “pledge or otherwise dispo se of or encumber [their shares] without prior +written consent of the Company.” Redman did not obtain prior written consent or inform company +counsel or the Board of Directors. The company never disclosed the pledge to investors as required +by Item 403(b) of Regulation S-K under the Exchange Act. + +20. In March 2017, in preparation to go public, ProPetro adopted an Insider Trading +Compliance Policy, which provided in relevant part that “[p]ledging the Company’s securities as +collateral to secure loans is also prohibited.” + +21. In January 2018, Redman purchased additional real estate, borrowing funds from a +second bank. Redman again agreed to pledge his ProPetro shares as collateral. The second bank +took steps to perfect its security interest and reached out to ProPetro’s General Counsel, who +informed the Board about the pledge. While the Board considered its options to deal with the pledge, +Redman and the second bank agreed to execute a “negative pledge” whereby Redman agreed not to +sell his shares in ProPetro for as long as he owes the bank for the loan. The Board agreed to allow +the negative pledge, and Redman executed his Amended Loan Agreements and a Negative Pledge +Agreement on September 14, 2018. During this time, Redman did not inform the Board of th e +original stock pledge in place with the first bank and the company did not disclose either the 2017 +pledge or the 2018 negative pledge in its SEC filings until 2020. +D&O Questionnaires +22. ProPetro did not have a formal written policy for the completion of its annual +Directors & Officers Questionnaire (“D&O Questionnaire”). Rather, the company’s General +Counsel was responsible for ensuring that directors and officers completed their annual D&O +Questionnaire and then used the information provided to complete the company’s disclosures on, +among other things, perquisites and beneficial ownership disclosures. + 6 +23. Redman was responsible for completing three D&O Questionnaires in connection +with the company’s preparation of the following SEC filings, all of which conta ined material +misstatements or omissions: +Filing Date SEC Filing +Feb. 8, 2017 Form S-1 +Mar. 27, 2018 Form 10-K +Apr. 26, 2018 Definitive Proxy Statement +Mar. 1, 2019 Form 10-K +Apr. 23, 2019 Definitive Proxy Statement + +24. On January 27, 2017, approximately one week after the close on the loan for his first +ranch with its associated stock pledge, Redman completed his “D&O Questionnaire” for the +disclosures in the company’s Form S-1 Registration Statement. Redman completed and signed the +2017 D&O Questionnaire, but left the line item for pledged shares blank. In 2018, Redman did not +complete a D&O Questionnaire at all. On January 21, 2019, Redman completed the D&O +Questionnaire but did not submit Schedule B, “Security Owners hip and Recent Transactions in +Company Securities,” which should have described his ProPetro equity ownership including his +stock pledges. +25. Redman also did not identify in his D&O Questionnaires any of his personal trips on +the Aviation Co. Learjet, the personal charges he made on the corporate credit card, or the additional +perquisites authorized by the company. In his 2017 D&O Questionnaire, Redman included some +perquisites for his company car, but failed to include any of the additional perquisites de tailed +above. In 2018, Redman failed to complete a D&O Questionnaire. On January 21, 2019, although +Redman included some perquisites in his D&O Questionnaire, he did not disclose the personal air +travel, any of the personal credit card charges reimbursed by the company that year or the various +previously authorized perquisites detailed above. +ProPetro’s Proxy Statements Contained Material Misstatements +Regarding Redman’s Perquisites and Stock Ownership +26. ProPetro did not properly disclose perquisites related to Redman’s use of his private +aircraft, company credit cards and other previously authorized benefits in the Summary +Compensation Table of its Definitive Proxy Statements filed in 2018 and 2019 (the “Proxy +Statements”). As a result, Redman’s perquisites were understated in the Proxy Statements by +$142,570 (identifying $10,800 instead of $153,370) for the 2017 fiscal year and $285,615 +(identifying $19,248 instead of $304,863) for the 2018 fiscal year.2 In the same filings, ProPetro +also did not accurately disclose Redman’s stock ownership in its Principal Stockholders table in its +Form S-1 filed on February 8, 2017 or the Proxy Statements due to the undisclosed stock pledges. + +2 Redman repaid the 2019 expenses during the year he incurred them. As such, the company properly did not +disclose these charges as perquisites in the Summary Compensation Table. + 7 +27. ProPetro and Redman used the Proxy Statements to solicit annual shareholder votes +to elect directors, including Redman. The 2019 Proxy Statement also solicited non-binding advisory +votes from shareholders on executive compensation, including Redman’s compensation. +28. ProPetro’s Annual Reports filed on Form 10-K incorporated the Proxy Statements +by reference , which included executive compensation and management’s stock ownership. +Consequently, those annual reports also materially understated Redman’s compensation and +perquisites, and failed to accurately disclose his ownership of ProPetro stock. +29. Between February 2017 and August 2019, ProPetro offered and sold securities, +including in March 2017 as part of its initial public offering, and through grants of restricted stock +units and exercises by employees of stock options. +ProPetro’s Internal Investigation, Self Reporting and Remediation +30. In May 2019, the Audit Committee of the Board of Directors hired independent +outside counsel and accounting advisors to conduct an internal investigation focused on a different +matter than the issues detailed above. Although the review did not reveal anything of substance with +respect to that matter , counsel uncovered other issues, including the improper e xpense +reimbursements and undisclosed stock pledges for Redman described herein +31. On August 8, 2019, ProPetro filed a Form 8 -K announcing certain preliminary +findings of the investigation. The company disclosed that due to inadequate documentation +associated with the company’s expense reimbursement practices, approximately $370,000 of +expenses had been incorrectly reimbursed to members of senior management for non -business +purchases, including approximately $345,636 to Redman. Redman reimbursed the company for the +$345,636 preliminary total in August 2019. +32. Around this same time, the company filed multiple Form s 8-K announcing the +resignation of several senior executives and Board members and the appointment of a new Executive +Chairman and principal executive officer, interim CFO, General Counsel, Chief Accounting Officer, +and new Board members. Finally, on March 13, 2020, the company self-reported its discovery that +Redman had entered into the two stock pledge agreements described above. The same Form 8-K +announced Redman’s resignation as CEO and a member of the Board. +33. On June 22, 2020, ProPetro filed its Form 10-K for the fiscal year ended December +31, 2019 with an introductory note summarizing all the findings of the expanded Audit Committee +Internal Review, including details on the improper expense reimbursements to Redman and +Redman’s undisclosed stock pledges. The company updated the compensation , disclosed as +provided to Redman for the fiscal years ended December 31, 2019, 2018, and 2017 in its 2019 Form +10-K, with an explanatory footnote to describe the increases in each category. +Violations +34. Section 17(a)(3) of the Securities Act makes it unlawful, in the offer or sale of +securities, to engage in any transaction, practice, or course of business which operates or would +operate as a fraud or deceit upon the purchaser. Negligence is sufficient to establish violations of + 8 +Section 17(a)(3); no finding of scienter is required. Aaron v. SEC, 446 U.S. 680, 696-97 (1980). As +a result of the conduct described above, Redman violated Section 17(a)(3) of the Securities Act. +35. In addition, as a result of the conduct described above, including the solicitations for +Redman’s election as a director and advisory approval of his compensation by means of proxy +statements that materially misrepresented and misstated his compensation by failing to report certain +perquisites, ProPetro and Redman violated Section 14(a) of the Exchange Act and Rules 14a-3 and +14a-9 thereunder. No showing of scienter is required to establish a violation of Section 14(a) of the +Exchange Act and Rules 14a-3 and 14a-9 thereunder. See, e.g., Gerstle v. Gamble-Skogmo, Inc., 478 +F.2d 1281, 1299-1300 (2d Cir. 1973). A showing of negligence is sufficient. See Dekalb County +Pension Fund v. Transocean Ltd, 817 F.3d 393, 408 (2d Cir. 2016). +36. In addition, as a result of the conduct described above, ProPetro violated, and Redman +caused ProPetro’s violations of, Section 13(a) of the Exchange Act and Rule 13a-1 thereunder, which +require reporting companies to file with the Commission complete and accurate annual reports. +ProPetro also violated, and Redman caused ProPetro’s violations of, Exchange Act Rule 12b -20, +which requires an issuer to include in a statement or report filed with the Commission any information +necessary to make the required statements in the filing not materially misleading. +37. In a ddition, as a result of the conduct described above, ProPetro violated, and +Redman caused ProPetro’s violations of, Section 13(b)(2)(A) of the Exchange Act, which requires +issuers such as ProPetro to make and keep books, records, and accounts which, in reasonable detail, +accurately and fairly reflect their transactions and dispositions of their assets, including perquisites +and executive compensation. +38. In addition, as a result of the conduct described above, ProPetro violated, and Redman +caused ProPetro’s violations of, Section 13(b)(2)(B) of the Exchange Act which requires reporting +companies to devise and maintain a system of internal accounting controls sufficient to, among other +things, provide reasonable assurances that transactions are executed in acc ordance with +management’s general or specific authorization and are recorded as necessary to maintain +accountability for assets, and that access to assets is permitted only in accordance with management’s +general or specific authorization. +39. In addition, as a result of the conduct described above, Redman violated Exchange +Act Rule 13b2-1 which prohibits any person from, directly or indirectly, falsifying or causing to be +falsified, any book, record, or account subject to Section 13(b)(2)(A) of the Exchange Act. + +ProPetro’s Remedial Efforts + +In determining to accept ProPetro’s Offer, the Commission considered the remedial acts +promptly undertaken by ProPetro and cooperation afforded the Commission staff. Specifically, +ProPetro (i) hired a new management team and additional finance department personnel, all with +significant public company experience; (ii) installed several new directors, including new Audit +Committee members, and created a new Disclosure Committee with its own disclosure cou nsel; +(iii) developed several new internal controls regarding internal auditing matters, credit card and + 9 +expense reimbursement, and travel ; (iv) created and implemented new training requirements for +employees; (v) enhanced the D&O Questionnaire process; an d (vi) retained an investigative firm +to do background checks on all senior executives and executive disclosures. +IV. + In view of the foregoing, the C ommission deems it appropriate to impose the sanctions +agreed to in Respondents’ Offers. + Accordingly, pursuant to Section 8A of the Securities Act and Section 21C of the Exchange +Act, it is hereby ORDERED that: + + A. Respondent ProPetro cease and desist from committing or causing any violations and +any future violations of Sections 13(a), 13(b)(2)(A), 13(b)(2)(B), and 14(a) of the Exchange Act and +Rules 12b-20, 13a-1, 14a-3, and 14a-9 thereunder. + + B. Respondent Redman cease and desist from committing or causing any violations and +any future violations of Section 17(a)(3) of the Securities Act and Sect ions 13(a), 13(b)(2)(A), +13(b)(2)(B), and 14(a) of the Exchange Act and Rules 12b-20, 13a-1, 13b2-1, 14a-3, and 14a-9 +thereunder. + +C. Respondent Redman shall, within 30 days of the entry of this Order, pay a civil +money penalty in the amount of $195,046 to the Securities and Exchange Commission for transfer +to the general fund of the United States Treasury, subject to Exchange Act Section 21F(g)(3). If +timely payment is not made, additional interest shall accrue pursuant to 31 U.S.C. § 3717. + +Payment must be made in one of the following ways: + +(1) Respondents may transmit payment electronically to the Commission, which +will provide detailed ACH transfer/Fedwire instructions upon request; + +(2) Respondents may make direct payment from a bank account via Pay.gov +through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or + +(3) Respondents may pay by certified check, bank cashier’s check, or United +States postal money order, made payable to the Se curities and Exchange +Commission and hand-delivered or mailed to: + +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + +Payments by check or money order must be accompanied by a cover letter identifying Dale +Redman as a Respondent in these proceedings, and the file number of these proceedings; a copy of + 10 +the cover letter and check or money order must be sent to Eric Werner, Division of Enforcement, +Securities and Exchange Commission, 801 Cherry Street, Suite 1900, Fort Worth, Texas 76102. + + D. Amounts ordered to be paid as civil money penalties pursuant to this Order shall be +treated as penalties paid to the government for all purposes, including all tax purposes. To +preserve the deterrent effect of the civil penalty, Respondent Redman agrees that in any Related +Investor Action, he shall not argue that he is entitled to, nor shall he benefit by, offset or reduction +of any award of compensatory damages by the amount of any part of his payment of a civil penalty +in this action (“Penalty Offset”). If the court in any Related Investor Action grants such a Penalty +Offset, Respondent Redman agrees that he shall, within 30 days after entry of a final order granting +the Penalty Offset, notify the Commission's counsel in this action and pay the amount of the +Penalty Offset to the Securities and Exchange Commission. Such a payment shall not be deemed +an additional civil penalty and shall not be deemed to change the amount of the civil penalty +imposed in this proceeding. For purposes of this paragraph, a “Related Investor Action” means a +private damages action brought against Respondent Redman by or on behalf of one or more +investors based on substantially the same facts as alleged in the Order instituted by the +Commission in this proceeding + + E. Respondent ProPetro acknowledges that the Commission is not imposing a civil +penalty based upon its cooperation in a Commission investigation. If at any time following the entry +of the Order, the Division of Enforcement (“Division”) obtains information indicating that +Respondent ProPetro knowingly provided materially false or misleading information or materials to +the Commission, or in a related proceeding, the Division may, at its sole discretion and with prior +notice to Respondent ProPetro, petition the Commission to reopen this matter and seek an order +directing that Respondent ProPetro pay a civil money penalty. Respondent ProPetro may contest by +way of defense in any resulting administrative proceeding whether it knowingly provided materially +false or misleading information, but may not: (1) contest the findings in the Order; or (2) assert any +defense to liability or remedy, including, but not limited to, any statute of limitations defense. +V. +It is further Ordered that, solely for purposes of exceptions to discharge set forth in Section +523 of the Bankruptcy Code, 11 U.S.C. §523, the findings in this Order are true and admitted by +Respondent Redman, and further, any debt for disgorgement, prejudgment interest, civil penalty or +other amounts due by Respondent Redman under this Order or any other judgment, order, consent +order, decree or settlement agreement entered in connection with this proceeding, is a debt for the +violation by Respondent Redman of the federal securities laws or any regulation or order issued +under such laws, as set forth in Section 523(a)(19) of the Bankruptcy Code, 11 U.S.C. §523(a)(19). + By the Commission. + + + + +Vanessa A. Countryman + Secretary \ No newline at end of file diff --git a/raw/aaer/2021/AAER-4269.txt b/raw/aaer/2021/AAER-4269.txt new file mode 100644 index 0000000000000000000000000000000000000000..30c36cef9fcebb7fc8ddc9083adf4e0e3b1e2b66 --- /dev/null +++ b/raw/aaer/2021/AAER-4269.txt @@ -0,0 +1,95 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 93647 / November 22, 2021 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4269 / November 22, 2021 + +ADMINISTRATIVE PROCEEDING +File No. 3-20658 + +: +In the Matter of : +: ORDER OF SUSPENSION PURSUANT +SHANNON D. DOYLE, CPA : TO RULE 102(e)(2) OF THE +: COMMISSION’S RULES OF PRACTICE +Respondent. : +: + + + +I. + +The Securities and Exchange Commission deems it appropriate to issue an order of +forthwith suspension of Shannon D. Doyle pursuant to Rule 102(e)(2) of the Commission’s +Rules of Practice [17 C.F.R. 201.102(e)(2)].1 + +II. + +The Commission finds that: + +1. Doyle, age 53, was a certified public accountant (“CPA”) licensed in the states of +Washington and Maryland. His license in Washington lapsed in 2013 and his license in +Maryland lapsed in 2019. From 2013 until he resigned in December 2017, Doyle was the Chief +Financial Officer of Digi Outdoor Media, Inc. (“Digi”), a Nevada corporation headquartered in +Snoqualmie, Washington with its principal place of business in Washington, D.C. + +2. On November 13, 2018, Doyle pleaded guilty to one count of conspiracy to +commit wire fraud in violation of 18 U.S.C. §1349 in connection with his work for Digi in the +United States District Court for the Northern District of California. United States v. Shannon + +1 Rule 102(e)(2) provides in pertinent part: “Any ... person who has been convicted of a felony or a +misdemeanor involving moral turpitude shall be forthwith suspended from appearing or practicing before the +Commission.” +Doyle, No. CR-17-00592-002-WHA (N.D. Cal.). + +3. As a result of his guilty plea, a judgment of conviction was entered against Doyle +on May 18, 2021 and Doyle was sentenced to 8 months imprisonment in a federal penitentiary +and ordered to pay a criminal fine in the amount of $15,000. + +III. + +In view of the foregoing, the Commission finds that Doyle has been convicted of a felony +within the meaning of Rule 102(e)(2) of the Commission’s Rules of Practice. + +Accordingly, it is ORDERED, that Shannon D. Doyle is forthwith suspended from +appearing or practicing before the Commission pursuant to Rule 102(e)(2) of the Commission’s +Rules of Practice. + + +By the Commission. + + +Vanessa A. Countryman +Secretary + + + + + + + + + + + + + + + + + + + + + + + + + + +2 \ No newline at end of file diff --git a/raw/aaer/2021/AAER-4270.txt b/raw/aaer/2021/AAER-4270.txt new file mode 100644 index 0000000000000000000000000000000000000000..8c21b31434337ff6726840c2dd8835d75a14b69d --- /dev/null +++ b/raw/aaer/2021/AAER-4270.txt @@ -0,0 +1,111 @@ + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 93682 / November 30, 2021 +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4270 / November 30, 2021 +ADMINISTRATIVE PROCEEDING +File No. 3-17107 + +In the Matter of +ANTHONY P. +HARTKE, CPA + +: +: +: +: +: +: +ORDER GRANTING APPLICATION FOR +REINSTATEMENT TO APPEAR AND PRACTICE +BEFORE THE COMMISSION AS AN +ACCOUNTANT RESPONSIBLE FOR THE +PREPARATION OR REVIEW OF FINANCIAL +STATEMENTS REQUIRED TO BE FILED WITH +THE COMMISSION + +On February 9, 2016, the Commission issued an Order Instituting Administrative and +Cease-and-Desist Proceedings Pursuant to Section 8A of the Securities Act of 1933 (“Securities +Act”), Sections 4C and 21C of the Securities Exchange Act of 1934 (“Exchange Act”), and Rule +102(e) of the Commission’s Rules of Practice, Making Findings and Imposing Remedial +Sanctions and a Cease-and-Desist Order (the “Suspension Order”) against Respondent Anthony +P. Hartke (“Hartke”) and others.1 The Suspension Order suspended Hartke from appearing or +practicing before the Commission as an accountant but permitted Hartke, after one year from the +date of the Suspension Order and if certain conditions were met, to request that the Commission +consider his reinstatement to resume appearing or practicing before the Commission as (1) a +preparer or reviewer, or a person responsible for the preparation or review, of financial +statements that are required to be filed with the Commission; or (2) an independent accountant. +This order is issued in response to Hartke’s application for reinstatement to appear and +practice before the Commission as an accountant responsible for the preparation or review of +financial statements required to be filed with the Commission. +The Commission found that Hartke willfully violated the federal securities laws with +respect to his conduct as a U.S. Business Analyst at Monsanto Company (“Monsanto”) during +fiscal years 2009 and 2010. During the relevant period, Hartke knew or should have known that +Monsanto was accounting for costs related to certain rebate programs in the incorrect period. As + +1 See Accounting and Auditing Enforcement Release No. 3741, dated February 9, 2016. + + 2 +a result of this conduct, the Commission found that Hartke caused Monsanto to violate Sections +17(a)(2) and (3) of the Securities Act, Sections 13(a) and 13(b)(2)(A) of the Exchange Act, and +Rules 12b-20, 13a-1, 13a-11, and 13a-13 thereunder. In addition, the Commission found that +Hartke willfully violated Rule 13b2-1 under the Exchange Act. + +Hartke has met all of the conditions set forth in the Suspension Order to be reinstated to +appear and practice before the Commission as a person responsible for the preparation or review +of financial statements of a public company required to be filed with the Commission and in this +capacity has attested that he will undertake to have his work reviewed by the independent audit +committee of any company for which he works, or in some other manner acceptable to the +Commission, while practicing before the Commission in this capacity. Hartke is not, at this time, +seeking to appear or practice before the Commission as an independent accountant. If, in the +future, Hartke should wish to resume appearing and practicing as an independent accountant, he +will be required to submit an application to the Commission showing, among other things, that +he has complied and will comply with the terms of the Suspension Order. + +Rule 102(e)(5) of the Commission’s Rules of Practice governs applications for +reinstatement, and provides that the Commission may reinstate the privilege to appear and +practice before the Commission “for good cause shown.”2 This “good cause” determination is +necessarily highly fact specific. + +On the basis of information supplied, representations made, and undertakings agreed to +by Hartke, it appears that he has complied with the terms of the Suspension Order. No +information has come to the attention of the Commission relating to his character, integrity, +professional conduct or qualifications to practice before the Commission that would be a basis +for adverse action against him pursuant to Rule 102(e) of the Commission's Rules of Practice. In +addition, Hartke has undertaken to have his work reviewed by the independent audit committee +of any company for which he works, or in some other manner acceptable to the Commission. As +a result, Hartke has shown good cause for reinstatement. Therefore, it is accordingly, + + + + + + + + + + + +2 Rule 102(e)(5)(i) provides: + +“An application for reinstatement of a person permanently suspended or disqualified under paragraph (e)(1) or (e)(3) +of this rule may be made at any time, and the applicant may, in the Commission’s discretion, be afforded a hearing; +however, the suspension or disqualification shall continue unless and until the applicant has been reinstated by the +Commission for good cause shown.” 17 C.F.R. § 201.102(e)(5)(i). + + + 3 +ORDERED pursuant to Rule 102(e)(5)(i) of the Commission’s Rules of Practice that +Anthony P. Hartke, CPA is hereby reinstated to appear and practice before the Commission as an +accountant responsible for the preparation or review of financial statements required to be filed +with the Commission. + +By the Commission. + + +Vanessa A. Countryman +Secretary \ No newline at end of file diff --git a/raw/aaer/2021/AAER-4273.txt b/raw/aaer/2021/AAER-4273.txt new file mode 100644 index 0000000000000000000000000000000000000000..f0cf30114eba0b51d16a784fd0602a28939dd78a --- /dev/null +++ b/raw/aaer/2021/AAER-4273.txt @@ -0,0 +1,462 @@ + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 93751 / December 10, 2021 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4273 / December 10, 2021 + +ADMINISTRATIVE PROCEEDING +File No. 3 - 20673 + + + +In the Matter of + +PHILIP S. HURAK, ESQ., + +Respondent. + + + + +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE AND CEASE- + AND-DESIST PROCEEDINGS PURSUANT TO +SECTIONS 4C AND 21C OF THE SECURITIES +EXCHANGE ACT OF 1934 AND RULE 102(e) +OF THE COMMISSION’S RULES OF +PRACTICE, MAKING FINDINGS, AND +IMPOSING REMEDIAL SANCTIONS AND A +CEASE-AND-DESIST ORDER + + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate that public +administrative and cease-and-desist proceedings be, and hereby are, instituted against Philip S. +Hurak (“Respondent”) pursuant to Sections 4C1 and 21C of the Securities Exchange Act of 1934 +(“Exchange Act”) and Rule 102(e)(1)(iii) of the Commission’s Rules of Practice.2 + +1 Section 4C provides, in relevant part, that: + + The Commission may censure any person, or deny, temporarily or permanently, +to any person the privilege of appearing or practicing before the Commission in +any way, if that person is found . . . (1) not to possess the requisite qualifications +to represent others; (2) to be lacking in character or integrity, or to have engaged +in unethical or improper professional conduct; or (3) to have willfully violated, or +willfully aided and abetted the violation of, any provision of the securities laws or +the rules and regulations issued thereunder. + +2 Rule 102(e)(1)(iii) provides, in pertinent part, that: + + +2 + +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over him and the subject matter of these +proceedings, which are admitted, and except as provided herein in Section V, Respondent consents +to the entry of this Order Instituting Public Administrative and Cease-and-Desist Proceedings +Pursuant to Sections 4C and 21C of the Securities Exchange Act of 1934 and Rule 102(e) of the +Commission’s Rules of Practice, Making Findings, and Imposing Remedial Sanctions and a Cease- +and-Desist Order (“Order”), as set forth below. + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds3 that: + +SUMMARY + +1. This matter involves aiding and abetting and causing violations of the auditor +independence rules arising from Ernst & Young LLP (“EY”), a public accounting firm, performing +non-audit services for its audit client Cintas Corporation (“Cintas”) on a contingent fee basis.4 EY +billed and received payment from Cintas on invoices calculated on a contingent fee basis for tax +credit and incentive services (“C&I services”) performed between July 2009 and August 2018. An +audit firm is not independent of its audit client if it provides any non-audit services to the audit +client for a contingent fee. As a result, EY was not independent of Cintas during that time period, +and Cintas filed annual and quarterly reports with the Commission that were not audited or +reviewed by an independent public accountant, as required by Section 13(a) of the Exchange Act + + + The Commission may . . . deny, temporarily or permanently, the privilege of +appearing or practicing before it . . . to any person who is found…to have +willfully violated, or willfully aided and abetted the violation of any provision of +the Federal securities laws or the rules and regulations thereunder. + +3 The findings herein are made pursuant to Respondent's Offer of Settlement and are not +binding on any other person or entity in this or any other proceeding. + +4 Contingent fee means … any fee established for the sale of a product or the performance of +any service pursuant to an arrangement in which no fee will be charged unless a specified +finding or result is attained, or in which the amount of the fee is otherwise dependent upon +the finding or result of such product or service. See 17 CFR § 210.2-01(f)(10). + + +3 +and Rules 13a-1 and 13a-13 thereunder. +2. Respondent, an attorney, was a senior manager and later a principal with EY. +Respondent served as an engagement manager for C&I services that EY provided to Cintas from +2013 through 2018. During that time, Respondent reviewed and approved EY’s bills sent to Cintas +containing fees calculated on a contingent fee basis, which Cintas paid. As a result of his conduct, +Respondent willfully aided and abetted and caused EY’s violation of Rule 2-02(b)(1) of Regulation +S-X, which, during the relevant period, required an auditor to state whether the audit was made in +accordance with generally accepted auditing standards (“GAAS”). Respondent also willfully aided +and abetted and caused Cintas to violate Exchange Act Section 13(a) and Rules 13a-1 and 13a-13, +which require the company to file annual and quarterly reports audited and reviewed by an +independent public accountant. +RESPONDENT + +3. Philip S. Hurak, age 41, was a senior manager and, beginning July 1, 2018, a +principal of EY before resigning from the firm in February 2019. He is an attorney licensed in the +state of Ohio. Respondent was an engagement manager for certain C&I services that EY provided +to Cintas from April 2013 to August 2018. +OTHER RELEVANT ENTITIES +4. Cintas Corporation is a Washington corporation headquartered in Cincinnati, Ohio. +Its common stock is registered with the Commission pursuant to Section 12(b) of the Exchange +Act and is traded on the Nasdaq Global Select Market. Cintas’s fiscal year end is the last day in +May. At the time of the conduct described herein, Cintas had reporting obligations under Section +13(a) of the Exchange Act. +5. Ernst & Young LLP, a partnership organized under the laws of Delaware, is a +public accounting firm with principal offices in New York, New York. EY has been registered +with the Public Company Accounting Oversight Board (“PCAOB”) since 2003. EY has served as +the auditor for Cintas since 1968. +FACTS + +6. Under the Commission’s auditor independence rules, external accountants are +required to be independent—in fact and in appearance—of their audit clients. The Commission’s +auditor independence rules set forth a general standard of independence in Rule 2-01(b) of +Regulation S-X which, among other things, states that, in determining whether an accountant is +independent, the Commission will consider “all relevant circumstances, including all relationships +between the accountant and the audit client . . .” Rule 2-01(c)(5) of Regulation S-X provides that +“[a]n accountant is not independent if, at any point during the audit and professional engagement +period, the accountant provides any service or product to an audit client for a contingent fee … or +receives a contingent fee … from an audit client.” EY’s policies and procedures also prohibited + + +4 +billing audit clients on a contingent fee basis. +7. Between July 2009 and August 2018, EY audited Cintas’s annual financial +statements that the issuer included in filings made with the Commission on Forms 10-K. EY +issued an audit report for Cintas’s annual financial statements (included in Forms 10-K), stating +that it had conducted its audit of Cintas in accordance with the standards of the PCAOB, which +include the requirement that auditors be independent of their audit clients. During this period, EY +also reviewed Cintas’s quarterly financial statements that the issuer included in Commission filings +on Forms 10-Q. +8. As Cintas’s auditor, EY had to obtain pre-approval from Cintas’s audit committee +under Section 10A(h) of the Exchange Act in order to provide non-audit tax services to Cintas. +EY’s policies and procedures required that requests for pre-approval of non-audit services to the +audit committee comply with PCAOB Rule 3524, which requires written disclosure of a fee +structure that complies with the auditor independence rules. +9. EY provided C&I services to Cintas between July 2009 and August 2018. In +obtaining pre-approval from the audit committee to provide those services, EY represented that it +would bill for C&I services on a time and materials basis. EY’s engagement letters with Cintas +similarly represented that EY would bill for C&I services on a time and materials basis. From +April 2013 through August 2018, Respondent was an engagement manager for certain C&I +services that EY provided to Cintas. Respondent knew that EY was supposed to bill Cintas on a +time and materials basis. +10. As an engagement manager, Respondent reviewed and approved certain EY +invoices sent to Cintas for C&I services. Respondent knew that the auditor independence rules and +EY’s policies and procedures prohibited EY from providing audit and review services while also +providing any services to Cintas on a contingent fee basis. +11. Respondent nevertheless approved EY’s invoices sent to Cintas that charged fees of +approximately—sometimes exactly—10% of the benefit Cintas received for federal tax credits and +15% of the benefit Cintas received for state and local tax credits resulting from EY’s C&I +engagements. +12. For example, in November 2016, Respondent approved billing Cintas for obtaining +a large federal hiring-related tax credit. The invoice listed both the amount of the credit and the +amount of the fee. The amount of the bill was almost exactly 10% of the credit amount that Cintas +received. Cintas paid the invoice in January 2017. +13. Similarly, in September 2017, Respondent emailed Cintas an invoice for C&I +services relating to three federal tax credits. The email also summarized the amount of each +federal credit and the charges for each credit. Those charges were approximately 10% of the tax +benefit Cintas received for each credit. Cintas paid the invoice in October 2017. +14. As a result of the contingent fees, EY was not independent of Cintas between July + + +5 +2009 and August 2018. Consequently, the Forms 10-K and 10-Q that Cintas filed with the +Commission during this period contained financial statements that were not audited or reviewed by +an independent public accountant. +VIOLATIONS +15. During the relevant period, Rule 2-02(b)(1) of Regulation S-X required each +auditor’s report on a public issuer’s financial statements to state “whether the audit was made in +accordance with generally accepted auditing standards.” GAAS includes the auditing standards set +forth in PCAOB standards and applicable Commission rules, both of which require an auditor to be +independent of its client.5 Circumstances in which an auditor will—and will not—be deemed +independent are set forth in Rule 2-01 of Regulation S-X. Rule 2-01(c)(5) of Regulation S-X +provides that “[a]n accountant is not independent if, at any point during the audit and professional +engagement period, the accountant provides any service or product to an audit client for a +contingent fee … or receives a contingent fee … from an audit client.” EY stated in its audit report +attached to Cintas’s Forms 10-K during the relevant period that EY conducted its audit of Cintas in +accordance with the standards of the PCAOB, when it had not. +16. By his conduct described above, Respondent willfully6 aided and abetted and +caused EY to violate Rule 2-02(b)(1) of Regulation S-X. +17. Section 13(a) of the Exchange Act and Exchange Act Rule 13a-1 require issuers +with equity securities registered under Section 12 to file annual reports with the Commission that +include financial statements audited by an independent public accountant. Exchange Act Rule +13a-13 requires issuers with securities to file with the Commission quarterly reports on Form 10- +Q. Rule 10-01(d) of Regulation S-X requires the interim financial statements included in a Form + +5 The Commission has stated that for audit reports issued on or after May 24, 2004, the +reference in Rule 2-02(b)(1) to GAAS means the standards of the PCAOB and applicable +Commission rules, both of which require an auditor to be independent of its client. See +Commission Guidance Regarding the Public Company Accounting Oversight Board’s +Auditing and Related Professional Practice Standard No. 1, Exchange Act Rel. No. +49708, 2004 WL 1439831, at *2 (May 14, 2004); see also PCAOB AS 3101 (superseding +PCAOB Auditing Standard No. 1 for audits of fiscal years ending on or after December 15, +2017); PCAOB Rule 3520 (“A registered public accounting firm and its associated +persons must be independent of the firm’s audit client throughout the audit and +professional engagement period.”); PCAOB Auditing Standards, Independence, AU § +220.03 (PCAOB auditor independence standards effective prior to December 31, 2016); +PCAOB AS 1005.03 (PCAOB auditor independence standards effective on or after +December 31, 2016). +6 “Willfully” for purposes of imposing relief under Section 102(e) “means no more than +the person charged with the duty knows what he is doing.” Wonsover v. SEC, 205 F.3d +408, 414 (D.C. Cir. 2000). + + +6 +10-Q to be reviewed by an independent public accountant. +18. By his conduct described above, Respondent willfully aided and abetted and caused +Cintas to violate Section 13(a) of the Exchange Act and Rules 13a-1 and 13a-13 promulgated +thereunder. +19. Section 4C of the Exchange Act and Rule 102(e)(1)(iii) of the Commission’s Rules +of Practice, permit the Commission to censure a person or deny a person the privilege of appearing +or practicing before it after finding that a person willfully violated or willfully aided and abetted +the violation of any provisions of the federal securities laws or the rules and regulations thereunder. +By his conduct described above, Respondent willfully aided and abetted EY’s and Cintas’s +violations of the federal securities laws within the meaning of Exchange Act Section 4C(a)(3) and +Rule 102(e)(1)(iii) of the Commission’s Rules of Practice. +FINDINGS + +20. Based on the foregoing, the Commission finds that Respondent willfully aided and +abetted and caused EY’s violations of Rule 2-02(b)(1) of Regulation S-X. +21. Based on the foregoing, the Commission finds that Respondent willfully aided and +abetted and caused Cintas’s violations of Section 13(a) of the Exchange Act and Rules 13a-1 and +13a-13 promulgated thereunder. +22. Based on the foregoing, the Commission finds that Respondent willfully aided and +abetted Cintas’s violations of the federal securities laws within the meaning of Section 4C(a)(3) of +the Exchange Act and Rule 102(e)(1)(iii) of the Commission’s Rules of Practice. +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + + A. Respondent shall cease and desist from committing or causing any violations and +any future violations of Rule 2-02(b)(1) of Regulation S-X, Section 13(a) of the Exchange Act and +Rules 13a-1 and 13a-13 promulgated thereunder. + + B. Respondent is denied the privilege of appearing or practicing before the +Commission as an attorney. + + C. After two years from the date of this Order, Respondent may request that the +Commission consider Respondent’s reinstatement by submitting an application to the +attention of the Office of the General Counsel. + + +7 + +D. In support of any application for reinstatement to appear and practice before the +Commission as an attorney, Respondent shall provide a certificate of good standing from each state +bar where Respondent is a member. + +E. In support of any application for reinstatement, Respondent shall also submit a +signed affidavit truthfully stating, under penalty of perjury: + +1. That Respondent has complied with the Commission suspension Order, and +with any related orders and undertakings, including any orders in these +proceedings or any related Commission proceedings, including any orders +requiring payment of disgorgement or penalties; + +2. That Respondent is not currently suspended or disbarred as an attorney by a +court of the United States (or any agency of the United States) or the bar or +court of any state, territory, district, commonwealth, or possession; + +3. That Respondent, since the entry of the Order, has not been convicted of a +felony or a misdemeanor involving moral turpitude that would constitute a +basis for a forthwith suspension from appearing or practicing before the +Commission pursuant to Rule 102(e)(2); + +4. That Respondent, since the entry of the Order: + +a. has not been charged with a felony or a misdemeanor involving +moral turpitude as set forth in Rule 102(e)(2) of the Commission’s +Rules of Practice, except for any charge concerning the conduct that +was the basis for the Order; + +b. has not been found by the Commission or a court of the United +States to have committed a violation of the federal securities laws, +and has not been enjoined from violating the federal securities laws, +except for any finding or injunction concerning the conduct that was +the basis for the Order; + +c. has not been charged by the Commission or the United States with a +violation of the federal securities laws, except for any charge +concerning the conduct that was the basis for the Order; + +d. has not been found by a court of the United States (or any agency of +the United States) or any state, territory, district, commonwealth, or +possession, or any bar thereof to have committed an offense (civil or + + +8 +criminal) involving moral turpitude, except for any finding +concerning the conduct that was the basis for the Order; + +e. has not been charged by the United States (or any agency of the +United States) or any state, territory, district, commonwealth, or +possession, civilly or criminally, with having committed an act of +moral turpitude, except for any charge concerning the conduct that +was the basis for the Order; and + +f. has not been subject to disciplinary action by a bar, court or agency +of any state for violations of applicable rules of professional +conduct, except for any charge concerning the conduct that was the +basis for the Order; + +5. That Respondent’s conduct is not at issue in any pending investigation of +the Commission’s Division of Enforcement or any criminal law +enforcement investigation. + +6. That Respondent is not the subject of any complaints to, or investigations +by, the bar or court of any state, territory, district, commonwealth, or +possession, except to the extent that such complaints concern the conduct +that was the basis for the Order; + +7. That Respondent has complied with any and all orders, undertakings, or +other remedial, disciplinary, or punitive sanctions resulting from any action +taken by the bar or court of any state, territory, district, commonwealth, or +possession, or other regulatory body; and + +8. That Respondent undertakes to notify the Office of General Counsel +immediately in writing if any information submitted in support of the +application for reinstatement becomes materially false or misleading or +otherwise changes in any material way while the application is pending. + +F. Respondent shall also provide a detailed description of: + +1. Respondent’s professional history since the imposition of the Order, including + +(a) all job titles, responsibilities and role at any employer; + +(b) the identification and description of any work performed for entities +regulated by the Commission, and the persons to whom Respondent reported for +such work; + + + +9 +2. The circumstances under which Respondent’s membership in a state bar or any +court for which Respondent was a member has lapsed or otherwise is no longer +active and an explanation of why for each; and + +3. Respondent’s plans for any future appearance or practice before the +Commission. + +G. The Commission may conduct its own investigation to determine if the foregoing +attestations are accurate. + +H. If Respondent provides the documentation and attestations required in this Order +and the Commission (1) discovers no contrary information therein, and (2) determines that +Respondent truthfully and accurately attested to each of the items required in Respondent’s +affidavit, and the Commission discovers no information, including under Paragraph G, indicating +that Respondent has violated a federal securities law, rule or regulation or rule of professional +conduct applicable to Respondent since entry of the Order (other than by conduct underlying +Respondent’s original Rule 102(e) suspension), then, unless the Commission determines that +reinstatement would not be in the public interest, the Commission shall reinstate the respondent for +cause shown. +. + +I. If Respondent is not able to provide the documentation and truthful and accurate +attestations required in this Order or if the Commission has discovered contrary information, +including under Paragraph G, the burden shall be on the Respondent to provide an explanation as +to the facts and circumstances pertaining to the matter setting forth why Respondent believes cause +for reinstatement nonetheless exists and reinstatement would not be contrary to the public interest. +The Commission may then, in its discretion, reinstate the Respondent for cause shown. + +J. If the Commission declines to reinstate Respondent pursuant to Paragraphs H and I, +it may, at Respondent’s request, hold a hearing to determine whether cause has been shown to +permit Respondent to resume appearing and practicing before the Commission as an attorney. + + + + +K. Respondent Hurak shall, within 14 days of the entry of this Order, pay a civil +money penalty in the amount of $20,000.00 to the Securities and Exchange Commission for +transfer to the general fund of the United States Treasury, subject to Exchange Act Section +21F(g)(3). If timely payment is not made, additional interest shall accrue pursuant to 31 U.S.C. +§3717. + +Payment must be made in one of the following ways: + + + +10 +(1) Respondent may transmit payment electronically to the Commission, which +will provide detailed ACH transfer/Fedwire instructions upon request; + +(2) Respondent may make direct payment from a bank account via Pay.gov +through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or + +(3) Respondent may pay by certified check, bank cashier’s check, or United +States postal money order, made payable to the Securities and Exchange +Commission and hand-delivered or mailed to: + +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + +Payments by check or money order must be accompanied by a cover letter identifying Philip S. +Hurak as a Respondent in these proceedings, and the file number of these proceedings; a copy of +the cover letter and check or money order must be sent to Carolyn Welshhans, Division of +Enforcement, Securities and Exchange Commission, 100 F St. NE, Washington, DC 20549. + + L. Amounts ordered to be paid as civil money penalties pursuant to this Order shall be +treated as penalties paid to the government for all purposes, including all tax purposes. To +preserve the deterrent effect of the civil penalty, Respondent agrees that in any Related Investor +Action, he shall not argue that he is entitled to, nor shall he benefit by, offset or reduction of any +award of compensatory damages by the amount of any part of Respondent’s payment of a civil +penalty in this action ("Penalty Offset"). If the court in any Related Investor Action grants such a +Penalty Offset, Respondent agrees that he shall, within 30 days after entry of a final order granting +the Penalty Offset, notify the Commission's counsel in this action and pay the amount of the +Penalty Offset to the Securities and Exchange Commission. Such a payment shall not be deemed +an additional civil penalty and shall not be deemed to change the amount of the civil penalty +imposed in this proceeding. For purposes of this paragraph, a “Related Investor Action” means a +private damages action brought against Respondent by or on behalf of one or more investors based +on substantially the same facts as alleged in the Order instituted by the Commission in this +proceeding. + +V. +It is further Ordered that, solely for purposes of exceptions to discharge set forth in Section +523 of the Bankruptcy Code, 11 U.S.C. § 523, the findings in this Order are true and admitted by +Respondent, and further, any debt for disgorgement, prejudgment interest, civil penalty or other +amounts due by Respondent under this Order or any other judgment, order, consent order, decree +or settlement agreement entered in connection with this proceeding, is a debt for the violation by +Respondent of the federal securities laws or any regulation or order issued under such laws, as set + + +11 +forth in Section 523(a)(19) of the Bankruptcy Code, 11 U.S.C. § 523(a)(19). + + + By the Commission. + + + +Vanessa A. Countryman +Secretary + + + \ No newline at end of file diff --git a/raw/filings/0000320187/2014/0000320187-15-000113/filing.txt b/raw/filings/0000320187/2014/0000320187-15-000113/filing.txt new file mode 100644 index 0000000000000000000000000000000000000000..308f3509dac8f6f85c54185bb7d25ae31fbdd3ae --- /dev/null +++ b/raw/filings/0000320187/2014/0000320187-15-000113/filing.txt @@ -0,0 +1,6685 @@ +10-K +1 +nke-5312015x10k.htm +10-K +NKE - 5.31.2015 - 10K +Table of Contents +UNITED STATES +SECURITIES AND EXCHANGE COMMISSION +Washington, D.C. 20549 +FORM 10-K +(Mark One) +þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 +FOR THE FISCAL YEAR ENDED May 31, 2015 +OR +¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 +FOR THE TRANSITION PERIOD FROM TO . +Commission File No. 1-10635 +NIKE, Inc . +(Exact name of Registrant as specified in its charter) +OREGON +93-0584541 +(State or other jurisdiction of incorporation) +(IRS Employer Identification No.) +One Bowerman Drive, Beaverton, Oregon +97005-6453 +(Address of principal executive offices) +(Zip Code) +(503) 671-6453 +(Registrant’s Telephone Number, Including Area Code) +SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: +Class B Common Stock +New York Stock Exchange +(Title of Each Class) +(Name of Each Exchange on Which Registered) +SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: +NONE +Indicate by check mark: +YES +NO +• +if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. +þ +¨ +• +if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. +¨ +þ +• +whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. +þ +¨ +• +whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). +þ +¨ +• +if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. +þ +• +whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. +Large accelerated filer þ +Accelerated filer ¨ +Non-accelerated filer ¨ +Smaller reporting company ¨ +• +whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). +¨ +þ +As of November 30, 2014, the aggregate market values of the Registrant’s Common Stock held by non-affiliates were: +Class A +$ +4,394,312,083 +Class B +67,997,995,244 +$ +72,392,307,327 +As of July 17, 2015, the number of shares of the Registrant’s Common Stock outstanding were: +Class A +177,457,876 +Class B +677,893,713 +855,351,589 +DOCUMENTS INCORPORATED BY REFERENCE: +Parts of Registrant’s Proxy Statement for the Annual Meeting of Shareholders to be held on September 17, 2015 are incorporated by reference into Part III of this Report . +Table of Contents +NIKE, INC. +ANNUAL REPORT ON FORM 10-K +Table of Contents +Page +PART I +1 +ITEM 1. +Business +1 +General +1 +Products +1 +Sales and Marketing +2 +United States Market +2 +International Markets +2 +Significant Customer +3 +Orders +3 +Product Research, Design and Development +3 +Manufacturing +3 +International Operations and Trade +4 +Competition +4 +Trademarks and Patents +4 +Employees +5 +Executive Officers of the Registrant +5 +ITEM 1A. +Risk Factors +6 +ITEM 1B. +Unresolved Staff Comments +15 +ITEM 2. +Properties +15 +ITEM 3. +Legal Proceedings +15 +ITEM 4. +Mine Safety Disclosures +15 +PART II +16 +ITEM 5. +Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities +16 +ITEM 6. +Selected Financial Data +18 +ITEM 7. +Management’s Discussion and Analysis of Financial Condition and Results of Operations +20 +ITEM 7A. +Quantitative and Qualitative Disclosures about Market Risk +42 +ITEM 8. +Financial Statements and Supplementary Data +43 +ITEM 9. +Changes in and Disagreements with Accountants on Accounting and Financial Disclosure +74 +ITEM 9A. +Controls and Procedures +74 +ITEM 9B. +Other Information +74 +PART III +75 +(Except for the information set forth under “Executive Officers of the Registrant” in Item 1 above, Part III is incorporated by reference from the Proxy Statement for the NIKE, Inc. 2015 Annual Meeting of Shareholders.) +ITEM 10. +Directors, Executive Officers and Corporate Governance +75 +ITEM 11. +Executive Compensation +75 +ITEM 12. +Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters +75 +ITEM 13. +Certain Relationships and Related Transactions and Director Independence +75 +ITEM 14. +Principal Accountant Fees and Services +75 +PART IV +76 +ITEM 15. +Exhibits and Financial Statement Schedules +76 +Signatures +80 +Table of Contents +PART I +ITEM 1. Business +General +NIKE, Inc. was incorporated in 1967 under the laws of the State of Oregon. As used in this report, the terms “we,” “us,” “NIKE,” and the “Company” refer to NIKE, Inc. and its predecessors, subsidiaries and affiliates, collectively, unless the context indicates otherwise. Our NIKE e-commerce website is located at www.nike.com. On our NIKE corporate website, located at news.nike.com, we post the following filings as soon as reasonably practicable after they are electronically filed with or furnished to the United States Securities and Exchange Commission (the “SEC”): our annual report on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities and Exchange Act of 1934, as amended. Our definitive Proxy Statements are also posted on our corporate website. All such filings on our corporate website are available free of charge. Copies of these filings may also be obtained by visiting the Public Reference Room of the SEC at 100 F Street, NE, Washington, D.C. 20549, or by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains a website ( www.sec.gov ) that contains current, quarterly and annual reports, proxy and information statements and other information regarding issuers that file electronically. Also available on our corporate website are the charters of the committees of our Board of Directors, as well as our corporate governance guidelines and code of ethics; copies of any of these documents will be provided in print to any shareholder who submits a request in writing to NIKE Investor Relations, One Bowerman Drive, Beaverton, Oregon 97005-6453. +Our principal business activity is the design, development and worldwide marketing and selling of athletic footwear, apparel, equipment, accessories and services. NIKE is the largest seller of athletic footwear and apparel in the world. We sell our products to retail accounts, through NIKE-owned retail stores and internet websites (which we refer to as our “Direct to Consumer” or "DTC" operations), and through a mix of independent distributors and licensees throughout the world. Virtually all of our products are manufactured by independent contractors. Practically all footwear and apparel products are produced outside the United States, while equipment products are produced both in the United States and abroad. +Products +We focus our NIKE Brand product offerings in eight key categories: Running, Basketball, Football (Soccer), Men’s Training, Women’s Training, Action Sports, Sportswear (our sports-inspired lifestyle products) and Golf. Basketball includes our Jordan Brand product offerings and Men's Training includes our baseball and American football product offerings. We also market products designed for kids, as well as for other athletic and recreational uses such as cricket, lacrosse, tennis, volleyball, wrestling, walking and outdoor activities. +NIKE’s athletic footwear products are designed primarily for specific athletic use, although a large percentage of the products are worn for casual or leisure purposes. We place considerable emphasis on high-quality construction and innovation in our products. Sportswear, Running, Basketball and Football (Soccer) are currently our top-selling footwear categories and we expect them to continue to lead in footwear sales. +We sell sports apparel covering most of the above-mentioned categories, which feature the same trademarks and are sold predominantly through the same marketing and distribution channels as athletic footwear. Our sports apparel, similar to our athletic footwear products, is designed primarily for athletic use and exemplifies our commitment to innovation and high-quality construction. Sportswear, Men's Training, Running and Football (Soccer) are currently our top-selling apparel categories and we expect them to continue to lead in apparel sales. We often market footwear, apparel and accessories in “collections” of similar use or by category. We also market apparel with licensed college and professional team and league logos. +We sell a line of performance equipment and accessories under the NIKE Brand name, including bags, socks, sport balls, eyewear, timepieces, digital devices, bats, gloves, protective equipment, golf clubs and other equipment designed for sports activities. We also sell small amounts of various plastic products to other manufacturers through our wholly owned subsidiary, NIKE IHM, Inc. +Our Jordan Brand designs, distributes and licenses athletic and casual footwear, apparel and accessories predominantly focused on Basketball using the Jumpman trademark. Sales and operating results for the Jordan Brand are included within the NIKE Brand Basketball category and within the respective NIKE Brand geographic operating segments. +One of our wholly owned subsidiary brands, Hurley, headquartered in Costa Mesa, California (“Hurley”), designs and distributes a line of action sports and youth lifestyle apparel and accessories under the Hurley trademark. Sales and operating results for Hurley are included within the NIKE Brand Action Sports category and within the NIKE Brand's North America geographic operating segment, respectively. +Another of our wholly owned subsidiary brands, Converse, headquartered in Boston, Massachusetts (“Converse”), designs, distributes and licenses casual sneakers, apparel and accessories under the Converse, Chuck Taylor, All Star, One Star, Star Chevron and Jack Purcell trademarks. Operating results of the Converse brand are reported on a stand-alone basis. +In addition to the products we sell to our wholesale customers and directly to consumers through our DTC operations, we have also entered into license agreements that permit unaffiliated parties to manufacture and sell, using NIKE-owned trademarks, certain apparel, digital devices and applications and other equipment designed for sports activities. +On February 1, 2013, and November 30, 2012, we completed the divestitures of the Cole Haan and Umbro businesses, respectively, allowing us to better focus our resources on driving growth in the NIKE, Jordan, Hurley and Converse brands. +1 +Table of Contents +Sales and Marketing +Financial information about geographic and segment operations appears in Note 18 — Operating Segments and Related Information of the accompanying Notes to the Consolidated Financial Statements. +We experience moderate fluctuations in aggregate sales volume during the year. Historically, revenues in the first and fourth fiscal quarters have slightly exceeded those in the second and third quarters. However, the mix of product sales may vary considerably as a result of changes in seasonal and geographic demand for particular types of footwear, apparel and equipment, as well as other macroeconomic, operating and logistics-related factors. +Because NIKE is a consumer products company, the relative popularity of various sports and fitness activities and changing design trends affect the demand for our products. We must, therefore, respond to trends and shifts in consumer preferences by adjusting the mix of existing product offerings, developing new products, styles and categories and influencing sports and fitness preferences through extensive marketing. Failure to respond in a timely and adequate manner could have a material adverse effect on our sales and profitability. This is a continuing risk. We report our NIKE Brand operations based on our internal geographic organization. Each NIKE Brand geography operates predominantly in one industry: the design, development, marketing and selling of athletic footwear, apparel, equipment, accessories and services. Our reportable operating segments for the NIKE Brand are: North America, Western Europe, Central & Eastern Europe, Greater China, Japan and Emerging Markets. Our NIKE Brand Direct to Consumer operations are managed within each geographic operating segment. +Converse is also a reportable segment, and operates in one industry: the design, marketing, licensing and selling of casual sneakers, apparel and accessories. +United States Market +For both fiscal 2015 and fiscal 2014 , NIKE Brand and Converse sales in the United States accounted for approximately 46% of total revenues, compared to 45% for fiscal 2013 . We sell our NIKE Brand, Jordan Brand, Hurley and Converse products to thousands of retail accounts in the United States, including a mix of footwear stores, sporting goods stores, athletic specialty stores, department stores, skate, tennis and golf shops and other retail accounts. In the United States, we utilize NIKE sales offices to solicit sales as well as independent sales representatives to sell specialty products for golf and skateboarding. During fiscal 2015 , our three largest customers accounted for approximately 26% of sales in the United States. +We make substantial use of our futures ordering program, which allows retailers to order five to six months in advance of delivery with the commitment that their orders will be delivered within a set time period at a fixed price. In fiscal 2015 , 87% of our U.S. wholesale footwear shipments (excluding NIKE Golf, Hurley and Converse) were made under the futures program, compared to 86% in fiscal 2014 and 87% in fiscal 2013 . In fiscal 2015 , 67% of our U.S. wholesale apparel shipments (excluding NIKE Golf, Hurley and Converse) were made under the futures program, compared to 71% in fiscal 2014 and 67% in fiscal 2013 . +Our Direct to Consumer operations sell NIKE Brand products, including Jordan Brand and Hurley, to consumers through our e-commerce website, www.nike.com . We also sell Converse products to consumers through a Converse owned e-commerce website, www.converse.com . In addition, our Direct to Consumer operations sell through the following number of retail stores in the United States: +U.S. Retail Stores +Number +NIKE Brand factory stores +185 +NIKE Brand in-line stores, including employee-only stores +33 +Converse stores (including factory stores) +92 +Hurley stores (including factory and employee stores) +29 +TOTAL +339 +NIKE owns a full product line distribution center located in Memphis, Tennessee. In addition, NIKE has four other distribution centers, three of which are leased, also located in Memphis. NIKE Brand apparel and equipment products are also shipped from our leased Foothill Ranch, California distribution center. Converse and Hurley products are shipped primarily from leased facilities in Ontario, California. +International Markets +For both fiscal 2015 and fiscal 2014 , non-U.S. NIKE Brand and Converse sales accounted for 54% of total revenues, compared with 55% for fiscal 2013 . We sell our products to retail accounts, through our own Direct to Consumer operations and through a mix of independent distributors, licensees and sales representatives around the world. We sell to thousands of retail accounts and ship products from 45 distribution centers outside of the United States. In many countries and regions, including Canada, Asia, some Latin American countries and Europe, we have a futures ordering program for retailers similar to the United States futures ordering program described above. During fiscal 2015 , NIKE’s three largest customers outside of the United States accounted for approximately 12% of total non-U.S. sales. +Our Direct to Consumer business operates the following number of retail stores outside the United States, in addition to NIKE and Converse owned e-commerce websites in over 25 countries: +Non-U.S. Retail Stores +Number +NIKE Brand factory stores +512 +NIKE Brand in-line stores, including employee-only stores +73 +Converse stores (including factory stores) +7 +TOTAL +592 +2 +Table of Contents +International branch offices and subsidiaries of NIKE are located in Argentina, Australia, Austria, Belgium, Bermuda, Brazil, Canada, Chile, China, Croatia, Cyprus, the Czech Republic, Denmark, Finland, France, Germany, Greece, Hong Kong, Hungary, India, Indonesia, Ireland, Israel, Italy, Japan, Korea, Malaysia, Mexico, New Zealand, the Netherlands, Norway, Panama, the Philippines, Poland, Portugal, Russia, Singapore, Slovakia, Slovenia, South Africa, Spain, Sri Lanka, Sweden, Switzerland, Taiwan, Thailand, Turkey, the United Arab Emirates, the United Kingdom, Uruguay and Vietnam. +Significant Customer +No customer accounted for 10% or more of our worldwide net sales during fiscal 2015 . +Orders +Worldwide futures orders for NIKE Brand athletic footwear and apparel, scheduled for delivery from June through November 2015, were $13.5 billion compared with $13.3 billion for the same period last year. This futures orders amount is calculated based upon our forecast of the actual currency exchange rates under which our revenues will be translated during this period. Reported futures orders are not necessarily indicative of our expectation of revenues for this period. This is because the mix of orders can shift between futures and at-once orders and the fulfillment of certain of these futures orders may fall outside of the scheduled time period noted above. In addition, foreign currency exchange rate fluctuations as well as differing levels of discounts, order cancellations and returns can cause differences in the comparisons between futures orders and actual revenues. Moreover, a portion of our revenue is not derived from futures orders, including at-once and closeout sales of NIKE Brand footwear and apparel, sales of NIKE Brand equipment, sales from our Direct to Consumer operations and sales from our Converse, Hurley and NIKE Golf businesses. +Product Research, Design and Development +We believe our research, design and development efforts are key factors in our success. Technical innovation in the design and manufacturing process of footwear, apparel and athletic equipment receive continued emphasis as NIKE strives to produce products that help to enhance athletic performance, reduce injury and maximize comfort while reducing waste. +In addition to NIKE’s own staff of specialists in the areas of biomechanics, chemistry, exercise physiology, engineering, industrial design, sustainability and related fields, we also utilize research committees and advisory boards made up of athletes, coaches, trainers, equipment managers, orthopedists, podiatrists and other experts who consult with us and review designs, materials, concepts for product and manufacturing process improvements and compliance with product safety regulations around the world. Employee athletes, athletes engaged under sports marketing contracts and other athletes wear-test and evaluate products during the design and development process. +As we continue to develop new technologies, NIKE is simultaneously focused on the design of innovative products incorporating such technologies throughout our product categories. Using market intelligence and research, the various NIKE design teams identify opportunities to leverage new technologies in existing categories responding to consumer preferences. The proliferation of NIKE Air, Lunar, Zoom, Free, Flywire, Dri-Fit, Flyknit, Flyweave and NIKE+ technologies through Running, Basketball, Men's Training, Women's Training and Sportswear, among others, typifies our dedication to designing innovative products. +Manufacturing +We are supplied by approximately 146 footwear factories located in 14 countries. The largest single footwear factory accounted for approximately 7% of total fiscal 2015 NIKE Brand footwear production. Virtually all of our footwear is manufactured outside of the United States by independent contract manufacturers who often operate multiple factories. In fiscal 2015 , contract factories in Vietnam, China and Indonesia manufactured approximately 43%, 32% and 20% of total NIKE Brand footwear, respectively. We also have manufacturing agreements with independent factories in Argentina, Brazil, India and Mexico to manufacture footwear for sale primarily within those countries. In fiscal 2015 , five footwear contract manufacturers each accounted for greater than 10% of footwear production, and in aggregate accounted for approximately 69% of NIKE Brand footwear production. +We are supplied by approximately 408 apparel factories located in 39 countries. The largest single apparel factory accounted for approximately 11% of total fiscal 2015 NIKE Brand apparel production. Virtually all of our apparel is manufactured outside of the United States by independent contract manufacturers which often operate multiple factories. In fiscal 2015 , most of this apparel production occurred in China, Vietnam, Sri Lanka, Thailand, Indonesia, Malaysia and Cambodia. In fiscal 2015 , one apparel contract manufacturer accounted for more than 10% of apparel production, and the top five contract manufacturers in aggregate accounted for approximately 36% of NIKE Brand apparel production. +The principal materials used in our footwear products are natural and synthetic rubber, plastic compounds, foam cushioning materials, natural and synthetic leather, nylon, polyester and canvas, as well as polyurethane films used to make NIKE Air-Sole cushioning components. During fiscal 2015 , NIKE IHM, Inc., a wholly-owned subsidiary of NIKE, Inc., with facilities near Beaverton, Oregon and in St. Louis, Missouri, and independent contractors in China and Vietnam, were our largest suppliers of the Air-Sole cushioning components used in footwear. The principal materials used in our apparel products are natural and synthetic fabrics and threads (both virgin and recycled); specialized performance fabrics designed to efficiently wick moisture away from the body, retain heat and repel rain and/or snow; and plastic and metal hardware. NIKE’s independent contractors and suppliers buy raw materials for the manufacturing of our footwear, apparel and equipment products. Most raw materials are available and purchased by those independent contractors and suppliers in the countries where manufacturing takes place. NIKE's independent contract manufacturers and suppliers have thus far experienced little difficulty in satisfying raw material requirements for the production of our products. +3 +Table of Contents +Since 1972, Sojitz Corporation of America (“Sojitz America”), a large Japanese trading company and the sole owner of our redeemable preferred stock, has performed significant import-export financing services for us. During fiscal 2015 , Sojitz America provided financing and purchasing services for NIKE Brand products sold in certain NIKE markets including Argentina, Uruguay, Canada, Brazil, India, Indonesia, the Philippines, South Africa and Thailand, excluding products produced and sold in the same country. Approximately 8% of NIKE Brand sales occurred in those countries. Any failure of Sojitz America to provide these services or any failure of Sojitz America’s banks could disrupt our ability to acquire products from our suppliers and to deliver products to our customers in those markets. Such a disruption could result in canceled orders that would adversely affect sales and profitability. However, we believe that any such disruption would be short-term in duration due to the ready availability of alternative sources of financing at competitive rates. Our current agreements with Sojitz America expire on May 31, 2018, and contain a provision allowing us to extend the agreements to May 31, 2019. +International Operations and Trade +Our international operations and sources of supply are subject to the usual risks of doing business abroad, such as possible increases in import duties, anti-dumping measures, quotas, safeguard measures, trade restrictions, restrictions on the transfer of funds and, in certain parts of the world, political instability and terrorism. We have not, to date, been materially affected by any such risk, but cannot predict the likelihood of such material effects occurring in the future. +In recent years, uncertain global and regional economic conditions have affected international trade and caused a rise in protectionist actions around the world. These trends are affecting many global manufacturing and service sectors, and the footwear and apparel industries, as a whole, are not immune. Companies in our industry are facing trade protectionism in many different regions, and in nearly all cases we are working together with industry groups to address trade issues and reduce the impact to the industry, while observing applicable competition laws. Notwithstanding our efforts, protectionist measures have resulted in increases in the cost of our products, and additional measures, if implemented, could adversely affect sales and/or profitability for NIKE as well as the imported footwear and apparel industry as a whole. +We monitor protectionist trends and developments throughout the world that may materially impact our industry, and we engage in administrative and judicial processes to mitigate trade restrictions. In Brazil and Argentina, we are actively participating in dumping investigations against footwear from China and actively monitoring actions in other countries that may result in additional anti-dumping measures and could affect our industry. We are also monitoring for and advocating against other impediments that may limit or delay customs clearance for imports of footwear, apparel and equipment. Moreover, with respect to trade restrictions targeting China, which represents an important sourcing country and consumer market for us, we are working with a broad coalition of global businesses and trade associations representing a wide variety of sectors to help ensure that any legislation enacted and implemented (i) addresses legitimate and core concerns, (ii) is consistent with international trade rules, and (iii) reflects and considers China's domestic economy and the important role it has in the global economic community. +Where trade protection measures are implemented, we believe that we have the ability to develop, over a period of time, adequate alternative sources of supply for the products obtained from our present suppliers. If events prevented us from acquiring products from our suppliers in a particular country, our operations could be temporarily disrupted and we could experience an adverse financial impact. However, we believe we could abate any such disruption, and that much of the adverse impact on supply would, therefore, be of a short-term nature, although alternate sources of supply might not be as cost-effective and could have an ongoing adverse impact on profitability. +NIKE advocates for trade liberalization for footwear and apparel in a number of regional and bilateral free trade agreements. The passage of Trade Promotion Authority in the United States will enable the conclusion of the Trans-Pacific Partnership (TPP). If ultimately passed, the TPP has the potential to reduce or eliminate high rates of customs duties for imports into the United States of NIKE products sourced from TPP countries (primarily footwear and apparel from Vietnam and apparel from Malaysia). Similarly, the European Union is close to concluding a free trade agreement with Vietnam that could lead to duty reduction or elimination for footwear and apparel. +Competition +The athletic footwear, apparel and equipment industry is highly competitive on a worldwide basis. We compete internationally with a significant number of athletic and leisure footwear companies, athletic and leisure apparel companies, sports equipment companies and large companies having diversified lines of athletic and leisure footwear, apparel and equipment, including adidas, Li Ning, lululemon athletica, Puma, V.F. Corp., Under Armour and UNIQLO, among others. The intense competition and the rapid changes in technology and consumer preferences in the markets for athletic and leisure footwear and apparel, and athletic equipment, constitute significant risk factors in our operations. +NIKE is the largest seller of athletic footwear, apparel and equipment in the world. Important aspects of competition in this industry are: +• +Product attributes such as quality; performance and reliability; new product innovation and development and consumer price/value. +• +Consumer connection and affinity for brands and products, developed through marketing and promotion; social media interaction; customer support and service; identification with prominent and influential athletes, coaches, teams, colleges and sports leagues who endorse our brands and use our products and active engagement through sponsored sporting events and clinics. +• +Effective sourcing and distribution of products, with attractive merchandising and presentation at retail, both in-store and online. +We believe that we are competitive in all of these areas. +Trademarks and Patents +We utilize trademarks on nearly all of our products and believe having distinctive marks that are readily identifiable is an important factor in creating a market for our goods, in identifying our brands and the Company and in distinguishing our goods from the goods of others. We consider our NIKE and Swoosh Design trademarks to be among our most valuable assets and we have registered these trademarks in almost 170 jurisdictions worldwide. In addition, we own many other trademarks that we utilize in marketing our products. We own common law rights in the trade dress of several significant shoe designs and elements. For certain trade dress, we have sought and obtained trademark registrations. +NIKE has copyright protection in its design, graphics and other original works. When appropriate, we have sought registrations for this content. +4 +Table of Contents +NIKE owns patents, and has a patent license, facilitating its use of “Air” technologies. The "Air" process utilizes pressurized gas encapsulated in polyurethane. Some of the early patents directed to the “Air” technologies have expired, which may enable competitors to use certain types of similar technology. Subsequent NIKE patents directed to the “Air” technologies will not expire for several years. +We also file and maintain many U.S. and foreign utility patents, as well as many U.S. and foreign design patents protecting components, manufacturing techniques, features and industrial design used in various athletic and leisure footwear, apparel, athletic equipment, digital devices and golf products. These patents expire at various times; and patents issued for original applications filed this calendar year in the United States may last until 2030 for design patents and until 2035 for utility patents. +We believe our success depends primarily upon our capabilities in areas such as design, research and development, production and marketing rather than exclusively upon our patent and trade secret positions. However, we have followed a policy of filing patent applications for the United States and select foreign countries on inventions, designs and improvements that we deem valuable. We also continue to vigorously protect our trademarks and patents against third-party infringement. +Employees +As of May 31, 2015 , we had approximately 62,600 employees worldwide, including retail and part-time employees. Management considers its relationship with employees to be excellent. None of our employees are represented by a union, except for certain employees in the Emerging Markets geography, where local law requires those employees to be represented by a trade union. Also, in some countries outside of the United States, local laws require employee representation by works councils (which may be entitled to information and consultation on certain Company decisions) or by organizations similar to a union. In certain European countries, we are required by local law to enter into and/or comply with industry-wide or national collective bargaining agreements. NIKE has never experienced a material interruption of operations due to labor disagreements. +Executive Officers of the Registrant +The executive officers of NIKE, Inc. as of July 17, 2015 are as follows: +Philip H. Knight, Chairman of the Board of Directors — Mr. Knight, 77, a director since 1968, is a co-founder of NIKE and, except for the period from June 1983 through September 1984, served as its President from 1968 to 1990 and from June 2000 to December 2004. Prior to 1968, Mr. Knight was a certified public accountant with Price Waterhouse and Coopers & Lybrand and was an Assistant Professor of Business Administration at Portland State University. +Mark G. Parker, President and Chief Executive Officer — Mr. Parker, 59, was appointed President and Chief Executive Officer in January 2006. He has been employed by NIKE since 1979 with primary responsibilities in product research, design and development, marketing and brand management. Mr. Parker was appointed divisional Vice President in charge of product development in 1987, corporate Vice President in 1989, General Manager in 1993, Vice President of Global Footwear in 1998 and President of the NIKE Brand in 2001. +David J. Ayre, Executive Vice President, Global Human Resources — Mr. Ayre, 55, joined NIKE as Vice President, Global Human Resources in 2007. Prior to joining NIKE, he held a number of senior human resource positions with PepsiCo, Inc. since 1990, most recently as head of Talent and Performance Rewards. +Donald W. Blair, Executive Vice President and Chief Financial Officer — Mr. Blair, 57, joined NIKE in November 1999. Prior to joining NIKE, he held a number of financial management positions with PepsiCo, Inc., including Vice President, Finance of Pepsi-Cola Asia, Vice President, Planning of PepsiCo’s Pizza Hut Division and Senior Vice President, Finance of The Pepsi Bottling Group, Inc. Prior to joining PepsiCo, Mr. Blair was a certified public accountant with Deloitte, Haskins & Sells. +Trevor A. Edwards, President, NIKE Brand — Mr. Edwards, 52, joined NIKE in 1992. He was appointed Marketing Manager, Strategic Accounts for Foot Locker in 1993, Director of Marketing for the Americas in 1995, Director of Marketing for Europe in 1997, Vice President, Marketing for Europe, Middle East and Africa in 1999 and Vice President, U.S. Brand Marketing in 2000. Mr. Edwards was appointed corporate Vice President, Global Brand Management in 2002, Vice President, Global Brand and Category Management in 2006 and President, NIKE Brand in 2013. Prior to NIKE, Mr. Edwards was with the Colgate-Palmolive Company. +Jeanne P. Jackson, President, Product and Merchandising — Ms. Jackson, 63, joined NIKE in 2009. She was appointed President, Direct to Consumer in 2009 and President, Product and Merchandising in 2013. Ms. Jackson also served as a member of the NIKE, Inc. Board of Directors from 2001 through 2009. She founded and served as Chief Executive Officer of MSP Capital, a private investment company, from 2002 to 2009. Ms. Jackson was Chief Executive Officer of Walmart.com from March 2000 to January 2002. She was with Gap, Inc., as President and Chief Executive Officer of Banana Republic from 1995 to 2000, also serving as Chief Executive Officer of Gap, Inc. Direct from 1998 to 2000. Since 1978, she has held various retail management positions with Victoria’s Secret, The Walt Disney Company, Saks Fifth Avenue and Federated Department Stores. +Hilary K. Krane, Executive Vice President, Chief Administrative Officer and General Counsel — Ms. Krane, 51, joined NIKE as Vice President and General Counsel in April 2010. In 2011, her responsibilities expanded and she became Vice President, General Counsel and Corporate Affairs. Ms. Krane was appointed to Executive Vice President, Chief Administrative Officer and General Counsel in 2013. Prior to joining NIKE, Ms. Krane was General Counsel and Senior Vice President for Corporate Affairs at Levi Strauss & Co. from 2006 to 2010. From 1996 to 2006, she was a partner and assistant general counsel at PricewaterhouseCoopers LLP. +John F. Slusher, Executive Vice President, Global Sports Marketing — Mr. Slusher, 46, has been employed by NIKE since 1998 with primary responsibilities in global sports marketing. Mr. Slusher was appointed Director of Sports Marketing for the Asia Pacific and Americas in 2006, divisional Vice President of Asia Pacific & Americas Sports Marketing in September 2007 and Vice President, Global Sports Marketing in November 2007. Prior to joining NIKE, Mr. Slusher was an attorney at the law firm of O’Melveny & Myers from 1995 to 1998. +Eric D. Sprunk, Chief Operating Officer — Mr. Sprunk, 51, joined NIKE in 1993. He was appointed Finance Director and General Manager of the Americas in 1994, Finance Director for NIKE Europe in 1995, Regional General Manager of NIKE Europe Footwear in 1998 and Vice President & General Manager of the Americas in 2000. Mr. Sprunk was appointed Vice President of Global Footwear in 2001, Vice President of Merchandising and Product in 2009 and Chief Operating Officer in 2013. Prior to joining NIKE, Mr. Sprunk was a certified public accountant with Price Waterhouse from 1987 to 1993. +5 +Table of Contents +ITEM 1A. Risk Factors +Special Note Regarding Forward-Looking Statements and Analyst Reports +Certain written and oral statements, other than purely historic information, including estimates, projections, statements relating to NIKE’s business plans, objectives and expected operating results and the assumptions upon which those statements are based, made or incorporated by reference from time to time by NIKE or its representatives in this report, other reports, filings with the SEC, press releases, conferences or otherwise, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements include, without limitation, any statement that may predict, forecast, indicate or imply future results, performance or achievements, and may contain the words “believe,” “anticipate,” “expect,” “estimate,” “project,” “will be,” “will continue,” “will likely result” or words or phrases of similar meaning. Forward-looking statements involve risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. The risks and uncertainties are detailed from time to time in reports filed by NIKE with the SEC, including reports filed on Forms 8-K, 10-Q and 10-K, and include, among others, the following: international, national and local general economic and market conditions; the size and growth of the overall athletic footwear, apparel and equipment markets; intense competition among designers, marketers, distributors and sellers of athletic footwear, apparel and equipment for consumers and endorsers; demographic changes; changes in consumer preferences; popularity of particular designs, categories of products and sports; seasonal and geographic demand for NIKE products; difficulties in anticipating or forecasting changes in consumer preferences, consumer demand for NIKE products and the various market factors described above; difficulties in implementing, operating and maintaining NIKE’s increasingly complex information systems and controls, including, without limitation, the systems related to demand and supply planning and inventory control; interruptions in data and information technology systems; consumer data security; fluctuations and difficulty in forecasting operating results, including, without limitation, the fact that advance futures orders may not be indicative of future revenues due to changes in shipment timing, the changing mix of futures and at-once orders, and discounts, order cancellations and returns; the ability of NIKE to sustain, manage or forecast its growth and inventories; the size, timing and mix of purchases of NIKE’s products; increases in the cost of materials, labor and energy used to manufacture products; new product development and introduction; the ability to secure and protect trademarks, patents and other intellectual property; product performance and quality; customer service; adverse publicity; the loss of significant customers or suppliers; dependence on distributors and licensees; business disruptions; increased costs of freight and transportation to meet delivery deadlines; increases in borrowing costs due to any decline in NIKE's debt ratings; changes in business strategy or development plans; general risks associated with doing business outside the United States, including, without limitation, exchange rate fluctuations, import duties, tariffs, quotas, political and economic instability and terrorism; changes in government regulations; the impact of, including business and legal developments relating to, climate change; natural disasters; liability and other claims asserted against NIKE; the ability to attract and retain qualified personnel; the effects of NIKE's decision to invest in or divest of businesses and other factors referenced or incorporated by reference in this report and other reports. +The risks included here are not exhaustive. Other sections of this report may include additional factors which could adversely affect NIKE’s business and financial performance. Moreover, NIKE operates in a very competitive and rapidly changing environment. New risks emerge from time to time and it is not possible for management to predict all such risks, nor can it assess the impact of all such risks on NIKE’s business or the extent to which any risk, or combination of risks, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results. +Investors should also be aware that while NIKE does, from time to time, communicate with securities analysts, it is against NIKE’s policy to disclose to them any material non-public information or other confidential commercial information. Accordingly, shareholders should not assume that NIKE agrees with any statement or report issued by any analyst irrespective of the content of the statement or report. Furthermore, NIKE has a policy against issuing or confirming financial forecasts or projections issued by others. Thus, to the extent that reports issued by securities analysts contain any projections, forecasts or opinions, such reports are not the responsibility of NIKE. +Our products face intense competition. +NIKE is a consumer products company and the relative popularity of various sports and fitness activities and changing design trends affect the demand for our products. The athletic footwear, apparel and equipment industry is highly competitive in the United States and on a worldwide basis. We compete internationally with a significant number of athletic and leisure footwear companies, athletic and leisure apparel companies, sports equipment companies and large companies having diversified lines of athletic and leisure footwear, apparel and equipment. We also compete with other companies for the production capacity of independent manufacturers that produce our products. +Product offerings, technologies, marketing expenditures (including expenditures for advertising and endorsements), pricing, costs of production, customer service and social media presence are areas of intense competition. This, in addition to rapid changes in technology and consumer preferences in the markets for athletic and leisure footwear and apparel, and athletic equipment, constitute significant risk factors in our operations. If we do not adequately and timely anticipate and respond to our competitors, our costs may increase or the consumer demand for our products may decline significantly. +Failure to maintain our reputation and brand image could negatively impact our business. +Our iconic brands have worldwide recognition, and our success depends on our ability to maintain and enhance our brand image and reputation. Maintaining, promoting and growing our brands will depend on our design and marketing efforts, including advertising and consumer campaigns, product innovation and product quality. Our commitment to product innovation and quality and our continuing investment in design (including materials) and marketing may not have the desired impact on our brand image and reputation. We could be adversely impacted if we fail to achieve any of these objectives or if the reputation or image of any of our brands is tarnished or receives negative publicity. In addition, adverse publicity about regulatory or legal action against us could damage our reputation and brand image, undermine consumer confidence in us and reduce long-term demand for our products, even if the regulatory or legal action is unfounded or not material to our operations. +In addition, our success in maintaining, extending and expanding our brand image depends on our ability to adapt to a rapidly changing media environment, including our increasing reliance on social media and online dissemination of advertising campaigns. Negative posts or comments about us on social networking websites could seriously damage our reputation and brand image. If we do not maintain, extend and expand our brand image, then our product sales, financial condition and results of operations could be materially and adversely affected. +6 +Table of Contents +If we are unable to anticipate consumer preferences and develop new products, we may not be able to maintain or increase our revenues and profits. +Our success depends on our ability to identify, originate and define product trends as well as to anticipate, gauge and react to changing consumer demands in a timely manner. However, lead times for many of our products may make it more difficult for us to respond rapidly to new or changing product trends or consumer preferences. All of our products are subject to changing consumer preferences that cannot be predicted with certainty. Our new products may not receive consumer acceptance as consumer preferences could shift rapidly to different types of performance products or away from these types of products altogether, and our future success depends in part on our ability to anticipate and respond to these changes. If we fail to anticipate accurately and respond to trends and shifts in consumer preferences by adjusting the mix of existing product offerings, developing new products, designs, styles and categories, and influencing sports and fitness preferences through aggressive marketing, we could experience lower sales, excess inventories or lower profit margins, any of which could have an adverse effect on our results of operations and financial condition. In addition, we market our products globally through a diverse spectrum of advertising and promotional programs and campaigns, including social media and online advertising. If we do not successfully market our products or if advertising and promotional costs increase, these factors could have an adverse effect on our business, financial condition and results of operations. +We rely on technical innovation and high-quality products to compete in the market for our products. +Technical innovation and quality control in the design and manufacturing process of footwear, apparel and athletic equipment is essential to the commercial success of our products. Research and development plays a key role in technical innovation. We rely upon specialists in the fields of biomechanics, chemistry, exercise physiology, engineering, industrial design, sustainability and related fields, as well as research committees and advisory boards made up of athletes, coaches, trainers, equipment managers, orthopedists, podiatrists and other experts to develop and test cutting edge performance products. While we strive to produce products that help to enhance athletic performance, reduce injury and maximize comfort, if we fail to introduce technical innovation in our products, consumer demand for our products could decline, and if we experience problems with the quality of our products, we may incur substantial expense to remedy the problems. +Failure to continue to obtain or maintain high-quality endorsers of our products could harm our business. +We establish relationships with professional athletes, sports teams and leagues to develop, evaluate and promote our products, as well as establish product authenticity with consumers. However, as competition in our industry has increased, the costs associated with establishing and retaining such sponsorships and other relationships have increased. If we are unable to maintain our current associations with professional athletes, sports teams and leagues, or to do so at a reasonable cost, we could lose the on-field authenticity associated with our products, and we may be required to modify and substantially increase our marketing investments. As a result, our brands, net revenues, expenses and profitability could be harmed. +Furthermore, if certain endorsers were to stop using our products contrary to their endorsement agreements, our business could be adversely affected. In addition, actions taken by athletes, teams or leagues associated with our products that harm the reputations of those athletes, teams or leagues, could also seriously harm our brand image with consumers and, as a result, could have an adverse effect on our sales and financial condition. In addition, poor performance by our endorsers, a failure to continue to correctly identify promising athletes to use and endorse our products, or a failure to enter into cost-effective endorsement arrangements with prominent athletes and sports organizations could adversely affect our brand, sales and profitability. +Currency exchange rate fluctuations could result in lower revenues, higher costs and decreased margins and earnings. +A majority of our products are manufactured and sold outside of the United States. As a result, we conduct purchase and sale transactions in various currencies, which increases our exposure to fluctuations in foreign currency exchange rates globally. Our international revenues and expenses generally are derived from sales and operations in foreign currencies, and these revenues and expenses could be affected by currency fluctuations, including amounts recorded in foreign currencies and translated into U.S. Dollars for consolidated financial reporting, as weakening of foreign currencies relative to the U.S. Dollar adversely affects the U.S. Dollar value of the Company's foreign currency-denominated sales and earnings. Currency exchange rate fluctuations could also disrupt the business of the independent manufacturers that produce our products by making their purchases of raw materials more expensive and more difficult to finance. Foreign currency fluctuations have adversely affected, and could continue to have an adverse effect on our results of operations and financial condition. +We may hedge certain foreign currency exposures to lessen and delay, but not to completely eliminate, the effects of foreign currency fluctuations on our financial results. Since the hedging activities are designed to lessen volatility, they not only reduce the negative impact of a stronger U.S. Dollar or other trading currency, but they also reduce the positive impact of a weaker U.S. Dollar or other trading currency. Our future financial results could be significantly affected by the value of the U.S. Dollar in relation to the foreign currencies in which we conduct business. The degree to which our financial results are affected for any given time period will depend in part upon our hedging activities. +7 +Table of Contents +Global economic conditions could have a material adverse effect on our business, operating results and financial condition. +The uncertain state of the global economy continues to impact businesses around the world, and most acutely in emerging markets and developing economies. If global economic and financial market conditions do not improve or deteriorate, the following factors could have a material adverse effect on our business, operating results and financial condition: +• +Slower consumer spending may result in reduced demand for our products, reduced orders from retailers for our products, order cancellations, lower revenues, higher discounts, increased inventories and lower gross margins. +• +In the future, we may be unable to access financing in the credit and capital markets at reasonable rates in the event we find it desirable to do so. +• +We conduct transactions in various currencies, which increases our exposure to fluctuations in foreign currency exchange rates relative to the U.S. Dollar. Continued volatility in the markets and exchange rates for foreign currencies and contracts in foreign currencies could have a significant impact on our reported operating results and financial condition. +• +Continued volatility in the availability and prices for commodities and raw materials we use in our products and in our supply chain (such as cotton or petroleum derivatives) could have a material adverse effect on our costs, gross margins and profitability. +• +If retailers of our products experience declining revenues, or experience difficulty obtaining financing in the capital and credit markets to purchase our products, this could result in reduced orders for our products, order cancellations, late retailer payments, extended payment terms, higher accounts receivable, reduced cash flows, greater expense associated with collection efforts and increased bad debt expense. +• +If retailers of our products experience severe financial difficulty, some may become insolvent and cease business operations, which could negatively impact the sale of our products to consumers. +• +If contract manufacturers of our products or other participants in our supply chain experience difficulty obtaining financing in the capital and credit markets to purchase raw materials or to finance capital equipment and other general working capital needs, it may result in delays or non-delivery of shipments of our products. +Our business is affected by seasonality, which could result in fluctuations in our operating results. +We experience moderate fluctuations in aggregate sales volume during the year. Historically, revenues in the first and fourth fiscal quarters have slightly exceeded those in the second and third fiscal quarters. However, the mix of product sales may vary considerably from time to time as a result of changes in seasonal and geographic demand for particular types of footwear, apparel and equipment and in connection with the timing of global sporting events, including without limitation the Olympics and the World Cup. In addition, our customers may cancel orders, change delivery schedules or change the mix of products ordered with minimal notice. As a result, we may not be able to accurately predict our quarterly sales. Accordingly, our results of operations are likely to fluctuate significantly from period to period. This seasonality, along with other factors that are beyond our control, including general economic conditions, changes in consumer preferences, weather conditions, availability of import quotas, transportation disruptions and currency exchange rate fluctuations, could adversely affect our business and cause our results of operations to fluctuate. Our operating margins are also sensitive to a number of additional factors that are beyond our control, including manufacturing and transportation costs, shifts in product sales mix and geographic sales trends, all of which we expect to continue. Results of operations in any period should not be considered indicative of the results to be expected for any future period. +Futures orders may not be an accurate indication of our future revenues. +We make substantial use of our futures ordering program, which allows retailers to order five to six months in advance of delivery with the commitment that their orders will be delivered within a set period of time at a fixed price. Our futures ordering program allows us to minimize the amount of products we hold in inventory, purchasing costs, the time necessary to fill customer orders and the risk of non-delivery. We report changes in futures orders in our periodic financial reports. Although we believe futures orders are an important indicator of our future revenues, reported futures orders are not necessarily indicative of our expectation of revenues for any future period. This is because the mix of orders can shift between futures and at-once orders. In addition, foreign currency exchange rate fluctuations, order cancellations, shipping timing, returns and discounts can cause differences in the comparisons between futures orders and actual revenues. Moreover, a significant portion of our revenue is not derived from futures orders, including at-once and closeout sales of NIKE Brand footwear and apparel, sales of NIKE Brand equipment, sales from our Direct to Consumer operations and sales from our Converse, Hurley and NIKE Golf businesses. +Our futures ordering program does not prevent excess inventories or inventory shortages, which could result in decreased operating margins, cash flows and harm to our business. +We purchase products from manufacturers outside of our futures ordering program and in advance of customer orders, which we hold in inventory and resell to customers. There is a risk we may be unable to sell excess products ordered from manufacturers. Inventory levels in excess of customer demand may result in inventory write-downs, and the sale of excess inventory at discounted prices could significantly impair our brand image and have an adverse effect on our operating results and financial condition. Conversely, if we underestimate consumer demand for our products or if our manufacturers fail to supply products we require at the time we need them, we may experience inventory shortages. Inventory shortages might delay shipments to customers, negatively impact retailer and distributor relationships and diminish brand loyalty. +The difficulty in forecasting demand also makes it difficult to estimate our future results of operations and financial condition from period to period. A failure to accurately predict the level of demand for our products could adversely affect our net revenues and net income, and we are unlikely to forecast such effects with any certainty in advance. +8 +Table of Contents +We may be adversely affected by the financial health of our retailers. +We extend credit to our customers based on an assessment of a customer’s financial condition, generally without requiring collateral. To assist in the scheduling of production and the shipping of seasonal products, we offer customers the ability to place orders five to six months ahead of delivery under our futures ordering program. These advance orders may be canceled, and the risk of cancellation may increase when dealing with financially ailing retailers or retailers struggling with economic uncertainty. In the past, some customers have experienced financial difficulties, which have had an adverse effect on our sales, our ability to collect on receivables and our financial condition. When the retail economy weakens, retailers may be more cautious with orders. A slowing economy in our key markets could adversely affect the financial health of our customers, which in turn could have an adverse effect on our results of operations and financial condition. In addition, product sales are dependent in part on high quality merchandising and an appealing store environment to attract consumers, which requires continuing investments by retailers. Retailers that experience financial difficulties may fail to make such investments or delay them, resulting in lower sales and orders for our products. +Consolidation of retailers or concentration of retail market share among a few retailers may increase and concentrate our credit risk, and impair our ability to sell products. +The athletic footwear, apparel and equipment retail markets in some countries are dominated by a few large athletic footwear, apparel and equipment retailers with many stores. These retailers have in the past increased their market share and may continue to do so in the future by expanding through acquisitions and construction of additional stores. These situations concentrate our credit risk with a relatively small number of retailers, and, if any of these retailers were to experience a shortage of liquidity, it would increase the risk that their outstanding payables to us may not be paid. In addition, increasing market share concentration among one or a few retailers in a particular country or region increases the risk that if any one of them substantially reduces their purchases of our products, we may be unable to find a sufficient number of other retail outlets for our products to sustain the same level of sales and revenues. +Our Direct to Consumer operations have required and will continue to require a substantial investment and commitment of resources, and are subject to numerous risks and uncertainties. +Our Direct to Consumer stores have required substantial fixed investment in equipment and leasehold improvements, information systems, inventory and personnel. We have entered into substantial operating lease commitments for retail space. Certain stores have been designed and built to serve as high-profile venues to promote brand awareness and marketing activities. Because of their unique design elements, locations and size, these stores require substantially more investment than other stores. Due to the high fixed-cost structure associated with our Direct to Consumer operations, a decline in sales or the closure or poor performance of individual or multiple stores could result in significant lease termination costs, write-offs of equipment and leasehold improvements and employee-related costs. +Many factors unique to retail operations, some of which are beyond the Company’s control, pose risks and uncertainties. Risks include, but are not limited to: credit card fraud; mismanagement of existing retail channel partners; and inability to manage costs associated with store construction and operation. In addition, extreme weather conditions in the areas in which our stores are located could adversely affect our business. +If the technology-based systems that give our customers the ability to shop with us online do not function effectively, our operating results, as well as our ability to grow our e-commerce business globally, could be materially adversely affected. +Many of our customers shop with us through our e-commerce website and mobile commerce applications. Increasingly, customers are using tablets and smart phones to shop online with us and with our competitors and to do comparison shopping. We are increasingly using social media and proprietary mobile applications to interact with our customers and as a means to enhance their shopping experience. Any failure on our part to provide attractive, effective, reliable, user-friendly e-commerce platforms that offer a wide assortment of merchandise with rapid delivery options and that continually meet the changing expectations of online shoppers could place us at a competitive disadvantage, result in the loss of e-commerce and other sales, harm our reputation with customers, have a material adverse impact on the growth of our e-commerce business globally and could have a material adverse impact on our business and results of operations. +Risks specific to our e-commerce business also include diversion of sales from our and our retailers' brick and mortar stores, difficulty in recreating the in-store experience through direct channels and liability for online content. Our failure to successfully respond to these risks might adversely affect sales in our e-commerce business, as well as damage our reputation and brands. +Failure to adequately protect or enforce our intellectual property rights could adversely affect our business. +We believe that our intellectual property rights are important to our brand, our success and our competitive position. We periodically discover products that are counterfeit reproductions of our products or that otherwise infringe on our intellectual property rights. If we are unsuccessful in enforcing our intellectual property, continued sales of these products could adversely affect our sales and our brand and could result in a shift of consumer preference away from our products. +The actions we take to establish and protect our intellectual property rights may not be adequate to prevent imitation of our products by others or to prevent others from seeking to block sales of our products as violations of proprietary rights. +We may be subject to liability if third parties successfully claim that we infringe on their intellectual property rights. Defending infringement claims could be expensive and time-consuming and might result in our entering into costly license agreements. We also may be subject to significant damages or injunctions against development, use, importation and/or sale of certain products. +We take various actions to prevent the unauthorized use and/or disclosure of confidential information. Such actions include contractual measures such as entering into non-disclosure and non-compete agreements and providing confidential information awareness training. Our controls and efforts to prevent unauthorized use and/or disclosure of confidential information might not always be effective. Confidential information that is related to business strategy, new technologies, mergers and acquisitions, unpublished financial results or personal data could be prematurely or inadvertently used and/or disclosed, resulting in a loss of reputation, a decline in our stock price and/or a negative impact on our market position, and could lead to damages, fines, penalties or injunctions. +9 +Table of Contents +In addition, the laws of certain countries may not protect or allow enforcement of intellectual property rights to the same extent as the laws of the United States. We may face significant expenses and liability in connection with the protection of our intellectual property rights, including outside the United States, and if we are unable to successfully protect our rights or resolve intellectual property conflicts with others, our business or financial condition may be adversely affected. +We are subject to the risk that our licensees may not generate expected sales or maintain the value of our brands. +We currently license, and expect to continue licensing, certain of our proprietary rights, such as trademarks or copyrighted material, to third parties. If our licensees fail to successfully market and sell licensed products, or fail to obtain sufficient capital or effectively manage their business operations, customer relationships, labor relationships, supplier relationships or credit risks, it could adversely affect our revenues, both directly from reduced royalties received and indirectly from reduced sales of our other products. +We also rely on our licensees to help preserve the value of our brands. Although we attempt to protect our brands through approval rights over the design, production processes, quality, packaging, merchandising, distribution, advertising and promotion of our licensed products, we cannot completely control the use of our licensed brands by our licensees. The misuse of a brand by a licensee could have a material adverse effect on that brand and on us. +We are subject to data security and privacy risks that could negatively affect our results, operations or reputation. +Hackers and data thieves are increasingly sophisticated and operate large-scale and complex automated attacks. Any breach of our network may result in the loss of valuable business data, misappropriation of our consumers’ or employees’ personal information or a disruption of our business, which could give rise to unwanted media attention, materially damage our customer relationships and reputation and result in lost sales, fines or lawsuits. +In addition, we must comply with increasingly complex and rigorous regulatory standards enacted to protect business and personal data. Any failure to comply with these regulatory standards could subject us to legal and reputational risks. Misuse of or failure to secure personal information could also result in violation of data privacy laws and regulations, proceedings against the Company by governmental entities or others, damage to our reputation and credibility and could have a negative impact on revenues and profits. +Failure of our contractors or our licensees’ contractors to comply with our code of conduct, local laws and other standards could harm our business. +We work with hundreds of contractors outside of the United States to manufacture our products, and we also have license agreements that permit unaffiliated parties to manufacture or contract for the manufacture of products using our intellectual property. We require the contractors that directly manufacture our products and our licensees that make products using our intellectual property (including, indirectly, their contract manufacturers) to comply with a code of conduct and other environmental, health and safety standards for the benefit of workers. We also require these contractors to comply with applicable standards for product safety. Notwithstanding their contractual obligations, from time to time contractors may not comply with such standards or applicable local law or our licensees may fail to enforce such standards or applicable local law on their contractors. Significant or continuing noncompliance with such standards and laws by one or more contractors could harm our reputation or result in a product recall and, as a result, could have an adverse effect on our sales and financial condition. +Our international operations involve inherent risks which could result in harm to our business. +Virtually all of our athletic footwear and apparel is manufactured outside of the United States, and the majority of our products are sold outside of the United States. Accordingly, we are subject to the risks generally associated with global trade and doing business abroad, which include foreign laws and regulations, varying consumer preferences across geographic regions, political unrest, disruptions or delays in cross-border shipments and changes in economic conditions in countries in which our products are manufactured or where we sell products. In addition, disease outbreaks, terrorist acts and military conflict have increased the risks of doing business abroad. These factors, among others, could affect our ability to manufacture products or procure materials, our ability to import products, our ability to sell products in international markets and our cost of doing business. If any of these or other factors make the conduct of business in a particular country undesirable or impractical, our business could be adversely affected. In addition, many of our imported products are subject to duties, tariffs or quotas that affect the cost and quantity of various types of goods imported into the United States and other countries. Any country in which our products are produced or sold may eliminate, adjust or impose new quotas, duties, tariffs, safeguard measures, anti-dumping duties, cargo restrictions to prevent terrorism, restrictions on the transfer of currency, climate change legislation, product safety regulations or other charges or restrictions, any of which could have an adverse effect on our results of operations and financial condition. +Changes in tax laws and unanticipated tax liabilities could adversely affect our effective income tax rate and profitability. +We earn a substantial portion of our income in foreign countries, and are subject to the tax laws of those jurisdictions. The Company's most significant tax liabilities are incurred in the United States, China and the Netherlands. If our capital or financing needs in the U.S. require us to repatriate earnings from foreign jurisdictions above our current levels, our effective income tax rates for the affected periods could be negatively impacted. Current economic and political conditions make tax rules in any jurisdiction, including the U.S., subject to significant change. There have been proposals to reform U.S. and foreign tax laws that could significantly impact how U.S. multinational corporations are taxed on foreign earnings. Although we cannot predict whether or in what form these proposals will pass, several of the proposals considered, if enacted into law, could have an adverse impact on our income tax expense and cash flows. +Our effective income tax rate in the future could be adversely affected by a number of factors, including changes in the mix of earnings in countries with differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities, changes in tax laws, the outcome of income tax audits in various jurisdictions around the world and any repatriation of non-U.S. earnings for which we have not previously provided for U.S. taxes. +10 +Table of Contents +We and our subsidiaries are engaged in a number of intercompany transactions across multiple tax jurisdictions. Although we believe that these transactions reflect the accurate economic allocation of profit and that the proper transfer pricing documentation is in place, the profit allocation and transfer pricing terms and conditions may be scrutinized by local tax authorities during an audit and any resulting changes may impact our mix of earnings in countries with differing statutory tax rates. +Portions of our operations are subject to a reduced tax rate or are free of tax under various tax holidays and rulings that expire in whole or in part from time to time. These tax holidays and rulings may be extended when certain conditions are met, or terminated if certain conditions are not met. If the tax holidays and rulings are not extended, or if we fail to satisfy the conditions of the reduced tax rate, then our effective tax rate would increase in the future. +We are also subject to the examination of our tax returns by the Internal Revenue Service and other tax authorities. We regularly assess all of these matters to determine the adequacy of our tax provision, which is subject to significant discretion. Although we believe our tax provisions are adequate, the final determination of tax audits and any related disputes could be materially different from our historical income tax provisions and accruals. The results of audits or related disputes could have an adverse effect on our financial statements for the period or periods for which the applicable final determinations are made. +If one or more of our counterparty financial institutions default on their obligations to us or fail, we may incur significant losses. +As part of our hedging activities, we enter into transactions involving derivative financial instruments, which may include forward contracts, commodity futures contracts, option contracts, collars and swaps with various financial institutions. In addition, we have significant amounts of cash, cash equivalents and other investments on deposit or in accounts with banks or other financial institutions in the United States and abroad. As a result, we are exposed to the risk of default by or failure of counterparty financial institutions. The risk of counterparty default or failure may be heightened during economic downturns and periods of uncertainty in the financial markets. If one of our counterparties were to become insolvent or file for bankruptcy, our ability to recover losses incurred as a result of default or our assets that are deposited or held in accounts with such counterparty may be limited by the counterparty’s liquidity or the applicable laws governing the insolvency or bankruptcy proceedings. In the event of default or failure of one or more of our counterparties, we could incur significant losses, which could negatively impact our results of operations and financial condition. +We rely on a concentrated source base of contract manufacturers to supply a significant portion of our footwear products. +NIKE is supplied by approximately 146 footwear factories located in 14 countries. We do not own or operate any of our own footwear manufacturing facilities and depend upon independent contract manufacturers to manufacture all of the footwear products we sell. In fiscal 2015, five footwear contract manufacturers each accounted for greater than 10% of fiscal 2015 footwear production, and in aggregate accounted for approximately 69% of NIKE Brand footwear production in fiscal 2015. Our ability to meet our customers' needs depends on our ability to maintain a steady supply of products from our independent contract manufacturers. If one or more of our significant suppliers were to sever their relationship with us or significantly alter the terms of our relationship, we may not be able to obtain replacement products in a timely manner, which could have a material adverse effect on our sales, financial condition or results of operations. Additionally, if any of our primary contract manufacturers fail to make timely shipments, do not meet our quality standards or otherwise fail to deliver us product in accordance with our plans, there could be a material adverse effect on our results of operations. +Our products are subject to risks associated with overseas sourcing, manufacturing and financing. +The principal materials used in our apparel products — natural and synthetic fabrics and threads, specialized performance fabrics designed to efficiently wick moisture away from the body, retain heat or repel rain and/or snow as well as plastic and metal hardware — are available in countries where our manufacturing takes place. The principal materials used in our footwear products — natural and synthetic rubber, plastic compounds, foam cushioning materials, natural and synthetic leather, nylon, canvas and polyurethane films — are also locally available to manufacturers. Both our apparel and footwear products are dependent upon the ability of our unaffiliated contract manufacturers to locate, train, employ and retain adequate personnel. NIKE contractors and suppliers buy raw materials and are subject to wage rates that are oftentimes regulated by the governments of the countries in which our products are manufactured. +There could be a significant disruption in the supply of fabrics or raw materials from current sources or, in the event of a disruption, our contract manufacturers might not be able to locate alternative suppliers of materials of comparable quality at an acceptable price, or at all. Further, our unaffiliated contract manufacturers have experienced and may continue to experience in the future, unexpected increases in work wages, whether government mandated or otherwise and increases in compliance costs due to governmental regulation concerning certain metals used in the manufacturing of our products. In addition, we cannot be certain that our unaffiliated manufacturers will be able to fill our orders in a timely manner. If we experience significant increases in demand, or reductions in the availability of materials, or need to replace an existing manufacturer, there can be no assurance that additional supplies of fabrics or raw materials or additional manufacturing capacity will be available when required on terms that are acceptable to us, or at all, or that any supplier or manufacturer would allocate sufficient capacity to us in order to meet our requirements. In addition, even if we are able to expand existing or find new manufacturing or sources of materials, we may encounter delays in production and added costs as a result of the time it takes to train suppliers and manufacturers in our methods, products, quality control standards and labor, health and safety standards. Any delays, interruption or increased costs in labor or wages, or the supply of materials or manufacture of our products could have an adverse effect on our ability to meet retail customer and consumer demand for our products and result in lower revenues and net income both in the short- and long- term. +Because independent manufacturers make a majority of our products outside of our principal sales markets, our products must be transported by third parties over large geographic distances. Delays in the shipment or delivery of our products due to the availability of transportation, work stoppages, port strikes, infrastructure congestion or other factors, and costs and delays associated with consolidating or transitioning between manufacturers, could adversely impact our financial performance. In addition, manufacturing delays or unexpected demand for our products may require us to use faster, but more expensive, transportation methods such as air freight, which could adversely affect our profit margins. The cost of oil is a significant component in manufacturing and transportation costs, so increases in the price of petroleum products can adversely affect our profit margins. +11 +Table of Contents +In addition, Sojitz America performs significant import-export financing services for the Company. During fiscal 2015, Sojitz America provided financing and purchasing services for NIKE Brand products sold in certain NIKE markets including Argentina, Uruguay, Canada, Brazil, India, Indonesia, the Philippines, South Africa and Thailand (collectively the "Sojitz Markets"), excluding products produced and sold in the same country. Any failure of Sojitz America to provide these services or any failure of Sojitz America’s banks could disrupt our ability to acquire products from our suppliers and to deliver products to our customers in the Sojitz Markets. Such a disruption could result in canceled orders that would adversely affect sales and profitability. +Our success depends on our global distribution facilities. +We distribute our products to customers directly from the factory and through distribution centers located throughout the world. Our ability to meet customer expectations, manage inventory, complete sales and achieve objectives for operating efficiencies and growth, particularly in emerging markets, depends on the proper operation of our distribution facilities, the development or expansion of additional distribution capabilities and the timely performance of services by third parties (including those involved in shipping product to and from our distribution facilities). Our distribution facilities could be interrupted by information technology problems and disasters such as earthquakes or fires. Any significant failure in our distribution facilities could result in an adverse effect on our business. We maintain business interruption insurance, but it may not adequately protect us from adverse effects that could be caused by significant disruptions in our distribution facilities. +We rely significantly on information technology to operate our business, including our supply chain and retail operations, and any failure, inadequacy or interruption of that technology could harm our ability to effectively operate our business. +We are heavily dependent on information technology systems and networks, including the Internet and third-party hosted services (“information technology systems”), across our supply chain, including product design, production, forecasting, ordering, manufacturing, transportation, sales and distribution, as well as for processing financial information for external and internal reporting purposes, retail operations and other business activities. Our ability to effectively manage and maintain our inventory and to ship products to customers on a timely basis depends significantly on the reliability of these information technology systems. Over a number of years, we have implemented information technology systems in all of the geographical regions in which we operate. Our work to integrate and enhance these systems and related processes in our global operations is ongoing. The failure of these systems to operate effectively, including as a result of security breaches, viruses, hackers or other causes, or problems with transitioning to upgraded or replacement systems could cause delays in product fulfillment and reduced efficiency of our operations, could require significant capital investments to remediate the problem, and may have an adverse effect on our reputation, results of operations and financial condition. +We also use information technology systems to process financial information and results of operations for internal reporting purposes and to comply with regulatory financial reporting, legal and tax requirements. If our information technology systems suffer severe damage, disruption or shutdown and our business continuity plans do not effectively resolve the issues in a timely manner, we could experience delays in reporting our financial results, which could result in lost revenues and profits, as well as reputational damage. Furthermore, we depend on information technology systems and personal data collection and use for digital marketing, digital commerce and the marketing and use of our NIKE+ products and services. We also engage in electronic communications throughout the world between and among our employees as well as with other third parties, including customers, suppliers, vendors and consumers. Our information technology systems are critical to many of our operating activities and our business processes and may be negatively impacted by any service interruption or shutdown. +The market for prime real estate is competitive. +Our ability to effectively obtain real estate to open new retail stores and otherwise conduct our operations, both domestically and internationally, depends on the availability of real estate that meets our criteria for traffic, square footage, co-tenancies, lease economics, demographics and other factors. We also must be able to effectively renew our existing real estate leases. In addition, from time to time, we seek to downsize, consolidate, reposition or close some of our real estate locations, which may require modification of an existing lease. Failure to secure adequate new locations or successfully modify leases for existing locations, or failure to effectively manage the profitability of our existing fleet of retail stores, could have an adverse effect on our operating results and financial condition. +Additionally, the economic environment may at times make it difficult to determine the fair market rent of real estate properties domestically and internationally. This could impact the quality of our decisions to exercise lease options at previously negotiated rents and to renew expiring leases at negotiated rents. Any adverse effect on the quality of these decisions could impact our ability to retain real estate locations adequate to meet our targets or efficiently manage the profitability of our existing fleet of stores, which could have an adverse effect on our operating results and financial condition. +Extreme weather conditions and natural disasters could negatively impact our operating results and financial condition. +Extreme weather conditions in the areas in which our retail stores, suppliers, customers, distribution centers and vendors are located could adversely affect our operating results and financial condition. Moreover, natural disasters such as earthquakes, hurricanes and tsunamis, whether occurring in the United States or abroad, and their related consequences and effects, including energy shortages and public health issues, could disrupt our operations, the operations of our vendors and other suppliers or result in economic instability that may negatively impact our operating results and financial condition. +Our financial results may be adversely affected if substantial investments in businesses and operations fail to produce expected returns. +From time to time, we may invest in technology, business infrastructure, new businesses, product offering and manufacturing innovation and expansion of existing businesses, such as our retail operations, which require substantial cash investments and management attention. We believe cost-effective investments are essential to business growth and profitability. However, significant investments are subject to typical risks and uncertainties inherent in developing a new business or expanding an existing business. The failure of any significant investment to provide expected returns or profitability could have a material adverse effect on our financial results and divert management attention from more profitable business operations. +12 +Table of Contents +We are subject to periodic litigation and other regulatory proceedings, which could result in unexpected expense of time and resources. +From time to time we are called upon to defend ourselves against lawsuits and regulatory actions relating to our business. Due to the inherent uncertainties of litigation and regulatory proceedings, we cannot accurately predict the ultimate outcome of any such proceedings. An unfavorable outcome could have an adverse impact on our business, financial condition and results of operations. In addition, any significant litigation in the future, regardless of its merits, could divert management’s attention from our operations and result in substantial legal fees. +We depend on key personnel, the loss of whom would harm our business. +Our future success will depend in part on the continued service of key executive officers and personnel. The loss of the services of any key individual could harm our business. Our future success also depends on our ability to recruit, retain and engage our personnel sufficiently, both to maintain our current business and to execute our strategic initiatives. Competition for employees in our industry is intense and we may not be successful in attracting and retaining such personnel. +The sale of a large number of shares of common stock owned or managed by our Chairman and related entities could depress the market price of our common stock. +As of June 30, 2015, Philip H. Knight, Co-founder and Chairman of our Board of Directors, and Swoosh, LLC, an entity formed to manage 128,500,000 shares of Class A Common Stock formerly owned by Mr. Knight, beneficially owned more than 82% of our Class A Common Stock. If on June 30, 2015 all of the aforementioned Class A Common Stock were converted into Class B Common Stock, the commensurate ownership percentage of our Class B Common Stock would be approximately 17.7%. The Class A Common Stock shares are available for resale, subject to the requirements of the U.S. securities laws and the terms of the limited liability company agreement governing Swoosh, LLC. The sale or prospect of the sale of a substantial number of these shares could have an adverse effect on the market price of our common stock. +Changes in our credit ratings or macroeconomic conditions may affect our liquidity, increasing borrowing costs and limiting our financing options. +Our long-term debt is currently rated investment grade by Standard & Poor’s and Moody’s Investors Service. If our credit ratings are lowered, borrowing costs for future long-term debt or short-term credit facilities may increase and our financing options, including our access to the unsecured credit market, could be limited. We may also be subject to restrictive covenants that would reduce our flexibility to, among other things, incur additional indebtedness, make restricted payments, pledge assets as security, make investments, loans, advances, guarantees and acquisitions, undergo fundamental changes and enter into transactions with affiliates. Failure to comply with such covenants could result in a default, and as a result, the commitments of our lenders under our credit agreements may be terminated and the maturity of amounts owed may be accelerated. In addition, macroeconomic conditions, such as increased volatility or disruption in the credit markets, could adversely affect our ability to refinance existing debt. +If our internal controls are ineffective, our operating results could be adversely affected. +Our internal control over financial reporting may not prevent or detect misstatements because of its inherent limitations, including the possibility of human error, the circumvention or overriding of controls or fraud. Even effective internal controls can provide only reasonable assurance with respect to the preparation and fair presentation of financial statements. If we fail to maintain the adequacy of our internal controls, including any failure to implement required new or improved controls, or if we experience difficulties in their implementation, our business and operating results could be harmed and we could fail to meet our financial reporting obligations. +If our estimates or judgments relating to our critical accounting policies prove to be incorrect, our operating results could be adversely affected. +The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, as provided in “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The results of these estimates form the basis for making judgments about the carrying values of assets, liabilities and equity, and the amount of revenue and expenses that are not readily apparent from other sources. Significant assumptions and estimates used in preparing our consolidated financial statements include those related to revenue recognition, allowance for uncollectible accounts receivable, inventories, contingent payments under endorsement contracts, accounting for property, plant and equipment and definite-lived assets and goodwill and indefinite-lived intangible assets. Our operating results may be adversely affected if our assumptions change or if actual circumstances differ from those in our assumptions, which could cause our operating results to fall below the expectations of securities analysts and investors, resulting in a decline in the price of our Class B Common Stock. +Anti-takeover provisions may impair an acquisition of the Company or reduce the price of our common stock. +There are provisions of our articles of incorporation and Oregon law that are intended to protect shareholder interests by providing the Board of Directors a means to attempt to deny coercive takeover attempts or to negotiate with a potential acquirer in order to obtain more favorable terms. Such provisions include a control share acquisition statute, a freeze-out statute, two classes of stock that vote separately on certain issues, and the fact that holders of Class A Common Stock elect three-quarters of the Board of Directors rounded down to the next whole number. However, such provisions could discourage, delay or prevent an unsolicited merger, acquisition or other change in control of our company that some shareholders might believe to be in their best interests or in which shareholders might receive a premium for their common stock over the prevailing market price. These provisions could also discourage proxy contests for control of the Company. +13 +Table of Contents +We may fail to meet market expectations, which could cause the price of our stock to decline. +Our Class B Common Stock is traded publicly, and at any given time various securities analysts follow our financial results and issue reports on us. These reports include information about our historical financial results as well as analysts’ estimates of our future performance. Analysts’ estimates are based upon their own opinions and are often different from our estimates or expectations. If our operating results are below the estimates or expectations of public market analysts and investors, our stock price could decline. In the past, securities class action litigation has been brought against NIKE and other companies following a decline in the market price of their securities. If our stock price is volatile, we may become involved in this type of litigation in the future. Any litigation could result in substantial costs and a diversion of management’s attention and resources that are needed to successfully run our business. +14 +Table of Contents +ITEM 1B. Unresolved Staff Comments +None. +ITEM 2. Properties +The following is a summary of principal properties owned or leased by NIKE. +The NIKE World Campus, owned by NIKE and located near Beaverton, Oregon, USA, is a 394-acre facility of 44 buildings which, together with adjacent leased properties, functions as our world headquarters and is occupied by approximately 9,200 employees engaged in management, research, design, development, marketing, finance and other administrative functions serving nearly all of our divisions. We also lease various office facilities in the surrounding metropolitan area. We lease a similar, but smaller, administrative facility in Hilversum, the Netherlands, which serves as the headquarters for the Western Europe and Central & Eastern Europe geographies, and manages certain brand management functions for our non-U.S. operations. We also lease an office complex in Shanghai, China, our headquarters for Greater China, occupied by employees focused on implementing our wholesale, DTC and merchandising strategies in the region, among other functions. In the United States, NIKE owns a full product line distribution center located in Memphis, Tennessee. In addition, NIKE has four other distribution centers, three of which are leased, also located in Memphis. NIKE Brand apparel and equipment are also shipped from our Foothill Ranch, California distribution center, which we lease. Smaller leased distribution facilities for non-NIKE Brand businesses are located in various parts of the United States. We also own or lease distribution and customer service facilities outside the United States. The most significant are the distribution facilities located in Laakdal, Belgium; Taicang, China; Tomisato, Japan and Incheon, Korea, all of which we own. +NIKE IHM, Inc. manufactures Air-Sole cushioning components at NIKE-owned facilities located near Beaverton, Oregon and in St. Charles, Missouri. We also manufacture and sell small amounts of various other plastic products to other manufacturers through NIKE IHM, Inc. +Aside from the principal properties described above, we lease many offices worldwide for sales and administrative purposes. We lease approximately 930 retail stores worldwide, which consist primarily of factory outlet stores. See “United States Market” and “International Markets” in Part I of this Report. Our leases expire at various dates through the year 2033. +ITEM 3. Legal Proceedings +There are no material pending legal proceedings, other than ordinary routine litigation incidental to our business, to which we are a party or of which any of our property is the subject. +ITEM 4. Mine Safety Disclosures +Not applicable. +15 +Table of Contents +PART II +ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities +NIKE’s Class B Common Stock is listed on the New York Stock Exchange and trades under the symbol NKE. At July 17, 2015 , there were 23,347 holders of record of our Class B Common Stock and 20 holders of record of our Class A Common Stock. These figures do not include beneficial owners who hold shares in nominee name. The Class A Common Stock is not publicly traded but each share is convertible upon request of the holder into one share of Class B Common Stock. The following tables set forth, for each of the quarterly periods indicated, the high and low sales prices for the Class B Common Stock as reported on the New York Stock Exchange Composite Tape and dividends declared on the Class A and Class B Common Stock. +Fiscal 2015 (June 1, 2014 — May 31, 2015) +High +Low +Dividends +Declared +First quarter +$ +80.30 +$ +73.14 +$ +0.24 +Second quarter +99.76 +78.35 +0.28 +Third quarter +99.50 +90.69 +0.28 +Fourth quarter +105.50 +95.18 +0.28 +Fiscal 2014 (June 1, 2013 — May 31, 2014) +High +Low +Dividends +Declared +First quarter +$ +66.85 +$ +59.11 +$ +0.21 +Second quarter +79.87 +63.50 +0.24 +Third quarter +80.26 +69.85 +0.24 +Fourth quarter +80.09 +70.60 +0.24 +The following table presents a summary of share repurchases made by NIKE during the quarter ended May 31, 2015 , under the four-year, $8 billion share repurchase program approved by the Board in September 2012; purchases under this program began during the second quarter of fiscal 2013. +Period +Total Number of Shares Purchased +Average Price +Paid per Share +Total Number of Shares +Purchased as Part of +Publicly Announced +Plans or Programs +Maximum Number (or Approximate Dollar Value) +of Shares that May Yet +Be Purchased Under the +Plans or Programs +(In millions) +March 1 — March 31, 2015 +1,510,740 +$ +96.47 +1,510,740 +$ +2,582 +April 1 — April 30, 2015 +2,659,836 +$ +99.95 +2,659,836 +$ +2,316 +May 1 — May 31, 2015 +2,616,006 +$ +101.97 +2,616,006 +$ +2,050 +6,786,582 +$ +99.95 +6,786,582 +16 +Table of Contents +Performance Graph +The following graph demonstrates a five-year comparison of cumulative total returns for NIKE’s Class B Common Stock, the Standard & Poor’s 500 Stock Index, the Standard & Poor’s Apparel, Accessories & Luxury Goods Index and the Dow Jones U.S. Footwear Index. The graph assumes an investment of $100 on May 31, 2010 in each of our Class B Common Stock, and the stocks comprising the Standard & Poor’s 500 Stock Index, the Standard & Poor’s Apparel, Accessories & Luxury Goods Index and the Dow Jones U.S. Footwear Index. Each of the indices assumes that all dividends were reinvested on the day of issuance. +COMPARISON OF 5-YEAR CUMULATIVE TOTAL RETURN AMONG NIKE, INC.; S&P 500 INDEX; S&P APPAREL, ACCESSORIES & LUXURY GOODS INDEX AND THE DOW JONES U.S. FOOTWEAR INDEX +The Dow Jones U.S. Footwear Index consists of NIKE, Deckers Outdoor Corp., Wolverine World Wide, Inc., Iconix Brand Group, Inc., Crocs, Inc. and Steven Madden, Ltd, among other companies. Because NIKE is part of the Dow Jones U.S. Footwear Index, the price and returns of NIKE stock have a substantial effect on this index. The Standard & Poor’s Apparel, Accessories & Luxury Goods Index consists of V.F. Corp., Coach, Inc., Polo Ralph Lauren Corporation, Under Armour, Inc. and Fossil Group, Inc, among other companies. The Dow Jones U.S. Footwear Index and the Standard & Poor’s Apparel, Accessories & Luxury Goods Index include companies in two major lines of business in which the Company competes. The indices do not encompass all of the Company’s competitors, nor all product categories and lines of business in which the Company is engaged. +The stock performance shown on the performance graph above is not necessarily indicative of future performance. The Company will not make or endorse any predictions as to future stock performance. +The performance graph above is being furnished solely to accompany this Report pursuant to Item 201(e) of Regulation S-K, and is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing. +17 +Table of Contents +ITEM 6. Selected Financial Data +Unless otherwise indicated, the following disclosures reflect the Company’s continuing operations; refer to Note 15 — Discontinued Operations in the accompanying Notes to the Consolidated Financial Statements for additional information regarding discontinued operations. All per share amounts are reflective of the two-for-one stock split that began trading at the split-adjusted price on December 26, 2012. +(Dollars in millions, except per share data and financial ratios) +Financial History +2015 +2014 +2013 +2012 +2011 +Year Ended May 31, +Revenues +$ +30,601 +$ +27,799 +$ +25,313 +$ +23,331 +$ +20,117 +Gross profit +14,067 +12,446 +11,034 +10,148 +9,202 +Gross margin % +46.0 +% +44.8 +% +43.6 +% +43.5 +% +45.7 +% +Net income from continuing operations +3,273 +2,693 +2,451 +2,257 +2,163 +Net income (loss) from discontinued operations +— +— +21 +(46 +) +(39 +) +Net income +3,273 +2,693 +2,472 +2,211 +2,124 +Earnings per common share from continuing operations: +Basic +3.80 +3.05 +2.74 +2.45 +2.27 +Diluted +3.70 +2.97 +2.68 +2.40 +2.23 +Earnings per common share from discontinued operations: +Basic +— +— +0.02 +(0.05 +) +(0.04 +) +Diluted +— +— +0.02 +(0.05 +) +(0.04 +) +Weighted average common shares outstanding +861.7 +883.4 +897.3 +920.0 +951.1 +Diluted weighted average common shares outstanding +884.4 +905.8 +916.4 +939.6 +971.3 +Cash dividends declared per common share +1.08 +0.93 +0.81 +0.70 +0.60 +Cash flow from operations, inclusive of discontinued operations (1) +4,680 +3,013 +3,032 +1,932 +1,796 +Price range of common stock: +High +105.50 +80.26 +65.91 +57.20 +46.15 +Low +73.14 +59.11 +43.89 +39.29 +33.61 +At May 31, +Cash and equivalents +$ +3,852 +$ +2,220 +$ +3,337 +$ +2,254 +$ +1,877 +Short-term investments +2,072 +2,922 +2,628 +1,503 +2,661 +Inventories +4,337 +3,947 +3,484 +3,251 +2,630 +Working capital, excluding assets and liabilities of discontinued operations (2)(3) +9,642 +8,669 +9,686 +7,531 +7,275 +Total assets, excluding assets of discontinued operations (2) +21,600 +18,594 +17,545 +14,804 +14,398 +Long-term debt +1,079 +1,199 +1,210 +228 +276 +Capital lease obligations (4) +5 +74 +81 +— +— +Redeemable preferred stock +0.3 +0.3 +0.3 +0.3 +0.3 +Shareholders’ equity +12,707 +10,824 +11,081 +10,319 +9,793 +Year-end stock price +101.67 +76.91 +61.66 +54.09 +42.23 +Market capitalization +87,044 +66,921 +55,124 +49,546 +39,523 +Financial Ratios: +Return on equity +27.8 +% +24.6 +% +23.1 +% +22.0 +% +21.8 +% +Return on assets +16.3 +% +14.9 +% +15.3 +% +15.1 +% +15.0 +% +Inventory turns +4.0 +4.1 +4.2 +4.5 +4.8 +Current ratio at May 31 +2.5 +2.7 +3.5 +3.0 +2.9 +Price/Earnings ratio at May 31 +27.5 +25.9 +22.8 +23.0 +19.3 +(1) +Prior year amounts for fiscal 2014, 2013 and 2012 have been revised to correct immaterial misstatements as described in Note 1 — Summary of Significant Accounting Policies in the accompanying Notes to the Consolidated Financial Statements. +(2) +Assets of discontinued operations were $0 million, $0 million, $0 million, $615 million and $560 million for the years ended May 31, 2015 , 2014 , 2013 , 2012 and 2011 , respectively. +(3) +Liabilities of discontinued operations were $0 million, $0 million, $18 million, $170 million and $184 million for the years ended May 31, 2015 , 2014 , 2013 , 2012 and 2011 , respectively. +(4) +During the fiscal year ended May 31, 2015, the Company restructured the terms of certain capital leases, which now qualify as operating leases. +18 +Table of Contents +Selected Quarterly Financial Data +(Unaudited) +(Dollars in millions, except per share data) +1st Quarter +2nd Quarter +3rd Quarter +4th Quarter +2015 +2014 +2015 +2014 +2015 +2014 +2015 +2014 +Revenues +$ +7,982 +$ +6,971 +$ +7,380 +$ +6,431 +$ +7,460 +$ +6,972 +$ +7,779 +$ +7,425 +Gross profit +3,721 +3,132 +3,327 +2,826 +3,426 +3,103 +3,593 +3,385 +Gross margin % +46.6 +% +44.9 +% +45.1 +% +43.9 +% +45.9 +% +44.5 +% +46.2 +% +45.6 +% +Net income from continuing operations (1) +962 +779 +655 +534 +791 +682 +865 +698 +Net income (1) +962 +779 +655 +534 +791 +682 +865 +698 +Earnings per common share from continuing operations: +Basic +1.11 +0.88 +0.76 +0.60 +0.92 +0.77 +1.01 +0.80 +Diluted +1.09 +0.86 +0.74 +0.59 +0.89 +0.75 +0.98 +0.78 +Weighted average common shares outstanding +864.9 +889.4 +863.1 +888.0 +861.4 +882.3 +857.5 +873.7 +Diluted weighted average common shares outstanding +886.2 +910.7 +884.8 +910.6 +883.8 +904.8 +879.8 +895.2 +Cash dividends declared per common share +0.24 +0.21 +0.28 +0.24 +0.28 +0.24 +0.28 +0.24 +Price range of common stock: +High +80.30 +66.85 +99.76 +79.87 +99.50 +80.26 +105.50 +80.09 +Low +73.14 +59.11 +78.35 +63.50 +90.69 +69.85 +95.18 +70.60 +(1) +Net income for the three month period ended May 31, 2015 was increased by an adjustment to Income tax expense to correct amounts accrued in prior fiscal 2015 quarters on intercompany transactions. These adjustments were not material to any prior interim periods and did not impact Net income or Income tax expense for the year ended May 31, 2015. +19 +Table of Contents +ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations +NIKE designs, develops, markets and sells athletic footwear, apparel, equipment, accessories and services worldwide. We are the largest seller of athletic footwear and apparel in the world. We sell our products to retail accounts, through NIKE-owned in-line and factory retail stores and NIKE-owned internet websites (which we refer to as our “Direct to Consumer” or "DTC" operations), and through a mix of independent distributors, licensees and sales representatives in virtually all countries around the world. Our goal is to deliver value to our shareholders by building a profitable global portfolio of branded footwear, apparel, equipment and accessories businesses. Our strategy is to achieve long-term revenue growth by creating innovative, “must have” products, building deep personal consumer connections with our brands and delivering compelling consumer experiences at retail and online. +In addition to achieving long-term, sustainable revenue growth, we continue to strive to deliver shareholder value by driving operational excellence in several key areas: +• +Expanding gross margin by: +- Delivering innovative, premium products that command higher prices while maintaining a balanced price-to-value proposition for consumers; +- Reducing product costs through a continued focus on manufacturing efficiency, product design and innovation; +- Making our supply chain a competitive advantage by investing in new technologies that increase automation, help reduce waste and have long-term potential to increase both customization of our products and speed to market; and +- Driving growth in our higher gross margin DTC business as part of an integrated marketplace growth strategy across our DTC and wholesale operations. +• +Optimizing selling and administrative expense by focusing on: +- Investments in consumer engagement that drive economic returns in the form of incremental revenue and gross profit; +- Infrastructure investments that improve the efficiency and effectiveness of our operations; and +- Increasing the productivity of our legacy infrastructure. +• +Improving working capital efficiency; and +• +Deploying capital effectively. +Through execution of this strategy, our long-term financial goals continue to be: +• +High single-digit revenue growth, +• +Mid-teens earnings per share growth, +• +Strong return on invested capital and accelerated cash flows and +• +Sustainable, profitable, long-term growth through effective management of our diversified portfolio of businesses. +Over the past ten years, we have achieved many of these financial goals. During this time, revenues and diluted earnings per common share for NIKE, Inc., inclusive of both continuing and discontinued operations, have grown 8% and 13%, respectively, on an annual compounded basis. Our return on invested capital has increased from 23.2% to 28.1% and we expanded gross margins by approximately 150 basis points. +On November 15, 2012, we announced a two-for-one stock split of both Class A and Class B Common shares. The stock split was in the form of a 100% stock dividend payable on December 24, 2012 to shareholders of record at the close of business on December 10, 2012. Common stock began trading at the split-adjusted price on December 26, 2012. All share numbers and per share amounts presented reflect the stock split. +Our fiscal 2015 results from continuing operations demonstrated NIKE's ongoing commitment to deliver consistent growth in revenues, earnings and cash returns to shareholders, while investing for long-term growth. Despite significant foreign currency headwinds, we delivered record revenues and earnings per share in fiscal 2015. NIKE, Inc. Revenues grew 10% to $30.6 billion, gross margin expanded 120 basis points, Net income from continuing operations increased 22% to $3.3 billion and diluted earnings per common share increased 25% to $3.70. +Earnings before interest and income taxes ("EBIT") from continuing operations increased 18% for fiscal 2015, driven by revenue growth and gross margin expansion, which more than offset higher selling and administrative expense. The increase in revenues was attributable to growth across nearly all NIKE Brand geographies, key categories and product types. This broad-based growth was primarily fueled by: +• +Innovative performance and sportswear products, incorporating proprietary technology platforms such as NIKE Air, Free, Zoom, Lunar, Flywire, Dri-Fit and Flyknit; +• +Deep brand connections to consumers through a category lens, reinforced by investments in endorsements by high-profile athletes, sports teams and leagues, high-impact marketing around global sporting events (such as the World Cup and NFL Super Bowl) and digital marketing; and +• +Strong category retail presentation online and at NIKE-owned and retail partner stores. +Our Converse business also grew, with revenue and EBIT growth of 18% and 4%, respectively. +Gross margin increased primarily due to higher average selling prices and the favorable impact of our higher-margin DTC businesses, partially offset by higher product input costs, primarily a result of labor input cost inflation and shifts in mix to higher-cost products. +For fiscal 2015, the growth of our net income from continuing operations was positively affected by a year-over-year decrease in our effective tax rate of 180 basis points primarily due to the favorable resolution of audits in several jurisdictions. In addition, diluted earnings per common share grew at a higher rate than net income due to a 2% decrease in the weighted average diluted common shares outstanding, driven by our share repurchase program. +20 +Table of Contents +While foreign currency markets remain volatile, we continue to see opportunities to drive future growth and remain committed to effectively managing our business to achieve our financial goals over the long-term by executing against the operational strategies outlined above. +Results of Operations +Unless otherwise indicated, the following disclosures reflect the Company’s continuing operations. +(Dollars in millions, except per share data) +Fiscal 2015 +Fiscal 2014 +% Change +Fiscal 2013 +% Change +Revenues +$ +30,601 +$ +27,799 +10 +% +$ +25,313 +10 +% +Cost of sales +16,534 +15,353 +8 +% +14,279 +8 +% +Gross profit +14,067 +12,446 +13 +% +11,034 +13 +% +Gross margin % +46.0 +% +44.8 +% +43.6 +% +Demand creation expense +3,213 +3,031 +6 +% +2,745 +10 +% +Operating overhead expense +6,679 +5,735 +16 +% +5,051 +14 +% +Total selling and administrative expense +9,892 +8,766 +13 +% +7,796 +12 +% +% of Revenues +32.3 +% +31.5 +% +30.8 +% +Interest expense (income), net +28 +33 +— +(3 +) +— +Other (income) expense, net +(58 +) +103 +— +(15 +) +— +Income before income taxes +4,205 +3,544 +19 +% +3,256 +9 +% +Income tax expense +932 +851 +10 +% +805 +6 +% +Effective tax rate +22.2 +% +24.0 +% +24.7 +% +Net income from continuing operations +3,273 +2,693 +22 +% +2,451 +10 +% +Net income from discontinued operations (1) +— +— +— +21 +— +Net income +$ +3,273 +$ +2,693 +22 +% +$ +2,472 +9 +% +Diluted earnings per common share - continuing operations +$ +3.70 +$ +2.97 +25 +% +$ +2.68 +11 +% +Diluted earnings per common share - discontinued operations (1) +$ +— +$ +— +— +$ +0.02 +— +(1) +During fiscal 2013, we divested of Umbro and Cole Haan, allowing us to focus our resources on driving growth in the NIKE, Jordan, Converse and Hurley brands. As of May 31, 2013, we had substantially completed all transition services related to the sale of both businesses. The results of the divestitures are presented as discontinued operations. Please refer to Note 15 — Discontinued Operations in the accompanying Notes to the Consolidated Financial Statements for more detail. +21 +Table of Contents +Consolidated Operating Results +Revenues +(Dollars in millions) +Fiscal 2015 +Fiscal 2014 (1) +% Change +% Change Excluding Currency Changes (2) +Fiscal 2013 (1) +% Change +% Change Excluding Currency Changes (2) +NIKE, Inc. Revenues: +NIKE Brand Revenues by: +Footwear +$ +18,318 +$ +16,208 +13 +% +17 +% +$ +14,635 +11 +% +12 +% +Apparel +8,636 +8,109 +6 +% +10 +% +7,491 +8 +% +10 +% +Equipment +1,632 +1,670 +-2 +% +1 +% +1,640 +2 +% +4 +% +Global Brand Divisions (3) +115 +125 +-8 +% +-2 +% +115 +9 +% +6 +% +Total NIKE Brand Revenues +28,701 +26,112 +10 +% +14 +% +23,881 +9 +% +11 +% +Converse +1,982 +1,684 +18 +% +21 +% +1,449 +16 +% +15 +% +Corporate (4) +(82 +) +3 +— +— +(17 +) +— +— +TOTAL NIKE, INC. REVENUES +$ +30,601 +$ +27,799 +10 +% +14 +% +$ +25,313 +10 +% +11 +% +Supplemental NIKE Brand Revenues Details: +NIKE Brand Revenues by: +Sales to Wholesale Customers +$ +21,952 +$ +20,683 +6 +% +10 +% +$ +19,401 +7 +% +8 +% +Sales Direct to Consumer +6,634 +5,304 +25 +% +29 +% +4,365 +22 +% +22 +% +Global Brand Divisions (3) +115 +125 +-8 +% +-2 +% +115 +9 +% +6 +% +TOTAL NIKE BRAND REVENUES +$ +28,701 +$ +26,112 +10 +% +14 +% +$ +23,881 +9 +% +11 +% +NIKE Brand Revenues on a Wholesale Equivalent Basis: (5) +Sales to Wholesale Customers +$ +21,952 +$ +20,683 +6 +% +10 +% +$ +19,401 +7 +% +8 +% +Sales from our Wholesale Operations to Direct to Consumer Operations +3,881 +3,107 +25 +% +29 +% +2,499 +24 +% +25 +% +TOTAL NIKE BRAND WHOLESALE EQUIVALENT REVENUES +$ +25,833 +$ +23,790 +9 +% +13 +% +$ +21,900 +9 +% +10 +% +NIKE Brand Wholesale Equivalent Revenues by: (5) +Men's +$ +14,694 +$ +14,001 +5 +% +9 +% +$ +13,073 +7 +% +9 +% +Women's +5,724 +4,971 +15 +% +20 +% +4,494 +11 +% +12 +% +Young Athletes' +4,301 +3,737 +15 +% +19 +% +3,251 +15 +% +16 +% +Others (6) +1,114 +1,081 +3 +% +7 +% +1,082 +0 +% +1 +% +TOTAL NIKE BRAND WHOLESALE EQUIVALENT REVENUES +$ +25,833 +$ +23,790 +9 +% +13 +% +$ +21,900 +9 +% +10 +% +NIKE Brand Wholesale Equivalent Revenues by: (5) +Running +$ +4,853 +$ +4,623 +5 +% +9 +% +$ +4,274 +8 +% +10 +% +Basketball +3,715 +3,119 +19 +% +21 +% +2,629 +19 +% +19 +% +Football (Soccer) +2,246 +2,413 +-7 +% +-2 +% +2,043 +18 +% +21 +% +Men’s Training +2,537 +2,483 +2 +% +4 +% +2,393 +4 +% +5 +% +Women’s Training +1,279 +1,145 +12 +% +16 +% +1,065 +8 +% +10 +% +Action Sports +736 +738 +0 +% +4 +% +683 +8 +% +9 +% +Sportswear +6,596 +5,742 +15 +% +20 +% +5,456 +5 +% +7 +% +Golf +771 +789 +-2 +% +0 +% +792 +0 +% +1 +% +Others (7) +3,100 +2,738 +13 +% +17 +% +2,565 +7 +% +8 +% +TOTAL NIKE BRAND WHOLESALE EQUIVALENT REVENUES +$ +25,833 +$ +23,790 +9 +% +13 +% +$ +21,900 +9 +% +10 +% +22 +Table of Contents +(1) +Certain prior year amounts have been reclassified to conform to fiscal 2015 presentation. These changes had no impact on previously reported results of operations or shareholders ’ equity. +(2) +Results have been restated using actual exchange rates in use during the comparative period to enhance the visibility of the underlying business trends by excluding the impact of translation arising from foreign currency exchange rate fluctuations. +(3) +Global Brand Divisions revenues primarily represent NIKE Brand licensing businesses that are not part of a geographic operating segment. +(4) +Corporate revenues primarily consist of foreign currency revenue-related hedge gains and losses generated by entities within the NIKE Brand geographic operating segments and Converse through our centrally managed foreign exchange risk management program. +(5) +References to NIKE Brand wholesale equivalent revenues are intended to provide context as to the total size of our NIKE Brand market footprint if we had no Direct to Consumer operations. NIKE Brand wholesale equivalent revenues consist of (1) sales to external wholesale customers and (2) internal sales from our wholesale operations to our Direct to Consumer operations which are charged at prices that are comparable to prices charged to external wholesale customers. +(6) +Others include all unisex products, equipment and other products not allocated to Men ’ s, Women ’ s and Young Athletes ’ , as well as certain adjustments that are not allocated to products designated by gender or age. +(7) +Others include all other categories and certain adjustments that are not allocated at the category level. +Fiscal 2015 Compared to Fiscal 2014 +On a currency-neutral basis, revenues from NIKE, Inc. continuing operations grew 14% for fiscal 2015, driven by increases in revenues for both the NIKE Brand and Converse. Every NIKE Brand geography delivered higher revenues for fiscal 2015 as our category offense continued to deliver innovative products, deep brand connections and compelling retail experiences to consumers. North America contributed 5 percentage points of the increase in NIKE, Inc. revenues, while Western Europe contributed 4 percentage points, Greater China contributed 2 percentage points and Central & Eastern Europe, Emerging Markets and Converse each contributed 1 percentage point. +Excluding the effects of changes in currency exchange rates, NIKE Brand footwear and apparel revenues increased 17% and 10%, respectively, while NIKE Brand equipment revenues increased 1% during fiscal 2015. The increase in NIKE Brand footwear revenues for fiscal 2015 was driven by strong performance in our Sportswear, Basketball, Running and Football (Soccer) categories. Footwear unit sales in fiscal 2015 increased 9% and increases in average selling price per pair contributed approximately 8 percentage points of footwear revenue growth. The increase in average selling price per pair was driven primarily by shifts in mix to higher-priced products, and to a lesser extent, the favorable impact of growth in our higher-priced DTC business. +The constant-currency increase in NIKE Brand apparel revenues for fiscal 2015 was driven by growth in most key categories, led by Sportswear, Running and Women's Training, which were partially offset by a decline in Football (Soccer) due largely to the comparison to significant sales of replica apparel in advance of the World Cup in 2014. Fiscal 2015 unit sales of apparel increased 8% and increases in average selling price per unit contributed approximately 2 percentage points of apparel revenue growth. The increase in average selling price per unit was driven primarily by increased revenues from our higher-priced DTC business. +While wholesale revenues remain the largest component of overall NIKE Brand revenues, we continue to expand our DTC businesses in each of our geographies. Our NIKE Brand DTC operations include NIKE-owned in-line and factory stores, as well as online sales through NIKE-owned websites. For fiscal 2015, DTC revenues represented approximately 23% of our total NIKE Brand revenues compared to 20% in fiscal 2014. On a currency-neutral basis, DTC revenues grew 29% for fiscal 2015, driven by strong comparable store sales growth of 16%, significant online sales growth and the addition of new stores. Comparable store sales include revenues from NIKE-owned in-line and factory stores for which all three of the following requirements have been met: (1) the store has been open at least one year, (2) square footage has not changed by more than 15% within the past year and (3) the store has not been permanently repositioned within the past year. Online sales through NIKE-owned websites, which are not included in comparable store sales, grew 59% in fiscal 2015. Online sales represented approximately 18% of our total NIKE Brand DTC revenues for fiscal 2015 compared to 15% for fiscal 2014. +On a wholesale equivalent basis and excluding the effects of changes in currency exchange rates, fiscal 2015 NIKE Brand Men’s revenues increased 9%, driven by growth in our Sportswear, Basketball and Running categories. Women’s revenues accelerated in fiscal 2015, achieving 20% growth primarily due to increases in Sportswear, Running and Women's Training categories. Revenues in our Young Athletes' business increased 19% as a result of continued efforts to expand footwear and apparel offerings for this group across multiple categories, particularly Basketball. +Fiscal 2014 Compared to Fiscal 2013 +On a currency-neutral basis, revenues from NIKE, Inc. continuing operations grew 11% for fiscal 2014, driven by increases in revenues for both the NIKE Brand and Converse. Every NIKE Brand geography delivered higher revenues for fiscal 2014. North America contributed 5 percentage points of the increase in NIKE, Inc. revenues, while Western Europe and Emerging Markets each contributed 2 percentage points and Central & Eastern Europe and Converse each contributed 1 percentage point. +On a currency-neutral basis, NIKE Brand footwear and apparel revenues increased 12% and 10%, respectively, while NIKE Brand equipment revenues increased 4% during fiscal 2014. The increase in NIKE Brand footwear revenues for fiscal 2014 was mainly due to growth in our Basketball, Sportswear, Running and Football (Soccer) categories. Footwear unit sales in fiscal 2014 increased approximately 7% and the average selling price per pair contributed approximately 5 percentage points of footwear revenue growth, driven nearly equally by price increases and shifts in mix to higher-priced products. +For NIKE Brand apparel, the increase in revenues for fiscal 2014 was driven by growth in all key categories, most notably our Football (Soccer), Running and Women's Training categories. In fiscal 2014, unit sales of apparel increased approximately 6% and the average selling price per unit contributed approximately 4 percentage points of apparel revenue growth, driven by price increases and, to a lesser extent, a shift in mix to higher-priced products. +For fiscal 2014, DTC revenues represented approximately 20% of our total NIKE Brand revenues compared to 18% in fiscal 2013. On a currency-neutral basis, DTC revenues grew 22% for fiscal 2014, as comparable store sales grew 10%, and we continued to open new stores and expand our e-commerce business. Online sales through NIKE-owned websites grew 42% in fiscal 2014. Online sales represented approximately 15% of our total NIKE Brand DTC revenues for fiscal 2014 compared to 12% for fiscal 2013. +23 +Table of Contents +On a wholesale equivalent basis and excluding the effects of changes in currency exchange rates, fiscal 2014 NIKE Brand Men's revenues increased 9% mainly as a result of strong growth in our Basketball, Football (Soccer), Running and Sportswear categories. Women's revenues increased 12% in large part due to increases in our Running, Sportswear and Women's Training categories. The 16% increase in the Young Athletes' business was driven by increases in the Basketball and Football (Soccer) categories in part due to our expanded footwear and apparel offerings for this age group. +Futures Orders +Futures orders for NIKE Brand footwear and apparel scheduled for delivery from June through November 2015 were 2% higher than the orders reported for the comparable prior year period. The U.S. Dollar futures order amount is calculated based upon our internal forecast of the currency exchange rates under which our revenues will be translated during this period. Excluding the impact of currency changes, futures orders increased 13%, with unit orders and average selling price per unit contributing approximately 8 and 5 percentage points of growth, respectively. +By geography, futures orders growth was as follows: +Reported Futures Orders +Futures Orders +Excluding Currency Changes (1) +North America +13 +% +13 +% +Western Europe +-11 +% +14 +% +Central & Eastern Europe +-9 +% +17 +% +Greater China +20 +% +22 +% +Japan +1 +% +20 +% +Emerging Markets +-14 +% +2 +% +TOTAL NIKE BRAND FUTURES ORDERS +2 +% +13 +% +(1) +Reported futures have been restated using prior year exchange rates for the comparative period to enhance the visibility of the underlying business trends excluding the impact of foreign currency exchange rate fluctuations. +The reported futures orders growth is not necessarily indicative of our expectation of revenue growth during this period. This is due to year-over-year changes in shipment timing, changes in the mix of orders between futures and at-once orders and because the fulfillment of certain orders may fall outside of the schedule noted above. In addition, exchange rate fluctuations as well as differing levels of order cancellations, discounts and returns can cause differences in the comparisons between futures orders and actual revenues. Moreover, a portion of our revenue is not derived from futures orders, including sales of at-once and closeout NIKE Brand footwear and apparel, sales of NIKE Brand equipment, sales from our DTC operations and sales from Converse, NIKE Golf and Hurley. +Gross Margin +(Dollars in millions) +Fiscal 2015 +Fiscal 2014 +% Change +Fiscal 2013 +% Change +Gross profit +$ +14,067 +$ +12,446 +13 +% +$ +11,034 +13 +% +Gross margin % +46.0 +% +44.8 +% +120 +bps +43.6 +% +120 +bps +Fiscal 2015 Compared to Fiscal 2014 +For fiscal 2015, our consolidated gross margin was 120 basis points higher than fiscal 2014, primarily driven by the following factors: +• +Higher NIKE Brand average net selling prices (increasing gross margin approximately 250 basis points) primarily attributable to shifts in mix to higher-priced products and, to a lesser extent, increased prices, in part in response to inflationary conditions in certain territories; +• +Higher NIKE Brand product costs (decreasing gross margin approximately 190 basis points) largely due to shifts in mix to higher-cost products, labor input cost inflation and higher air freight costs, in part to mitigate the negative impacts from product delays due to the West Coast port congestion in the United States; +• +Growth in our higher-margin DTC business (increasing gross margin approximately 40 basis points); and +• +Changes in foreign currency exchange rates (including gains and losses on hedge transactions) increased gross margin approximately 20 basis points. +Fiscal 2014 Compared to Fiscal 2013 +For fiscal 2014, our consolidated gross margin was 120 basis points higher than fiscal 2013, primarily driven by the following factors: +• +Higher NIKE Brand average net selling prices (increasing gross margin approximately 160 basis points) attributable to both shifts in mix to higher-priced products and price increases; +• +Higher NIKE Brand product costs (decreasing gross margin approximately 50 basis points), primarily due to shifts in mix to higher-cost products, as well as labor input cost inflation; +• +Growth in our higher-margin DTC business (increasing gross margin approximately 40 basis points); +• +Improved margins due to cleaner closeout inventories (increasing margin approximately 20 basis points); and +• +Unfavorable changes in foreign currency exchange rates, including hedges (decreasing gross margin approximately 50 basis points). +24 +Table of Contents +Total Selling and Administrative Expense +(Dollars in millions) +Fiscal 2015 +Fiscal 2014 +% Change +Fiscal 2013 +% Change +Demand creation expense (1) +$ +3,213 +$ +3,031 +6 +% +$ +2,745 +10 +% +Operating overhead expense +6,679 +5,735 +16 +% +5,051 +14 +% +Total selling and administrative expense +$ +9,892 +$ +8,766 +13 +% +$ +7,796 +12 +% +% of Revenues +32.3 +% +31.5 +% +80 +bps +30.8 +% +70 +bps +(1) +Demand creation expense consists of advertising and promotion costs, including costs of endorsement contracts, television, digital and print advertising, brand events and retail brand presentation. +Fiscal 2015 Compared to Fiscal 2014 +Demand creation expense increased 6% for fiscal 2015 compared to the prior year, primarily due to support for key brand and consumer events, including the World Cup in early fiscal 2015, increased digital brand marketing, investments in DTC marketing and higher sports marketing expense. Changes in foreign currency exchange rates decreased growth in Demand creation expense by approximately 4 percentage points for fiscal 2015. +Operating overhead expense increased 16% compared to the prior year, primarily driven by investments in our rapidly growing DTC business, including new store openings and higher variable expenses, investments in operational infrastructure and consumer-focused digital capabilities and higher performance-based compensation. For fiscal 2015, changes in foreign currency exchange rates decreased growth in Operating overhead expense by approximately 3 percentage points. +Fiscal 2014 Compared to Fiscal 2013 +Demand creation expense increased 10% compared to the prior year, mainly driven by marketing support for events, including the World Cup, higher sports marketing expense, key product launches and initiatives and investments to upgrade the presentation of our products in wholesale accounts. For fiscal 2014, changes in foreign currency exchange rates did not have a material impact on Demand creation expense . +Compared to the prior year, Operating overhead expense increased 14%, primarily attributable to growth in our DTC business driven by new store openings, higher personnel costs and e-commerce launches, as well as increased investments in our digital capabilities and corporate infrastructure. Changes in foreign currency exchange rates did not have a material impact on Operating overhead expense for fiscal 2014. +Other (Income) Expense, Net +(In millions) +Fiscal 2015 +Fiscal 2014 +Fiscal 2013 +Other (income) expense, net +$ +(58 +) +$ +103 +$ +(15 +) +Other (income) expense, net comprises foreign currency conversion gains and losses from the re-measurement of monetary assets and liabilities denominated in non-functional currencies and the impact of certain foreign currency derivative instruments, as well as unusual or non-operating transactions that are outside the normal course of business. +Fiscal 2015 Compared to Fiscal 2014 +Other (income) expense, net shifted from $103 million of other expense, net for fiscal 2014 to $58 million of other (income), net for fiscal 2015, primarily driven by a $147 million change to net foreign currency conversion gains, primarily due to significant hedge gains from available-for-sale investments, as well as an adverse legal judgment in the prior year related to a long outstanding bankruptcy case for a former customer in Western Europe. +We estimate the combination of the translation of foreign currency-denominated profits from our international business and the year-over-year change in foreign currency-related gains and losses included in Other (income) expense, net had an unfavorable impact on our Income before income taxes of $73 million for fiscal 2015. +Fiscal 2014 Compared to Fiscal 2013 +Other (income) expense, net shifted from $15 million of other (income), net for fiscal 2013 to $103 million of other expense, net for fiscal 2014, primarily driven by a $90 million adverse change in foreign currency conversion gains and losses as well as an adverse legal judgment in the second quarter of fiscal 2014 related to a long outstanding bankruptcy case for a former customer in Western Europe. +We estimate the combination of the translation of foreign currency-denominated profits from our international businesses and the year-over-year change in foreign currency-related gains and losses included in Other (income) expense, net had an unfavorable impact on our Income before income taxes of $139 million for fiscal 2014. +Income Taxes +Fiscal 2015 +Fiscal 2014 +% Change +Fiscal 2013 +% Change +Effective tax rate +22.2 +% +24.0 +% +(180) bps +24.7 +% +(70) bps +Fiscal 2015 Compared to Fiscal 2014 +The 180 basis point decrease in our effective tax rate for the fiscal year was primarily due to the favorable resolution of audits in several jurisdictions. +25 +Table of Contents +Fiscal 2014 Compared to Fiscal 2013 +The 70 basis point decrease in our effective tax rate for the fiscal year was primarily driven by an increase in earnings in lower tax jurisdictions. During the fourth quarter of the fiscal year ended May 31, 2014, we reached a resolution with the IRS on an Advanced Pricing Agreement. This agreement did not have a material impact on our effective tax rate for fiscal 2014. Refer to Note 9 — Income Taxes in the accompanying Notes to the Consolidated Financial Statements for additional disclosure. +Operating Segments +Our reportable operating segments are evidence of the structure of the Company's internal organization. The NIKE Brand segments are defined by geographic regions for operations participating in NIKE Brand sales activity. +Each NIKE Brand geographic segment operates predominantly in one industry: the design, development, marketing and selling of athletic footwear, apparel and equipment. The Company’s reportable operating segments for the NIKE Brand are: North America, Western Europe, Central & Eastern Europe, Greater China, Japan and Emerging Markets, and include results for the NIKE, Jordan and Hurley brands. The Company’s NIKE Brand DTC operations are managed within each geographic operating segment. Converse is also a reportable segment for NIKE, Inc., and operates in one industry: the design, marketing, licensing and selling of casual sneakers, apparel and accessories. +As part of our centrally managed foreign exchange risk management program, standard foreign currency rates are assigned twice per year to each NIKE Brand entity in our geographic operating segments and Converse. These rates are set approximately nine months in advance of the future selling season based on average market spot rates in the calendar month preceding the date they are established. Inventories and cost of sales for geographic operating segments and Converse reflect the use of these standard rates to record non-functional currency product purchases into the entity’s functional currency. Differences between assigned standard foreign currency rates and actual market rates are included in Corporate together with foreign currency hedge gains and losses generated from our centrally managed foreign exchange risk management program and other conversion gains and losses. +The breakdown of revenues is as follows: +(Dollars in millions) +Fiscal 2015 +Fiscal 2014 +% Change +% Change Excluding Currency Changes (1) +Fiscal 2013 +% Change +% Change Excluding Currency Changes (1) +North America +$ +13,740 +$ +12,299 +12 +% +12 +% +$ +11,158 +10 +% +10 +% +Western Europe +5,709 +4,979 +15 +% +21 +% +4,193 +19 +% +14 +% +Central & Eastern Europe +1,417 +1,387 +2 +% +15 +% +1,229 +13 +% +15 +% +Greater China +3,067 +2,602 +18 +% +19 +% +2,478 +5 +% +3 +% +Japan +755 +771 +-2 +% +9 +% +876 +-12 +% +5 +% +Emerging Markets +3,898 +3,949 +-1 +% +8 +% +3,832 +3 +% +13 +% +Global Brand Divisions (2) +115 +125 +-8 +% +-2 +% +115 +9 +% +6 +% +Total NIKE Brand Revenues +28,701 +26,112 +10 +% +14 +% +23,881 +9 +% +11 +% +Converse +1,982 +1,684 +18 +% +21 +% +1,449 +16 +% +15 +% +Corporate (3) +(82 +) +3 +— +— +(17 +) +— +— +TOTAL NIKE, INC. REVENUES +$ +30,601 +$ +27,799 +10 +% +14 +% +$ +25,313 +10 +% +11 +% +(1) +Results have been restated using actual exchange rates in use during the comparative period to enhance the visibility of the underlying business trends excluding the impact of translation arising from foreign currency exchange rate fluctuations. +(2) +Global Brand Divisions revenues primarily represent NIKE Brand licensing businesses that are not part of a geographic operating segment. +(3) +Corporate revenues primarily consist of foreign currency revenue-related hedge gains and losses generated by entities within the NIKE Brand geographic operating segments and Converse through our centrally managed foreign exchange risk management program. +The primary financial measure used by the Company to evaluate performance of individual operating segments is earnings before interest and taxes (commonly referred to as “EBIT”), which represents Net income before Interest expense (income), net and Income tax expense in the Consolidated Statements of Income. As discussed in Note 18 — Operating Segments and Related Information in the accompanying Notes to the Consolidated Financial Statements, certain corporate costs are not included in EBIT of our operating segments. +26 +Table of Contents +The breakdown of earnings before interest and taxes is as follows: +(Dollars in millions) +Fiscal 2015 +Fiscal 2014 (1) +% Change +Fiscal 2013 (1) +% Change +North America +$ +3,645 +$ +3,077 +18 +% +$ +2,639 +17 +% +Western Europe +1,277 +855 +49 +% +643 +33 +% +Central & Eastern Europe +247 +279 +-11 +% +234 +19 +% +Greater China +993 +816 +22 +% +813 +0 +% +Japan +100 +131 +-24 +% +139 +-6 +% +Emerging Markets +818 +952 +-14 +% +985 +-3 +% +Global Brand Divisions +(2,263 +) +(1,993 +) +-14 +% +(1,716 +) +-16 +% +Total NIKE Brand +4,817 +4,117 +17 +% +3,737 +10 +% +Converse +517 +496 +4 +% +425 +17 +% +Corporate +(1,101 +) +(1,036 +) +-6 +% +(909 +) +-14 +% +TOTAL CONSOLIDATED EARNINGS +BEFORE INTEREST AND TAXES +4,233 +3,577 +18 +% +3,253 +10 +% +Interest expense (income), net +28 +33 +— +(3 +) +— +TOTAL CONSOLIDATED INCOME +BEFORE INCOME TAXES +$ +4,205 +$ +3,544 +19 +% +$ +3,256 +9 +% +(1) +Certain prior year amounts have been reclassified to conform to fiscal 2015 presentation. These changes had no impact on previously reported results of operations or shareholders’ equity. +North America +(Dollars in millions) +Fiscal 2015 +Fiscal 2014 +% Change +% Change Excluding Currency Changes +Fiscal 2013 +% Change +% Change Excluding Currency Changes +Revenues by: +Footwear +$ +8,506 +$ +7,495 +13 +% +14 +% +$ +6,751 +11 +% +11 +% +Apparel +4,410 +3,937 +12 +% +12 +% +3,591 +10 +% +10 +% +Equipment +824 +867 +-5 +% +-5 +% +816 +6 +% +6 +% +TOTAL REVENUES +$ +13,740 +$ +12,299 +12 +% +12 +% +$ +11,158 +10 +% +10 +% +Revenues by: +Sales to Wholesale Customers +$ +10,243 +$ +9,296 +10 +% +10 +% +$ +8,571 +8 +% +9 +% +Sales Direct to Consumer +3,497 +3,003 +16 +% +17 +% +2,587 +16 +% +16 +% +TOTAL REVENUES +$ +13,740 +$ +12,299 +12 +% +12 +% +$ +11,158 +10 +% +10 +% +EARNINGS BEFORE INTEREST +AND TAXES +$ +3,645 +$ +3,077 +18 +% +$ +2,639 +17 +% +Fiscal 2015 Compared to Fiscal 2014 +North America revenues increased 12%, despite congestion at ports on the West Coast of the United States in the second half of the fiscal year, which affected the Company's supply chain and flow of product to customers. Revenue growth was driven by nearly all key categories for fiscal 2015, led by our Basketball, Sportswear and Men's and Women's Training categories. On a constant currency basis, DTC revenue grew 17% for fiscal 2015, fueled by comparable store sales growth of 8%, strong online sales growth and the addition of new stores. +Footwear revenue growth was driven by increases in most key categories, notably Basketball and Sportswear. Unit sales of footwear for fiscal 2015 increased 6% and higher average selling price per pair contributed approximately 8 percentage points of footwear revenue growth. The increase in average selling price per pair was primarily due to shifts in mix to higher-priced products, and to a lesser extent, price increases. +Apparel revenue growth was attributable to strong demand in most key categories, led by Sportswear, Men's Training, Women's Training and Running, partially offset by slight declines in Football (Soccer) and Action Sports. For fiscal 2015, unit sales of apparel increased 9% and higher average selling price per unit contributed approximately 3 percentage points of apparel revenue growth. The increase in average selling price per unit was driven primarily by the favorable impact of our higher-priced DTC business, as well as shifts in mix to higher-priced products. +EBIT grew 18% for fiscal 2015 as a result of higher revenues, gross margin expansion and selling and administrative expense leverage. Gross margin increased 110 basis points due to shifts in mix to higher-priced products, improved off-price product margins and lower inventory obsolescence costs, partially offset by higher product input and logistics costs. Selling and administrative expense decreased as a percent of revenues despite higher demand creation expense to support key brand and sporting events and higher sports marketing expense. Operating overhead costs also increased to support DTC growth and investments in infrastructure, as well as higher performance-based compensation costs. +Fiscal 2014 Compared to Fiscal 2013 +Our continued focus on the category offense drove increased demand for NIKE Brand products across all key categories for fiscal 2014. Our Basketball, Men's Training, Running and Sportswear categories fueled the revenue growth in fiscal 2014. DTC revenue growth in North America for fiscal 2014 was driven by a 7% increase in comparable store sales, the addition of 16 net new stores and strong online sales growth. +27 +Table of Contents +Footwear revenue growth in North America was driven by higher demand in nearly all key categories, led by our Basketball, Running and Sportswear categories. For fiscal 2014, unit sales increased 7% and average selling price per pair contributed 4 percentage points of footwear revenue growth. The increase in average selling price per pair was driven by price increases and shifts in mix toward higher-priced products in nearly equal amounts. +North America apparel revenue growth was fueled by higher demand in all key categories, most notably our Men's Training, Women's Training and Sportswear categories. Unit sales increased 6% and average selling price per unit contributed approximately 4 percentage points of apparel revenue growth. The increase in average selling price per unit was primarily driven by price increases, and to a lesser extent, shifts in mix to higher-priced products. +EBIT grew faster than revenues due to gross margin expansion and slight selling and administrative expense leverage. Gross margin increased 120 basis points for fiscal 2014, reflecting pricing initiatives as well as lower product costs as a result of favorable changes in product mix. These gross margin benefits were partially offset by higher off-price mix. Selling and administrative expenses grew in line with revenues as a result of higher operating overhead costs to support DTC growth and higher demand creation expense in support of the World Cup and key product and brand initiatives. +Western Europe +(Dollars in millions) +Fiscal 2015 +Fiscal 2014 +% Change +% Change Excluding Currency Changes +Fiscal 2013 +% Change +% Change Excluding Currency Changes +Revenues by: +Footwear +$ +3,876 +$ +3,299 +17 +% +25 +% +$ +2,657 +24 +% +20 +% +Apparel +1,555 +1,427 +9 +% +14 +% +1,289 +11 +% +7 +% +Equipment +278 +253 +10 +% +15 +% +247 +2 +% +-1 +% +TOTAL REVENUES +$ +5,709 +$ +4,979 +15 +% +21 +% +$ +4,193 +19 +% +14 +% +Revenues by: +Sales to Wholesale Customers +$ +4,455 +$ +4,022 +11 +% +17 +% +$ +3,481 +16 +% +11 +% +Sales Direct to Consumer +1,254 +957 +31 +% +40 +% +712 +34 +% +29 +% +TOTAL REVENUES +$ +5,709 +$ +4,979 +15 +% +21 +% +$ +4,193 +19 +% +14 +% +EARNINGS BEFORE INTEREST AND TAXES +$ +1,277 +$ +855 +49 +% +$ +643 +33 +% +Fiscal 2015 Compared to Fiscal 2014 +Excluding the changes in currency exchange rates, revenues for fiscal 2015 increased 21% and grew in every territory, led by AGS (Austria, Germany and Switzerland) and the UK & Ireland, our largest territories in Western Europe, which grew 27% and 20%, respectively. Revenues grew for every key category, most notably Sportswear and Running. DTC revenues grew 40%, driven by comparable store sales growth of 24%, strong online sales growth and the addition of new stores. +The constant currency footwear revenue growth was driven by increases in nearly every category, most notably Sportswear, Running and Football (Soccer). For fiscal 2015, unit sales of footwear increased 20% and average selling price per pair contributed approximately 5 percentage points of footwear revenue growth. The increase in average selling price per pair was driven equally by shifts in mix to higher-priced products and the favorable impact of growth in our higher-priced DTC business. +The constant currency apparel revenue growth was attributable to increases in nearly all key categories, led by Sportswear, Women's Training and Running, partially offset by a slight decline in Football (Soccer) primarily due to the impact of World Cup in fiscal 2014. Unit sales of apparel in fiscal 2015 increased 14% while average selling price per unit was flat compared to the prior year. +Despite the negative translation impact from changes in foreign currency exchange rates, most notably the Euro, reported EBIT grew 49% for fiscal 2015 as a result of strong revenue growth, gross margin expansion and selling and administrative expense leverage. Gross margin increased 190 basis points, primarily due to favorable standard foreign currency exchange rates and higher average selling prices, which were only partially offset by higher product costs. Selling and administrative expense decreased as a percent of revenues despite increases in operating overhead, primarily as a result of higher costs to support our growing DTC business. Demand creation increased largely as a result of higher sports marketing and digital demand creation costs. +Fiscal 2014 Compared to Fiscal 2013 +On a currency-neutral basis, all territories in Western Europe reported revenue growth for fiscal 2014, except Italy and Iberia, which declined 7% and 1%, respectively. Revenues for the U.K. & Ireland and AGS increased 20% and 23%, respectively. On a category basis, revenue growth in fiscal 2014 was fueled by our Running, Football (Soccer) and Sportswear categories. The growth in DTC revenues for fiscal 2014 was driven by 17% growth in comparable store sales, rapid growth in online sales and the addition of 19 net new stores. +Constant currency footwear revenue growth in Western Europe reflected increases in every key category, most notably our Sportswear, Running, Football (Soccer) and Basketball categories. Unit sales in fiscal 2014 increased 11% and average selling price per pair contributed approximately 9 percentage points of footwear revenue growth. The increase in average price per pair was primarily the result of price increases, shifts in mix to higher-priced products and lower discounts. +The constant currency increase in Western Europe apparel revenue was due to increases in Football (Soccer), Running and Women's Training, partially offset by a decline in Sportswear. Unit sales increased 3% while average selling price per unit contributed approximately 4 percentage points of apparel revenue growth, driven primarily by lower discounts on off-price closeout sales compared to the prior year. +28 +Table of Contents +On a reported basis, EBIT for fiscal 2014 grew at a faster rate than revenues as a result of a 150 basis point increase in gross margin and selling and administrative expense leverage. The gross margin increase was fueled by higher average selling prices, growth in our higher-margin DTC business, lower discounts and lower off-price mix, which more than offset unfavorable standard foreign currency exchange rates and higher product input costs. Selling and administrative expense was lower as a percent of revenue despite higher operating overhead costs to support growth in our DTC business and higher demand creation spending for sports marketing and support for key events, such as the World Cup. +Central & Eastern Europe +(Dollars in millions) +Fiscal 2015 +Fiscal 2014 +% Change +% Change Excluding Currency Changes +Fiscal 2013 +% Change +% Change Excluding Currency Changes +Revenues by: +Footwear +$ +827 +$ +763 +8 +% +22 +% +$ +672 +14 +% +15 +% +Apparel +495 +532 +-7 +% +5 +% +468 +14 +% +17 +% +Equipment +95 +92 +3 +% +14 +% +89 +3 +% +7 +% +TOTAL REVENUES +$ +1,417 +$ +1,387 +2 +% +15 +% +$ +1,229 +13 +% +15 +% +Revenues by: +Sales to Wholesale Customers +$ +1,237 +$ +1,245 +-1 +% +11 +% +$ +1,126 +11 +% +13 +% +Sales Direct to Consumer +180 +142 +27 +% +48 +% +103 +38 +% +45 +% +TOTAL REVENUES +$ +1,417 +$ +1,387 +2 +% +15 +% +$ +1,229 +13 +% +15 +% +EARNINGS BEFORE INTEREST AND TAXES +$ +247 +$ +279 +-11 +% +$ +234 +19 +% +Fiscal 2015 Compared to Fiscal 2014 +Excluding changes in currency exchange rates, Central & Eastern Europe revenues for fiscal 2015 grew 15%, attributable to increases in most territories. Turkey, one of our largest territories, grew 23% and our distributors business grew 18%, while revenues declined in Israel, our smallest territory. On a category basis, revenue growth was driven by increases in most key categories, primarily Sportswear and Running. DTC revenues increased 48%, driven by strong comparable store sales growth of 28%, the addition of new stores and online sales growth. +The constant currency growth in footwear revenue in fiscal 2015 was driven by growth in nearly all key categories, most notably Sportswear and Running. Unit sales of footwear increased 11% and increases in average selling price per pair contributed approximately 11 percentage points of footwear revenue growth. The increase in average selling price per pair was driven by price increases in response to inflationary conditions in certain territories, as well as shifts in mix to higher-priced products. +The constant currency growth in apparel revenue in fiscal 2015 resulted from growth in most key categories, led by Sportswear and Running, partially offset by a decline in Football (Soccer) due to comparison to strong sales related to the World Cup in fiscal 2014. Unit sales of apparel increased 1% and increases in average selling price per unit contributed approximately 4 percentage points of apparel revenue growth. The increase in average selling price per unit was primarily due to price increases in response to inflationary conditions in certain territories. +On a reported basis, EBIT declined 11% for fiscal 2015, primarily reflecting the impact of weakening foreign currency exchange rates. Reported revenue increases and slight selling and administrative expense leverage were more than offset by lower gross margin. Gross margin decreased 340 basis points as higher product costs and unfavorable standard foreign currency exchange rates were only partially offset by higher average selling prices. Selling and administrative expense decreased as a percent of revenue despite increases in both demand creation and operating overhead. Operating overhead increased primarily as a result of investments in our growing DTC business, while demand creation increased as a result of higher sports marketing costs. +Fiscal 2014 Compared to Fiscal 2013 +On a currency-neutral basis, Central & Eastern Europe revenues for fiscal 2014 were driven by growth across nearly all territories, particularly Russia, our largest territory, which grew 14%, and Turkey, which grew 17%. Revenue growth was driven by growth in nearly every key category, led by Football (Soccer) and Running. +Constant currency footwear revenue growth in fiscal 2014 was driven by growth in nearly all categories, most notably Running and Football (Soccer). Unit sales increased 11% while average selling price per pair contributed approximately 4 percentage points of footwear revenue growth, due primarily to price increases. +Constant currency apparel revenue growth in fiscal 2014 was driven by growth in every key category, led by Football (Soccer) and Running. Unit sales increased 15%, while average selling price per unit contributed approximately 2 percentage points of apparel revenue growth, driven by price increases. +On a reported basis, EBIT grew faster than revenues primarily due to gross margin improvement, partially offset by higher selling and administrative expense. Gross margin increased 180 basis points, primarily driven by price increases, a shift in mix to higher-margin products, warehousing efficiencies and the favorable impact of our higher-margin DTC business, partially offset by unfavorable standard foreign currency exchange rates. Selling and administrative expense increased as a result of higher demand creation expense to support key events as well as higher operating overhead to support overall growth, including our expanding DTC business. +29 +Table of Contents +Greater China +(Dollars in millions) +Fiscal 2015 +Fiscal 2014 +% Change +% Change Excluding Currency Changes +Fiscal 2013 +% Change +% Change Excluding Currency Changes +Revenues by: +Footwear +$ +2,016 +$ +1,600 +26 +% +28 +% +$ +1,495 +7 +% +5 +% +Apparel +925 +876 +6 +% +7 +% +844 +4 +% +1 +% +Equipment +126 +126 +0 +% +1 +% +139 +-9 +% +-11 +% +TOTAL REVENUES +$ +3,067 +$ +2,602 +18 +% +19 +% +$ +2,478 +5 +% +3 +% +Revenues by: +Sales to Wholesale Customers +$ +2,233 +$ +2,041 +9 +% +11 +% +$ +2,079 +-2 +% +-4 +% +Sales Direct to Consumer +834 +561 +49 +% +51 +% +399 +41 +% +38 +% +TOTAL REVENUES +$ +3,067 +$ +2,602 +18 +% +19 +% +$ +2,478 +5 +% +3 +% +EARNINGS BEFORE INTEREST AND TAXES +$ +993 +$ +816 +22 +% +$ +813 +0 +% +Fiscal 2015 Compared to Fiscal 2014 +Excluding changes in currency exchange rates, Greater China revenue growth for fiscal 2015 was driven by higher revenues in our Sportswear, Running and Basketball categories, partially offset by small declines in other categories. Strong growth in DTC revenues reflected a 28% increase in comparable store sales, strong online sales growth and the addition of new stores. +Constant currency footwear revenue growth in fiscal 2015 was driven by increased sales in our Sportswear, Running and Basketball categories, partially offset by small declines in other categories. Unit sales of footwear increased 20% for fiscal 2015 while increases in average selling price per pair contributed approximately 8 percentage points of footwear revenue growth. The increase in average selling price per pair was due primarily to an increase in the proportion of revenues from our higher-priced DTC business. +Constant currency apparel revenue growth in fiscal 2015 was driven by increases in the Sportswear, Running and Basketball categories, partially offset by decreases in other categories, primarily Football (Soccer) and Men’s Training. For fiscal 2015, unit sales of apparel increased 8% while changes in average selling price per unit reduced apparel revenues by approximately 1 percentage point. The decline in average selling price per unit was due primarily to shifts in mix to lower-priced products, partially offset by increased revenues from our higher-priced DTC business. +On a reported basis, EBIT increased 22% for fiscal 2015 as higher revenues and gross margin expansion more than offset higher selling and administrative expense. Gross margin increased 270 basis points primarily due to higher average selling prices and an increase in the proportion of revenues from our higher-margin DTC business, partially offset by higher product costs. Selling and administrative expense increased due to higher operating overhead to support growth initiatives, primarily related to our DTC operations, as well as higher demand creation spending, primarily for sports marketing. +Fiscal 2014 Compared to Fiscal 2013 +Excluding changes in currency exchange rates, Greater China revenues increased 3% in fiscal 2014, primarily driven by strong growth in our DTC business, which represented 22% of total Greater China revenues for fiscal 2014. The growth in DTC revenues reflected a 20% increase in comparable store sales, the addition of 30 net new stores, as well as online sales growth. The increase in DTC revenues more than offset a 4% decrease in sales in our wholesale business as we continued to manage the amount of product sold into the market and worked with our wholesale partners to optimize product mix for the consumer. On a category basis, higher revenues in our Basketball, Sportswear and Running categories more than offset declines in Men's Training, Action Sports and Women's Training. +Constant currency footwear revenue growth in fiscal 2014 was driven by increased sales in our Basketball and Sportswear categories, partially offset by declines in our Men's Training, Running and Action Sports categories. Unit sales for fiscal 2014 were flat compared to the prior year while average selling price per pair contributed approximately 5 percentage points of footwear revenue growth. The increase in average selling price per pair was driven by favorable revenue mix resulting from a higher percent of sales from our higher-priced DTC business, as well as shifts in mix to higher-priced products. +Constant currency apparel revenue growth for fiscal 2014 was driven by increases in the Running, Sportswear and Basketball categories, partially offset by decreases in Men's Training and Women's Training. Apparel unit sales in fiscal 2014 were 1% higher while average selling price per unit was flat. +Fiscal 2014 reported EBIT was flat compared to the prior year as reported revenue and gross margin increases were offset by higher selling and administrative expense as a percent of sales. Gross margin increased 150 basis points as higher average selling prices, growth in our higher-margin DTC business and improved margins on closeout sales more than offset higher product input costs and unfavorable product mix. Selling and administrative expense increased due to higher operating overhead costs driven by increased investments to support DTC growth and our new Greater China headquarters in Shanghai, as well as higher demand creation spending. +30 +Table of Contents +Japan +(Dollars in millions) +Fiscal 2015 +Fiscal 2014 +% Change +% Change Excluding Currency Changes +Fiscal 2013 +% Change +% Change Excluding Currency Changes +Revenues by: +Footwear +$ +452 +$ +409 +11 +% +23 +% +$ +439 +-7 +% +11 +% +Apparel +230 +276 +-17 +% +-8 +% +337 +-18 +% +-2 +% +Equipment +73 +86 +-15 +% +-6 +% +100 +-14 +% +2 +% +TOTAL REVENUES +$ +755 +$ +771 +-2 +% +9 +% +$ +876 +-12 +% +5 +% +Revenues by: +Sales to Wholesale Customers +$ +536 +$ +597 +-10 +% +0 +% +$ +700 +-15 +% +1 +% +Sales Direct to Consumer +219 +174 +26 +% +40 +% +176 +-1 +% +18 +% +TOTAL REVENUES +$ +755 +$ +771 +-2 +% +9 +% +$ +876 +-12 +% +5 +% +EARNINGS BEFORE INTEREST AND TAXES +$ +100 +$ +131 +-24 +% +$ +139 +-6 +% +Fiscal 2015 Compared to Fiscal 2014 +Constant currency revenues for Japan increased 9% in fiscal 2015, driven primarily by increases in Sportswear, Basketball and Running , partially offset by declines in Men's Training, Golf and Women's Training. DTC revenues grew 40% in fiscal 2015 driven by a 20% increase in comparable store sales, strong online sales growth and the addition of new stores. +On a reported basis, fiscal 2015 EBIT decreased 24% compared to the prior year period, reflecting the impact of the weaker Yen. Gross margin decreased 270 basis points as unfavorable standard foreign currency exchange rates and higher product costs more than offset higher average selling prices and an increase in the proportion of revenues from our higher-margin DTC business. Selling and administrative expense increased as a percent of revenues as higher operating overhead, primarily to support our expanding DTC business, was only partially offset by a decrease in demand creation expense. +Fiscal 2014 Compared to Fiscal 2013 +On a currency-neutral basis, revenues increased 5% for Japan, driven by higher revenues in Sportswear, Football (Soccer) and Basketball, partially offset by lower revenues in Men's Training and Golf. +Fiscal 2014 EBIT decreased 6% as a 12% decline in reported revenues, due to the weaker Yen, was only partially offset by higher gross margin and selling and administrative expense leverage. Gross margin increased 20 basis points as higher average selling prices, favorable off-price mix and the favorable impact of higher-margin DTC revenues were mostly offset by unfavorable standard foreign currency exchange rates. The decrease in selling and administrative expense in fiscal 2014 was attributable to lower operating overhead and demand creation spending. +Emerging Markets +(Dollars in millions) +Fiscal 2015 +Fiscal 2014 +% Change +% Change Excluding Currency Changes +Fiscal 2013 +% Change +% Change Excluding Currency Changes +Revenues by: +Footwear +$ +2,641 +$ +2,642 +0 +% +9 +% +$ +2,621 +1 +% +10 +% +Apparel +1,021 +1,061 +-4 +% +5 +% +962 +10 +% +21 +% +Equipment +236 +246 +-4 +% +5 +% +249 +-1 +% +9 +% +TOTAL REVENUES +$ +3,898 +$ +3,949 +-1 +% +8 +% +$ +3,832 +3 +% +13 +% +Revenues by: +Sales to Wholesale Customers +$ +3,247 +$ +3,483 +-7 +% +2 +% +$ +3,443 +1 +% +11 +% +Sales Direct to Consumer +651 +466 +40 +% +51 +% +389 +20 +% +28 +% +TOTAL REVENUES +$ +3,898 +$ +3,949 +-1 +% +8 +% +$ +3,832 +3 +% +13 +% +EARNINGS BEFORE INTEREST +AND TAXES +$ +818 +$ +952 +-14 +% +$ +985 +-3 +% +Fiscal 2015 Compared to Fiscal 2014 +On a currency-neutral basis, fiscal 2015 revenues for Emerging Markets increased 8%, driven by growth in 7 of 9 territories. Growth was led by one of our largest territories, SOCO (which includes Argentina, Uruguay and Chile), which grew 28%, and our Pacific territory (which includes Australia and New Zealand), which grew 26%. Revenues in our Mexico and Brazil territories decreased 21% and 3%, respectively. The decrease in Mexico was attributable to efforts to liquidate excess inventory in the marketplace largely resulting from an inconsistent flow of product to customers following distribution center transition issues in fiscal 2014, while the decrease in Brazil was primarily due to challenging macroeconomic conditions and comparison to strong sales related to the World Cup in fiscal 2014. On a category basis, revenues were higher in most key categories, led by Sportswear, Running and Basketball, partially offset by a decline in Football (Soccer). DTC revenues increased 51% compared to fiscal 2014, driven by strong comparable store sales growth of 26%, the addition of new stores and online sales growth. +31 +Table of Contents +The constant currency growth in footwear revenue for fiscal 2015 was attributable to increases in several key categories, most notably Sportswear, Basketball, Action Sports and Running. Unit sales of footwear decreased 2% while average selling price per pair contributed approximately 11 percentage points of footwear revenue growth. The increase in average selling price per pair was primarily due to price increases in response to inflationary conditions in certain Latin American countries, particularly Argentina, as well as shifts in mix to higher-priced products and the favorable impact of growth in our higher-priced DTC business. +Constant currency apparel revenue growth was due to increases in nearly all key categories, primarily Sportswear, Running and Women's Training, partially offset by a decline in Football (Soccer) revenues due to higher World Cup sales in fiscal 2014. Unit sales of apparel decreased 1% while average selling price per unit contributed approximately 6 percentage points of apparel revenue growth. The increase in average selling price per unit was primarily attributable to an increase in revenues from our higher-priced DTC business, and to a lesser extent, price increases in response to inflationary conditions. +On a reported basis, EBIT decreased 14% primarily due to reported revenue declines, lower gross margin and higher selling and administrative expense, as well as the impact of weakening foreign currency exchange rates . Gross margin decreased 140 basis points due to unfavorable standard foreign currency exchange rates, higher inventory obsolescence and higher off-price mix, partially offset by higher average selling prices. Selling and administrative expense increased due to higher operating overhead costs, primarily to support DTC growth, as well as higher demand creation expense, in part as a result of support for the World Cup in early fiscal 2015 and higher sports marketing expense. +Fiscal 2014 Compared to Fiscal 2013 +Excluding changes in currency exchange rates, fiscal 2014 revenues for Emerging Markets increased 13% as a result of growth across nearly every territory. Our largest territory, Brazil, grew 19%, while our SOCO territory grew 25%. Mexico revenues decreased 3% largely as a result of shipping delays caused by issues with a distribution center transition in the first half of fiscal 2014. On a category basis, revenues were higher in nearly every category, led by Football (Soccer), Running and Sportswear. +Constant currency footwear revenue growth for fiscal 2014 was driven by growth in nearly every key category, led by Running, Sportswear, Football (Soccer) and Action Sports. Unit sales for fiscal 2014 increased 4% and average selling price per pair contributed approximately 6 percentage points of footwear revenue growth. The increase in average selling price per pair was primarily driven by price increases, in part reflecting inflationary conditions in certain Latin American territories, and to a lesser extent, shifts in mix to higher-priced products. +Constant currency apparel revenue increased driven by growth in every key category, most notably Football (Soccer) and Running. Unit sales increased 11% and average selling price per unit contributed approximately 10 percentage points of apparel revenue growth, primarily due to price increases, in part reflecting inflationary conditions in certain Latin American territories. +Fiscal 2014 reported EBIT decreased primarily due to a decline in gross margin, higher selling and administrative expense and weaker currencies in a number of developing markets. Gross margin decreased 30 basis points due primarily to unfavorable foreign currency exchange rates, higher product costs, higher warehousing costs related to distribution center transition challenges in Mexico and higher discounts, which more than offset higher average selling prices. Selling and administrative expense increased due to higher operating overhead costs to support the expansion of our DTC business and infrastructure investments to support growth, as well as increases in demand creation spending to support the World Cup and key product launches. +Global Brand Divisions +(Dollars in millions) +Fiscal 2015 +Fiscal 2014 +% Change +% Change Excluding Currency Changes +Fiscal 2013 +% Change +% Change Excluding Currency Changes +Revenues +$ +115 +$ +125 +-8 +% +-2 +% +$ +115 +9 +% +6 +% +(Loss) Before Interest and Taxes +$ +(2,263 +) +$ +(1,993 +) +14 +% +$ +(1,716 +) +16 +% +Global Brand Divisions primarily represent demand creation, operating overhead and product creation and design expenses that are centrally managed for the NIKE Brand. Revenues for Global Brand Divisions are primarily attributable to NIKE Brand licensing businesses that are not part of a geographic operating segment. +Fiscal 2015 Compared to Fiscal 2014 +Global Brand Divisions' loss before interest and taxes increased $270 million in fiscal 2015, primarily due to higher operating overhead reflecting continued investments in operational infrastructure, including digital capabilities, consumer engagement and supply chain initiatives, as well as higher performance-based compensation. Demand creation expense increased slightly due to support for the World Cup in the first quarter of fiscal 2015 and key brand and consumer events. +Fiscal 2014 Compared to Fiscal 2013 +For fiscal 2014, Global Brand Divisions' loss before interest and taxes increased $277 million, primarily driven by an increase in centrally managed product costs, increased investments in our digital infrastructure, as well as higher demand creation spending in the fourth quarter of fiscal 2014 to support the World Cup and product creation and design initiatives. +32 +Table of Contents +Converse +(Dollars in millions) +Fiscal 2015 +Fiscal 2014 +% Change +% Change Excluding Currency Changes +Fiscal 2013 +% Change +% Change Excluding Currency Changes +Revenues +$ +1,982 +$ +1,684 +18 +% +21 +% +$ +1,449 +16 +% +15 +% +Earnings Before Interest and Taxes +$ +517 +$ +496 +4 +% +$ +425 +17 +% +In territories we define as “direct distribution markets” Converse designs, markets and sells products directly to distributors, wholesale customers and to consumers through DTC operations. The largest direct distribution markets are the United States, the United Kingdom and China. Converse does not own the Converse trademarks in Japan. Territories other than direct distribution markets and Japan are serviced by third-party licensees who pay royalties to Converse for the use of its registered trademarks and other intellectual property rights. +Fiscal 2015 Compared to Fiscal 2014 +Excluding changes in currency exchange rates, revenues for Converse increased 21% for fiscal 2015. Comparable direct distribution markets (i.e., markets served under a direct distribution model for comparable periods in the current and prior fiscal years) grew 14%, contributing 12 percentage points of total revenue growth for fiscal 2015. Comparable direct distribution market unit sales increased 12% and average selling price per unit contributed approximately 2 percentage points of Converse comparable direct distribution market revenue growth. The United States market was the most significant contributor to the growth of comparable direct distribution markets due to volume increases with key wholesale customers and expansion of our DTC business. Conversion of markets from licensed to direct distribution contributed 8 percentage points of total Converse revenue growth for fiscal 2015, driven by conversion of several European markets, most significantly AGS (Austria, Germany and Switzerland). Revenues from comparable licensed markets increased 8% for fiscal 2015, contributing 1 percentage point of total Converse revenue growth. +EBIT for Converse increased 4% for fiscal 2015 as strong revenue growth was partially offset by lower gross margin and higher selling and administrative expense. Gross margin decreased 60 basis points primarily due to transitions of licensed markets to direct distribution markets. Selling and administrative expense increased for fiscal 2015, primarily due to higher operating overhead costs resulting from investments in infrastructure to support current and future growth, including market transitions, new systems and new headquarters, as well as higher intellectual property enforcement costs. +Fiscal 2014 Compared to Fiscal 2013 +Excluding changes in currency exchange rates, revenues for Converse increased 15% for fiscal 2014. Comparable direct distribution markets grew 13%, contributing 10 percentage points of total revenue growth for fiscal 2014, primarily due to strength in our United States, China and United Kingdom markets. Comparable direct distribution market unit sales increased 12% and average selling price per unit contributed approximately 1 percentage point of Converse comparable direct distribution market revenue growth. Conversion of markets from licensed to direct distribution contributed 4 percentage points of total Converse revenue growth for fiscal 2014. Revenues from comparable licensed markets increased 8% for fiscal 2014, contributing 1 percentage point of total Converse revenue growth. +On a reported basis, EBIT at Converse grew 17% for fiscal 2014 as higher revenues and gross margin were partially offset by higher selling and administrative expense. Gross margin increased 80 basis points, primarily due to growth in higher-margin territories and products within our direct distribution markets. Selling and administrative expense grew faster than revenue for fiscal 2014 due to higher operating overhead to support growth initiatives and DTC expansion, as well as higher demand creation spending. +Corporate +(Dollars in millions) +Fiscal 2015 +Fiscal 2014 +% Change +Fiscal 2013 +% Change +Revenues +$ +(82 +) +$ +3 +— +$ +(17 +) +— +(Loss) Before Interest and Taxes +$ +(1,101 +) +$ +(1,036 +) +6 +% +$ +(909 +) +14 +% +Corporate revenues primarily consist of foreign currency hedge gains and losses related to revenues generated by entities within the NIKE Brand geographic operating segments and Converse but managed through our central foreign exchange risk management program. +The Corporate loss before interest and taxes consists largely of unallocated general and administrative expenses, including expenses associated with centrally managed departments; depreciation and amortization related to our corporate headquarters; unallocated insurance, benefit and compensation programs, including stock-based compensation; and certain foreign currency gains and losses. +In addition to the foreign currency gains and losses recognized in Corporate revenues, foreign currency results in Corporate include gains and losses resulting from the difference between actual foreign currency rates and standard rates used to record non-functional currency denominated product purchases within the NIKE Brand geographic operating segments and Converse; related foreign currency hedge results; conversion gains and losses arising from re-measurement of monetary assets and liabilities in non-functional currencies; and certain other foreign currency derivative instruments. +33 +Table of Contents +Fiscal 2015 Compared to Fiscal 2014 +For fiscal 2015, Corporate's loss before interest and taxes increased $65 million primarily due to the following: +• +a $211 million increase in corporate overhead expense related to corporate initiatives to support growth of the business as well as performance-based compensation; +• +a $144 million beneficial change from net foreign currency losses to net foreign currency gains, reported as a component of Other (income) expense, net ; and +• +an approximate $2 million increase in foreign exchange losses related to the difference between actual foreign currency exchange rates and standard foreign currency exchange rates assigned to the NIKE Brand geographic operating segments and Converse, net of hedge gains; these losses are reported as a component of consolidated gross margin. +Fiscal 2014 Compared to Fiscal 2013 +For fiscal 2014, Corporate's loss before interest and taxes increased by $127 million primarily due to the following: +• +a $101 million increase in corporate overhead expense related to corporate initiatives to support the growth of the business as well as performance-based compensation; +• +a $90 million increase in net foreign currency losses, reported as a component of Other (income) expense, net ; and +• +a $ 56 million decrease in foreign exchange losses related to the difference between actual foreign currency exchange rates and standard foreign currency exchange rates assigned to the NIKE Brand geographic operating segments and Converse, net of hedge gains; these losses are reported as a component of consolidated gross margin. +Foreign Currency Exposures and Hedging Practices +Overview +As a global company with significant operations outside the United States, in the normal course of business we are exposed to risk arising from changes in currency exchange rates. Our primary foreign currency exposures arise from the recording of transactions denominated in non-functional currencies and the translation of foreign currency denominated results of operations, financial position and cash flows into U.S. Dollars. +Our foreign exchange risk management program is intended to lessen both the positive and negative effects of currency fluctuations on our consolidated results of operations, financial position and cash flows. We manage global foreign exchange risk centrally on a portfolio basis to address those risks that are material to NIKE, Inc. We manage these exposures by taking advantage of natural offsets and currency correlations that exist within the portfolio and, where practical and material, by hedging a portion of the remaining exposures using derivative instruments such as forward contracts and options. As described below, the implementation of the NIKE Trading Company ("NTC") and our foreign currency adjustment program enhanced our ability to manage our foreign exchange risk by increasing the natural offsets and currency correlation benefits that exist within our portfolio of foreign exchange exposures. Our hedging policy is designed to partially or entirely offset the impact of exchange rate changes on the underlying net exposures being hedged. Where exposures are hedged, our program has the effect of delaying the impact of exchange rate movements on our Consolidated Financial Statements; the length of the delay is dependent upon hedge horizons. We do not hold or issue derivative instruments for trading or speculative purposes. +Transactional Exposures +We conduct business in various currencies and have transactions which subject us to foreign currency risk. Our most significant transactional foreign currency exposures are: +• +Product Costs — NIKE’s product costs are exposed to fluctuations in foreign currencies in the following ways: +1. +Product purchases denominated in currencies other than the functional currency of the transacting entity: +a. +Certain NIKE entities, including those supporting our North America, Greater China, Japan and European geographies, purchase product from the NTC, a wholly-owned sourcing hub that buys NIKE branded products from third-party factories, predominantly in U.S. Dollars. The NTC, whose functional currency is the U.S. Dollar, then sells the products to NIKE entities in their respective functional currencies. When the NTC sells to a NIKE entity with a different functional currency, the result is a foreign currency exposure for the NTC. +b. +Other NIKE entities purchase product directly from third-party factories in U.S. Dollars. These purchases generate a foreign currency exposure for those NIKE entities with a functional currency other than the U.S. Dollar. +In both purchasing scenarios, a weaker U.S. Dollar decreases the inventory cost incurred by NIKE whereas a stronger U.S. Dollar increases its cost. +34 +Table of Contents +2. +Factory input costs: NIKE operates a foreign currency adjustment program with certain factories. The program is designed to more effectively manage foreign currency risk by assuming certain of the factories’ foreign currency exposures, some of which are natural offsets to our existing foreign currency exposures. Under this program, our payments to these factories are adjusted for rate fluctuations in the basket of currencies (“factory currency exposure index”) in which the labor, materials and overhead costs incurred by the factories in the production of NIKE branded products (“factory input costs”) are denominated. +For the currency within the factory currency exposure indices that is the local or functional currency of the factory, the currency rate fluctuation affecting the product cost is recorded within Inventories and is recognized in Cost of sales when the related product is sold to a third-party. All currencies within the indices, excluding the U.S. Dollar and the local or functional currency of the factory, are recognized as embedded derivative contracts and are recorded at fair value through Other (income) expense, net . Refer to Note 17 — Risk Management and Derivatives in the accompanying Notes to the Consolidated Financial Statements for additional detail. +As an offset to the impacts of the fluctuating U.S. Dollar on our non-functional currency denominated product purchases described above, a strengthe ning U.S. Dollar against the foreign currencies within the factory currency exposure indices decreases NIKE’s U.S. Dollar inventory cost. Conversely, a weakening U.S. Dollar against the indexed foreign currencies increases our inventory cost. +• +Non-Functional Currency Denominated External Sales — A portion of our Western Europe and Central & Eastern Europe geography revenues, as well as a portion of our Converse European operations revenues, are earned in currencies other than the Euro (e.g. the British Pound) but are recognized at a subsidiary that uses the Euro as its functional currency. These sales generate a foreign currency exposure. +• +Other Costs — Non-functional currency denominated costs, such as endorsement contracts, also generate foreign currency risk, though to a lesser extent. In certain cases, the Company has also entered into other contractual agreements which have payments that are indexed to foreign currencies and create embedded derivative contracts that are recorded at fair value through Other (income) expense, net . Refer to Note 17 — Risk Management and Derivatives in the accompanying Notes to the Consolidated Financial Statements for additional detail. +• +Non-Functional Currency Denominated Monetary Assets and Liabilities — Our global subsidiaries have various assets and liabilities, primarily receivables and payables, including intercompany receivables and payables, denominated in currencies other than their functional currencies. These balance sheet items are subject to re-measurement which may create fluctuations in Other (income) expense, net within our consolidated results of operations. +Managing Transactional Exposures +Transactional exposures are managed on a portfolio basis within our foreign currency risk management program. We manage these exposures by taking advantage of natural offsets and currency correlations that exist within the portfolio and may also elect to use currency forward and option contracts to hedge a portion of the remaining effect of exchange rate fluctuations on probable forecasted future cash flows, including certain product cost purchase exposures, non-functional currency denominated external sales and other costs described above. Generally, these are accounted for as cash flow hedges in accordance with the accounting standards for derivatives and hedging, except for hedges of the embedded derivatives component of the product cost exposures as discussed below. +Certain currency forward contracts used to manage the foreign exchange exposure of non-functional currency denominated monetary assets and liabilities subject to re-measurement and the embedded derivative contracts discussed above are not formally designated as hedging instruments under the accounting standards for derivatives and hedging. Accordingly, changes in fair value of these instruments are immediately recognized in Other (income) expense, net and are intended to offset the foreign currency impact of the re-measurement of the related non-functional currency denominated asset or liability or the embedded derivative contract being hedged. +Refer to Note 6 — Fair Value Measurements and Note 17 — Risk Management and Derivatives in the accompanying Notes to the Consolidated Financial Statements for additional description of how the above financial instruments are valued and recorded as well as the fair value of outstanding derivatives at each reported period end. +Translational Exposures +Many of our foreign subsidiaries operate in functional currencies other than the U.S. Dollar. Fluctuations in currency exchange rates create volatility in our reported results as we are required to translate the balance sheets, operational results and cash flows of these subsidiaries into U.S. Dollars for consolidated reporting. The translation of foreign subsidiaries’ non-U.S. Dollar denominated balance sheets into U.S. Dollars for consolidated reporting results in a cumulative translation adjustment to Other comprehensive income within the Consolidated Statements of Shareholders’ Equity. In the translation of our Consolidated Statements of Income, a weaker U.S. Dollar in relation to foreign functional currencies benefits our consolidated earnings whereas a stronger U.S. Dollar reduces our consolidated earnings. The impact of foreign exchange rate fluctuations on the translation of our consolidated Revenues was a detriment of approximately $1,171 million and $288 million for the years ended May 31, 2015 and 2014, respectively. The impact of foreign exchange rate fluctuations on the translation of our Income before income taxes was a detriment of approximately $221 million and $49 million for the years ended May 31, 2015 and 2014, respectively. +Managing Translational Exposures +To minimize the impact of translating foreign currency denominated revenues and expenses into U.S. Dollars for consolidated reporting, certain foreign subsidiaries use excess cash to purchase U.S. Dollar denominated available-for-sale investments. The variable future cash flows associated with the purchase and subsequent sale of these U.S. Dollar denominated securities at non-U.S. Dollar functional currency subsidiaries creates a foreign currency exposure that qualifies for hedge accounting under the accounting standards for derivatives and hedging. We utilize forward contracts and/or options to mitigate the variability of the forecasted future purchases and sales of these U.S. Dollar investments. The combination of the purchase and sale of the U.S. Dollar investment and the hedging instrument has the effect of partially offsetting the year-over-year foreign currency translation impact on net earnings in the period the investments are sold. Hedges of available-for-sale investments are accounted for as cash flow hedges. +35 +Table of Contents +Refer to Note 6 — Fair Value Measurements and Note 17 — Risk Management and Derivatives in the accompanying Notes to the Consolidated Financial Statements for additional description of how the above financial instruments are valued and recorded as well as the fair value of outstanding derivatives at each reported period end. +We estimate the combination of translation of foreign currency-denominated profits from our international businesses and the year-over-year change in foreign currency related gains and losses included in Other (income) expense, net had an unfavorable impact of approximately $73 million and $139 million on our Income before income taxes for the years ended May 31, 2015 and 2014, respectively. +Net Investments in Foreign Subsidiaries +We are also exposed to the impact of foreign exchange fluctuations on our investments in wholly-owned foreign subsidiaries denominated in a currency other than the U.S. Dollar, which could adversely impact the U.S. Dollar value of these investments and therefore the value of future repatriated earnings. We have, in the past, hedged and may, in the future, hedge net investment positions in certain foreign subsidiaries to mitigate the effects of foreign exchange fluctuations on these net investments. These hedges are accounted for in accordance with the accounting standards for net investment hedges. There were no outstanding net investment hedges as of May 31, 2015 and 2014. There were no cash flows from net investment hedge settlements for the years ended May 31, 2015 and 2014. +Liquidity and Capital Resources +Cash Flow Activity +Cash provided by operations was $4,680 million for fiscal 2015 compared to $3,013 million for fiscal 2014 . Our primary source of operating cash flow for fiscal 2015 was Net income of $3,273 million . Our fiscal 2015 change in working capital was a net cash inflow of $256 million as compared to a net cash outflow of $488 million for fiscal 2014 . Our investments in working capital decreased due to increases in Accrued liabilities , primarily resulting from the receipt of $968 million of cash collateral from counterparties as a result of hedging activity. These amounts were partially offset by higher inventory levels resulting from business growth and West Coast port delays in North America, as well as lower Income taxes payable as a result of tax payments made in fiscal 2015 following the U.S. Unilateral Advance Pricing Agreement reached with the IRS in fiscal 2014. +Cash used by investing activities was $175 million for fiscal 2015 , compared to a $1,207 million use of cash for fiscal 2014 . The primary driver of the decrease in Cash used by investing activities was the net change in short-term investments (including sales, maturities and purchases) from net purchases to net sales/maturities. In fiscal 2015, there were $935 million of net sales/maturities compared to $328 million of net purchases of short-term investments in the same period of fiscal 2014. Additions to property, plant and equipment were $963 million in fiscal 2015 as compared to $880 million in fiscal 2014. The increase in Additions to property, plant and equipment resulted from continued investments in infrastructure to support current and future growth, primarily relating to expansion of our DTC operations as well as supply chain and corporate initiatives. +In fiscal 2016, we plan to continue investing in our infrastructure to support future growth, as well as expand our digital capabilities. We anticipate investing approximately 4% of revenue, a portion of which will be used for the continued expansion of our corporate facilities, new DTC stores and digital capabilities. +Cash used by financing activities was $2,790 million for fiscal 2015 compared to $2,914 million for fiscal 2014 , a decrease of $124 million, as increased dividends were more than offset by an increase in proceeds from the exercise of stock options and the excess tax benefits from share-based payment arrangements. +In fiscal 2015 , we purchased 29.0 million shares of NIKE’s Class B Common Stock for $2,534 million , an average price of $ 87.37 . During fiscal 2013, we completed the four-year, $5 billion share repurchase program approved by our Board of Directors in September 2008. Under that program, we purchased a total of 118.8 million shares at an average price of $42.08. Subsequently, we began repurchases under a four-year, $8 billion program approved by the Board in September 2012. As of the end of fiscal 2015 , we had repurchased 80.9 million shares at an average price of $73.55 for a total cost of $5,950 million under this current program. We continue to expect funding of share repurchases will come from operating cash flow, excess cash and/or debt. The timing and the amount of shares purchased will be dictated by our capital needs and stock market conditions. +Capital Resources +On April 23, 2013, we filed a shelf registration statement (the "Shelf") with the SEC which permits us to issue an unlimited amount of debt securities. The Shelf expires on April 23, 2016. On April 23, 2013, we issued $1.0 billion of senior notes with tranches maturing in 2023 and 2043. The 2023 senior notes were issued in an initial aggregate principal amount of $500 million at a 2.25% fixed, annual interest rate and will mature on May 1, 2023. The 2043 senior notes were issued in an initial aggregate principal amount of $500 million at a 3.625% fixed, annual interest rate and will mature on May 1, 2043. Interest on the senior notes is payable semi-annually on May 1 and November 1 of each year. The issuance resulted in gross proceeds before expenses of $998 million. +On November 1, 2011, we entered into a committed credit facility agreement with a syndicate of banks which provides for up to $1 billion of borrowings with the option to increase borrowings to $1.5 billion with lender approval. The facility matures November 1, 2017. As of and for the periods ended May 31, 2015 and 2014 , we had no amounts outstanding under our committed credit facility. +We currently have long-term debt ratings of AA- and A1 from Standard and Poor's Corporation and Moody's Investor Services, respectively. If our long-term debt ratings were to decline, the facility fee and interest rate under our committed credit facility would increase. Conversely, if our long-term debt rating were to improve, the facility fee and interest rate would decrease. Changes in our long-term debt rating would not trigger acceleration of maturity of any then-outstanding borrowings or any future borrowings under the committed credit facility. Under this committed revolving credit facility, we have agreed to various covenants. These covenants include limits on our disposal of fixed assets, the amount of debt secured by liens we may incur, as well as a minimum capitalization ratio. In the event we were to have any borrowings outstanding under this facility and failed to meet any covenant, and were unable to obtain a waiver from a majority of the banks in the syndicate, any borrowings would become immediately due and payable. As of May 31, 2015 , we were in full compliance with each of these covenants and believe it is unlikely we will fail to meet any of these covenants in the foreseeable future. +36 +Table of Contents +Liquidity is also provided by our $1 billion commercial paper program. During the year ended May 31, 2015 , we did not issue commercial paper, and as of May 31, 2015 , there were no outstanding borrowings under this program. We may issue commercial paper or other debt securities during fiscal 2016 depending on general corporate needs. We currently have short-term debt ratings of A1+ and P1 from Standard and Poor's Corporation and Moody's Investor Services, respectively. +As of May 31, 2015 , we had cash, cash equivalents and short-term investments totaling $5.9 billion , of which $4.2 billion was held by our foreign subsidiaries. Included in Cash and equivalents as of May 31, 2015 was $968 million of cash collateral received from counterparties as a result of hedging activity. Cash equivalents and Short-term investments consist primarily of deposits held at major banks, money market funds, commercial paper, corporate notes, U.S. Treasury obligations, U.S. government sponsored enterprise obligations and other investment grade fixed income securities. Our fixed income investments are exposed to both credit and interest rate risk. All of our investments are investment grade to minimize our credit risk. While individual securities have varying durations, as of May 31, 2015 the weighted average remaining duration of our short-term investments and cash equivalents portfolio was 79 days. +To date we have not experienced difficulty accessing the credit markets or incurred higher interest costs. Future volatility in the capital markets, however, may increase costs associated with issuing commercial paper or other debt instruments or affect our ability to access those markets. We believe that existing cash, cash equivalents, short-term investments and cash generated by operations, together with access to external sources of funds as described above, will be sufficient to meet our domestic and foreign capital needs in the foreseeable future. +We utilize a variety of tax planning and financing strategies to manage our worldwide cash and deploy funds to locations where they are needed. We routinely repatriate a portion of our foreign earnings for which U.S. taxes have previously been provided. We also indefinitely reinvest a significant portion of our foreign earnings, and our current plans do not demonstrate a need to repatriate these earnings. Should we require additional capital in the United States, we may elect to repatriate indefinitely reinvested foreign funds or raise capital in the United States through debt. If we were to repatriate indefinitely reinvested foreign funds, we would be required to accrue and pay additional U.S. taxes less applicable foreign tax credits. If we elect to raise capital in the United States through debt, we would incur additional interest expense . +Off-Balance Sheet Arrangements +In connection with various contracts and agreements, we routinely provide indemnification relating to the enforceability of intellectual property rights, coverage for legal issues that arise and other items where we are acting as the guarantor. Currently, we have several such agreements in place. However, based on our historical experience and the estimated probability of future loss, we have determined that the fair value of such indemnification is not material to our financial position or results of operations. +Contractual Obligations +Our significant long-term contractual obligations as of May 31, 2015 and significant endorsement contracts, including related marketing commitments, entered into through the date of this report are as follows: +Description of Commitment +Cash Payments Due During the Year Ending May 31, +(In millions) +2016 +2017 +2018 +2019 +2020 +Thereafter +Total +Operating Leases +$ +447 +$ +423 +$ +371 +$ +311 +$ +268 +$ +1,154 +$ +2,974 +Capital Leases +2 +2 +1 +— +— +— +5 +Long-term Debt (1) +142 +77 +55 +36 +36 +1,451 +1,797 +Endorsement Contracts (2) +1,009 +919 +882 +706 +533 +2,143 +6,192 +Product Purchase Obligations (3) +3,735 +— +— +— +— +— +3,735 +Other (4) +343 +152 +75 +72 +36 +92 +770 +TOTAL +$ +5,678 +$ +1,573 +$ +1,384 +$ +1,125 +$ +873 +$ +4,840 +$ +15,473 +(1) +The cash payments due for long-term debt include estimated interest payments. Estimates of interest payments are based on outstanding principal amounts, applicable fixed interest rates or currently effective interest rates as of May 31, 2015 (if variable), timing of scheduled payments and the term of the debt obligations. +(2) +The amounts listed for endorsement contracts represent approximate amounts of base compensation and minimum guaranteed royalty fees we are obligated to pay athlete, sport team and league endorsers of our products. Actual payments under some contracts may be higher than the amounts listed as these contracts provide for bonuses to be paid to the endorsers based upon athletic achievements and/or royalties on product sales in future periods. Actual payments under some contracts may also be lower as these contracts include provisions for reduced payments if athletic performance declines in future periods. +In addition to the cash payments, we are obligated to furnish our endorsers with NIKE product for their use. It is not possible to determine how much we will spend on this product on an annual basis as the contracts generally do not stipulate a specific amount of cash to be spent on the product. The amount of product provided to the endorsers will depend on many factors, including general playing conditions, the number of sporting events in which they participate and our own decisions regarding product and marketing initiatives. In addition, the costs to design, develop, source and purchase the products furnished to the endorsers are incurred over a period of time and are not necessarily tracked separately from similar costs incurred for products sold to customers. +(3) +We generally order product at least four to five months in advance of sale based primarily on futures orders received from customers. The amounts listed for product purchase obligations represent agreements (including open purchase orders) to purchase products in the ordinary course of business that are enforceable and legally binding and that specify all significant terms. In some cases, prices are subject to change throughout the production process. The reported amounts exclude product purchase liabilities included in Accounts payable on the Consolidated Balance Sheet as of May 31, 2015 . +(4) +Other amounts primarily include service and marketing commitments, including marketing commitments associated with endorsement contracts, made in the ordinary course of business. The amounts represent the minimum payments required by legally binding contracts and agreements that specify all significant terms, including open purchase orders for non-product purchases. The reported amounts exclude those liabilities included in Accounts payable or Accrued liabilities on the Consolidated Balance Sheet as of May 31, 2015 . +37 +Table of Contents +The total liability for uncertain tax positions was $438 million , excluding related interest and penalties, at May 31, 2015 . We are not able to reasonably estimate when or if cash payments of the long-term liability for uncertain tax positions will occur. +We also have the following outstanding short-term debt obligations as of May 31, 2015 . Refer to Note 7 — Short-Term Borrowings and Credit Lines in the accompanying Notes to the Consolidated Financial Statements for further description and interest rates related to the short-term debt obligations listed below. +(In millions) +Outstanding as of May 31, 2015 +Notes payable, due at mutually agreed-upon dates within one year of issuance or on demand +$ +74 +Payable to Sojitz America for the purchase of inventories, generally due 60 days after shipment of goods from a foreign port +78 +As of May 31, 2015 , the Company had letters of credit outstanding totaling $165 million . These letters of credit were issued primarily for the purchase of inventory and as guarantees of the Company’s performance under certain self-insurance and other programs. +Recently Adopted Accounting Standards +In July 2013, the Financial Accounting Standards Board (“FASB”) issued an accounting standards update intended to provide guidance on the presentation of unrecognized tax benefits, reflecting the manner in which an entity would settle, at the reporting date, any additional income taxes that would result from the disallowance of a tax position when net operating loss carryforwards, similar tax losses or tax credit carryforwards exist. This accounting standard was effective for us beginning June 1, 2014 and early adoption was permitted. We early adopted this guidance and the adoption did not have a material impact on our consolidated financial position or results of operations. +In July 2012, the FASB issued an accounting standards update intended to simplify how an entity tests indefinite-lived intangible assets other than goodwill for impairment by providing entities with an option to perform a qualitative assessment to determine whether further impairment testing is necessary. This accounting standard update was effective for us beginning June 1, 2013. The adoption of this standard did not have a material impact on our consolidated financial position or results of operations. +In December 2011, the FASB issued guidance enhancing disclosure requirements surrounding the nature of an entity’s right to offset and related arrangements associated with its financial instruments and derivative instruments. This new guidance requires companies to disclose both gross and net information about instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to master netting arrangements. This new guidance was effective for us beginning June 1, 2013. As this guidance only requires expanded disclosures, the adoption had no impact on our consolidated financial position or results of operations. +Recently Issued Accounting Standards +In May 2014, the FASB issued an accounting standards update that replaces existing revenue recognition guidance. The updated guidance requires companies to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, the new standard requires that reporting companies disclose the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. Based on the FASB's decision in July 2015 to defer the effective date and to allow more flexibility with implementation, we anticipate the new standard will be effective for us beginning June 1, 2018. The new standard is required to be applied retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying it recognized at the date of initial application. We have not yet selected a transition method and are currently evaluating the effect the guidance will have on our consolidated financial position or results of operations. +Critical Accounting Policies +Our previous discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. +We believe that the estimates, assumptions and judgments involved in the accounting policies described below have the greatest potential impact on our financial statements, so we consider these to be our critical accounting policies. Because of the uncertainty inherent in these matters, actual results could differ from the estimates we use in applying the critical accounting policies. Certain of these critical accounting policies affect working capital account balances, including the policies for revenue recognition, the allowance for uncollectible accounts receivable, inventory reserves and contingent payments under endorsement contracts. These policies require that we make estimates in the preparation of our financial statements as of a given date. However, since our business cycle is relatively short, actual results related to these estimates are generally known within the six-month period following the financial statement date. Thus, these policies generally affect only the timing of reported amounts across two to three fiscal quarters. +Within the context of these critical accounting policies, we are not currently aware of any reasonably likely events or circumstances that would result in materially different amounts being reported. +Revenue Recognition +We record wholesale revenues when title passes and the risks and rewards of ownership have passed to the customer, based on the terms of sale. Title passes generally upon shipment or upon receipt by the customer depending on the country of the sale and the agreement with the customer. Retail store revenues are recorded at the time of sale and online store revenues are recorded upon delivery to the customer. +38 +Table of Contents +In some instances, we ship product directly from our supplier to the customer and recognize revenue when the product is delivered to and accepted by the customer. Our revenues may fluctuate in cases when our customers delay accepting shipment of product for periods of up to several weeks. +In certain countries outside of the United States, precise information regarding the date of receipt by the customer is not readily available. In these cases, we estimate the date of receipt by the customer based upon historical delivery times by geographic location. On the basis of our tests of actual transactions, we have no indication that these estimates have been materially inaccurate historically. +As part of our revenue recognition policy, we record estimated sales returns, discounts and miscellaneous claims from customers as reductions to revenues at the time revenues are recorded. Our post invoice sales discounts consist of contractual programs with certain customers or discretionary discounts that are expected to be granted to certain customers at a later date. We base our estimates on historical rates of product returns, discounts and claims, specific identification of outstanding claims and outstanding returns not yet received from customers and estimated returns, discounts and claims expected but not yet finalized with our customers. Actual returns, discounts and claims in any future period are inherently uncertain and thus may differ from our estimates. If actual or expected future returns, discounts and claims were significantly greater or lower than the reserves we had established, we would record a reduction or increase to net revenues in the period in which we made such determination. +Allowance for Uncollectible Accounts Receivable +We make ongoing estimates relating to the ability to collect our accounts receivable and maintain an allowance for estimated losses resulting from the inability of our customers to make required payments. In determining the amount of the allowance, we consider our historical level of credit losses and make judgments about the creditworthiness of significant customers based on ongoing credit evaluations. Since we cannot predict future changes in the financial stability of our customers, actual future losses from uncollectible accounts may differ from our estimates. If the financial condition of our customers were to deteriorate, resulting in their inability to make payments, a larger allowance might be required. In the event we determine that a smaller or larger allowance is appropriate, we would record a credit or a charge to Operating overhead expense in the period in which such a determination is made. +Inventory Reserves +We also make ongoing estimates relating to the net realizable value of inventories based upon our assumptions about future demand and market conditions. If we estimate that the net realizable value of our inventory is less than the cost of the inventory recorded on our books, we record a reserve equal to the difference between the cost of the inventory and the estimated net realizable value. This reserve is recorded as a charge to Cost of sales . If changes in market conditions result in reductions in the estimated net realizable value of our inventory below our previous estimate, we would increase our reserve in the period in which we made such a determination and record a charge to Cost of sales . +Contingent Payments under Endorsement Contracts +A significant portion of our Demand creation expense relates to payments under endorsement contracts. In general, endorsement payments are expensed uniformly over the term of the contract. However, certain contract elements may be accounted for differently, based upon the facts and circumstances of each individual contract. +Certain contracts provide for contingent payments to endorsers based upon specific achievements in their sports (e.g., winning a championship). We record demand creation expense for these amounts when the endorser achieves the specific goal. +Certain contracts provide for variable payments based upon endorsers maintaining a level of performance in their sport over an extended period of time (e.g., maintaining a specified ranking in a sport for a year). When we determine payments are probable, the amounts are recorded in Demand creation expense ratably over the contract period based on our best estimate of the endorser's performance. In these instances, to the extent that actual payments to the endorser differ from our estimate due to changes in the endorser’s performance, increased or decreased Demand creation expense may be recorded in a future period. +Certain contracts provide for royalty payments to endorsers based upon a predetermined percent of sales of particular products. We expense these payments in Cost of sales as the related sales occur. In certain contracts, we offer minimum guaranteed royalty payments. For contracts for which we estimate we will not meet the minimum guaranteed amount of royalty fees through sales of product, we record the amount of the guaranteed payment in excess of that earned through sales of product in Demand creation expense uniformly over the guarantee period. +Property, Plant and Equipment and Definite-Lived Assets +Property, plant and equipment, including buildings, equipment and computer hardware and software are recorded at cost (including, in some cases, the cost of internal labor) and are depreciated over the estimated useful life. Changes in circumstances (such as technological advances or changes to our business operations) can result in differences between the actual and estimated useful lives. In those cases where we determine that the useful life of a long-lived asset should be shortened, we increase depreciation expense over the remaining useful life to depreciate the asset’s net book value to its salvage value. +We review the carrying value of long-lived assets or asset groups to be used in operations whenever events or changes in circumstances indicate that the carrying amount of the assets might not be recoverable. Factors that would necessitate an impairment assessment include a significant adverse change in the extent or manner in which an asset is used, a significant adverse change in legal factors or the business climate that could affect the value of the asset or a significant decline in the observable market value of an asset, among others. If such facts indicate a potential impairment, we would assess the recoverability of an asset group by determining if the carrying value of the asset group exceeds the sum of the projected undiscounted cash flows expected to result from the use and eventual disposition of the assets over the remaining economic life of the primary asset in the asset group. If the recoverability test indicates that the carrying value of the asset group is not recoverable, we will estimate the fair value of the asset group using appropriate valuation methodologies that would typically include an estimate of discounted cash flows. Any impairment would be measured as the difference between the asset group’s carrying amount and its estimated fair value. +39 +Table of Contents +Goodwill and Indefinite-Lived Intangible Assets +We perform annual impairment tests on goodwill and intangible assets with indefinite lives in the fourth quarter of each fiscal year, or when events occur or circumstances change that would, more likely than not, reduce the fair value of a reporting unit or an intangible asset with an indefinite life below its carrying value. Events or changes in circumstances that may trigger interim impairment reviews include significant changes in business climate, operating results, planned investments in the reporting unit, planned divestitures or an expectation that the carrying amount may not be recoverable, among other factors. We may first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events and circumstances, we determine that it is more likely than not that the fair value of the reporting unit is greater than its carrying amount, the two-step impairment test is unnecessary. The two-step impairment test requires us to estimate the fair value of our reporting units. If the carrying value of a reporting unit exceeds its fair value, the goodwill of that reporting unit is potentially impaired and we proceed to step two of the impairment analysis. In step two of the analysis, we measure and record an impairment loss equal to the excess of the carrying value of the reporting unit's goodwill over its implied fair value, if any. +We generally base our measurement of the fair value of a reporting unit on a blended analysis of the present value of future discounted cash flows and the market valuation approach. The discounted cash flows model indicates the fair value of the reporting unit based on the present value of the cash flows that we expect the reporting unit to generate in the future. Our significant estimates in the discounted cash flows model include: our weighted average cost of capital; long-term rate of growth and profitability of the reporting unit's business; and working capital effects. The market valuation approach indicates the fair value of the business based on a comparison of the reporting unit to comparable publicly traded companies in similar lines of business. Significant estimates in the market valuation approach model include identifying similar companies with comparable business factors such as size, growth, profitability, risk and return on investment, and assessing comparable revenue and operating income multiples in estimating the fair value of the reporting unit. +Indefinite-lived intangible assets primarily consist of acquired trade names and trademarks. We may first perform a qualitative assessment to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired. If, after assessing the totality of events and circumstances, we determine that it is more likely than not that the indefinite-lived intangible asset is not impaired, no quantitative fair value measurement is necessary. If a quantitative fair value measurement calculation is required for these intangible assets, we utilize the relief-from-royalty method. This method assumes that trade names and trademarks have value to the extent that their owner is relieved of the obligation to pay royalties for the benefits received from them. This method requires us to estimate the future revenue for the related brands, the appropriate royalty rate and the weighted average cost of capital. +Fair Value Measurements +For financial assets and liabilities measured at fair value on a recurring basis, fair value is the price we would receive to sell an asset or pay to transfer a liability in an orderly transaction with a market participant at the measurement date. In general, and where applicable, we use quoted prices in active markets for identical assets or liabilities to determine the fair values of our financial instruments. This pricing methodology applies to our Level 1 investments, including U.S. Treasury securities. +In the absence of active markets for identical assets or liabilities, such measurements involve developing assumptions based on market observable data, including quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active. This pricing methodology applies to our Level 2 investments such as time deposits, commercial paper and bonds, U.S. Agency securities and money market funds. +Level 3 investments are valued using internally developed models with unobservable inputs. Assets and liabilities measured using unobservable inputs are an immaterial portion of our portfolio. +A majority of our available-for-sale securities are priced by pricing vendors and are generally Level 1 or Level 2 investments as these vendors either provide a quoted market price in an active market or use observable inputs without applying significant adjustments in their pricing. Observable inputs include broker quotes, interest rates and yield curves observable at commonly quoted intervals, volatilities and credit risks. Our fair value processes include controls that are designed to ensure appropriate fair values are recorded. These controls include a comparison to another independent pricing vendor. +Hedge Accounting for Derivatives +We use derivative contracts to hedge certain anticipated foreign currency and interest rate transactions as well as certain non-functional currency monetary assets and liabilities. When the specific criteria to qualify for hedge accounting has been met, changes in the fair value of contracts hedging probable forecasted future cash flows are recorded in Other comprehensive income , rather than Net income , until the underlying hedged transaction affects Net income . In most cases, this results in gains and losses on hedge derivatives being released from Other comprehensive income into Net income sometime after the maturity of the derivative. One of the criteria for this accounting treatment is that the notional value of these derivative contracts should not be in excess of specifically identified anticipated transactions. By their very nature, our estimates of anticipated transactions may fluctuate over time and may ultimately vary from actual transactions. When anticipated transaction estimates or actual transaction amounts decline below hedged levels, or if it is no longer probable that a forecasted transaction will occur by the end of the originally specified time period or within an additional two-month period of time thereafter, we are required to reclassify the cumulative change in fair value of the over-hedged portion of the related hedge contract from Other comprehensive income to Other (income) expense, net during the quarter in which the decrease occurs. +We have, in the past, used and may, in the future use, forward contracts or options to hedge our investment in the net assets of certain international subsidiaries to offset foreign currency translation related to our net investment in those subsidiaries. The change in fair value of the forward contracts or options hedging our net investments is reported in the cumulative translation adjustment component of Accumulated other comprehensive income within Total shareholders’ equity , to the extent effective, to offset the foreign currency translation adjustments on those investments. As the value of our underlying net investments in wholly-owned international subsidiaries is known at the time a hedge is placed, the designated hedge is matched to the portion of our net investment at risk. Accordingly, the variability involved in net investment hedges is substantially less than that of other types of hedge transactions and we do not expect any material ineffectiveness. We consider, on a quarterly basis, the need to redesignate existing hedge relationships based on changes in the underlying net investment. Should the level of our net investment decrease below hedged levels, the cumulative change in fair value of the over-hedged portion of the related hedge contract would be reported as Other (income) expense, net during the period in which changes occur. +40 +Table of Contents +Stock-based Compensation +We account for stock-based compensation by estimating the fair value of stock-based compensation on the date of grant using the Black-Scholes option pricing model. The Black-Scholes option pricing model requires the input of highly subjective assumptions including volatility. Expected volatility is estimated based on implied volatility in market traded options on our common stock with a term greater than one year, along with other factors. Our decision to use implied volatility was based on the availability of actively traded options on our common stock and our assessment that implied volatility is more representative of future stock price trends than historical volatility. If factors change and we use different assumptions for estimating stock-based compensation expense in future periods, stock-based compensation expense may differ materially in the future from that recorded in the current period. +Income Taxes +We record valuation allowances against our deferred tax assets, when necessary. Realization of deferred tax assets (such as net operating loss carry-forwards) is dependent on future taxable earnings and is therefore uncertain. At least quarterly, we assess the likelihood that our deferred tax asset balance will be recovered from future taxable income. To the extent we believe that recovery is not likely, we establish a valuation allowance against our net deferred tax asset, which increases our Income tax expense in the period when such determination is made. +In addition, we have not recorded U.S. income tax expense for foreign earnings that we have determined to be indefinitely reinvested outside the United States, thus reducing our overall Income tax expense . The amount of earnings designated as indefinitely reinvested offshore is based upon the actual deployment of such earnings in our offshore assets and our expectations of the future cash needs of our U.S. and foreign entities. Income tax considerations are also a factor in determining the amount of foreign earnings to be indefinitely reinvested offshore. +We carefully review all factors that drive the ultimate disposition of foreign earnings determined to be reinvested offshore and apply stringent standards to overcome the presumption of repatriation. Despite this approach, because the determination involves our future plans and expectations of future events, the possibility exists that amounts declared as indefinitely reinvested offshore may ultimately be repatriated. For instance, the actual cash needs of our U.S. entities may exceed our current expectations, or the actual cash needs of our foreign entities may be less than our current expectations. This would result in additional Income tax expense in the year we determined that amounts were no longer indefinitely reinvested offshore. Conversely, our approach may also result in a determination that accumulated foreign earnings (for which U.S. income taxes have been provided) will be indefinitely reinvested offshore. In this case, our Income tax expense would be reduced in the year of such determination. +On an interim basis, we estimate what our effective tax rate will be for the full fiscal year. This estimated annual effective tax rate is then applied to the year-to-date Income before income taxes excluding infrequently occurring or unusual items, to determine the year-to-date Income tax expense . The income tax effects of infrequent or unusual items are recognized in the interim period in which they occur. As the fiscal year progresses, we continually refine our estimate based upon actual events and earnings by jurisdiction during the year. This continual estimation process periodically results in a change to our expected effective tax rate for the fiscal year. When this occurs, we adjust the income tax provision during the quarter in which the change in estimate occurs. +On a quarterly basis, we evaluate the probability that a tax position will be effectively sustained and the appropriateness of the amount recognized for uncertain tax positions based on factors including changes in facts or circumstances, changes in tax law, settled audit issues and new audit activity. Changes in our assessment may result in the recognition of a tax benefit or an additional charge to the tax provision in the period our assessment changes. We recognize interest and penalties related to income tax matters in Income tax expense . +Other Contingencies +In the ordinary course of business, we are involved in legal proceedings regarding contractual and employment relationships, product liability claims, trademark rights and a variety of other matters. We record contingent liabilities resulting from claims against us, including related legal costs, when a loss is assessed to be probable and the amount of the loss is reasonably estimable. Assessing probability of loss and estimating probable losses requires analysis of multiple factors, including in some cases judgments about the potential actions of third-party claimants and courts. Recorded contingent liabilities are based on the best information available and actual losses in any future period are inherently uncertain. If future adjustments to estimated probable future losses or actual losses exceed our recorded liability for such claims, we would record additional charges during the period in which the actual loss or change in estimate occurred. In addition to contingent liabilities recorded for probable losses, we disclose contingent liabilities when there is a reasonable possibility that the ultimate loss will materially exceed the recorded liability. While we cannot predict the outcome of pending legal matters with certainty, we do not believe any currently identified claim, proceeding, or litigation, either individually or in aggregate, will have a material impact on our results of operations, financial position or cash flows. +41 +Table of Contents +ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk +In the normal course of business and consistent with established policies and procedures, we employ a variety of financial instruments to manage exposure to fluctuations in the value of foreign currencies and interest rates. It is our policy to utilize these financial instruments only where necessary to finance our business and manage such exposures; we do not enter into these transactions for trading or speculative purposes. +We are exposed to foreign currency fluctuations, primarily as a result of our international sales, product sourcing and funding activities. Our foreign exchange risk management program is intended to lessen both the positive and negative effects of currency fluctuations on our consolidated results of operations, financial position and cash flows. We use forward and options contracts to hedge certain anticipated but not yet firmly committed transactions as well as certain firm commitments and the related receivables and payables, including third-party and intercompany transactions. We have, in the past, and may, in the future, also use forward or options contracts to hedge our investment in the net assets of certain international subsidiaries to offset foreign currency translation adjustments related to our net investment in those subsidiaries. Where exposures are hedged, our program has the effect of delaying the impact of exchange rate movements on our Consolidated Financial Statements. +The timing for hedging exposures, as well as the type and duration of the hedge instruments employed, are guided by our hedging policies and determined based upon the nature of the exposure and prevailing market conditions. Typically, the Company may enter into hedge contracts starting up to 12 to 24 months in advance of the forecasted transaction and may place incremental hedges up to 100% of the exposure by the time the forecasted transaction occurs. The majority of derivatives outstanding as of May 31, 2015 are designated as foreign currency cash flow hedges, primarily for Euro/U.S. Dollar, British Pound/Euro and Japanese Yen/U.S. Dollar currency pairs. See section “Foreign Currency Exposures and Hedging Practices” under Item 7 for additional detail. +Our earnings are also exposed to movements in short- and long-term market interest rates. Our objective in managing this interest rate exposure is to limit the impact of interest rate changes on earnings and cash flows and to reduce overall borrowing costs. To achieve these objectives, we maintain a mix of commercial paper, bank loans, fixed-rate debt of varying maturities and have entered into receive-fixed, pay-variable interest rate swaps for a portion of our fixed-rate debt as well as pay-fixed, receive-variable forward-starting interest rate swaps for cash outflows of interest payments on future debt. +Market Risk Measurement +We monitor foreign exchange risk, interest rate risk and related derivatives using a variety of techniques including a review of market value, sensitivity analysis and Value-at-Risk (“VaR”). Our market-sensitive derivative and other financial instruments are foreign currency forward contracts, foreign currency option contracts, interest rate swaps, intercompany loans denominated in non-functional currencies, fixed interest rate U.S. Dollar denominated debt and fixed interest rate Japanese Yen denominated debt. +We use VaR to monitor the foreign exchange risk of our foreign currency forward and foreign currency option derivative instruments only. The VaR determines the maximum potential one-day loss in the fair value of these foreign exchange rate-sensitive financial instruments. The VaR model estimates assume normal market conditions and a 95% confidence level. There are various modeling techniques that can be used in the VaR computation. Our computations are based on interrelationships between currencies and interest rates (a “variance/co-variance” technique). These interrelationships are a function of foreign exchange currency market changes and interest rate changes over the preceding one year period. The value of foreign currency options does not change on a one-to-one basis with changes in the underlying currency rate. We adjust the potential loss in option value for the estimated sensitivity (the “delta” and “gamma”) to changes in the underlying currency rate. This calculation reflects the impact of foreign currency rate fluctuations on the derivative instruments only and does not include the impact of such rate fluctuations on non-functional currency transactions (such as anticipated transactions, firm commitments, cash balances and accounts and loans receivable and payable), including those which are hedged by these instruments. +The VaR model is a risk analysis tool and does not purport to represent actual losses in fair value that we will incur nor does it consider the potential effect of favorable changes in market rates. It also does not represent the full extent of the possible loss that may occur. Actual future gains and losses will differ from those estimated because of changes or differences in market rates and interrelationships, hedging instruments and hedge percentages, timing and other factors. +The estimated maximum one-day loss in fair value on our foreign currency sensitive derivative financial instruments, derived using the VaR model, was $117 million and $50 million at May 31, 2015 and 2014, respectively. The VaR increased year-over-year as a result of an increase in the total notional value of our foreign currency derivative portfolio, a longer weighted average duration on our outstanding trades and an increase in foreign currency volatilities at May 31, 2015. Such a hypothetical loss in the fair value of our derivatives would be offset by increases in the value of the underlying transactions being hedged. The average monthly change in the fair values of foreign currency forward and foreign currency option derivative instruments was $205 million and $70 million during fiscal 2015 and fiscal 2014, respectively. +The instruments not included in the VaR are intercompany loans denominated in non-functional currencies, fixed interest rate Japanese Yen denominated debt, fixed interest rate U.S. Dollar denominated debt and interest rate swaps. Intercompany loans and related interest amounts are eliminated in consolidation. Furthermore, our non-functional currency intercompany loans are substantially hedged against foreign exchange risk through the use of forward contracts, which are included in the VaR calculation above. Therefore, we consider the interest rate and foreign currency market risks associated with our non-functional currency intercompany loans to be immaterial to our consolidated financial position, results from operations and cash flows. +During the year ended May 31, 2015, we entered into a series of forward-starting interest rate swap agreements. A forward-starting interest rate swap is an agreement that effectively hedges the variability in future benchmark interest payments attributable to changes in interest rates on the forecasted issuance of fixed-rate debt. We entered into these forward-starting interest rate swaps in order to lock in fixed interest rates on our forecasted issuance of debt. These instruments were designated as cash flow hedges of the variability in the expected cash outflows of interest payments on future debt due to changes in benchmark interest rates. +Details of third-party debt and interest rate swaps are provided in the table below. The table presents principal cash flows and related weighted average interest rates by expected maturity dates. Weighted average interest rates for the fixed rate swapped to floating rate debt reflect the effective interest rates at May 31, 2015. +42 +Table of Contents +Expected Maturity Date +Year Ending May 31, +(Dollars in millions) +2016 +2017 +2018 +2019 +2020 +Thereafter +Total +Fair Value +Foreign Exchange Risk +Japanese Yen Functional Currency +Long-term Japanese Yen debt — Fixed rate +Principal payments +$ +5 +$ +5 +$ +5 +$ +5 +$ +5 +$ +4 +$ +29 +$ +31 +Average interest rate +2.4 +% +2.4 +% +2.4 +% +2.4 +% +2.4 +% +2.4 +% +2.4 +% +Interest Rate Risk +Japanese Yen Functional Currency +Long-term Japanese Yen debt — Fixed rate +Principal payments +$ +5 +$ +5 +$ +5 +$ +5 +$ +5 +$ +4 +$ +29 +$ +31 +Average interest rate +2.4 +% +2.4 +% +2.4 +% +2.4 +% +2.4 +% +2.4 +% +2.4 +% +U.S. Dollar Functional Currency +Long-term U.S. Dollar debt — Fixed rate swapped to Floating rate +Principal payments +$ +100 +$ +— +$ +— +$ +— +$ +— +$ +— +$ +100 +$ +102 +Average interest rate +0.4 +% +0.0 +% +0.0 +% +0.0 +% +0.0 +% +0.0 +% +0.4 +% +Long-term U.S. Dollar debt — Fixed rate +Principal payments +$ +1 +$ +38 +$ +18 +$ +— +$ +— +$ +1,000 +$ +1,057 +$ +1,027 +Average interest rate +6.4 +% +6.2 +% +6.8 +% +0.0 +% +0.0 +% +2.9 +% +3.1 +% +Anticipated long-term U.S. Dollar debt issuance - Floating rate swapped to fixed rate +Notional (1) +$ +1,000 +$ +— +$ +— +$ +— +$ +— +$ +— +$ +1,000 +$ +76 +Weighted-average fixed rate +2.3 +% +0.0 +% +0.0 +% +0.0 +% +0.0 +% +0.0 +% +Weighted-average floating rate +0.3 +% +0.0 +% +0.0 +% +0.0 +% +0.0 +% +0.0 +% +(1) Forward-starting interest rate swaps have been included in the maturities category based on when the related hedged forecasted debt issuance and corresponding swap terminations are expected to occur. +The fixed interest rate Japanese Yen denominated debt instruments were issued by and are accounted for by one of our Japanese subsidiaries. Accordingly, the monthly translation of these instruments, which varies due to changes in foreign exchange rates, is recognized in Accumulated other comprehensive income upon consolidation of this subsidiary. +ITEM 8. Financial Statements and Supplementary Data +Management of NIKE, Inc. is responsible for the information and representations contained in this report. The financial statements have been prepared in conformity with the generally accepted accounting principles we considered appropriate in the circumstances and include some amounts based on our best estimates and judgments. Other financial information in this report is consistent with these financial statements. +Our accounting systems include controls designed to reasonably assure assets are safeguarded from unauthorized use or disposition and provide for the preparation of financial statements in conformity with generally accepted accounting principles. These systems are supplemented by the selection and training of qualified financial personnel and an organizational structure providing for appropriate segregation of duties. +An internal Corporate Audit department reviews the results of its work with the Audit Committee of the Board of Directors, presently consisting of four outside directors. The Audit Committee is responsible for the appointment of the independent registered public accounting firm and reviews, with the independent registered public accounting firm, management and the internal audit staff, the scope and the results of the annual examination, the effectiveness of the accounting control system and other matters relating to the financial affairs of NIKE as the Audit Committee deems appropriate. The independent registered public accounting firm and the internal auditors have full access to the Committee, with and without the presence of management, to discuss any appropriate matters. +43 +Table of Contents +Management’s Annual Report on Internal Control Over Financial Reporting +Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13(a) - 15(f) and Rule 15(d) - 15(f) of the Securities Exchange Act of 1934, as amended. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the financial statements for external purposes in accordance with generally accepted accounting principles in the United States of America. Internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of assets of the Company that could have a material effect on the financial statements. +While “reasonable assurance” is a high level of assurance, it does not mean absolute assurance. Because of its inherent limitations, internal control over financial reporting may not prevent or detect every misstatement and instance of fraud. Controls are susceptible to manipulation, especially in instances of fraud caused by the collusion of two or more people, including our senior management. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +Under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, our management conducted an evaluation of the effectiveness of our internal control over financial reporting based upon the framework in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on the results of our evaluation, our management concluded that our internal control over financial reporting was effective as of May 31, 2015 . +PricewaterhouseCoopers LLP, an independent registered public accounting firm, has audited (1) the Consolidated Financial Statements and (2) the effectiveness of our internal control over financial reporting as of May 31, 2015 , as stated in their report herein. +Mark G. Parker +Donald W. Blair +President and Chief Executive Officer +Chief Financial Officer +44 +Table of Contents +Report of Independent Registered Public Accounting Firm +To the Board of Directors and Shareholders of NIKE, Inc.: +In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)(1) present fairly, in all material respects, the financial position of NIKE, Inc. and its subsidiaries at May 31, 2015 and 2014 , and the results of their operations and their cash flows for each of the three years in the period ended May 31, 2015 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of May 31, 2015 , based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Annual Report on Internal Control Over Financial Reporting appearing under Item 8. Our responsibility is to express opinions on these financial statements, on the financial statement schedule and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. +A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements. +Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +/S/ PRICEWATERHOUSECOOPERS LLP +Portland, Oregon +July 23, 2015 +45 +Table of Contents +NIKE, Inc. Consolidated Statements of Income +Year Ended May 31, +(In millions, except per share data) +2015 +2014 +2013 +Income from continuing operations: +Revenues +$ +30,601 +$ +27,799 +$ +25,313 +Cost of sales +16,534 +15,353 +14,279 +Gross profit +14,067 +12,446 +11,034 +Demand creation expense +3,213 +3,031 +2,745 +Operating overhead expense +6,679 +5,735 +5,051 +Total selling and administrative expense +9,892 +8,766 +7,796 +Interest expense (income), net (Notes 6, 7 and 8) +28 +33 +(3 +) +Other (income) expense, net (Note 17) +(58 +) +103 +(15 +) +Income before income taxes +4,205 +3,544 +3,256 +Income tax expense (Note 9) +932 +851 +805 +NET INCOME FROM CONTINUING OPERATIONS +3,273 +2,693 +2,451 +NET INCOME FROM DISCONTINUED OPERATIONS +— +— +21 +NET INCOME +$ +3,273 +$ +2,693 +$ +2,472 +Earnings per common share from continuing operations: +Basic (Notes 1 and 12) +$ +3.80 +$ +3.05 +$ +2.74 +Diluted (Notes 1 and 12) +$ +3.70 +$ +2.97 +$ +2.68 +Earnings per common share from discontinued operations: +Basic (Notes 1 and 12) +$ +— +$ +— +$ +0.02 +Diluted (Notes 1 and 12) +$ +— +$ +— +$ +0.02 +Dividends declared per common share +$ +1.08 +$ +0.93 +$ +0.81 +The accompanying Notes to the Consolidated Financial Statements are an integral part of this statement. +46 +Table of Contents +NIKE, Inc. Consolidated Statements of Comprehensive Income +Year Ended May 31, +(In millions) +2015 +2014 +2013 +Net income +$ +3,273 +$ +2,693 +$ +2,472 +Other comprehensive income (loss), net of tax: +Change in net foreign currency translation adjustment (1) +(20 +) +(32 +) +38 +Change in net gains (losses) on cash flow hedges (2) +1,188 +(161 +) +12 +Change in net gains (losses) on other (3) +(7 +) +4 +(8 +) +Change in release of cumulative translation loss related to Umbro (4) +— +— +83 +Total other comprehensive income (loss), net of tax +1,161 +(189 +) +125 +TOTAL COMPREHENSIVE INCOME +$ +4,434 +$ +2,504 +$ +2,597 +(1) +Net of tax benefit (expense) of $0 million , $0 million and $(13) million , respectively. +(2) +Net of tax benefit (expense) of $(31) million , $18 million and $(22) million , respectively. +(3) +Net of tax benefit (expense) of $0 million , $0 million and $1 million , respectively. +(4) +Net of tax benefit (expense) of $0 million , $0 million and $47 million , respectively. +The accompanying Notes to the Consolidated Financial Statements are an integral part of this statement. +47 +Table of Contents +NIKE, Inc. Consolidated Balance Sheets +May 31, +(In millions) +2015 +2014 +ASSETS +Current assets: +Cash and equivalents (Note 6) +$ +3,852 +$ +2,220 +Short-term investments (Note 6) +2,072 +2,922 +Accounts receivable, net (Note 1) +3,358 +3,434 +Inventories (Notes 1 and 2) +4,337 +3,947 +Deferred income taxes (Note 9) +389 +355 +Prepaid expenses and other current assets (Notes 6 and 17) +1,968 +818 +Total current assets +15,976 +13,696 +Property, plant and equipment, net (Note 3) +3,011 +2,834 +Identifiable intangible assets, net (Note 4) +281 +282 +Goodwill (Note 4) +131 +131 +Deferred income taxes and other assets (Notes 6, 9 and 17) +2,201 +1,651 +TOTAL ASSETS +$ +21,600 +$ +18,594 +LIABILITIES AND SHAREHOLDERS’ EQUITY +Current liabilities: +Current portion of long-term debt (Note 8) +$ +107 +$ +7 +Notes payable (Note 7) +74 +167 +Accounts payable (Note 7) +2,131 +1,930 +Accrued liabilities (Notes 5, 6 and 17) +3,951 +2,491 +Income taxes payable (Note 9) +71 +432 +Total current liabilities +6,334 +5,027 +Long-term debt (Note 8) +1,079 +1,199 +Deferred income taxes and other liabilities (Notes 6, 9, 13 and 17) +1,480 +1,544 +Commitments and contingencies (Note 16) +Redeemable preferred stock (Note 10) +— +— +Shareholders’ equity: +Common stock at stated value (Note 11): +Class A convertible — 178 and 178 shares outstanding +— +— +Class B — 679 and 692 shares outstanding +3 +3 +Capital in excess of stated value +6,773 +5,865 +Accumulated other comprehensive income (Note 14) +1,246 +85 +Retained earnings +4,685 +4,871 +Total shareholders’ equity +12,707 +10,824 +TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY +$ +21,600 +$ +18,594 +The accompanying Notes to the Consolidated Financial Statements are an integral part of this statement. +48 +Table of Contents +NIKE, Inc. Consolidated Statements of Cash Flows +Year Ended May 31, +(In millions) +2015 +2014 +2013 +Cash provided by operations: +Net income +$ +3,273 +$ +2,693 +$ +2,472 +Income charges (credits) not affecting cash: +Depreciation +606 +518 +438 +Deferred income taxes +(113 +) +(11 +) +20 +Stock-based compensation (Note 11) +191 +177 +174 +Amortization and other +43 +68 +64 +Net foreign currency adjustments +424 +56 +66 +Net gain on divestitures +— +— +(124 +) +Changes in certain working capital components and other assets and liabilities: +(Increase) decrease in accounts receivable +(216 +) +(298 +) +142 +(Increase) in inventories +(621 +) +(505 +) +(219 +) +(Increase) in prepaid expenses and other current assets +(144 +) +(210 +) +(28 +) +Increase in accounts payable, accrued liabilities and income taxes payable +1,237 +525 +27 +Cash provided by operations +4,680 +3,013 +3,032 +Cash used by investing activities: +Purchases of short-term investments +(4,936 +) +(5,386 +) +(4,133 +) +Maturities of short-term investments +3,655 +3,932 +1,663 +Sales of short-term investments +2,216 +1,126 +1,330 +Investments in reverse repurchase agreements +(150 +) +— +— +Additions to property, plant and equipment +(963 +) +(880 +) +(598 +) +Disposals of property, plant and equipment +3 +3 +14 +Proceeds from divestitures +— +— +786 +(Increase) in other assets, net of other liabilities +— +(2 +) +(2 +) +Cash used by investing activities +(175 +) +(1,207 +) +(940 +) +Cash used by financing activities: +Net proceeds from long-term debt issuance +— +— +986 +Long-term debt payments, including current portion +(7 +) +(60 +) +(49 +) +(Decrease) increase in notes payable +(63 +) +75 +10 +Payments on capital lease obligations +(19 +) +(17 +) +— +Proceeds from exercise of stock options and other stock issuances +514 +383 +313 +Excess tax benefits from share-based payment arrangements +218 +132 +72 +Repurchase of common stock +(2,534 +) +(2,628 +) +(1,674 +) +Dividends — common and preferred +(899 +) +(799 +) +(703 +) +Cash used by financing activities +(2,790 +) +(2,914 +) +(1,045 +) +Effect of exchange rate changes on cash and equivalents +(83 +) +(9 +) +36 +Net increase (decrease) in cash and equivalents +1,632 +(1,117 +) +1,083 +Cash and equivalents, beginning of year +2,220 +3,337 +2,254 +CASH AND EQUIVALENTS, END OF YEAR +$ +3,852 +$ +2,220 +$ +3,337 +Supplemental disclosure of cash flow information: +Cash paid during the year for: +Interest, net of capitalized interest +$ +53 +$ +53 +$ +20 +Income taxes +1,262 +856 +702 +Non-cash additions to property, plant and equipment +206 +167 +137 +Dividends declared and not paid +240 +209 +188 +The accompanying Notes to the Consolidated Financial Statements are an integral part of this statement. +49 +Table of Contents +NIKE, Inc. Consolidated Statements of Shareholders’ Equity +Common Stock +Capital in +Excess +of Stated +Value +Accumulated +Other +Comprehensive +Income +Retained +Earnings +Total +Class A +Class B +(In millions, except per share data) +Shares +Amount +Shares +Amount +Balance at May 31, 2012 +180 +$ +— +736 +$ +3 +$ +4,641 +$ +149 +$ +5,526 +$ +10,319 +Stock options exercised +10 +322 +322 +Conversion to Class B Common Stock +(2 +) +2 +— +Repurchase of Class B Common Stock +(34 +) +(10 +) +(1,647 +) +(1,657 +) +Dividends on common stock ($0.81 per share) +(727 +) +(727 +) +Issuance of shares to employees +2 +65 +65 +Stock-based compensation (Note 11) +174 +174 +Forfeiture of shares from employees +— +(8 +) +(4 +) +(12 +) +Net income +2,472 +2,472 +Other comprehensive income (loss) +125 +125 +Balance at May 31, 2013 +178 +$ +— +716 +$ +3 +$ +5,184 +$ +274 +$ +5,620 +$ +11,081 +Stock options exercised +11 +445 +445 +Repurchase of Class B Common Stock +(37 +) +(11 +) +(2,617 +) +(2,628 +) +Dividends on common stock ($0.93 per share) +(821 +) +(821 +) +Issuance of shares to employees +2 +78 +78 +Stock-based compensation (Note 11) +177 +177 +Forfeiture of shares from employees +— +(8 +) +(4 +) +(12 +) +Net income +2,693 +2,693 +Other comprehensive income (loss) +(189 +) +(189 +) +Balance at May 31, 2014 +178 +$ +— +692 +$ +3 +$ +5,865 +$ +85 +$ +4,871 +$ +10,824 +Stock options exercised +14 +639 +639 +Repurchase of Class B Common Stock +(29 +) +(9 +) +(2,525 +) +(2,534 +) +Dividends on common stock ($1.08 per share) +(931 +) +(931 +) +Issuance of shares to employees +2 +92 +92 +Stock-based compensation (Note 11) +191 +191 +Forfeiture of shares from employees +— +(5 +) +(3 +) +(8 +) +Net income +3,273 +3,273 +Other comprehensive income (loss) +1,161 +1,161 +Balance at May 31, 2015 +178 +$ +— +679 +$ +3 +$ +6,773 +$ +1,246 +$ +4,685 +$ +12,707 +The accompanying Notes to the Consolidated Financial Statements are an integral part of this statement. +50 +Table of Contents +Notes to Consolidated Financial Statements +Note 1 +Summary of Significant Accounting Policies +52 +Note 2 +Inventories +57 +Note 3 +Property, Plant and Equipment +57 +Note 4 +Identifiable Intangible Assets and Goodwill +57 +Note 5 +Accrued Liabilities +57 +Note 6 +Fair Value Measurements +57 +Note 7 +Short-Term Borrowings and Credit Lines +59 +Note 8 +Long-Term Debt +60 +Note 9 +Income Taxes +60 +Note 10 +Redeemable Preferred Stock +63 +Note 11 +Common Stock and Stock-Based Compensation +63 +Note 12 +Earnings Per Share +65 +Note 13 +Benefit Plans +65 +Note 14 +Accumulated Other Comprehensive Income +65 +Note 15 +Discontinued Operations +66 +Note 16 +Commitments and Contingencies +67 +Note 17 +Risk Management and Derivatives +67 +Note 18 +Operating Segments and Related Information +71 +51 +Table of Contents +NOTE 1 — Summary of Significant Accounting Policies +Description of Business +NIKE, Inc. is a worldwide leader in the design, development and worldwide marketing and selling of athletic footwear, apparel, equipment, accessories and services. NIKE, Inc. portfolio brands include the NIKE Brand, Jordan Brand, Hurley and Converse. The NIKE Brand is focused on performance athletic footwear, apparel, equipment, accessories and services across a wide range of sport categories, amplified with sport-inspired sportswear products carrying the Swoosh trademark as well as other NIKE Brand trademarks. The Jordan Brand is focused on athletic and casual footwear, apparel and accessories, using the Jumpman trademark. Sales of Jordan Brand products are included within the NIKE Brand Basketball category. The Hurley brand is focused on surf and action sports and youth lifestyle footwear, apparel and accessories, using the Hurley trademark. Sales of Hurley brand products are included within the NIKE Brand Action Sports category. Converse designs, distributes, markets and sells casual sneakers, apparel and accessories under the Converse, Chuck Taylor, All Star, One Star, Star Chevron and Jack Purcell trademarks. In some markets outside the U.S., these trademarks are licensed to third parties who design, distribute, market and sell similar products. Operating results of the Converse brand are reported on a stand-alone basis. +Basis of Consolidation +The Consolidated Financial Statements include the accounts of NIKE, Inc. and its subsidiaries (the "Company”). All significant intercompany transactions and balances have been eliminated. +The Company completed the sale of Cole Haan during the third quarter ended February 28, 2013 and completed the sale of Umbro during the second quarter ended November 30, 2012. As a result, the Company reports the operating results of Cole Haan and Umbro in the Net income from discontinued operations line in the Consolidated Statements of Income for all applicable periods presented. There were no assets or liabilities of discontinued operations as of May 31, 2015 and May 31, 2014 (refer to Note 15 — Discontinued Operations ). Unless otherwise indicated, the disclosures accompanying the Consolidated Financial Statements reflect the Company’s continuing operations. +On November 15, 2012, the Company announced a two -for-one split of both NIKE Class A and Class B Common shares. The stock split was a 100 percent stock dividend payable on December 24, 2012 to shareholders of record at the close of business on December 10, 2012. Common stock began trading at the split-adjusted price on December 26, 2012. All share numbers and per share amounts presented reflect the stock split. +Reclassifications +Certain prior year amounts have been reclassified to conform to fiscal 2015 presentation. +Revisions +During the third quarter of fiscal 2015, management determined it had incorrectly reflected unrealized gains and losses from re-measurement of non-functional currency intercompany balances between certain of its foreign wholly-owned subsidiaries in its Consolidated Statements of Cash Flows. These unrealized gains and losses should have been classified as non-cash reconciling items from Net income to Cash provided by operations , but were instead reported on the Effect of exchange rate changes on cash and equivalents line of the Consolidated Statements of Cash Flows. This resulted in an understatement of Cash provided by operations reported on the Consolidated Statements of Cash Flows for certain prior periods; there was no impact for any period to Net increase (decrease) in cash and equivalents reported on the Consolidated Statements of Cash Flows, or Cash and equivalents reported on the Consolidated Statements of Cash Flows and Balance Sheets. The Company assessed the materiality of the misclassifications on prior periods' financial statements in accordance with SEC Staff Accounting Bulletin (“SAB”) No. 99, Materiality, codified in Accounting Standards Codification (“ASC”) 250, Presentation of Financial Statements, and concluded that these misstatements were not material to any prior annual or interim periods. Accordingly, in accordance with ASC 250 (SAB No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements), the amounts have been revised in the applicable Consolidated Statements of Cash Flows. For the three and six months ended August 31, 2014 and November 30, 2014 of fiscal 2015, the revisions increased Cash provided by operations and decreased Effect of exchange rate changes on cash and equivalents by $95 million and $312 million , respectively. For the fiscal years ended May 31, 2014 and 2013, the revisions increased Cash provided by operations and decreased Effect of exchange rate changes on cash and equivalents by $10 million and $64 million , respectively. These amounts have been reflected in the applicable tables below. As part of the revision to the Consolidated Statements of Cash Flows, the Company has updated its presentation to separately report Net foreign currency adjustments , which was previously included within Amortization and other . +52 +Table of Contents +The following are selected line items from the Company's Unaudited Condensed Consolidated Statements of Cash Flows illustrating the effect of these corrections: +NIKE, Inc. Unaudited Condensed Consolidated Statements of Cash Flows +Three Months Ended August 31, 2014 +Six Months Ended November 30, 2014 +(In millions) +As Reported +Adjustment +As Revised +As Reported +Adjustment +As Revised +Cash provided by operations: +Net income +$ +962 +$ +— +$ +962 +$ +1,617 +$ +— +$ +1,617 +Income charges (credits) not affecting cash: +Amortization and other +(34 +) +42 +8 +(54 +) +69 +15 +Net foreign currency adjustments +— +53 +53 +— +243 +243 +Cash provided by operations +588 +95 +683 +1,235 +312 +1,547 +Effect of exchange rate changes on cash and equivalents +97 +(95 +) +2 +288 +(312 +) +(24 +) +Net increase (decrease) in cash and equivalents +83 +— +83 +53 +— +53 +Cash and equivalents, beginning of period +2,220 +— +2,220 +2,220 +— +2,220 +CASH AND EQUIVALENTS, END OF PERIOD +$ +2,303 +$ +— +$ +2,303 +$ +2,273 +$ +— +$ +2,273 +The following are selected line items from the Company's Consolidated Statements of Cash Flows illustrating the effect of these corrections on the amounts previously reported in the Company's fiscal 2014 Annual Report on Form 10-K: +NIKE, Inc. Consolidated Statements of Cash Flows +Year Ended May 31, 2014 +Year Ended May 31, 2013 +(In millions) +As Reported +Adjustment +As Revised +As Reported +Adjustment +As Revised +Cash provided by operations: +Net income +$ +2,693 +$ +— +$ +2,693 +$ +2,472 +$ +— +$ +2,472 +Income charges (credits) not affecting cash: +Amortization and other +114 +(46 +) +68 +66 +(2 +) +64 +Net foreign currency adjustments +— +56 +56 +— +66 +66 +Cash provided by operations +3,003 +10 +3,013 +2,968 +64 +3,032 +Effect of exchange rate changes on cash and equivalents +1 +(10 +) +(9 +) +100 +(64 +) +36 +Net increase (decrease) in cash and equivalents +(1,117 +) +— +(1,117 +) +1,083 +— +1,083 +Cash and equivalents, beginning of year +3,337 +— +3,337 +2,254 +— +2,254 +CASH AND EQUIVALENTS, END OF YEAR +$ +2,220 +$ +— +$ +2,220 +$ +3,337 +$ +— +$ +3,337 +Recognition of Revenues +Wholesale revenues are recognized when title and the risks and rewards of ownership have passed to the customer, based on the terms of sale. This occurs upon shipment or upon receipt by the customer depending on the country of the sale and the agreement with the customer. Retail store revenues are recorded at the time of sale and online store revenues are recorded upon delivery to the customer. Provisions for post-invoice sales discounts, returns and miscellaneous claims from customers are estimated and recorded as a reduction to revenue at the time of sale. Post-invoice sales discounts consist of contractual programs with certain customers or discretionary discounts that are expected to be granted to certain customers at a later date. Estimates of discretionary discounts, returns and claims are based on historical rates, specific identification of outstanding claims and outstanding returns not yet received from customers and estimated discounts, returns and claims expected, but not yet finalized with customers. As of May 31, 2015 and 2014 , the Company’s reserve balances for post-invoice sales discounts, returns and miscellaneous claims were $724 million and $610 million , respectively. +Cost of Sales +Cost of sales consists primarily of inventory costs, as well as warehousing costs (including the cost of warehouse labor), third-party royalties, certain foreign currency hedge gains and losses and research, design and development costs. +Shipping and Handling Costs +Outbound shipping and handling costs are expensed as incurred and included in Cost of sales . +53 +Table of Contents +Operating Overhead Expense +Operating overhead expense consists primarily of payroll and benefit related costs, rent, depreciation and amortization, professional services and meetings and travel. +Demand Creation Expense +Demand creation expense consists of advertising and promotion costs, including costs of endorsement contracts, television, digital and print advertising, brand events and retail brand presentation. Advertising production costs are expensed the first time an advertisement is run. Advertising communication costs are expensed when the advertisement appears. Costs related to brand events are expensed when the event occurs. Costs related to retail brand presentation are expensed when the presentation is completed and delivered. +A significant amount of the Company’s promotional expenses result from payments under endorsement contracts. Accounting for endorsement payments is based upon specific contract provisions. Generally, endorsement payments are expensed on a straight-line basis over the term of the contract after giving recognition to periodic performance compliance provisions of the contracts. Prepayments made under contracts are included in Prepaid expenses and other current assets or Deferred income taxes and other assets depending on the period to which the prepayment applies. +Certain contracts provide for contingent payments to endorsers based upon specific achievements in their sports (e.g., winning a championship). The Company records demand creation expense for these amounts when the endorser achieves the specific goal. +Certain contracts provide for variable payments based upon endorsers maintaining a level of performance in their sport over an extended period of time (e.g., maintaining a specified ranking in a sport for a year). When the Company determines payments are probable, the amounts are reported in demand creation expense ratably over the contract period based on our best estimate of the endorser's performance. In these instances, to the extent that actual payments to the endorser differ from the Company's estimate due to changes in the endorser’s performance, increased or decreased demand creation expense may be recorded in a future period. +Certain contracts provide for royalty payments to endorsers based upon a predetermined percent of sales of particular products. The Company expenses these payments in Cost of sales as the related sales occur. In certain contracts, the Company offers minimum guaranteed royalty payments. For contracts for which the Company estimates it will not meet the minimum guaranteed amount of royalty fees through sales of product, the Company records the amount of the guaranteed payment in excess of that earned through sales of product in Demand creation expense uniformly over the guarantee period. +Through cooperative advertising programs, the Company reimburses retail customers for certain costs of advertising the Company’s products. The Company records these costs in Demand creation expense at the point in time when it is obligated to its customers for the costs. This obligation may arise prior to the related advertisement being run. +Total advertising and promotion expenses were $3,213 million , $3,031 million and $2,745 million for the years ended May 31, 2015 , 2014 and 2013 , respectively. Prepaid advertising and promotion expenses totaled $455 million and $516 million at May 31, 2015 and 2014 , respectively, and were recorded in Prepaid expenses and other current assets and Deferred income taxes and other assets depending on the period to which the prepayment applies. +Cash and Equivalents +Cash and equivalents represent cash and short-term, highly liquid investments, including commercial paper, U.S. Treasury, U.S. Agency, money market funds, time deposits and corporate debt securities with maturities of 90 days or less at the date of purchase. +Short-Term Investments +Short-term investments consist of highly liquid investments, including commercial paper, U.S. Treasury, U.S. Agency and corporate debt securities, with maturities over 90 days at the date of purchase. Debt securities that the Company has the ability and positive intent to hold to maturity are carried at amortized cost. At May 31, 2015 and 2014 , the Company did not hold any short-term investments that were classified as trading or held-to-maturity. +At May 31, 2015 and 2014 , Short-term investments consisted of available-for-sale securities. Available-for-sale securities are recorded at fair value with unrealized gains and losses reported, net of tax, in Other comprehensive income , unless unrealized losses are determined to be other than temporary. Realized gains and losses on the sale of securities are determined by specific identification. The Company considers all available-for-sale securities, including those with maturity dates beyond 12 months, as available to support current operational liquidity needs and therefore classifies all securities with maturity dates beyond 90 days at the date of purchase as current assets within Short-term investments on the Consolidated Balance Sheets. +Refer to Note 6 — Fair Value Measurements for more information on the Company’s short-term investments. +Allowance for Uncollectible Accounts Receivable +Accounts receivable consists primarily of amounts receivable from customers. The Company makes ongoing estimates relating to the collectability of its accounts receivable and maintains an allowance for estimated losses resulting from the inability of its customers to make required payments. In determining the amount of the allowance, the Company considers historical levels of credit losses and makes judgments about the creditworthiness of significant customers based on ongoing credit evaluations. Accounts receivable with anticipated collection dates greater than 12 months from the balance sheet date and related allowances are considered non-current and recorded in Deferred income taxes and other assets . The allowance for uncollectible accounts receivable was $78 million and $78 million at May 31, 2015 and 2014 , respectively, of which $24 million and $37 million , respectively, was classified as long-term and recorded in Deferred income taxes and other assets . +54 +Table of Contents +Inventory Valuation +Inventories are stated at lower of cost or market and valued on either an average or specific identification cost basis. For inventories in transit that represent direct shipments to customers, the related inventory and cost of sales are recognized on a specific identification basis. Inventory costs primarily consist of product cost from the Company's suppliers, as well as inbound freight, import duties, taxes, insurance and logistics and other handling fees. +Property, Plant and Equipment and Depreciation +Property, plant and equipment are recorded at cost. Depreciation is determined on a straight-line basis for buildings and leasehold improvements over 2 to 40 years and for machinery and equipment over 2 to 15 years. +Depreciation and amortization of assets used in manufacturing, warehousing and product distribution are recorded in Cost of sales . Depreciation and amortization of other assets are recorded in Total selling and administrative expense . +Software Development Costs +Internal Use Software . Expenditures for major software purchases and software developed for internal use are capitalized and amortized over a 2 to 10 year period on a straight-line basis. The Company’s policy provides for the capitalization of external direct costs of materials and services associated with developing or obtaining internal use computer software. In addition, the Company also capitalizes certain payroll and payroll-related costs for employees who are directly associated with internal use computer software projects. The amount of capitalizable payroll costs with respect to these employees is limited to the time directly spent on such projects. Costs associated with preliminary project stage activities, training, maintenance and all other post-implementation stage activities are expensed as incurred. +Computer Software to be Sold, Leased or Otherwise Marketed . Development costs of computer software to be sold, leased or otherwise marketed as an integral part of a product are subject to capitalization beginning when a product’s technological feasibility has been established and ending when a product is available for general release to customers. In most instances, the Company’s products are released soon after technological feasibility has been established. Therefore, software development costs incurred subsequent to achievement of technological feasibility are usually not significant, and generally most software development costs have been expensed as incurred. +Impairment of Long-Lived Assets +The Company reviews the carrying value of long-lived assets or asset groups to be used in operations whenever events or changes in circumstances indicate that the carrying amount of the assets might not be recoverable. Factors that would necessitate an impairment assessment include a significant adverse change in the extent or manner in which an asset is used, a significant adverse change in legal factors or the business climate that could affect the value of the asset or a significant decline in the observable market value of an asset, among others. If such facts indicate a potential impairment, the Company would assess the recoverability of an asset group by determining if the carrying value of the asset group exceeds the sum of the projected undiscounted cash flows expected to result from the use and eventual disposition of the assets over the remaining economic life of the primary asset in the asset group. If the recoverability test indicates that the carrying value of the asset group is not recoverable, the Company will estimate the fair value of the asset group using appropriate valuation methodologies, which would typically include an estimate of discounted cash flows. Any impairment would be measured as the difference between the asset group’s carrying amount and its estimated fair value. +Goodwill and Indefinite-Lived Intangible Assets +The Company performs annual impairment tests on goodwill and intangible assets with indefinite lives in the fourth quarter of each fiscal year, or when events occur or circumstances change that would, more likely than not, reduce the fair value of a reporting unit or an intangible asset with an indefinite life below its carrying value. Events or changes in circumstances that may trigger interim impairment reviews include significant changes in business climate, operating results, planned investments in the reporting unit, planned divestitures or an expectation that the carrying amount may not be recoverable, among other factors. The Company may first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events and circumstances, the Company determines that it is more likely than not that the fair value of the reporting unit is greater than its carrying amount, the two-step impairment test is unnecessary. The two-step impairment test first requires the Company to estimate the fair value of its reporting units. If the carrying value of a reporting unit exceeds its fair value, the goodwill of that reporting unit is potentially impaired and the Company proceeds to step two of the impairment analysis. In step two of the analysis, the Company measures and records an impairment loss equal to the excess of the carrying value of the reporting unit's goodwill over its implied fair value, if any. +The Company generally bases its measurement of the fair value of a reporting unit on a blended analysis of the present value of future discounted cash flows and the market valuation approach. The discounted cash flows model indicates the fair value of the reporting unit based on the present value of the cash flows that the Company expects the reporting unit to generate in the future. The Company's significant estimates in the discounted cash flows model include: its weighted average cost of capital; long-term rate of growth and profitability of the reporting unit's business; and working capital effects. The market valuation approach indicates the fair value of the business based on a comparison of the reporting unit to comparable publicly traded companies in similar lines of business. Significant estimates in the market valuation approach model include identifying similar companies with comparable business factors such as size, growth, profitability, risk and return on investment and assessing comparable revenue and operating income multiples in estimating the fair value of the reporting unit. +Indefinite-lived intangible assets primarily consist of acquired trade names and trademarks. The Company may first perform a qualitative assessment to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired. If, after assessing the totality of events and circumstances, the C ompany determines that it is more likely than not that the indefinite-lived intangible asset is not impaired, no quantitative fair value measurement is necessary. If a quantitative fair value measurement calculation is required for these intangible assets, the Company utilizes the relief-from-royalty method. This method assumes that trade names and trademarks have value to the extent that their owner is relieved of the obligation to pay royalties for the benefits received from them. This method requires the Company to estimate the future revenue for the related brands, the appropriate royalty rate and the weighted average cost of capital. +55 +Table of Contents +Operating Leases +The Company leases retail store space, certain distribution and warehouse facilities, office space and other non-real estate assets under operating leases. Operating lease agreements may contain rent escalation clauses, rent holidays or certain landlord incentives, including tenant improvement allowances. Rent expense for non-cancelable operating leases with scheduled rent increases or landlord incentives are recognized on a straight-line basis over the lease term, beginning with the effective lease commencement date, which is generally the date in which the Company takes possession of or controls the physical use of the property. Certain leases also provide for contingent rents, which are determined as a percent of sales in excess of specified levels. A contingent rent liability is recognized together with the corresponding rent expense when specified levels have been achieved or when the Company determines that achieving the specified levels during the period is probable. +Fair Value Measurements +The Company measures certain financial assets and liabilities at fair value on a recurring basis, including derivatives and available-for-sale securities. Fair value is the price the Company would receive to sell an asset or pay to transfer a liability in an orderly transaction with a market participant at the measurement date. The Company uses a three-level hierarchy established by the Financial Accounting Standards Board ("FASB") that prioritizes fair value measurements based on the types of inputs used for the various valuation techniques (market approach, income approach and cost approach). +The levels of hierarchy are described below: +• +Level 1: Quoted prices in active markets for identical assets or liabilities. +• +Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly; these include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active. +• +Level 3: Unobservable inputs for which there is little or no market data available, which require the reporting entity to develop its own assumptions. +The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. Financial assets and liabilities are classified in their entirety based on the most conservative level of input that is significant to the fair value measurement. +Pricing vendors are utilized for certain Level 1 and Level 2 investments. These vendors either provide a quoted market price in an active market or use observable inputs without applying significant adjustments in their pricing. Observable inputs include broker quotes, interest rates and yield curves observable at commonly quoted intervals, volatilities and credit risks. The fair value of derivative contracts is determined using observable market inputs such as the daily market foreign currency rates, forward pricing curves, currency volatilities, currency correlations and interest rates and considers nonperformance risk of the Company and that of its counterparties. +The Company’s fair value processes include controls that are designed to ensure appropriate fair values are recorded. These controls include a comparison of fair values to another independent pricing vendor. +Refer to Note 6 — Fair Value Measurements for additional information. +Foreign Currency Translation and Foreign Currency Transactions +Adjustments resulting from translating foreign functional currency financial statements into U.S. Dollars are included in the foreign currency translation adjustment, a component of Accumulated other comprehensive income in Total shareholders’ equity . +The Company’s global subsidiaries have various assets and liabilities, primarily receivables and payables, which are denominated in currencies other than their functional currency. These balance sheet items are subject to re-measurement, the impact of which is recorded in Other (income) expense, net , within the Consolidated Statements of Income. +Accounting for Derivatives and Hedging Activities +The Company uses derivative financial instruments to reduce its exposure to changes in foreign currency exchange rates and interest rates. All derivatives are recorded at fair value on the Consolidated Balance Sheets and changes in the fair value of derivative financial instruments are either recognized in Accumulated other comprehensive income (a component of Total shareholders’ equity ), Long-term debt or Net income depending on the nature of the underlying exposure, whether the derivative is formally designated as a hedge and, if designated, the extent to which the hedge is effective. The Company classifies the cash flows at settlement from derivatives in the same category as the cash flows from the related hedged items. For undesignated hedges and designated cash flow hedges, this is primarily within the Cash provided by operations component of the Consolidated Statements of Cash Flows. For designated net investment hedges, this is within the Cash used by investing activities component of the Consolidated Statement of Cash Flows. For the Company’s fair value hedges, which are interest rate swaps used to mitigate the change in fair value of its fixed-rate debt attributable to changes in interest rates, the related cash flows from periodic interest payments are reflected within the Cash provided by operations component of the Consolidated Statements of Cash Flows. Refer to Note 17 — Risk Management and Derivatives for more information on the Company’s risk management program and derivatives. +Stock-Based Compensation +The Company estimates the fair value of options and stock appreciation rights granted under the NIKE, Inc. 1990 Stock Incentive Plan (the “1990 Plan”) and employees’ purchase rights under the Employee Stock Purchase Plans (“ESPPs”) using the Black-Scholes option pricing model. The Company recognizes this fair value, net of estimated forfeitures, as Operating overhead expense in the Consolidated Statements of Income over the vesting period using the straight-line method. +Refer to Note 11 — Common Stock and Stock-Based Compensation for more information on the Company’s stock programs. +56 +Table of Contents +Income Taxes +The Company accounts for income taxes using the asset and liability method. This approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of assets and liabilities. The Company records a valuation allowance to reduce deferred tax assets to the amount management believes is more likely than not to be realized. United States income taxes are provided currently on financial statement earnings of non-U.S. subsidiaries that are expected to be repatriated. The Company determines annually the amount of undistributed non-U.S. earnings to invest indefinitely in its non-U.S. operations. +The Company recognizes a tax benefit from uncertain tax positions in the financial statements only when it is more likely than not that the position will be sustained upon examination by relevant tax authorities. The Company recognizes interest and penalties related to income tax matters in Income tax expense . +Refer to Note 9 — Income Taxes for further discussion. +Earnings Per Share +Basic earnings per common share is calculated by dividing Net income by the weighted average number of common shares outstanding during the year. Diluted earnings per common share is calculated by adjusting weighted average outstanding shares, assuming conversion of all potentially dilutive stock options and awards. +Refer to Note 12 — Earnings Per Share for further discussion. +Management Estimates +The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates, including estimates relating to assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. +Recently Adopted Accounting Standards +In July 2013, the FASB issued an accounting standards update intended to provide guidance on the presentation of unrecognized tax benefits, reflecting the manner in which an entity would settle, at the reporting date, any additional income taxes that would result from the disallowance of a tax position when net operating loss carryforwards, similar tax losses or tax credit carryforwards exist. This accounting standard was effective for the Company beginning June 1, 2014 and early adoption was permitted. Management early adopted this guidance and the adoption did not have a material impact on the Company's consolidated financial position or results of operations. +In July 2012, the FASB issued an accounting standards update intended to simplify how an entity tests indefinite-lived intangible assets other than goodwill for impairment by providing entities with an option to perform a qualitative assessment to determine whether further impairment testing is necessary. This accounting standards update was effective for the Company beginning June 1, 2013. The adoption of this standard did not have a material impact on the Company's consolidated financial position or results of operations. +In December 2011, the FASB issued guidance enhancing disclosure requirements surrounding the nature of an entity’s right to offset and related arrangements associated with its financial instruments and derivative instruments. This new guidance requires companies to disclose both gross and net information about instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to master netting arrangements. This new guidance was effective for the Company beginning June 1, 2013. As this guidance only requires expanded disclosures, the adoption had no impact on the Company's consolidated financial position or results of operations. +Recently Issued Accounting Standards +In May 2014, the FASB issued an accounting standards update that replaces existing revenue recognition guidance. The updated guidance requires companies to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, the new standard requires that reporting companies disclose the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. Based on the FASB's decision in July 2015 to defer the effective date and to allow more flexibility with implementation, the Company anticipates the new standard will be effective for the Company beginning June 1, 2018. The new standard is required to be applied retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying it recognized at the date of initial application. The Company has not yet selected a transition method and is currently evaluating the effect the guidance will have on the Consolidated Financial Statements. +NOTE 2 — Inventories +Inventory balances of $4,337 million and $3,947 million at May 31, 2015 and 2014 , respectively, were substantially all finished goods. +NOTE 3 — Property, Plant and Equipment +Property, plant and equipment, net included the following: +As of May 31, +(In millions) +2015 +2014 +Land +$ +273 +$ +270 +Buildings +1,250 +1,261 +Machinery, equipment and internal-use software +3,329 +3,376 +Leasehold improvements +1,150 +1,066 +Construction in process +350 +247 +Total property, plant and equipment, gross +6,352 +6,220 +Less accumulated depreciation +3,341 +3,386 +TOTAL PROPERTY, PLANT AND EQUIPMENT, NET +$ +3,011 +$ +2,834 +Capitalized interest was not material for the years ended May 31, 2015 , 2014 and 2013 . The Company had $5 million and $74 million in capital lease obligations as of May 31, 2015 and May 31, 2014 , respectively, included in machinery, equipment and internal-use software. During the fiscal year ended May 31, 2015, the Company restructured the terms of certain capital leases, which now qualify as operating leases. +NOTE 4 — Identifiable Intangible Assets and Goodwill +Identifiable intangible assets, net consists of indefinite-lived trademarks, which are not subject to amortization, and acquired trademarks and other intangible assets, which are subject to amortization. At May 31, 2015 and 2014, indefinite-lived trademarks were $281 million and $282 million , respectively. Acquired trademarks and other intangible assets at May 31, 2015 and 2014 were $17 million and $39 million , respectively, and were fully amortized at the end of both periods. Goodwill was $131 million at May 31, 2015 and 2014 of which $65 million and $64 million were included in the Converse segment in the respective periods. The remaining amounts were included in Global Brand Divisions for segment reporting purposes. There were no accumulated impairment balances for goodwill as of either period end. +NOTE 5 — Accrued Liabilities +Accrued liabilities included the following: +As of May 31, +(In millions) +2015 +2014 +Compensation and benefits, excluding taxes +$ +997 +$ +782 +Collateral received from counterparties to hedging instruments +968 +— +Endorsement compensation +388 +328 +Dividends payable +240 +209 +Import and logistics costs +207 +127 +Taxes other than income taxes +174 +204 +Fair value of derivatives +162 +85 +Advertising and marketing +117 +133 +Other (1) +698 +623 +TOTAL ACCRUED LIABILITIES +$ +3,951 +$ +2,491 +(1) +Other consists of various accrued expenses with no individual item accounting for more than 5% of the total Accrued liabilities balance at May 31, 2015 and 2014 . +NOTE 6 — Fair Value Measurements +The following tables present information about the Company's financial assets and liabilities measured at fair value on a recurring basis as of May 31, 2015 and 2014 and indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value. Refer to Note 1 — Summary of Significant Accounting Policies for additional detail regarding the Company’s fair value measurement methodology. +57 +Table of Contents +As of May 31, 2015 +(In millions) +Assets at Fair Value +Cash and Cash Equivalents +Short-term Investments +Other Long-term Assets +Cash +$ +615 +$ +615 +$ +— +$ +— +Level 1: +U.S. Treasury securities +869 +225 +644 +— +Level 2: +Time deposits +684 +684 +— +— +U.S. Agency securities +976 +110 +866 +— +Commercial paper and bonds +914 +352 +562 +— +Money market funds +1,866 +1,866 +— +— +Total level 2 +4,440 +3,012 +1,428 +— +Level 3: +Non-marketable preferred stock +8 +— +— +8 +TOTAL +$ +5,932 +$ +3,852 +$ +2,072 +$ +8 +As of May 31, 2014 +(In millions) +Assets at Fair Value +Cash and Cash Equivalents +Short-term Investments +Other Long-term Assets +Cash +$ +780 +$ +780 +$ +— +$ +— +Level 1: +U.S. Treasury securities +1,137 +151 +986 +— +Level 2: +Time deposits +227 +227 +— +— +U.S. Agency securities +1,027 +25 +1,002 +— +Commercial paper and bonds +959 +25 +934 +— +Money market funds +1,012 +1,012 +— +— +Total level 2 +3,225 +1,289 +1,936 +— +Level 3: +Non-marketable preferred stock +7 +— +— +7 +TOTAL +$ +5,149 +$ +2,220 +$ +2,922 +$ +7 +The Company elects to record the gross assets and liabilities of its derivative financial instruments on the Consolidated Balance Sheets. The Company’s derivative financial instruments are subject to master netting arrangements that allow for the offset of assets and liabilities in the event of default or early termination of the contract. Any amounts of cash collateral received related to these instruments associated with the Company's credit-related contingent features are recorded in Cash and equivalents and Accrued liabilities , the latter of which would further offset against the Company’s derivative asset balance (refer to Note 17 — Risk Management and Derivatives ). Cash collateral received related to the Company's credit related contingent features is presented in the Cash provided by operations component of the Consolidated Statement of Cash Flows. Any amounts of non-cash collateral received, such as securities, are not recorded on the Consolidated Balance Sheets pursuant to the accounting standards for non-cash collateral received. +The following tables present information about the Company’s derivative assets and liabilities measured at fair value on a recurring basis as of May 31, 2015 and May 31, 2014 , and indicate the level in the fair value hierarchy in which the Company classifies the fair value measurement. +As of May 31, 2015 +Derivative Assets +Derivative Liabilities +(In millions) +Assets at Fair Value +Other Current Assets +Other Long-term Assets +Liabilities at Fair Value +Accrued Liabilities +Other Long-term Liabilities +Level 2: +Foreign exchange forwards and options (1) +$ +1,554 +$ +1,034 +$ +520 +$ +164 +$ +160 +$ +4 +Embedded derivatives +7 +2 +5 +11 +2 +9 +Interest rate swaps (2) +78 +78 +— +— +— +— +TOTAL +$ +1,639 +$ +1,114 +$ +525 +$ +175 +$ +162 +$ +13 +(1) +If the foreign exchange derivative instruments had been netted in the Consolidated Balance Sheets, the asset and liability positions each would have been reduced by $161 million as of May 31, 2015 . As of that date, the Company had received $900 million of cash collateral and $74 million of securities from various counterparties related to these foreign exchange derivative instruments. No amount of collateral was posted on the Company’s derivative liability balance as of May 31, 2015 . +(2) +As of May 31, 2015 , the Company had received $68 million of cash collateral related to its interest rate swaps. +58 +Table of Contents +As of May 31, 2014 +Derivative Assets +Derivative Liabilities +(In millions) +Assets at Fair Value +Other Current Assets +Other Long-term Assets +Liabilities at Fair Value +Accrued Liabilities +Other Long-term Liabilities +Level 2: +Foreign exchange forwards and options (1) +$ +127 +$ +101 +$ +26 +$ +85 +$ +84 +$ +1 +Interest rate swaps +6 +— +6 +— +— +— +TOTAL +$ +133 +$ +101 +$ +32 +$ +85 +$ +84 +$ +1 +(1) +If the foreign exchange derivative financial instruments had been netted in the Consolidated Balance Sheets, the asset and liability positions each would have been reduced by $63 million as of May 31, 2014 . No amounts of collateral were received or posted on the Company’s derivative assets and liabilities as of May 31, 2014 . +Available-for-sale securities comprise investments in U.S. Treasury and Agency securities, money market funds, corporate commercial paper and bonds. These securities are valued using market prices on both active markets (Level 1) and less active markets (Level 2). The gross realized gains and losses on sales of available-for-sale securities were immaterial for the fiscal years ended May 31, 2015 and 2014 . Unrealized gains and losses on available-for-sale securities included in Other comprehensive income were immaterial as of May 31, 2015 and 2014 . +The Company regularly reviews its available-for-sale securities for other-than-temporary impairment. For the years ended May 31, 2015 and 2014 , the Company did not consider its securities to be other-than-temporarily impaired and accordingly, did not recognize any impairment losses. +As of May 31, 2015 , the Company held $1,808 million of available-for-sale securities with maturity dates within one year and $264 million with maturity dates over one year and less than five years within Short-term investments on the Consolidated Balance Sheets. +Included in Interest expense (income), net was interest income related to the Company's available-for-sale securities of $6 million , $5 million and $4 million for the years ended May 31, 2015 , 2014 and 2013 , respectively. +The Company’s Level 3 assets comprise investments in certain non-marketable preferred stock. These Level 3 investments are an immaterial portion of the Company's portfolio. Changes in Level 3 investment assets were immaterial during the years ended May 31, 2015 and 2014 . +Derivative financial instruments include foreign exchange forwards and options, embedded derivatives and interest rate swaps. Refer to Note 17 — Risk Management and Derivatives for additional detail. +No transfers among the levels within the fair value hierarchy occurred during the years ended May 31, 2015 or 2014 . +As of May 31, 2015 and 2014 , the Company had no assets or liabilities that were required to be measured at fair value on a non-recurring basis. +For fair value information regarding Notes payable and Long-term debt , refer to Note 7 — Short-Term Borrowings and Credit Lines and Note 8 — Long-Term Debt . +At May 31, 2015 , the Company had $150 million of outstanding receivables related to its investments in reverse repurchase agreements recorded within Prepaid expenses and other current assets on the Consolidated Balance Sheet. The carrying amount of these agreements approximates their fair value based upon observable inputs other than quoted prices (Level 2). The reverse repurchase agreements are fully collateralized. +NOTE 7 — Short-Term Borrowings and Credit Lines +Notes payable and interest-bearing accounts payable to Sojitz Corporation of America (“Sojitz America”) as of May 31, 2015 and 2014 are summarized below: +As of May 31, +2015 +2014 +(Dollars in millions) +Borrowings +Interest Rate +Borrowings +Interest Rate +Notes payable: +U.S. operations +$ +— +0.00 +% +(1) +$ +— +0.00 +% +(1) +Non-U.S. operations +74 +12.39 +% +(1) +167 +10.04 +% +(1) +TOTAL NOTES PAYABLE +$ +74 +$ +167 +Interest-bearing accounts payable: +Sojitz America +$ +78 +0.98 +% +$ +60 +0.94 +% +(1) +Weighted average interest rate includes non-interest bearing overdrafts. +The carrying amounts reflected in the Consolidated Balance Sheets for Notes payable approximate fair value. +The Company purchases through Sojitz America certain NIKE Brand products it acquires from non-U.S. suppliers. These purchases are for products sold in certain countries in the Company's Emerging Markets geographic operating segment and Canada, excluding products produced and sold in the same country. Accounts payable to Sojitz America are generally due up to 60 days after shipment of goods from the foreign port. The interest rate on such accounts payable is the 60 -day London Interbank Offered Rate (“LIBOR”) as of the beginning of the month of the invoice date, plus 0.75% . +As of May 31, 2015 and 2014 , the Company had no amounts outstanding under its commercial paper program. +59 +Table of Contents +On November 1, 2011, the Company entered into a committed credit facility agreement with a syndicate of banks which provides for up to $1 billion of borrowings with the option to increase borrowings to $1.5 billion with lender approval. Following an extension agreement on September 17, 2013 between the Company and the syndicate of banks, the facility matures November 1, 2017. Based on the Company’s current long-term senior unsecured debt ratings of AA- and A1 from Standard and Poor’s Corporation and Moody’s Investor Services, respectively, the interest rate charged on any outstanding borrowings would be the prevailing LIBOR plus 0.445% . The facility fee is 0.055% of the total commitment. Under this committed credit facility, the Company must maintain, among other things, certain minimum specified financial ratios with which the Company was in compliance at May 31, 2015 . No amounts were outstanding under this facility as of May 31, 2015 or 2014 . +NOTE 8 — Long-Term Debt +Long-term debt , net of unamortized premiums and discounts and swap fair value adjustments, comprises the following : +Book Value Outstanding +As of May 31, +Scheduled Maturity (Dollars and Yen in millions) +Original +Principal +Interest +Rate +Interest +Payments +2015 +2014 +Corporate Bond Payables: (4) +October 15, 2015 (1) +$ +100 +5.15 +% +Semi-Annually +$ +101 +$ +108 +May 1, 2023 (5) +$ +500 +2.25 +% +Semi-Annually +499 +499 +May 1, 2043 (5) +$ +500 +3.63 +% +Semi-Annually +499 +499 +Promissory Notes: +April 1, 2017 (2) +$ +40 +6.20 +% +Monthly +39 +39 +January 1, 2018 (2) +$ +19 +6.79 +% +Monthly +19 +19 +Japanese Yen Notes: +August 20, 2001 through November 20, 2020 (3) +¥ +9,000 +2.60 +% +Quarterly +20 +29 +August 20, 2001 through November 20, 2020 (3) +¥ +4,000 +2.00 +% +Quarterly +9 +13 +Total +1,186 +1,206 +Less current maturities +107 +7 +TOTAL LONG-TERM DEBT +$ +1,079 +$ +1,199 +(1) +The Company has entered into interest rate swap agreements whereby the Company receives fixed interest payments at the same rate as the note and pays variable interest payments based on the six -month LIBOR plus a spread. The swaps have the same notional amount and maturity date as the corresponding note. At May 31, 2015 , the interest rates payable on these swap agreements ranged from approximately 0.3% to 0.5% . +(2) +The Company assumed a total of $59 million in bonds payable as part of its agreement to purchase certain Corporate properties; this was treated as a non-cash financing transaction. The property serves as collateral for the debt. The purchase of these properties was accounted for as a business combination where the total consideration of $85 million was allocated to the land and buildings acquired; no other tangible or intangible assets or liabilities resulted from the purchase. The bonds mature in 2017 and 2018 and the Company does not have the ability to re-negotiate the terms of the debt agreements and would incur significant financial penalties if the notes were paid-off prior to maturity. +(3) +NIKE Logistics YK assumed a total of ¥13.0 billion in loans as part of its agreement to purchase a distribution center in Japan, which serves as collateral for the loans. These loans mature in equal quarterly installments during the period August 20, 2001 through November 20, 2020 . +(4) +These senior unsecured obligations rank equally with the Company's other unsecured and unsubordinated indebtedness. +(5) +The bonds are redeemable at the Company's option prior to February 1, 2023 and November 1, 2042, respectively, at a price equal to the greater of (i) 100% of the aggregate principal amount of the notes to be redeemed, and (ii) the sum of the present values of the remaining scheduled payments, plus in each case, accrued and unpaid interest. Subsequent to February 1, 2023 and November 1, 2042, respectively, the bonds also feature a par call provision, which allows for the bonds to be redeemed at a price equal to 100% of the aggregate principal amount of the notes being redeemed, plus accrued and unpaid interest. +The scheduled maturity of Long-term debt in each of the years ending May 31, 2016 through 2020 are $106 million , $44 million , $24 million , $6 million and $6 million , respectively, at face value. +The fair value of the Company’s Long-term debt , including the current portion, was approximately $1,160 million at May 31, 2015 and $1,154 million at May 31, 2014 . The fair value of Long-term debt is estimated based upon quoted prices of similar instruments (level 2). +NOTE 9 — Income Taxes +Income before income taxes is as follows: +Year Ended May 31, +(In millions) +2015 +2014 +2013 +Income before income taxes: +United States +$ +1,967 +$ +3,066 +$ +1,231 +Foreign +2,238 +478 +2,025 +TOTAL INCOME BEFORE INCOME TAXES +$ +4,205 +$ +3,544 +$ +3,256 +60 +Table of Contents +The provision for income taxes is as follows: +Year Ended May 31, +(In millions) +2015 +2014 +2013 +Current: +United States +Federal +$ +596 +$ +259 +$ +378 +State +80 +104 +79 +Foreign +369 +499 +442 +Total +1,045 +862 +899 +Deferred: +United States +Federal +(66 +) +19 +(4 +) +State +(11 +) +(3 +) +(4 +) +Foreign +(36 +) +(27 +) +(86 +) +Total +(113 +) +(11 +) +(94 +) +TOTAL INCOME TAX EXPENSE +$ +932 +$ +851 +$ +805 +A reconciliation from the U.S. statutory federal income tax rate to the effective income tax rate is as follows: +Year Ended May 31, +2015 +2014 +2013 +Federal income tax rate +35.0 +% +35.0 +% +35.0 +% +State taxes, net of federal benefit +0.9 +% +1.8 +% +1.4 +% +Foreign earnings +-15.7 +% +2.2 +% +-11.8 +% +Deferred charge +0.9 +% +-14.6 +% +0.0 +% +Other, net +1.1 +% +-0.4 +% +0.1 +% +EFFECTIVE INCOME TAX RATE +22.2 +% +24.0 +% +24.7 +% +The effective tax rate from continuing operations for the year ended May 31, 2015 was 180 basis points lower than the effective tax rate from continuing operations for the year ended May 31, 2014 primarily due to the favorable resolution of audits in several jurisdictions. +The effective tax rate from continuing operations for the year ended May 31, 2014 was 70 basis points lower than the effective tax rate from continuing operations for the year ended May 31, 2013 primarily due to an increase in the amount of earnings from lower tax rate jurisdictions. +During the fourth quarter of the fiscal year ended May 31, 2014 , the Company reached a resolution with the IRS on a U.S. Unilateral Advanced Pricing Agreement that covers intercompany transfer pricing for fiscal years 2011 through 2020. This agreement resulted in an increase in the effective tax rate due to a reduction in the Company’s permanently reinvested foreign earnings, which was partially offset by a reduction in previously unrecognized tax benefits. It also resulted in a decrease in the effective tax rate due to the recognition of a deferred tax charge. The net result of the agreement did not have a material impact on the Company’s effective income tax rate in fiscal 2014. +61 +Table of Contents +Deferred tax assets and (liabilities) comprise the following: +As of May 31, +(In millions) +2015 +2014 +Deferred tax assets: +Allowance for doubtful accounts +$ +11 +$ +11 +Inventories +59 +49 +Sales return reserves +143 +113 +Deferred compensation +258 +211 +Stock-based compensation +179 +162 +Reserves and accrued liabilities +92 +95 +Net operating loss carry-forwards +10 +16 +Undistributed earnings of foreign subsidiaries +149 +194 +Other +76 +51 +Total deferred tax assets +977 +902 +Valuation allowance +(9 +) +(9 +) +Total deferred tax assets after valuation allowance +968 +893 +Deferred tax liabilities: +Property, plant and equipment +(220 +) +(237 +) +Intangibles +(93 +) +(94 +) +Other +(38 +) +(2 +) +Total deferred tax liability +(351 +) +(333 +) +NET DEFERRED TAX ASSET +$ +617 +$ +560 +The following is a reconciliation of the changes in the gross balance of unrecognized tax benefits: +As of May 31, +(In millions) +2015 +2014 +2013 +Unrecognized tax benefits, beginning of the period +$ +506 +$ +447 +$ +285 +Gross increases related to prior period tax positions (1) +32 +814 +77 +Gross decreases related to prior period tax positions (1) +(123 +) +(166 +) +(3 +) +Gross increases related to current period tax positions +82 +125 +130 +Gross decreases related to current period tax positions +(9 +) +(30 +) +(9 +) +Settlements (1) +(27 +) +(676 +) +— +Lapse of statute of limitations +(10 +) +(4 +) +(21 +) +Changes due to currency translation +(13 +) +(4 +) +(12 +) +UNRECOGNIZED TAX BENEFITS, END OF THE PERIOD +$ +438 +$ +506 +$ +447 +(1) +During the fourth quarter of the fiscal year ended May 31, 2014 , the Company reached a resolution with the IRS on a U.S. Unilateral Advanced Pricing Agreement that covers intercompany transfer pricing for fiscal years 2011 through 2020. As a result, the Company recorded a gross increase in unrecognized tax benefits related to prior period tax positions, a gross decrease in unrecognized tax benefits related to prior period tax positions and a settlement. The net impact of these items resulted in a decrease to unrecognized tax benefits. +As of May 31, 2015 , total gross unrecognized tax benefits, excluding related interest and penalties, were $438 million , $260 million of which would affect the Company's effective tax rate if recognized in future periods. +The Company recognizes interest and penalties related to income tax matters in Income tax expense . The liability for payment of interest and penalties decreased $3 million during the year ended May 31, 2015 , and increased $55 million and $4 million during the years ended May 31, 2014 and 2013 , respectively. As of May 31, 2015 and 2014 , accrued interest and penalties related to uncertain tax positions were $164 million and $167 million , respectively (excluding federal benefit). +The Company incurs tax liabilities primarily in the United States, China and the Netherlands, as well as various state and other foreign jurisdictions. The Company is currently under audit by the U.S. Internal Revenue Service (IRS) for the 2012 through 2014 tax years. The Company has closed all U.S. federal income tax matters through fiscal 2011, with the exception of the validation of foreign tax credits utilized. As previously disclosed, the Company received a statutory notice of deficiency for fiscal 2011 proposing an increase in tax of $31 million , subject to interest, related to the foreign tax credit matter. This notice also reported a decrease in foreign tax credit carryovers for fiscal 2010 and 2011. The Company has contested this deficiency notice by filing a petition with the U.S Tax Court in April 2015. The Company does not expect the outcome of this matter to have a material impact on the financial statements. No payments on the assessment would be required until the dispute is definitively resolved. Based on the information currently available, the Company does not anticipate a significant increase or decrease to its unrecognized tax benefits for this matter within the next 12 months. +The Company’s major foreign jurisdictions, China, the Netherlands and Brazil, have concluded substantially all income tax matters through calendar 2005, fiscal 2009 and calendar 2008, respectively. Although the timing of resolution of audits is not certain, the Company evaluates all domestic and foreign audit issues in the aggregate, along with the expiration of applicable statutes of limitations, and estimates that it is reasonably possible the total gross unrecognized tax benefits could decrease by up to $63 million within the next 12 months. +62 +Table of Contents +The Company provides for U.S. income taxes on the undistributed earnings of foreign subsidiaries unless they are considered indefinitely reinvested outside the United States. At May 31, 2015 , the indefinitely reinvested earnings in foreign subsidiaries upon which United States income taxes have not been provided were approximately $8.3 billion . If these undistributed earnings were repatriated to the United States, or if the shares of the relevant foreign subsidiaries were sold or otherwise transferred, they would generate foreign tax credits that would reduce the federal tax liability associated with the foreign dividend or the otherwise taxable transaction. Assuming a full utilization of the foreign tax credits, the potential net deferred tax liability associated with these temporary differences of undistributed earnings would be approximately $2.7 billion at May 31, 2015 . +A portion of the Company's foreign operations are benefiting from a tax holiday, which is set to expire in 2021 . This tax holiday may be extended when certain conditions are met or may be terminated early if certain conditions are not met. The impact of this tax holiday decreased foreign taxes by $174 million , $138 million and $108 million for the fiscal years ended May 31, 2015 , 2014 and 2013 , respectively. The benefit of the tax holiday on diluted earnings per common share was $0.20 , $0.15 and $0.12 for the fiscal years ended May 31, 2015 , 2014 and 2013 , respectively. +Deferred tax assets at May 31, 2015 and 2014 were reduced by a valuation allowance relating to tax benefits of certain subsidiaries with operating losses. There was no net change in the valuation allowance for the year ended May 31, 2015 compared to a net increase of $4 million and a net decrease of $22 million for the years ended May 31, 2014 and 2013 , respectively. +The Company has available domestic and foreign loss carry-forwards of $36 million at May 31, 2015 . Such losses will expire as follows: +Year Ending May 31, +(In millions) +2016 +2017 +2018 +2019 +2020-2035 +Indefinite +Total +Net operating losses +$ +— +$ +— +$ +4 +$ +1 +$ +17 +$ +14 +$ +36 +During the years ended May 31, 2015 , 2014 and 2013 , income tax benefits attributable to employee stock-based compensation transactions of $224 million , $135 million and $76 million , respectively, were allocated to Total shareholders’ equity . +NOTE 10 — Redeemable Preferred Stock +Sojitz America is the sole owner of the Company’s authorized redeemable preferred stock, $1 par value, which is redeemable at the option of Sojitz America or the Company at par value aggregating $0.3 million . A cumulative dividend of $0.10 per share is payable annually on May 31 and no dividends may be declared or paid on the common stock of the Company unless dividends on the redeemable preferred stock have been declared and paid in full. There have been no changes in the redeemable preferred stock in the three years ended May 31, 2015 , 2014 and 2013 . As the holder of the redeemable preferred stock, Sojitz America does not have general voting rights, but does have the right to vote as a separate class on the sale of all or substantially all of the assets of the Company and its subsidiaries, on merger, consolidation, liquidation or dissolution of the Company or on the sale or assignment of the NIKE trademark for athletic footwear sold in the United States. The redeemable preferred stock has been fully issued to Sojitz America and is not blank check preferred stock. The Company's articles of incorporation do not permit the issuance of additional preferred stock. +NOTE 11 — Common Stock and Stock-Based Compensation +The authorized number of shares of Class A Common Stock, no par value, and Class B Common Stock, no par value, are 200 million and 1,200 million , respectively. Each share of Class A Common Stock is convertible into one share of Class B Common Stock. Voting rights of Class B Common Stock are limited in certain circumstances with respect to the election of directors. There are no differences in the dividend and liquidation preferences or participation rights of the Class A and Class B common shareholders. +In 1990, the Board of Directors adopted, and the shareholders approved, the NIKE, Inc. 1990 Stock Incentive Plan (the “1990 Plan”). The 1990 Plan, as amended, provides for the issuance of up to 326 million previously unissued shares of Class B Common Stock in connection with stock options and other awards granted under the plan. The 1990 Plan authorizes the grant of non-statutory stock options, incentive stock options, stock appreciation rights, restricted stock, restricted stock units and performance-based awards. The exercise price for stock options and stock appreciation rights may not be less than the fair market value of the underlying shares on the date of grant. A committee of the Board of Directors administers the 1990 Plan. The committee has the authority to determine the employees to whom awards will be made, the amount of the awards and the other terms and conditions of the awards. Substantially all stock option grants outstanding under the 1990 Plan were granted in the first quarter of each fiscal year, vest ratably over four years and expire 10 years from the date of grant. +The following table summarizes the Company’s total stock-based compensation expense recognized in Operating overhead expense : +Year Ended May 31, +(In millions) +2015 +2014 +2013 +Stock options (1) +$ +136 +$ +125 +$ +123 +ESPPs +24 +22 +19 +Restricted stock +31 +30 +32 +TOTAL STOCK-BASED COMPENSATION EXPENSE +$ +191 +$ +177 +$ +174 +(1) +Expense for stock options includes the expense associated with stock appreciation rights. Accelerated stock option expense is recorded for employees eligible for accelerated stock option vesting upon retirement. Accelerated stock option expense for the years ended May 31, 2015 , 2014 and 2013 was $19 million , $15 million and $22 million , respectively. +As of May 31, 2015 , the Company had $180 million of unrecognized compensation costs from stock options, net of estimated forfeitures, to be recognized in Operating overhead expense over a weighted average period of 1.9 years. +63 +Table of Contents +The weighted average fair value per share of the options granted during the years ended May 31, 2015 , 2014 and 2013 , as computed using the Black-Scholes pricing model, was $16.95 , $14.89 and $12.71 , respectively. The weighted average assumptions used to estimate these fair values are as follows: +Year Ended May 31, +2015 +2014 +2013 +Dividend yield +1.2 +% +1.3 +% +1.5 +% +Expected volatility +23.6 +% +27.9 +% +35.0 +% +Weighted average expected life (in years) +5.8 +5.3 +5.3 +Risk-free interest rate +1.7 +% +1.3 +% +0.6 +% +The Company estimates the expected volatility based on the implied volatility in market traded options on the Company’s common stock with a term greater than one year, along with other factors. The weighted average expected life of options is based on an analysis of historical and expected future exercise patterns. The interest rate is based on the U.S. Treasury (constant maturity) risk-free rate in effect at the date of grant for periods corresponding with the expected term of the options. +The following summarizes the stock option transactions under the plan discussed above: +Shares (1) +Weighted Average +Option Price +(In millions) +Options outstanding May 31, 2012 +64.3 +$ +30.59 +Exercised +(9.9 +) +24.70 +Forfeited +(1.3 +) +40.14 +Granted +14.6 +46.55 +Options outstanding May 31, 2013 +67.7 +$ +34.72 +Exercised +(11.0 +) +28.29 +Forfeited +(1.3 +) +48.33 +Granted +8.1 +63.54 +Options outstanding May 31, 2014 +63.5 +$ +39.28 +Exercised +(13.6 +) +30.78 +Forfeited +(1.0 +) +59.02 +Granted +9.2 +77.68 +Options outstanding May 31, 2015 +58.1 +$ +47.00 +Options exercisable at May 31, +2013 +35.9 +$ +27.70 +2014 +37.0 +31.42 +2015 +34.3 +36.53 +(1) +Includes stock appreciation rights transactions. +The weighted average contractual life remaining for options outstanding and options exercisable at May 31, 2015 was 6.0 years and 4.7 years, respectively. The aggregate intrinsic value for options outstanding and exercisable at May 31, 2015 was $3,178 million and $2,235 million , respectively. The aggregate intrinsic value was the amount by which the market value of the underlying stock exceeded the exercise price of the options. The total intrinsic value of the options exercised during the years ended May 31, 2015 , 2014 and 2013 was $795 million , $474 million and $293 million , respectively. +In addition to the 1990 Plan, the Company gives employees the right to purchase shares at a discount to the market price under employee stock purchase plans (“ESPPs”). Employees are eligible to participate through payroll deductions of up to 10% of their compensation. At the end of each six -month offering period, shares are purchased by the participants at 85% of the lower of the fair market value at the beginning or the end of the offering period. Employees purchased 1.4 million , 1.4 million and 1.6 million shares during each of the three years ended May 31, 2015 , 2014 and 2013 , respectively. +From time to time, the Company grants restricted stock and restricted stock units to key employees under the 1990 Plan. The number of shares underlying such awards granted to employees during the years ended May 31, 2015 , 2014 and 2013 were 0.3 million , 0.3 million and 1.6 million , respectively, with weighted average values per share of $79.38 , $63.89 and $46.86 , respectively. Recipients of restricted stock are entitled to cash dividends and to vote their respective shares throughout the period of restriction. Recipients of restricted stock units are entitled to dividend equivalent cash payments upon vesting. The value of all grants of restricted stock and restricted stock units was established by the market price on the date of grant. During the years ended May 31, 2015 , 2014 and 2013 , the aggregate fair value of restricted stock and restricted stock units vested was $20 million , $28 million and $25 million , respectively, determined as of the date of vesting. As of May 31, 2015, the Company had $48 million of unrecognized compensation costs from restricted stock units to be recognized in Operating overhead expense over a weighted average period of 1.5 years. +64 +Table of Contents +NOTE 12 — Earnings Per Share +The following is a reconciliation from Basic earnings per common share to Diluted earnings per common share. The computation of Diluted earnings per common share omitted options to purchase an additional 0.1 million , 0.1 million and 0.1 million shares of common stock outstanding for the years ended May 31, 2015 , 2014 and 2013 , respectively, because the options were anti-dilutive. +Year Ended May 31, +(In millions, except per share data) +2015 +2014 +2013 +Determination of shares: +Weighted average common shares outstanding +861.7 +883.4 +897.3 +Assumed conversion of dilutive stock options and awards +22.7 +22.4 +19.1 +DILUTED WEIGHTED AVERAGE COMMON SHARES OUTSTANDING +884.4 +905.8 +916.4 +Earnings per common share from continuing operations: +Basic +$ +3.80 +$ +3.05 +$ +2.74 +Diluted +$ +3.70 +$ +2.97 +$ +2.68 +Earnings per common share from discontinued operations: +Basic +$ +— +$ +— +$ +0.02 +Diluted +$ +— +$ +— +$ +0.02 +Basic earnings per common share for NIKE, Inc. +$ +3.80 +$ +3.05 +$ +2.76 +Diluted earnings per common share for NIKE, Inc. +$ +3.70 +$ +2.97 +$ +2.70 +NOTE 13 — Benefit Plans +The Company has a qualified 401(k) Savings and Profit Sharing Plan to which all U.S. employees who work at least 1,000 hours in a year are able to participate. The Company matches a portion of employee contributions. Company contributions to the savings plan were $58 million , $51 million and $46 million for the years ended May 31, 2015 , 2014 and 2013 , respectively, and are included in Operating overhead expense . The terms of the plan also allow for annual discretionary profit sharing contributions to the accounts of eligible employees by the Company as determined by the Board of Directors. Contributions of $58 million , $49 million and $47 million were made to the plan and are included in Operating overhead expense for the years ended May 31, 2015 , 2014 and 2013 , respectively. +The Company also has a Long-Term Incentive Plan (“LTIP”) that was adopted by the Board of Directors and approved by shareholders in September 1997 and later amended in fiscal 2007. The Company recognized $68 million , $46 million and $50 million of Operating overhead expense related to cash awards under the LTIP during the years ended May 31, 2015 , 2014 and 2013 , respectively. +The Company allows certain highly compensated employees and non-employee directors of the Company to defer compensation under a nonqualified deferred compensation plan. Deferred compensation plan liabilities were $443 million and $390 million at May 31, 2015 and 2014 , respectively, and primarily classified as long-term in Deferred income taxes and other liabilities . +The Company has pension plans in various countries worldwide. The pension plans are only available to local employees and are generally government mandated. The liability related to the unfunded pension liabilities of the plans was $98 million and $100 million at May 31, 2015 and May 31, 2014 , respectively, which was primarily classified as long-term in Deferred income taxes and other liabilities . +NOTE 14 — Accumulated Other Comprehensive Income +The changes in Accumulated other comprehensive income , net of tax, were as follows: +(In millions) +Foreign Currency Translation Adjustment (1) +Cash Flow Hedges +Net Investment Hedges (1) +Other +Total +Balance at May 31, 2014 +$ +9 +$ +32 +$ +95 +$ +(51 +) +$ +85 +Other comprehensive gains (losses) before reclassifications (2) +(20 +) +1,447 +— +33 +1,460 +Reclassifications to net income of previously deferred (gains) losses (3) +— +(259 +) +— +(40 +) +(299 +) +Other comprehensive income (loss) +(20 +) +1,188 +— +(7 +) +1,161 +Balance at May 31, 2015 +$ +(11 +) +$ +1,220 +$ +95 +$ +(58 +) +$ +1,246 +(1) +The accumulated foreign currency translation adjustment and net investment hedge gains/losses related to an investment in a foreign subsidiary are reclassified to Net income upon sale or upon complete or substantially complete liquidation of the respective entity. +(2) +Net of tax benefit (expense) of $ 0 million , $ (33) million , $ 0 million , $ 0 million and $ (33) million , respectively. +(3) +Net of tax (benefit) expense of $ 0 million , $ 2 million , $ 0 million , $ 0 million and $ 2 million , respectively. +65 +Table of Contents +(In millions) +Foreign Currency Translation Adjustment (1) +Cash Flow Hedges +Net Investment Hedges (1) +Other +Total +Balance at May 31, 2013 +$ +41 +$ +193 +$ +95 +$ +(55 +) +$ +274 +Other comprehensive gains (losses) before reclassifications (2) +(32 +) +(134 +) +— +— +(166 +) +Reclassifications to net income of previously deferred (gains) losses (3) +— +(27 +) +— +4 +(23 +) +Other comprehensive income (loss) +(32 +) +(161 +) +— +4 +(189 +) +Balance at May 31, 2014 +$ +9 +$ +32 +$ +95 +$ +(51 +) +$ +85 +(1) +The accumulated foreign currency translation adjustment and net investment hedge gains/losses related to an investment in a foreign subsidiary are reclassified to Net income upon sale or upon complete or substantially complete liquidation of the respective entity. +(2) +Net of tax benefit (expense) of $ 0 million , $ 9 million , $ 0 million , $ 0 million and $ 9 million , respectively. +(3) +Net of tax (benefit) expense of $ 0 million , $ 9 million , $ 0 million , $ 0 million and $ 9 million respectively. +The following table summarizes the reclassifications from Accumulated other comprehensive income to the Consolidated Statements of Income: +Amount of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income into Income +Location of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income into Income +Year Ended May 31, +(In millions) +2015 +2014 +Gains (losses) on cash flow hedges: +Foreign exchange forwards and options +$ +(95 +) +$ +14 +Revenues +Foreign exchange forwards and options +220 +12 +Cost of sales +Foreign exchange forwards and options +— +— +Total selling and administrative expense +Foreign exchange forwards and options +136 +10 +Other (income) expense, net +Total before tax +261 +36 +Tax expense +(2 +) +(9 +) +Gain, net of tax +259 +27 +Gains (losses) on other +40 +(4 +) +Other (income) expense, net +Total before tax +40 +(4 +) +Tax expense +— +— +Gain (loss), net of tax +40 +(4 +) +Total net gain reclassified for the period +$ +299 +$ +23 +Refer to Note 17 — Risk Management and Derivatives for more information on the Company's risk management program and derivatives. +NOTE 15 — Discontinued Operations +During the year ended May 31, 2013 , the Company divested of Umbro and Cole Haan, allowing it to focus its resources on driving growth in the NIKE, Jordan, Converse and Hurley brands. +On February 1, 2013, the Company completed the sale of Cole Haan to Apax Partners for an agreed upon purchase price of $570 million and received at closing $561 million , net of $9 million of purchase price adjustments. The transaction resulted in a gain on sale of $231 million , net of $137 million in Income tax expense ; this gain is included in the Net income from discontinued operations line item on the Consolidated Statements of Income. There were no adjustments to these recorded amounts as of May 31, 2015 . Beginning November 30, 2012, the Company classified the Cole Haan disposal group as held-for-sale and presented the results of Cole Haan's operations in the Net income from discontinued operations line item on the Consolidated Statements of Income. From this date until the sale, the assets and liabilities of Cole Haan were recorded in the Assets of discontinued operations and Liabilities of discontinued operations line items on the Consolidated Balance Sheets, respectively. Previously, these amounts were reported in the Company's operating segment presentation as “Other Businesses.” +Under the sale agreement, the Company agreed to provide certain transition services to Cole Haan for an expected period of 3 to 9 months from the date of sale. These services were essentially complete as of May 31, 2013 and the Company has had no significant involvement with Cole Haan beyond the transition services. The Company has also licensed NIKE proprietary Air and Lunar technologies to Cole Haan for a transition period. The continuing cash flows related to these items are not significant to Cole Haan. Additionally, preexisting guarantees of certain Cole Haan lease payments remained in place after the sale; the maximum exposure under the guarantees is $ 23 million at May 31, 2015 . The fair value of the guarantees is not material. +66 +Table of Contents +On November 30, 2012, the Company completed the sale of certain assets of Umbro to Iconix Brand Group (“Iconix”) for $ 225 million . The Umbro disposal group was classified as held-for-sale as of November 30, 2012 and the results of Umbro's operations are presented in the Net income from discontinued operations line item on the Consolidated Statements of Income. The liabilities of Umbro were recorded in the Liabilities of discontinued operations line items on the Consolidated Balance Sheets. Previously, these amounts were reported in the Company's operating segment presentation as “Other Businesses.” Upon meeting the held-for-sale criteria, the Company recorded a loss of $ 107 million , net of tax, on the sale of Umbro and the loss is included in the Net income from discontinued operations line item on the Consolidated Statements of Income. The loss on sale was calculated as the net sales price less Umbro assets of $ 248 million , including intangibles, goodwill and fixed assets, other miscellaneous charges of $ 22 million and the release of the associated cumulative translation adjustment of $ 129 million . The tax benefit on the loss was $ 67 million . There were no adjustments to these recorded amounts as of May 31, 2015 . +Summarized results of the Company's discontinued operations are as follows: +Year Ended May 31, +(In millions) +2015 +2014 +2013 +Revenues +$ +— +$ +— +$ +523 +Income before income taxes +— +— +108 +Income tax expense +— +— +87 +NET INCOME FROM DISCONTINUED OPERATIONS +$ +— +$ +— +$ +21 +There were no assets or liabilities of discontinued operations as of May 31, 2015 and May 31, 2014 . +NOTE 16 — Commitments and Contingencies +The Company leases space for certain of its offices, warehouses and retail stores under leases expiring from 1 to 19 years after May 31, 2015 . Rent expense was $594 million , $533 million and $482 million for the years ended May 31, 2015 , 2014 and 2013 , respectively. Amounts of minimum future annual commitments under non-cancelable operating and capital leases are as follows (in millions): +2016 +2017 +2018 +2019 +2020 +Thereafter +Total +Operating leases +$ +447 +$ +423 +$ +371 +$ +311 +$ +268 +$ +1,154 +$ +2,974 +Capital leases +$ +2 +$ +2 +$ +1 +$ +— +$ +— +$ +— +$ +5 +As of May 31, 2015 and 2014 , the Company had letters of credit outstanding totaling $165 million and $135 million , respectively. These letters of credit were generally issued for the purchase of inventory and guarantees of the Company’s performance under certain self-insurance and other programs. +In connection with various contracts and agreements, the Company provides routine indemnification relating to the enforceability of intellectual property rights, coverage for legal issues that arise and other items where the Company is acting as the guarantor. Currently, the Company has several such agreements in place. However, based on the Company’s historical experience and the estimated probability of future loss, the Company has determined that the fair value of such indemnification is not material to the Company’s financial position or results of operations. +In the ordinary course of its business, the Company is involved in various legal proceedings involving contractual and employment relationships, product liability claims, trademark rights and a variety of other matters. While the Company cannot predict the outcome of its pending legal matters with certainty, the Company does not believe any currently identified claim, proceeding or litigation, either individually or in aggregate, will have a material impact on the Company’s results of operations, financial position or cash flows. +NOTE 17 — Risk Management and Derivatives +The Company is exposed to global market risks, including the effect of changes in foreign currency exchange rates and interest rates, and uses derivatives to manage financial exposures that occur in the normal course of business. The Company does not hold or issue derivatives for trading or speculative purposes. +The Company may elect to designate certain derivatives as hedging instruments under the accounting standards for derivatives and hedging. The Company formally documents all relationships between designated hedging instruments and hedged items as well as its risk management objectives and strategies for undertaking hedge transactions. This process includes linking all derivatives designated as hedges to either recognized assets or liabilities or forecasted transactions. +The majority of derivatives outstanding as of May 31, 2015 are designated as foreign currency cash flow hedges primarily for Euro/U.S. Dollar, British Pound/Euro and Japanese Yen/U.S. Dollar currency pairs . All derivatives are recognized on the Consolidated Balance Sheets at fair value and classified based on the instrument’s maturity date. +67 +Table of Contents +The following table presents the fair values of derivative instruments included within the Consolidated Balance Sheets as of May 31, 2015 and 2014 : +Asset Derivatives +Liability Derivatives +(In millions) +Balance Sheet +Location +2015 +2014 +Balance Sheet +Location +2015 +2014 +Derivatives formally designated as hedging instruments: +Foreign exchange forwards and options +Prepaid expenses and other current assets +$ +825 +$ +76 +Accrued liabilities +$ +140 +$ +57 +Interest rate swaps +Prepaid expenses and other current assets +78 +— +Accrued liabilities +— +— +Foreign exchange forwards and options +Deferred income taxes and other assets +520 +26 +Deferred income taxes and other liabilities +4 +1 +Interest rate swaps +Deferred income taxes and other assets +— +6 +Deferred income taxes and other liabilities +— +— +Total derivatives formally designated as hedging instruments +1,423 +108 +144 +58 +Derivatives not designated as hedging instruments: +Foreign exchange forwards and options +Prepaid expenses and other current assets +209 +25 +Accrued liabilities +20 +27 +Embedded derivatives +Prepaid expenses and other current assets +2 +— +Accrued liabilities +2 +— +Embedded derivatives +Deferred income taxes and other assets +5 +— +Deferred income taxes and other liabilities +9 +— +Total derivatives not designated as hedging instruments +216 +25 +31 +27 +TOTAL DERIVATIVES +$ +1,639 +$ +133 +$ +175 +$ +85 +The following tables present the amounts affecting the Consolidated Statements of Income for years ended May 31, 2015 , 2014 and 2013 : +(In millions) +Amount of Gain (Loss) +Recognized in Other +Comprehensive Income +on Derivatives (1) +Amount of Gain (Loss) +Reclassified From Accumulated +Other Comprehensive Income into Income (1) +Year Ended May 31, +Location of Gain (Loss) Reclassified From +Accumulated Other Comprehensive Income Into Income (1) +Year Ended May 31, +2015 +2014 +2013 +2015 +2014 +2013 +Derivatives designated as cash flow hedges: +Foreign exchange forwards and options +$ +(202 +) +$ +(48 +) +$ +42 +Revenues +$ +(95 +) +$ +14 +$ +(19 +) +Foreign exchange forwards and options +1,109 +(78 +) +67 +Cost of sales +220 +12 +113 +Foreign exchange forwards and options +— +4 +(3 +) +Total selling and administrative expense +— +— +2 +Foreign exchange forwards and options +497 +(21 +) +33 +Other (income) expense, net +136 +10 +9 +Interest rate swaps +76 +— +— +Interest expense (income), net +— +— +— +Total designated cash flow hedges +$ +1,480 +$ +(143 +) +$ +139 +$ +261 +$ +36 +$ +105 +Derivatives designated as net investment hedges: +Foreign exchange forwards and options +$ +— +$ +— +$ +— +Other (income) expense, net +$ +— +$ +— +$ +— +(1) +For the years ended May 31, 2015 , 2014 and 2013 , the amounts recorded in Other (income) expense, net as a result of hedge ineffectiveness and the discontinuance of cash flow hedges because the forecasted transactions were no longer probable of occurring were immaterial. +68 +Table of Contents +Amount of Gain (Loss) Recognized in +Income on Derivatives +Location of Gain (Loss) +Recognized in Income on Derivatives +Year Ended May 31, +(In millions) +2015 +2014 +2013 +Derivatives designated as fair value hedges: +Interest rate swaps (1) +$ +5 +$ +5 +$ +5 +Interest expense (income), net +Derivatives not designated as hedging instruments: +Foreign exchange forwards and options +$ +611 +$ +(75 +) +$ +51 +Other (income) expense, net +Embedded derivatives +$ +(1 +) +$ +(1 +) +$ +(4 +) +Other (income) expense, net +(1) +All interest rate swaps designated as fair value hedges meet the shortcut method requirements under the accounting standards for derivatives and hedging. Accordingly, changes in the fair values of the interest rate swaps are considered to exactly offset changes in the fair value of the underlying long-term debt. Refer to “Fair Value Hedges” in this note for additional detail. +Refer to Note 6 — Fair Value Measurements for a description of how the above financial instruments are valued and Note 14 — Accumulated Other Comprehensive Income and the Consolidated Statements of Shareholders’ Equity for additional information on changes in Other comprehensive income for the years ended May 31, 2015 , 2014 and 2013 . +Cash Flow Hedges +The purpose of the Company's foreign exchange risk management program is to lessen both the positive and negative effects of currency fluctuations on the Company's consolidated results of operations, financial position and cash flows. Foreign currency exposures that the Company may elect to hedge in this manner include product cost exposures, non-functional currency denominated external and intercompany revenues, selling and administrative expenses, investments in U.S. Dollar-denominated available-for-sale debt securities and certain other intercompany transactions. +Product cost exposures are primarily generated through non-functional currency denominated product purchases and the foreign currency adjustment program described below. NIKE entities primarily purchase products in two ways: (1) Certain NIKE entities , including those supporting the Company's North America, Greater China, Japan and European geographies, purchase product from the NIKE Trading Company (“NTC”), a wholly owned sourcing hub that buys NIKE branded products from third party factories, predominantly in U.S. Dollars. The NTC, whose functional currency is the U.S. Dollar, then sells the products to NIKE entities in their respective functional currencies. When the NTC sells to a NIKE entity with a different functional currency, the result is a foreign currency exposure for the NTC. (2) Other NIKE entities purchase product directly from third party factories in U.S. Dollars. These purchases generate a foreign currency exposure for those NIKE entities with a functional currency other than the U.S. Dollar. +The Company operates a foreign currency adjustment program with certain factories. The program is designed to more effectively manage foreign currency risk by assuming certain of the factories’ foreign currency exposures, some of which are natural offsets to the Company's existing foreign currency exposures. Under this program, the Company’s payments to these factories are adjusted for rate fluctuations in the basket of currencies (“factory currency exposure index”) in which the labor, materials and overhead costs incurred by the factories in the production of NIKE branded products (“factory input costs”) are denominated. For the portion of the indices denominated in the local or functional currency of the factory, the Company may elect to place formally designated cash flow hedges. For all currencies within the indices, excluding the U.S. Dollar and the local or functional currency of the factory, an embedded derivative contract is created upon the factory’s acceptance of NIKE’s purchase order. Embedded derivative contracts are separated from the related purchase order, and their accounting treatment is described further below. +The Company’s policy permits the utilization of derivatives to reduce its foreign currency exposures where internal netting or other strategies cannot be effectively employed. Typically the Company may enter into hedge contracts starting up to 12 to 24 months in advance of the forecasted transaction and may place incremental hedges up to 100% of the exposure by the time the forecasted transaction occurs. The total notional amount of outstanding foreign currency derivatives designated as cash flow hedges was $14.4 billion as of May 31, 2015 . +During the year ended May 31, 2015 , the Company entered into a series of forward-starting interest rate swap agreements with a total notional amount of $1 billion . These instruments were designated as cash flow hedges of the variability in the expected cash outflows of interest payments on future debt due to changes in benchmark interest rates. +All changes in fair value of derivatives designated as cash flow hedges, excluding any ineffective portion, are recorded in Other comprehensive income until Net income is affected by the variability of cash flows of the hedged transaction. In most cases, amounts recorded in Other comprehensive income will be released to Net income in periods following the maturity of the related derivative, rather than at maturity. Effective hedge results are classified within the Consolidated Statements of Income in the same manner as the underlying exposure, with the results of hedges of non-functional currency denominated revenues and product cost exposures, excluding embedded derivatives as described below, recorded in Revenues or Cost of sales , when the underlying hedged transaction affects consolidated Net income . Results of hedges of selling and administrative expense are recorded together with those costs when the related expense is recorded. Amounts recorded in Other comprehensive income related to forward-starting interest rate swaps will be released through Interest expense (income), net over the term of the issued debt. Results of hedges of anticipated purchases and sales of U.S. Dollar-denominated available-for-sale securities are recorded in Other (income) expense, net when the securities are sold. Results of hedges of certain anticipated intercompany transactions are recorded in Other (income) expense, net when the transaction occurs. The Company classifies the cash flows at settlement from these designated cash flow hedge derivatives in the same category as the cash flows from the related hedged items, primarily within the Cash provided by operations component of the Consolidated Statements of Cash Flows. +Premiums paid on options are initially recorded as deferred charges. The Company assesses the effectiveness of options based on the total cash flows method and records total changes in the options’ fair value to Other comprehensive income to the degree they are effective. +The Company formally assesses, both at a hedge’s inception and on an ongoing basis, whether the derivatives that are used in the hedging transaction have been highly effective in offsetting changes in the cash flows of hedged items and whether those derivatives may be expected to remain highly effective in future periods. Effectiveness for cash flow hedges is assessed based on changes in forward rates . Ineffectiveness was immaterial for the years ended May 31, 2015 , 2014 and 2013 . +69 +Table of Contents +The Company discontinues hedge accounting prospectively when: (1) it determines that the derivative is no longer highly effective in offsetting changes in the cash flows of a hedged item (including hedged items such as firm commitments or forecasted transactions); (2) the derivative expires or is sold, terminated or exercised; (3) it is no longer probable that the forecasted transaction will occur; or (4) management determines that designating the derivative as a hedging instrument is no longer appropriate. +When the Company discontinues hedge accounting because it is no longer probable that the forecasted transaction will occur in the originally expected period, but is expected to occur within an additional two-month period of time thereafter, the gain or loss on the derivative remains in Accumulated other comprehensive income and is reclassified to Net income when the forecasted transaction affects consolidated Net income . However, if it is probable that a forecasted transaction will not occur by the end of the originally specified time period or within an additional two-month period of time thereafter, the gains and losses that were accumulated in Other comprehensive income will be recognized immediately in Other (income) expense, net . In all situations in which hedge accounting is discontinued and the derivative remains outstanding, the Company will carry the derivative at its fair value on the Consolidated Balance Sheets, recognizing future changes in the fair value in Other (income) expense, net . For the years ended May 31, 2015 , 2014 and 2013 , the amounts recorded in Other (income) expense, net as a result of the discontinuance of cash flow hedging because the forecasted transaction was no longer probable of occurring were immaterial . +As of May 31, 2015 , $685 million of deferred net gains (net of tax) on both outstanding and matured derivatives accumulated in Other comprehensive income are expected to be reclassified to Net income during the next 12 months concurrent with the underlying hedged transactions also being recorded in Net income . Actual amounts ultimately reclassified to Net income are dependent on the exchange rates in effect when derivative contracts that are currently outstanding mature. As of May 31, 2015 , the maximum term over which the Company is hedging exposures to the variability of cash flows for its forecasted transactions was 36 months. +Fair Value Hedges +The Company is also exposed to the risk of changes in the fair value of certain fixed-rate debt attributable to changes in interest rates. Derivatives currently used by the Company to hedge this risk are receive-fixed, pay-variable interest rate swaps. All interest rate swaps designated as fair value hedges of the related long-term debt meet the shortcut method requirements under the accounting standards for derivatives and hedging. Accordingly, changes in the fair values of the interest rate swaps are considered to exactly offset changes in the fair value of the underlying long-term debt. The cash flows associated with the Company’s fair value hedges are periodic interest payments while the swaps are outstanding, which are reflected within the Cash provided by operations component of the Consolidated Statements of Cash Flows. The Company recorded no ineffectiveness from its interest rate swaps designated as fair value hedges for the years ended May 31, 2015 , 2014 or 2013 . As of May 31, 2015 , interest rate swaps designated as fair value hedges had a total notional amount of $100 million . +Net Investment Hedges +The Company has, in the past, hedged and may, in the future, hedge the risk of variability in foreign-currency-denominated net investments in wholly-owned international operations. All changes in fair value of the derivatives designated as net investment hedges, except ineffective portions, are reported as a component of Other comprehensive income along with the foreign currency translation adjustments on those investments. The Company classifies the cash flows at settlement of its net investment hedges within the Cash used by investing activities component of the Consolidated Statement of Cash Flows. The Company assesses hedge effectiveness based on changes in forward rates. The Company recorded no ineffectiveness from its net investment hedges for the years ended May 31, 2015 , 2014 or 2013 . The Company had no outstanding net investment hedges as of May 31, 2015 . +Undesignated Derivative Instruments +The Company may elect to enter into foreign exchange forwards to mitigate the change in fair value of specific assets and liabilities on the balance sheet and/or the embedded derivative contracts explained below. These forwards are not designated as hedging instruments under the accounting standards for derivatives and hedging. Accordingly, these undesignated instruments are recorded at fair value as a derivative asset or liability on the Consolidated Balance Sheets with their corresponding change in fair value recognized in Other (income) expense, net , together with the re-measurement gain or loss from the hedged balance sheet position or embedded derivative contract. The Company classifies the cash flows at settlement from undesignated instruments within the Cash provided by operations component of the Consolidated Statements of Cash Flows. The total notional amount of outstanding undesignated derivative instruments was $4.4 billion as of May 31, 2015 . +Embedded Derivatives +As part of the foreign currency adjustment program described above, an embedded derivative contract is created upon the factory’s acceptance of NIKE’s purchase order for currencies within the factory currency exposure indices that are neither the U.S. Dollar nor the local or functional currency of the factory. Embedded derivative contracts are treated as foreign currency forward contracts that are bifurcated from the related purchase order and recorded at fair value as a derivative asset or liability on the Consolidated Balance Sheets with their corresponding change in fair value recognized in Other (income) expense, net , from the date a purchase order is accepted by a factory through the date the purchase price is no longer subject to foreign currency fluctuations. +In addition, the Company has entered into certain other contractual agreements which have payments that are indexed to currencies that are not the functional currency of either substantial party to the contracts. These payment terms expose NIKE to variability in foreign exchange rates and create embedded derivative contracts that must be bifurcated from the related contract and recorded at fair value as derivative assets or liabilities on the Consolidated Balance Sheets with their corresponding changes in fair value recognized in Other (income) expense, net until each payment is settled. +At May 31, 2015 , the notional amount of all embedded derivatives outstanding was approximately $205 million . +Credit Risk +The Company is exposed to credit-related losses in the event of nonperformance by counterparties to hedging instruments. The counterparties to all derivative transactions are major financial institutions with investment grade credit ratings. However, this does not eliminate the Company’s +70 +Table of Contents +exposure to credit risk with these institutions. This credit risk is limited to the unrealized gains in such contracts should any of these counterparties fail to perform as contracted. To manage this risk, the Company has established strict counterparty credit guidelines that are continually monitored. +The Company’s derivative contracts contain credit risk related contingent features designed to protect against significant deterioration in counterparties’ creditworthiness and their ultimate ability to settle outstanding derivative contracts in the normal course of business. The Company’s bilateral credit related contingent features generally require the owing entity, either the Company or the derivative counterparty, to post collateral for the portion of the fair value in excess of $50 million should the fair value of outstanding derivatives per counterparty be greater than $50 million . Additionally, a certain level of decline in credit rating of either the Company or the counterparty could also trigger collateral requirements. As of May 31, 2015 , the Company was in compliance with all credit risk related contingent features and had derivative instruments with credit risk related contingent features in a net liability position of $4 million . Accordingly, the Company was not required to post any collateral as a result of these contingent features. Further, as of May 31, 2015 , the Company had received $968 million of cash collateral and $74 million of securities from various counterparties to its derivative contracts (refer to Note 6 — Fair Value Measurements ). Given the considerations described above, the Company considers the impact of the risk of counterparty default to be immaterial . +NOTE 18 — Operating Segments and Related Information +The Company’s operating segments are evidence of the structure of the Company's internal organization. The NIKE Brand segments are defined by geographic regions for operations participating in NIKE Brand sales activity. +Each NIKE Brand geographic segment operates predominantly in one industry: the design, development, marketing and selling of athletic footwear, apparel and equipment. The Company’s reportable operating segments for the NIKE Brand are: North America, Western Europe, Central & Eastern Europe, Greater China, Japan and Emerging Markets, and include results for the NIKE, Jordan and Hurley brands. The Company’s NIKE Brand Direct to Consumer operations are managed within each geographic operating segment. Converse is also a reportable segment for NIKE, Inc., and operates in one industry: the design, marketing, licensing and selling of casual sneakers, apparel and accessories. +Global Brand Divisions is included within the NIKE Brand for presentation purposes to align with the way management views the Company. Global Brand Divisions primarily represent NIKE Brand licensing businesses that are not part of a geographic operating segment, and demand creation, operating overhead and product creation and design expenses that are centrally managed for the NIKE Brand. +Corporate consists largely of unallocated general and administrative expenses, including expenses associated with centrally managed departments; depreciation and amortization related to the Company’s headquarters; unallocated insurance, benefit and compensation programs, including stock-based compensation; and certain foreign currency gains and losses, including certain hedge gains and losses. +The primary financial measure used by the Company to evaluate performance of individual operating segments is earnings before interest and taxes (commonly referred to as “EBIT”), which represents Net income before Interest expense (income), net and Income tax expense in the Consolidated Statements of Income. Reconciling items for EBIT represent corporate expense items that are not allocated to the operating segments for management reporting. +As part of the Company's centrally managed foreign exchange risk management program, standard foreign currency rates are assigned twice per year to each NIKE Brand entity in the Company's geographic operating segments and to Converse. These rates are set approximately nine months in advance of the future selling season based on average market spot rates in the calendar month preceding the date they are established. Inventories and Cost of sales for geographic operating segments and Converse reflect use of these standard rates to record non-functional currency product purchases in the entity’s functional currency. Differences between assigned standard foreign currency rates and actual market rates are included in Corporate, together with foreign currency hedge gains and losses generated from the Company's centrally managed foreign exchange risk management program and other conversion gains and losses. +Accounts receivable, net , Inventories and Property, plant and equipment, net for operating segments are regularly reviewed by management and are therefore provided below. Additions to long-lived assets as presented in the following table represent capital expenditures. +Certain prior year amounts have been reclassified to conform to fiscal 2015 presentation. +71 +Table of Contents +Year Ended May 31, +(In millions) +2015 +2014 +2013 +REVENUES +North America +$ +13,740 +$ +12,299 +$ +11,158 +Western Europe +5,709 +4,979 +4,193 +Central & Eastern Europe +1,417 +1,387 +1,229 +Greater China +3,067 +2,602 +2,478 +Japan +755 +771 +876 +Emerging Markets +3,898 +3,949 +3,832 +Global Brand Divisions +115 +125 +115 +Total NIKE Brand +28,701 +26,112 +23,881 +Converse +1,982 +1,684 +1,449 +Corporate +(82 +) +3 +(17 +) +TOTAL NIKE CONSOLIDATED REVENUES +$ +30,601 +$ +27,799 +$ +25,313 +EARNINGS BEFORE INTEREST AND TAXES +North America +$ +3,645 +$ +3,077 +$ +2,639 +Western Europe +1,277 +855 +643 +Central & Eastern Europe +247 +279 +234 +Greater China +993 +816 +813 +Japan +100 +131 +139 +Emerging Markets +818 +952 +985 +Global Brand Divisions +(2,263 +) +(1,993 +) +(1,716 +) +Total NIKE Brand +4,817 +4,117 +3,737 +Converse +517 +496 +425 +Corporate +(1,101 +) +(1,036 +) +(909 +) +Total NIKE Consolidated Earnings Before Interest and Taxes +4,233 +3,577 +3,253 +Interest expense (income), net +28 +33 +(3 +) +TOTAL NIKE CONSOLIDATED EARNINGS BEFORE TAXES +$ +4,205 +$ +3,544 +$ +3,256 +ADDITIONS TO LONG-LIVED ASSETS +North America +$ +208 +$ +240 +$ +132 +Western Europe +216 +120 +75 +Central & Eastern Europe +20 +19 +22 +Greater China +69 +63 +52 +Japan +15 +9 +7 +Emerging Markets +37 +55 +50 +Global Brand Divisions +225 +225 +270 +Total NIKE Brand +790 +731 +608 +Converse +69 +30 +20 +Corporate +144 +161 +153 +TOTAL ADDITIONS TO LONG-LIVED ASSETS +$ +1,003 +$ +922 +$ +781 +DEPRECIATION +North America +$ +121 +$ +109 +$ +92 +Western Europe +75 +71 +68 +Central & Eastern Europe +12 +11 +9 +Greater China +46 +38 +32 +Japan +22 +19 +22 +Emerging Markets +27 +25 +20 +Global Brand Divisions +210 +175 +122 +Total NIKE Brand +513 +448 +365 +Converse +18 +16 +15 +Corporate +75 +54 +38 +TOTAL DEPRECIATION +$ +606 +$ +518 +$ +418 +72 +Table of Contents +As of May 31, +(In millions) +2015 +2014 +ACCOUNTS RECEIVABLE, NET +North America +$ +1,737 +$ +1,505 +Western Europe +344 +341 +Central & Eastern Europe +242 +280 +Greater China +84 +68 +Japan +134 +162 +Emerging Markets +461 +819 +Global Brand Divisions +88 +71 +Total NIKE Brand +3,090 +3,246 +Converse +258 +171 +Corporate +10 +17 +TOTAL ACCOUNTS RECEIVABLE, NET +$ +3,358 +$ +3,434 +INVENTORIES +North America +$ +2,207 +$ +1,758 +Western Europe +699 +711 +Central & Eastern Europe +169 +271 +Greater China +249 +221 +Japan +94 +94 +Emerging Markets +528 +633 +Global Brand Divisions +32 +18 +Total NIKE Brand +3,978 +3,706 +Converse +237 +261 +Corporate +122 +(20 +) +TOTAL INVENTORIES +$ +4,337 +$ +3,947 +PROPERTY, PLANT AND EQUIPMENT, NET +North America +$ +632 +$ +545 +Western Europe +451 +384 +Central & Eastern Europe +47 +51 +Greater China +254 +232 +Japan +205 +258 +Emerging Markets +103 +115 +Global Brand Divisions +484 +537 +Total NIKE Brand +2,176 +2,122 +Converse +122 +70 +Corporate +713 +642 +TOTAL PROPERTY, PLANT AND EQUIPMENT, NET +$ +3,011 +$ +2,834 +Revenues by Major Product Lines +Revenues to external customers for NIKE Brand products are attributable to sales of footwear, apparel and equipment. Other revenues to external customers consist primarily of sales by Converse. +Year Ended May 31, +(In millions) +2015 +2014 +2013 +Footwear +$ +18,318 +$ +16,208 +$ +14,635 +Apparel +8,636 +8,109 +7,491 +Equipment +1,632 +1,670 +1,640 +Other +2,015 +1,812 +1,547 +TOTAL NIKE CONSOLIDATED REVENUES +$ +30,601 +$ +27,799 +$ +25,313 +73 +Table of Contents +Revenues and Long-Lived Assets by Geographic Area +After allocation of revenues for Global Brand Divisions, Converse and Corporate to geographical areas based on the location where the sales originated, revenues by geographical area are essentially the same as reported above under operating segments with the exception of the United States. Revenues derived in the United States were $14,180 million , $12,711 million and $11,385 million for the years ended May 31, 2015 , 2014 and 2013 , respectively. The Company’s largest concentrations of long-lived assets primarily consist of the Company’s world headquarters and distribution facilities in the United States and distribution facilities in Japan, Belgium and China. Long-lived assets attributable to operations in the United States, which are primarily composed of net property, plant & equipment, were $1,877 million and $1,652 million at May 31, 2015 and 2014 , respectively. Long-lived assets attributable to operations in Japan were $205 million and $258 million at May 31, 2015 and 2014 , respectively. Long-lived assets attributable to operations in Belgium were $234 million and $175 million at May 31, 2015 and 2014 , respectively. Long-lived assets attributable to operations in China were $267 million and $234 million at May 31, 2015 and 2014 , respectively. +Major Customers +No customer accounted for 10% or more of the Company’s net revenues during the years ended May 31, 2015 , 2014 and 2013 . +ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure +There has been no change of accountants nor any disagreements with accountants on any matter of accounting principles or practices or financial statement disclosure required to be reported under this Item. +ITEM 9A. Controls and Procedures +We maintain disclosure controls and procedures that are designed to ensure information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. +We carry out a variety of ongoing procedures, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, to evaluate the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of May 31, 2015 . +“Management’s Annual Report on Internal Control Over Financial Reporting” is included in Item 8 of this Report. +We have commenced several transformation initiatives to centralize and simplify our business processes and systems. These are long-term initiatives, which we believe will enhance our internal control over financial reporting due to increased automation and further integration of related processes. We will continue to monitor our internal control over financial reporting for effectiveness throughout the transformation. +There have not been any other changes in our internal control over financial reporting during our most recent fiscal quarter that have materially affected, or are reasonable likely to materially affect, our internal control over financial reporting. +ITEM 9B. Other Information +No disclosure is required under this Item. +74 +Table of Contents +PART III +ITEM 10. Directors, Executive Officers and Corporate Governance +The information required by Item 401 of Regulation S-K regarding directors is included under “Election of Directors” in the definitive Proxy Statement for our 2015 Annual Meeting of Shareholders and is incorporated herein by reference. The information required by Item 401 of Regulation S-K regarding executive officers is included under “Executive Officers of the Registrant” in Item 1 of this Report. The information required by Item 405 of Regulation S-K is included under “Election of Directors — Section 16(a) Beneficial Ownership Reporting Compliance” in the definitive Proxy Statement for our 2015 Annual Meeting of Shareholders and is incorporated herein by reference. The information required by Item 406 of Regulation S-K is included under “Corporate Governance — Code of Business Conduct and Ethics” in the definitive Proxy Statement for our 2015 Annual Meeting of Shareholders and is incorporated herein by reference. The information required by Items 407(d)(4) and (d)(5) of Regulation S-K regarding the Audit Committee of the Board of Directors is included under “Corporate Governance — Board Committees” in the definitive Proxy Statement for our 2015 Annual Meeting of Shareholders and is incorporated herein by reference. +ITEM 11. Executive Compensation +The information required by Items 402, 407(e)(4) and 407(e)(5) of Regulation S-K regarding executive compensation is included under “Election of Directors — Director Compensation for Fiscal 2015 ,” “Compensation Discussion and Analysis,” “Executive Compensation,” “Election of Directors — Compensation Committee Interlocks and Insider Participation,” and “Compensation Committee Report” in the definitive Proxy Statement for our 2015 Annual Meeting of Shareholders and is incorporated herein by reference. +ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters +The information required by Item 201(d) of Regulation S-K is included under “Executive Compensation — Equity Compensation Plans” in the definitive Proxy Statement for our 2015 Annual Meeting of Shareholders and is incorporated herein by reference. The information required by Item 403 of Regulation S-K is included under “Election of Directors — Stock Holdings of Certain Owners and Management” in the definitive Proxy Statement for our 2015 Annual Meeting of Shareholders and is incorporated herein by reference. +ITEM 13. Certain Relationships and Related Transactions and Director Independence +The information required by Items 404 and 407(a) of Regulation S-K is included under “Election of Directors — Transactions with Related Persons” and “Corporate Governance — Director Independence” in the definitive Proxy Statement for our 2015 Annual Meeting of Shareholders and is incorporated herein by reference. +ITEM 14. Principal Accountant Fees and Services +The information required by Item 9(e) of Schedule 14A is included under “Ratification Of Independent Registered Public Accounting Firm” in the definitive Proxy Statement for our 2015 Annual Meeting of Shareholders and is incorporated herein by reference. +75 +Table of Contents +PART IV +ITEM 15. Exhibits and Financial Statement Schedules +(a) +The following documents are filed as part of this report: +Form 10-K +Page No. +1. +Financial Statements: +Report of Independent Registered Public Accounting Firm +45 +Consolidated Statements of Income for each of the three years ended May 31, 2015, May 31, 2014 and May 31, 2013 +46 +Consolidated Statements of Comprehensive Income for each of the three years ended May 31, 2015, May 31, 2014 and May 31, 2013 +47 +Consolidated Balance Sheets at May 31, 2015 and May 31, 2014 +48 +Consolidated Statements of Cash Flows for each of the three years ended May 31, 2015, May 31, 2014 and May 31, 2013 +49 +Consolidated Statements of Shareholders’ Equity for each of the three years ended May 31, 2015, May 31, 2014 and May 31, 2013 +50 +Notes to Consolidated Financial Statements +51 +2. +Financial Statement Schedule: +II — Valuation and Qualifying Accounts +78 +All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. +3. +Exhibits: +3.1 +Restated Articles of Incorporation, as amended (incorporated by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended November 30, 2012). +3.2 +Third Restated Bylaws, as amended (incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K filed June 21, 2013). +4.1 +Restated Articles of Incorporation, as amended (see Exhibit 3.1). +4.2 +Third Restated Bylaws, as amended (see Exhibit 3.2). +10.1 +Form of Non-Statutory Stock Option Agreement for options granted to non-employee directors prior to May 31, 2010 under the 1990 Stock Incentive Plan (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed June 21, 2005).* +10.2 +Form of Non-Statutory Stock Option Agreement for options granted to non-employee directors after May 31, 2010 under the 1990 Stock Incentive Plan (incorporated by reference to Exhibit 10.2 to the Company’s Annual Report on Form 10-K for the fiscal year ended May 31, 2010).* +10.3 +Form of Non-Statutory Stock Option Agreement for options granted to executives prior to May 31, 2010 under the 1990 Stock Incentive Plan (incorporated by reference to Exhibit 10.1 to the Company’s Annual Report on Form 10-K for the fiscal year ended May 31, 2009).* +10.4 +Form of Restricted Stock Agreement for non-employee directors under the 1990 Stock Incentive Plan (incorporated by reference to Exhibit 10.4 to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 2014).* +10.5 +Form of Non-Statutory Stock Option Agreement for options granted to executives after May 31, 2010 under the Stock Incentive Plan.* +10.6 +Form of Indemnity Agreement entered into between the Company and each of its officers and directors (incorporated by reference to Exhibit 10.2 to the Company’s Annual Report on Form 10-K for the fiscal year ended May 31, 2008).* +10.7 +NIKE, Inc. 1990 Stock Incentive Plan (incorporated by reference to Exhibit 10.7 to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 2014).* +10.8 +NIKE, Inc. Executive Performance Sharing Plan (incorporated by reference to Exhibit 10.7 to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 2012).* +10.9 +NIKE, Inc. Long-Term Incentive Plan.* +10.10 +NIKE, Inc. Deferred Compensation Plan (Amended and Restated effective April 1, 2013) (incorporated by reference to Exhibit 10.9 to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 2013).* +76 +Table of Contents +10.11 +NIKE, Inc. Deferred Compensation Plan (Amended and Restated effective June 1, 2004) (applicable to amounts deferred before January 1, 2005) (incorporated by reference to Exhibit 10.6 to the Company’s Annual Report on Form 10-K for the fiscal year ended May 31, 2004).* +10.12 +Amendment No. 1 effective January 1, 2008 to the NIKE, Inc. Deferred Compensation Plan (June 1, 2004 Restatement) (incorporated by reference to Exhibit 10.9 to the Company’s Annual Report on Form 10-K for the fiscal year ended May 31, 2009).* +10.13 +NIKE, Inc. Foreign Subsidiary Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended November 30, 2008).* +10.14 +Amended and Restated Covenant Not To Compete and Non-Disclosure Agreement between NIKE, Inc. and Mark G. Parker dated July 24, 2008 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed July 24, 2008).* +10.15 +Form of Restricted Stock Agreement under the Stock Incentive Plan for awards after May 31, 2010.* +10.16 +Form of Restricted Stock Unit Agreement under the Stock Incentive Plan.* +10.17 +Covenant Not to Compete and Non-Disclosure Agreement between NIKE, Inc. and Donald W. Blair dated November 10, 1999 (incorporated by reference to Exhibit 10.15 to the Company’s Annual Report on Form 10-K for the fiscal year ended May 31, 2006).* +10.18 +Covenant Not to Compete and Non-Disclosure Agreement between NIKE, Inc. and Eric D. Sprunk dated April 18, 2001 (incorporated by reference to Exhibit 10.23 to the Company’s Annual Report on Form 10-K for the fiscal year ended May 31, 2010).* +10.19 +Covenant Not to Compete and Non-Disclosure Agreement between NIKE, Inc. and Trevor A. Edwards dated November 14, 2002 (incorporated by reference to Exhibit 10.19 to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 2008).* +10.20 +Covenant Not to Compete and Non-Disclosure Agreement between NIKE, Inc. and Jeanne Jackson dated March 4, 2009 (incorporated by reference to Exhibit 10.21 to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 2014).* +10.21 +Policy for Recoupment of Incentive Compensation (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed July 20, 2010).* +10.22 +Credit Agreement dated as of November 1, 2011 among NIKE, Inc., Bank of America, N.A., individually and as Agent and the other banks party thereto (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed November 2, 2011). +12.1 +Computation of Ratio of Earnings to Fixed Charges. +21 +Subsidiaries of the Registrant. +23 +Consent of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm (included within this Annual Report on Form 10-K). +31.1 +Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer. +31.2 +Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer. +32 +Section 1350 Certifications. +101.INS +XBRL Instance Document +101.SCH +XBRL Taxonomy Extension Schema +101.CAL +XBRL Taxonomy Extension Calculation Linkbase +101.DEF +XBRL Taxonomy Extension Definition Document +101.LAB +XBRL Taxonomy Extension Label Linkbase +101.PRE +XBRL Taxonomy Extension Presentation Linkbase +* Management contract or compensatory plan or arrangement. +The Exhibits filed herewith do not include certain instruments with respect to long-term debt of NIKE and its subsidiaries, inasmuch as the total amount of debt authorized under any such instrument does not exceed 10 percent of the total assets of NIKE and its subsidiaries on a consolidated basis. NIKE agrees, pursuant to Item 601(b)(4)(iii) of Regulation S-K, that it will furnish a copy of any such instrument to the SEC upon request. +Upon written request to Investor Relations, NIKE, Inc., One Bowerman Drive, Beaverton, Oregon 97005-6453, NIKE will furnish shareholders with a copy of any Exhibit upon payment of $0.10 per page, which represents our reasonable expenses in furnishing Exhibits. +77 +Table of Contents +SCHEDULE II — Valuation and Qualifying Accounts +(In millions) +Balance at +Beginning of Period +Charged to Costs +and Expenses +Charged to Other Accounts (1) +Write-Offs, Net +Balance at End +of Period +Sales returns reserve +For the year ended May 31, 2013 +$ +173 +$ +538 +$ +1 +$ +(471 +) +$ +241 +For the year ended May 31, 2014 +241 +619 +(3 +) +(549 +) +308 +For the year ended May 31, 2015 +308 +726 +(35 +) +(620 +) +379 +Allowance for doubtful accounts (2) +For the year ended May 31, 2013 +$ +91 +$ +31 +$ +1 +$ +(19 +) +$ +104 +For the year ended May 31, 2014 +104 +13 +(2 +) +(37 +) +78 +For the year ended May 31, 2015 +78 +35 +(15 +) +(20 +) +78 +(1) +Amounts included in this column primarily relate to foreign currency translation. +(2) +Includes both current and non-current portions of the allowance for doubtful accounts. The non-current portion is included in Deferred income taxes and other assets on the Consolidated Balance Sheets. +78 +Table of Contents +Consent of Independent Registered Public Accounting Firm +We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (No. 333-188072) and Form S-8 (Nos. 033-63995, 333-63581, 333-63583, 333-68864, 333-68886, 333-71660, 333-104822, 333-117059, 333-133360, 333-164248, 333-171647 and 333-173727) of NIKE, Inc. of our report dated July 23, 2015 relating to the financial statements, financial statement schedule and the effectiveness of internal control over financial reporting, which appears in this Form 10-K. +/s/ PRICEWATERHOUSECOOPERS LLP +Portland, Oregon +July 23, 2015 +79 +Table of Contents +Signatures +Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. +NIKE, INC. +By: +/s/ MARK G. PARKER +Mark G. Parker +Chief Executive Officer and President +Date: +July 23, 2015 +Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. +Signature +Title +Date +PRINCIPAL EXECUTIVE OFFICER AND DIRECTOR: +/s/ MARK G. PARKER +Mark G. Parker +Director, Chief Executive Officer and President +July 23, 2015 +PRINCIPAL FINANCIAL OFFICER: +/s/ DONALD W. BLAIR +Donald W. Blair +Chief Financial Officer +July 23, 2015 +PRINCIPAL ACCOUNTING OFFICER: +/s/ BERNARD F. PLISKA +Bernard F. Pliska +Corporate Controller +July 23, 2015 +DIRECTORS: +/s/ PHILIP H. KNIGHT +Philip H. Knight +Director, Chairman of the Board +July 23, 2015 +/s/ ELIZABETH J. COMSTOCK +Elizabeth J. Comstock +Director +July 23, 2015 +/s/ JOHN G. CONNORS +John G. Connors +Director +July 23, 2015 +/s/ TIMOTHY D. COOK +Timothy D. Cook +Director +July 23, 2015 +/s/ JOHN J. DONAHOE II +John J. Donahoe II +Director +July 23, 2015 +/s/ ALAN B. GRAF, JR. +Alan B. Graf, Jr. +Director +July 23, 2015 +/s/ DOUGLAS G. HOUSER +Douglas G. Houser +Director +July 23, 2015 +/s/ TRAVIS A. KNIGHT +Travis A. Knight +Director +July 23, 2015 +/s/ JOHN C. LECHLEITER +John C. Lechleiter +Director +July 23, 2015 +/s/ MICHELLE A. PELUSO +Michelle A. Peluso +Director +July 23, 2015 +/s/ JOHNATHAN A. RODGERS +Johnathan A. Rodgers +Director +July 23, 2015 +/s/ ORIN C. SMITH +Orin C. Smith +Director +July 23, 2015 +/s/ JOHN R. THOMPSON, JR. +John R. Thompson, Jr. +Director +July 23, 2015 +/s/ PHYLLIS M. WISE +Phyllis M. Wise +Director +July 23, 2015 +80 \ No newline at end of file diff --git a/raw/filings/0000320187/2014/0000320187-15-000113/filing_metadata.csv b/raw/filings/0000320187/2014/0000320187-15-000113/filing_metadata.csv new file mode 100644 index 0000000000000000000000000000000000000000..3a1a42110e5198a76f602d217c919d0277ccf391 --- /dev/null +++ b/raw/filings/0000320187/2014/0000320187-15-000113/filing_metadata.csv @@ -0,0 +1,2 @@ +cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing +0000320187,NKE,"NIKE, Inc.",10-K,2015-07-23,2015-05-31,2015-07-24T01:26:50.000Z,0000320187-15-000113,nke-5312015x10k.htm,10-K,16905418,1,0,https://www.sec.gov/Archives/edgar/data/320187/000032018715000113/nke-5312015x10k.htm,https://www.sec.gov/Archives/edgar/data/320187/000032018715000113/,2014,2014,1 diff --git a/raw/filings/0000320187/2014/0000320187-15-000113/item1.txt b/raw/filings/0000320187/2014/0000320187-15-000113/item1.txt new file mode 100644 index 0000000000000000000000000000000000000000..4e6aae7bec68c07960fb19553564c7b4a5d61839 --- /dev/null +++ b/raw/filings/0000320187/2014/0000320187-15-000113/item1.txt @@ -0,0 +1,108 @@ +ITEM 1. Business +General +NIKE, Inc. was incorporated in 1967 under the laws of the State of Oregon. As used in this report, the terms “we,” “us,” “NIKE,” and the “Company” refer to NIKE, Inc. and its predecessors, subsidiaries and affiliates, collectively, unless the context indicates otherwise. Our NIKE e-commerce website is located at www.nike.com. On our NIKE corporate website, located at news.nike.com, we post the following filings as soon as reasonably practicable after they are electronically filed with or furnished to the United States Securities and Exchange Commission (the “SEC”): our annual report on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities and Exchange Act of 1934, as amended. Our definitive Proxy Statements are also posted on our corporate website. All such filings on our corporate website are available free of charge. Copies of these filings may also be obtained by visiting the Public Reference Room of the SEC at 100 F Street, NE, Washington, D.C. 20549, or by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains a website ( www.sec.gov ) that contains current, quarterly and annual reports, proxy and information statements and other information regarding issuers that file electronically. Also available on our corporate website are the charters of the committees of our Board of Directors, as well as our corporate governance guidelines and code of ethics; copies of any of these documents will be provided in print to any shareholder who submits a request in writing to NIKE Investor Relations, One Bowerman Drive, Beaverton, Oregon 97005-6453. +Our principal business activity is the design, development and worldwide marketing and selling of athletic footwear, apparel, equipment, accessories and services. NIKE is the largest seller of athletic footwear and apparel in the world. We sell our products to retail accounts, through NIKE-owned retail stores and internet websites (which we refer to as our “Direct to Consumer” or "DTC" operations), and through a mix of independent distributors and licensees throughout the world. Virtually all of our products are manufactured by independent contractors. Practically all footwear and apparel products are produced outside the United States, while equipment products are produced both in the United States and abroad. +Products +We focus our NIKE Brand product offerings in eight key categories: Running, Basketball, Football (Soccer), Men’s Training, Women’s Training, Action Sports, Sportswear (our sports-inspired lifestyle products) and Golf. Basketball includes our Jordan Brand product offerings and Men's Training includes our baseball and American football product offerings. We also market products designed for kids, as well as for other athletic and recreational uses such as cricket, lacrosse, tennis, volleyball, wrestling, walking and outdoor activities. +NIKE’s athletic footwear products are designed primarily for specific athletic use, although a large percentage of the products are worn for casual or leisure purposes. We place considerable emphasis on high-quality construction and innovation in our products. Sportswear, Running, Basketball and Football (Soccer) are currently our top-selling footwear categories and we expect them to continue to lead in footwear sales. +We sell sports apparel covering most of the above-mentioned categories, which feature the same trademarks and are sold predominantly through the same marketing and distribution channels as athletic footwear. Our sports apparel, similar to our athletic footwear products, is designed primarily for athletic use and exemplifies our commitment to innovation and high-quality construction. Sportswear, Men's Training, Running and Football (Soccer) are currently our top-selling apparel categories and we expect them to continue to lead in apparel sales. We often market footwear, apparel and accessories in “collections” of similar use or by category. We also market apparel with licensed college and professional team and league logos. +We sell a line of performance equipment and accessories under the NIKE Brand name, including bags, socks, sport balls, eyewear, timepieces, digital devices, bats, gloves, protective equipment, golf clubs and other equipment designed for sports activities. We also sell small amounts of various plastic products to other manufacturers through our wholly owned subsidiary, NIKE IHM, Inc. +Our Jordan Brand designs, distributes and licenses athletic and casual footwear, apparel and accessories predominantly focused on Basketball using the Jumpman trademark. Sales and operating results for the Jordan Brand are included within the NIKE Brand Basketball category and within the respective NIKE Brand geographic operating segments. +One of our wholly owned subsidiary brands, Hurley, headquartered in Costa Mesa, California (“Hurley”), designs and distributes a line of action sports and youth lifestyle apparel and accessories under the Hurley trademark. Sales and operating results for Hurley are included within the NIKE Brand Action Sports category and within the NIKE Brand's North America geographic operating segment, respectively. +Another of our wholly owned subsidiary brands, Converse, headquartered in Boston, Massachusetts (“Converse”), designs, distributes and licenses casual sneakers, apparel and accessories under the Converse, Chuck Taylor, All Star, One Star, Star Chevron and Jack Purcell trademarks. Operating results of the Converse brand are reported on a stand-alone basis. +In addition to the products we sell to our wholesale customers and directly to consumers through our DTC operations, we have also entered into license agreements that permit unaffiliated parties to manufacture and sell, using NIKE-owned trademarks, certain apparel, digital devices and applications and other equipment designed for sports activities. +On February 1, 2013, and November 30, 2012, we completed the divestitures of the Cole Haan and Umbro businesses, respectively, allowing us to better focus our resources on driving growth in the NIKE, Jordan, Hurley and Converse brands. +1 +Table of Contents +Sales and Marketing +Financial information about geographic and segment operations appears in Note 18 — Operating Segments and Related Information of the accompanying Notes to the Consolidated Financial Statements. +We experience moderate fluctuations in aggregate sales volume during the year. Historically, revenues in the first and fourth fiscal quarters have slightly exceeded those in the second and third quarters. However, the mix of product sales may vary considerably as a result of changes in seasonal and geographic demand for particular types of footwear, apparel and equipment, as well as other macroeconomic, operating and logistics-related factors. +Because NIKE is a consumer products company, the relative popularity of various sports and fitness activities and changing design trends affect the demand for our products. We must, therefore, respond to trends and shifts in consumer preferences by adjusting the mix of existing product offerings, developing new products, styles and categories and influencing sports and fitness preferences through extensive marketing. Failure to respond in a timely and adequate manner could have a material adverse effect on our sales and profitability. This is a continuing risk. We report our NIKE Brand operations based on our internal geographic organization. Each NIKE Brand geography operates predominantly in one industry: the design, development, marketing and selling of athletic footwear, apparel, equipment, accessories and services. Our reportable operating segments for the NIKE Brand are: North America, Western Europe, Central & Eastern Europe, Greater China, Japan and Emerging Markets. Our NIKE Brand Direct to Consumer operations are managed within each geographic operating segment. +Converse is also a reportable segment, and operates in one industry: the design, marketing, licensing and selling of casual sneakers, apparel and accessories. +United States Market +For both fiscal 2015 and fiscal 2014 , NIKE Brand and Converse sales in the United States accounted for approximately 46% of total revenues, compared to 45% for fiscal 2013 . We sell our NIKE Brand, Jordan Brand, Hurley and Converse products to thousands of retail accounts in the United States, including a mix of footwear stores, sporting goods stores, athletic specialty stores, department stores, skate, tennis and golf shops and other retail accounts. In the United States, we utilize NIKE sales offices to solicit sales as well as independent sales representatives to sell specialty products for golf and skateboarding. During fiscal 2015 , our three largest customers accounted for approximately 26% of sales in the United States. +We make substantial use of our futures ordering program, which allows retailers to order five to six months in advance of delivery with the commitment that their orders will be delivered within a set time period at a fixed price. In fiscal 2015 , 87% of our U.S. wholesale footwear shipments (excluding NIKE Golf, Hurley and Converse) were made under the futures program, compared to 86% in fiscal 2014 and 87% in fiscal 2013 . In fiscal 2015 , 67% of our U.S. wholesale apparel shipments (excluding NIKE Golf, Hurley and Converse) were made under the futures program, compared to 71% in fiscal 2014 and 67% in fiscal 2013 . +Our Direct to Consumer operations sell NIKE Brand products, including Jordan Brand and Hurley, to consumers through our e-commerce website, www.nike.com . We also sell Converse products to consumers through a Converse owned e-commerce website, www.converse.com . In addition, our Direct to Consumer operations sell through the following number of retail stores in the United States: +U.S. Retail Stores +Number +NIKE Brand factory stores +185 +NIKE Brand in-line stores, including employee-only stores +33 +Converse stores (including factory stores) +92 +Hurley stores (including factory and employee stores) +29 +TOTAL +339 +NIKE owns a full product line distribution center located in Memphis, Tennessee. In addition, NIKE has four other distribution centers, three of which are leased, also located in Memphis. NIKE Brand apparel and equipment products are also shipped from our leased Foothill Ranch, California distribution center. Converse and Hurley products are shipped primarily from leased facilities in Ontario, California. +International Markets +For both fiscal 2015 and fiscal 2014 , non-U.S. NIKE Brand and Converse sales accounted for 54% of total revenues, compared with 55% for fiscal 2013 . We sell our products to retail accounts, through our own Direct to Consumer operations and through a mix of independent distributors, licensees and sales representatives around the world. We sell to thousands of retail accounts and ship products from 45 distribution centers outside of the United States. In many countries and regions, including Canada, Asia, some Latin American countries and Europe, we have a futures ordering program for retailers similar to the United States futures ordering program described above. During fiscal 2015 , NIKE’s three largest customers outside of the United States accounted for approximately 12% of total non-U.S. sales. +Our Direct to Consumer business operates the following number of retail stores outside the United States, in addition to NIKE and Converse owned e-commerce websites in over 25 countries: +Non-U.S. Retail Stores +Number +NIKE Brand factory stores +512 +NIKE Brand in-line stores, including employee-only stores +73 +Converse stores (including factory stores) +7 +TOTAL +592 +2 +Table of Contents +International branch offices and subsidiaries of NIKE are located in Argentina, Australia, Austria, Belgium, Bermuda, Brazil, Canada, Chile, China, Croatia, Cyprus, the Czech Republic, Denmark, Finland, France, Germany, Greece, Hong Kong, Hungary, India, Indonesia, Ireland, Israel, Italy, Japan, Korea, Malaysia, Mexico, New Zealand, the Netherlands, Norway, Panama, the Philippines, Poland, Portugal, Russia, Singapore, Slovakia, Slovenia, South Africa, Spain, Sri Lanka, Sweden, Switzerland, Taiwan, Thailand, Turkey, the United Arab Emirates, the United Kingdom, Uruguay and Vietnam. +Significant Customer +No customer accounted for 10% or more of our worldwide net sales during fiscal 2015 . +Orders +Worldwide futures orders for NIKE Brand athletic footwear and apparel, scheduled for delivery from June through November 2015, were $13.5 billion compared with $13.3 billion for the same period last year. This futures orders amount is calculated based upon our forecast of the actual currency exchange rates under which our revenues will be translated during this period. Reported futures orders are not necessarily indicative of our expectation of revenues for this period. This is because the mix of orders can shift between futures and at-once orders and the fulfillment of certain of these futures orders may fall outside of the scheduled time period noted above. In addition, foreign currency exchange rate fluctuations as well as differing levels of discounts, order cancellations and returns can cause differences in the comparisons between futures orders and actual revenues. Moreover, a portion of our revenue is not derived from futures orders, including at-once and closeout sales of NIKE Brand footwear and apparel, sales of NIKE Brand equipment, sales from our Direct to Consumer operations and sales from our Converse, Hurley and NIKE Golf businesses. +Product Research, Design and Development +We believe our research, design and development efforts are key factors in our success. Technical innovation in the design and manufacturing process of footwear, apparel and athletic equipment receive continued emphasis as NIKE strives to produce products that help to enhance athletic performance, reduce injury and maximize comfort while reducing waste. +In addition to NIKE’s own staff of specialists in the areas of biomechanics, chemistry, exercise physiology, engineering, industrial design, sustainability and related fields, we also utilize research committees and advisory boards made up of athletes, coaches, trainers, equipment managers, orthopedists, podiatrists and other experts who consult with us and review designs, materials, concepts for product and manufacturing process improvements and compliance with product safety regulations around the world. Employee athletes, athletes engaged under sports marketing contracts and other athletes wear-test and evaluate products during the design and development process. +As we continue to develop new technologies, NIKE is simultaneously focused on the design of innovative products incorporating such technologies throughout our product categories. Using market intelligence and research, the various NIKE design teams identify opportunities to leverage new technologies in existing categories responding to consumer preferences. The proliferation of NIKE Air, Lunar, Zoom, Free, Flywire, Dri-Fit, Flyknit, Flyweave and NIKE+ technologies through Running, Basketball, Men's Training, Women's Training and Sportswear, among others, typifies our dedication to designing innovative products. +Manufacturing +We are supplied by approximately 146 footwear factories located in 14 countries. The largest single footwear factory accounted for approximately 7% of total fiscal 2015 NIKE Brand footwear production. Virtually all of our footwear is manufactured outside of the United States by independent contract manufacturers who often operate multiple factories. In fiscal 2015 , contract factories in Vietnam, China and Indonesia manufactured approximately 43%, 32% and 20% of total NIKE Brand footwear, respectively. We also have manufacturing agreements with independent factories in Argentina, Brazil, India and Mexico to manufacture footwear for sale primarily within those countries. In fiscal 2015 , five footwear contract manufacturers each accounted for greater than 10% of footwear production, and in aggregate accounted for approximately 69% of NIKE Brand footwear production. +We are supplied by approximately 408 apparel factories located in 39 countries. The largest single apparel factory accounted for approximately 11% of total fiscal 2015 NIKE Brand apparel production. Virtually all of our apparel is manufactured outside of the United States by independent contract manufacturers which often operate multiple factories. In fiscal 2015 , most of this apparel production occurred in China, Vietnam, Sri Lanka, Thailand, Indonesia, Malaysia and Cambodia. In fiscal 2015 , one apparel contract manufacturer accounted for more than 10% of apparel production, and the top five contract manufacturers in aggregate accounted for approximately 36% of NIKE Brand apparel production. +The principal materials used in our footwear products are natural and synthetic rubber, plastic compounds, foam cushioning materials, natural and synthetic leather, nylon, polyester and canvas, as well as polyurethane films used to make NIKE Air-Sole cushioning components. During fiscal 2015 , NIKE IHM, Inc., a wholly-owned subsidiary of NIKE, Inc., with facilities near Beaverton, Oregon and in St. Louis, Missouri, and independent contractors in China and Vietnam, were our largest suppliers of the Air-Sole cushioning components used in footwear. The principal materials used in our apparel products are natural and synthetic fabrics and threads (both virgin and recycled); specialized performance fabrics designed to efficiently wick moisture away from the body, retain heat and repel rain and/or snow; and plastic and metal hardware. NIKE’s independent contractors and suppliers buy raw materials for the manufacturing of our footwear, apparel and equipment products. Most raw materials are available and purchased by those independent contractors and suppliers in the countries where manufacturing takes place. NIKE's independent contract manufacturers and suppliers have thus far experienced little difficulty in satisfying raw material requirements for the production of our products. +3 +Table of Contents +Since 1972, Sojitz Corporation of America (“Sojitz America”), a large Japanese trading company and the sole owner of our redeemable preferred stock, has performed significant import-export financing services for us. During fiscal 2015 , Sojitz America provided financing and purchasing services for NIKE Brand products sold in certain NIKE markets including Argentina, Uruguay, Canada, Brazil, India, Indonesia, the Philippines, South Africa and Thailand, excluding products produced and sold in the same country. Approximately 8% of NIKE Brand sales occurred in those countries. Any failure of Sojitz America to provide these services or any failure of Sojitz America’s banks could disrupt our ability to acquire products from our suppliers and to deliver products to our customers in those markets. Such a disruption could result in canceled orders that would adversely affect sales and profitability. However, we believe that any such disruption would be short-term in duration due to the ready availability of alternative sources of financing at competitive rates. Our current agreements with Sojitz America expire on May 31, 2018, and contain a provision allowing us to extend the agreements to May 31, 2019. +International Operations and Trade +Our international operations and sources of supply are subject to the usual risks of doing business abroad, such as possible increases in import duties, anti-dumping measures, quotas, safeguard measures, trade restrictions, restrictions on the transfer of funds and, in certain parts of the world, political instability and terrorism. We have not, to date, been materially affected by any such risk, but cannot predict the likelihood of such material effects occurring in the future. +In recent years, uncertain global and regional economic conditions have affected international trade and caused a rise in protectionist actions around the world. These trends are affecting many global manufacturing and service sectors, and the footwear and apparel industries, as a whole, are not immune. Companies in our industry are facing trade protectionism in many different regions, and in nearly all cases we are working together with industry groups to address trade issues and reduce the impact to the industry, while observing applicable competition laws. Notwithstanding our efforts, protectionist measures have resulted in increases in the cost of our products, and additional measures, if implemented, could adversely affect sales and/or profitability for NIKE as well as the imported footwear and apparel industry as a whole. +We monitor protectionist trends and developments throughout the world that may materially impact our industry, and we engage in administrative and judicial processes to mitigate trade restrictions. In Brazil and Argentina, we are actively participating in dumping investigations against footwear from China and actively monitoring actions in other countries that may result in additional anti-dumping measures and could affect our industry. We are also monitoring for and advocating against other impediments that may limit or delay customs clearance for imports of footwear, apparel and equipment. Moreover, with respect to trade restrictions targeting China, which represents an important sourcing country and consumer market for us, we are working with a broad coalition of global businesses and trade associations representing a wide variety of sectors to help ensure that any legislation enacted and implemented (i) addresses legitimate and core concerns, (ii) is consistent with international trade rules, and (iii) reflects and considers China's domestic economy and the important role it has in the global economic community. +Where trade protection measures are implemented, we believe that we have the ability to develop, over a period of time, adequate alternative sources of supply for the products obtained from our present suppliers. If events prevented us from acquiring products from our suppliers in a particular country, our operations could be temporarily disrupted and we could experience an adverse financial impact. However, we believe we could abate any such disruption, and that much of the adverse impact on supply would, therefore, be of a short-term nature, although alternate sources of supply might not be as cost-effective and could have an ongoing adverse impact on profitability. +NIKE advocates for trade liberalization for footwear and apparel in a number of regional and bilateral free trade agreements. The passage of Trade Promotion Authority in the United States will enable the conclusion of the Trans-Pacific Partnership (TPP). If ultimately passed, the TPP has the potential to reduce or eliminate high rates of customs duties for imports into the United States of NIKE products sourced from TPP countries (primarily footwear and apparel from Vietnam and apparel from Malaysia). Similarly, the European Union is close to concluding a free trade agreement with Vietnam that could lead to duty reduction or elimination for footwear and apparel. +Competition +The athletic footwear, apparel and equipment industry is highly competitive on a worldwide basis. We compete internationally with a significant number of athletic and leisure footwear companies, athletic and leisure apparel companies, sports equipment companies and large companies having diversified lines of athletic and leisure footwear, apparel and equipment, including adidas, Li Ning, lululemon athletica, Puma, V.F. Corp., Under Armour and UNIQLO, among others. The intense competition and the rapid changes in technology and consumer preferences in the markets for athletic and leisure footwear and apparel, and athletic equipment, constitute significant risk factors in our operations. +NIKE is the largest seller of athletic footwear, apparel and equipment in the world. Important aspects of competition in this industry are: +• +Product attributes such as quality; performance and reliability; new product innovation and development and consumer price/value. +• +Consumer connection and affinity for brands and products, developed through marketing and promotion; social media interaction; customer support and service; identification with prominent and influential athletes, coaches, teams, colleges and sports leagues who endorse our brands and use our products and active engagement through sponsored sporting events and clinics. +• +Effective sourcing and distribution of products, with attractive merchandising and presentation at retail, both in-store and online. +We believe that we are competitive in all of these areas. +Trademarks and Patents +We utilize trademarks on nearly all of our products and believe having distinctive marks that are readily identifiable is an important factor in creating a market for our goods, in identifying our brands and the Company and in distinguishing our goods from the goods of others. We consider our NIKE and Swoosh Design trademarks to be among our most valuable assets and we have registered these trademarks in almost 170 jurisdictions worldwide. In addition, we own many other trademarks that we utilize in marketing our products. We own common law rights in the trade dress of several significant shoe designs and elements. For certain trade dress, we have sought and obtained trademark registrations. +NIKE has copyright protection in its design, graphics and other original works. When appropriate, we have sought registrations for this content. +4 +Table of Contents +NIKE owns patents, and has a patent license, facilitating its use of “Air” technologies. The "Air" process utilizes pressurized gas encapsulated in polyurethane. Some of the early patents directed to the “Air” technologies have expired, which may enable competitors to use certain types of similar technology. Subsequent NIKE patents directed to the “Air” technologies will not expire for several years. +We also file and maintain many U.S. and foreign utility patents, as well as many U.S. and foreign design patents protecting components, manufacturing techniques, features and industrial design used in various athletic and leisure footwear, apparel, athletic equipment, digital devices and golf products. These patents expire at various times; and patents issued for original applications filed this calendar year in the United States may last until 2030 for design patents and until 2035 for utility patents. +We believe our success depends primarily upon our capabilities in areas such as design, research and development, production and marketing rather than exclusively upon our patent and trade secret positions. However, we have followed a policy of filing patent applications for the United States and select foreign countries on inventions, designs and improvements that we deem valuable. We also continue to vigorously protect our trademarks and patents against third-party infringement. +Employees +As of May 31, 2015 , we had approximately 62,600 employees worldwide, including retail and part-time employees. Management considers its relationship with employees to be excellent. None of our employees are represented by a union, except for certain employees in the Emerging Markets geography, where local law requires those employees to be represented by a trade union. Also, in some countries outside of the United States, local laws require employee representation by works councils (which may be entitled to information and consultation on certain Company decisions) or by organizations similar to a union. In certain European countries, we are required by local law to enter into and/or comply with industry-wide or national collective bargaining agreements. NIKE has never experienced a material interruption of operations due to labor disagreements. +Executive Officers of the Registrant +The executive officers of NIKE, Inc. as of July 17, 2015 are as follows: +Philip H. Knight, Chairman of the Board of Directors — Mr. Knight, 77, a director since 1968, is a co-founder of NIKE and, except for the period from June 1983 through September 1984, served as its President from 1968 to 1990 and from June 2000 to December 2004. Prior to 1968, Mr. Knight was a certified public accountant with Price Waterhouse and Coopers & Lybrand and was an Assistant Professor of Business Administration at Portland State University. +Mark G. Parker, President and Chief Executive Officer — Mr. Parker, 59, was appointed President and Chief Executive Officer in January 2006. He has been employed by NIKE since 1979 with primary responsibilities in product research, design and development, marketing and brand management. Mr. Parker was appointed divisional Vice President in charge of product development in 1987, corporate Vice President in 1989, General Manager in 1993, Vice President of Global Footwear in 1998 and President of the NIKE Brand in 2001. +David J. Ayre, Executive Vice President, Global Human Resources — Mr. Ayre, 55, joined NIKE as Vice President, Global Human Resources in 2007. Prior to joining NIKE, he held a number of senior human resource positions with PepsiCo, Inc. since 1990, most recently as head of Talent and Performance Rewards. +Donald W. Blair, Executive Vice President and Chief Financial Officer — Mr. Blair, 57, joined NIKE in November 1999. Prior to joining NIKE, he held a number of financial management positions with PepsiCo, Inc., including Vice President, Finance of Pepsi-Cola Asia, Vice President, Planning of PepsiCo’s Pizza Hut Division and Senior Vice President, Finance of The Pepsi Bottling Group, Inc. Prior to joining PepsiCo, Mr. Blair was a certified public accountant with Deloitte, Haskins & Sells. +Trevor A. Edwards, President, NIKE Brand — Mr. Edwards, 52, joined NIKE in 1992. He was appointed Marketing Manager, Strategic Accounts for Foot Locker in 1993, Director of Marketing for the Americas in 1995, Director of Marketing for Europe in 1997, Vice President, Marketing for Europe, Middle East and Africa in 1999 and Vice President, U.S. Brand Marketing in 2000. Mr. Edwards was appointed corporate Vice President, Global Brand Management in 2002, Vice President, Global Brand and Category Management in 2006 and President, NIKE Brand in 2013. Prior to NIKE, Mr. Edwards was with the Colgate-Palmolive Company. +Jeanne P. Jackson, President, Product and Merchandising — Ms. Jackson, 63, joined NIKE in 2009. She was appointed President, Direct to Consumer in 2009 and President, Product and Merchandising in 2013. Ms. Jackson also served as a member of the NIKE, Inc. Board of Directors from 2001 through 2009. She founded and served as Chief Executive Officer of MSP Capital, a private investment company, from 2002 to 2009. Ms. Jackson was Chief Executive Officer of Walmart.com from March 2000 to January 2002. She was with Gap, Inc., as President and Chief Executive Officer of Banana Republic from 1995 to 2000, also serving as Chief Executive Officer of Gap, Inc. Direct from 1998 to 2000. Since 1978, she has held various retail management positions with Victoria’s Secret, The Walt Disney Company, Saks Fifth Avenue and Federated Department Stores. +Hilary K. Krane, Executive Vice President, Chief Administrative Officer and General Counsel — Ms. Krane, 51, joined NIKE as Vice President and General Counsel in April 2010. In 2011, her responsibilities expanded and she became Vice President, General Counsel and Corporate Affairs. Ms. Krane was appointed to Executive Vice President, Chief Administrative Officer and General Counsel in 2013. Prior to joining NIKE, Ms. Krane was General Counsel and Senior Vice President for Corporate Affairs at Levi Strauss & Co. from 2006 to 2010. From 1996 to 2006, she was a partner and assistant general counsel at PricewaterhouseCoopers LLP. +John F. Slusher, Executive Vice President, Global Sports Marketing — Mr. Slusher, 46, has been employed by NIKE since 1998 with primary responsibilities in global sports marketing. Mr. Slusher was appointed Director of Sports Marketing for the Asia Pacific and Americas in 2006, divisional Vice President of Asia Pacific & Americas Sports Marketing in September 2007 and Vice President, Global Sports Marketing in November 2007. Prior to joining NIKE, Mr. Slusher was an attorney at the law firm of O’Melveny & Myers from 1995 to 1998. +Eric D. Sprunk, Chief Operating Officer — Mr. Sprunk, 51, joined NIKE in 1993. He was appointed Finance Director and General Manager of the Americas in 1994, Finance Director for NIKE Europe in 1995, Regional General Manager of NIKE Europe Footwear in 1998 and Vice President & General Manager of the Americas in 2000. Mr. Sprunk was appointed Vice President of Global Footwear in 2001, Vice President of Merchandising and Product in 2009 and Chief Operating Officer in 2013. Prior to joining NIKE, Mr. Sprunk was a certified public accountant with Price Waterhouse from 1987 to 1993. +5 +Table of Contents \ No newline at end of file diff --git a/raw/filings/0000320187/2014/0000320187-15-000113/item13.txt b/raw/filings/0000320187/2014/0000320187-15-000113/item13.txt new file mode 100644 index 0000000000000000000000000000000000000000..b03c435fd402f5a296c97984ec85f538bde6ea01 --- /dev/null +++ b/raw/filings/0000320187/2014/0000320187-15-000113/item13.txt @@ -0,0 +1,2 @@ +ITEM 13. Certain Relationships and Related Transactions and Director Independence +The information required by Items 404 and 407(a) of Regulation S-K is included under “Election of Directors — Transactions with Related Persons” and “Corporate Governance — Director Independence” in the definitive Proxy Statement for our 2015 Annual Meeting of Shareholders and is incorporated herein by reference. \ No newline at end of file diff --git a/raw/filings/0000320187/2014/0000320187-15-000113/item9a.txt b/raw/filings/0000320187/2014/0000320187-15-000113/item9a.txt new file mode 100644 index 0000000000000000000000000000000000000000..04ac68302d5f1f5a274d7441bc28169ce962a201 --- /dev/null +++ b/raw/filings/0000320187/2014/0000320187-15-000113/item9a.txt @@ -0,0 +1,6 @@ +ITEM 9A. Controls and Procedures +We maintain disclosure controls and procedures that are designed to ensure information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. +We carry out a variety of ongoing procedures, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, to evaluate the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of May 31, 2015 . +“Management’s Annual Report on Internal Control Over Financial Reporting” is included in Item 8 of this Report. +We have commenced several transformation initiatives to centralize and simplify our business processes and systems. These are long-term initiatives, which we believe will enhance our internal control over financial reporting due to increased automation and further integration of related processes. We will continue to monitor our internal control over financial reporting for effectiveness throughout the transformation. +There have not been any other changes in our internal control over financial reporting during our most recent fiscal quarter that have materially affected, or are reasonable likely to materially affect, our internal control over financial reporting. \ No newline at end of file diff --git a/raw/filings/0000320187/2014/0000320187-15-000113/rp_note.txt b/raw/filings/0000320187/2014/0000320187-15-000113/rp_note.txt new file mode 100644 index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391 diff --git a/raw/filings/0000320187/2014/0000320187-15-000113/rpt_disclosure.txt b/raw/filings/0000320187/2014/0000320187-15-000113/rpt_disclosure.txt new file mode 100644 index 0000000000000000000000000000000000000000..4e76a695213609e8179341015c1648a2c5629db2 --- /dev/null +++ b/raw/filings/0000320187/2014/0000320187-15-000113/rpt_disclosure.txt @@ -0,0 +1,9 @@ +Transactions with Related Persons +Mr. Howard S. Slusher, the father of John Slusher, Executive Vice President of Sports Marketing, and the Company are parties to a Consulting Agreement pursuant to which Howard Slusher manages the planning, design, and construction of new buildings at, and improvements to, NIKE’s World Headquarters. Howard Slusher was selected due to his deep history and experience with the Company, as he has managed several significant construction projects for the Company, including the original World Headquarters construction and later expansions. In addition, Howard Slusher’s previous engagement with the Company garnered the trust of management and makes him uniquely qualified to oversee the project. During fiscal 2016, the Company paid Howard Slusher $3,408,837 for these services. +Pursuant to the terms of a past consulting agreement with the Company, the Company agreed to pay for health and life insurance policies for Howard Slusher following expiration of the agreement. During fiscal 2016, the Company paid $123,574 for life insurance premiums. +Three of Mr. Parker’s siblings, each with over 25 years of service to the Company, were employed by the Company in non-executive roles in fiscal 2016. Ann Parker was an Executive Talent Scout, Bob Parker was a Marketplace Director, and Stephen Parker held a Vice President role with Converse. During fiscal 2016, the Company paid aggregate compensation to each of Ann Parker and Stephen Parker in the amounts of $317,642 and $525,491, respectively, comprising of salary, bonuses, the grant date fair value of stock options granted during the fiscal year estimated using the Black-Scholes pricing model, profit sharing and matching contributions to Company-sponsored retirement plans. Additionally, the Company paid aggregate compensation to Bob Parker in the amount of approximately $506,948, comprising of approximately $504,144 paid in connection with his termination of services as well as the compensation components listed above. The compensation and benefits received by each of Mr. Parker’s siblings, including the separation benefits received by Bob Parker, were consistent with compensation paid to other employees holding similar positions. +Mr. Thompson’s son, John Thompson III, head basketball coach at Georgetown University, and the Company are parties to a contract pursuant to which Mr. Thompson III provides certain endorsement and consulting services to the Company. The terms of this agreement, effective August 2014 through August 2019, provide for annual base compensation of $200,000, and up to $112,500 per year of product and merchandise, for use by him, the basketball staff and team. In addition, there are annual incentive payments based upon his team’s performance of up to $100,000. +Ms. Lindsay A. Jackson, the daughter of Jeanne Jackson, President of Product and Merchandising during fiscal 2016, was employed by the Company in a non-executive role in fiscal 2016 as a Brand Director. During fiscal 2016, the Company paid aggregate compensation to Ms. Lindsay Jackson of $152,861, comprising salary, bonuses, the grant date fair value of stock options granted during the fiscal year estimated using the Black-Scholes pricing model, profit sharing and matching contributions to Company-sponsored retirement plans. The compensation and benefits received by Ms. Lindsay Jackson was consistent with compensation paid to other employees holding similar positions. +On June 30, 2016 Mr. Philip Knight, the father of NIKE director Travis Knight, retired from the Board of Directors. Effective immediately upon his retirement, the Board has appointed Mr. Philip Knight to the position of Chairman Emeritus, which provides a standing invitation for Mr. Philip Knight to attend meetings of the Board and its committees as a non-voting observer. Pursuant to serving as the Chairman Emeritus, Mr. Knight will receive medical and dental insurance coverage available to employees and will receive an annual salary of $500,000. +The Company’s written policy requires the Nominating and Corporate Governance Committee to review any transaction or proposed transaction with a related person that would be required to be reported under Item 404(a) of Regulation S-K, and to determine whether to ratify or approve the transaction, with ratification or approval to occur only if the Committee determines that the transaction is fair to the Company or that approval or ratification of the transaction is in the interest of the Company. +NIKE, INC. Ÿ 2016 Notice of Annual Meeting 14 \ No newline at end of file diff --git a/raw/filings/0000320187/2015/0000320187-16-000336/filing.txt b/raw/filings/0000320187/2015/0000320187-16-000336/filing.txt new file mode 100644 index 0000000000000000000000000000000000000000..803526d123ed707fb0899c1ef1b78a634d00cefe --- /dev/null +++ b/raw/filings/0000320187/2015/0000320187-16-000336/filing.txt @@ -0,0 +1,6340 @@ +10-K +1 +nke-5312016x10k.htm +10-K +Document +Table of Contents +UNITED STATES +SECURITIES AND EXCHANGE COMMISSION +Washington, D.C. 20549 +FORM 10-K +(Mark One) +þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 +FOR THE FISCAL YEAR ENDED May 31, 2016 +OR +¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 +FOR THE TRANSITION PERIOD FROM TO . +Commission File No. 1-10635 +NIKE, Inc . +(Exact name of Registrant as specified in its charter) +OREGON +93-0584541 +(State or other jurisdiction of incorporation) +(IRS Employer Identification No.) +One Bowerman Drive, Beaverton, Oregon +97005-6453 +(Address of principal executive offices) +(Zip Code) +(503) 671-6453 +(Registrant’s Telephone Number, Including Area Code) +SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: +Class B Common Stock +New York Stock Exchange +(Title of Each Class) +(Name of Each Exchange on Which Registered) +SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: +NONE +Indicate by check mark: +YES +NO +• +if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. +þ +¨ +• +if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. +¨ +þ +• +whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. +þ +¨ +• +whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). +þ +¨ +• +if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. +þ +• +whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. +Large accelerated filer þ +Accelerated filer ¨ +Non-accelerated filer ¨ +Smaller reporting company ¨ +• +whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). +¨ +þ +As of November 30, 2015, the aggregate market values of the Registrant’s Common Stock held by non-affiliates were: +Class A +$ +4,075,394,149 +Class B +89,393,235,582 +$ +93,468,629,731 +As of July 15, 2016, the number of shares of the Registrant’s Common Stock outstanding were: +Class A +329,251,752 +Class B +1,348,366,883 +1,677,618,635 +DOCUMENTS INCORPORATED BY REFERENCE: +Parts of Registrant’s Proxy Statement for the Annual Meeting of Shareholders to be held on September 22, 2016 are incorporated by reference into Part III of this Report . +Table of Contents +NIKE, INC. +ANNUAL REPORT ON FORM 10-K +Table of Contents +Page +PART I +1 +ITEM 1. +Business +1 +General +1 +Products +1 +Sales and Marketing +2 +United States Market +2 +International Markets +2 +Significant Customer +3 +Orders +3 +Product Research, Design and Development +3 +Manufacturing +3 +International Operations and Trade +4 +Competition +4 +Trademarks and Patents +4 +Employees +5 +Executive Officers of the Registrant +5 +ITEM 1A. +Risk Factors +7 +ITEM 1B. +Unresolved Staff Comments +16 +ITEM 2. +Properties +16 +ITEM 3. +Legal Proceedings +16 +ITEM 4. +Mine Safety Disclosures +16 +PART II +17 +ITEM 5. +Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities +17 +ITEM 6. +Selected Financial Data +19 +ITEM 7. +Management’s Discussion and Analysis of Financial Condition and Results of Operations +21 +ITEM 7A. +Quantitative and Qualitative Disclosures about Market Risk +44 +ITEM 8. +Financial Statements and Supplementary Data +45 +ITEM 9. +Changes in and Disagreements with Accountants on Accounting and Financial Disclosure +76 +ITEM 9A. +Controls and Procedures +76 +ITEM 9B. +Other Information +76 +PART III +77 +(Except for the information set forth under “Executive Officers of the Registrant” in Item 1 above, Part III is incorporated by reference from the Proxy Statement for the NIKE, Inc. 2016 Annual Meeting of Shareholders.) +ITEM 10. +Directors, Executive Officers and Corporate Governance +77 +ITEM 11. +Executive Compensation +77 +ITEM 12. +Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters +77 +ITEM 13. +Certain Relationships and Related Transactions and Director Independence +77 +ITEM 14. +Principal Accountant Fees and Services +77 +PART IV +78 +ITEM 15. +Exhibits and Financial Statement Schedules +78 +Signatures +82 +Table of Contents +PART I +ITEM 1. Business +General +NIKE, Inc. was incorporated in 1967 under the laws of the State of Oregon. As used in this report, the terms “we,” “us,” “NIKE,” and the “Company” refer to NIKE, Inc. and its predecessors, subsidiaries and affiliates, collectively, unless the context indicates otherwise. Our NIKE e-commerce website is located at www.nike.com. On our NIKE corporate website, located at news.nike.com, we post the following filings as soon as reasonably practicable after they are electronically filed with or furnished to the United States Securities and Exchange Commission (the “SEC”): our annual report on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities and Exchange Act of 1934, as amended. Our definitive Proxy Statements are also posted on our corporate website. All such filings on our corporate website are available free of charge. Copies of these filings may also be obtained by visiting the Public Reference Room of the SEC at 100 F Street, NE, Washington, D.C. 20549, or by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains a website ( www.sec.gov ) that contains current, quarterly and annual reports, proxy and information statements and other information regarding issuers that file electronically. Also available on our corporate website are the charters of the committees of our Board of Directors, as well as our corporate governance guidelines and code of ethics; copies of any of these documents will be provided in print to any shareholder who submits a request in writing to NIKE Investor Relations, One Bowerman Drive, Beaverton, Oregon 97005-6453. +Our principal business activity is the design, development and worldwide marketing and selling of athletic footwear, apparel, equipment, accessories and services. NIKE is the largest seller of athletic footwear and apparel in the world. We sell our products to retail accounts, through NIKE-owned retail stores and internet websites (which we refer to collectively as our “Direct to Consumer” or “DTC” operations), and through a mix of independent distributors and licensees throughout the world. Virtually all of our products are manufactured by independent contractors. Nearly all footwear and apparel products are produced outside the United States, while equipment products are produced both in the United States and abroad. +Products +We focus our NIKE Brand product offerings in nine key categories: Running, NIKE Basketball, the Jordan Brand, Football (Soccer), Men’s Training, Women’s Training, Action Sports, Sportswear (our sports-inspired lifestyle products) and Golf. Men's Training includes our baseball and American football product offerings. We also market products designed for kids, as well as for other athletic and recreational uses such as cricket, lacrosse, tennis, volleyball, wrestling, walking and outdoor activities. +NIKE’s athletic footwear products are designed primarily for specific athletic use, although a large percentage of the products are worn for casual or leisure purposes. We place considerable emphasis on innovation and high-quality construction in our products. Sportswear, Running, the Jordan Brand and Football (Soccer) are currently our top-selling footwear categories and we expect them to continue to lead in footwear sales. +We also sell sports apparel covering the above-mentioned categories, which feature the same trademarks and are sold predominantly through the same marketing and distribution channels as athletic footwear. Our sports apparel, similar to our athletic footwear products, is designed primarily for athletic use and exemplifies our commitment to innovation and high-quality construction. Sportswear, Men's Training, Running, Football (Soccer) and Women's Training are currently our top-selling apparel categories, and we expect them to continue to lead in apparel sales. We often market footwear, apparel and accessories in “collections” of similar use or by category. We also market apparel with licensed college and professional team and league logos. +We sell a line of performance equipment and accessories under the NIKE Brand name, including bags, socks, sport balls, eyewear, timepieces, digital devices, bats, gloves, protective equipment, golf clubs and other equipment designed for sports activities. We also sell small amounts of various plastic products to other manufacturers through our wholly-owned subsidiary, NIKE IHM, Inc. +Our Jordan Brand designs, distributes and licenses athletic and casual footwear, apparel and accessories predominantly focused on basketball using the Jumpman trademark. Sales and operating results for the Jordan Brand are reported as a separate category and within the NIKE Brand geographic operating segments, respectively. +One of our wholly-owned subsidiary brands, Hurley, headquartered in Costa Mesa, California, designs and distributes a line of action sports and youth lifestyle apparel and accessories under the Hurley trademark. Sales and operating results for Hurley are included within the NIKE Brand Action Sports category and within the NIKE Brand's North America geographic operating segment, respectively. +Another of our wholly-owned subsidiary brands, Converse, headquartered in Boston, Massachusetts, designs, distributes and licenses casual sneakers, apparel and accessories under the Converse, Chuck Taylor, All Star, One Star, Star Chevron and Jack Purcell trademarks. Operating results of the Converse brand are reported on a stand-alone basis. +In addition to the products we sell to our wholesale customers and directly to consumers through our DTC operations, we have also entered into license agreements that permit unaffiliated parties to manufacture and sell, using NIKE-owned trademarks, certain apparel, digital devices and applications and other equipment designed for sports activities. +1 +Table of Contents +Sales and Marketing +Financial information about geographic and segment operations appears in Note 17 — Operating Segments and Related Information of the accompanying Notes to the Consolidated Financial Statements. +We experience moderate fluctuations in aggregate sales volume during the year. Historically, revenues in the first and fourth fiscal quarters have slightly exceeded those in the second and third quarters. However, the mix of product sales may vary considerably as a result of changes in seasonal and geographic demand for particular types of footwear, apparel and equipment, as well as other macroeconomic, operating and logistics-related factors. +Because NIKE is a consumer products company, the relative popularity of various sports and fitness activities and changing design trends affect the demand for our products. We must, therefore, respond to trends and shifts in consumer preferences by adjusting the mix of existing product offerings, developing new products, styles and categories and influencing sports and fitness preferences through extensive marketing. Failure to respond in a timely and adequate manner could have a material adverse effect on our sales and profitability. This is a continuing risk. Refer to Item 1A. Risk Factors. +We report our NIKE Brand operations based on our internal geographic organization. Each NIKE Brand geography operates predominantly in one industry: the design, development, marketing and selling of athletic footwear, apparel, equipment, accessories and services. Our reportable operating segments for the NIKE Brand are: North America, Western Europe, Central & Eastern Europe, Greater China, Japan and Emerging Markets. Our NIKE Brand Direct to Consumer operations are managed within each geographic operating segment. +Converse is also a reportable segment and operates in one industry: the design, marketing, licensing and selling of casual sneakers, apparel and accessories. Converse Direct to Consumer operations, including e-commerce, are reported within the Converse operating segment results. +United States Market +For fiscal 2016 , NIKE Brand and Converse sales in the United States accounted for approximately 47% of total revenues, compared to 46% for both fiscal 2015 and fiscal 2014 . We sell our NIKE Brand, Jordan Brand, Hurley and Converse products to thousands of retail accounts in the United States, including a mix of footwear stores, sporting goods stores, athletic specialty stores, department stores, skate, tennis and golf shops and other retail accounts. In the United States, we utilize NIKE sales offices to solicit sales as well as independent sales representatives to sell specialty products for golf and skateboarding. During fiscal 2016 , our three largest customers accounted for approximately 25% of sales in the United States. +We make substantial use of our futures ordering program, which allows retailers to order five to six months in advance of delivery with the commitment that their orders will be delivered within a set time period at a fixed price. In fiscal 2016 , 84% of our U.S. wholesale footwear shipments were made under the futures program, compared to 87% in fiscal 2015 and 86% in fiscal 2014 . In fiscal 2016 , 66% of our U.S. wholesale apparel shipments were made under the futures program, compared to 67% in fiscal 2015 and 71% in fiscal 2014 . +Our Direct to Consumer operations sell NIKE Brand, Jordan Brand, Hurley and Converse products to consumers through our e-commerce website, www.nike.com . In addition, our Direct to Consumer operations sell through the following number of retail stores in the United States: +U.S. Retail Stores +Number +NIKE Brand factory stores +196 +NIKE Brand in-line stores, including employee-only stores +34 +Converse stores (including factory stores) +103 +Hurley stores (including factory and employee stores) +29 +TOTAL +362 +In the United States, NIKE has five significant distribution centers located in Memphis, Tennessee, two of which are owned and three are leased. NIKE Brand apparel and equipment products are also shipped from our leased Foothill Ranch, California distribution center. Converse and Hurley products are shipped primarily from leased facilities in Ontario, California. Smaller leased distribution facilities are located in various parts of the United States. +International Markets +For fiscal 2016 , non-U.S. NIKE Brand and Converse sales accounted for 53% of total revenues, compared to 54% for both fiscal 2015 and fiscal 2014 . We sell our products to retail accounts, through our own Direct to Consumer operations and through a mix of independent distributors, licensees and sales representatives around the world. We sell to thousands of retail accounts and ship products from 42 distribution centers outside of the United States. In many countries and regions, including Canada, Asia, some Latin American countries and Europe, we have a futures ordering program for retailers similar to the United States futures ordering program described above. During fiscal 2016 , NIKE’s three largest customers outside of the United States accounted for approximately 13% of total non-U.S. sales. +In addition to NIKE and Converse owned e-commerce websites in over 40 countries, our Direct to Consumer business operates the following number of retail stores outside the United States: +Non-U.S. Retail Stores +Number +NIKE Brand factory stores +588 +NIKE Brand in-line stores, including employee-only stores +72 +Converse stores (including factory stores) +23 +TOTAL +683 +2 +Table of Contents +International branch offices and subsidiaries of NIKE are located in Argentina, Australia, Austria, Belgium, Bermuda, Brazil, Canada, Chile, China, Croatia, the Czech Republic, Denmark, Finland, France, Germany, Greece, Hong Kong, Hungary, India, Indonesia, Ireland, Israel, Italy, Japan, Jordan, Korea, Malaysia, Mexico, New Zealand, the Netherlands, Norway, Panama, the Philippines, Poland, Portugal, Russia, Singapore, Slovakia, Slovenia, South Africa, Spain, Sri Lanka, Sweden, Switzerland, Taiwan, Thailand, Turkey, the United Arab Emirates, the United Kingdom, Uruguay and Vietnam. +Significant Customer +No customer accounted for 10% or more of our worldwide net revenues during fiscal 2016 . +Orders +Worldwide futures orders for NIKE Brand athletic footwear and apparel, scheduled for delivery from June through November 2016, were $14.9 billion compared with $13.8 billion for the same period last year. NIKE Brand reported futures include (1) orders from external wholesale customers and (2) internal orders from our DTC in-line stores and e-commerce operations which are reflected at prices that are comparable to prices charged to external wholesale customers. The U.S. Dollar futures orders amount is calculated based upon our internal forecast of the actual currency exchange rates under which our revenues will be translated during this period. Reported futures orders are not necessarily indicative of our expectation of revenues for this period. This is because the mix of orders can shift between futures and at-once orders and the fulfillment of certain of these futures orders may fall outside of the scheduled time period noted above. In addition, foreign currency exchange rate fluctuations as well as differing levels of order cancellations, discounts and returns can cause differences in the comparisons between futures orders and actual revenues. Moreover, a portion of our revenue is not derived from futures orders, including sales of at-once and closeout NIKE Brand footwear and apparel, all sales of NIKE Brand equipment, the difference between retail sales and internal orders from our Direct to Consumer in-line stores and e-commerce operations, and sales from our Converse, Hurley and NIKE Golf businesses. +Product Research, Design and Development +We believe our research, design and development efforts are key factors in our success. Technical innovation in the design and manufacturing process of footwear, apparel and athletic equipment receive continued emphasis as we strive to produce products that help to enhance athletic performance, reduce injury and maximize comfort while reducing waste. +In addition to our own staff of specialists in the areas of biomechanics, chemistry, exercise physiology, engineering, industrial design, sustainability and related fields, we also utilize research committees and advisory boards made up of athletes, coaches, trainers, equipment managers, orthopedists, podiatrists and other experts who consult with us and review designs, materials, concepts for product and manufacturing process improvements and compliance with product safety regulations around the world. Employee athletes, athletes engaged under sports marketing contracts and other athletes wear-test and evaluate products during the design and development process. +As we continue to develop new technologies, we are simultaneously focused on the design of innovative products incorporating such technologies throughout our product categories. Using market intelligence and research, our various design teams identify opportunities to leverage new technologies in existing categories responding to consumer preferences. The proliferation of NIKE Air, Lunar, Zoom, Free, Flywire, Dri-Fit, Flyknit, Flyweave and NIKE+ technologies through Running, NIKE Basketball, the Jordan Brand, Football (Soccer), Men's Training, Women's Training and Sportswear, among others, typifies our dedication to designing innovative products. +Manufacturing +We are supplied by approximately 142 footwear factories located in 15 countries. The largest single footwear factory accounted for approximately 7% of total fiscal 2016 NIKE Brand footwear production. Virtually all of our footwear is manufactured outside of the United States by independent contract manufacturers who often operate multiple factories. In fiscal 2016 , contract factories in Vietnam, China and Indonesia manufactured approximately 44%, 29% and 21% of total NIKE Brand footwear, respectively. We also have manufacturing agreements with independent factories in Argentina, India, Brazil and Mexico to manufacture footwear for sale primarily within those countries. In fiscal 2016 , five footwear contract manufacturers each accounted for greater than 10% of footwear production and in aggregate accounted for approximately 69% of NIKE Brand footwear production. +We are supplied by approximately 394 apparel factories located in 39 countries. The largest single apparel factory accounted for approximately 12% of total fiscal 2016 NIKE Brand apparel production. Virtually all of our apparel is manufactured outside of the United States by independent contract manufacturers which often operate multiple factories. In fiscal 2016 , contract factories in China, Vietnam and Indonesia produced approximately 26%, 23% and 9% of total NIKE Brand apparel, respectively. In fiscal 2016 , one apparel contract manufacturer accounted for more than 10% of apparel production, and the top five contract manufacturers in aggregate accounted for approximately 39% of NIKE Brand apparel production. +The principal materials used in our footwear products are natural and synthetic rubber, plastic compounds, foam cushioning materials, natural and synthetic leather, nylon, polyester and canvas, as well as polyurethane films used to make NIKE Air-Sole cushioning components. During fiscal 2016 , NIKE IHM, Inc., a wholly-owned subsidiary of NIKE, Inc., with facilities near Beaverton, Oregon and in St. Charles, Missouri, as well as independent contractors in China and Vietnam, were our largest suppliers of the Air-Sole cushioning components used in footwear. The principal materials used in our apparel products are natural and synthetic fabrics and threads (both virgin and recycled); specialized performance fabrics designed to efficiently wick moisture away from the body, retain heat and repel rain and/or snow; and plastic and metal hardware. NIKE’s independent contractors and suppliers buy raw materials for the manufacturing of our footwear, apparel and equipment products. Most raw materials are available and purchased by those independent contractors and suppliers in the countries where manufacturing takes place. NIKE's independent contract manufacturers and suppliers have thus far experienced little difficulty in satisfying raw material requirements for the production of our products. +3 +Table of Contents +Since 1972, Sojitz Corporation of America (“Sojitz America”), a large Japanese trading company and the sole owner of our redeemable preferred stock, has performed significant import-export financing services for us. During fiscal 2016 , Sojitz America provided financing and purchasing services for NIKE Brand products sold in certain NIKE markets including Argentina, Uruguay, Brazil, Canada, India, South Africa and Thailand, excluding products produced and sold in the same country. Approximately 6% of NIKE Brand sales occurred in those countries. Any failure of Sojitz America to provide these services or any failure of Sojitz America’s banks could disrupt our ability to acquire products from our suppliers and to deliver products to our customers in those markets. Such a disruption could result in canceled orders that would adversely affect sales and profitability. However, we believe that any such disruption would be short-term in duration due to the ready availability of alternative sources of financing at competitive rates. Our current agreements with Sojitz America expire on May 31, 2018 and contain a provision allowing us to extend the agreements to May 31, 2019. +International Operations and Trade +Our international operations and sources of supply are subject to the usual risks of doing business abroad, such as possible increases in import duties, anti-dumping measures, quotas, safeguard measures, trade restrictions, restrictions on the transfer of funds and, in certain parts of the world, political instability and terrorism. We have not, to date, been materially affected by any such risk, but cannot predict the likelihood of such material effects occurring in the future. +In recent years, uncertain global and regional economic conditions have affected international trade and caused a rise in protectionist actions around the world. These trends are affecting many global manufacturing and service sectors, and the footwear and apparel industries, as a whole, are not immune. Companies in our industry are facing trade protectionism in many different regions, and in nearly all cases we are working together with industry groups to address trade issues and reduce the impact to the industry, while observing applicable competition laws. Notwithstanding our efforts, protectionist measures have resulted in increases in the cost of our products, and additional measures, if implemented, could adversely affect sales and/or profitability for NIKE as well as the imported footwear and apparel industry as a whole. +We monitor protectionist trends and developments throughout the world that may materially impact our industry, and we engage in administrative and judicial processes to mitigate trade restrictions. We are actively monitoring actions that may result in additional anti-dumping measures and could affect our industry. We are also monitoring for and advocating against other impediments that may limit or delay customs clearance for imports of footwear, apparel and equipment. Moreover, with respect to trade restrictions targeting China, which represents an important sourcing country and consumer market for us, we are working with a broad coalition of global businesses and trade associations representing a wide variety of sectors to help ensure that any legislation enacted and implemented (i) addresses legitimate and core concerns, (ii) is consistent with international trade rules, and (iii) reflects and considers China's domestic economy and the important role it has in the global economic community. +Where trade protection measures are implemented, we believe that we have the ability to develop, over a period of time, adequate alternative sources of supply for the products obtained from our present suppliers. If events prevented us from acquiring products from our suppliers in a particular country, our operations could be temporarily disrupted and we could experience an adverse financial impact. However, we believe we could abate any such disruption, and that much of the adverse impact on supply would, therefore, be of a short-term nature, although alternate sources of supply might not be as cost-effective and could have an ongoing adverse impact on profitability. +NIKE advocates for trade liberalization for footwear and apparel in a number of regional and bilateral free trade agreements. The Trans-Pacific Partnership (TPP), if ultimately ratified, has the potential to reduce or eliminate high rates of customs duties for imports into the United States of NIKE products sourced from TPP countries (primarily footwear and apparel from Vietnam and apparel from Malaysia). Similarly, the European Union has concluded a free trade agreement with Vietnam that, if approved, could lead to duty reduction or elimination for footwear and apparel. +Competition +The athletic footwear, apparel and equipment industry is highly competitive on a worldwide basis. We compete internationally with a significant number of athletic and leisure footwear companies, athletic and leisure apparel companies, sports equipment companies and large companies having diversified lines of athletic and leisure footwear, apparel and equipment, including adidas, ASICS, Li Ning, lululemon athletica, Puma, V.F. Corporation and Under Armour, among others. The intense competition and the rapid changes in technology and consumer preferences in the markets for athletic and leisure footwear and apparel and athletic equipment, constitute significant risk factors in our operations. +NIKE is the largest seller of athletic footwear, apparel and equipment in the world. Important aspects of competition in this industry are: +• +Product attributes such as quality; performance and reliability; new product innovation and development and consumer price/value. +• +Consumer connection and affinity for brands and products, developed through marketing and promotion; social media interaction; customer support and service; identification with prominent and influential athletes, coaches, teams, colleges and sports leagues who endorse our brands and use our products and active engagement through sponsored sporting events and clinics. +• +Effective sourcing and distribution of products, with attractive merchandising and presentation at retail, both in-store and online. +We believe that we are competitive in all of these areas. +Trademarks and Patents +We utilize trademarks on nearly all of our products and believe having distinctive marks that are readily identifiable is an important factor in creating a market for our goods, in identifying our brands and the Company and in distinguishing our goods from the goods of others. We consider our NIKE and Swoosh Design trademarks to be among our most valuable assets and we have registered these trademarks in almost 170 jurisdictions worldwide. In addition, we own many other trademarks that we utilize in marketing our products. We own common law rights in the trade dress of several significant shoe designs and elements. For certain trade dress, we have sought and obtained trademark registrations. +We have copyright protection in our design, graphics and other original works. When appropriate, we have sought registrations for this content. +We own patents and have a patent license, facilitating our use of “Air” technologies. +4 +Table of Contents +We also file and maintain many U.S. and foreign utility patents, as well as many U.S. and foreign design patents protecting components, manufacturing techniques, features and industrial design used in various athletic and leisure footwear and apparel, athletic equipment, digital devices and golf products. These patents expire at various times; patents issued for original applications filed this calendar year in the United States may last until 2031 for design patents and until 2036 for utility patents. +We believe our success depends upon our capabilities in areas such as design, research and development, production and marketing rather than exclusively upon our patent and trade secret positions. However, we have followed a policy of filing patent applications for the United States and select foreign countries on inventions, designs and improvements that we deem valuable. We also continue to vigorously protect our trademarks and patents against third-party infringement. +Employees +As of May 31, 2016 , we had approximately 70,700 employees worldwide, including retail and part-time employees. Management considers its relationship with employees to be excellent. None of our employees are represented by a union, except for certain employees in the Emerging Markets geography, where local law requires those employees to be represented by a trade union. Also, in some countries outside of the United States, local laws require employee representation by works councils (which may be entitled to information and consultation on certain Company decisions) or by organizations similar to a union. In certain European countries, we are required by local law to enter into and/or comply with industry-wide or national collective bargaining agreements. NIKE has never experienced a material interruption of operations due to labor disagreements. +Executive Officers of the Registrant +The executive officers of NIKE, Inc. as of July 15, 2016 are as follows: +Mark G. Parker, Chairman, President and Chief Executive Officer — Mr. Parker, 60, was appointed President and Chief Executive Officer in January 2006 and named Chairman of the Board in June 2016. He has been employed by NIKE since 1979 with primary responsibilities in product research, design and development, marketing and brand management. Mr. Parker was appointed divisional Vice President in charge of product development in 1987, corporate Vice President in 1989, General Manager in 1993, Vice President of Global Footwear in 1998 and President of the NIKE Brand in 2001. +Chris L. Abston, Vice President and Corporate Controller — Mr. Abston, 53, joined NIKE in 2015 from Wal-Mart Stores, Inc., where he served as Vice President, Global Controls and Governance since February 2015. Prior to that he was Vice President and Controller of Walmart International from February 2013 to January 2015, responsible for the oversight of international accounting and reporting, and Vice President and Assistant Controller of Wal-Mart Stores, Inc. from May 2011 to January 2013. Before joining Wal-Mart, Mr. Abston spent 25 years in public accounting with Ernst & Young LLP, most recently leading its Strategic Growth Markets practice as a Partner in the Dallas office. +David J. Ayre, Executive Vice President, Global Human Resources — Mr. Ayre, 56, joined NIKE as Vice President, Global Human Resources in 2007. Prior to joining NIKE, he held a number of senior human resource positions with PepsiCo, Inc. since 1990, most recently as head of Talent and Performance Rewards. +Andrew Campion, Executive Vice President and Chief Financial Officer — Mr. Campion, 44, joined NIKE in 2007 as Vice President of Global Planning and Development, leading strategic and financial planning. He was appointed Chief Financial Officer of the NIKE Brand in 2010, responsible for leading all aspects of financial management for the Company's flagship brand. In 2014, he was appointed Senior Vice President, Strategy, Finance and Investor Relations in addition to his role as Chief Financial Officer of NIKE Brand. Mr. Campion assumed the role of Executive Vice President and Chief Financial Officer in August 2015. Prior to joining NIKE, he held leadership roles in strategic planning, mergers and acquisitions, financial planning and analysis, operations and planning, investor relations and tax at The Walt Disney Company from 1996 to 2007. +Trevor A. Edwards, President, NIKE Brand — Mr. Edwards, 53, joined NIKE in 1992. He was appointed Marketing Manager, Strategic Accounts for Foot Locker in 1993, Director of Marketing for the Americas in 1995, Director of Marketing for Europe in 1997, Vice President, Marketing for Europe, Middle East and Africa in 1999 and Vice President, U.S. Brand Marketing in 2000. Mr. Edwards was appointed corporate Vice President, Global Brand Management in 2002, Vice President, Global Brand and Category Management in 2006 and President, NIKE Brand in 2013. Prior to NIKE, Mr. Edwards was with the Colgate-Palmolive Company. +Jeanne P. Jackson, President & Strategic Advisor — Ms. Jackson, 64, joined NIKE in 2009. She was appointed President & Strategic Advisor in June 2016. She was appointed President, Product and Merchandising in 2013 and President, Direct to Consumer in 2009. Ms. Jackson also served as a member of the NIKE, Inc. Board of Directors from 2001 through 2009. She founded and served as Chief Executive Officer of MSP Capital, a private investment company, from 2002 to 2009. Ms. Jackson was Chief Executive Officer of Walmart.com from March 2000 to January 2002. She was with Gap, Inc., as President and Chief Executive Officer of Banana Republic from 1995 to 2000, also serving as Chief Executive Officer of Gap, Inc. Direct from 1998 to 2000. Since 1978, she has held various retail management positions with Victoria’s Secret, The Walt Disney Company, Saks Fifth Avenue and Federated Department Stores. +Hilary K. Krane, Executive Vice President, Chief Administrative Officer and General Counsel — Ms. Krane, 52, joined NIKE as Vice President and General Counsel in April 2010. In 2011, her responsibilities expanded and she became Vice President, General Counsel and Corporate Affairs. Ms. Krane was appointed Executive Vice President, Chief Administrative Officer and General Counsel in 2013. Prior to joining NIKE, Ms. Krane was General Counsel and Senior Vice President for Corporate Affairs at Levi Strauss & Co. from 2006 to 2010. From 1996 to 2006, she was a partner and assistant general counsel at PricewaterhouseCoopers LLP. +John F. Slusher, Executive Vice President, Global Sports Marketing — Mr. Slusher, 47, has been employed by NIKE since 1998 with primary responsibilities in global sports marketing. Mr. Slusher was appointed Director of Sports Marketing for the Asia Pacific and Americas in 2006, divisional Vice President of Asia Pacific & Americas Sports Marketing in September 2007 and Vice President, Global Sports Marketing in November 2007. Prior to joining NIKE, Mr. Slusher was an attorney at the law firm of O’Melveny & Myers from 1995 to 1998. +Michael Spillane, President, Product and Merchandising — Mr. Spillane, 56, joined NIKE in 2007. He was appointed President, Product and Merchandising in 2016. He has served the Company in various roles including Vice President and General Manager of Greater China, Chief Executive Officer of Umbro and Converse and most recently as Vice President and General Manager of Footwear. Prior to joining NIKE, Mr. Spillane held leadership roles at Polartec, Maiden Mills Industries, Inc. and Tommy Hilfiger Licensing, LLC. +5 +Table of Contents +Eric D. Sprunk, Chief Operating Officer — Mr. Sprunk, 52, joined NIKE in 1993. He was appointed Finance Director and General Manager of the Americas in 1994, Finance Director for NIKE Europe in 1995, Regional General Manager of NIKE Europe Footwear in 1998 and Vice President & General Manager of the Americas in 2000. Mr. Sprunk was appointed Vice President of Global Footwear in 2001, Vice President of Merchandising and Product in 2009 and Chief Operating Officer in 2013. Prior to joining NIKE, Mr. Sprunk was a certified public accountant with Price Waterhouse from 1987 to 1993. +6 +Table of Contents +ITEM 1A. Risk Factors +Special Note Regarding Forward-Looking Statements and Analyst Reports +Certain written and oral statements, other than purely historic information, including estimates, projections, statements relating to NIKE’s business plans, objectives and expected operating results and the assumptions upon which those statements are based, made or incorporated by reference from time to time by NIKE or its representatives in this report, other reports, filings with the SEC, press releases, conferences or otherwise, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements include, without limitation, any statement that may predict, forecast, indicate or imply future results, performance or achievements, and may contain the words “believe,” “anticipate,” “expect,” “estimate,” “project,” “will be,” “will continue,” “will likely result” or words or phrases of similar meaning. Forward-looking statements involve risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. The risks and uncertainties are detailed from time to time in reports filed by NIKE with the SEC, including reports filed on Forms 8-K, 10-Q and 10-K, and include, among others, the following: international, national and local general economic and market conditions; the size and growth of the overall athletic footwear, apparel and equipment markets; intense competition among designers, marketers, distributors and sellers of athletic footwear, apparel and equipment for consumers and endorsers; demographic changes; changes in consumer preferences; popularity of particular designs, categories of products and sports; seasonal and geographic demand for NIKE products; difficulties in anticipating or forecasting changes in consumer preferences, consumer demand for NIKE products and the various market factors described above; difficulties in implementing, operating and maintaining NIKE’s increasingly complex information systems and controls, including, without limitation, the systems related to demand and supply planning and inventory control; interruptions in data and information technology systems; consumer data security; fluctuations and difficulty in forecasting operating results, including, without limitation, the fact that advance futures orders may not be indicative of future revenues due to changes in shipment timing, the changing mix of futures and at-once orders, and discounts, order cancellations and returns; the ability of NIKE to sustain, manage or forecast its growth and inventories; the size, timing and mix of purchases of NIKE’s products; increases in the cost of materials, labor and energy used to manufacture products; new product development and introduction; the ability to secure and protect trademarks, patents and other intellectual property; product performance and quality; customer service; adverse publicity; the loss of significant customers or suppliers; dependence on distributors and licensees; business disruptions; increased costs of freight and transportation to meet delivery deadlines; increases in borrowing costs due to any decline in NIKE's debt ratings; changes in business strategy or development plans; general risks associated with doing business outside the United States, including, without limitation, exchange rate fluctuations, import duties, tariffs, quotas, political and economic instability and terrorism; changes in government regulations; the impact of, including business and legal developments relating to, climate change, natural disasters, liability and other claims asserted against NIKE; the ability to attract and retain qualified personnel; the effects of NIKE's decision to invest in or divest of businesses and other factors referenced or incorporated by reference in this report and other reports. +The risks included here are not exhaustive. Other sections of this report may include additional factors which could adversely affect NIKE’s business and financial performance. Moreover, NIKE operates in a very competitive and rapidly changing environment. New risks emerge from time to time and it is not possible for management to predict all such risks, nor can it assess the impact of all such risks on NIKE’s business or the extent to which any risk, or combination of risks, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results. +Investors should also be aware that while NIKE does, from time to time, communicate with securities analysts, it is against NIKE’s policy to disclose to them any material non-public information or other confidential commercial information. Accordingly, shareholders should not assume that NIKE agrees with any statement or report issued by any analyst irrespective of the content of the statement or report. Furthermore, NIKE has a policy against issuing or confirming financial forecasts or projections issued by others. Thus, to the extent that reports issued by securities analysts contain any projections, forecasts or opinions, such reports are not the responsibility of NIKE. +Our products face intense competition. +NIKE is a consumer products company and the relative popularity of various sports and fitness activities and changing design trends affect the demand for our products. The athletic footwear, apparel and equipment industry is highly competitive both in the United States and worldwide. We compete internationally with a significant number of athletic and leisure footwear companies, athletic and leisure apparel companies, sports equipment companies and large companies having diversified lines of athletic and leisure footwear, apparel and equipment. We also compete with other companies for the production capacity of independent manufacturers that produce our products. +Product offerings, technologies, marketing expenditures (including expenditures for advertising and endorsements), pricing, costs of production, customer service and social media presence are areas of intense competition. This, in addition to rapid changes in technology and consumer preferences in the markets for athletic and leisure footwear and apparel and athletic equipment, constitute significant risk factors in our operations. If we do not adequately and timely anticipate and respond to our competitors, our costs may increase or the consumer demand for our products may decline significantly. +Failure to maintain our reputation and brand image could negatively impact our business. +Our iconic brands have worldwide recognition, and our success depends on our ability to maintain and enhance our brand image and reputation. Maintaining, promoting and growing our brands will depend on our design and marketing efforts, including advertising and consumer campaigns, product innovation and product quality. Our commitment to product innovation and quality and our continuing investment in design (including materials) and marketing may not have the desired impact on our brand image and reputation. We could be adversely impacted if we fail to achieve any of these objectives or if the reputation or image of any of our brands is tarnished or receives negative publicity. In addition, adverse publicity about regulatory or legal action against us, or by us, could damage our reputation and brand image, undermine consumer confidence in us and reduce long-term demand for our products, even if the regulatory or legal action is unfounded or not material to our operations. +In addition, our success in maintaining, extending and expanding our brand image depends on our ability to adapt to a rapidly changing media environment, including our increasing reliance on social media and digital dissemination of advertising campaigns. Negative posts or comments about us on social networking websites could seriously damage our reputation and brand image. If we do not maintain, extend and expand our brand image, then our product sales, financial condition and results of operations could be materially and adversely affected. +7 +Table of Contents +If we are unable to anticipate consumer preferences and develop new products, we may not be able to maintain or increase our revenues and profits. +Our success depends on our ability to identify, originate and define product trends as well as to anticipate, gauge and react to changing consumer demands in a timely manner. However, lead times for many of our products may make it more difficult for us to respond rapidly to new or changing product trends or consumer preferences. All of our products are subject to changing consumer preferences that cannot be predicted with certainty. Our new products may not receive consumer acceptance as consumer preferences could shift rapidly to different types of performance products or away from these types of products altogether, and our future success depends in part on our ability to anticipate and respond to these changes. If we fail to anticipate accurately and respond to trends and shifts in consumer preferences by adjusting the mix of existing product offerings, developing new products, designs, styles and categories, and influencing sports and fitness preferences through aggressive marketing, we could experience lower sales, excess inventories or lower profit margins, any of which could have an adverse effect on our results of operations and financial condition. In addition, we market our products globally through a diverse spectrum of advertising and promotional programs and campaigns, including social media and online advertising. If we do not successfully market our products or if advertising and promotional costs increase, these factors could have an adverse effect on our business, financial condition and results of operations. +We rely on technical innovation and high-quality products to compete in the market for our products. +Technical innovation and quality control in the design and manufacturing process of footwear, apparel and athletic equipment is essential to the commercial success of our products. Research and development plays a key role in technical innovation. We rely upon specialists in the fields of biomechanics, chemistry, exercise physiology, engineering, industrial design, sustainability and related fields, as well as research committees and advisory boards made up of athletes, coaches, trainers, equipment managers, orthopedists, podiatrists and other experts to develop and test cutting edge performance products. While we strive to produce products that help to enhance athletic performance, reduce injury and maximize comfort, if we fail to introduce technical innovation in our products, consumer demand for our products could decline, and if we experience problems with the quality of our products, we may incur substantial expense to remedy the problems. +Failure to continue to obtain or maintain high-quality endorsers of our products could harm our business. +We establish relationships with professional athletes, sports teams and leagues to develop, evaluate and promote our products, as well as establish product authenticity with consumers. However, as competition in our industry has increased, the costs associated with establishing and retaining such sponsorships and other relationships have increased. If we are unable to maintain our current associations with professional athletes, sports teams and leagues, or to do so at a reasonable cost, we could lose the on-field authenticity associated with our products, and we may be required to modify and substantially increase our marketing investments. As a result, our brands, net revenues, expenses and profitability could be harmed. +Furthermore, if certain endorsers were to stop using our products contrary to their endorsement agreements, our business could be adversely affected. In addition, actions taken by athletes, teams or leagues associated with our products that harm the reputations of those athletes, teams or leagues, could also seriously harm our brand image with consumers and, as a result, could have an adverse effect on our sales and financial condition. In addition, poor performance by our endorsers, a failure to continue to correctly identify promising athletes to use and endorse our products or a failure to enter into cost-effective endorsement arrangements with prominent athletes and sports organizations could adversely affect our brand, sales and profitability. +Currency exchange rate fluctuations could result in lower revenues, higher costs and decreased margins and earnings. +A majority of our products are manufactured and sold outside of the United States. As a result, we conduct purchase and sale transactions in various currencies, which increases our exposure to fluctuations in foreign currency exchange rates globally. Additionally, there has been, and may continue to be, volatility in currency exchange rates as a result of the United Kingdom's June 23, 2016 referendum in which voters approved the United Kingdom's exit from the European Union, commonly referred to as “Brexit.” Our international revenues and expenses generally are derived from sales and operations in foreign currencies, and these revenues and expenses could be affected by currency fluctuations, specifically amounts recorded in foreign currencies and translated into U.S. Dollars for consolidated financial reporting, as weakening of foreign currencies relative to the U.S. Dollar adversely affects the U.S. Dollar value of the Company's foreign currency-denominated sales and earnings. Currency exchange rate fluctuations could also disrupt the business of the independent manufacturers that produce our products by making their purchases of raw materials more expensive and more difficult to finance. Foreign currency fluctuations have adversely affected and could continue to have an adverse effect on our results of operations and financial condition. +We may hedge certain foreign currency exposures to lessen and delay, but not to completely eliminate, the effects of foreign currency fluctuations on our financial results. Since the hedging activities are designed to lessen volatility, they not only reduce the negative impact of a stronger U.S. Dollar or other trading currency, but they also reduce the positive impact of a weaker U.S. Dollar or other trading currency. Our future financial results could be significantly affected by the value of the U.S. Dollar in relation to the foreign currencies in which we conduct business. The degree to which our financial results are affected for any given time period will depend in part upon our hedging activities. +8 +Table of Contents +Global economic conditions could have a material adverse effect on our business, operating results and financial condition. +The uncertain state of the global economy continues to impact businesses around the world, most acutely in emerging markets and developing economies. If global economic and financial market conditions do not improve or deteriorate, the following factors could have a material adverse effect on our business, operating results and financial condition: +• +Slower consumer spending may result in reduced demand for our products, reduced orders from retailers for our products, order cancellations, lower revenues, higher discounts, increased inventories and lower gross margins. +• +In the future, we may be unable to access financing in the credit and capital markets at reasonable rates in the event we find it desirable to do so. +• +We conduct transactions in various currencies, which increases our exposure to fluctuations in foreign currency exchange rates relative to the U.S. Dollar. Continued volatility in the markets and exchange rates for foreign currencies and contracts in foreign currencies could have a significant impact on our reported operating results and financial condition. +• +Continued volatility in the availability and prices for commodities and raw materials we use in our products and in our supply chain (such as cotton or petroleum derivatives) could have a material adverse effect on our costs, gross margins and profitability. +• +If retailers of our products experience declining revenues or experience difficulty obtaining financing in the capital and credit markets to purchase our products, this could result in reduced orders for our products, order cancellations, late retailer payments, extended payment terms, higher accounts receivable, reduced cash flows, greater expense associated with collection efforts and increased bad debt expense. +• +If retailers of our products experience severe financial difficulty, some may become insolvent and cease business operations, which could negatively impact the sale of our products to consumers. +• +If contract manufacturers of our products or other participants in our supply chain experience difficulty obtaining financing in the capital and credit markets to purchase raw materials or to finance capital equipment and other general working capital needs, it may result in delays or non-delivery of shipments of our products. +Our business is affected by seasonality, which could result in fluctuations in our operating results. +We experience moderate fluctuations in aggregate sales volume during the year. Historically, revenues in the first and fourth fiscal quarters have slightly exceeded those in the second and third fiscal quarters. However, the mix of product sales may vary considerably from time to time as a result of changes in seasonal and geographic demand for particular types of footwear, apparel and equipment and in connection with the timing of significant sporting events, including without limitation the Olympics and the European football championship. In addition, our customers may cancel orders, change delivery schedules or change the mix of products ordered with minimal notice. As a result, we may not be able to accurately predict our quarterly sales. Accordingly, our results of operations are likely to fluctuate significantly from period to period. This seasonality, along with other factors that are beyond our control, including general economic conditions, changes in consumer preferences, weather conditions, availability of import quotas, transportation disruptions and currency exchange rate fluctuations, could adversely affect our business and cause our results of operations to fluctuate. Our operating margins are also sensitive to a number of additional factors that are beyond our control, including manufacturing and transportation costs, shifts in product sales mix and geographic sales trends, all of which we expect to continue. Results of operations in any period should not be considered indicative of the results to be expected for any future period. +Futures orders may not be an accurate indication of our future revenues. +We make substantial use of our futures ordering program, which allows retailers to order five to six months in advance of delivery with the commitment that their orders will be delivered within a set period of time at a fixed price. Our futures ordering program allows us to minimize the amount of products we hold in inventory, purchasing costs, the time necessary to fill customer orders and the risk of non-delivery. We report changes in futures orders in our periodic financial reports. Although we believe futures orders are an important indicator of our future revenues, reported futures orders are not necessarily indicative of our expectation of revenues for any future period. This is due to year-over-year changes in shipment timing, changes in the mix of orders between futures and at-once orders and because the fulfillment of certain orders may fall outside of the schedule noted above. In addition, foreign currency exchange rate fluctuations, as well as differing levels of order cancellations, discounts and returns can cause differences in the comparisons between futures orders and actual revenues. Moreover, a portion of our revenue is not derived from futures orders, including sales of at-once and closeout NIKE Brand footwear and apparel, all sales of NIKE Brand equipment, the difference between retail sales and internal orders from our Direct to Consumer in-line stores and e-commerce operations, and sales from Converse, NIKE Golf and Hurley. +Our futures ordering program does not prevent excess inventories or inventory shortages, which could result in decreased operating margins, reduced cash flows and harm to our business. +We purchase products from manufacturers outside of our futures ordering program and in advance of customer orders, which we hold in inventory and resell to customers. There is a risk we may be unable to sell excess products ordered from manufacturers. Inventory levels in excess of customer demand may result in inventory write-downs, and the sale of excess inventory at discounted prices could significantly impair our brand image and have an adverse effect on our operating results, financial condition and cash flows. Conversely, if we underestimate consumer demand for our products or if our manufacturers fail to supply products we require at the time we need them, we may experience inventory shortages. Inventory shortages might delay shipments to customers, negatively impact retailer and distributor relationships and diminish brand loyalty. +The difficulty in forecasting demand also makes it difficult to estimate our future results of operations, financial condition and cash flows from period to period. A failure to accurately predict the level of demand for our products could adversely affect our net revenues and net income, and we are unlikely to forecast such effects with any certainty in advance. +9 +Table of Contents +We may be adversely affected by the financial health of our customers. +We extend credit to our customers based on an assessment of a customer’s financial condition, generally without requiring collateral. To assist in the scheduling of production and the shipping of seasonal products, we offer customers the ability to place orders five to six months ahead of delivery under our futures ordering program. These advance orders may be canceled, and the risk of cancellation may increase when dealing with financially unstable retailers or retailers struggling with economic uncertainty. In the past, some customers have experienced financial difficulties up to and including bankruptcies, which have had an adverse effect on our sales, our ability to collect on receivables and our financial condition. When the retail economy weakens, retailers may be more cautious with orders. A slowing economy in our key markets could adversely affect the financial health of our customers, which in turn could have an adverse effect on our results of operations and financial condition. In addition, product sales are dependent in part on high quality merchandising and an appealing store environment to attract consumers, which requires continuing investments by retailers. Retailers that experience financial difficulties may fail to make such investments or delay them, resulting in lower sales and orders for our products. +Consolidation of retailers or concentration of retail market share among a few retailers may increase and concentrate our credit risk and impair our ability to sell products. +The athletic footwear, apparel and equipment retail markets in some countries are dominated by a few large athletic footwear, apparel and equipment retailers with many stores. These retailers have in the past increased their market share and may continue to do so in the future by expanding through acquisitions and construction of additional stores. These situations concentrate our credit risk with a relatively small number of retailers, and, if any of these retailers were to experience a shortage of liquidity, it would increase the risk that their outstanding payables to us may not be paid. In addition, increasing market share concentration among one or a few retailers in a particular country or region increases the risk that if any one of them substantially reduces their purchases of our products, we may be unable to find a sufficient number of other retail outlets for our products to sustain the same level of sales and revenues. +Our Direct to Consumer operations have required and will continue to require a substantial investment and commitment of resources and are subject to numerous risks and uncertainties. +Our Direct to Consumer stores have required substantial fixed investment in equipment and leasehold improvements, information systems, inventory and personnel. We have entered into substantial operating lease commitments for retail space. Certain stores have been designed and built to serve as high-profile venues to promote brand awareness and marketing activities. Because of their unique design elements, locations and size, these stores require substantially more investment than other stores. Due to the high fixed-cost structure associated with our Direct to Consumer operations, a decline in sales or the closure or poor performance of individual or multiple stores could result in significant lease termination costs, write-offs of equipment and leasehold improvements and employee-related costs. +Many factors unique to retail operations, some of which are beyond the Company’s control, pose risks and uncertainties. Risks include, but are not limited to: credit card fraud; mismanagement of existing retail channel partners; and inability to manage costs associated with store construction and operation. In addition, extreme weather conditions in the areas in which our stores are located could adversely affect our business. +If the technology-based systems that give our customers the ability to shop with us online do not function effectively, our operating results, as well as our ability to grow our e-commerce business globally, could be materially adversely affected. +Many of our customers shop with us through our e-commerce website and mobile commerce applications. Increasingly, customers are using tablets and smart phones to shop online with us and with our competitors and to do comparison shopping. We are increasingly using social media and proprietary mobile applications to interact with our customers and as a means to enhance their shopping experience. Any failure on our part to provide attractive, effective, reliable, user-friendly e-commerce platforms that offer a wide assortment of merchandise with rapid delivery options and that continually meet the changing expectations of online shoppers could place us at a competitive disadvantage, result in the loss of e-commerce and other sales, harm our reputation with customers, have a material adverse impact on the growth of our e-commerce business globally and could have a material adverse impact on our business and results of operations. +Risks specific to our e-commerce business also include diversion of sales from our and our retailers' brick and mortar stores, difficulty in recreating the in-store experience through direct channels and liability for online content. Our failure to successfully respond to these risks might adversely affect sales in our e-commerce business, as well as damage our reputation and brands. +Failure to adequately protect or enforce our intellectual property rights could adversely affect our business. +We believe that our intellectual property rights are important to our brand, our success and our competitive position. We periodically discover products that are counterfeit reproductions of our products or that otherwise infringe on our intellectual property rights. If we are unsuccessful in enforcing our intellectual property, continued sales of these products could adversely affect our sales and our brand and could result in a shift of consumer preference away from our products. +The actions we take to establish and protect our intellectual property rights may not be adequate to prevent imitation of our products by others or to prevent others from seeking to block sales of our products as violations of proprietary rights. +We may be subject to liability if third parties successfully claim that we infringe on their intellectual property rights. Defending infringement claims could be expensive and time-consuming and might result in our entering into costly license agreements. We also may be subject to significant damages or injunctions against development, use, importation and/or sale of certain products. +We take various actions to prevent the unauthorized use and/or disclosure of confidential information. Such actions include contractual measures such as entering into non-disclosure and non-compete agreements and providing confidential information awareness training. Our controls and efforts to prevent unauthorized use and/or disclosure of confidential information might not always be effective. Confidential information that is related to business strategy, new technologies, mergers and acquisitions, unpublished financial results or personal data could be prematurely or inadvertently used and/or disclosed, resulting in a loss of reputation, a decline in our stock price and/or a negative impact on our market position, and could lead to damages, fines, penalties or injunctions. +10 +Table of Contents +In addition, the laws of certain countries may not protect or allow enforcement of intellectual property rights to the same extent as the laws of the United States. We may face significant expenses and liability in connection with the protection of our intellectual property rights, including outside the United States, and if we are unable to successfully protect our rights or resolve intellectual property conflicts with others, our business or financial condition may be adversely affected. +We are subject to the risk that our licensees may not generate expected sales or maintain the value of our brands. +We currently license, and expect to continue licensing, certain of our proprietary rights, such as trademarks or copyrighted material, to third parties. If our licensees fail to successfully market and sell licensed products, or fail to obtain sufficient capital or effectively manage their business operations, customer relationships, labor relationships, supplier relationships or credit risks, it could adversely affect our revenues, both directly from reduced royalties received and indirectly from reduced sales of our other products. +We also rely on our licensees to help preserve the value of our brands. Although we attempt to protect our brands through approval rights over the design, production processes, quality, packaging, merchandising, distribution, advertising and promotion of our licensed products, we cannot completely control the use of our licensed brands by our licensees. The misuse of a brand by a licensee could have a material adverse effect on that brand and on us. +We are subject to data security and privacy risks that could negatively affect our results, operations or reputation. +In addition to our own sensitive and proprietary business information, we collect transactional and personal information about our customers and users of our digital experiences, which include online distribution channels and product engagement and personal fitness applications. Hackers and data thieves are increasingly sophisticated and operate large-scale and complex automated attacks. Any breach of our network may result in the loss of valuable business data, misappropriation of our consumers’, users' or employees’ personal information or a disruption of our business, which could give rise to unwanted media attention, materially damage our consumers, customer relationships and our reputation and result in lost sales, lost users, fines, or lawsuits. We also may need to expend significant resources to protect against, respond to and/or redress problems caused by any breach. +In addition, we must comply with increasingly complex and rigorous regulatory standards enacted to protect business and personal data. Compliance with existing and proposed laws and regulations can be costly, and any failure to comply with these regulatory standards could subject us to legal and reputational risks. Misuse of or failure to secure personal information could also result in violation of data privacy laws and regulations, proceedings against the Company by governmental entities or others, damage to our reputation and credibility and could have a negative impact on revenues and profits. +Failure of our contractors or our licensees’ contractors to comply with our code of conduct, local laws and other standards could harm our business. +We work with hundreds of contractors outside of the United States to manufacture our products, and we also have license agreements that permit unaffiliated parties to manufacture or contract for the manufacture of products using our intellectual property. We require the contractors that directly manufacture our products and our licensees that make products using our intellectual property (including, indirectly, their contract manufacturers) to comply with a code of conduct and other environmental, health and safety standards for the benefit of workers. We also require these contractors to comply with applicable standards for product safety. Notwithstanding their contractual obligations, from time to time contractors may not comply with such standards or applicable local law or our licensees may fail to enforce such standards or applicable local law on their contractors. Significant or continuing noncompliance with such standards and laws by one or more contractors could harm our reputation or result in a product recall and, as a result, could have an adverse effect on our sales and financial condition. +Our international operations involve inherent risks which could result in harm to our business. +Virtually all of our athletic footwear and apparel is manufactured outside of the United States, and the majority of our products are sold outside of the United States. Accordingly, we are subject to the risks generally associated with global trade and doing business abroad, which include foreign laws and regulations, varying consumer preferences across geographic regions, political unrest, disruptions or delays in cross-border shipments and changes in economic conditions in countries in which our products are manufactured or where we sell products. This includes, for example, the uncertainty surrounding the implementation and effect of Brexit, including changes to the legal and regulatory framework that apply to the United Kingdom and its relationship with the European Union. In addition, disease outbreaks, terrorist acts and military conflict have increased the risks of doing business abroad. These factors, among others, could affect our ability to manufacture products or procure materials, our ability to import products, our ability to sell products in international markets and our cost of doing business. If any of these or other factors make the conduct of business in a particular country undesirable or impractical, our business could be adversely affected. In addition, many of our imported products are subject to duties, tariffs or quotas that affect the cost and quantity of various types of goods imported into the United States and other countries. Any country in which our products are produced or sold may eliminate, adjust or impose new quotas, duties, tariffs, safeguard measures, anti-dumping duties, cargo restrictions to prevent terrorism, restrictions on the transfer of currency, climate change legislation, product safety regulations or other charges or restrictions, any of which could have an adverse effect on our results of operations and financial condition. +We could be subject to changes in tax rates, adoption of new tax laws or additional tax liabilities. +We are subject to the tax laws in the United States and numerous foreign jurisdictions. Current economic and political conditions make tax rules in any jurisdiction, including the United States, subject to significant change. There have been proposals to reform U.S. and foreign tax laws that could significantly impact how U.S. multinational corporations are taxed on foreign earnings. Although we cannot predict whether or in what form these proposals will pass, several of the proposals considered, if enacted into law, could have an adverse impact on our income tax expense and cash flows. We earn a substantial portion of our income in foreign countries and are subject to the tax laws of those jurisdictions. If our capital or financing needs in the United States require us to repatriate earnings from foreign jurisdictions above our current levels, our effective income tax rates for the affected periods could be negatively impacted. +11 +Table of Contents +Portions of our operations are subject to a reduced tax rate or are free of tax under various tax holidays and rulings that expire in whole or in part from time to time. These tax holidays and rulings may be extended when certain conditions are met, or terminated if certain conditions are not met. If the tax holidays and rulings are not extended, or if we fail to satisfy the conditions of the reduced tax rate, our future effective income tax rate would increase in the future. +We are also subject to the examination of our tax returns by the United States Internal Revenue Service (“IRS”) and other tax authorities. We regularly assess the likelihood of an adverse outcome resulting from these examinations to determine the adequacy of its provision for income taxes. Although we believe our tax provisions are adequate, the final determination of tax audits and any related disputes could be materially different from our historical income tax provisions and accruals. The results of audits or related disputes could have an adverse effect on our financial statements for the period or periods for which the applicable final determinations are made. For example, the IRS has assessed additional tax liabilities for 2011 and 2012 related to a foreign tax credit matter. We are currently contesting the matter in U.S. Tax Court. In addition to the risk of additional tax for these years, if this litigation is adversely determined and the IRS was to seek similar adjustments in subsequent years, we could be subject to significant additional tax liabilities. Additionally, we and our subsidiaries are engaged in a number of intercompany transactions across multiple tax jurisdictions. Although we believe we have clearly reflected the economics of these transactions and the proper local transfer pricing documentation is in place, tax authorities may propose and sustain adjustments that could result in changes that may impact our mix of earnings in countries with differing statutory tax rates. +If one or more of our counterparty financial institutions default on their obligations to us or fail, we may incur significant losses. +As part of our hedging activities, we enter into transactions involving derivative financial instruments, which may include forward contracts, commodity futures contracts, option contracts, collars and swaps with various financial institutions. In addition, we have significant amounts of cash, cash equivalents and other investments on deposit or in accounts with banks or other financial institutions in the United States and abroad. As a result, we are exposed to the risk of default by or failure of counterparty financial institutions. The risk of counterparty default or failure may be heightened during economic downturns and periods of uncertainty in the financial markets. If one of our counterparties were to become insolvent or file for bankruptcy, our ability to recover losses incurred as a result of default or our assets that are deposited or held in accounts with such counterparty may be limited by the counterparty’s liquidity or the applicable laws governing the insolvency or bankruptcy proceedings. In the event of default or failure of one or more of our counterparties, we could incur significant losses, which could negatively impact our results of operations and financial condition. +We rely on a concentrated source base of contract manufacturers to supply a significant portion of our footwear products. +NIKE is supplied by approximately 142 footwear factories located in 15 countries. We do not own or operate any of our own footwear manufacturing facilities and depend upon independent contract manufacturers to manufacture all of the footwear products we sell. In fiscal 2016 , five footwear contract manufacturers each accounted for greater than 10% of fiscal 2016 footwear production and in aggregate accounted for approximately 69% of NIKE Brand footwear production in fiscal 2016 . Our ability to meet our customers' needs depends on our ability to maintain a steady supply of products from our independent contract manufacturers. If one or more of our significant suppliers were to sever their relationship with us or significantly alter the terms of our relationship, we may not be able to obtain replacement products in a timely manner, which could have a material adverse effect on our sales, financial condition or results of operations. Additionally, if any of our primary contract manufacturers fail to make timely shipments, do not meet our quality standards or otherwise fail to deliver us product in accordance with our plans, there could be a material adverse effect on our results of operations. +Our products are subject to risks associated with overseas sourcing, manufacturing and financing. +The principal materials used in our apparel products — natural and synthetic fabrics and threads, specialized performance fabrics designed to efficiently wick moisture away from the body, retain heat or repel rain and/or snow as well as plastic and metal hardware — are available in countries where our manufacturing takes place. The principal materials used in our footwear products — natural and synthetic rubber, plastic compounds, foam cushioning materials, natural and synthetic leather, natural and synthetic fabrics and threads, nylon, canvas and polyurethane films — are also locally available to manufacturers. Both our apparel and footwear products are dependent upon the ability of our unaffiliated contract manufacturers to locate, train, employ and retain adequate personnel. NIKE contractors and suppliers buy raw materials and are subject to wage rates that are oftentimes regulated by the governments of the countries in which our products are manufactured. +There could be a significant disruption in the supply of fabrics or raw materials from current sources or, in the event of a disruption, our contract manufacturers might not be able to locate alternative suppliers of materials of comparable quality at an acceptable price or at all. Further, our unaffiliated contract manufacturers have experienced and may continue to experience in the future, unexpected increases in work wages, whether government mandated or otherwise and increases in compliance costs due to governmental regulation concerning certain metals used in the manufacturing of our products. In addition, we cannot be certain that our unaffiliated manufacturers will be able to fill our orders in a timely manner. If we experience significant increases in demand, or reductions in the availability of materials, or need to replace an existing manufacturer, there can be no assurance that additional supplies of fabrics or raw materials or additional manufacturing capacity will be available when required on terms that are acceptable to us, or at all, or that any supplier or manufacturer would allocate sufficient capacity to us in order to meet our requirements. In addition, even if we are able to expand existing or find new manufacturing or sources of materials, we may encounter delays in production and added costs as a result of the time it takes to train suppliers and manufacturers in our methods, products, quality control standards and labor, health and safety standards. Any delays, interruption or increased costs in labor or wages, or the supply of materials or manufacture of our products could have an adverse effect on our ability to meet retail customer and consumer demand for our products and result in lower revenues and net income both in the short- and long-term. +Because independent manufacturers make a majority of our products outside of our principal sales markets, our products must be transported by third parties over large geographic distances. Delays in the shipment or delivery of our products due to the availability of transportation, work stoppages, port strikes, infrastructure congestion or other factors, and costs and delays associated with consolidating or transitioning between manufacturers, could adversely impact our financial performance. In addition, manufacturing delays or unexpected demand for our products may require us to use faster, but more expensive, transportation methods such as air freight, which could adversely affect our profit margins. The cost of oil is a significant component in manufacturing and transportation costs, so increases in the price of petroleum products can adversely affect our profit margins. +12 +Table of Contents +In addition, Sojitz America performs significant import-export financing services for the Company. During fiscal 2016, Sojitz America provided financing and purchasing services for NIKE Brand products sold in certain NIKE markets including Argentina, Uruguay, Brazil, Canada, India, South Africa and Thailand (collectively the “Sojitz Markets”), excluding products produced and sold in the same country. Any failure of Sojitz America to provide these services or any failure of Sojitz America’s banks could disrupt our ability to acquire products from our suppliers and to deliver products to our customers in the Sojitz Markets. Such a disruption could result in canceled orders that would adversely affect sales and profitability. +Our success depends on our global distribution facilities. +We distribute our products to customers directly from the factory and through distribution centers located throughout the world. Our ability to meet customer expectations, manage inventory, complete sales and achieve objectives for operating efficiencies and growth, particularly in emerging markets, depends on the proper operation of our distribution facilities, the development or expansion of additional distribution capabilities and the timely performance of services by third parties (including those involved in shipping product to and from our distribution facilities). Our distribution facilities could be interrupted by information technology problems and disasters such as earthquakes or fires. Any significant failure in our distribution facilities could result in an adverse effect on our business. We maintain business interruption insurance, but it may not adequately protect us from adverse effects that could be caused by significant disruptions in our distribution facilities. +We rely significantly on information technology to operate our business, including our supply chain and retail operations, and any failure, inadequacy or interruption of that technology could harm our ability to effectively operate our business. +We are heavily dependent on information technology systems and networks, including the Internet and third-party hosted services (“information technology systems”), across our supply chain, including product design, production, forecasting, ordering, manufacturing, transportation, sales and distribution, as well as for processing financial information for external and internal reporting purposes, retail operations and other business activities. Our information technology systems are critical to many of our operating activities and our business processes and may be negatively impacted by any service interruption or shutdown. For example, our ability to effectively manage and maintain our inventory and to ship products to customers on a timely basis depends significantly on the reliability of these information technology systems. Over a number of years, we have implemented information technology systems in all of the geographical regions in which we operate. Our work to integrate, secure and enhance these systems and related processes in our global operations is ongoing and NIKE will continue to invest in these efforts. The failure of these systems to operate effectively, including as a result of security breaches, viruses, hackers or other causes, or our failure to properly maintain, protect, repair or upgrade our systems, or problems with transitioning to upgraded or replacement systems could cause delays in product fulfillment and reduced efficiency of our operations, could require significant capital investments to remediate the problem and may have an adverse effect on our reputation, results of operations and financial condition. +We also use information technology systems to process financial information and results of operations for internal reporting purposes and to comply with regulatory financial reporting, legal and tax requirements. If our information technology systems suffer severe damage, disruption or shutdown and our business continuity plans do not effectively resolve the issues in a timely manner, we could experience delays in reporting our financial results, which could result in lost revenues and profits, as well as reputational damage. Furthermore, we depend on information technology systems and personal data collection and use for digital marketing, digital commerce, consumer engagement and the marketing and use of our digital products and services. We also rely on our ability to engage in electronic communications throughout the world between and among our employees as well as with other third parties, including customers, suppliers, vendors and consumers. Any interruption in our information technology systems may impede our ability to engage in the digital space and result in lost revenues, damage to our reputation, and loss of users. +The market for prime real estate is competitive. +Our ability to effectively obtain real estate to open new retail stores and otherwise conduct our operations, both domestically and internationally, depends on the availability of real estate that meets our criteria for traffic, square footage, co-tenancies, lease economics, demographics and other factors. We also must be able to effectively renew our existing real estate leases. In addition, from time to time, we seek to downsize, consolidate, reposition or close some of our real estate locations, which may require modification of an existing lease. Failure to secure adequate new locations or successfully modify leases for existing locations, or failure to effectively manage the profitability of our existing fleet of retail stores, could have an adverse effect on our operating results and financial condition. +Additionally, the economic environment may at times make it difficult to determine the fair market rent of real estate properties domestically and internationally. This could impact the quality of our decisions to exercise lease options at previously negotiated rents and to renew expiring leases at negotiated rents. Any adverse effect on the quality of these decisions could impact our ability to retain real estate locations adequate to meet our targets or efficiently manage the profitability of our existing fleet of stores, which could have an adverse effect on our operating results and financial condition. +Extreme weather conditions and natural disasters could negatively impact our operating results and financial condition. +Extreme weather conditions in the areas in which our retail stores, suppliers, customers, distribution centers and vendors are located could adversely affect our operating results and financial condition. Moreover, natural disasters such as earthquakes, hurricanes and tsunamis, whether occurring in the United States or abroad, and their related consequences and effects, including energy shortages and public health issues, could disrupt our operations, the operations of our vendors and other suppliers or result in economic instability that may negatively impact our operating results and financial condition. +Our financial results may be adversely affected if substantial investments in businesses and operations fail to produce expected returns. +From time to time, we may invest in technology, business infrastructure, new businesses, product offering and manufacturing innovation and expansion of existing businesses, such as our retail operations, which require substantial cash investments and management attention. We believe cost-effective investments are essential to business growth and profitability. However, significant investments are subject to typical risks and uncertainties inherent in developing a new business or expanding an existing business. The failure of any significant investment to provide expected returns or profitability could have a material adverse effect on our financial results and divert management attention from more profitable business operations. +13 +Table of Contents +We are subject to periodic litigation and other regulatory proceedings, which could result in unexpected expense of time and resources. +From time to time we are called upon to defend ourselves against lawsuits and regulatory actions relating to our business. Due to the inherent uncertainties of litigation and regulatory proceedings, we cannot accurately predict the ultimate outcome of any such proceedings. An unfavorable outcome could have an adverse impact on our business, financial condition and results of operations. In addition, any significant litigation in the future, regardless of its merits, could divert management’s attention from our operations and result in substantial legal fees. +We depend on key personnel, the loss of whom would harm our business. +Our future success will depend in part on the continued service of key executive officers and personnel. The loss of the services of any key individual could harm our business. Our future success also depends on our ability to recruit, retain and engage our personnel sufficiently, both to maintain our current business and to execute our strategic initiatives. Competition for employees in our industry is intense and we may not be successful in attracting and retaining such personnel. +The sale of a large number of shares of common stock by our principal stockholder could depress the market price of our common stock. +As of June 30, 2016, Swoosh, LLC beneficially owned more than 78% of our Class A Common Stock. If, on June 30, 2016, all of these shares were converted into Class B Common Stock, the commensurate ownership percentage of our Class B Common Stock would be approximately 16%. The shares are available for resale, subject to the requirements of the U.S. securities laws and the terms of the limited liability company agreement governing Swoosh, LLC. The sale or prospect of a sale of a substantial number of these shares could have an adverse effect on the market price of our common stock. Swoosh, LLC was formed by Philip H. Knight, our Chairman Emeritus, to hold the majority of his shares of Class A Common Stock. On June 30, 2016, Mr. Knight sold his voting interest in Swoosh, LLC to a trust controlled by his son and NIKE director, Travis Knight. +Changes in our credit ratings or macroeconomic conditions may affect our liquidity, increasing borrowing costs and limiting our financing options. +Our long-term debt is currently rated Investment Grade by Standard & Poor’s and Moody’s Investors Service. If our credit ratings are lowered, borrowing costs for future long-term debt or short-term credit facilities may increase and our financing options, including our access to the unsecured credit market, could be limited. We may also be subject to restrictive covenants that would reduce our flexibility to, among other things, incur additional indebtedness, make restricted payments, pledge assets as security, make investments, loans, advances, guarantees and acquisitions, undergo fundamental changes and enter into transactions with affiliates. Failure to comply with such covenants could result in a default, and as a result, the commitments of our lenders under our credit agreements may be terminated and the maturity of amounts owed may be accelerated. In addition, macroeconomic conditions, such as increased volatility or disruption in the credit markets, could adversely affect our ability to refinance existing debt. +If our internal controls are ineffective, our operating results could be adversely affected. +Our internal control over financial reporting may not prevent or detect misstatements because of its inherent limitations, including the possibility of human error, the circumvention or overriding of controls or fraud. Even effective internal controls can provide only reasonable assurance with respect to the preparation and fair presentation of financial statements. If we fail to maintain the adequacy of our internal controls, including any failure to implement required new or improved controls, or if we experience difficulties in their implementation, our business and operating results could be harmed and we could fail to meet our financial reporting obligations. +If our estimates or judgments relating to our critical accounting policies prove to be incorrect, our operating results could be adversely affected. +The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, as provided in “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The results of these estimates form the basis for making judgments about the carrying values of assets, liabilities and equity, and the amount of revenue and expenses that are not readily apparent from other sources. Significant assumptions and estimates used in preparing our consolidated financial statements include those related to revenue recognition, allowance for uncollectible accounts receivable, inventories, contingent payments under endorsement contracts, accounting for property, plant and equipment and definite-lived assets and goodwill and indefinite-lived intangible assets. Our operating results may be adversely affected if our assumptions change or if actual circumstances differ from those in our assumptions, which could cause our operating results to fall below the expectations of securities analysts and investors, resulting in a decline in the price of our Class B Common Stock. +Anti-takeover provisions may impair an acquisition of the Company or reduce the price of our common stock. +There are provisions of our articles of incorporation and Oregon law that are intended to protect shareholder interests by providing the Board of Directors a means to attempt to deny coercive takeover attempts or to negotiate with a potential acquirer in order to obtain more favorable terms. Such provisions include a control share acquisition statute, a freeze-out statute, two classes of stock that vote separately on certain issues, and the fact that holders of Class A Common Stock elect three-quarters of the Board of Directors rounded down to the next whole number. However, such provisions could discourage, delay or prevent an unsolicited merger, acquisition or other change in control of our company that some shareholders might believe to be in their best interests or in which shareholders might receive a premium for their common stock over the prevailing market price. These provisions could also discourage proxy contests for control of the Company. +14 +Table of Contents +We may fail to meet market expectations, which could cause the price of our stock to decline. +Our Class B Common Stock is traded publicly, and at any given time various securities analysts follow our financial results and issue reports on us. These reports include information about our historical financial results as well as analysts’ estimates of our future performance. Analysts’ estimates are based upon their own opinions and are often different from our estimates or expectations. If our operating results are below the estimates or expectations of public market analysts and investors, our stock price could decline. In the past, securities class action litigation has been brought against NIKE and other companies following a decline in the market price of their securities. If our stock price is volatile, we may become involved in this type of litigation in the future. Any litigation could result in substantial costs and a diversion of management’s attention and resources that are needed to successfully run our business. +15 +Table of Contents +ITEM 1B. Unresolved Staff Comments +None. +ITEM 2. Properties +The following is a summary of principal properties owned or leased by NIKE: +The NIKE World Campus, owned by NIKE and located near Beaverton, Oregon, USA, is a 400-acre site consisting of over 40 buildings which, together with adjacent leased properties, functions as our world headquarters and is occupied by approximately 10,700 employees engaged in management, research, design, development, marketing, finance and other administrative functions serving nearly all of our divisions. We also lease various office facilities in the surrounding metropolitan area. We lease a similar, but smaller, administrative facility in Hilversum, the Netherlands, which serves as the headquarters for the Western Europe and Central & Eastern Europe geographies and management of certain brand functions for our non-U.S. operations. We also lease an office complex in Shanghai, China, our headquarters for Greater China, occupied by employees focused on implementing our wholesale, DTC and merchandising strategies in the region, among other functions. In the United States, NIKE has five significant distribution centers located in Memphis, Tennessee, two of which are owned and three are leased. NIKE Brand apparel and equipment are also shipped from our Foothill Ranch, California distribution center, which we lease. Smaller leased distribution facilities are located in various parts of the United States. We also own or lease distribution and customer service facilities outside the United States. The most significant are the distribution facilities located in Laakdal, Belgium; Taicang, China; Tomisato, Japan and Incheon, Korea, all of which we own. +NIKE IHM, Inc. manufactures Air-Sole cushioning components at NIKE-owned facilities located near Beaverton, Oregon and in St. Charles, Missouri. We also manufacture and sell small amounts of various other plastic products to other manufacturers through NIKE IHM, Inc. +Aside from the principal properties described above, we lease many offices worldwide for sales and administrative purposes. We lease approximately 1,044 retail stores worldwide, which consist primarily of factory outlet stores. See “United States Market” and “International Markets” in Part I of this Report. Our leases expire at various dates through the year 2033. +ITEM 3. Legal Proceedings +There are no material pending legal proceedings, other than ordinary routine litigation incidental to our business, to which we are a party or of which any of our property is the subject. +ITEM 4. Mine Safety Disclosures +Not applicable. +16 +Table of Contents +PART II +ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities +NIKE’s Class B Common Stock is listed on the New York Stock Exchange and trades under the symbol NKE. At July 15, 2016 , there were 23,196 holders of record of our Class B Common Stock and 16 holders of record of our Class A Common Stock. These figures do not include beneficial owners who hold shares in nominee name. The Class A Common Stock is not publicly traded but each share is convertible upon request of the holder into one share of Class B Common Stock. Refer to Selected Quarterly Financial Data in Part II, Item 6 of this Report for information regarding quarterly high and low sales prices for the Class B Common Stock as reported on the New York Stock Exchange Composite Tape, and dividends declared on the Class A and Class B Common Stock. +During the third quarter of fiscal 2016, the Company concluded its four-year, $8 billion share repurchase program approved by the Board of Directors in September 2012. Under this program the Company purchased a total of 197.1 million shares at a cost of $8 billion (an average price of $40.58 per share). Following the completion of this program, the Company began repurchases under the new four-year, $12 billion program approved by the Board of Directors in November 2015. As of the end of the fourth quarter of fiscal 2016 , the Company had repurchased 20.1 million shares at an average price of $59.21 per share for a total approximate cost of $1.2 billion under the new program. We intend to use excess cash, future cash from operations and/or proceeds from debt to fund repurchases under the share repurchase program. +The following table presents a summary of share repurchases made by NIKE under these programs during the quarter ended May 31, 2016 : +Period +Total Number of Shares Purchased +Average Price +Paid per Share +Total Number of Shares +Purchased as Part of +Publicly Announced +Plans or Programs +Maximum Number +(or Approximate Dollar Value) +of Shares that May Yet +Be Purchased Under the +Plans or Programs +(In millions) +March 1 — March 31, 2016 +2,923,173 +$ +61.04 +2,923,173 +$ +11,173 +April 1 — April 30, 2016 +4,328,107 +$ +59.69 +4,328,107 +$ +10,914 +May 1 — May 31, 2016 +1,765,373 +$ +58.47 +1,765,373 +$ +10,811 +9,016,653 +$ +59.89 +9,016,653 +17 +Table of Contents +Performance Graph +The following graph demonstrates a five-year comparison of cumulative total returns for NIKE’s Class B Common Stock, the Standard & Poor’s 500 Stock Index, the Standard & Poor’s Apparel, Accessories & Luxury Goods Index and the Dow Jones U.S. Footwear Index. The graph assumes an investment of $100 on May 31, 2011 in each of our Class B Common Stock, and the stocks comprising the Standard & Poor’s 500 Stock Index, the Standard & Poor’s Apparel, Accessories & Luxury Goods Index and the Dow Jones U.S. Footwear Index. Each of the indices assumes that all dividends were reinvested on the day of issuance. +COMPARISON OF 5-YEAR CUMULATIVE TOTAL RETURN AMONG NIKE, INC.; S&P 500 INDEX; S&P APPAREL, ACCESSORIES & LUXURY GOODS INDEX AND THE DOW JONES U.S. FOOTWEAR INDEX +The Dow Jones U.S. Footwear Index consists of NIKE, Deckers Outdoor Corp., Wolverine World Wide, Inc., Skechers U.S.A., Inc. and Steven Madden, Ltd., among other companies. Because NIKE is part of the Dow Jones U.S. Footwear Index, the price and returns of NIKE stock have a substantial effect on this index. The Standard & Poor’s Apparel, Accessories & Luxury Goods Index consists of V.F. Corporation, Coach, Inc., Ralph Lauren Corporation, Under Armour, Inc. and Michael Kors Holdings, Limited, among other companies. The Dow Jones U.S. Footwear Index and the Standard & Poor’s Apparel, Accessories & Luxury Goods Index include companies in two major lines of business in which the Company competes. The indices do not encompass all of the Company’s competitors, nor all product categories and lines of business in which the Company is engaged. +The stock performance shown on the performance graph above is not necessarily indicative of future performance. The Company will not make or endorse any predictions as to future stock performance. +The performance graph above is being furnished solely to accompany this Report pursuant to Item 201(e) of Regulation S-K, and is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing. +18 +Table of Contents +ITEM 6. Selected Financial Data +Unless otherwise indicated, the following disclosures reflect the Company’s continuing operations. All share and per share amounts are reflective of the two-for-one stock splits that began trading at split-adjusted prices on December 24, 2015 and December 26, 2012. +(In millions, except per share data and financial ratios) +Financial History +2016 +2015 +2014 +2013 +2012 +Year Ended May 31, +Revenues +$ +32,376 +$ +30,601 +$ +27,799 +$ +25,313 +$ +23,331 +Gross profit +14,971 +14,067 +12,446 +11,034 +10,148 +Gross margin % +46.2 +% +46.0 +% +44.8 +% +43.6 +% +43.5 +% +Net income from continuing operations +3,760 +3,273 +2,693 +2,451 +2,257 +Net income (loss) from discontinued operations +— +— +— +21 +(46 +) +Net income +3,760 +3,273 +2,693 +2,472 +2,211 +Earnings per common share from continuing operations: +Basic +2.21 +1.90 +1.52 +1.37 +1.23 +Diluted +2.16 +1.85 +1.49 +1.34 +1.20 +Earnings per common share from discontinued operations: +Basic +— +— +— +0.01 +(0.03 +) +Diluted +— +— +— +0.01 +(0.02 +) +Weighted average common shares outstanding +1,697.9 +1,723.5 +1,766.7 +1,794.6 +1,839.9 +Diluted weighted average common shares outstanding +1,742.5 +1,768.8 +1,811.6 +1,832.9 +1,879.2 +Cash dividends declared per common share +0.62 +0.54 +0.47 +0.41 +0.35 +Cash flow from operations, inclusive of discontinued operations +3,096 +4,680 +3,013 +3,032 +1,932 +Price range of common stock: +High +68.19 +52.75 +40.13 +32.96 +28.60 +Low +47.25 +36.57 +29.56 +21.95 +19.65 +At May 31, +Cash and equivalents +$ +3,138 +$ +3,852 +$ +2,220 +$ +3,337 +$ +2,254 +Short-term investments +2,319 +2,072 +2,922 +2,628 +1,503 +Inventories +4,838 +4,337 +3,947 +3,484 +3,251 +Working capital, excluding assets and liabilities of discontinued operations (1)(2)(3) +9,667 +9,255 +8,319 +9,391 +7,271 +Total assets, excluding assets of discontinued operations (1)(2) +21,396 +21,597 +18,587 +17,540 +14,800 +Long-term debt +2,010 +1,079 +1,199 +1,210 +228 +Capital lease obligations (4) +15 +5 +74 +81 +— +Redeemable preferred stock +0.3 +0.3 +0.3 +0.3 +0.3 +Shareholders’ equity +12,258 +12,707 +10,824 +11,081 +10,319 +Year-end stock price +55.22 +50.84 +38.46 +30.83 +27.05 +Market capitalization +92,867 +87,044 +66,921 +55,124 +49,546 +Financial Ratios: +Return on equity +30.1 +% +27.8 +% +24.6 +% +23.1 +% +22.0 +% +Return on assets (1) +17.5 +% +16.3 +% +14.9 +% +15.3 +% +15.1 +% +Inventory turns +3.8 +4.0 +4.1 +4.2 +4.5 +Current ratio at May 31 (1) +2.8 +2.5 +2.7 +3.4 +3.0 +Price/Earnings ratio at May 31 +25.6 +27.5 +25.9 +22.8 +23.0 +(1) +Prior year amounts have been updated to reflect the adoption of Accounting Standards Update No. 2015-17, which requires all deferred tax assets and deferred tax liabilities to be classified as non-current. Refer to Recently Adopted Accounting Standards in Note 1 — Summary of Significant Accounting Policies in the accompanying Notes to the Consolidated Financial Statements. +(2) +Assets of discontinued operations were $0 million, $0 million, $0 million, $0 million and $615 million for the years ended May 31, 2016 , 2015 , 2014 , 2013 and 2012 , respectively. +(3) +Liabilities of discontinued operations were $0 million, $0 million, $0 million, $18 million and $170 million for the years ended May 31, 2016 , 2015 , 2014 , 2013 and 2012 , respectively. +(4) +During the fiscal year ended May 31, 2015, the Company restructured the terms of certain capital leases, which subsequently qualified as operating leases. +19 +Table of Contents +Selected Quarterly Financial Data +(Unaudited) +(In millions, except per share data) +1st Quarter +2nd Quarter +3rd Quarter +4th Quarter +2016 +2015 +2016 +2015 +2016 +2015 +2016 +2015 +Revenues +$ +8,414 +$ +7,982 +$ +7,686 +$ +7,380 +$ +8,032 +$ +7,460 +$ +8,244 +$ +7,779 +Gross profit +3,995 +3,721 +3,501 +3,327 +3,689 +3,426 +3,786 +3,593 +Gross margin % +47.5 +% +46.6 +% +45.6 +% +45.1 +% +45.9 +% +45.9 +% +45.9 +% +46.2 +% +Net income +1,179 +962 +785 +655 +950 +791 +846 +865 +Earnings per common share: +Basic +0.69 +0.56 +0.46 +0.38 +0.56 +0.46 +0.50 +0.50 +Diluted +0.67 +0.54 +0.45 +0.37 +0.55 +0.45 +0.49 +0.49 +Weighted average common shares outstanding +1,709.0 +1,729.8 +1,706.5 +1,726.2 +1,693.8 +1,722.9 +1,682.4 +1,715.0 +Diluted weighted average common shares outstanding +1,754.5 +1,772.4 +1,751.4 +1,769.6 +1,737.3 +1,767.7 +1,723.1 +1,759.6 +Cash dividends declared per common share +0.14 +0.12 +0.16 +0.14 +0.16 +0.14 +0.16 +0.14 +Price range of common stock: +High +58.86 +40.15 +67.65 +49.88 +68.19 +49.75 +65.44 +52.75 +Low +47.25 +36.57 +54.01 +39.18 +53.64 +43.35 +55.17 +47.59 +20 +Table of Contents +ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations +NIKE designs, develops, markets and sells athletic footwear, apparel, equipment, accessories and services worldwide. We are the largest seller of athletic footwear and apparel in the world. We sell our products to retail accounts, through NIKE-owned in-line and factory retail stores and NIKE-owned internet websites (which we refer to collectively as our “Direct to Consumer” or “DTC” operations) and through a mix of independent distributors, licensees and sales representatives in virtually all countries around the world. Our goal is to deliver value to our shareholders by building a profitable global portfolio of branded footwear, apparel, equipment and accessories businesses. Our strategy is to achieve long-term revenue growth by creating innovative, “must have” products, building deep personal consumer connections with our brands and delivering compelling consumer experiences at retail and online. +In addition to achieving long-term, sustainable revenue growth, we continue to strive to deliver shareholder value by driving operational excellence in several key areas: +• +Expanding gross margin by: +- Delivering innovative, premium products that command higher prices while maintaining a balanced price-to-value equation for consumers; +- Reducing product costs through a continued focus on manufacturing efficiency, product design and innovation; +- Making our supply chain a competitive advantage by investing in new technologies that increase automation, help reduce waste and have long-term potential to increase both customization of our products and speed to market; and +- Driving growth in our higher gross margin DTC business, led by NIKE.com, as part of an integrated marketplace growth strategy across our DTC and wholesale operations. +• +Optimizing selling and administrative expense by focusing on: +- Investments in consumer engagement that drive economic returns in the form of incremental revenue and gross profit; +- Infrastructure investments that improve the efficiency and effectiveness of our operations; and +- Investments in key areas of future growth, including our DTC business. +• +Managing working capital efficiency; and +• +Deploying capital effectively. +Through execution of this strategy, our long-term financial goals through fiscal 2020, on average per year, are as follows: +• +High single-digit to low-double digit revenue growth; +• +Mid-teens earnings per share growth; +• +High-twenties to low-thirties percentage rate of return on invested capital; +• +Free cash flow growing faster than net income; and +• +Sustainable, profitable, long-term growth through effective management of our diversified portfolio of businesses. +Over the past ten years, we have achieved many of our financial goals. During this time, revenues and diluted earnings per common share for NIKE, Inc., inclusive of both continuing and discontinued operations, have grown 8% and 13%, respectively, on an annual compounded basis. We expanded gross margin by approximately 220 basis points and our return on invested capital has increased from 22.6% to 29.7%. +On November 19, 2015, we announced a two-for-one stock split of both NIKE Class A and Class B Common Stock. The stock split was in the form of a 100 percent stock dividend payable on December 23, 2015 to shareholders of record at the close of business on December 9, 2015. Common stock began trading at the split-adjusted price on December 24, 2015. All share and per share amounts presented reflect the stock split. +Our fiscal 2016 results demonstrated the power of the NIKE, Inc. portfolio to deliver continued growth and expanding profitability. Despite significant foreign currency headwinds, we achieved record revenues and earnings per share for fiscal 2016. NIKE, Inc. Revenues grew 6% to $32.4 billion, gross margin expanded 20 basis points, Net income increased 15% and diluted earnings per common share grew 17% to $2.16. We also delivered strong cash returns to shareholders while investing for long-term growth. +Earnings before interest and income taxes ("EBIT") increased 10% for fiscal 2016, driven by revenue growth and gross margin expansion, while selling and administrative expense was flat as a percent of revenues. The increase in revenues was attributable to growth for nearly every NIKE Brand geography and across most key categories and product types. This broad-based growth was primarily fueled by: +• +Innovative performance and sportswear products, incorporating proprietary technology platforms such as NIKE Air, Free, Zoom, Lunar, Flywire, Dri-Fit and Flyknit; +• +Deep brand connections with consumers through our category offense, reinforced by investments in endorsements by high-profile athletes, sports teams and leagues, high-impact marketing around global sporting events and digital marketing; and +• +Strong category retail presentation online and at NIKE-owned and retail partner stores. +Converse revenues and EBIT decreased 1% and 6%, respectively, as growth in direct distribution markets was more than offset by the negative impact of changes in foreign currency exchange rates. +Gross margin increased primarily due to higher full-price average selling price and the favorable impact of growth in our higher-margin DTC businesses, partially offset by higher product costs, primarily due to shifts in mix to higher-cost products and labor input cost inflation, higher off-price mix and unfavorable changes in foreign currency exchange rates. +21 +Table of Contents +For fiscal 2016, the growth in Net income was positively affected by a year-over-year decrease in our effective tax rate of 350 basis points primarily due to an increase in the proportion of earnings from operations outside the United States, which are generally subject to a lower tax rate. Diluted earnings per common share grew at a higher rate than Net income due to a 1% decrease in the weighted average diluted common shares outstanding, driven by our share repurchase program. +While foreign currency markets remain volatile, we continue to see opportunities to drive future growth and profitability, and remain committed to effectively managing our business to achieve our financial goals over the long-term by executing against the operational strategies outlined above. +Results of Operations +(Dollars in millions, except per share data) +Fiscal 2016 +Fiscal 2015 +% Change +Fiscal 2014 +% Change +Revenues +$ +32,376 +$ +30,601 +6 +% +$ +27,799 +10 +% +Cost of sales +17,405 +16,534 +5 +% +15,353 +8 +% +Gross profit +14,971 +14,067 +6 +% +12,446 +13 +% +Gross margin % +46.2 +% +46.0 +% +44.8 +% +Demand creation expense +3,278 +3,213 +2 +% +3,031 +6 +% +Operating overhead expense +7,191 +6,679 +8 +% +5,735 +16 +% +Total selling and administrative expense +10,469 +9,892 +6 +% +8,766 +13 +% +% of Revenues +32.3 +% +32.3 +% +31.5 +% +Interest expense (income), net +19 +28 +— +33 +— +Other (income) expense, net +(140 +) +(58 +) +— +103 +— +Income before income taxes +4,623 +4,205 +10 +% +3,544 +19 +% +Income tax expense +863 +932 +-7 +% +851 +10 +% +Effective tax rate +18.7 +% +22.2 +% +24.0 +% +Net income +$ +3,760 +$ +3,273 +15 +% +$ +2,693 +22 +% +Diluted earnings per common share +$ +2.16 +$ +1.85 +17 +% +$ +1.49 +24 +% +22 +Table of Contents +Consolidated Operating Results +Revenues +(Dollars in millions) +Fiscal 2016 +Fiscal 2015 (1) +% Change +% Change Excluding Currency Changes (2) +Fiscal 2014 (1) +% Change +% Change Excluding Currency Changes (2) +NIKE, Inc. Revenues: +NIKE Brand Revenues by: +Footwear +$ +19,871 +$ +18,318 +8 +% +15 +% +$ +16,208 +13 +% +17 +% +Apparel +9,067 +8,637 +5 +% +11 +% +8,109 +7 +% +10 +% +Equipment +1,496 +1,631 +-8 +% +-2 +% +1,670 +-2 +% +1 +% +Global Brand Divisions (3) +73 +115 +-37 +% +-30 +% +125 +-8 +% +-2 +% +Total NIKE Brand Revenues +30,507 +28,701 +6 +% +13 +% +26,112 +10 +% +14 +% +Converse +1,955 +1,982 +-1 +% +2 +% +1,684 +18 +% +21 +% +Corporate (4) +(86 +) +(82 +) +— +— +3 +— +— +TOTAL NIKE, INC. REVENUES +$ +32,376 +$ +30,601 +6 +% +12 +% +$ +27,799 +10 +% +14 +% +Supplemental NIKE Brand Revenues Details: +NIKE Brand Revenues by: +Sales to Wholesale Customers +$ +22,577 +$ +21,952 +3 +% +9 +% +$ +20,683 +6 +% +10 +% +Sales Direct to Consumer +7,857 +6,634 +18 +% +25 +% +5,304 +25 +% +29 +% +Global Brand Divisions (3) +73 +115 +-37 +% +-30 +% +125 +-8 +% +-2 +% +TOTAL NIKE BRAND REVENUES +$ +30,507 +$ +28,701 +6 +% +13 +% +$ +26,112 +10 +% +14 +% +NIKE Brand Revenues on a Wholesale Equivalent Basis: (5) +Sales to Wholesale Customers +$ +22,577 +$ +21,952 +3 +% +9 +% +$ +20,683 +6 +% +10 +% +Sales from our Wholesale Operations to Direct to Consumer Operations +4,672 +3,881 +20 +% +27 +% +3,107 +25 +% +29 +% +TOTAL NIKE BRAND WHOLESALE EQUIVALENT REVENUES +$ +27,249 +$ +25,833 +5 +% +12 +% +$ +23,790 +9 +% +13 +% +NIKE Brand Wholesale Equivalent Revenues by: (5) +Men's +$ +15,410 +$ +14,689 +5 +% +11 +% +$ +13,996 +5 +% +9 +% +Women's +6,296 +5,732 +10 +% +17 +% +4,976 +15 +% +20 +% +Young Athletes' +4,560 +4,301 +6 +% +11 +% +3,737 +15 +% +19 +% +Others (6) +983 +1,111 +-12 +% +-4 +% +1,081 +3 +% +7 +% +TOTAL NIKE BRAND WHOLESALE EQUIVALENT REVENUES +$ +27,249 +$ +25,833 +5 +% +12 +% +$ +23,790 +9 +% +13 +% +NIKE Brand Wholesale Equivalent Revenues by: (5) +Running +$ +5,017 +$ +4,863 +3 +% +10 +% +$ +4,626 +5 +% +9 +% +NIKE Basketball +1,378 +1,385 +-1 +% +2 +% +1,178 +18 +% +19 +% +Jordan Brand +2,753 +2,329 +18 +% +21 +% +1,941 +20 +% +22 +% +Football (Soccer) +2,143 +2,250 +-5 +% +7 +% +2,414 +-7 +% +-2 +% +Men’s Training +2,611 +2,545 +3 +% +6 +% +2,485 +2 +% +4 +% +Women’s Training +1,344 +1,281 +5 +% +11 +% +1,145 +12 +% +16 +% +Action Sports +711 +737 +-4 +% +3 +% +738 +0 +% +4 +% +Sportswear +7,513 +6,604 +14 +% +22 +% +5,744 +15 +% +20 +% +Golf +706 +769 +-8 +% +-6 +% +788 +-2 +% +0 +% +Others (7) +3,073 +3,070 +0 +% +6 +% +2,731 +12 +% +17 +% +TOTAL NIKE BRAND WHOLESALE EQUIVALENT REVENUES +$ +27,249 +$ +25,833 +5 +% +12 +% +$ +23,790 +9 +% +13 +% +23 +Table of Contents +(1) +Certain prior year amounts have been reclassified to conform to fiscal 2016 presentation. These changes had no impact on previously reported results of operations or shareholders' equity. +(2) +Results have been restated using actual exchange rates in use during the comparative prior year period to enhance the visibility of the underlying business trends by excluding the impact of translation arising from foreign currency exchange rate fluctuations. +(3) +Global Brand Divisions revenues are primarily attributable to NIKE Brand licensing businesses that are not part of a geographic operating segment. +(4) +Corporate revenues primarily consist of foreign currency hedge gains and losses related to revenues generated by entities within the NIKE Brand geographic operating segments and Converse but managed through our central foreign exchange risk management program. +(5) +References to NIKE Brand wholesale equivalent revenues are intended to provide context as to the total size of our NIKE Brand market footprint if we had no Direct to Consumer operations. NIKE Brand wholesale equivalent revenues consist of (1) sales to external wholesale customers and (2) internal sales from our wholesale operations to our Direct to Consumer operations which are charged at prices that are comparable to prices charged to external wholesale customers. +(6) +Others include all unisex products, equipment and other products not allocated to Men’s, Women’s and Young Athletes’, as well as certain adjustments that are not allocated to products designated by gender or age. +(7) +Others include all other categories and certain adjustments that are not allocated at the category level. +Fiscal 2016 Compared to Fiscal 2015 +On a currency-neutral basis, NIKE, Inc. Revenues grew 12% for fiscal 2016, primarily driven by higher revenues for the NIKE Brand. Every NIKE Brand geography grew revenues for fiscal 2016 as our category offense continued to deliver innovative products, deep brand connections and compelling retail experiences to consumers online and at NIKE-owned and retail partner stores, driving strong demand for NIKE Brand products. North America contributed approximately 4 percentage points of the increase in NIKE, Inc. revenues, while Greater China and Western Europe each contributed approximately 3 percentage points, Emerging Markets contributed approximately 2 percentage points and Central & Eastern Europe contributed approximately 1 percentage point. +Excluding the effects of changes in currency exchange rates, NIKE Brand footwear and apparel revenues increased 15% and 11%, respectively, for fiscal 2016, while NIKE Brand equipment revenues decreased 2%. The increase in NIKE Brand footwear revenues for fiscal 2016 was driven by growth in nearly every key category, including strong growth in Sportswear, the Jordan Brand and Running. Footwear unit sales for fiscal 2016 increased 9%, with higher average selling price (ASP) per pair contributing approximately 6 percentage points of footwear revenue growth. Higher ASP per pair was driven by higher full-price ASP, and to a lesser extent, the favorable impact of an increase in the proportion of revenues from our higher-priced DTC business. +The constant-currency increase in NIKE Brand apparel revenues for fiscal 2016 was attributable to growth in most key categories, led by Sportswear, Men's Training, Running, Women's Training and Football (Soccer). Apparel unit sales for fiscal 2016 increased 7%. Higher ASP per unit contributed approximately 4 percentage points of apparel revenue growth, primarily due to higher full-price ASP and growth in our higher-priced DTC business. +While wholesale revenues remain the largest component of overall NIKE Brand revenues, we continue to expand our DTC businesses in each of our geographies. NIKE Brand DTC operations include NIKE-owned in-line and factory stores, as well as online sales through NIKE-owned websites. For fiscal 2016, DTC revenues represented approximately 26% of our total NIKE Brand revenues. On a currency-neutral basis, DTC revenues increased 25% for fiscal 2016, driven by strong online sales growth, the addition of new stores and comparable store sales growth of 10%. Comparable store sales include revenues from NIKE-owned in-line and factory stores for which all three of the following requirements have been met: (1) the store has been open at least one year, (2) square footage has not changed by more than 15% within the past year and (3) the store has not been permanently repositioned within the past year. Online sales through NIKE-owned websites, which are not included in comparable store sales, grew 51% in fiscal 2016. For fiscal 2016, online sales represented approximately 22% of our total NIKE Brand DTC revenues. +On a wholesale equivalent basis and excluding the effects of changes in currency exchange rates, fiscal 2016 NIKE Brand Men’s revenues increased 11%, driven by growth in Sportswear and the Jordan Brand, while Women's revenues increased 17%, led by Sportswear, Running and Women's Training. Revenues for our Young Athletes' business increased 11%, with growth across multiple categories, most notably the Jordan Brand. +Fiscal 2015 Compared to Fiscal 2014 +On a currency-neutral basis, revenues from NIKE, Inc. continuing operations grew 14% for fiscal 2015, driven by increases in revenues for both the NIKE Brand and Converse. Every NIKE Brand geography delivered higher revenues for fiscal 2015 as our category offense continued to deliver innovative products, deep brand connections and compelling retail experiences to consumers. North America contributed 5 percentage points of the increase in NIKE, Inc. revenues, while Western Europe contributed 4 percentage points, Greater China contributed 2 percentage points and Central & Eastern Europe, Emerging Markets and Converse each contributed 1 percentage point. +Excluding the effects of changes in currency exchange rates, NIKE Brand footwear and apparel revenues increased 17% and 10%, respectively, while NIKE Brand equipment revenues increased 1% during fiscal 2015. The increase in NIKE Brand footwear revenues for fiscal 2015 was driven by strong performance in Sportswear, the Jordan Brand, Running, NIKE Basketball and Football (Soccer). Footwear unit sales in fiscal 2015 increased 9%. Higher ASP per pair contributed approximately 8 percentage points of footwear revenue growth, driven primarily by higher full-price ASP, and to a lesser extent, the favorable impact of growth in our higher-priced DTC business. +The constant-currency increase in NIKE Brand apparel revenues for fiscal 2015 was driven by growth in most key categories, led by Sportswear, Running and Women's Training, which were partially offset by a decline in Football (Soccer) due largely to the comparison to significant sales of replica apparel in advance of the World Cup in 2014. Fiscal 2015 unit sales of apparel increased 8% with higher ASP per unit contributing approximately 2 percentage points of apparel revenue growth, driven primarily by growth in our higher-priced DTC business. +For fiscal 2015, DTC revenues represented approximately 23% of our total NIKE Brand revenues compared to 20% in fiscal 2014. On a currency-neutral basis, DTC revenues grew 29% for fiscal 2015, driven by strong comparable store sales growth of 16%, significant online sales growth and the addition of new stores. Online sales through NIKE-owned websites grew 59% in fiscal 2015. Online sales represented approximately 18% of our total NIKE Brand DTC revenues for fiscal 2015 compared to 15% for fiscal 2014. +24 +Table of Contents +On a wholesale equivalent basis and excluding the effects of changes in currency exchange rates, fiscal 2015 NIKE Brand Men’s revenues increased 9%, driven by growth in our Sportswear, the Jordan Brand, NIKE Basketball and Running categories. Women’s revenues accelerated in fiscal 2015, achieving 20% growth primarily due to increases in Sportswear, Running and Women's Training categories. Revenues in our Young Athletes' business increased 19% as a result of continued efforts to expand footwear and apparel offerings for this group across multiple categories, particularly the Jordan Brand. +Futures Orders +Futures orders for NIKE Brand footwear and apparel scheduled for delivery from June through November 2016 totaled $ 14.9 billion and were 8% higher than the orders reported for the comparable prior year period. NIKE Brand reported futures include (1) orders from external wholesale customers and (2) internal orders from our DTC in-line stores and e-commerce operations which are reflected at prices that are comparable to prices charged to external wholesale customers. The U.S. Dollar futures orders amount is calculated based upon our internal forecast of the currency exchange rates under which our revenues will be translated during this period. Excluding the impact of currency changes, futures orders increased 11% , with unit orders increasing 4% and average selling price per unit contributing approximately 7 percentage points of growth. +By geography, futures orders growth was as follows: +Reported Futures Orders +Futures Orders Excluding +Currency Changes (1) +North America +6% +6% +Western Europe +8% +11% +Central & Eastern Europe +3% +7% +Greater China +19% +24% +Japan +24% +15% +Emerging Markets +3% +13% +TOTAL NIKE BRAND FUTURES ORDERS +8% +11% +(1) +Reported futures have been restated using prior year exchange rates for the comparative period to enhance the visibility of the underlying business trends, excluding the impact of foreign currency exchange rate fluctuations. +The reported futures orders growth is not necessarily indicative of our expectation of revenue growth during this period. This is due to year-over-year changes in shipment timing, changes in the mix of orders between futures and at-once orders, and because the fulfillment of certain orders may fall outside of the schedule noted above. In addition, exchange rate fluctuations as well as differing levels of order cancellations, discounts and returns can cause differences in the comparisons between futures orders and actual revenues. Moreover, a portion of our revenue is not derived from futures orders, including sales of at-once and closeout NIKE Brand footwear and apparel, all sales of NIKE Brand equipment, the difference between retail sales and internal orders from our DTC in-line stores and e-commerce operations, and sales from Converse, NIKE Golf and Hurley. +Gross Margin +(Dollars in millions) +Fiscal 2016 +Fiscal 2015 +% Change +Fiscal 2014 +% Change +Gross profit +$ +14,971 +$ +14,067 +6 +% +$ +12,446 +13 +% +Gross margin % +46.2 +% +46.0 +% +20 +bps +44.8 +% +120 +bps +Fiscal 2016 Compared to Fiscal 2015 +For fiscal 2016, our consolidated gross margin was 20 basis points higher than fiscal 2015, primarily attributable to the following factors: +• +Higher NIKE Brand full-price ASP (increasing gross margin approximately 190 basis points) aligned with our strategy to deliver innovative, premium products with higher prices and, to a lesser extent, due to price increases reflecting inflationary conditions in certain territories; +• +Growth in our higher-margin DTC business (increasing gross margin approximately 20 basis points); +• +Higher NIKE Brand product costs (decreasing gross margin approximately 70 basis points) as shifts in mix to higher-cost products and labor input cost inflation were only partially offset by lower material input costs; +• +Higher off-price mix (decreasing gross margin approximately 30 basis points), primarily reflecting the impacts from clearing excess inventory in North America; +• +Unfavorable changes in foreign currency exchange rates, net of hedges (decreasing gross margin approximately 40 basis points); +• +Higher other costs (decreasing gross margin approximately 20 basis points), primarily due to higher product design and development costs; and +• +Lower gross margin from Converse (decreasing gross margin approximately 20 basis points), primarily resulting from shifts in mix to lower-margin products. +Fiscal 2015 Compared to Fiscal 2014 +For fiscal 2015, our consolidated gross margin was 120 basis points higher than fiscal 2014, primarily driven by the following factors: +• +Higher NIKE Brand full-price ASP (increasing gross margin approximately 250 basis points) primarily attributable to shifts in mix to higher-priced products and, to a lesser extent, price increases in response to inflationary conditions in certain territories; +25 +Table of Contents +• +Higher NIKE Brand product costs (decreasing gross margin approximately 190 basis points) largely due to shifts in mix to higher-cost products, labor input cost inflation and higher air freight costs, in part to mitigate the negative impacts from product delays due to the West Coast port congestion in the United States; +• +Growth in our higher-margin DTC business (increasing gross margin approximately 40 basis points); and +• +Changes in foreign currency exchange rates (including gains and losses on hedge transactions) increased gross margin approximately 20 basis points. +Total Selling and Administrative Expense +(Dollars in millions) +Fiscal 2016 +Fiscal 2015 +% Change +Fiscal 2014 +% Change +Demand creation expense (1) +$ +3,278 +$ +3,213 +2 +% +$ +3,031 +6 +% +Operating overhead expense +7,191 +6,679 +8 +% +5,735 +16 +% +Total selling and administrative expense +$ +10,469 +$ +9,892 +6 +% +$ +8,766 +13 +% +% of Revenues +32.3 +% +32.3 +% +— +31.5 +% +80 +bps +(1) +Demand creation expense consists of advertising and promotion costs, including costs of endorsement contracts, television, digital and print advertising, brand events and retail brand presentation. +Fiscal 2016 Compared to Fiscal 2015 +Demand creation expense increased 2% for fiscal 2016 compared to fiscal 2015, primarily due to investments in digital brand marketing, including for our DTC business, as well as support for key brand events and initiatives, and sports marketing investments, partially offset by lower advertising expense. For fiscal 2016, changes in foreign currency exchange rates decreased growth in Demand creation expense by approximately 6 percentage points. +Operating overhead expense increased 8% compared to fiscal 2015, primarily as a result of continued investments in our DTC business, including new store openings and higher variable expenses, as well as targeted investments in operational infrastructure and consumer-focused digital capabilities, partially offset by lower performance-based compensation. Changes in foreign currency exchange rates decreased growth in Operating overhead expense by approximately 4 percentage points for fiscal 2016. +Fiscal 2015 Compared to Fiscal 2014 +Demand creation expense increased 6% for fiscal 2015 compared to the prior year, primarily due to support for key brand and consumer events, including the World Cup in early fiscal 2015, increased digital brand marketing, investments in DTC marketing and higher sports marketing expense. Changes in foreign currency exchange rates decreased growth in Demand creation expense by approximately 4 percentage points for fiscal 2015. +Operating overhead expense increased 16% compared to the prior year, primarily driven by investments in our rapidly growing DTC business, including new store openings and higher variable expenses, investments in operational infrastructure and consumer-focused digital capabilities and higher performance-based compensation. For fiscal 2015, changes in foreign currency exchange rates decreased growth in Operating overhead expense by approximately 3 percentage points. +Other (Income) Expense, Net +(In millions) +Fiscal 2016 +Fiscal 2015 +Fiscal 2014 +Other (income) expense, net +$ +(140 +) +$ +(58 +) +$ +103 +Other (income) expense, net comprises foreign currency conversion gains and losses from the re-measurement of monetary assets and liabilities denominated in non-functional currencies and the impact of certain foreign currency derivative instruments, as well as unusual or non-operating transactions that are outside the normal course of business. +Fiscal 2016 Compared to Fiscal 2015 +Other (income) expense, net increased from $58 million of other income, net for fiscal 2015 to $140 million of other income, net for fiscal 2016, driven by a $26 million net change in foreign currency conversion gains and losses, a favorable settlement of a legal judgment related to a bankruptcy case in Western Europe and net gains from other non-operating items. +We estimate the combination of the translation of foreign currency-denominated profits from our international business and the year-over-year change in foreign currency-related gains and losses included in Other (income) expense, net had an unfavorable impact on our Income before income taxes of $423 million for fiscal 2016. +Fiscal 2015 Compared to Fiscal 2014 +Other (income) expense, net shifted from $103 million of other expense, net for fiscal 2014 to $58 million of other income, net for fiscal 2015, primarily driven by a $147 million net change in foreign currency conversion gains and losses, primarily due to significant hedge gains from available-for-sale investments, as well as an adverse legal judgment in the prior year related to a long outstanding bankruptcy case for a former customer in Western Europe. +We estimate the combination of the translation of foreign currency-denominated profits from our international business and the year-over-year change in foreign currency-related gains and losses included in Other (income) expense, net had an unfavorable impact on our Income before income taxes of $73 million for fiscal 2015. +26 +Table of Contents +Income Taxes +Fiscal 2016 +Fiscal 2015 +% Change +Fiscal 2014 +% Change +Effective tax rate +18.7 +% +22.2 +% +(350) bps +24.0 +% +(180) bps +Fiscal 2016 Compared to Fiscal 2015 +The 350 basis point decrease in our effective tax rate for the fiscal year was primarily due to an increase in the proportion of earnings from operations outside the United States, which are generally subject to a lower tax rate. +Fiscal 2015 Compared to Fiscal 2014 +The 180 basis point decrease in our effective tax rate for the fiscal year was primarily due to the favorable resolution of audits in several jurisdictions. +Operating Segments +Our operating segments are evidence of the structure of the Company’s internal organization. The NIKE Brand segments are defined by geographic regions for operations participating in NIKE Brand sales activity. +Each NIKE Brand geographic segment operates predominantly in one industry: the design, development, marketing and selling of athletic footwear, apparel and equipment. The Company’s reportable operating segments for the NIKE Brand are: North America, Western Europe, Central & Eastern Europe, Greater China, Japan and Emerging Markets, and include results for the NIKE, Jordan and Hurley brands. The Company’s NIKE Brand DTC operations are managed within each geographic operating segment. Converse is also a reportable segment for the Company and operates in one industry: the design, marketing, licensing and selling of casual sneakers, apparel and accessories. +As part of our centrally managed foreign exchange risk management program, standard foreign currency rates are assigned twice per year to each NIKE Brand entity in our geographic operating segments and Converse. These rates are set approximately nine and twelve months in advance of the future selling seasons to which they relate (specifically, for each currency, one standard rate applies to the fall and holiday selling seasons and one standard rate applies to the spring and summer selling seasons) based on average market spot rates in the calendar month preceding the date they are established. Inventories and Cost of sales for geographic operating segments and Converse reflect use of these standard rates to record non-functional currency product purchases into the entity’s functional currency. Differences between assigned standard foreign currency rates and actual market rates are included in Corporate together with foreign currency hedge gains and losses generated from our centrally managed foreign exchange risk management program and other conversion gains and losses. +The breakdown of revenues is as follows: +(Dollars in millions) +Fiscal 2016 +Fiscal 2015 (1) +% Change +% Change Excluding Currency Changes (2) +Fiscal 2014 (1) +% Change +% Change Excluding Currency Changes (2) +North America +$ +14,764 +$ +13,740 +7 +% +8 +% +$ +12,299 +12 +% +12 +% +Western Europe +5,884 +5,705 +3 +% +14 +% +4,979 +15 +% +21 +% +Central & Eastern Europe +1,431 +1,421 +1 +% +17 +% +1,387 +2 +% +15 +% +Greater China +3,785 +3,067 +23 +% +27 +% +2,602 +18 +% +19 +% +Japan +869 +755 +15 +% +22 +% +771 +-2 +% +9 +% +Emerging Markets +3,701 +3,898 +-5 +% +13 +% +3,949 +-1 +% +8 +% +Global Brand Divisions (3) +73 +115 +-37 +% +-30 +% +125 +-8 +% +-2 +% +Total NIKE Brand Revenues +30,507 +28,701 +6 +% +13 +% +26,112 +10 +% +14 +% +Converse +1,955 +1,982 +-1 +% +2 +% +1,684 +18 +% +21 +% +Corporate (4) +(86 +) +(82 +) +— +— +3 +— +— +TOTAL NIKE, INC. REVENUES +$ +32,376 +$ +30,601 +6 +% +12 +% +$ +27,799 +10 +% +14 +% +(1) +Certain prior year amounts have been reclassified to conform to fiscal 2016 presentation. These changes had no impact on previously reported results of operations or shareholders' equity. +(2) +Results have been restated using actual exchange rates in use during the comparative prior year period to enhance the visibility of the underlying business trends by excluding the impact of translation arising from foreign currency exchange rate fluctuations. +(3) +Global Brand Divisions revenues are primarily attributable to NIKE Brand licensing businesses that are not part of a geographic operating segment. +(4) +Corporate revenues primarily consist of foreign currency hedge gains and losses related to revenues generated by entities within the NIKE Brand geographic operating segments and Converse, but managed through our central foreign exchange risk management program. +The primary financial measure used by the Company to evaluate performance of individual operating segments is earnings before interest and taxes (commonly referred to as “EBIT”), which represents Net income before Interest expense (income), net and Income tax expense in the Consolidated Statements of Income. As discussed in Note 17 — Operating Segments and Related Information in the accompanying Notes to the Consolidated Financial Statements, certain corporate costs are not included in EBIT of our operating segments. +27 +Table of Contents +The breakdown of earnings before interest and taxes is as follows: +(Dollars in millions) +Fiscal 2016 +Fiscal 2015 (1) +% Change +Fiscal 2014 (1) +% Change +North America +$ +3,763 +$ +3,645 +3 +% +$ +3,077 +18 +% +Western Europe +1,434 +1,275 +12 +% +855 +49 +% +Central & Eastern Europe +289 +249 +16 +% +279 +-11 +% +Greater China +1,372 +993 +38 +% +816 +22 +% +Japan +174 +100 +74 +% +131 +-24 +% +Emerging Markets +892 +818 +9 +% +952 +-14 +% +Global Brand Divisions +(2,596 +) +(2,267 +) +-15 +% +(1,993 +) +-14 +% +Total NIKE Brand +5,328 +4,813 +11 +% +4,117 +17 +% +Converse +487 +517 +-6 +% +496 +4 +% +Corporate +(1,173 +) +(1,097 +) +-7 +% +(1,036 +) +-6 +% +TOTAL CONSOLIDATED EARNINGS +BEFORE INTEREST AND TAXES +4,642 +4,233 +10 +% +3,577 +18 +% +Interest expense (income), net +19 +28 +— +33 +— +TOTAL CONSOLIDATED INCOME +BEFORE INCOME TAXES +$ +4,623 +$ +4,205 +10 +% +$ +3,544 +19 +% +(1) +Certain prior year amounts have been reclassified to conform to fiscal 2016 presentation. These changes had no impact on previously reported results of operations or shareholders' equity. +North America +(Dollars in millions) +Fiscal 2016 +Fiscal 2015 +% Change +% Change Excluding Currency Changes +Fiscal 2014 +% Change +% Change Excluding Currency Changes +Revenues by: +Footwear +$ +9,299 +$ +8,506 +9 +% +10 +% +$ +7,495 +13 +% +14 +% +Apparel +4,746 +4,410 +8 +% +8 +% +3,937 +12 +% +12 +% +Equipment +719 +824 +-13 +% +-13 +% +867 +-5 +% +-5 +% +TOTAL REVENUES +$ +14,764 +$ +13,740 +7 +% +8 +% +$ +12,299 +12 +% +12 +% +Revenues by: +Sales to Wholesale Customers +$ +10,674 +$ +10,243 +4 +% +5 +% +$ +9,296 +10 +% +10 +% +Sales Direct to Consumer +4,090 +3,497 +17 +% +17 +% +3,003 +16 +% +17 +% +TOTAL REVENUES +$ +14,764 +$ +13,740 +7 +% +8 +% +$ +12,299 +12 +% +12 +% +EARNINGS BEFORE INTEREST +AND TAXES +$ +3,763 +$ +3,645 +3 +% +$ +3,077 +18 +% +Fiscal 2016 Compared to Fiscal 2015 +Excluding changes in foreign currency exchange rates, North America revenues increased 8% primarily due to growth in our Sportswear, Jordan Brand and Running categories. DTC revenues grew 17% for fiscal 2016, fueled by strong online sales growth, the addition of new stores and comparable store sales growth of 6%. +Currency-neutral footwear revenue growth was attributable to higher revenues in most key categories, led by the Jordan Brand, Sportswear, Running and Women's Training, partially offset by a slight decline in NIKE Basketball. Fiscal 2016 unit sales of footwear increased 8%. Higher average selling price (ASP) per pair contributed approximately 2 percentage points of footwear revenue growth, driven by higher full-price ASP and the favorable impact of an increase in the proportion of revenues from our higher-priced DTC business, partially offset by higher off-price mix. +Apparel revenue growth for fiscal 2016 was primarily driven by our Sportswear and Men's Training categories. For fiscal 2016, unit sales of apparel grew 7%. Higher ASP per unit contributed approximately 1 percentage point of apparel revenue growth, primarily attributable to higher full-price ASP. +Reported EBIT increased 3% for fiscal 2016 as higher revenues were largely offset by lower gross margin and higher selling and administrative expense as a percent of revenues. Gross margin declined 80 basis points as higher off-price mix, higher warehousing and inventory obsolescence costs, as well as higher product input costs more than offset higher full-price ASP. Selling and administrative expense increased as a percent of revenues as higher operating overhead to support our growing DTC operations and bad debt expense related to customer bankruptcies was only partially offset by lower performance-based compensation. Demand creation also grew at a faster rate than revenues due to higher spending for sports marketing, DTC marketing and key brand events and initiatives, partially offset by lower advertising expense. +Fiscal 2015 Compared to Fiscal 2014 +North America revenues increased 12%, despite congestion at ports on the West Coast of the United States in the second half of the fiscal year, which affected the Company's supply chain and flow of product to customers. Revenue growth was driven by nearly all key categories for fiscal 2015, led by the Jordan Brand, Sportswear, Men's Training, NIKE Basketball and Women's Training. On a constant currency basis, DTC revenue grew 17% for fiscal 2015, fueled by comparable store sales growth of 8%, strong online sales growth and the addition of new stores. +28 +Table of Contents +Footwear revenue growth was driven by increases in most key categories, notably the Jordan Brand, NIKE Basketball and Sportswear. Unit sales of footwear for fiscal 2015 increased 6%, while higher ASP per pair contributed approximately 8 percentage points of footwear revenue growth, primarily due to higher full-price ASP. +Apparel revenue growth was attributable to strong demand in most key categories, led by Sportswear, Men's Training, Women's Training and Running, partially offset by slight declines in Football (Soccer) and Action Sports. For fiscal 2015, unit sales of apparel increased 9%. Higher ASP per unit contributed approximately 3 percentage points of apparel revenue growth, driven primarily by higher full-price ASP and the favorable impact of growth in our higher-priced DTC business. +EBIT grew 18% for fiscal 2015 as a result of higher revenues, gross margin expansion and selling and administrative expense leverage. Gross margin increased 110 basis points due to higher full-price ASP, improved off-price product margins and lower inventory obsolescence costs, partially offset by higher product input and logistics costs. Selling and administrative expense decreased as a percent of revenues despite higher demand creation expense to support key brand and sporting events and higher sports marketing expense. Operating overhead costs also increased to support DTC growth and investments in infrastructure, as well as higher performance-based compensation costs. +Western Europe +(Dollars in millions) +Fiscal 2016 +Fiscal 2015 +% Change +% Change Excluding Currency Changes +Fiscal 2014 +% Change +% Change Excluding Currency Changes +Revenues by: +Footwear +$ +3,985 +$ +3,876 +3 +% +14 +% +$ +3,299 +17 +% +25 +% +Apparel +1,628 +1,552 +5 +% +16 +% +1,427 +9 +% +14 +% +Equipment +271 +277 +-2 +% +8 +% +253 +9 +% +15 +% +TOTAL REVENUES +$ +5,884 +$ +5,705 +3 +% +14 +% +$ +4,979 +15 +% +21 +% +Revenues by: +Sales to Wholesale Customers +$ +4,429 +$ +4,451 +0 +% +10 +% +$ +4,022 +11 +% +17 +% +Sales Direct to Consumer +1,455 +1,254 +16 +% +28 +% +957 +31 +% +40 +% +TOTAL REVENUES +$ +5,884 +$ +5,705 +3 +% +14 +% +$ +4,979 +15 +% +21 +% +EARNINGS BEFORE INTEREST AND TAXES +$ +1,434 +$ +1,275 +12 +% +$ +855 +49 +% +Fiscal 2016 Compared to Fiscal 2015 +Excluding changes in currency exchange rates, Western Europe revenues for fiscal 2016 increased 14% with double-digit growth in every territory. Growth was led by our largest territories, the UK & Ireland and AGS (Austria, Germany and Switzerland), which grew 12% and 16%, respectively. On a category basis, revenues grew for every key category, most notably Sportswear, Football (Soccer) and the Jordan Brand. DTC revenues grew 28% for fiscal 2016, due to strong online sales growth, the addition of new stores and comparable store sales growth of 13%. +Currency-neutral footwear revenue growth was fueled by increases in most key categories, led by Sportswear and the Jordan Brand. For fiscal 2016, unit sales of footwear increased 10%. Higher ASP per pair contributed approximately 4 percentage points of footwear revenue growth, driven by higher full-price ASP and the favorable impact of an increase in the proportion of revenues from our higher-priced DTC business, partially offset by higher off-price mix. +The constant currency apparel revenue growth was attributable to increases in every key category, most notably Sportswear, with Football (Soccer) also providing strong growth. Unit sales of apparel for fiscal 2016 increased 11%. Higher ASP per unit contributed approximately 5 percentage points of apparel revenue growth, primarily driven by the favorable impact of an increase in the proportion of revenues from our higher-priced DTC business and higher full-price ASP. +On a reported basis, EBIT grew 12% for fiscal 2016, despite the negative translation impact from changes in foreign currency exchange rates, most notably the Euro. EBIT grew at a higher rate than revenue as selling and administrative expense leverage and the favorable settlement of a legal judgment related to a bankruptcy case reflected in Other (income) expense, net , were only partially offset by lower gross margin. Gross margin declined 10 basis points as unfavorable standard foreign currency exchange rates and higher off-price mix were mostly offset by higher full-price ASP, shifts in mix to lower-cost products and growth in our higher-margin DTC business. Selling and administrative expense was lower as a percent of revenues despite higher operating overhead, primarily to support DTC expansion. Demand creation increased slightly as higher spending for DTC and other demand creation costs more than offset lower sports marketing costs. +Fiscal 2015 Compared to Fiscal 2014 +Excluding the changes in currency exchange rates, revenues for fiscal 2015 increased 21% and grew in every territory, led by AGS and the UK & Ireland, our largest territories in Western Europe, which grew 27% and 20%, respectively. Revenues grew for every key category, most notably Sportswear and Running. DTC revenues grew 40%, driven by comparable store sales growth of 24%, strong online sales growth and the addition of new stores. +The constant currency footwear revenue growth was driven by increases in nearly every category, most notably Sportswear, Running and Football (Soccer). For fiscal 2015, unit sales of footwear increased 20%. Higher ASP per pair contributed approximately 5 percentage points of footwear revenue growth, driven equally by higher full-price ASP and the favorable impact of growth in our higher-priced DTC business. +The constant currency apparel revenue growth was attributable to increases in nearly all key categories, led by Sportswear, Women's Training and Running, partially offset by a slight decline in Football (Soccer) primarily due to the impact of World Cup in fiscal 2014. Unit sales of apparel in fiscal 2015 increased 14% while ASP per unit was flat. +29 +Table of Contents +Despite the negative translation impact from changes in foreign currency exchange rates, most notably the Euro, reported EBIT grew 49% for fiscal 2015 as a result of strong revenue growth, gross margin expansion and selling and administrative expense leverage. Gross margin increased 190 basis points, primarily due to favorable standard foreign currency exchange rates and higher full-price ASP, which were only partially offset by higher product costs. Selling and administrative expense decreased as a percent of revenues despite increases in operating overhead, primarily as a result of higher costs to support our growing DTC business. Demand creation increased largely as a result of higher sports marketing and digital demand creation costs. +Central & Eastern Europe +(Dollars in millions) +Fiscal 2016 +Fiscal 2015 +% Change +% Change Excluding Currency Changes +Fiscal 2014 +% Change +% Change Excluding Currency Changes +Revenues by: +Footwear +$ +882 +$ +827 +7 +% +23 +% +$ +763 +8 +% +22 +% +Apparel +463 +499 +-7 +% +9 +% +532 +-6 +% +5 +% +Equipment +86 +95 +-9 +% +7 +% +92 +3 +% +14 +% +TOTAL REVENUES +$ +1,431 +$ +1,421 +1 +% +17 +% +$ +1,387 +2 +% +15 +% +Revenues by: +Sales to Wholesale Customers +$ +1,215 +$ +1,241 +-2 +% +13 +% +$ +1,245 +0 +% +11 +% +Sales Direct to Consumer +216 +180 +20 +% +46 +% +142 +27 +% +48 +% +TOTAL REVENUES +$ +1,431 +$ +1,421 +1 +% +17 +% +$ +1,387 +2 +% +15 +% +EARNINGS BEFORE INTEREST AND TAXES +$ +289 +$ +249 +16 +% +$ +279 +-11 +% +Fiscal 2016 Compared to Fiscal 2015 +On a currency neutral basis, fiscal 2016 revenues for Central & Eastern Europe increased 17%, with double-digit growth in nearly every territory. Revenue growth was led by two of our largest territories, Turkey and Russia, which increased 26% and 18%, respectively, while our distributors business also grew 16%. Revenues grew in nearly every key category, driven by Sportswear, Running and Football (Soccer). DTC revenues increased 46%, fueled by comparable store sales growth of 27% and the addition of new stores. +Constant currency footwear revenue growth in fiscal 2016 was driven by growth in nearly every key category, led by Sportswear and Running. Fiscal 2016 unit sales of footwear increased 7%. Higher ASP per pair contributed approximately 16 percentage points of footwear revenue growth, primarily driven by higher full-price ASP, largely reflecting inflationary conditions in certain territories. +The currency-neutral growth in apparel revenue in fiscal 2016 was attributable to growth in nearly all key categories, most notably Football (Soccer) and Running. Unit sales of apparel decreased 2% for fiscal 2016. Higher ASP per unit contributed approximately 11 percentage points of apparel revenue growth, primarily driven by higher full-price ASP, largely reflecting inflationary conditions in certain territories. +On a reported basis, EBIT increased 16% for fiscal 2016, despite the negative impact of changes in foreign currency exchange rates, primarily the Russian Ruble and Turkish Lira. EBIT grew faster than reported revenues due to significant gross margin expansion and selling and administrative expense leverage. Gross margin increased 140 basis points as significantly higher full-price ASP, warehousing efficiencies and the favorable impact of a higher proportion of revenues from our higher-margin DTC business more than offset unfavorable standard foreign currency exchange rates and shifts in mix to higher-cost products. Selling and administrative expense decreased as a percent of revenues despite higher operating overhead to support DTC expansion and higher demand creation expense due to increased sports marketing costs and spending to support brand events. +Fiscal 2015 Compared to Fiscal 2014 +Excluding changes in currency exchange rates, Central & Eastern Europe revenues for fiscal 2015 grew 15%, attributable to increases in most territories. Turkey grew 23% and our distributors business grew 18%, while revenues declined in Israel, our smallest territory. On a category basis, revenue growth was driven by increases in most key categories, primarily Sportswear and Running. DTC revenues increased 48%, driven by strong comparable store sales growth of 28%, the addition of new stores and online sales growth. +The constant currency growth in footwear revenue in fiscal 2015 was driven by growth in nearly all key categories, most notably Sportswear and Running. Fiscal 2015 unit sales of footwear increased 11%. Higher ASP per pair contributed approximately 11 percentage points of footwear revenue growth, driven by higher full-price ASP, primarily reflecting inflationary conditions in certain territories. +The constant currency growth in apparel revenue in fiscal 2015 resulted from growth in most key categories, led by Sportswear and Running, partially offset by a decline in Football (Soccer) due to comparison to strong sales related to the World Cup in fiscal 2014. Unit sales of apparel increased 1% for fiscal 2015. Higher ASP per unit contributed approximately 4 percentage points of apparel revenue growth, primarily due to higher full-price ASP reflecting inflationary conditions in certain territories. +On a reported basis, EBIT declined 11% for fiscal 2015, primarily reflecting the impact of weakening foreign currency exchange rates. Reported revenue increases and slight selling and administrative expense leverage were more than offset by lower gross margin. Gross margin decreased 340 basis points as higher product costs and unfavorable standard foreign currency exchange rates were only partially offset by higher full-price ASP. Selling and administrative expense decreased as a percent of revenue despite increases in both demand creation and operating overhead. Operating overhead increased primarily as a result of investments in our growing DTC business, while demand creation increased as a result of higher sports marketing costs. +30 +Table of Contents +Greater China +(Dollars in millions) +Fiscal 2016 +Fiscal 2015 +% Change +% Change Excluding Currency Changes +Fiscal 2014 +% Change +% Change Excluding Currency Changes +Revenues by: +Footwear +$ +2,599 +$ +2,016 +29 +% +33 +% +$ +1,600 +26 +% +28 +% +Apparel +1,055 +925 +14 +% +17 +% +876 +6 +% +7 +% +Equipment +131 +126 +4 +% +7 +% +126 +0 +% +1 +% +TOTAL REVENUES +$ +3,785 +$ +3,067 +23 +% +27 +% +$ +2,602 +18 +% +19 +% +Revenues by: +Sales to Wholesale Customers +$ +2,623 +$ +2,234 +17 +% +21 +% +$ +2,041 +9 +% +11 +% +Sales Direct to Consumer +1,162 +833 +39 +% +44 +% +561 +48 +% +51 +% +TOTAL REVENUES +$ +3,785 +$ +3,067 +23 +% +27 +% +$ +2,602 +18 +% +19 +% +EARNINGS BEFORE INTEREST AND TAXES +$ +1,372 +$ +993 +38 +% +$ +816 +22 +% +Fiscal 2016 Compared to Fiscal 2015 +On a currency-neutral basis, Greater China revenues for fiscal 2016 increased 27%, driven by higher revenues in nearly every key category, led by Sportswear, Running, NIKE Basketball and the Jordan Brand. DTC revenues increased 44%, driven by significant online sales growth, the addition of new stores and comparable store sales growth of 19%. +The constant currency increase in footwear revenue for fiscal 2016 was driven by growth in nearly every key category, most notably Sportswear, Running, NIKE Basketball and the Jordan Brand. For fiscal 2016, unit sales of footwear increased 27%. Higher ASP per pair contributed approximately 6 percentage points of footwear revenue growth, driven by higher full-price ASP and the favorable impact of an increase in the proportion of revenues from our higher-priced DTC business. +Constant currency apparel revenue growth for fiscal 2016 was attributable to higher revenues in nearly every key category, led by Running and Sportswear. Unit sales of apparel increased 17% for fiscal 2016 while ASP per unit was flat. +On a reported basis, EBIT increased 38% for fiscal 2016 due to strong revenue growth, gross margin expansion and selling and administrative expense leverage. Gross margin increased 80 basis points due to higher full-price ASP and an increase in the proportion of revenues from our higher-margin DTC business, partially offset by shifts in mix to higher-cost products and unfavorable standard foreign currency exchange rates. Selling and administrative expense decreased as a percent of revenues despite higher operating overhead and demand creation expense. Operating overhead increased largely due to support for our growing DTC operations, while demand creation was also higher, primarily due to retail brand presentation costs to re-profile category and consumer-focused retail stores as well as spending for key brand events. +Fiscal 2015 Compared to Fiscal 2014 +Excluding changes in currency exchange rates, Greater China revenue growth for fiscal 2015 was driven by higher revenues in our Sportswear, Running, NIKE Basketball and Jordan Brand categories, partially offset by small declines in other categories. Strong growth in DTC revenues reflected a 28% increase in comparable store sales, strong online sales growth and the addition of new stores. +Constant currency footwear revenue growth in fiscal 2015 was driven by increased sales in our Sportswear, Running, NIKE Basketball and Jordan Brand categories, partially offset by small declines in other categories. Unit sales of footwear increased 20% for fiscal 2015. Higher ASP per pair contributed approximately 8 percentage points of footwear revenue growth, primarily due to an increase in the proportion of revenues from our higher-priced DTC business. +Constant currency apparel revenue growth in fiscal 2015 was driven by increases in the Sportswear, Running, Jordan Brand and NIKE Basketball categories, partially offset by decreases in other categories, primarily Football (Soccer) and Men’s Training. For fiscal 2015, unit sales of apparel increased 8%. Changes in ASP per unit reduced apparel revenues by approximately 1 percentage point, due primarily to lower full-price ASP, partially offset by increased revenues from our higher-priced DTC business. +On a reported basis, EBIT increased 22% for fiscal 2015 as higher revenues and gross margin expansion more than offset higher selling and administrative expense. Gross margin increased 270 basis points primarily due to higher full-price ASP on footwear and an increase in the proportion of revenues from our higher-margin DTC business, partially offset by higher product costs. Selling and administrative expense increased due to higher operating overhead to support growth initiatives, primarily related to our DTC operations, as well as higher demand creation spending, primarily for sports marketing. +31 +Table of Contents +Japan +(Dollars in millions) +Fiscal 2016 +Fiscal 2015 +% Change +% Change Excluding Currency Changes +Fiscal 2014 +% Change +% Change Excluding Currency Changes +Revenues by: +Footwear +$ +570 +$ +452 +26 +% +34 +% +$ +409 +11 +% +23 +% +Apparel +228 +230 +-1 +% +5 +% +276 +-17 +% +-8 +% +Equipment +71 +73 +-3 +% +3 +% +86 +-15 +% +-6 +% +TOTAL REVENUES +$ +869 +$ +755 +15 +% +22 +% +$ +771 +-2 +% +9 +% +Revenues by: +Sales to Wholesale Customers +$ +587 +$ +536 +10 +% +16 +% +$ +597 +-10 +% +0 +% +Sales Direct to Consumer +282 +219 +29 +% +37 +% +174 +26 +% +40 +% +TOTAL REVENUES +$ +869 +$ +755 +15 +% +22 +% +$ +771 +-2 +% +9 +% +EARNINGS BEFORE INTEREST AND TAXES +$ +174 +$ +100 +74 +% +$ +131 +-24 +% +Fiscal 2016 Compared to Fiscal 2015 +Excluding changes in foreign currency exchange rates, revenues for Japan increased 22% for fiscal 2016, driven by growth in most key categories, led by Sportswear, Running and the Jordan Brand. DTC revenues were 37% higher, due to strong online sales growth, comparable store sales growth of 17% and the addition of new stores. +Reported EBIT increased 74%, despite the weaker Yen. EBIT growth was driven by higher reported revenues, gross margin expansion and significant selling and administrative expense leverage. Gross margin expanded 270 basis points due to higher full-price ASP, in part due to lower discounts, as well as growth in our higher-margin DTC business, lower product input costs and warehousing efficiencies, which more than offset unfavorable standard foreign currency exchange rates. Selling and administrative expense decreased as a percent of revenues despite investments in operating overhead to support our growing DTC business. Demand creation spending for DTC marketing and brand events was largely offset by lower spending for retail brand presentation and advertising costs. +Fiscal 2015 Compared to Fiscal 2014 +Constant currency revenues for Japan increased 9% in fiscal 2015, driven primarily by increases in Sportswear, Running, the Jordan Brand and NIKE Basketball , partially offset by declines in Men's Training, Golf and Women's Training. DTC revenues grew 40% in fiscal 2015 driven by a 20% increase in comparable store sales, strong online sales growth and the addition of new stores. +On a reported basis, fiscal 2015 EBIT decreased 24% compared to the prior year period, reflecting the impact of the weaker Yen. Gross margin decreased 270 basis points as unfavorable standard foreign currency exchange rates and higher product costs more than offset higher full-price ASP and an increase in the proportion of revenues from our higher-margin DTC business. Selling and administrative expense increased as a percent of revenues as higher operating overhead, primarily to support our expanding DTC business, was only partially offset by a decrease in demand creation expense. +Emerging Markets +(Dollars in millions) +Fiscal 2016 +Fiscal 2015 +% Change +% Change Excluding Currency Changes +Fiscal 2014 +% Change +% Change Excluding Currency Changes +Revenues by: +Footwear +$ +2,536 +$ +2,641 +-4 +% +14 +% +$ +2,642 +0 +% +9 +% +Apparel +947 +1,021 +-7 +% +11 +% +1,061 +-4 +% +5 +% +Equipment +218 +236 +-8 +% +11 +% +246 +-4 +% +5 +% +TOTAL REVENUES +$ +3,701 +$ +3,898 +-5 +% +13 +% +$ +3,949 +-1 +% +8 +% +Revenues by: +Sales to Wholesale Customers +$ +3,049 +$ +3,247 +-6 +% +11 +% +$ +3,483 +-7 +% +2 +% +Sales Direct to Consumer +652 +651 +0 +% +23 +% +466 +40 +% +51 +% +TOTAL REVENUES +$ +3,701 +$ +3,898 +-5 +% +13 +% +$ +3,949 +-1 +% +8 +% +EARNINGS BEFORE INTEREST +AND TAXES +$ +892 +$ +818 +9 +% +$ +952 +-14 +% +Fiscal 2016 Compared to Fiscal 2015 +Excluding changes in foreign currency exchange rates, fiscal 2016 revenues for Emerging Markets increased 13%. Growth was attributable to higher revenues in 7 of 9 territories, led by one of our largest territories, SOCO (which includes Argentina, Uruguay and Chile), which grew 32%, and by Mexico and Pacific (which includes Australia and New Zealand), which grew 31% and 27%, respectively. Revenues declined 5% in Brazil, primarily reflecting on-going macroeconomic challenges. On a category basis, revenues grew in nearly every key category, led by Sportswear and Running. DTC revenues increased 23%, driven by the addition of new stores, comparable store sales growth of 7% and online sales growth. +32 +Table of Contents +The constant currency growth in footwear revenue for fiscal 2016 was driven by higher revenues in nearly every key category, most notably Sportswear and Running. For fiscal 2016, unit sales of footwear increased 1%, while higher ASP per pair contributed approximately 13 percentage points of footwear revenue growth. Higher ASP was attributable to higher full-price ASP, primarily reflecting inflationary conditions in certain territories, and to a lesser extent, the favorable impact of an increase in the proportion of revenues from our higher-priced DTC business. +The constant currency growth in apparel revenue was due to increases in most key categories, led by Sportswear, Running and Women's Training. Fiscal 2016 unit sales of apparel decreased 2%, while higher ASP per unit contributed approximately 13 percentage points of apparel revenue growth. Higher ASP was due to higher full-price ASP, primarily reflecting inflationary conditions in certain territories, and to a lesser extent, the favorable impact of an increase in the proportion of revenues from our higher-priced DTC business. +On a reported basis, EBIT increased 9%, despite the negative impact of foreign currency exchange rates, primarily the Argentine Peso, Mexican Peso and Korean Won, as gross margin expansion more than offset lower reported revenues and higher selling and administrative expense as a percent of revenues. Gross margin expanded 350 basis points due to higher full-price ASP, lower warehousing and obsolescence costs, and growth in our higher-margin DTC business, partially offset by shifts in mix to higher-cost products and unfavorable standard foreign currency exchange rates. Selling and administrative expense declined on a reported basis, but was higher as a percent of revenues as higher operating overhead due to additional investments in our DTC business and operating infrastructure, and higher performance-based compensation were more than offset by changes in foreign currency exchange rates. Demand creation expense also increased driven by sports marketing and digital brand marketing costs, offset by the impact of foreign currency exchange rates. +Fiscal 2015 Compared to Fiscal 2014 +On a currency-neutral basis, fiscal 2015 revenues for Emerging Markets increased 8%, driven by growth in 7 of 9 territories. Growth was led by SOCO and Pacific which grew 28% and 26%, respectively. Revenues in our Mexico and Brazil territories decreased 21% and 3%, respectively. The decrease in Mexico was attributable to efforts to liquidate excess inventory in the marketplace largely resulting from an inconsistent flow of product to customers following distribution center transition issues in fiscal 2014, while the decrease in Brazil was primarily due to challenging macroeconomic conditions and comparison to strong sales related to the World Cup in fiscal 2014. On a category basis, revenues were higher in most key categories, led by Sportswear, Running, Action Sports and the Jordan Brand, partially offset by a decline in Football (Soccer). DTC revenues increased 51% compared to fiscal 2014, driven by strong comparable store sales growth of 26%, the addition of new stores and online sales growth. +The constant currency growth in footwear revenue for fiscal 2015 was attributable to increases in several key categories, most notably Sportswear, Action Sports, the Jordan Brand and Running. Unit sales of footwear decreased 2% while higher ASP per pair contributed approximately 11 percentage points of footwear revenue growth. Higher ASP per pair was primarily due to higher full-price ASP reflecting price increases in response to inflationary conditions in certain Latin American countries, particularly Argentina, as well as the favorable impact of growth in our higher-priced DTC business. +Constant currency apparel revenue growth was due to increases in nearly all key categories, primarily Sportswear, Running and Women's Training, partially offset by a decline in Football (Soccer) revenues due to higher World Cup sales in fiscal 2014. Unit sales of apparel decreased 1% for fiscal 2015. Higher ASP per unit contributed approximately 6 percentage points of apparel revenue growth, primarily attributable to an increase in the proportion of revenues from our higher-priced DTC business, and to a lesser extent, higher full-price ASP driven by price increases in response to inflationary conditions. +On a reported basis, EBIT decreased 14% primarily due to reported revenue declines, lower gross margin and higher selling and administrative expense, as well as the impact of weakening foreign currency exchange rates . Gross margin decreased 140 basis points due to unfavorable standard foreign currency exchange rates, higher inventory obsolescence and higher off-price mix, partially offset by higher full-price ASP. Selling and administrative expense increased due to higher operating overhead costs, primarily to support DTC growth, as well as higher demand creation expense, in part as a result of support for the World Cup in early fiscal 2015 and higher sports marketing expense. +Global Brand Divisions +(Dollars in millions) +Fiscal 2016 +Fiscal 2015 +% Change +% Change Excluding Currency Changes +Fiscal 2014 +% Change +% Change Excluding Currency Changes +Revenues +$ +73 +$ +115 +-37 +% +-30 +% +$ +125 +-8 +% +-2 +% +(Loss) Before Interest and Taxes +$ +(2,596 +) +$ +(2,267 +) +15 +% +$ +(1,993 +) +14 +% +Global Brand Divisions primarily represent demand creation, operating overhead and product creation and design expenses that are centrally managed for the NIKE Brand. Revenues for Global Brand Divisions are primarily attributable to NIKE Brand licensing businesses that are not part of a geographic operating segment. +Fiscal 2016 Compared to Fiscal 2015 +Global Brand Divisions' loss before interest and taxes increased $329 million for fiscal 2016 due to higher operating overhead and demand creation expense, and to a lesser extent, lower revenues, largely resulting from the expiration of certain football club endorsement agreements. Operating overhead increased due to investments in operational infrastructure and consumer-focused digital capabilities, partially offset by lower performance-based compensation expenses. Demand creation expense increased due to higher advertising and digital brand marketing expenses. +Fiscal 2015 Compared to Fiscal 2014 +Global Brand Divisions' loss before interest and taxes increased $274 million in fiscal 2015, primarily due to higher operating overhead reflecting continued investments in operational infrastructure, including digital capabilities, consumer engagement and supply chain initiatives, as well as higher performance-based compensation. Demand creation expense increased slightly due to support for the World Cup in the first quarter of fiscal 2015 and key brand and consumer events. +33 +Table of Contents +Converse +(Dollars in millions) +Fiscal 2016 +Fiscal 2015 +% Change +% Change Excluding Currency Changes +Fiscal 2014 +% Change +% Change Excluding Currency Changes +Revenues +$ +1,955 +$ +1,982 +-1 +% +2 +% +$ +1,684 +18 +% +21 +% +Earnings Before Interest and Taxes +$ +487 +$ +517 +-6 +% +$ +496 +4 +% +In territories we define as “direct distribution markets” Converse designs, markets and sells products directly to distributors, wholesale customers and to consumers through DTC operations. The largest direct distribution markets are the United States, the United Kingdom and China. We do not own the Converse trademarks in Japan. Territories other than direct distribution markets and Japan are serviced by third-party licensees who pay royalty revenues to Converse for the use of its registered trademarks and other intellectual property rights. +Fiscal 2016 Compared to Fiscal 2015 +Excluding changes in foreign currency exchange rates, Converse revenues increased 2% for fiscal 2016. Comparable direct distribution markets (i.e. markets served under a direct distribution model for comparable periods in the current and prior fiscal years) grew 4%, contributing approximately 3 percentage points of total Converse revenue growth for fiscal 2016. Comparable direct distribution market unit sales decreased 2%, while higher ASP per unit contributed approximately 6 percentage points of direct distribution market revenue growth. On a territory basis, growth in the United States and Asia Pacific was partially offset by declines in Europe, primarily the United Kingdom. Conversion of markets from licensed to direct distribution markets had an insignificant impact on total Converse revenue growth for fiscal 2016. Revenues from comparable licensed markets decreased 15% for fiscal 2016, reducing total Converse revenue growth by approximately 1 percentage point. The decrease in comparable licensed markets revenues was primarily due to poor macroeconomic conditions in Latin America. +Reported EBIT for Converse decreased 6% for fiscal 2016 as a decrease in reported revenues and lower gross margin more than offset selling and administrative expense leverage. Gross margin declined 220 basis points as unfavorable standard foreign currency exchange rates, shifts in mix to higher-cost products and higher off-price mix more than offset higher full-price ASP. Selling and administrative expense declined faster than reported revenues primarily due to lower demand creation, which more than offset slightly higher operating overhead due to investments in infrastructure to support growth. +Fiscal 2015 Compared to Fiscal 2014 +Excluding changes in currency exchange rates, revenues for Converse increased 21% for fiscal 2015. Comparable direct distribution markets grew 14%, contributing 12 percentage points of total revenue growth for fiscal 2015. Comparable direct distribution market unit sales increased 12% and higher ASP per unit contributed approximately 2 percentage points of Converse comparable direct distribution market revenue growth. The United States market was the most significant contributor to the growth of comparable direct distribution markets due to volume increases with key wholesale customers and expansion of our DTC business. Conversion of markets from licensed to direct distribution contributed 8 percentage points of total Converse revenue growth for fiscal 2015, driven by conversion of several European markets, most significantly AGS (Austria, Germany and Switzerland). Revenues from comparable licensed markets increased 8% for fiscal 2015, contributing 1 percentage point of total Converse revenue growth. +EBIT for Converse increased 4% for fiscal 2015 as strong revenue growth was partially offset by lower gross margin and higher selling and administrative expense. Gross margin decreased 60 basis points primarily due to transitions of licensed markets to direct distribution markets. Selling and administrative expense increased for fiscal 2015, primarily due to higher operating overhead costs resulting from investments in infrastructure to support current and future growth, including market transitions, new systems and new headquarters, as well as higher intellectual property enforcement costs. +Corporate +(Dollars in millions) +Fiscal 2016 +Fiscal 2015 +% Change +Fiscal 2014 +% Change +Revenues +$ +(86 +) +$ +(82 +) +— +$ +3 +— +(Loss) Before Interest and Taxes +$ +(1,173 +) +$ +(1,097 +) +7 +% +$ +(1,036 +) +6 +% +Corporate revenues primarily consist of foreign currency hedge gains and losses related to revenues generated by entities within the NIKE Brand geographic operating segments and Converse but managed through our central foreign exchange risk management program. +The Corporate loss before interest and taxes consists largely of unallocated general and administrative expenses, including expenses associated with centrally managed departments; depreciation and amortization related to our corporate headquarters; unallocated insurance, benefit and compensation programs, including stock-based compensation; and certain foreign currency gains and losses. +In addition to the foreign currency gains and losses recognized in Corporate revenues, foreign currency results in Corporate include gains and losses resulting from the difference between actual foreign currency rates and standard rates used to record non-functional currency denominated product purchases within the NIKE Brand geographic operating segments and Converse; related foreign currency hedge results; conversion gains and losses arising from re-measurement of monetary assets and liabilities in non-functional currencies; and certain other foreign currency derivative instruments. +34 +Table of Contents +Fiscal 2016 Compared to Fiscal 2015 +For fiscal 2016, Corporate's loss before interest and taxes increased $76 million primarily due to the following: +• +an increase of $179 million, primarily driven by higher operating overhead expense to support corporate growth initiatives; +• +a beneficial change of $76 million from net foreign currency losses to net foreign currency gains related to the difference between actual foreign currency exchange rates and standard foreign currency exchange rates assigned to the NIKE Brand geographic operating segments and Converse, net of hedge gains; these gains are reported as a component of consolidated gross margin; and +• +a beneficial change of $27 million in net foreign currency gains related to the re-measurement of monetary assets and liabilities denominated in non-functional currencies and the impact of certain foreign currency derivative instruments, reported as a component of Other (income) expense, net. +Fiscal 2015 Compared to Fiscal 2014 +For fiscal 2015, Corporate's loss before interest and taxes increased $61 million primarily due to the following: +• +a $203 million increase, primarily in corporate overhead expense related to corporate initiatives to support growth of the business as well as higher performance-based compensation; +• +a $144 million beneficial change from net foreign currency losses to net foreign currency gains, reported as a component of Other (income) expense, net ; and +• +an approximate $2 million increase in foreign exchange losses related to the difference between actual foreign currency exchange rates and standard foreign currency exchange rates assigned to the NIKE Brand geographic operating segments and Converse, net of hedge gains; these losses are reported as a component of consolidated gross margin. +Foreign Currency Exposures and Hedging Practices +Overview +As a global company with significant operations outside the United States, in the normal course of business we are exposed to risk arising from changes in currency exchange rates. Our primary foreign currency exposures arise from the recording of transactions denominated in non-functional currencies and the translation of foreign currency denominated results of operations, financial position and cash flows into U.S. Dollars. +Our foreign exchange risk management program is intended to lessen both the positive and negative effects of currency fluctuations on our consolidated results of operations, financial position and cash flows. We manage global foreign exchange risk centrally on a portfolio basis to address those risks that are material to NIKE, Inc. We manage these exposures by taking advantage of natural offsets and currency correlations that exist within the portfolio and, where practical and material, by hedging a portion of the remaining exposures using derivative instruments such as forward contracts and options. As described below, the implementation of the NIKE Trading Company ("NTC") and our foreign currency adjustment program enhanced our ability to manage our foreign exchange risk by increasing the natural offsets and currency correlation benefits that exist within our portfolio of foreign exchange exposures. Our hedging policy is designed to partially or entirely offset the impact of exchange rate changes on the underlying net exposures being hedged. Where exposures are hedged, our program has the effect of delaying the impact of exchange rate movements on our Consolidated Financial Statements; the length of the delay is dependent upon hedge horizons. We do not hold or issue derivative instruments for trading or speculative purposes. +Transactional Exposures +We conduct business in various currencies and have transactions which subject us to foreign currency risk. Our most significant transactional foreign currency exposures are: +• +Product Costs — NIKE’s product costs are exposed to fluctuations in foreign currencies in the following ways: +1. +Product purchases denominated in currencies other than the functional currency of the transacting entity: +a. +Certain NIKE entities purchase product from the NTC, a wholly-owned sourcing hub that buys NIKE branded products from third-party factories, predominantly in U.S. Dollars. The NTC, whose functional currency is the U.S. Dollar, then sells the products to NIKE entities in their respective functional currencies. When the NTC sells to a NIKE entity with a different functional currency, the result is a foreign currency exposure for the NTC. +b. +Other NIKE entities purchase product directly from third-party factories in U.S. Dollars. These purchases generate a foreign currency exposure for those NIKE entities with a functional currency other than the U.S. Dollar. +In both purchasing scenarios, a weaker U.S. Dollar decreases the inventory cost incurred by NIKE whereas a stronger U.S. Dollar increases its cost. +35 +Table of Contents +2. +Factory input costs: NIKE operates a foreign currency adjustment program with certain factories. The program is designed to more effectively manage foreign currency risk by assuming certain of the factories’ foreign currency exposures, some of which are natural offsets to our existing foreign currency exposures. Under this program, our payments to these factories are adjusted for rate fluctuations in the basket of currencies (“factory currency exposure index”) in which the labor, materials and overhead costs incurred by the factories in the production of NIKE branded products (“factory input costs”) are denominated. +For the currency within the factory currency exposure indices that is the local or functional currency of the factory, the currency rate fluctuation affecting the product cost is recorded within Inventories and is recognized in Cost of sales when the related product is sold to a third-party. All currencies within the indices, excluding the U.S. Dollar and the local or functional currency of the factory, are recognized as embedded derivative contracts and are recorded at fair value through Other (income) expense, net . Refer to Note 16 — Risk Management and Derivatives in the accompanying Notes to the Consolidated Financial Statements for additional detail. +As an offset to the impacts of the fluctuating U.S. Dollar on our non-functional currency denominated product purchases described above, a strengthe ning U.S. Dollar against the foreign currencies within the factory currency exposure indices decreases NIKE’s U.S. Dollar inventory cost. Conversely, a weakening U.S. Dollar against the indexed foreign currencies increases our inventory cost. +• +Non-Functional Currency Denominated External Sales — A portion of our Western Europe and Central & Eastern Europe geography revenues, as well as a portion of our Converse European operations revenues, are earned in currencies other than the Euro (e.g. the British Pound) but are recognized at a subsidiary that uses the Euro as its functional currency. These sales generate a foreign currency exposure. +• +Other Costs — Non-functional currency denominated costs, such as endorsement contracts, also generate foreign currency risk, though to a lesser extent. In certain cases, the Company has also entered into other contractual agreements which have payments that are indexed to foreign currencies and create embedded derivative contracts that are recorded at fair value through Other (income) expense, net . Refer to Note 16 — Risk Management and Derivatives in the accompanying Notes to the Consolidated Financial Statements for additional detail. +• +Non-Functional Currency Denominated Monetary Assets and Liabilities — Our global subsidiaries have various assets and liabilities, primarily receivables and payables, including intercompany receivables and payables, denominated in currencies other than their functional currencies. These balance sheet items are subject to re-measurement which may create fluctuations in Other (income) expense, net within our consolidated results of operations. +Managing Transactional Exposures +Transactional exposures are managed on a portfolio basis within our foreign currency risk management program. We manage these exposures by taking advantage of natural offsets and currency correlations that exist within the portfolio and may also elect to use currency forward and option contracts to hedge a portion of the remaining effect of exchange rate fluctuations on probable forecasted future cash flows, including certain product cost purchase exposures, non-functional currency denominated external sales and other costs described above. Generally, these are accounted for as cash flow hedges in accordance with the accounting standards for derivatives and hedging, except for hedges of the embedded derivatives component of the product cost exposures as discussed below. +Certain currency forward contracts used to manage the foreign exchange exposure of non-functional currency denominated monetary assets and liabilities subject to re-measurement and the embedded derivative contracts discussed above are not formally designated as hedging instruments under the accounting standards for derivatives and hedging. Accordingly, changes in fair value of these instruments are immediately recognized in Other (income) expense, net and are intended to offset the foreign currency impact of the re-measurement of the related non-functional currency denominated asset or liability or the embedded derivative contract being hedged. +Refer to Note 6 — Fair Value Measurements and Note 16 — Risk Management and Derivatives in the accompanying Notes to the Consolidated Financial Statements for additional description of how the above financial instruments are valued and recorded as well as the fair value of outstanding derivatives at each reported period end. +Translational Exposures +Many of our foreign subsidiaries operate in functional currencies other than the U.S. Dollar. Fluctuations in currency exchange rates create volatility in our reported results as we are required to translate the balance sheets, operational results and cash flows of these subsidiaries into U.S. Dollars for consolidated reporting. The translation of foreign subsidiaries’ non-U.S. Dollar denominated balance sheets into U.S. Dollars for consolidated reporting results in a cumulative translation adjustment to Accumulated other comprehensive income within the Consolidated Statements of Shareholders’ Equity. In the translation of our Consolidated Statements of Income, a weaker U.S. Dollar in relation to foreign functional currencies benefits our consolidated earnings whereas a stronger U.S. Dollar reduces our consolidated earnings. The impact of foreign exchange rate fluctuations on the translation of our consolidated Revenues was a detriment of approximately $1,985 million and $1,171 million for the years ended May 31, 2016 and 2015, respectively. The impact of foreign exchange rate fluctuations on the translation of our Income before income taxes was a detriment of approximately $449 million and $221 million for the years ended May 31, 2016 and 2015, respectively. +Managing Translational Exposures +To minimize the impact of translating foreign currency denominated revenues and expenses into U.S. Dollars for consolidated reporting, certain foreign subsidiaries use excess cash to purchase U.S. Dollar denominated available-for-sale investments. The variable future cash flows associated with the purchase and subsequent sale of these U.S. Dollar denominated securities at non-U.S. Dollar functional currency subsidiaries creates a foreign currency exposure that qualifies for hedge accounting under the accounting standards for derivatives and hedging. We utilize forward contracts and/or options to mitigate the variability of the forecasted future purchases and sales of these U.S. Dollar investments. The combination of the purchase and sale of the U.S. Dollar investment and the hedging instrument has the effect of partially offsetting the year-over-year foreign currency translation impact on net earnings in the period the investments are sold. Hedges of available-for-sale investments are accounted for as cash flow hedges. +36 +Table of Contents +Refer to Note 6 — Fair Value Measurements and Note 16 — Risk Management and Derivatives in the accompanying Notes to the Consolidated Financial Statements for additional description of how the above financial instruments are valued and recorded as well as the fair value of outstanding derivatives at each reported period end. +We estimate the combination of translation of foreign currency-denominated profits from our international businesses and the year-over-year change in foreign currency related gains and losses included in Other (income) expense, net had an unfavorable impact of approximately $423 million and $73 million on our Income before income taxes for the years ended May 31, 2016 and 2015, respectively. +Net Investments in Foreign Subsidiaries +We are also exposed to the impact of foreign exchange fluctuations on our investments in wholly-owned foreign subsidiaries denominated in a currency other than the U.S. Dollar, which could adversely impact the U.S. Dollar value of these investments and therefore the value of future repatriated earnings. We have, in the past, hedged and may, in the future, hedge net investment positions in certain foreign subsidiaries to mitigate the effects of foreign exchange fluctuations on these net investments. These hedges are accounted for in accordance with the accounting standards for net investment hedges. There were no outstanding net investment hedges as of May 31, 2016 and 2015. There were no cash flows from net investment hedge settlements for the years ended May 31, 2016 and 2015. +Liquidity and Capital Resources +Cash Flow Activity +Cash provided by operations was $3,096 million for fiscal 2016 compared to $4,680 million for fiscal 2015 . Our primary source of operating cash flow for fiscal 2016 was Net income of $3,760 million . Our fiscal 2016 change in working capital was a net cash outflow of $1,580 million as compared to a net cash inflow of $256 million for fiscal 2015 . The change in working capital was primarily due to a net decrease in the amount of cash collateral received as a result of hedging activities (refer to the Credit Risk section of Note 16 — Risk Management and Derivatives for additional detail). For fiscal 2016, cash collateral received from counterparties declined $863 million as compared to an increase in collateral received from counterparties of $968 million for fiscal 2015. +Cash used by investing activities was $1,034 million for fiscal 2016 , compared to a $175 million use of cash for fiscal 2015 . The primary driver of the increase in Cash used by investing activities was the net change in short-term investments (including sales, maturities and purchases) from net sales/maturities to net purchases. In fiscal 2016, there were $57 million of net purchases of short-term investments compared to $935 million of net sales/maturities of short-term investments in the same period of fiscal 2015. Additions to property, plant and equipment were $1,143 million for fiscal 2016 as compared to $963 million for fiscal 2015. The increase in Additions to property, plant and equipment resulted from continued investments in infrastructure to support current and future growth, primarily relating to supply chain and corporate initiatives, as well as expansion of our DTC operations. +In fiscal 2017, we plan to continue investing in our infrastructure to support future growth, as well as expand our digital capabilities. We anticipate investing approximately 4% of revenue, a portion of which will be used for the continued expansion of our corporate facilities, new DTC stores and digital capabilities. +Cash used by financing activities was $2,671 million for fiscal 2016 compared to $2,790 million for fiscal 2015 , a decrease of $119 million, as increases in share repurchases and dividends were more than offset by the receipt of $981 million in net proceeds from the issuance of long-term debt in October 2015. +In fiscal 2016 , we purchased 55.4 million shares of NIKE’s Class B Common Stock for $3,238 million (an average price of $ 58.44 ). During the third quarter of fiscal 2016, we concluded the Company's four-year, $8 billion share repurchase program approved by our Board of Directors in September 2012. Under this program the Company purchased a total of 197.1 million shares at a cost of $8 billion (an average price of $40.58 per share). Following the completion of this program, the Company began purchases under a four-year, $12 billion program approved by our Board of Directors in November 2015. Of the total 55.4 million shares repurchased in fiscal 2016, 20.1 million shares were purchased under this new program at a cost of approximately $1,189 million (an average price of $59.21 per share). We continue to expect funding of share repurchases will come from operating cash flow, excess cash and/or debt. The timing and the amount of shares purchased will be dictated by our capital needs and stock market conditions. +Capital Resources +On April 23, 2013, we filed a shelf registration statement (the "Shelf") with the SEC which permitted us to issue an unlimited amount of debt securities. On April 23, 2013, we issued $1.0 billion of senior notes with tranches maturing in 2023 and 2043. The 2023 senior notes were issued in an initial aggregate principal amount of $500 million at a 2.25% fixed, annual interest rate and will mature on May 1, 2023. The 2043 senior notes were issued in an initial aggregate principal amount of $500 million at a 3.625% fixed, annual interest rate and will mature on May 1, 2043. Interest on the senior notes is payable semi-annually on May 1 and November 1 of each year. The issuance resulted in gross proceeds before expenses of $998 million. On October 29, 2015, we issued an additional $1.0 billion of senior notes at a 3.875% fixed, annual interest rate that will mature on November 1, 2045. Interest on the senior notes is payable semi-annually on May 1 and November 1 of each year. The issuance resulted in proceeds before expenses of $991 million. The Shelf expired on April 23, 2016. We plan to file a new shelf registration statement with the SEC in July 2016. +On August 28, 2015, we entered into a committed credit facility agreement with a syndicate of banks, which provides for up to $2 billion of borrowings. The facility matures August 28, 2020, with a one year extension option prior to any anniversary of the closing date, provided that in no event shall it extend beyond August 28, 2022. This facility replaces the prior $1 billion credit facility agreement entered into on November 1, 2011, which would have matured November 1, 2017. As of and for the periods ended May 31, 2016 and 2015 , we had no amounts outstanding under either committed credit facility. +37 +Table of Contents +We currently have long-term debt ratings of AA- and A1 from Standard and Poor's Corporation and Moody's Investor Services, respectively. If our long-term debt ratings were to decline, the facility fee and interest rate under our committed credit facility would increase. Conversely, if our long-term debt rating were to improve, the facility fee and interest rate would decrease. Changes in our long-term debt rating would not trigger acceleration of maturity of any then-outstanding borrowings or any future borrowings under the committed credit facility. Under this committed revolving credit facility, we have agreed to various covenants. These covenants include limits on our disposal of fixed assets, the amount of debt secured by liens we may incur, as well as limits on the indebtedness we can incur relative to our net worth. In the event we were to have any borrowings outstanding under this facility and failed to meet any covenant, and were unable to obtain a waiver from a majority of the banks in the syndicate, any borrowings would become immediately due and payable. As of May 31, 2016 , we were in full compliance with each of these covenants and believe it is unlikely we will fail to meet any of these covenants in the foreseeable future. +Liquidity is also provided by our $2 billion commercial paper program, which increased $1 billion during the second quarter of fiscal 2016. During the year ended May 31, 2016 , we did not issue commercial paper, and as of May 31, 2016 , there were no outstanding borrowings under this program. Any future issuance of commercial paper or other debt securities during fiscal 2017 will depend on general corporate needs. We currently have short-term debt ratings of A1+ and P1 from Standard and Poor's Corporation and Moody's Investor Services, respectively. +As of May 31, 2016 , we had cash, cash equivalents and short-term investments totaling $5.5 billion , of which $4.6 billion was held by our foreign subsidiaries. Included in Cash and equivalents as of May 31, 2016 was $105 million of cash collateral received from counterparties as a result of hedging activity. Cash equivalents and Short-term investments consist primarily of deposits held at major banks, money market funds, commercial paper, corporate notes, U.S. Treasury obligations, U.S. government sponsored enterprise obligations and other investment grade fixed income securities. Our fixed income investments are exposed to both credit and interest rate risk. All of our investments are investment grade to minimize our credit risk. While individual securities have varying durations, as of May 31, 2016 , the weighted average remaining duration of our cash equivalents and short-term investments portfolio was 91 days. +To date we have not experienced difficulty accessing the credit markets or incurred higher interest costs. Future volatility in the capital markets, however, may increase costs associated with issuing commercial paper or other debt instruments or affect our ability to access those markets. We believe that existing cash, cash equivalents, short-term investments and cash generated by operations, together with access to external sources of funds as described above, will be sufficient to meet our domestic and foreign capital needs in the foreseeable future. +We utilize a variety of tax planning and financing strategies to manage our worldwide cash and deploy funds to locations where they are needed. We routinely repatriate a portion of our foreign earnings for which U.S. taxes have previously been provided. We also indefinitely reinvest a significant portion of our foreign earnings, and our current plans do not demonstrate a need to repatriate these earnings. Should we require additional capital in the United States, we may elect to repatriate indefinitely reinvested foreign funds or raise capital in the United States through debt. If we were to repatriate indefinitely reinvested foreign funds, we would be required to accrue and pay additional U.S. taxes less applicable foreign tax credits. If we elect to raise capital in the United States through debt, we would incur additional interest expense . +Off-Balance Sheet Arrangements +In connection with various contracts and agreements, we routinely provide indemnification relating to the enforceability of intellectual property rights, coverage for legal issues that arise and other items where we are acting as the guarantor. Currently, we have several such agreements in place. However, based on our historical experience and the estimated probability of future loss, we have determined that the fair value of such indemnification is not material to our financial position or results of operations. +38 +Table of Contents +Contractual Obligations +Our significant long-term contractual obligations as of May 31, 2016 and significant endorsement contracts, including related marketing commitments, entered into through the date of this report are as follows: +Description of Commitment +Cash Payments Due During the Year Ending May 31, +(In millions) +2017 +2018 +2019 +2020 +2021 +Thereafter +Total +Operating Leases +$ +491 +$ +453 +$ +395 +$ +347 +$ +301 +$ +1,244 +$ +3,231 +Capital Leases +7 +5 +2 +1 +— +— +15 +Long-Term Debt (1) +115 +75 +74 +74 +71 +3,365 +3,774 +Endorsement Contracts (2) +1,198 +1,238 +945 +827 +698 +4,514 +9,420 +Product Purchase Obligations (3) +4,149 +— +— +— +— +— +4,149 +Other Purchase Obligations (4) +384 +118 +90 +48 +42 +90 +772 +TOTAL +$ +6,344 +$ +1,889 +$ +1,506 +$ +1,297 +$ +1,112 +$ +9,213 +$ +21,361 +(1) +The cash payments due for long-term debt include estimated interest payments. Estimates of interest payments are based on outstanding principal amounts, applicable fixed interest rates or currently effective interest rates as of May 31, 2016 (if variable), timing of scheduled payments and the term of the debt obligations. +(2) +The amounts listed for endorsement contracts represent approximate amounts of base compensation and minimum guaranteed royalty fees we are obligated to pay athlete, sport team and league endorsers of our products. Actual payments under some contracts may be higher than the amounts listed as these contracts provide for bonuses to be paid to the endorsers based upon athletic achievements and/or royalties on product sales in future periods. Actual payments under some contracts may also be lower as these contracts include provisions for reduced payments if athletic performance declines in future periods. +In addition to the cash payments, we are obligated to furnish our endorsers with NIKE product for their use. It is not possible to determine how much we will spend on this product on an annual basis as the contracts generally do not stipulate a specific amount of cash to be spent on the product. The amount of product provided to the endorsers will depend on many factors, including general playing conditions, the number of sporting events in which they participate and our own decisions regarding product and marketing initiatives. In addition, the costs to design, develop, source and purchase the products furnished to the endorsers are incurred over a period of time and are not necessarily tracked separately from similar costs incurred for products sold to customers. +(3) +We generally order product at least four to five months in advance of sale based primarily on futures orders received from external wholesale customers and internal orders from our DTC in-line stores and e-commerce operations. The amounts listed for product purchase obligations represent agreements (including open purchase orders) to purchase products in the ordinary course of business that are enforceable and legally binding and that specify all significant terms. In some cases, prices are subject to change throughout the production process. +(4) +Other purchase obligations primarily include service and marketing commitments, including marketing commitments associated with endorsement contracts, made in the ordinary course of business. The amounts represent the minimum payments required by legally binding contracts and agreements that specify all significant terms, including open purchase orders for non-product purchases. +In addition to the above, we have long-term obligations for uncertain tax positions and various post-retirement benefits for which we are not able to reasonably estimate when cash payments will occur. Refer to Note 9 — Income Taxes and Note 13 — Benefit Plans in the accompanying Notes to the Consolidated Financial Statements for further information related to uncertain tax positions and post-retirement benefits, respectively. +We also have the following outstanding short-term debt obligations as of May 31, 2016 . Refer to Note 7 — Short-Term Borrowings and Credit Lines in the accompanying Notes to the Consolidated Financial Statements for further description and interest rates related to the short-term debt obligations listed below. +Outstanding as of +(In millions) +May 31, 2016 +Notes payable, due at mutually agreed-upon dates within one year of issuance or on demand +$ +1 +Payable to Sojitz America for the purchase of inventories, generally due 60 days after shipment of goods from a foreign port +39 +As of May 31, 2016 , the Company had letters of credit outstanding totaling $157 million . These letters of credit were issued primarily for the purchase of inventory and as guarantees of the Company’s performance under certain self-insurance and other programs. +New Accounting Pronouncements +Refer to Note 1 — Summary of Significant Accounting Policies in the accompanying Notes to the Consolidated Financial Statements for recently adopted and recently issued accounting standards. +Critical Accounting Policies +Our previous discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. +39 +Table of Contents +We believe that the estimates, assumptions and judgments involved in the accounting policies described below have the greatest potential impact on our financial statements, so we consider these to be our critical accounting policies. Because of the uncertainty inherent in these matters, actual results could differ from the estimates we use in applying the critical accounting policies. Certain of these critical accounting policies affect working capital account balances, including the policies for revenue recognition, the allowance for uncollectible accounts receivable, inventory reserves and contingent payments under endorsement contracts. These policies require that we make estimates in the preparation of our financial statements as of a given date. However, since our business cycle is relatively short, actual results related to these estimates are generally known within the six-month period following the financial statement date. Thus, these policies generally affect only the timing of reported amounts across two to three fiscal quarters. +Within the context of these critical accounting policies, we are not currently aware of any reasonably likely events or circumstances that would result in materially different amounts being reported. +Revenue Recognition +We record wholesale revenues when title passes and the risks and rewards of ownership have passed to the customer, based on the terms of sale. Title passes generally upon shipment or upon receipt by the customer depending on the country of the sale and the agreement with the customer. Retail store revenues are recorded at the time of sale and online store revenues are recorded upon delivery to the customer. +In some instances, we ship product directly from our supplier to the customer and recognize revenue when the product is delivered to and accepted by the customer. Our revenues may fluctuate in cases when our customers delay accepting shipment of product for periods of up to several weeks. +In certain countries outside of the United States, precise information regarding the date of receipt by the customer is not readily available. In these cases, we estimate the date of receipt by the customer based upon historical delivery times by geographic location. On the basis of our tests of actual transactions, we have no indication that these estimates have been materially inaccurate historically. +As part of our revenue recognition policy, we record estimated sales returns, discounts and miscellaneous claims from customers as reductions to revenues at the time revenues are recorded. Our post invoice sales discounts consist of contractual programs with certain customers or discretionary discounts that are expected to be granted to certain customers at a later date. We base our estimates on (1) historical rates of product returns, discounts and claims, (2) specific identification of outstanding claims and outstanding returns not yet received from customers and (3) estimated returns, discounts and claims expected but not yet finalized with our customers. Actual returns, discounts and claims in any future period are inherently uncertain and thus may differ from our estimates. If actual or expected future returns, discounts and claims are significantly greater or lower than established reserves, we record a reduction or increase to net revenues in the period in which we make such determination. +Allowance for Uncollectible Accounts Receivable +We make ongoing estimates relating to the ability to collect our accounts receivable and maintain an allowance for estimated losses resulting from the inability of our customers to make required payments. In determining the amount of the allowance, we consider our historical level of credit losses and make judgments about the creditworthiness of significant customers based on ongoing credit evaluations. Since we cannot predict future changes in the financial stability of our customers, actual future losses from uncollectible accounts may differ from our estimates. If the financial condition of our customers were to deteriorate, resulting in their inability to make payments, a larger allowance might be required. In the event we determine that a smaller or larger allowance is appropriate, we would record a credit or a charge to Operating overhead expense in the period in which such a determination is made. +Inventory Reserves +We also make ongoing estimates relating to the net realizable value of inventories based upon our assumptions about future demand and market conditions. If we estimate that the net realizable value of our inventory is less than the cost of the inventory recorded on our books, we record a reserve equal to the difference between the cost of the inventory and the estimated net realizable value. This reserve is recorded as a charge to Cost of sales . If changes in market conditions result in reductions in the estimated net realizable value of our inventory below our previous estimate, we would increase our reserve in the period in which we made such a determination and record a charge to Cost of sales . +Contingent Payments under Endorsement Contracts +A significant portion of our Demand creation expense relates to payments under endorsement contracts. In general, endorsement payments are expensed uniformly over the term of the contract. However, certain contract elements may be accounted for differently, based upon the facts and circumstances of each individual contract. +Certain contracts provide for contingent payments to endorsers based upon specific achievements in their sports (e.g., winning a championship). We record demand creation expense for these amounts when the endorser achieves the specific goal. +Certain contracts provide for variable payments based upon endorsers maintaining a level of performance in their sport over an extended period of time (e.g., maintaining a specified ranking in a sport for a year). When we determine payments are probable, the amounts are recorded in Demand creation expense ratably over the contract period based on our best estimate of the endorser's performance. In these instances, to the extent that actual payments to the endorser differ from our estimate due to changes in the endorser’s performance, increased or decreased Demand creation expense may be recorded in a future period. +Certain contracts provide for royalty payments to endorsers based upon a predetermined percent of sales of particular products. We expense these payments in Cost of sales as the related sales occur. In certain contracts, we offer minimum guaranteed royalty payments. For contracts for which we estimate we will not meet the minimum guaranteed amount of royalty fees through sales of product, we record the amount of the guaranteed payment in excess of that earned through sales of product in Demand creation expense uniformly over the contract term. +40 +Table of Contents +Property, Plant and Equipment and Definite-Lived Assets +Property, plant and equipment, including buildings, equipment and computer hardware and software are recorded at cost (including, in some cases, the cost of internal labor) and are depreciated over the estimated useful life. Changes in circumstances (such as technological advances or changes to our business operations) can result in differences between the actual and estimated useful lives. In those cases where we determine that the useful life of a long-lived asset should be shortened, we increase depreciation expense over the remaining useful life to depreciate the asset’s net book value to its salvage value. +We review the carrying value of long-lived assets or asset groups to be used in operations whenever events or changes in circumstances indicate that the carrying amount of the assets might not be recoverable. Factors that would necessitate an impairment assessment include a significant adverse change in the extent or manner in which an asset is used, a significant adverse change in legal factors or the business climate that could affect the value of the asset or a significant decline in the observable market value of an asset, among others. If such facts indicate a potential impairment, we would assess the recoverability of an asset group by determining if the carrying value of the asset group exceeds the sum of the projected undiscounted cash flows expected to result from the use and eventual disposition of the assets over the remaining economic life of the primary asset in the asset group. If the recoverability test indicates that the carrying value of the asset group is not recoverable, we will estimate the fair value of the asset group using appropriate valuation methodologies that would typically include an estimate of discounted cash flows. Any impairment would be measured as the difference between the asset group’s carrying amount and its estimated fair value. +Goodwill and Indefinite-Lived Intangible Assets +We perform annual impairment tests on goodwill and intangible assets with indefinite lives in the fourth quarter of each fiscal year or when events occur or circumstances change that would, more likely than not, reduce the fair value of a reporting unit or an intangible asset with an indefinite life below its carrying value. Events or changes in circumstances that may trigger interim impairment reviews include significant changes in business climate, operating results, planned investments in the reporting unit, planned divestitures or an expectation that the carrying amount may not be recoverable, among other factors. We may first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events and circumstances, we determine that it is more likely than not that the fair value of the reporting unit is greater than its carrying amount, the two-step impairment test is unnecessary. The two-step impairment test requires us to estimate the fair value of our reporting units. If the carrying value of a reporting unit exceeds its fair value, the goodwill of that reporting unit is potentially impaired and we proceed to step two of the impairment analysis. In step two of the analysis, we measure and record an impairment loss equal to the excess of the carrying value of the reporting unit's goodwill over its implied fair value, if any. +We generally base our measurement of the fair value of a reporting unit on a blended analysis of the present value of future discounted cash flows and the market valuation approach. The discounted cash flows model indicates the fair value of the reporting unit based on the present value of the cash flows that we expect the reporting unit to generate in the future. Our significant estimates in the discounted cash flows model include: our weighted average cost of capital; long-term rate of growth and profitability of the reporting unit's business; and working capital effects. The market valuation approach indicates the fair value of the business based on a comparison of the reporting unit to comparable publicly traded companies in similar lines of business. Significant estimates in the market valuation approach model include identifying similar companies with comparable business factors such as size, growth, profitability, risk and return on investment, and assessing comparable revenue and operating income multiples in estimating the fair value of the reporting unit. +Indefinite-lived intangible assets primarily consist of acquired trade names and trademarks. We may first perform a qualitative assessment to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired. If, after assessing the totality of events and circumstances, we determine that it is more likely than not that the indefinite-lived intangible asset is not impaired, no quantitative fair value measurement is necessary. If a quantitative fair value measurement calculation is required for these intangible assets, we utilize the relief-from-royalty method. This method assumes that trade names and trademarks have value to the extent that their owner is relieved of the obligation to pay royalties for the benefits received from them. This method requires us to estimate the future revenue for the related brands, the appropriate royalty rate and the weighted average cost of capital. +Fair Value Measurements +For financial assets and liabilities measured at fair value on a recurring basis, fair value is the price we would receive to sell an asset or pay to transfer a liability in an orderly transaction with a market participant at the measurement date. In general, and where applicable, we use quoted prices in active markets for identical assets or liabilities to determine the fair values of our financial instruments. This pricing methodology applies to our Level 1 investments, including U.S. Treasury securities. +In the absence of active markets for identical assets or liabilities, such measurements involve developing assumptions based on market observable data, including quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active. This pricing methodology applies to our Level 2 investments such as time deposits, commercial paper and bonds, U.S. Agency securities and money market funds. +Level 3 investments are valued using internally developed models with unobservable inputs. Assets and liabilities measured using unobservable inputs are an immaterial portion of our portfolio. +A majority of our available-for-sale securities are priced by pricing vendors and are generally Level 1 or Level 2 investments as these vendors either provide a quoted market price in an active market or use observable inputs without applying significant adjustments in their pricing. Observable inputs include broker quotes, interest rates and yield curves observable at commonly quoted intervals, volatilities and credit risks. Our fair value processes include controls that are designed to ensure appropriate fair values are recorded. These controls include a comparison to another independent pricing vendor. +41 +Table of Contents +Hedge Accounting for Derivatives +We use derivative contracts to hedge certain anticipated foreign currency and interest rate transactions as well as certain non-functional currency monetary assets and liabilities. When the specific criteria to qualify for hedge accounting has been met, changes in the fair value of contracts hedging probable forecasted future cash flows are recorded in Other comprehensive income , rather than Net income , until the underlying hedged transaction affects Net income . In most cases, this results in gains and losses on hedge derivatives being released from Other comprehensive income into Net income sometime after the maturity of the derivative. One of the criteria for this accounting treatment is that the notional value of these derivative contracts should not be in excess of specifically identified anticipated transactions. By their very nature, our estimates of anticipated transactions may fluctuate over time and may ultimately vary from actual transactions. When anticipated transaction estimates or actual transaction amounts decline below hedged levels, or if it is no longer probable that a forecasted transaction will occur by the end of the originally specified time period or within an additional two-month period of time thereafter, we are required to reclassify the cumulative change in fair value of the over-hedged portion of the related hedge contract from Other comprehensive income to Other (income) expense, net during the quarter in which the decrease occurs. +We have used in the past, and may use in the future, forward contracts or options to hedge our investment in the net assets of certain international subsidiaries to offset foreign currency translation related to our net investment in those subsidiaries. The change in fair value of the forward contracts or options hedging our net investments is reported in the cumulative translation adjustment component of Accumulated other comprehensive income within Total shareholders’ equity , to the extent effective, to offset the foreign currency translation adjustments on those investments. As the value of our underlying net investments in wholly-owned international subsidiaries is known at the time a hedge is placed, the designated hedge is matched to the portion of our net investment at risk. Accordingly, the variability involved in net investment hedges is substantially less than that of other types of hedge transactions and we do not expect any material ineffectiveness. We consider, on a quarterly basis, the need to redesignate existing hedge relationships based on changes in the underlying net investment. Should the level of our net investment decrease below hedged levels, the cumulative change in fair value of the over-hedged portion of the related hedge contract would be reported as Other (income) expense, net during the period in which changes occur. +Stock-based Compensation +We account for stock-based compensation by estimating the fair value of stock-based compensation on the date of grant using the Black-Scholes option pricing model. The Black-Scholes option pricing model requires the input of highly subjective assumptions including volatility. Expected volatility is estimated based on implied volatility in market traded options on our common stock with a term greater than one year, along with other factors. Our decision to use implied volatility was based on the availability of actively traded options on our common stock and our assessment that implied volatility is more representative of future stock price trends than historical volatility. If factors change and we use different assumptions for estimating stock-based compensation expense in future periods, stock-based compensation expense may differ materially in the future from that recorded in the current period. +Income Taxes +We record valuation allowances against our deferred tax assets, when necessary. Realization of deferred tax assets (such as net operating loss carry-forwards) is dependent on future taxable earnings and is therefore uncertain. At least quarterly, we assess the likelihood that our deferred tax asset balance will be recovered from future taxable income. To the extent we believe that recovery is not likely, we establish a valuation allowance against our net deferred tax asset, which increases our Income tax expense in the period when such determination is made. +In addition, we have not recorded U.S. income tax expense for foreign earnings that we have determined to be indefinitely reinvested outside the United States, thus reducing our overall Income tax expense . The amount of earnings designated as indefinitely reinvested offshore is based upon the actual deployment of such earnings in our offshore assets and our expectations of the future cash needs of our U.S. and foreign entities. Income tax considerations are also a factor in determining the amount of foreign earnings to be indefinitely reinvested offshore. +We carefully review all factors that drive the ultimate disposition of foreign earnings determined to be reinvested offshore and apply stringent standards to overcome the presumption of repatriation. Despite this approach, because the determination involves our future plans and expectations of future events, the possibility exists that amounts declared as indefinitely reinvested offshore may ultimately be repatriated. For instance, the actual cash needs of our U.S. entities may exceed our current expectations, or the actual cash needs of our foreign entities may be less than our current expectations. This would result in additional Income tax expense in the year we determined that amounts were no longer indefinitely reinvested offshore. Conversely, our approach may also result in a determination that accumulated foreign earnings (for which U.S. income taxes have been provided) will be indefinitely reinvested offshore. In this case, our Income tax expense would be reduced in the year of such determination. +On an interim basis, we estimate what our effective tax rate will be for the full fiscal year. This estimated annual effective tax rate is then applied to the year-to-date Income before income taxes excluding infrequently occurring or unusual items, to determine the year-to-date Income tax expense . The income tax effects of infrequent or unusual items are recognized in the interim period in which they occur. As the fiscal year progresses, we continually refine our estimate based upon actual events and earnings by jurisdiction during the year. This continual estimation process periodically results in a change to our expected effective tax rate for the fiscal year. When this occurs, we adjust the income tax provision during the quarter in which the change in estimate occurs. +On a quarterly basis, we evaluate the probability that a tax position will be effectively sustained and the appropriateness of the amount recognized for uncertain tax positions based on factors including changes in facts or circumstances, changes in tax law, settled audit issues and new audit activity. Changes in our assessment may result in the recognition of a tax benefit or an additional charge to the tax provision in the period our assessment changes. We recognize interest and penalties related to income tax matters in Income tax expense . +42 +Table of Contents +Other Contingencies +In the ordinary course of business, we are involved in legal proceedings regarding contractual and employment relationships, product liability claims, trademark rights and a variety of other matters. We record contingent liabilities resulting from claims against us, including related legal costs, when a loss is assessed to be probable and the amount of the loss is reasonably estimable. Assessing probability of loss and estimating probable losses requires analysis of multiple factors, including in some cases judgments about the potential actions of third-party claimants and courts. Recorded contingent liabilities are based on the best information available and actual losses in any future period are inherently uncertain. If future adjustments to estimated probable future losses or actual losses exceed our recorded liability for such claims, we would record additional charges during the period in which the actual loss or change in estimate occurred. In addition to contingent liabilities recorded for probable losses, we disclose contingent liabilities when there is a reasonable possibility that the ultimate loss will materially exceed the recorded liability. While we cannot predict the outcome of pending legal matters with certainty, we do not believe any currently identified claim, proceeding or litigation, either individually or in aggregate, will have a material impact on our results of operations, financial position or cash flows. +43 +Table of Contents +ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk +In the normal course of business and consistent with established policies and procedures, we employ a variety of financial instruments to manage exposure to fluctuations in the value of foreign currencies and interest rates. It is our policy to utilize these financial instruments only where necessary to finance our business and manage such exposures; we do not enter into these transactions for trading or speculative purposes. +We are exposed to foreign currency fluctuations, primarily as a result of our international sales, product sourcing and funding activities. Our foreign exchange risk management program is intended to lessen both the positive and negative effects of currency fluctuations on our consolidated results of operations, financial position and cash flows. We use forward and option contracts to hedge certain anticipated but not yet firmly committed transactions as well as certain firm commitments and the related receivables and payables, including third-party and intercompany transactions. We have, in the past, and may in the future, also use forward or options contracts to hedge our investment in the net assets of certain international subsidiaries to offset foreign currency translation adjustments related to our net investment in those subsidiaries. Where exposures are hedged, our program has the effect of delaying the impact of exchange rate movements on our Consolidated Financial Statements. +The timing for hedging exposures, as well as the type and duration of the hedge instruments employed, are guided by our hedging policies and determined based upon the nature of the exposure and prevailing market conditions. Typically, the Company may enter into hedge contracts starting up to 12 to 24 months in advance of the forecasted transaction and may place incremental hedges up to 100% of the exposure by the time the forecasted transaction occurs. The majority of derivatives outstanding as of May 31, 2016 are designated as foreign currency cash flow hedges, primarily for Euro/U.S. Dollar, British Pound/Euro and Japanese Yen/U.S. Dollar currency pairs. See section “Foreign Currency Exposures and Hedging Practices” under Item 7 for additional detail. +Our earnings are also exposed to movements in short- and long-term market interest rates. Our objective in managing this interest rate exposure is to limit the impact of interest rate changes on earnings and cash flows and to reduce overall borrowing costs. To achieve these objectives, we maintain a mix of commercial paper, bank loans, fixed-rate debt of varying maturities and have entered into receive-fixed, pay-variable interest rate swaps for a portion of our fixed-rate debt, as well as pay-fixed, receive-variable forward-starting interest rate swaps for cash outflows of interest payments on future debt. +Market Risk Measurement +We monitor foreign exchange risk, interest rate risk and related derivatives using a variety of techniques including a review of market value, sensitivity analysis and Value-at-Risk (“VaR”). Our market-sensitive derivative and other financial instruments are foreign currency forward contracts, foreign currency option contracts, interest rate swaps, intercompany loans denominated in non-functional currencies, fixed interest rate U.S. Dollar denominated debt and fixed interest rate Japanese Yen denominated debt. +We use VaR to monitor the foreign exchange risk of our foreign currency forward and foreign currency option derivative instruments only. The VaR determines the maximum potential one-day loss in the fair value of these foreign exchange rate-sensitive financial instruments. The VaR model estimates assume normal market conditions and a 95% confidence level. There are various modeling techniques that can be used in the VaR computation. Our computations are based on interrelationships between currencies and interest rates (a “variance/co-variance” technique). These interrelationships are a function of foreign exchange currency market changes and interest rate changes over the preceding one year period. The value of foreign currency options does not change on a one-to-one basis with changes in the underlying currency rate. We adjust the potential loss in option value for the estimated sensitivity (the “delta” and “gamma”) to changes in the underlying currency rate. This calculation reflects the impact of foreign currency rate fluctuations on the derivative instruments only and does not include the impact of such rate fluctuations on non-functional currency transactions (such as anticipated transactions, firm commitments, cash balances and accounts and loans receivable and payable), including those which are hedged by these instruments. +The VaR model is a risk analysis tool and does not purport to represent actual losses in fair value that we will incur nor does it consider the potential effect of favorable changes in market rates. It also does not represent the full extent of the possible loss that may occur. Actual future gains and losses will differ from those estimated because of changes or differences in market rates and interrelationships, hedging instruments and hedge percentages, timing and other factors. +The estimated maximum one-day loss in fair value on our foreign currency sensitive derivative financial instruments, derived using the VaR model, was $109 million and $117 million at May 31, 2016 and 2015, respectively. The VaR decreased year-over-year as a result of a decrease in the total notional value of our foreign currency derivative portfolio at May 31, 2016. Such a hypothetical loss in the fair value of our derivatives would be offset by increases in the value of the underlying transactions being hedged. The average monthly change in the fair values of foreign currency forward and foreign currency option derivative instruments was $209 million and $205 million during fiscal 2016 and fiscal 2015, respectively. +The instruments not included in the VaR are intercompany loans denominated in non-functional currencies, fixed interest rate Japanese Yen denominated debt, fixed interest rate U.S. Dollar denominated debt and interest rate swaps. Intercompany loans and related interest amounts are eliminated in consolidation. Furthermore, our non-functional currency intercompany loans are substantially hedged against foreign exchange risk through the use of forward contracts, which are included in the VaR calculation above. Therefore, we consider the interest rate and foreign currency market risks associated with our non-functional currency intercompany loans to be immaterial to our consolidated financial position, results from operations and cash flows. +During the year ended May 31, 2016, we entered into a series of forward-starting interest rate swap agreements. A forward-starting interest rate swap is an agreement that effectively hedges the variability in future benchmark interest payments attributable to changes in interest rates on the forecasted issuance of fixed-rate debt. We entered into these forward-starting interest rate swaps in order to lock in fixed interest rates on our forecasted issuance of debt. These instruments were designated as cash flow hedges of the variability in the expected cash outflows of interest payments on future debt due to changes in benchmark interest rates. +Details of third-party debt and interest rate swaps are provided in the table below. The table presents principal cash flows and related weighted average interest rates by expected maturity dates. +44 +Table of Contents +Expected Maturity Date +Year Ending May 31, +(Dollars in millions) +2017 +2018 +2019 +2020 +2021 +Thereafter +Total +Fair +Value +Foreign Exchange Risk +Japanese Yen Functional Currency +Long-term Japanese Yen debt — Fixed rate +Principal payments +$ +6 +$ +6 +$ +6 +$ +6 +$ +3 +$ +— +$ +27 +$ +28 +Average interest rate +2.4 +% +2.4 +% +2.4 +% +2.4 +% +2.4 +% +0.0 +% +2.4 +% +Interest Rate Risk +Japanese Yen Functional Currency +Long-term Japanese Yen debt — Fixed rate +Principal payments +$ +6 +$ +6 +$ +6 +$ +6 +$ +3 +$ +— +$ +27 +$ +28 +Average interest rate +2.4 +% +2.4 +% +2.4 +% +2.4 +% +2.4 +% +0.0 +% +2.4 +% +U.S. Dollar Functional Currency +Long-term U.S. Dollar debt — Fixed rate +Principal payments +$ +38 +$ +— +$ +— +$ +— +$ +— +$ +2,000 +$ +2,038 +$ +2,097 +Average interest rate +6.2 +% +0.0 +% +0.0 +% +0.0 +% +0.0 +% +3.4 +% +3.5 +% +Anticipated long-term U.S. Dollar debt issuance - Floating rate swapped to fixed rate +Notional (1) +$ +1,500 +$ +— +$ +— +$ +— +$ +— +$ +— +$ +1,500 +$ +38 +Weighted-average fixed rate +2.2 +% +0.0 +% +0.0 +% +0.0 +% +0.0 +% +0.0 +% +2.2 +% +Weighted-average floating rate +0.7 +% +0.0 +% +0.0 +% +0.0 +% +0.0 +% +0.0 +% +0.7 +% +(1) Forward-starting interest rate swaps have been included in the maturities category based on when the related forecasted debt issuance and corresponding swap terminations are expected to occur. +The fixed interest rate Japanese Yen denominated debt instruments were issued by and are accounted for by one of our Japanese subsidiaries. Accordingly, the monthly translation of these instruments, which varies due to changes in foreign exchange rates, is recognized in Accumulated other comprehensive income upon consolidation of this subsidiary. +ITEM 8. Financial Statements and Supplementary Data +Management of NIKE, Inc. is responsible for the information and representations contained in this report. The financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and include certain amounts based on our best estimates and judgments. Other financial information in this report is consistent with these financial statements. +Our accounting systems include controls designed to reasonably assure assets are safeguarded from unauthorized use or disposition and provide for the preparation of financial statements in conformity with U.S. GAAP. These systems are supplemented by the selection and training of qualified financial personnel and an organizational structure providing for appropriate segregation of duties. +An internal Corporate Audit department reviews the results of its work with the Audit Committee of the Board of Directors, presently consisting of four outside directors. The Audit Committee is responsible for the appointment of the independent registered public accounting firm and reviews, with the independent registered public accounting firm, management and the internal audit staff, the scope and the results of the annual audit, the effectiveness of the accounting control system and other matters relating to the financial affairs of NIKE as the Audit Committee deems appropriate. The independent registered public accounting firm and the internal auditors have full access to the Audit Committee, with and without the presence of management, to discuss any appropriate matters. +45 +Table of Contents +Management’s Annual Report on Internal Control Over Financial Reporting +Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13(a) - 15(f) and Rule 15(d) - 15(f) of the Securities Exchange Act of 1934, as amended. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the financial statements for external purposes in accordance with generally accepted accounting principles in the United States of America. Internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of assets of the Company that could have a material effect on the financial statements. +While “reasonable assurance” is a high level of assurance, it does not mean absolute assurance. Because of its inherent limitations, internal control over financial reporting may not prevent or detect every misstatement and instance of fraud. Controls are susceptible to manipulation, especially in instances of fraud caused by the collusion of two or more people, including our senior management. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +Under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, our management conducted an evaluation of the effectiveness of our internal control over financial reporting based upon the framework in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on the results of our evaluation, our management concluded that our internal control over financial reporting was effective as of May 31, 2016 . +PricewaterhouseCoopers LLP, an independent registered public accounting firm, has audited (1) the Consolidated Financial Statements and (2) the effectiveness of our internal control over financial reporting as of May 31, 2016 , as stated in their report herein. +Mark G. Parker +Andrew Campion +Chairman, President and Chief Executive Officer +Chief Financial Officer +46 +Table of Contents +Report of Independent Registered Public Accounting Firm +To the Board of Directors and Shareholders of NIKE, Inc.: +In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)(1) present fairly, in all material respects, the financial position of NIKE, Inc. and its subsidiaries at May 31, 2016 and 2015 , and the results of their operations and their cash flows for each of the three years in the period ended May 31, 2016 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of May 31, 2016 , based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Annual Report on Internal Control over Financial Reporting appearing under Item 8. Our responsibility is to express opinions on these financial statements, on the financial statement schedule and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. +A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. +Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +/S/ PRICEWATERHOUSECOOPERS LLP +Portland, Oregon +July 21, 2016 +47 +Table of Contents +NIKE, Inc. Consolidated Statements of Income +Year Ended May 31, +(In millions, except per share data) +2016 +2015 +2014 +Revenues +$ +32,376 +$ +30,601 +$ +27,799 +Cost of sales +17,405 +16,534 +15,353 +Gross profit +14,971 +14,067 +12,446 +Demand creation expense +3,278 +3,213 +3,031 +Operating overhead expense +7,191 +6,679 +5,735 +Total selling and administrative expense +10,469 +9,892 +8,766 +Interest expense (income), net +19 +28 +33 +Other (income) expense, net +(140 +) +(58 +) +103 +Income before income taxes +4,623 +4,205 +3,544 +Income tax expense +863 +932 +851 +NET INCOME +$ +3,760 +$ +3,273 +$ +2,693 +Earnings per common share: +Basic +$ +2.21 +$ +1.90 +$ +1.52 +Diluted +$ +2.16 +$ +1.85 +$ +1.49 +Dividends declared per common share +$ +0.62 +$ +0.54 +$ +0.47 +The accompanying Notes to the Consolidated Financial Statements are an integral part of this statement. +48 +Table of Contents +NIKE, Inc. Consolidated Statements of Comprehensive Income +Year Ended May 31, +(In millions) +2016 +2015 +2014 +Net income +$ +3,760 +$ +3,273 +$ +2,693 +Other comprehensive income (loss), net of tax: +Change in net foreign currency translation adjustment (1) +(176 +) +(20 +) +(32 +) +Change in net gains (losses) on cash flow hedges (2) +(757 +) +1,188 +(161 +) +Change in net gains (losses) on other (3) +5 +(7 +) +4 +Total other comprehensive income (loss), net of tax +(928 +) +1,161 +(189 +) +TOTAL COMPREHENSIVE INCOME +$ +2,832 +$ +4,434 +$ +2,504 +(1) +Net of tax benefit (expense) of $0 million , $0 million and $0 million , respectively. +(2) +Net of tax benefit (expense) of $35 million , $(31) million and $18 million , respectively. +(3) +Net of tax benefit (expense) of $0 million , $0 million and $0 million , respectively. +The accompanying Notes to the Consolidated Financial Statements are an integral part of this statement. +49 +Table of Contents +NIKE, Inc. Consolidated Balance Sheets +May 31, +(In millions) +2016 +2015 +ASSETS +Current assets: +Cash and equivalents +$ +3,138 +$ +3,852 +Short-term investments +2,319 +2,072 +Accounts receivable, net +3,241 +3,358 +Inventories +4,838 +4,337 +Prepaid expenses and other current assets +1,489 +1,968 +Total current assets +15,025 +15,587 +Property, plant and equipment, net +3,520 +3,011 +Identifiable intangible assets, net +281 +281 +Goodwill +131 +131 +Deferred income taxes and other assets +2,439 +2,587 +TOTAL ASSETS +$ +21,396 +$ +21,597 +LIABILITIES AND SHAREHOLDERS’ EQUITY +Current liabilities: +Current portion of long-term debt +$ +44 +$ +107 +Notes payable +1 +74 +Accounts payable +2,191 +2,131 +Accrued liabilities +3,037 +3,949 +Income taxes payable +85 +71 +Total current liabilities +5,358 +6,332 +Long-term debt +2,010 +1,079 +Deferred income taxes and other liabilities +1,770 +1,479 +Commitments and contingencies +Redeemable preferred stock +— +— +Shareholders’ equity: +Common stock at stated value: +Class A convertible — 353 and 355 shares outstanding +— +— +Class B — 1,329 and 1,357 shares outstanding +3 +3 +Capital in excess of stated value +7,786 +6,773 +Accumulated other comprehensive income +318 +1,246 +Retained earnings +4,151 +4,685 +Total shareholders’ equity +12,258 +12,707 +TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY +$ +21,396 +$ +21,597 +The accompanying Notes to the Consolidated Financial Statements are an integral part of this statement. +50 +Table of Contents +NIKE, Inc. Consolidated Statements of Cash Flows +Year Ended May 31, +(In millions) +2016 +2015 +2014 +Cash provided by operations: +Net income +$ +3,760 +$ +3,273 +$ +2,693 +Income charges (credits) not affecting cash: +Depreciation +649 +606 +518 +Deferred income taxes +(80 +) +(113 +) +(11 +) +Stock-based compensation +236 +191 +177 +Amortization and other +13 +43 +68 +Net foreign currency adjustments +98 +424 +56 +Changes in certain working capital components and other assets and liabilities: +Decrease (increase) in accounts receivable +60 +(216 +) +(298 +) +(Increase) in inventories +(590 +) +(621 +) +(505 +) +(Increase) in prepaid expenses and other current assets +(161 +) +(144 +) +(210 +) +(Decrease) increase in accounts payable, accrued liabilities and income taxes payable +(889 +) +1,237 +525 +Cash provided by operations +3,096 +4,680 +3,013 +Cash used by investing activities: +Purchases of short-term investments +(5,367 +) +(4,936 +) +(5,386 +) +Maturities of short-term investments +2,924 +3,655 +3,932 +Sales of short-term investments +2,386 +2,216 +1,126 +Investments in reverse repurchase agreements +150 +(150 +) +— +Additions to property, plant and equipment +(1,143 +) +(963 +) +(880 +) +Disposals of property, plant and equipment +10 +3 +3 +Decrease (increase) in other assets, net of other liabilities +6 +— +(2 +) +Cash used by investing activities +(1,034 +) +(175 +) +(1,207 +) +Cash used by financing activities: +Net proceeds from long-term debt issuance +981 +— +— +Long-term debt payments, including current portion +(106 +) +(7 +) +(60 +) +(Decrease) increase in notes payable +(67 +) +(63 +) +75 +Payments on capital lease obligations +(7 +) +(19 +) +(17 +) +Proceeds from exercise of stock options and other stock issuances +507 +514 +383 +Excess tax benefits from share-based payment arrangements +281 +218 +132 +Repurchase of common stock +(3,238 +) +(2,534 +) +(2,628 +) +Dividends — common and preferred +(1,022 +) +(899 +) +(799 +) +Cash used by financing activities +(2,671 +) +(2,790 +) +(2,914 +) +Effect of exchange rate changes on cash and equivalents +(105 +) +(83 +) +(9 +) +Net (decrease) increase in cash and equivalents +(714 +) +1,632 +(1,117 +) +Cash and equivalents, beginning of year +3,852 +2,220 +3,337 +CASH AND EQUIVALENTS, END OF YEAR +$ +3,138 +$ +3,852 +$ +2,220 +Supplemental disclosure of cash flow information: +Cash paid during the year for: +Interest, net of capitalized interest +$ +70 +$ +53 +$ +53 +Income taxes +748 +1,262 +856 +Non-cash additions to property, plant and equipment +252 +206 +167 +Dividends declared and not paid +271 +240 +209 +The accompanying Notes to the Consolidated Financial Statements are an integral part of this statement. +51 +Table of Contents +NIKE, Inc. Consolidated Statements of Shareholders’ Equity +Common Stock +Capital in +Excess +of Stated +Value +Accumulated +Other +Comprehensive +Income +Retained +Earnings +Total +Class A +Class B +(In millions, except per share data) +Shares +Amount +Shares +Amount +Balance at May 31, 2013 +356 +$ +— +1,433 +$ +3 +$ +5,184 +$ +274 +$ +5,620 +$ +11,081 +Stock options exercised +22 +445 +445 +Conversion to Class B Common Stock +(1 +) +— +1 +— +— +Repurchase of Class B Common Stock +(73 +) +(11 +) +(2,617 +) +(2,628 +) +Dividends on common stock ($0.47 per share) +(821 +) +(821 +) +Issuance of shares to employees +3 +78 +78 +Stock-based compensation +177 +177 +Forfeiture of shares from employees +(1 +) +(8 +) +(4 +) +(12 +) +Net income +2,693 +2,693 +Other comprehensive income (loss) +(189 +) +(189 +) +Balance at May 31, 2014 +355 +$ +— +1,385 +$ +3 +$ +5,865 +$ +85 +$ +4,871 +$ +10,824 +Stock options exercised +27 +639 +639 +Repurchase of Class B Common Stock +(58 +) +(9 +) +(2,525 +) +(2,534 +) +Dividends on common stock ($0.54 per share) +(931 +) +(931 +) +Issuance of shares to employees +3 +92 +92 +Stock-based compensation +191 +191 +Forfeiture of shares from employees +— +(5 +) +(3 +) +(8 +) +Net income +3,273 +3,273 +Other comprehensive income (loss) +1,161 +1,161 +Balance at May 31, 2015 +355 +$ +— +1,357 +$ +3 +$ +6,773 +$ +1,246 +$ +4,685 +$ +12,707 +Stock options exercised +22 +680 +680 +Conversion to Class B Common Stock +(2 +) +— +2 +— +— +Repurchase of Class B Common Stock +(55 +) +(8 +) +(3,230 +) +(3,238 +) +Dividends on common stock ($0.62 per share) +(1,053 +) +(1,053 +) +Issuance of shares to employees +3 +115 +115 +Stock-based compensation +236 +236 +Forfeiture of shares from employees +— +(10 +) +(11 +) +(21 +) +Net income +3,760 +3,760 +Other comprehensive income (loss) +(928 +) +(928 +) +Balance at May 31, 2016 +353 +$ +— +1,329 +$ +3 +$ +7,786 +$ +318 +$ +4,151 +$ +12,258 +The accompanying Notes to the Consolidated Financial Statements are an integral part of this statement. +52 +Table of Contents +Notes to Consolidated Financial Statements +Note 1 +Summary of Significant Accounting Policies +54 +Note 2 +Inventories +58 +Note 3 +Property, Plant and Equipment +58 +Note 4 +Identifiable Intangible Assets and Goodwill +58 +Note 5 +Accrued Liabilities +59 +Note 6 +Fair Value Measurements +59 +Note 7 +Short-Term Borrowings and Credit Lines +61 +Note 8 +Long-Term Debt +62 +Note 9 +Income Taxes +63 +Note 10 +Redeemable Preferred Stock +65 +Note 11 +Common Stock and Stock-Based Compensation +65 +Note 12 +Earnings Per Share +67 +Note 13 +Benefit Plans +67 +Note 14 +Accumulated Other Comprehensive Income +67 +Note 15 +Commitments and Contingencies +68 +Note 16 +Risk Management and Derivatives +69 +Note 17 +Operating Segments and Related Information +72 +53 +Table of Contents +NOTE 1 — Summary of Significant Accounting Policies +Description of Business +NIKE, Inc. is a worldwide leader in the design, development and worldwide marketing and selling of athletic footwear, apparel, equipment, accessories and services. NIKE, Inc. portfolio brands include the NIKE Brand, Jordan Brand, Hurley and Converse. The NIKE Brand is focused on performance athletic footwear, apparel, equipment, accessories and services across a wide range of sport categories, amplified with sport-inspired sportswear products carrying the Swoosh trademark as well as other NIKE Brand trademarks. The Jordan Brand is focused on athletic and casual footwear, apparel and accessories, using the Jumpman trademark. Sales of Jordan Brand products are reported as a separate category within the respective NIKE Brand geographic operating segments. The Hurley brand is focused on surf and action sports and youth lifestyle footwear, apparel and accessories, using the Hurley trademark. Sales of Hurley brand products are included within the NIKE Brand Action Sports category and within the NIKE Brand's North America geographic operating segment, respectively. Converse designs, distributes, markets and sells casual sneakers, apparel and accessories under the Converse, Chuck Taylor, All Star, One Star, Star Chevron and Jack Purcell trademarks. In some markets outside the U.S., these trademarks are licensed to third parties who design, distribute, market and sell similar products. Operating results of the Converse brand are reported on a stand-alone basis. +Basis of Consolidation +The Consolidated Financial Statements include the accounts of NIKE, Inc. and its subsidiaries (the “Company”). All significant intercompany transactions and balances have been eliminated. +On November 19, 2015, the Company announced a two -for-one split of both NIKE Class A and Class B Common Stock. The stock split was in the form of a 100 percent stock dividend payable on December 23, 2015 to shareholders of record at the close of business on December 9, 2015. Common stock began trading at the split-adjusted price on December 24, 2015. All share and per share amounts presented reflect the stock split. +Reclassifications +Certain prior year amounts have been reclassified to conform to fiscal 2016 presentation. +Revenue Recognition +Wholesale revenues are recognized when title and the risks and rewards of ownership have passed to the customer, based on the terms of sale. This occurs upon shipment or upon receipt by the customer depending on the country of the sale and the agreement with the customer. Retail store revenues are recorded at the time of sale and online store revenues are recorded upon delivery to the customer. Provisions for post-invoice sales discounts, returns and miscellaneous claims from customers are estimated and recorded as a reduction to revenue at the time of sale. Post-invoice sales discounts consist of contractual programs with certain customers or discretionary discounts that are expected to be granted to certain customers at a later date. Estimates of discretionary discounts, returns and claims are based on (1) historical rates, (2) specific identification of outstanding claims and outstanding returns not yet received from customers and (3) estimated discounts, returns and claims expected, but not yet finalized with customers. As of May 31, 2016 and 2015 , the Company’s reserve balances for post-invoice sales discounts, returns and miscellaneous claims were $789 million and $724 million , respectively. +Cost of Sales +Cost of sales consists primarily of inventory costs, as well as warehousing costs (including the cost of warehouse labor), third-party royalties, certain foreign currency hedge gains and losses and research, design and development costs. Outbound shipping and handling costs are expensed as incurred and included in Cost of sales . +Operating Overhead Expense +Operating overhead expense consists primarily of payroll and benefit related costs, rent, depreciation and amortization, professional services and meetings and travel. +Demand Creation Expense +Demand creation expense consists of advertising and promotion costs, including costs of endorsement contracts, television, digital and print advertising, brand events and retail brand presentation. Advertising production costs are expensed the first time an advertisement is run. Advertising communication costs are expensed when the advertisement appears. Costs related to brand events are expensed when the event occurs. Costs related to retail brand presentation are expensed when the presentation is completed and delivered. +A significant amount of the Company’s promotional expenses result from payments under endorsement contracts. Accounting for endorsement payments is based upon specific contract provisions. Generally, endorsement payments are expensed on a straight-line basis over the term of the contract after giving recognition to periodic performance compliance provisions of the contracts. Prepayments made under contracts are included in Prepaid expenses and other current assets or Deferred income taxes and other assets depending on the period to which the prepayment applies. +Certain contracts provide for contingent payments to endorsers based upon specific achievements in their sports (e.g., winning a championship). The Company records demand creation expense for these amounts when the endorser achieves the specific goal. +Certain contracts provide for variable payments based upon endorsers maintaining a level of performance in their sport over an extended period of time (e.g., maintaining a specified ranking in a sport for a year). When the Company determines payments are probable, the amounts are reported in Demand creation expense ratably over the contract period based on our best estimate of the endorser's performance. In these instances, to the extent that actual payments to the endorser differ from the Company's estimate due to changes in the endorser’s performance, increased or decreased demand creation expense may be recorded in a future period. +54 +Table of Contents +Certain contracts provide for royalty payments to endorsers based upon a predetermined percent of sales of particular products. The Company expenses these payments in Cost of sales as the related sales occur. In certain contracts, the Company offers minimum guaranteed royalty payments. For contracts for which the Company estimates it will not meet the minimum guaranteed amount of royalty fees through sales of product, the Company records the amount of the guaranteed payment in excess of that earned through sales of product in Demand creation expense uniformly over the contract term. +Through cooperative advertising programs, the Company reimburses retail customers for certain costs of advertising the Company’s products. The Company records these costs in Demand creation expense at the point in time when it is obligated to its customers for the costs. This obligation may arise prior to the related advertisement being run. +Total advertising and promotion expenses were $3,278 million , $3,213 million and $3,031 million for the years ended May 31, 2016 , 2015 and 2014 , respectively. Prepaid advertising and promotion expenses totaled $540 million and $455 million at May 31, 2016 and 2015 , respectively, and were recorded in Prepaid expenses and other current assets and Deferred income taxes and other assets depending on the period to which the prepayment applies. +Cash and Equivalents +Cash and equivalents represent cash and short-term, highly liquid investments, including commercial paper, U.S. Treasury, U.S. Agency, money market funds, time deposits and corporate debt securities with maturities of 90 days or less at the date of purchase. +Short-Term Investments +Short-term investments consist of highly liquid investments, including commercial paper, U.S. Treasury, U.S. Agency, time deposits and corporate debt securities, with maturities over 90 days at the date of purchase. Debt securities that the Company has the ability and positive intent to hold to maturity are carried at amortized cost. At May 31, 2016 and 2015 , the Company did not hold any short-term investments that were classified as trading or held-to-maturity. +At May 31, 2016 and 2015 , Short-term investments consisted of available-for-sale securities. Available-for-sale securities are recorded at fair value with unrealized gains and losses reported, net of tax, in Accumulated other comprehensive income , unless unrealized losses are determined to be other than temporary. Realized gains and losses on the sale of securities are determined by specific identification. The Company considers all available-for-sale securities, including those with maturity dates beyond 12 months, as available to support current operational liquidity needs and therefore classifies all securities with maturity dates beyond 90 days at the date of purchase as current assets within Short-term investments on the Consolidated Balance Sheets. +Refer to Note 6 — Fair Value Measurements for more information on the Company’s short-term investments. +Allowance for Uncollectible Accounts Receivable +Accounts receivable, net consist primarily of amounts receivable from customers. The Company makes ongoing estimates relating to the collectability of its accounts receivable and maintains an allowance for estimated losses resulting from the inability of its customers to make required payments. In determining the amount of the allowance, the Company considers historical levels of credit losses and makes judgments about the creditworthiness of significant customers based on ongoing credit evaluations. Accounts receivable with anticipated collection dates greater than 12 months from the balance sheet date and related allowances are considered non-current and recorded in Deferred income taxes and other assets . The allowance for uncollectible accounts receivable was $43 million and $78 million at May 31, 2016 and 2015 , respectively, of which $17 million and $24 million , respectively, was classified as long-term and recorded in Deferred income taxes and other assets . +Inventory Valuation +Inventories are stated at lower of cost or market and valued on either an average or specific identification cost basis. For inventories in transit that represent direct shipments to customers, the related inventory and cost of sales are recognized on a specific identification basis. Inventory costs primarily consist of product cost from the Company's suppliers, as well as inbound freight, import duties, taxes, insurance and logistics and other handling fees. +Property, Plant and Equipment and Depreciation +Property, plant and equipment are recorded at cost. Depreciation is determined on a straight-line basis for buildings and leasehold improvements over 2 to 40 years and for machinery and equipment over 2 to 15 years. +Depreciation and amortization of assets used in manufacturing, warehousing and product distribution are recorded in Cost of sales . Depreciation and amortization of other assets are recorded in Operating overhead expense . +Software Development Costs +Internal Use Software : Expenditures for major software purchases and software developed for internal use are capitalized and amortized over a 2 to 10 year period on a straight-line basis. The Company’s policy provides for the capitalization of external direct costs of materials and services associated with developing or obtaining internal use computer software. In addition, the Company also capitalizes certain payroll and payroll-related costs for employees who are directly associated with internal use computer software projects. The amount of capitalizable payroll costs with respect to these employees is limited to the time directly spent on such projects. Costs associated with preliminary project stage activities, training, maintenance and all other post-implementation stage activities are expensed as incurred. +Computer Software to be Sold, Leased or Otherwise Marketed : Development costs of computer software to be sold, leased or otherwise marketed as an integral part of a product are subject to capitalization beginning when a product’s technological feasibility has been established and ending when a product is available for general release to customers. In most instances, the Company’s products are released soon after technological feasibility has been established. Therefore, software development costs incurred subsequent to achievement of technological feasibility are usually not significant, and generally most software development costs have been expensed as incurred. +55 +Table of Contents +Impairment of Long-Lived Assets +The Company reviews the carrying value of long-lived assets or asset groups to be used in operations whenever events or changes in circumstances indicate that the carrying amount of the assets might not be recoverable. Factors that would necessitate an impairment assessment include a significant adverse change in the extent or manner in which an asset is used, a significant adverse change in legal factors or the business climate that could affect the value of the asset or a significant decline in the observable market value of an asset, among others. If such facts indicate a potential impairment, the Company would assess the recoverability of an asset group by determining if the carrying value of the asset group exceeds the sum of the projected undiscounted cash flows expected to result from the use and eventual disposition of the assets over the remaining economic life of the primary asset in the asset group. If the recoverability test indicates that the carrying value of the asset group is not recoverable, the Company will estimate the fair value of the asset group using appropriate valuation methodologies, which would typically include an estimate of discounted cash flows. Any impairment would be measured as the difference between the asset group’s carrying amount and its estimated fair value. +Goodwill and Indefinite-Lived Intangible Assets +The Company performs annual impairment tests on goodwill and intangible assets with indefinite lives in the fourth quarter of each fiscal year or when events occur or circumstances change that would, more likely than not, reduce the fair value of a reporting unit or an intangible asset with an indefinite life below its carrying value. Events or changes in circumstances that may trigger interim impairment reviews include significant changes in business climate, operating results, planned investments in the reporting unit, planned divestitures or an expectation that the carrying amount may not be recoverable, among other factors. The Company may first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events and circumstances, the Company determines that it is more likely than not that the fair value of the reporting unit is greater than its carrying amount, the two-step impairment test is unnecessary. The two-step impairment test first requires the Company to estimate the fair value of its reporting units. If the carrying value of a reporting unit exceeds its fair value, the goodwill of that reporting unit is potentially impaired and the Company proceeds to step two of the impairment analysis. In step two of the analysis, the Company measures and records an impairment loss equal to the excess of the carrying value of the reporting unit's goodwill over its implied fair value, if any. +The Company generally bases its measurement of the fair value of a reporting unit on a blended analysis of the present value of future discounted cash flows and the market valuation approach. The discounted cash flows model indicates the fair value of the reporting unit based on the present value of the cash flows that the Company expects the reporting unit to generate in the future. The Company's significant estimates in the discounted cash flows model include: its weighted average cost of capital; long-term rate of growth and profitability of the reporting unit's business; and working capital effects. The market valuation approach indicates the fair value of the business based on a comparison of the reporting unit to comparable publicly traded companies in similar lines of business. Significant estimates in the market valuation approach model include identifying similar companies with comparable business factors such as size, growth, profitability, risk and return on investment and assessing comparable revenue and operating income multiples in estimating the fair value of the reporting unit. +Indefinite-lived intangible assets primarily consist of acquired trade names and trademarks. The Company may first perform a qualitative assessment to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired. If, after assessing the totality of events and circumstances, the C ompany determines that it is more likely than not that the indefinite-lived intangible asset is not impaired, no quantitative fair value measurement is necessary. If a quantitative fair value measurement calculation is required for these intangible assets, the Company utilizes the relief-from-royalty method. This method assumes that trade names and trademarks have value to the extent that their owner is relieved of the obligation to pay royalties for the benefits received from them. This method requires the Company to estimate the future revenue for the related brands, the appropriate royalty rate and the weighted average cost of capital. +Operating Leases +The Company leases retail store space, certain distribution and warehouse facilities, office space and other non-real estate assets under operating leases. Operating lease agreements may contain rent escalation clauses, renewal options, rent holidays or certain landlord incentives, including tenant improvement allowances. Rent expense for non-cancelable operating leases with scheduled rent increases or landlord incentives are recognized on a straight-line basis over the lease term, beginning with the effective lease commencement date, which is generally the date in which the Company takes possession of or controls the physical use of the property. Certain leases also provide for contingent rent, which is determined as a percent of sales in excess of specified levels. A contingent rent liability is recognized together with the corresponding rent expense when specified levels have been achieved or when the Company determines that achieving the specified levels during the period is probable. +Fair Value Measurements +The Company measures certain financial assets and liabilities at fair value on a recurring basis, including derivatives and available-for-sale securities. Fair value is the price the Company would receive to sell an asset or pay to transfer a liability in an orderly transaction with a market participant at the measurement date. The Company uses a three-level hierarchy established by the Financial Accounting Standards Board ("FASB") that prioritizes fair value measurements based on the types of inputs used for the various valuation techniques (market approach, income approach and cost approach). +The levels of hierarchy are described below: +• +Level 1: Quoted prices in active markets for identical assets or liabilities. +• +Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly; these include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active. +• +Level 3: Unobservable inputs for which there is little or no market data available, which require the reporting entity to develop its own assumptions. +The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. Financial assets and liabilities are classified in their entirety based on the most conservative level of input that is significant to the fair value measurement. +56 +Table of Contents +Pricing vendors are utilized for certain Level 1 and Level 2 investments. These vendors either provide a quoted market price in an active market or use observable inputs without applying significant adjustments in their pricing. Observable inputs include broker quotes, interest rates and yield curves observable at commonly quoted intervals, volatilities and credit risks. The fair value of derivative contracts is determined using observable market inputs such as the daily market foreign currency rates, forward pricing curves, currency volatilities, currency correlations and interest rates and considers nonperformance risk of the Company and that of its counterparties. +The Company’s fair value processes include controls that are designed to ensure appropriate fair values are recorded. These controls include a comparison of fair values to another independent pricing vendor. +Refer to Note 6 — Fair Value Measurements for additional information. +Foreign Currency Translation and Foreign Currency Transactions +Adjustments resulting from translating foreign functional currency financial statements into U.S. Dollars are included in the foreign currency translation adjustment, a component of Accumulated other comprehensive income in Total shareholders’ equity . +The Company’s global subsidiaries have various assets and liabilities, primarily receivables and payables, which are denominated in currencies other than their functional currency. These balance sheet items are subject to re-measurement, the impact of which is recorded in Other (income) expense, net , within the Consolidated Statements of Income. +Accounting for Derivatives and Hedging Activities +The Company uses derivative financial instruments to reduce its exposure to changes in foreign currency exchange rates and interest rates. All derivatives are recorded at fair value on the Consolidated Balance Sheets and changes in the fair value of derivative financial instruments are either recognized in Accumulated other comprehensive income (a component of Total shareholders’ equity ), Long-term debt or Net income depending on the nature of the underlying exposure, whether the derivative is formally designated as a hedge and, if designated, the extent to which the hedge is effective. The Company classifies the cash flows at settlement from derivatives in the same category as the cash flows from the related hedged items. For undesignated hedges and designated cash flow hedges, this is primarily within the Cash provided by operations component of the Consolidated Statements of Cash Flows. For designated net investment hedges, this is within the Cash used by investing activities component of the Consolidated Statements of Cash Flows. For the Company’s fair value hedges, which are interest rate swaps used to mitigate the change in fair value of its fixed-rate debt attributable to changes in interest rates, the related cash flows from periodic interest payments are reflected within the Cash provided by operations component of the Consolidated Statements of Cash Flows. Refer to Note 16 — Risk Management and Derivatives for more information on the Company’s risk management program and derivatives. +Stock-Based Compensation +The Company estimates the fair value of options and stock appreciation rights granted under the NIKE, Inc. Stock Incentive Plan and employees’ purchase rights under the Employee Stock Purchase Plans (“ESPPs”) using the Black-Scholes option pricing model. The Company recognizes this fair value, net of estimated forfeitures, as Operating overhead expense in the Consolidated Statements of Income over the vesting period using the straight-line method. +Refer to Note 11 — Common Stock and Stock-Based Compensation for more information on the Company’s stock-based compensation programs. +Income Taxes +The Company accounts for income taxes using the asset and liability method. This approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of assets and liabilities. The Company records a valuation allowance to reduce deferred tax assets to the amount management believes is more likely than not to be realized. United States income taxes are provided currently on financial statement earnings of non-U.S. subsidiaries that are expected to be repatriated. The Company determines annually the amount of undistributed non-U.S. earnings to invest indefinitely in its non-U.S. operations. +The Company recognizes a tax benefit from uncertain tax positions in the financial statements only when it is more likely than not that the position will be sustained upon examination by relevant tax authorities. The Company recognizes interest and penalties related to income tax matters in Income tax expense . +Refer to Note 9 — Income Taxes for further discussion. +Earnings Per Share +Basic earnings per common share is calculated by dividing Net income by the weighted average number of common shares outstanding during the year. Diluted earnings per common share is calculated by adjusting weighted average outstanding shares, assuming conversion of all potentially dilutive stock options and awards. +Refer to Note 12 — Earnings Per Share for further discussion. +Management Estimates +The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates, including estimates relating to assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. +57 +Table of Contents +Recently Adopted Accounting Standards +In November 2015, the FASB issued ASU No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes to simplify the presentation of deferred taxes in the statement of financial position. The updated guidance requires that deferred tax assets and liabilities be classified as non-current in a classified balance sheet. The Company elected to early adopt ASU 2015-17 on a retrospective basis in the fourth quarter of fiscal 2016. The adoption of this standard reduced Total current assets by $389 million , increased Deferred income taxes and other assets by $386 million and reduced Total current liabilities and Deferred income taxes and other liabilities by $2 million and $1 million , respectively, on the Consolidated Balance Sheet as of May 31, 2015. +Recently Issued Accounting Standards +In May 2014, the Financial Accounting Standards Board ("FASB") issued an accounting standards update that replaces existing revenue recognition guidance. The updated guidance requires companies to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, the new standard requires that reporting companies disclose the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. Based on the FASB's decision in July 2015 to defer the effective date and to allow more flexibility with implementation, the new standard will be effective for the Company beginning June 1, 2018, with early application permitted. The new standard is required to be applied retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying it recognized at the date of initial application. The Company has not yet selected a transition method and is currently evaluating the effect the guidance will have on the Consolidated Financial Statements. +In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities . The updated guidance enhances the reporting model for financial instruments, which includes amendments to address aspects of recognition, measurement, presentation and disclosure. The update to the standard is effective for the Company beginning June 1, 2018. The Company does not expect the adoption to have a material impact on the Consolidated Financial Statements. +In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) that replaces existing lease guidance. The new standard is intended to provide enhanced transparency and comparability by requiring lessees to record right-of-use assets and corresponding lease liabilities on the balance sheet. The new guidance will continue to classify leases as either finance or operating, with classification affecting the pattern of expense recognition in the statement of income. The standard is effective for the Company beginning June 1, 2019, with early application permitted. The new standard is required to be applied with a modified retrospective approach to each prior reporting period presented with optional practical expedients. The Company is currently evaluating the effect the guidance will have on the Consolidated Financial Statements. +In March 2016, the FASB Issued ASU No. 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting . The updated guidance changes how companies account for certain aspects of share-based payment awards to employees, including the accounting for income taxes, forfeitures and statutory tax withholding requirements, as well as classification in the statement of cash flows. The update to the standard is effective for the Company beginning June 1, 2017, with early application permitted. The Company is currently evaluating the effect the guidance will have on the Consolidated Financial Statements. +NOTE 2 — Inventories +Inventory balances of $4,838 million and $4,337 million at May 31, 2016 and 2015 , respectively, were substantially all finished goods. +NOTE 3 — Property, Plant and Equipment +Property, plant and equipment, net included the following: +As of May 31, +(In millions) +2016 +2015 +Land +$ +286 +$ +273 +Buildings +1,467 +1,250 +Machinery, equipment and internal-use software +3,510 +3,329 +Leasehold improvements +1,338 +1,150 +Construction in process +437 +350 +Total property, plant and equipment, gross +7,038 +6,352 +Less accumulated depreciation +3,518 +3,341 +TOTAL PROPERTY, PLANT AND EQUIPMENT, NET +$ +3,520 +$ +3,011 +Capitalized interest was not material for the years ended May 31, 2016 , 2015 and 2014 . +NOTE 4 — Identifiable Intangible Assets and Goodwill +Identifiable intangible assets, net consist of indefinite-lived trademarks, which are not subject to amortization, and acquired trademarks and other intangible assets, which are subject to amortization. Indefinite-lived trademarks were $281 million at May 31, 2016 and 2015 . Acquired trademarks and other intangible assets at May 31, 2016 and 2015 were $16 million and $17 million , respectively, and were fully amortized at the end of both periods. Goodwill was $131 million at May 31, 2016 and 2015 of which $65 million was included in the Converse segment for the respective periods. The remaining amounts were included in Global Brand Divisions for segment reporting purposes. There were no accumulated impairment balances for goodwill as of either period end. +58 +Table of Contents +NOTE 5 — Accrued Liabilities +Accrued liabilities included the following: +As of May 31, +(In millions) +2016 +2015 +Compensation and benefits, excluding taxes +$ +943 +$ +997 +Endorsement compensation +393 +388 +Dividends payable +271 +240 +Import and logistics costs +198 +207 +Fair value of derivatives +162 +162 +Taxes other than income taxes payable +159 +172 +Advertising and marketing +119 +117 +Collateral received from counterparties to hedging instruments +105 +968 +Other (1) +687 +698 +TOTAL ACCRUED LIABILITIES +$ +3,037 +$ +3,949 +(1) +Other consists of various accrued expenses with no individual item accounting for more than 5% of the total Accrued liabilities balance at May 31, 2016 and 2015 . +NOTE 6 — Fair Value Measurements +The following tables present information about the Company's financial assets and liabilities measured at fair value on a recurring basis as of May 31, 2016 and 2015 , and indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value. Refer to Note 1 — Summary of Significant Accounting Policies for additional detail regarding the Company’s fair value measurement methodology. +As of May 31, 2016 +(In millions) +Assets at Fair Value +Cash Equivalents +Short-term Investments +Other Long-term Assets +Cash +$ +774 +$ +774 +$ +— +$ +— +Level 1: +U.S. Treasury securities +1,265 +100 +1,165 +— +Level 2: +Time deposits +831 +827 +4 +— +U.S. Agency securities +679 +— +679 +— +Commercial paper and bonds +733 +262 +471 +— +Money market funds +1,175 +1,175 +— +— +Total level 2 +3,418 +2,264 +1,154 +— +Level 3: +Non-marketable preferred stock +10 +— +— +10 +TOTAL +$ +5,467 +$ +3,138 +$ +2,319 +$ +10 +59 +Table of Contents +As of May 31, 2015 +(In millions) +Assets at Fair Value +Cash Equivalents +Short-term Investments +Other Long-term Assets +Cash +$ +615 +$ +615 +$ +— +$ +— +Level 1: +U.S. Treasury securities +869 +225 +644 +— +Level 2: +Time deposits +684 +684 +— +— +U.S. Agency securities +976 +110 +866 +— +Commercial paper and bonds +914 +352 +562 +— +Money market funds +1,866 +1,866 +— +— +Total level 2 +4,440 +3,012 +1,428 +— +Level 3: +Non-marketable preferred stock +8 +— +— +8 +TOTAL +$ +5,932 +$ +3,852 +$ +2,072 +$ +8 +The Company elects to record the gross assets and liabilities of its derivative financial instruments on the Consolidated Balance Sheets. The Company’s derivative financial instruments are subject to master netting arrangements that allow for the offset of assets and liabilities in the event of default or early termination of the contract. Any amounts of cash collateral received related to these instruments associated with the Company's credit-related contingent features are recorded in Cash and equivalents and Accrued liabilities , the latter of which would further offset against the Company’s derivative asset balance (refer to Note 16 — Risk Management and Derivatives ). Cash collateral received related to the Company's credit related contingent features is presented in the Cash provided by operations component of the Consolidated Statements of Cash Flows. Any amounts of non-cash collateral received, such as securities, are not recorded on the Consolidated Balance Sheets pursuant to the accounting standards for non-cash collateral received. +The following tables present information about the Company’s derivative assets and liabilities measured at fair value on a recurring basis as of May 31, 2016 and 2015 , and indicate the level in the fair value hierarchy in which the Company classifies the fair value measurement. +As of May 31, 2016 +Derivative Assets +Derivative Liabilities +(In millions) +Assets at Fair Value +Other Current Assets +Other Long-term Assets +Liabilities at Fair Value +Accrued Liabilities +Other Long-term Liabilities +Level 2: +Foreign exchange forwards and options (1) +$ +603 +$ +487 +$ +116 +$ +145 +$ +115 +$ +30 +Embedded derivatives +7 +2 +5 +9 +2 +7 +Interest rate swaps (2) +7 +7 +— +45 +45 +— +TOTAL +$ +617 +$ +496 +$ +121 +$ +199 +$ +162 +$ +37 +(1) +If the foreign exchange derivative instruments had been netted in the Consolidated Balance Sheets, the asset and liability positions each would have been reduced by $136 million as of May 31, 2016 . As of that date, the Company had received $105 million of cash collateral from various counterparties related to these foreign exchange derivative instruments. No amount of collateral was posted on the Company’s derivative liability balance as of May 31, 2016 . +(2) +As of May 31, 2016 , no amount of cash collateral had been received or posted on the derivative asset and liability balances related to the Company's interest rate swaps. +As of May 31, 2015 +Derivative Assets +Derivative Liabilities +(In millions) +Assets at Fair Value +Other Current Assets +Other Long-term Assets +Liabilities at Fair Value +Accrued Liabilities +Other Long-term Liabilities +Level 2: +Foreign exchange forwards and options (1) +$ +1,554 +$ +1,034 +$ +520 +$ +164 +$ +160 +$ +4 +Embedded derivatives +7 +2 +5 +11 +2 +9 +Interest rate swaps (2) +78 +78 +— +— +— +— +TOTAL +$ +1,639 +$ +1,114 +$ +525 +$ +175 +$ +162 +$ +13 +(1) +If the foreign exchange derivative instruments had been netted in the Consolidated Balance Sheets, the asset and liability positions each would have been reduced by $161 million as of May 31, 2015 . As of that date, the Company had received $900 million of cash collateral and $74 million of securities from various counterparties related to these foreign exchange derivative instruments. No amount of collateral was posted on the Company’s derivative liability balance as of May 31, 2015 . +(2) +As of May 31, 2015 , the Company had received $68 million of cash collateral related to its interest rate swaps. +60 +Table of Contents +Available-for-sale securities comprise investments in U.S. Treasury and Agency securities, money market funds, corporate commercial paper and bonds. These securities are valued using market prices on both active markets (Level 1) and less active markets (Level 2). As of May 31, 2016 , the Company held $2,113 million of available-for-sale securities with maturity dates within one year and $206 million with maturity dates over one year and less than five years within Short-term investments on the Consolidated Balance Sheets. The gross realized gains and losses on sales of available-for-sale securities were immaterial for the fiscal years ended May 31, 2016 and 2015 . Unrealized gains and losses on available-for-sale securities included in Other comprehensive income were immaterial as of May 31, 2016 and 2015 . The Company regularly reviews its available-for-sale securities for other-than-temporary impairment. For the years ended May 31, 2016 and 2015 , the Company did not consider its securities to be other-than-temporarily impaired and accordingly, did not recognize any impairment losses. +Included in Interest expense (income), net was interest income related to the Company's available-for-sale securities of $12 million , $6 million and $5 million for the years ended May 31, 2016 , 2015 and 2014 , respectively. +The Company’s Level 3 assets comprise investments in certain non-marketable preferred stock. These Level 3 investments are an immaterial portion of the Company's portfolio. Changes in Level 3 investment assets were immaterial during the years ended May 31, 2016 and 2015 . +No transfers among the levels within the fair value hierarchy occurred during the years ended May 31, 2016 or 2015 . +Derivative financial instruments include foreign exchange forwards and options, embedded derivatives and interest rate swaps. Refer to Note 16 — Risk Management and Derivatives for additional detail. For fair value information regarding Notes payable and Long-term debt , refer to Note 7 — Short-Term Borrowings and Credit Lines and Note 8 — Long-Term Debt , respectively. +As of May 31, 2016 and May 31, 2015 , assets or liabilities that were required to be measured at fair value on a non-recurring basis were immaterial. +At May 31, 2015 , the Company had $150 million of outstanding receivables related to its investments in reverse repurchase agreements recorded within Prepaid expenses and other current assets on the Consolidated Balance Sheets. The carrying amount of these agreements approximates their fair value based upon observable inputs other than quoted prices (Level 2). The reverse repurchase agreements are fully collateralized. At May 31, 2016 , there were no outstanding receivables related to investments in reverse repurchase agreements. +NOTE 7 — Short-Term Borrowings and Credit Lines +Notes payable and interest-bearing accounts payable to Sojitz Corporation of America (“Sojitz America”) as of May 31, 2016 and 2015 are summarized below: +As of May 31, +2016 +2015 +(Dollars in millions) +Borrowings +Interest Rate +Borrowings +Interest Rate +Notes payable: +U.S. operations +$ +— +0.00 +% +(1) +$ +— +0.00 +% +(1) +Non-U.S. operations +1 +13.00 +% +(1) +74 +12.39 +% +(1) +TOTAL NOTES PAYABLE +$ +1 +$ +74 +Interest-bearing accounts payable: +Sojitz America +$ +39 +1.27 +% +$ +78 +0.98 +% +(1) +Weighted average interest rate includes non-interest bearing overdrafts. +The carrying amounts reflected in the Consolidated Balance Sheets for Notes payable approximate fair value. +The Company purchases through Sojitz America certain NIKE Brand products it acquires from non-U.S. suppliers. These purchases are for products sold in certain countries in the Company's Emerging Markets geographic operating segment and Canada, excluding products produced and sold in the same country. Accounts payable to Sojitz America are generally due up to 60 days after shipment of goods from the foreign port. The interest rate on such accounts payable is the 60 -day London Interbank Offered Rate (“LIBOR”) as of the beginning of the month of the invoice date, plus 0.75% . +As of May 31, 2016 and 2015 , the Company had no amounts outstanding under its $2 billion commercial paper program. +On August 28, 2015, the Company entered into a committed credit facility agreement with a syndicate of banks which provides for up to $2 billion of borrowings. The facility matures August 28, 2020, with a one year extension option prior to any anniversary of the closing date, provided that in no event shall it extend beyond August 28, 2022. Based on the Company’s current long-term senior unsecured debt ratings of AA- and A1 from Standard and Poor’s Corporation and Moody’s Investor Services, respectively, the interest rate charged on any outstanding borrowings would be the prevailing LIBOR plus 0.455% . The facility fee is 0.045% of the total commitment. Under this committed credit facility, the Company must maintain certain financial ratios, among other things, with which the Company was in compliance at May 31, 2016 . This facility replaces the prior $1 billion credit facility agreement entered into on November 1, 2011, which would have matured November 1, 2017. No amounts were outstanding under either committed credit facility as of May 31, 2016 or 2015 . +61 +Table of Contents +NOTE 8 — Long-Term Debt +Long-term debt , net of unamortized premiums and discounts and swap fair value adjustments, comprises the following : +Book Value Outstanding +As of May 31, +Scheduled Maturity (Dollars and Yen in millions) +Original +Principal +Interest +Rate +Interest +Payments +2016 +2015 +Corporate Bond Payables: (1) +October 15, 2015 (2) +$ +100 +5.15 +% +Semi-Annually +$ +— +$ +101 +May 1, 2023 (3) +$ +500 +2.25 +% +Semi-Annually +499 +499 +May 1, 2043 (3) +$ +500 +3.63 +% +Semi-Annually +499 +499 +November 1, 2045 (4) +$ +1,000 +3.88 +% +Semi-Annually +991 +— +Promissory Notes: +April 1, 2017 (5) +$ +40 +6.20 +% +Monthly +38 +39 +January 1, 2018 (5) +$ +19 +6.79 +% +Monthly +— +19 +Japanese Yen Notes: +August 20, 2001 through November 20, 2020 (6) +¥ +9,000 +2.60 +% +Quarterly +18 +20 +August 20, 2001 through November 20, 2020 (6) +¥ +4,000 +2.00 +% +Quarterly +9 +9 +Total +2,054 +1,186 +Less current maturities +44 +107 +TOTAL LONG-TERM DEBT +$ +2,010 +$ +1,079 +(1) +These senior unsecured obligations rank equally with the Company's other unsecured and unsubordinated indebtedness. +(2) +The Company has entered into interest rate swap agreements whereby the Company receives fixed interest payments at the same rate as the note and pays variable interest payments based on the six -month LIBOR plus a spread. The swaps have the same notional amount and maturity date as the corresponding note. On October 15, 2015, the Company repaid the long-term debt which had previously been hedged with these interest rate swaps. Accordingly, as of May 31, 2016 , the Company had no interest rate swaps designated as fair value hedges. +(3) +The bonds are redeemable at the Company's option prior to February 1, 2023 and November 1, 2042, respectively, at a price equal to the greater of (i) 100% of the aggregate principal amount of the notes to be redeemed or (ii) the sum of the present values of the remaining scheduled payments, plus in each case, accrued and unpaid interest. Subsequent to February 1, 2023 and November 1, 2042, respectively, the bonds also feature a par call provision, which allows for the bonds to be redeemed at a price equal to 100% of the aggregate principal amount of the notes being redeemed, plus accrued and unpaid interest. +(4) +The bonds are redeemable at the Company's option prior to May 1, 2045, at a price equal to the greater of (i) 100% of the aggregate principal amount of the notes to be redeemed or (ii) the sum of the present values of the remaining scheduled payments, plus in each case, accrued and unpaid interest. Subsequent to May 1, 2045, the bonds also feature a par call provision, which allows for the bonds to be redeemed at a price equal to 100% of the aggregate principal amount of the notes being redeemed, plus accrued and unpaid interest. +(5) +The Company assumed a total of $59 million in bonds payable as part of its agreement to purchase certain Corporate properties; this was treated as a non-cash financing transaction. The property serves as collateral for the debt. The purchase of these properties was accounted for as a business combination where the total consideration of $85 million was allocated to the land and buildings acquired; no other tangible or intangible assets or liabilities resulted from the purchase. The bonds mature in 2017 and 2018 and the Company does not have the ability to re-negotiate the terms of the debt agreements and would incur significant financial penalties if the notes were paid-off prior to maturity. During the year ended May 31, 2016 , the notes due January 1, 2018 were legally defeased and an insignificant loss on defeasance was recognized. +(6) +NIKE Logistics YK assumed a total of ¥13.0 billion in loans as part of its agreement to purchase a distribution center in Japan, which serves as collateral for the loans. These loans mature in equal quarterly installments during the period August 20, 2001 through November 20, 2020 . +The scheduled maturity of Long-term debt in each of the years ending May 31, 2017 through 2021 are $44 million , $6 million , $6 million , $6 million and $3 million , respectively, at face value. +The Company's Long-term debt is recorded at adjusted cost, net of unamortized premiums and discounts and interest rate swap fair value adjustments. The fair value of Long-term debt is estimated based upon quoted prices for similar instruments or quoted prices for identical instruments in inactive markets (Level 2). The fair value of the Company’s Long-term debt , including the current portion, was approximately $2,125 million at May 31, 2016 and $1,160 million at May 31, 2015 . +62 +Table of Contents +NOTE 9 — Income Taxes +Income before income taxes is as follows: +Year Ended May 31, +(In millions) +2016 +2015 +2014 +Income before income taxes: +United States +$ +956 +$ +1,967 +$ +3,066 +Foreign +3,667 +2,238 +478 +TOTAL INCOME BEFORE INCOME TAXES +$ +4,623 +$ +4,205 +$ +3,544 +The provision for income taxes is as follows: +Year Ended May 31, +(In millions) +2016 +2015 +2014 +Current: +United States +Federal +$ +304 +$ +596 +$ +259 +State +71 +80 +104 +Foreign +568 +369 +499 +Total +943 +1,045 +862 +Deferred: +United States +Federal +(57 +) +(66 +) +19 +State +(16 +) +(11 +) +(3 +) +Foreign +(7 +) +(36 +) +(27 +) +Total +(80 +) +(113 +) +(11 +) +TOTAL INCOME TAX EXPENSE +$ +863 +$ +932 +$ +851 +A reconciliation from the U.S. statutory federal income tax rate to the effective income tax rate is as follows: +Year Ended May 31, +2016 +2015 +2014 +Federal income tax rate +35.0 +% +35.0 +% +35.0 +% +State taxes, net of federal benefit +1.1 +% +0.9 +% +1.8 +% +Foreign earnings +-18.6 +% +-15.7 +% +2.2 +% +Deferred charge +0.4 +% +0.9 +% +-14.6 +% +Other, net +0.8 +% +1.1 +% +-0.4 +% +EFFECTIVE INCOME TAX RATE +18.7 +% +22.2 +% +24.0 +% +The effective tax rate for the year ended May 31, 2016 was 350 basis points lower than the effective tax rate for the year ended May 31, 2015 primarily due to an increase in the proportion of earnings from operations outside of the United States, which are generally subject to a lower tax rate. +The effective tax rate for the year ended May 31, 2015 was 180 basis points lower than the effective tax rate for the year ended May 31, 2014 primarily due to the favorable resolution of audits in several jurisdictions. +63 +Table of Contents +Deferred tax assets and liabilities comprise the following: +As of May 31, +(In millions) +2016 +2015 +Deferred tax assets: +Allowance for doubtful accounts +$ +5 +$ +11 +Inventories +88 +59 +Sales return reserves +182 +143 +Deferred compensation +274 +258 +Stock-based compensation +206 +179 +Reserves and accrued liabilities +78 +92 +Net operating loss carry-forwards +44 +10 +Undistributed earnings of foreign subsidiaries +179 +149 +Other +72 +76 +Total deferred tax assets +1,128 +977 +Valuation allowance +(52 +) +(9 +) +Total deferred tax assets after valuation allowance +1,076 +968 +Deferred tax liabilities: +Property, plant and equipment +(268 +) +(220 +) +Intangibles +(92 +) +(93 +) +Other +(4 +) +(38 +) +Total deferred tax liability +(364 +) +(351 +) +NET DEFERRED TAX ASSET +$ +712 +$ +617 +The following is a reconciliation of the changes in the gross balance of unrecognized tax benefits: +As of May 31, +(In millions) +2016 +2015 +2014 +Unrecognized tax benefits, beginning of the period +$ +438 +$ +506 +$ +447 +Gross increases related to prior period tax positions (1) +49 +32 +814 +Gross decreases related to prior period tax positions (1) +(20 +) +(123 +) +(166 +) +Gross increases related to current period tax positions +81 +82 +125 +Gross decreases related to current period tax positions +— +(9 +) +(30 +) +Settlements (1) +(13 +) +(27 +) +(676 +) +Lapse of statute of limitations +(17 +) +(10 +) +(4 +) +Changes due to currency translation +(12 +) +(13 +) +(4 +) +UNRECOGNIZED TAX BENEFITS, END OF THE PERIOD +$ +506 +$ +438 +$ +506 +(1) +During the fourth quarter of the fiscal year ended May 31, 2014, the Company reached a resolution with the IRS on a U.S. Unilateral Advanced Pricing Agreement that covers intercompany transfer pricing for fiscal years 2011 through 2020. As a result, the Company recorded a gross increase in unrecognized tax benefits related to prior period tax positions, a gross decrease in unrecognized tax benefits related to prior period tax positions and a settlement. The net impact of these items resulted in a decrease to unrecognized tax benefits. +As of May 31, 2016 , total gross unrecognized tax benefits, excluding related interest and penalties, were $506 million , $290 million of which would affect the Company's effective tax rate if recognized in future periods. +The Company recognizes interest and penalties related to income tax matters in Income tax expense . The liability for payment of interest and penalties increased by $45 million during the year ended May 31, 2016 , decreased by $3 million during the year ended May 31, 2015 and increased by $55 million during the year ended May 31, 2014 . As of May 31, 2016 and 2015 , accrued interest and penalties related to uncertain tax positions were $209 million and $164 million , respectively (excluding federal benefit). +The Company incurs tax liabilities primarily in the United States, China and the Netherlands, as well as various state and other foreign jurisdictions. The Company is currently under audit by the U.S. Internal Revenue Service (“IRS”) for fiscal years 2013 through 2015 . The Company has closed all U.S. federal income tax matters through fiscal 2012, with the exception of the validation of foreign tax credits utilized. During the year ended May 31, 2016, the Company received from the IRS a statutory notice of deficiency for fiscal 2012, proposing an increase in tax of $223 million , subject to interest, related to the foreign tax credit matter. The Company intends to contest this deficiency notice. As previously disclosed, the Company received a statutory notice of deficiency for fiscal 2011, proposing an increase in tax of $31 million , subject to interest, related to the foreign tax credit matter. This notice also reported a decrease in foreign tax credit carryovers for fiscal 2010 and 2011. The Company has contested this deficiency notice by filing a petition with the U.S Tax Court in April 2015. The Company does not expect the outcome of this matter to have a material impact on the financial statements. No payments on the assessment would be required until the dispute is definitively resolved. Based on the information currently available, the Company does not anticipate a significant increase or decrease to its unrecognized tax benefits for this matter within the next 12 months. +64 +Table of Contents +The Company’s major foreign jurisdictions, China and the Netherlands, have concluded substantially all income tax matters through calendar 2005 and fiscal 2010, respectively. Although the timing of resolution of audits is not certain, the Company evaluates all domestic and foreign audit issues in the aggregate, along with the expiration of applicable statutes of limitations, and estimates that it is reasonably possible the total gross unrecognized tax benefits could decrease by up to $92 million within the next 12 months. +The Company provides for U.S. income taxes on the undistributed earnings of foreign subsidiaries unless they are considered indefinitely reinvested outside the United States. At May 31, 2016 , the indefinitely reinvested earnings in foreign subsidiaries upon which United States income taxes have not been provided were approximately $10.7 billion . If these undistributed earnings were repatriated to the United States or if the shares of the relevant foreign subsidiaries were sold or otherwise transferred, they would generate foreign tax credits that would reduce the federal tax liability associated with the foreign dividend or the otherwise taxable transaction. Assuming a full utilization of the foreign tax credits, the potential net deferred tax liability associated with these temporary differences of undistributed earnings would be approximately $3.6 billion at May 31, 2016 . +A portion of the Company's foreign operations are benefiting from a tax holiday, which is set to expire in 2021 . This tax holiday may be extended when certain conditions are met or may be terminated early if certain conditions are not met. The impact of this tax holiday decreased foreign taxes by $173 million , $174 million and $138 million for the fiscal years ended May 31, 2016 , 2015 and 2014 , respectively. The benefit of the tax holiday on diluted earnings per common share was $0.10 , $0.10 and $0.08 for the fiscal years ended May 31, 2016 , 2015 and 2014 , respectively. +Deferred tax assets at May 31, 2016 and 2015 were reduced by a valuation allowance relating to tax benefits of certain subsidiaries with operating losses. There was a $43 million net increase in the valuation allowance for the year ended May 31, 2016 , compared to no net change and a net increase of $4 million for the years ended May 31, 2015 and 2014 , respectively. +The Company has available domestic and foreign loss carry-forwards of $143 million at May 31, 2016 . Such losses will expire as follows: +Year Ending May 31, +(In millions) +2017 +2018 +2019 +2020 +2021-2035 +Indefinite +Total +Net operating losses +$ +1 +$ +4 +$ +1 +$ +1 +$ +35 +$ +101 +$ +143 +During the years ended May 31, 2016 , 2015 and 2014 , income tax benefits attributable to employee stock-based compensation transactions of $281 million , $224 million and $135 million , respectively, were allocated to Total shareholders’ equity . +NOTE 10 — Redeemable Preferred Stock +Sojitz America is the sole owner of the Company’s authorized redeemable preferred stock, $1 par value, which is redeemable at the option of Sojitz America or the Company at par value aggregating $0.3 million . A cumulative dividend of $0.10 per share is payable annually on May 31 and no dividends may be declared or paid on the common stock of the Company unless dividends on the redeemable preferred stock have been declared and paid in full. There have been no changes in the redeemable preferred stock in the three years ended May 31, 2016 , 2015 and 2014 . As the holder of the redeemable preferred stock, Sojitz America does not have general voting rights, but does have the right to vote as a separate class on the sale of all or substantially all of the assets of the Company and its subsidiaries, on merger, consolidation, liquidation or dissolution of the Company or on the sale or assignment of the NIKE trademark for athletic footwear sold in the United States. The redeemable preferred stock has been fully issued to Sojitz America and is not blank check preferred stock. The Company's articles of incorporation do not permit the issuance of additional preferred stock. +NOTE 11 — Common Stock and Stock-Based Compensation +The authorized number of shares of Class A Common Stock, no par value, and Class B Common Stock, no par value, are 400 million and 2,400 million , respectively. Each share of Class A Common Stock is convertible into one share of Class B Common Stock. Voting rights of Class B Common Stock are limited in certain circumstances with respect to the election of directors. There are no differences in the dividend and liquidation preferences or participation rights of the Class A and Class B common shareholders. +The NIKE, Inc. Stock Incentive Plan (the "Stock Incentive Plan") provides for the issuance of up to 718 million previously unissued shares of Class B Common Stock in connection with stock options and other awards granted under the Stock Incentive Plan. The Stock Incentive Plan authorizes the grant of non-statutory stock options, incentive stock options, stock appreciation rights, restricted stock, restricted stock units and performance-based awards. The exercise price for stock options and stock appreciation rights may not be less than the fair market value of the underlying shares on the date of grant. A committee of the Board of Directors administers the Stock Incentive Plan. The committee has the authority to determine the employees to whom awards will be made, the amount of the awards and the other terms and conditions of the awards. Substantially all stock option grants outstanding under the Stock Incentive Plan are granted in the first quarter of each fiscal year, vest ratably over four years and expire ten years from the date of grant. +The following table summarizes the Company’s total stock-based compensation expense recognized in Operating overhead expense : +Year Ended May 31, +(In millions) +2016 +2015 +2014 +Stock options (1) +$ +171 +$ +136 +$ +125 +ESPPs +31 +24 +22 +Restricted stock +34 +31 +30 +TOTAL STOCK-BASED COMPENSATION EXPENSE +$ +236 +$ +191 +$ +177 +(1) +Expense for stock options includes the expense associated with stock appreciation rights. Accelerated stock option expense is recorded for employees eligible for accelerated stock option vesting upon retirement. Accelerated stock option expense for the years ended May 31, 2016 , 2015 and 2014 was $30 million , $19 million and $15 million , respectively. +As of May 31, 2016 , the Company had $245 million of unrecognized compensation costs from stock options, net of estimated forfeitures, to be recognized in Operating overhead expense over a weighted average period of 2.0 years. +65 +Table of Contents +The weighted average fair value per share of the options granted during the years ended May 31, 2016 , 2015 and 2014 , as computed using the Black-Scholes pricing model, was $12.66 , $8.48 and $7.45 , respectively. The weighted average assumptions used to estimate these fair values are as follows: +Year Ended May 31, +2016 +2015 +2014 +Dividend yield +1.0 +% +1.2 +% +1.3 +% +Expected volatility +23.6 +% +23.6 +% +27.9 +% +Weighted average expected life (in years) +5.8 +5.8 +5.3 +Risk-free interest rate +1.7 +% +1.7 +% +1.3 +% +The Company estimates the expected volatility based on the implied volatility in market traded options on the Company’s common stock with a term greater than 1 year, along with other factors. The weighted average expected life of options is based on an analysis of historical and expected future exercise patterns. The interest rate is based on the U.S. Treasury (constant maturity) risk-free rate in effect at the date of grant for periods corresponding with the expected term of the options. +The following summarizes the stock option transactions under the plan discussed above: +Shares (1) +Weighted Average +Option Price +(In millions) +Options outstanding May 31, 2013 +135.3 +$ +17.36 +Exercised +(22.0 +) +14.15 +Forfeited +(2.5 +) +24.17 +Granted +16.3 +31.77 +Options outstanding May 31, 2014 +127.1 +19.64 +Exercised +(27.2 +) +15.39 +Forfeited +(2.1 +) +29.51 +Granted +18.4 +38.84 +Options outstanding May 31, 2015 +116.2 +23.50 +Exercised +(22.5 +) +17.75 +Forfeited +(2.3 +) +39.96 +Granted +20.6 +56.41 +Options outstanding May 31, 2016 +112.0 +$ +30.38 +Options exercisable at May 31, +2014 +74.0 +$ +15.71 +2015 +68.6 +18.26 +2016 +66.5 +21.48 +(1) +Includes stock appreciation rights transactions. +The weighted average contractual life remaining for options outstanding and options exercisable at May 31, 2016 was 6.0 years and 4.6 years, respectively. The aggregate intrinsic value for options outstanding and exercisable at May 31, 2016 was $2,806 million and $2,242 million , respectively. The aggregate intrinsic value was the amount by which the market value of the underlying stock exceeded the exercise price of the options. The total intrinsic value of the options exercised during the years ended May 31, 2016 , 2015 and 2014 was $946 million , $795 million and $474 million , respectively. +In addition to the Stock Incentive Plan, the Company gives employees the right to purchase shares at a discount to the market price under employee stock purchase plans (“ESPPs”). Employees are eligible to participate through payroll deductions of up to 10% of their compensation. At the end of each 6 -month offering period, shares are purchased by the participants at 85% of the lower of the fair market value at the beginning or the end of the offering period. Employees purchased 2.5 million , 2.7 million and 2.8 million shares during each of the three years ended May 31, 2016 , 2015 and 2014 , respectively. +From time to time, the Company grants restricted stock and restricted stock units to key employees under the Stock Incentive Plan. The number of shares underlying such awards granted to employees during the years ended May 31, 2016 , 2015 and 2014 were 1 million , 0.5 million and 0.6 million , respectively, with weighted average values per share of $54.87 , $39.69 and $31.94 , respectively. Recipients of restricted stock are entitled to cash dividends and to vote their respective shares throughout the period of restriction. Recipients of restricted stock units are entitled to dividend equivalent cash payments upon vesting. The value of all grants of restricted stock and restricted stock units was established by the market price on the date of grant. During the years ended May 31, 2016 , 2015 and 2014 , the aggregate fair value of restricted stock and restricted stock units vested was $49 million , $20 million and $28 million , respectively, determined as of the date of vesting. As of May 31, 2016 , the Company had $62 million of unrecognized compensation costs from restricted stock and restricted stock units to be recognized in Operating overhead expense over a weighted average period of 2.8 years. +66 +Table of Contents +NOTE 12 — Earnings Per Share +The following is a reconciliation from basic earnings per common share to diluted earnings per common share. The computations of diluted earnings per common share excluded options, including shares under employee stock purchase plans (“ESPPs”), to purchase an additional 0.2 million , 1.7 million and 1.5 million shares of common stock outstanding for the years ended May 31, 2016 , 2015 and 2014 , respectively, because the options were anti-dilutive. +Year Ended May 31, +(In millions, except per share data) +2016 +2015 +2014 +Determination of shares: +Weighted average common shares outstanding +1,697.9 +1,723.5 +1,766.7 +Assumed conversion of dilutive stock options and awards +44.6 +45.3 +44.9 +DILUTED WEIGHTED AVERAGE COMMON SHARES OUTSTANDING +1,742.5 +1,768.8 +1,811.6 +Earnings per common share: +Basic +$ +2.21 +$ +1.90 +$ +1.52 +Diluted +$ +2.16 +$ +1.85 +$ +1.49 +NOTE 13 — Benefit Plans +The Company has a qualified 401(k) Savings and Profit Sharing Plan, in which all U.S. employees are able to participate. The Company matches a portion of employee contributions to the savings plan. Company contributions to the savings plan were $72 million , $58 million and $51 million and included in Operating overhead expense for the years ended May 31, 2016 , 2015 and 2014 , respectively. The terms of the plan also allow for annual discretionary profit sharing contributions, as determined by the Board of Directors, to the accounts of eligible U.S. employees who work at least 1,000 hours in a year. Profit sharing contributions of $64 million , $58 million and $49 million were made to the plan and included in Operating overhead expense for the years ended May 31, 2016 , 2015 and 2014 , respectively. +The Company also has a Long-Term Incentive Plan (“LTIP”) that was adopted by the Board of Directors and approved by shareholders in September 1997 and later amended in fiscal 2007. The Company recognized $85 million , $68 million and $46 million of Operating overhead expense related to cash awards under the LTIP during the years ended May 31, 2016 , 2015 and 2014 , respectively. +The Company allows certain highly compensated employees and non-employee directors of the Company to defer compensation under a nonqualified deferred compensation plan. Deferred compensation plan liabilities were $475 million and $443 million at May 31, 2016 and 2015 , respectively, and primarily classified as long-term in Deferred income taxes and other liabilities . +The Company has pension plans in various countries worldwide. The pension plans are only available to local employees and are generally government mandated. The liability related to the unfunded pension liabilities of the plans was $93 million and $98 million at May 31, 2016 and 2015 , respectively, and primarily classified as long-term in Deferred income taxes and other liabilities . +NOTE 14 — Accumulated Other Comprehensive Income +The changes in Accumulated other comprehensive income , net of tax, were as follows: +(In millions) +Foreign Currency Translation Adjustment (1)(2) +Cash Flow Hedges +Net Investment Hedges (1)(2) +Other +Total +Balance at May 31, 2015 +$ +(31 +) +$ +1,220 +$ +115 +$ +(58 +) +$ +1,246 +Other comprehensive gains (losses) before reclassifications (3) +(178 +) +(47 +) +— +6 +(219 +) +Reclassifications to net income of previously deferred (gains) losses (4) +2 +(710 +) +— +(1 +) +(709 +) +Other comprehensive income (loss) +(176 +) +(757 +) +— +5 +(928 +) +Balance at May 31, 2016 +$ +(207 +) +$ +463 +$ +115 +$ +(53 +) +$ +318 +(1) +The accumulated foreign currency translation adjustment and net investment hedge gains/losses related to an investment in a foreign subsidiary are reclassified to Net income upon sale or upon complete or substantially complete liquidation of the respective entity. +(2) +Beginning balances have been updated to reflect the proper classification of $20 million of deferred tax balances between Foreign Currency Translation Adjustment and Net Investment Hedges. +(3) +Net of tax benefit (expense) of $ 0 million , $ 28 million , $ 0 million , $ (2) million and $ 26 million , respectively. +(4) +Net of tax (benefit) expense of $ 0 million , $ 7 million , $ 0 million , $ 2 million and $ 9 million , respectively. +67 +Table of Contents +(In millions) +Foreign Currency Translation Adjustment (1)(2) +Cash Flow Hedges +Net Investment Hedges (1)(2) +Other +Total +Balance at May 31, 2014 +$ +(11 +) +$ +32 +$ +115 +$ +(51 +) +$ +85 +Other comprehensive gains (losses) before reclassifications (3) +(20 +) +1,447 +— +33 +1,460 +Reclassifications to net income of previously deferred (gains) losses (4) +— +(259 +) +— +(40 +) +(299 +) +Other comprehensive income (loss) +(20 +) +1,188 +— +(7 +) +1,161 +Balance at May 31, 2015 +$ +(31 +) +$ +1,220 +$ +115 +$ +(58 +) +$ +1,246 +(1) +The accumulated foreign currency translation adjustment and net investment hedge gains/losses related to an investment in a foreign subsidiary are reclassified to Net income upon sale or upon complete or substantially complete liquidation of the respective entity. +(2) +Beginning and ending balances have been updated to reflect the proper classification of $20 million of deferred tax balances between Foreign Currency Translation Adjustment and Net Investment Hedges. +(3) +Net of tax benefit (expense) of $ 0 million , $ (33) million , $ 0 million , $ 0 million and $ (33) million , respectively. +(4) +Net of tax (benefit) expense of $ 0 million , $ 2 million , $ 0 million , $ 0 million and $ 2 million , respectively. +The following table summarizes the reclassifications from Accumulated other comprehensive income to the Consolidated Statements of Income: +Amount of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income into Income +Location of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income into Income +Year Ended May 31, +(In millions) +2016 +2015 +Gains (losses) on foreign currency translation adjustment +$ +(2 +) +$ +— +Other (income) expense, net +Total before tax +(2 +) +— +Tax (expense) benefit +— +— +Gain (loss) net of tax +(2 +) +— +Gains (losses) on cash flow hedges: +Foreign exchange forwards and options +(88 +) +(95 +) +Revenues +Foreign exchange forwards and options +586 +220 +Cost of sales +Foreign exchange forwards and options +— +— +Total selling and administrative expense +Foreign exchange forwards and options +219 +136 +Other (income) expense, net +Total before tax +717 +261 +Tax (expense) benefit +(7 +) +(2 +) +Gain (loss) net of tax +710 +259 +Gains (losses) on other +3 +40 +Other (income) expense, net +Total before tax +3 +40 +Tax (expense) benefit +(2 +) +— +Gain (loss) net of tax +1 +40 +Total net gain (loss) reclassified for the period +$ +709 +$ +299 +Refer to Note 16 — Risk Management and Derivatives for more information on the Company's risk management program and derivatives. +NOTE 15 — Commitments and Contingencies +The Company leases retail store space, certain distribution and warehouse facilities, and office space and other non-real estate assets under operating leases expiring from 1 to 18 years after May 31, 2016 . Rent expense was $661 million , $594 million and $533 million for the years ended May 31, 2016 , 2015 and 2014 , respectively. Amounts of minimum future annual commitments under non-cancelable operating and capital leases are as follows (in millions): +2017 +2018 +2019 +2020 +2021 +Thereafter +Total +Operating leases +$ +491 +$ +453 +$ +395 +$ +347 +$ +301 +$ +1,244 +$ +3,231 +Capital leases +$ +7 +$ +5 +$ +2 +$ +1 +$ +— +$ +— +$ +15 +As of May 31, 2016 and 2015 , the Company had letters of credit outstanding totaling $157 million and $165 million , respectively. These letters of credit were generally issued for the purchase of inventory and guarantees of the Company’s performance under certain self-insurance and other programs. +68 +Table of Contents +In connection with various contracts and agreements, the Company provides routine indemnification relating to the enforceability of intellectual property rights, coverage for legal issues that arise and other items where the Company is acting as the guarantor. Currently, the Company has several such agreements in place. However, based on the Company’s historical experience and the estimated probability of future loss, the Company has determined that the fair value of such indemnification is not material to the Company’s financial position or results of operations. +In the ordinary course of its business, the Company is involved in various legal proceedings involving contractual and employment relationships, product liability claims, trademark rights and a variety of other matters. While the Company cannot predict the outcome of its pending legal matters with certainty, the Company does not believe any currently identified claim, proceeding or litigation, either individually or in aggregate, will have a material impact on the Company’s results of operations, financial position or cash flows. +NOTE 16 — Risk Management and Derivatives +The Company is exposed to global market risks, including the effect of changes in foreign currency exchange rates and interest rates, and uses derivatives to manage financial exposures that occur in the normal course of business. The Company does not hold or issue derivatives for trading or speculative purposes. +The Company may elect to designate certain derivatives as hedging instruments under the accounting standards for derivatives and hedging. The Company formally documents all relationships between designated hedging instruments and hedged items as well as its risk management objectives and strategies for undertaking hedge transactions. This process includes linking all derivatives designated as hedges to either recognized assets or liabilities or forecasted transactions. +The majority of derivatives outstanding as of May 31, 2016 are designated as foreign currency cash flow hedges, primarily for Euro/U.S. Dollar, British Pound/Euro and Japanese Yen/U.S. Dollar currency pairs . All derivatives are recognized on the Consolidated Balance Sheets at fair value and classified based on the instrument’s maturity date. +The following table presents the fair values of derivative instruments included within the Consolidated Balance Sheets as of May 31, 2016 and 2015 : +Asset Derivatives +Liability Derivatives +(In millions) +Balance Sheet +Location +2016 +2015 +Balance Sheet +Location +2016 +2015 +Derivatives formally designated as hedging instruments: +Foreign exchange forwards and options +Prepaid expenses and other current assets +$ +447 +$ +825 +Accrued liabilities +$ +38 +$ +140 +Interest rate swaps +Prepaid expenses and other current assets +7 +78 +Accrued liabilities +45 +— +Foreign exchange forwards and options +Deferred income taxes and other assets +90 +520 +Deferred income taxes and other liabilities +12 +4 +Interest rate swaps +Deferred income taxes and other assets +— +— +Deferred income taxes and other liabilities +— +— +Total derivatives formally designated as hedging instruments +544 +1,423 +95 +144 +Derivatives not designated as hedging instruments: +Foreign exchange forwards and options +Prepaid expenses and other current assets +40 +209 +Accrued liabilities +76 +20 +Embedded derivatives +Prepaid expenses and other current assets +2 +2 +Accrued liabilities +2 +2 +Foreign exchange forwards and options +Deferred income taxes and other assets +26 +— +Deferred income taxes and other liabilities +19 +— +Embedded derivatives +Deferred income taxes and other assets +5 +5 +Deferred income taxes and other liabilities +7 +9 +Total derivatives not designated as hedging instruments +73 +216 +104 +31 +TOTAL DERIVATIVES +$ +617 +$ +1,639 +$ +199 +$ +175 +69 +Table of Contents +The following tables present the amounts affecting the Consolidated Statements of Income for the years ended May 31, 2016 , 2015 and 2014 : +(In millions) +Amount of Gain (Loss) +Recognized in Other +Comprehensive Income +on Derivatives (1) +Amount of Gain (Loss) +Reclassified From Accumulated +Other Comprehensive Income into Income (1) +Year Ended May 31, +Location of Gain (Loss) Reclassified From +Accumulated Other Comprehensive Income Into Income +Year Ended May 31, +2016 +2015 +2014 +2016 +2015 +2014 +Derivatives designated as cash flow hedges: +Foreign exchange forwards and options +$ +90 +$ +(202 +) +$ +(48 +) +Revenues +$ +(88 +) +$ +(95 +) +$ +14 +Foreign exchange forwards and options +(57 +) +1,109 +(78 +) +Cost of sales +586 +220 +12 +Foreign exchange forwards and options +— +— +4 +Total selling and administrative expense +— +— +— +Foreign exchange forwards and options +(25 +) +497 +(21 +) +Other (income) expense, net +219 +136 +10 +Interest rate swaps +(83 +) +76 +— +Interest expense (income), net +— +— +— +Total designated cash flow hedges +(75 +) +1,480 +(143 +) +717 +261 +36 +Derivatives designated as net investment hedges: +Foreign exchange forwards and options +$ +— +$ +— +$ +— +Other (income) expense, net +$ +— +$ +— +$ +— +(1) +For the years ended May 31, 2016 , 2015 and 2014 , the amounts recorded in Other (income) expense, net as a result of hedge ineffectiveness and the discontinuance of cash flow hedges because the forecasted transactions were no longer probable of occurring were immaterial. +Amount of Gain (Loss) Recognized in +Income on Derivatives +Location of Gain (Loss) +Recognized in Income on Derivatives +Year Ended May 31, +(In millions) +2016 +2015 +2014 +Derivatives designated as fair value hedges: +Interest rate swaps (1) +$ +2 +$ +5 +$ +5 +Interest expense (income), net +Derivatives not designated as hedging instruments: +Foreign exchange forwards and options +(68 +) +611 +(75 +) +Other (income) expense, net +Embedded derivatives +$ +(2 +) +$ +(1 +) +$ +(1 +) +Other (income) expense, net +(1) +All interest rate swaps designated as fair value hedges meet the shortcut method requirements under the accounting standards for derivatives and hedging. Accordingly, changes in the fair values of the interest rate swaps are considered to exactly offset changes in the fair value of the underlying long-term debt. Refer to “Fair Value Hedges” in this note for additional detail. +Refer to Note 6 — Fair Value Measurements for a description of how the above financial instruments are valued and Note 14 — Accumulated Other Comprehensive Income and the Consolidated Statements of Shareholders’ Equity for additional information on changes in Accumulated other comprehensive income for the years ended May 31, 2016 , 2015 and 2014 . +Cash Flow Hedges +The purpose of the Company's foreign exchange risk management program is to lessen both the positive and negative effects of currency fluctuations on the Company's consolidated results of operations, financial position and cash flows. Foreign currency exposures that the Company may elect to hedge in this manner include product cost exposures, non-functional currency denominated external and intercompany revenues, selling and administrative expenses, investments in U.S. Dollar-denominated available-for-sale debt securities and certain other intercompany transactions. +Product cost exposures are primarily generated through non-functional currency denominated product purchases and the foreign currency adjustment program described below. NIKE entities primarily purchase products in two ways: (1) Certain NIKE entities purchase product from the NIKE Trading Company (“NTC”), a wholly owned sourcing hub that buys NIKE branded products from third party factories, predominantly in U.S. Dollars. The NTC, whose functional currency is the U.S. Dollar, then sells the product to NIKE entities in their respective functional currencies. When the NTC sells to a NIKE entity with a different functional currency, the result is a foreign currency exposure for the NTC. (2) Other NIKE entities purchase product directly from third party factories in U.S. Dollars. These purchases generate a foreign currency exposure for those NIKE entities with a functional currency other than the U.S. Dollar. +The Company operates a foreign currency adjustment program with certain factories. The program is designed to more effectively manage foreign currency risk by assuming certain of the factories’ foreign currency exposures, some of which are natural offsets to the Company's existing foreign currency exposures. Under this program, the Company’s payments to these factories are adjusted for rate fluctuations in the basket of currencies (“factory currency exposure index”) in which the labor, materials and overhead costs incurred by the factories in the production of NIKE branded products (“factory input costs”) are denominated. For the portion of the indices denominated in the local or functional currency of the factory, the Company may elect to place formally designated cash flow hedges. For all currencies within the indices, excluding the U.S. Dollar and the local or functional currency of the factory, an embedded derivative contract is created upon the factory’s acceptance of NIKE’s purchase order. Embedded derivative contracts are separated from the related purchase order, as further described within the Embedded Derivatives section below. +The Company’s policy permits the utilization of derivatives to reduce its foreign currency exposures where internal netting or other strategies cannot be effectively employed. Typically, the Company may enter into hedge contracts starting up to 12 to 24 months in advance of the forecasted transaction and may place incremental hedges up to 100% of the exposure by the time the forecasted transaction occurs. The total notional amount of outstanding foreign currency derivatives designated as cash flow hedges was $11.5 billion as of May 31, 2016 . +70 +Table of Contents +As of May 31, 2016 , the Company had a series of forward-starting interest rate swap agreements with a total outstanding notional amount of $1.5 billion . These instruments were designated as cash flow hedges of the variability in the expected cash outflows of interest payments on future debt due to changes in benchmark interest rates. During the second quarter of fiscal 2016, the Company terminated certain forward-starting interest rate swaps with a total notional amount of $1 billion in connection with the October 29, 2015 debt issuance (refer to Note 8 — Long-Term Debt ). Upon termination of these forward-starting swaps, the Company received a cash payment from the related counterparties of $34 million , which was recorded in Accumulated other comprehensive income and will be released through Interest expense (income), net as interest payments are made over the term of the issued debt. +All changes in fair value of derivatives designated as cash flow hedges, excluding any ineffective portion, are recorded in Accumulated other comprehensive income until Net income is affected by the variability of cash flows of the hedged transaction. In most cases, amounts recorded in Accumulated other comprehensive income will be released to Net income in periods following the maturity of the related derivative, rather than at maturity. Effective hedge results are classified within the Consolidated Statements of Income in the same manner as the underlying exposure. The results of hedges of non-functional currency denominated revenues and product cost exposures, excluding embedded derivatives, are recorded in Revenues or Cost of sales when the underlying hedged transaction affects consolidated Net income . Results of hedges of selling and administrative expense are recorded together with those costs when the related expense is recorded. Amounts recorded in Accumulated other comprehensive income related to forward-starting interest rate swaps will be released through Interest expense (income), net as interest payments are made over the term of the issued debt. Results of hedges of anticipated purchases and sales of U.S. Dollar-denominated available-for-sale securities are recorded in Other (income) expense, net when the securities are sold. Results of hedges of certain anticipated intercompany transactions are recorded in Other (income) expense, net when the transaction occurs. The Company classifies the cash flows at settlement from these designated cash flow hedge derivatives in the same category as the cash flows from the related hedged items, primarily within the Cash provided by operations component of the Consolidated Statements of Cash Flows. +Premiums paid or received on options are initially recorded as deferred charges or deferred credits, respectively. The Company assesses the effectiveness of options based on the total cash flows method and records total changes in the options’ fair value to Accumulated other comprehensive income to the degree they are effective. +The Company formally assesses, both at a hedge’s inception and on an ongoing basis, whether the derivatives that are used in the hedging transaction have been highly effective in offsetting changes in the cash flows of hedged items and whether those derivatives may be expected to remain highly effective in future periods. Effectiveness for cash flow hedges is assessed based on changes in forward rates . Ineffectiveness was 0 billion for the years ended May 31, 2016 , 2015 and 2014 . +The Company discontinues hedge accounting prospectively when: (1) it determines that the derivative is no longer highly effective in offsetting changes in the cash flows of a hedged item (including hedged items such as firm commitments or forecasted transactions); (2) the derivative expires or is sold, terminated or exercised; (3) it is no longer probable that the forecasted transaction will occur; or (4) management determines that designating the derivative as a hedging instrument is no longer appropriate. +When the Company discontinues hedge accounting because it is no longer probable that the forecasted transaction will occur in the originally expected period, but is expected to occur within an additional two-month period of time thereafter, the gain or loss on the derivative remains in Accumulated other comprehensive income and is reclassified to Net income when the forecasted transaction affects consolidated Net income . However, if it is probable that a forecasted transaction will not occur by the end of the originally specified time period or within an additional two-month period of time thereafter, the gains and losses that were in Accumulated other comprehensive income will be recognized immediately in Other (income) expense, net . In all situations in which hedge accounting is discontinued and the derivative remains outstanding, the Company will carry the derivative at its fair value on the Consolidated Balance Sheets, recognizing future changes in the fair value in Other (income) expense, net . For the years ended May 31, 2016 , 2015 and 2014 , the amounts recorded in Other (income) expense, net as a result of the discontinuance of cash flow hedging because the forecasted transaction was no longer probable of occurring were immaterial . +As of May 31, 2016 , $460 million of deferred net gains (net of tax) on both outstanding and matured derivatives in Accumulated other comprehensive income are expected to be reclassified to Net income during the next 12 months concurrent with the underlying hedged transactions also being recorded in Net income . Actual amounts ultimately reclassified to Net income are dependent on the exchange rates in effect when derivative contracts that are currently outstanding mature. As of May 31, 2016 , the maximum term over which the Company is hedging exposures to the variability of cash flows for its forecasted transactions was 24 months. +Fair Value Hedges +The Company is also exposed to the risk of changes in the fair value of certain fixed-rate debt attributable to changes in interest rates. Derivatives used by the Company to hedge this risk are receive-fixed, pay-variable interest rate swaps. All interest rate swaps designated as fair value hedges of the related long-term debt meet the shortcut method requirements under the accounting standards for derivatives and hedging. Accordingly, changes in the fair values of the interest rate swaps are considered to exactly offset changes in the fair value of the underlying long-term debt. The cash flows associated with the Company’s fair value hedges are periodic interest payments while the swaps are outstanding, which are reflected within the Cash provided by operations component of the Consolidated Statements of Cash Flows. The Company recorded no ineffectiveness from its interest rate swaps designated as fair value hedges for the years ended May 31, 2016 , 2015 or 2014 . On October 15, 2015, the Company repaid the long-term debt which had previously been hedged with these interest rate swaps. Accordingly, a s of May 31, 2016 , the Company had no interest rate swaps designated as fair value hedges. +Net Investment Hedges +The Company has, in the past, hedged and may, in the future, hedge the risk of variability in foreign-currency-denominated net investments in wholly-owned international operations. All changes in fair value of the derivatives designated as net investment hedges, except ineffective portions, are reported in Accumulated other comprehensive income along with the foreign currency translation adjustments on those investments. The Company classifies the cash flows at settlement of its net investment hedges within the Cash used by investing activities component of the Consolidated Statements of Cash Flows. The Company assesses hedge effectiveness based on changes in forward rates. The Company recorded no ineffectiveness from net investment hedges for the years ended May 31, 2016 , 2015 or 2014 . The Company had no outstanding net investment hedges as of May 31, 2016 . +71 +Table of Contents +Undesignated Derivative Instruments +The Company may elect to enter into foreign exchange forwards to mitigate the change in fair value of specific assets and liabilities on the balance sheet and/or the embedded derivative contracts. These forwards are not designated as hedging instruments under the accounting standards for derivatives and hedging. Accordingly, these undesignated instruments are recorded at fair value as a derivative asset or liability on the Consolidated Balance Sheets with their corresponding change in fair value recognized in Other (income) expense, net , together with the re-measurement gain or loss from the hedged balance sheet position or embedded derivative contract. The Company classifies the cash flows at settlement from undesignated instruments in the same category as the cash flows from the related hedged items, primarily within the Cash provided by operations component of the Consolidated Statements of Cash Flows. The total notional amount of outstanding undesignated derivative instruments was $7.1 billion as of May 31, 2016 . +Embedded Derivatives +As part of the foreign currency adjustment program described above, an embedded derivative contract is created upon the factory’s acceptance of NIKE’s purchase order for currencies within the factory currency exposure indices that are neither the U.S. Dollar nor the local or functional currency of the factory. Embedded derivative contracts are treated as foreign currency forward contracts that are bifurcated from the related purchase order and recorded at fair value as a derivative asset or liability on the Consolidated Balance Sheets with their corresponding change in fair value recognized in Other (income) expense, net , from the date a purchase order is accepted by a factory through the date the purchase price is no longer subject to foreign currency fluctuations. +In addition, the Company has entered into certain other contractual agreements which have payments that are indexed to currencies that are not the functional currency of either substantial party to the contracts. These payment terms expose NIKE to variability in foreign exchange rates and create embedded derivative contracts that must be bifurcated from the related contract and recorded at fair value as derivative assets or liabilities on the Consolidated Balance Sheets with their corresponding changes in fair value recognized in Other (income) expense, net until each payment is settled. +At May 31, 2016 , the notional amount of all embedded derivatives outstanding was approximately $282 million . +Credit Risk +The Company is exposed to credit-related losses in the event of nonperformance by counterparties to hedging instruments. The counterparties to all derivative transactions are major financial institutions with investment grade credit ratings. However, this does not eliminate the Company’s exposure to credit risk with these institutions. This credit risk is limited to the unrealized gains in such contracts should any of these counterparties fail to perform as contracted. To manage this risk, the Company has established strict counterparty credit guidelines that are continually monitored. +The Company’s derivative contracts contain credit risk related contingent features designed to protect against significant deterioration in counterparties’ creditworthiness and their ultimate ability to settle outstanding derivative contracts in the normal course of business. The Company’s bilateral credit related contingent features generally require the owing entity, either the Company or the derivative counterparty, to post collateral for the portion of the fair value in excess of $50 million should the fair value of outstanding derivatives per counterparty be greater than $50 million . Additionally, a certain level of decline in credit rating of either the Company or the counterparty could also trigger collateral requirements. As of May 31, 2016 , the Company was in compliance with all credit risk-related contingent features and had derivative instruments with credit risk-related contingent features in a net liability position of $3 million . Accordingly, the Company was not required to post any collateral as a result of these contingent features. Further, as of May 31, 2016 , the Company had received $105 million of cash collateral from various counterparties to its derivative contracts (refer to Note 6 — Fair Value Measurements ). Given the considerations described above, the Company considers the impact of the risk of counterparty default to be immaterial . +NOTE 17 — Operating Segments and Related Information +The Company’s operating segments are evidence of the structure of the Company's internal organization. The NIKE Brand segments are defined by geographic regions for operations participating in NIKE Brand sales activity. +Each NIKE Brand geographic segment operates predominantly in one industry: the design, development, marketing and selling of athletic footwear, apparel and equipment. The Company’s reportable operating segments for the NIKE Brand are: North America, Western Europe, Central & Eastern Europe, Greater China, Japan and Emerging Markets, and include results for the NIKE, Jordan and Hurley brands. The Company’s NIKE Brand Direct to Consumer operations are managed within each geographic operating segment. Converse is also a reportable segment for the Company, and operates in one industry: the design, marketing, licensing and selling of casual sneakers, apparel and accessories. +Global Brand Divisions is included within the NIKE Brand for presentation purposes to align with the way management views the Company. Global Brand Divisions primarily represent NIKE Brand licensing businesses that are not part of a geographic operating segment, and demand creation, operating overhead and product creation and design expenses that are centrally managed for the NIKE Brand. +Corporate consists largely of unallocated general and administrative expenses, including expenses associated with centrally managed departments; depreciation and amortization related to the Company’s headquarters; unallocated insurance, benefit and compensation programs, including stock-based compensation; and certain foreign currency gains and losses, including certain hedge gains and losses. +72 +Table of Contents +The primary financial measure used by the Company to evaluate performance of individual operating segments is earnings before interest and taxes (commonly referred to as “EBIT”), which represents Net income before Interest expense (income), net and Income tax expense in the Consolidated Statements of Income. +As part of the Company's centrally managed foreign exchange risk management program, standard foreign currency rates are assigned twice per year to each NIKE Brand entity in the Company's geographic operating segments and to Converse. These rates are set approximately nine and twelve months in advance of the future selling seasons to which they relate (specifically, for each currency, one standard rate applies to the fall and holiday selling seasons and one standard rate applies to the spring and summer selling seasons) based on average market spot rates in the calendar month preceding the date they are established. Inventories and Cost of sales for geographic operating segments and Converse reflect use of these standard rates to record non-functional currency product purchases in the entity’s functional currency. Differences between assigned standard foreign currency rates and actual market rates are included in Corporate, together with foreign currency hedge gains and losses generated from the Company's centrally managed foreign exchange risk management program and other conversion gains and losses. +Accounts receivable, net , Inventories and Property, plant and equipment, net for operating segments are regularly reviewed by management and are therefore provided below. Additions to long-lived assets as presented in the following table represent capital expenditures. +Certain prior year amounts have been reclassified to conform to fiscal 2016 presentation. +73 +Table of Contents +Year Ended May 31, +(In millions) +2016 +2015 +2014 +REVENUES +North America +$ +14,764 +$ +13,740 +$ +12,299 +Western Europe +5,884 +5,705 +4,979 +Central & Eastern Europe +1,431 +1,421 +1,387 +Greater China +3,785 +3,067 +2,602 +Japan +869 +755 +771 +Emerging Markets +3,701 +3,898 +3,949 +Global Brand Divisions +73 +115 +125 +Total NIKE Brand +30,507 +28,701 +26,112 +Converse +1,955 +1,982 +1,684 +Corporate +(86 +) +(82 +) +3 +TOTAL NIKE CONSOLIDATED REVENUES +$ +32,376 +$ +30,601 +$ +27,799 +EARNINGS BEFORE INTEREST AND TAXES +North America +$ +3,763 +$ +3,645 +$ +3,077 +Western Europe +1,434 +1,275 +855 +Central & Eastern Europe +289 +249 +279 +Greater China +1,372 +993 +816 +Japan +174 +100 +131 +Emerging Markets +892 +818 +952 +Global Brand Divisions +(2,596 +) +(2,267 +) +(1,993 +) +Total NIKE Brand +5,328 +4,813 +4,117 +Converse +487 +517 +496 +Corporate +(1,173 +) +(1,097 +) +(1,036 +) +Total NIKE Consolidated Earnings Before Interest and Taxes +4,642 +4,233 +3,577 +Interest expense (income), net +19 +28 +33 +TOTAL NIKE CONSOLIDATED INCOME BEFORE INCOME TAXES +$ +4,623 +$ +4,205 +$ +3,544 +ADDITIONS TO LONG-LIVED ASSETS +North America +$ +242 +$ +208 +$ +240 +Western Europe +215 +216 +120 +Central & Eastern Europe +17 +20 +19 +Greater China +44 +69 +63 +Japan +13 +15 +9 +Emerging Markets +51 +37 +55 +Global Brand Divisions +258 +225 +225 +Total NIKE Brand +840 +790 +731 +Converse +39 +69 +30 +Corporate +312 +144 +161 +TOTAL ADDITIONS TO LONG-LIVED ASSETS +$ +1,191 +$ +1,003 +$ +922 +DEPRECIATION +North America +$ +133 +$ +121 +$ +109 +Western Europe +72 +75 +71 +Central & Eastern Europe +12 +12 +11 +Greater China +48 +46 +38 +Japan +18 +22 +19 +Emerging Markets +25 +27 +25 +Global Brand Divisions +230 +210 +175 +Total NIKE Brand +538 +513 +448 +Converse +27 +18 +16 +Corporate +84 +75 +54 +TOTAL DEPRECIATION +$ +649 +$ +606 +$ +518 +74 +Table of Contents +As of May 31, +(In millions) +2016 +2015 +ACCOUNTS RECEIVABLE, NET +North America +$ +1,689 +$ +1,737 +Western Europe +378 +344 +Central & Eastern Europe +194 +242 +Greater China +74 +84 +Japan +129 +134 +Emerging Markets +409 +461 +Global Brand Divisions +76 +88 +Total NIKE Brand +2,949 +3,090 +Converse +270 +258 +Corporate +22 +10 +TOTAL ACCOUNTS RECEIVABLE, NET +$ +3,241 +$ +3,358 +INVENTORIES +North America +$ +2,363 +$ +2,207 +Western Europe +929 +699 +Central & Eastern Europe +210 +169 +Greater China +375 +249 +Japan +146 +94 +Emerging Markets +478 +528 +Global Brand Divisions +35 +32 +Total NIKE Brand +4,536 +3,978 +Converse +306 +237 +Corporate +(4 +) +122 +TOTAL INVENTORIES +$ +4,838 +$ +4,337 +PROPERTY, PLANT AND EQUIPMENT, NET +North America +$ +742 +$ +632 +Western Europe +589 +451 +Central & Eastern Europe +50 +47 +Greater China +234 +254 +Japan +223 +205 +Emerging Markets +109 +103 +Global Brand Divisions +511 +484 +Total NIKE Brand +2,458 +2,176 +Converse +125 +122 +Corporate +937 +713 +TOTAL PROPERTY, PLANT AND EQUIPMENT, NET +$ +3,520 +$ +3,011 +Revenues by Major Product Lines +Revenues to external customers for NIKE Brand products are attributable to sales of footwear, apparel and equipment. Other revenues to external customers consist primarily of sales by Converse. +Year Ended May 31, +(In millions) +2016 +2015 +2014 +Footwear +$ +19,871 +$ +18,318 +$ +16,208 +Apparel +9,067 +8,637 +8,109 +Equipment +1,496 +1,631 +1,670 +Other +1,942 +2,015 +1,812 +TOTAL NIKE CONSOLIDATED REVENUES +$ +32,376 +$ +30,601 +$ +27,799 +75 +Table of Contents +Revenues and Long-Lived Assets by Geographic Area +After allocation of revenues for Global Brand Divisions, Converse and Corporate to geographical areas based on the location where the sales originated, revenues by geographical area are essentially the same as reported above for the NIKE Brand operating segments with the exception of the United States. Revenues derived in the United States were $15,304 million , $14,180 million and $12,711 million for the years ended May 31, 2016 , 2015 and 2014 , respectively. The Company’s largest concentrations of long-lived assets primarily consist of the Company’s world headquarters and distribution facilities in the United States and distribution facilities in Belgium, China and Japan. Long-lived assets attributable to operations in the United States, which are primarily composed of net property, plant & equipment, were $2,241 million and $1,877 million at May 31, 2016 and 2015 , respectively. Long-lived assets attributable to operations in Belgium were $348 million and $234 million at May 31, 2016 and 2015 , respectively. Long-lived assets attributable to operations in China were $240 million and $267 million at May 31, 2016 and 2015 , respectively. Long-lived assets attributable to operations in Japan were $223 million and $205 million at May 31, 2016 and 2015 , respectively. +Major Customers +No customer accounted for 10% or more of the Company’s net revenues during the years ended May 31, 2016 , 2015 and 2014 . +ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure +There has been no change of accountants nor any disagreements with accountants on any matter of accounting principles or practices or financial statement disclosure required to be reported under this Item. +ITEM 9A. Controls and Procedures +We maintain disclosure controls and procedures that are designed to ensure information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. +We carry out a variety of ongoing procedures, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, to evaluate the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of May 31, 2016 . +“Management’s Annual Report on Internal Control Over Financial Reporting” is included in Item 8 of this Report. +We have commenced several transformation initiatives to centralize and simplify our business processes and systems. These are long-term initiatives, which we believe will enhance our internal control over financial reporting due to increased automation and further integration of related processes. We will continue to monitor our internal control over financial reporting for effectiveness throughout the transformation. +There have not been any other changes in our internal control over financial reporting during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. +ITEM 9B. Other Information +No disclosure is required under this Item. +76 +Table of Contents +PART III +ITEM 10. Directors, Executive Officers and Corporate Governance +The information required by Item 401 of Regulation S-K regarding directors is included under “Election of Directors” in the definitive Proxy Statement for our 2016 Annual Meeting of Shareholders and is incorporated herein by reference. The information required by Item 401 of Regulation S-K regarding executive officers is included under “Executive Officers of the Registrant” in Item 1 of this Report. The information required by Item 405 of Regulation S-K is included under “Election of Directors — Section 16(a) Beneficial Ownership Reporting Compliance” in the definitive Proxy Statement for our 2016 Annual Meeting of Shareholders and is incorporated herein by reference. The information required by Item 406 of Regulation S-K is included under “Corporate Governance — Code of Business Conduct and Ethics” in the definitive Proxy Statement for our 2016 Annual Meeting of Shareholders and is incorporated herein by reference. The information required by Items 407(d)(4) and (d)(5) of Regulation S-K regarding the Audit Committee of the Board of Directors is included under “Corporate Governance — Board Committees” in the definitive Proxy Statement for our 2016 Annual Meeting of Shareholders and is incorporated herein by reference. +ITEM 11. Executive Compensation +The information required by Items 402, 407(e)(4) and 407(e)(5) of Regulation S-K regarding executive compensation is included under “Election of Directors — Director Compensation for Fiscal 2016 ,” “Compensation Discussion and Analysis,” “Executive Compensation,” “Election of Directors — Compensation Committee Interlocks and Insider Participation,” and “Compensation Committee Report” in the definitive Proxy Statement for our 2016 Annual Meeting of Shareholders and is incorporated herein by reference. +ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters +The information required by Item 201(d) of Regulation S-K is included under “Executive Compensation — Equity Compensation Plans” in the definitive Proxy Statement for our 2016 Annual Meeting of Shareholders and is incorporated herein by reference. The information required by Item 403 of Regulation S-K is included under “Election of Directors — Stock Holdings of Certain Owners and Management” in the definitive Proxy Statement for our 2016 Annual Meeting of Shareholders and is incorporated herein by reference. +ITEM 13. Certain Relationships and Related Transactions and Director Independence +The information required by Items 404 and 407(a) of Regulation S-K is included under “Election of Directors — Transactions with Related Persons” and “Corporate Governance — Director Independence” in the definitive Proxy Statement for our 2016 Annual Meeting of Shareholders and is incorporated herein by reference. +ITEM 14. Principal Accountant Fees and Services +The information required by Item 9(e) of Schedule 14A is included under “Ratification Of Independent Registered Public Accounting Firm” in the definitive Proxy Statement for our 2016 Annual Meeting of Shareholders and is incorporated herein by reference. +77 +Table of Contents +PART IV +ITEM 15. Exhibits and Financial Statement Schedules +(a) +The following documents are filed as part of this report: +Form 10-K +Page No. +1. +Financial Statements: +Report of Independent Registered Public Accounting Firm +47 +Consolidated Statements of Income for each of the three years ended May 31, 2016, May 31, 2015 and May 31, 2014 +48 +Consolidated Statements of Comprehensive Income for each of the three years ended May 31, 2016, May 31, 2015 and May 31, 2014 +49 +Consolidated Balance Sheets at May 31, 2016 and May 31, 2015 +50 +Consolidated Statements of Cash Flows for each of the three years ended May 31, 2016, May 31, 2015 and May 31, 2014 +51 +Consolidated Statements of Shareholders’ Equity for each of the three years ended May 31, 2016, May 31, 2015 and May 31, 2014 +52 +Notes to Consolidated Financial Statements +53 +2. +Financial Statement Schedule: +II — Valuation and Qualifying Accounts +80 +All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. +3. +Exhibits: +3.1 +Restated Articles of Incorporation, as amended (incorporated by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended November 30, 2015). +3.2 +Third Restated Bylaws, as amended (incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K filed June 21, 2013). +4.1 +Restated Articles of Incorporation, as amended (see Exhibit 3.1). +4.2 +Third Restated Bylaws, as amended (see Exhibit 3.2). +4.3 +Indenture dated as of April 26, 2013, by and between NIKE, Inc. and Deutsche Bank Trust Company Americas, as trustee (incorporated by reference to Exhibit 4.1 tot he Company's Form 8-Q filed April 26, 2013). +4.4 +Second Supplemental Indenture, dated as of October 29, 2015, by and between NIKE, Inc. and Deutsche Bank Trust Company Americas, as trustee, including the form of 3.875% Notes due 2045 (incorporated by reference to Exhibit 5.2 to the Company's Form 8-Q filed October 29, 2015). +10.1 +Form of Non-Statutory Stock Option Agreement for options granted to non-employee directors prior to May 31, 2010 under the 1990 Stock Incentive Plan (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed June 21, 2005).* +10.2 +Form of Non-Statutory Stock Option Agreement for options granted to non-employee directors after May 31, 2010 under the 1990 Stock Incentive Plan (incorporated by reference to Exhibit 10.2 to the Company’s Annual Report on Form 10-K for the fiscal year ended May 31, 2010).* +10.3 +Form of Non-Statutory Stock Option Agreement for options granted to executives prior to May 31, 2010 under the 1990 Stock Incentive Plan (incorporated by reference to Exhibit 10.1 to the Company’s Annual Report on Form 10-K for the fiscal year ended May 31, 2009).* +10.4 +Form of Restricted Stock Agreement for non-employee directors under the 1990 Stock Incentive Plan (incorporated by reference to Exhibit 10.4 to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 2014).* +10.5 +Form of Non-Statutory Stock Option Agreement for options granted to executives after May 31, 2010 under the Stock Incentive Plan (incorporated by reference to Exhibit 10.5 to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 2015).* +10.6 +Form of Indemnity Agreement entered into between the Company and each of its officers and directors (incorporated by reference to Exhibit 10.2 to the Company’s Annual Report on Form 10-K for the fiscal year ended May 31, 2008).* +10.7 +NIKE, Inc. 1990 Stock Incentive Plan (incorporated by reference to Exhibit 10.7 to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 2014).* +78 +Table of Contents +10.8 +NIKE, Inc. Executive Performance Sharing Plan (incorporated by reference to Exhibit 10.7 to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 2012).* +10.9 +NIKE, Inc. Long-Term Incentive Plan (incorporated by reference to Exhibit 10.9 to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 2015).* +10.10 +NIKE, Inc. Deferred Compensation Plan (Amended and Restated effective April 1, 2013) (incorporated by reference to Exhibit 10.9 to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 2013).* +10.11 +NIKE, Inc. Deferred Compensation Plan (Amended and Restated effective June 1, 2004) (applicable to amounts deferred before January 1, 2005) (incorporated by reference to Exhibit 10.6 to the Company’s Annual Report on Form 10-K for the fiscal year ended May 31, 2004).* +10.12 +Amendment No. 1 effective January 1, 2008 to the NIKE, Inc. Deferred Compensation Plan (June 1, 2004 Restatement) (incorporated by reference to Exhibit 10.9 to the Company’s Annual Report on Form 10-K for the fiscal year ended May 31, 2009).* +10.13 +NIKE, Inc. Foreign Subsidiary Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended November 30, 2008).* +10.14 +Amended and Restated Covenant Not To Compete and Non-Disclosure Agreement between NIKE, Inc. and Mark G. Parker dated July 24, 2008 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed July 24, 2008).* +10.15 +Form of Restricted Stock Agreement under the Stock Incentive Plan for awards after May 31, 2010 (incorporated by reference to Exhibit 10.15 to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 2015).* +10.16 +Form of Restricted Stock Unit Agreement under the Stock Incentive Plan (incorporated by reference to Exhibit 10.16 to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 2015).* +10.17 +Covenant Not to Compete and Non-Disclosure Agreement between NIKE, Inc. and Andrew Campion dated January 23, 2007.* +10.18 +Covenant Not to Compete and Non-Disclosure Agreement between NIKE, Inc. and Eric D. Sprunk dated April 18, 2001 (incorporated by reference to Exhibit 10.23 to the Company’s Annual Report on Form 10-K for the fiscal year ended May 31, 2010).* +10.19 +Covenant Not to Compete and Non-Disclosure Agreement between NIKE, Inc. and Trevor A. Edwards dated November 14, 2002 (incorporated by reference to Exhibit 10.19 to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 2008).* +10.20 +Covenant Not to Compete and Non-Disclosure Agreement between NIKE, Inc. and Jeanne Jackson dated March 4, 2009 (incorporated by reference to Exhibit 10.21 to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 2014).* +10.21 +Policy for Recoupment of Incentive Compensation (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed July 20, 2010).* +10.22 +Credit Agreement dated as of August 28, 2015 among NIKE, Inc., Bank of America, N.A., as Administrative Agent, Citibank N.A., as Syndication Agent, Deutsche Bank A.G. New York Branch and HSBC Bank USA, National Association, as Co-Documentation Agents, and the other Banks named therein (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed September 2, 2015). +10.23 +Executive Performance Sharing Plan (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed September 23, 2015). +10.24 +Stock Incentive Plan, as amended (incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K filed September 23, 2015). +12.1 +Computation of Ratio of Earnings to Fixed Charges. +21 +Subsidiaries of the Registrant. +23 +Consent of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm (included within this Annual Report on Form 10-K). +31.1 +Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer. +31.2 +Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer. +32 +Section 1350 Certifications. +101.INS +XBRL Instance Document +101.SCH +XBRL Taxonomy Extension Schema +101.CAL +XBRL Taxonomy Extension Calculation Linkbase +101.DEF +XBRL Taxonomy Extension Definition Document +101.LAB +XBRL Taxonomy Extension Label Linkbase +101.PRE +XBRL Taxonomy Extension Presentation Linkbase +* Management contract or compensatory plan or arrangement. +The Exhibits filed herewith do not include certain instruments with respect to long-term debt of NIKE and its subsidiaries, inasmuch as the total amount of debt authorized under any such instrument does not exceed 10 percent of the total assets of NIKE and its subsidiaries on a consolidated basis. NIKE agrees, pursuant to Item 601(b)(4)(iii) of Regulation S-K, that it will furnish a copy of any such instrument to the SEC upon request. +Upon written request to Investor Relations, NIKE, Inc., One Bowerman Drive, Beaverton, Oregon 97005-6453, NIKE will furnish shareholders with a copy of any Exhibit upon payment of $0.10 per page, which represents our reasonable expenses in furnishing Exhibits. +79 +Table of Contents +SCHEDULE II — Valuation and Qualifying Accounts +(In millions) +Balance at +Beginning of Period +Charged to Costs +and Expenses +Charged to Other Accounts (1) +Write-Offs, Net +Balance at End +of Period +Sales returns reserve +For the year ended May 31, 2014 +$ +241 +$ +619 +$ +(3 +) +$ +(549 +) +$ +308 +For the year ended May 31, 2015 +308 +726 +(35 +) +(620 +) +379 +For the year ended May 31, 2016 +379 +788 +(15 +) +(708 +) +444 +Allowance for doubtful accounts (2) +For the year ended May 31, 2014 +$ +104 +$ +13 +$ +(2 +) +$ +(37 +) +$ +78 +For the year ended May 31, 2015 +78 +35 +(15 +) +(20 +) +78 +For the year ended May 31, 2016 +78 +52 +(2 +) +(85 +) +43 +(1) +Amounts included in this column primarily relate to foreign currency translation. +(2) +Includes both current and non-current portions of the allowance for doubtful accounts. The non-current portion is included in Deferred income taxes and other assets on the Consolidated Balance Sheets. +80 +Table of Contents +Consent of Independent Registered Public Accounting Firm +We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 033-63995, 333-63581, 333-63583, 333-68864, 333-68886, 333-71660, 333-104822, 333-117059, 333-133360, 333-164248, 333-171647, 333-173727 and 333-208900) of NIKE, Inc. of our report dated July 21, 2016 relating to the financial statements, financial statement schedule and the effectiveness of internal control over financial reporting, which appears in this Form 10-K. +/s/ PRICEWATERHOUSECOOPERS LLP +Portland, Oregon +July 21, 2016 +81 +Table of Contents +Signatures +Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. +NIKE, INC. +By: +/s/ MARK G. PARKER +Mark G. Parker +Chairman, President and Chief Executive Officer +Date: +July 21, 2016 +Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. +Signature +Title +Date +PRINCIPAL EXECUTIVE OFFICER AND DIRECTOR: +/s/ MARK G. PARKER +Mark G. Parker +Chairman, President and Chief Executive Officer +July 21, 2016 +PRINCIPAL FINANCIAL OFFICER: +/s/ ANDREW CAMPION +Andrew Campion +Chief Financial Officer +July 21, 2016 +PRINCIPAL ACCOUNTING OFFICER: +/s/ CHRIS L. ABSTON +Chris L. Abston +Corporate Controller +July 21, 2016 +DIRECTORS: +/s/ ELIZABETH J. COMSTOCK +Elizabeth J. Comstock +Director +July 21, 2016 +/s/ JOHN G. CONNORS +John G. Connors +Director +July 21, 2016 +/s/ TIMOTHY D. COOK +Timothy D. Cook +Director +July 21, 2016 +/s/ JOHN J. DONAHOE II +John J. Donahoe II +Director +July 21, 2016 +/s/ ALAN B. GRAF, JR. +Alan B. Graf, Jr. +Director +July 21, 2016 +/s/ TRAVIS A. KNIGHT +Travis A. Knight +Director +July 21, 2016 +/s/ JOHN C. LECHLEITER +John C. Lechleiter +Director +July 21, 2016 +/s/ MICHELLE A. PELUSO +Michelle A. Peluso +Director +July 21, 2016 +/s/ JOHNATHAN A. RODGERS +Johnathan A. Rodgers +Director +July 21, 2016 +/s/ JOHN R. THOMPSON, JR. +John R. Thompson, Jr. +Director +July 21, 2016 +/s/ PHYLLIS M. WISE +Phyllis M. Wise +Director +July 21, 2016 +82 \ No newline at end of file diff --git a/raw/filings/0000320187/2015/0000320187-16-000336/filing_metadata.csv b/raw/filings/0000320187/2015/0000320187-16-000336/filing_metadata.csv new file mode 100644 index 0000000000000000000000000000000000000000..257a57132cc478e76f6fb21614a6105fc1b95b86 --- /dev/null +++ b/raw/filings/0000320187/2015/0000320187-16-000336/filing_metadata.csv @@ -0,0 +1,2 @@ +cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing +0000320187,NKE,"NIKE, Inc.",10-K,2016-07-21,2016-05-31,2016-07-22T00:11:03.000Z,0000320187-16-000336,nke-5312016x10k.htm,10-K,14641297,1,0,https://www.sec.gov/Archives/edgar/data/320187/000032018716000336/nke-5312016x10k.htm,https://www.sec.gov/Archives/edgar/data/320187/000032018716000336/,2015,2015,1 diff --git a/raw/filings/0000320187/2015/0000320187-16-000336/item1.txt b/raw/filings/0000320187/2015/0000320187-16-000336/item1.txt new file mode 100644 index 0000000000000000000000000000000000000000..f95b02e9322b52314161bda8276a2742cd32d803 --- /dev/null +++ b/raw/filings/0000320187/2015/0000320187-16-000336/item1.txt @@ -0,0 +1,111 @@ +ITEM 1. Business +General +NIKE, Inc. was incorporated in 1967 under the laws of the State of Oregon. As used in this report, the terms “we,” “us,” “NIKE,” and the “Company” refer to NIKE, Inc. and its predecessors, subsidiaries and affiliates, collectively, unless the context indicates otherwise. Our NIKE e-commerce website is located at www.nike.com. On our NIKE corporate website, located at news.nike.com, we post the following filings as soon as reasonably practicable after they are electronically filed with or furnished to the United States Securities and Exchange Commission (the “SEC”): our annual report on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities and Exchange Act of 1934, as amended. Our definitive Proxy Statements are also posted on our corporate website. All such filings on our corporate website are available free of charge. Copies of these filings may also be obtained by visiting the Public Reference Room of the SEC at 100 F Street, NE, Washington, D.C. 20549, or by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains a website ( www.sec.gov ) that contains current, quarterly and annual reports, proxy and information statements and other information regarding issuers that file electronically. Also available on our corporate website are the charters of the committees of our Board of Directors, as well as our corporate governance guidelines and code of ethics; copies of any of these documents will be provided in print to any shareholder who submits a request in writing to NIKE Investor Relations, One Bowerman Drive, Beaverton, Oregon 97005-6453. +Our principal business activity is the design, development and worldwide marketing and selling of athletic footwear, apparel, equipment, accessories and services. NIKE is the largest seller of athletic footwear and apparel in the world. We sell our products to retail accounts, through NIKE-owned retail stores and internet websites (which we refer to collectively as our “Direct to Consumer” or “DTC” operations), and through a mix of independent distributors and licensees throughout the world. Virtually all of our products are manufactured by independent contractors. Nearly all footwear and apparel products are produced outside the United States, while equipment products are produced both in the United States and abroad. +Products +We focus our NIKE Brand product offerings in nine key categories: Running, NIKE Basketball, the Jordan Brand, Football (Soccer), Men’s Training, Women’s Training, Action Sports, Sportswear (our sports-inspired lifestyle products) and Golf. Men's Training includes our baseball and American football product offerings. We also market products designed for kids, as well as for other athletic and recreational uses such as cricket, lacrosse, tennis, volleyball, wrestling, walking and outdoor activities. +NIKE’s athletic footwear products are designed primarily for specific athletic use, although a large percentage of the products are worn for casual or leisure purposes. We place considerable emphasis on innovation and high-quality construction in our products. Sportswear, Running, the Jordan Brand and Football (Soccer) are currently our top-selling footwear categories and we expect them to continue to lead in footwear sales. +We also sell sports apparel covering the above-mentioned categories, which feature the same trademarks and are sold predominantly through the same marketing and distribution channels as athletic footwear. Our sports apparel, similar to our athletic footwear products, is designed primarily for athletic use and exemplifies our commitment to innovation and high-quality construction. Sportswear, Men's Training, Running, Football (Soccer) and Women's Training are currently our top-selling apparel categories, and we expect them to continue to lead in apparel sales. We often market footwear, apparel and accessories in “collections” of similar use or by category. We also market apparel with licensed college and professional team and league logos. +We sell a line of performance equipment and accessories under the NIKE Brand name, including bags, socks, sport balls, eyewear, timepieces, digital devices, bats, gloves, protective equipment, golf clubs and other equipment designed for sports activities. We also sell small amounts of various plastic products to other manufacturers through our wholly-owned subsidiary, NIKE IHM, Inc. +Our Jordan Brand designs, distributes and licenses athletic and casual footwear, apparel and accessories predominantly focused on basketball using the Jumpman trademark. Sales and operating results for the Jordan Brand are reported as a separate category and within the NIKE Brand geographic operating segments, respectively. +One of our wholly-owned subsidiary brands, Hurley, headquartered in Costa Mesa, California, designs and distributes a line of action sports and youth lifestyle apparel and accessories under the Hurley trademark. Sales and operating results for Hurley are included within the NIKE Brand Action Sports category and within the NIKE Brand's North America geographic operating segment, respectively. +Another of our wholly-owned subsidiary brands, Converse, headquartered in Boston, Massachusetts, designs, distributes and licenses casual sneakers, apparel and accessories under the Converse, Chuck Taylor, All Star, One Star, Star Chevron and Jack Purcell trademarks. Operating results of the Converse brand are reported on a stand-alone basis. +In addition to the products we sell to our wholesale customers and directly to consumers through our DTC operations, we have also entered into license agreements that permit unaffiliated parties to manufacture and sell, using NIKE-owned trademarks, certain apparel, digital devices and applications and other equipment designed for sports activities. +1 +Table of Contents +Sales and Marketing +Financial information about geographic and segment operations appears in Note 17 — Operating Segments and Related Information of the accompanying Notes to the Consolidated Financial Statements. +We experience moderate fluctuations in aggregate sales volume during the year. Historically, revenues in the first and fourth fiscal quarters have slightly exceeded those in the second and third quarters. However, the mix of product sales may vary considerably as a result of changes in seasonal and geographic demand for particular types of footwear, apparel and equipment, as well as other macroeconomic, operating and logistics-related factors. +Because NIKE is a consumer products company, the relative popularity of various sports and fitness activities and changing design trends affect the demand for our products. We must, therefore, respond to trends and shifts in consumer preferences by adjusting the mix of existing product offerings, developing new products, styles and categories and influencing sports and fitness preferences through extensive marketing. Failure to respond in a timely and adequate manner could have a material adverse effect on our sales and profitability. This is a continuing risk. Refer to Item 1A. Risk Factors. +We report our NIKE Brand operations based on our internal geographic organization. Each NIKE Brand geography operates predominantly in one industry: the design, development, marketing and selling of athletic footwear, apparel, equipment, accessories and services. Our reportable operating segments for the NIKE Brand are: North America, Western Europe, Central & Eastern Europe, Greater China, Japan and Emerging Markets. Our NIKE Brand Direct to Consumer operations are managed within each geographic operating segment. +Converse is also a reportable segment and operates in one industry: the design, marketing, licensing and selling of casual sneakers, apparel and accessories. Converse Direct to Consumer operations, including e-commerce, are reported within the Converse operating segment results. +United States Market +For fiscal 2016 , NIKE Brand and Converse sales in the United States accounted for approximately 47% of total revenues, compared to 46% for both fiscal 2015 and fiscal 2014 . We sell our NIKE Brand, Jordan Brand, Hurley and Converse products to thousands of retail accounts in the United States, including a mix of footwear stores, sporting goods stores, athletic specialty stores, department stores, skate, tennis and golf shops and other retail accounts. In the United States, we utilize NIKE sales offices to solicit sales as well as independent sales representatives to sell specialty products for golf and skateboarding. During fiscal 2016 , our three largest customers accounted for approximately 25% of sales in the United States. +We make substantial use of our futures ordering program, which allows retailers to order five to six months in advance of delivery with the commitment that their orders will be delivered within a set time period at a fixed price. In fiscal 2016 , 84% of our U.S. wholesale footwear shipments were made under the futures program, compared to 87% in fiscal 2015 and 86% in fiscal 2014 . In fiscal 2016 , 66% of our U.S. wholesale apparel shipments were made under the futures program, compared to 67% in fiscal 2015 and 71% in fiscal 2014 . +Our Direct to Consumer operations sell NIKE Brand, Jordan Brand, Hurley and Converse products to consumers through our e-commerce website, www.nike.com . In addition, our Direct to Consumer operations sell through the following number of retail stores in the United States: +U.S. Retail Stores +Number +NIKE Brand factory stores +196 +NIKE Brand in-line stores, including employee-only stores +34 +Converse stores (including factory stores) +103 +Hurley stores (including factory and employee stores) +29 +TOTAL +362 +In the United States, NIKE has five significant distribution centers located in Memphis, Tennessee, two of which are owned and three are leased. NIKE Brand apparel and equipment products are also shipped from our leased Foothill Ranch, California distribution center. Converse and Hurley products are shipped primarily from leased facilities in Ontario, California. Smaller leased distribution facilities are located in various parts of the United States. +International Markets +For fiscal 2016 , non-U.S. NIKE Brand and Converse sales accounted for 53% of total revenues, compared to 54% for both fiscal 2015 and fiscal 2014 . We sell our products to retail accounts, through our own Direct to Consumer operations and through a mix of independent distributors, licensees and sales representatives around the world. We sell to thousands of retail accounts and ship products from 42 distribution centers outside of the United States. In many countries and regions, including Canada, Asia, some Latin American countries and Europe, we have a futures ordering program for retailers similar to the United States futures ordering program described above. During fiscal 2016 , NIKE’s three largest customers outside of the United States accounted for approximately 13% of total non-U.S. sales. +In addition to NIKE and Converse owned e-commerce websites in over 40 countries, our Direct to Consumer business operates the following number of retail stores outside the United States: +Non-U.S. Retail Stores +Number +NIKE Brand factory stores +588 +NIKE Brand in-line stores, including employee-only stores +72 +Converse stores (including factory stores) +23 +TOTAL +683 +2 +Table of Contents +International branch offices and subsidiaries of NIKE are located in Argentina, Australia, Austria, Belgium, Bermuda, Brazil, Canada, Chile, China, Croatia, the Czech Republic, Denmark, Finland, France, Germany, Greece, Hong Kong, Hungary, India, Indonesia, Ireland, Israel, Italy, Japan, Jordan, Korea, Malaysia, Mexico, New Zealand, the Netherlands, Norway, Panama, the Philippines, Poland, Portugal, Russia, Singapore, Slovakia, Slovenia, South Africa, Spain, Sri Lanka, Sweden, Switzerland, Taiwan, Thailand, Turkey, the United Arab Emirates, the United Kingdom, Uruguay and Vietnam. +Significant Customer +No customer accounted for 10% or more of our worldwide net revenues during fiscal 2016 . +Orders +Worldwide futures orders for NIKE Brand athletic footwear and apparel, scheduled for delivery from June through November 2016, were $14.9 billion compared with $13.8 billion for the same period last year. NIKE Brand reported futures include (1) orders from external wholesale customers and (2) internal orders from our DTC in-line stores and e-commerce operations which are reflected at prices that are comparable to prices charged to external wholesale customers. The U.S. Dollar futures orders amount is calculated based upon our internal forecast of the actual currency exchange rates under which our revenues will be translated during this period. Reported futures orders are not necessarily indicative of our expectation of revenues for this period. This is because the mix of orders can shift between futures and at-once orders and the fulfillment of certain of these futures orders may fall outside of the scheduled time period noted above. In addition, foreign currency exchange rate fluctuations as well as differing levels of order cancellations, discounts and returns can cause differences in the comparisons between futures orders and actual revenues. Moreover, a portion of our revenue is not derived from futures orders, including sales of at-once and closeout NIKE Brand footwear and apparel, all sales of NIKE Brand equipment, the difference between retail sales and internal orders from our Direct to Consumer in-line stores and e-commerce operations, and sales from our Converse, Hurley and NIKE Golf businesses. +Product Research, Design and Development +We believe our research, design and development efforts are key factors in our success. Technical innovation in the design and manufacturing process of footwear, apparel and athletic equipment receive continued emphasis as we strive to produce products that help to enhance athletic performance, reduce injury and maximize comfort while reducing waste. +In addition to our own staff of specialists in the areas of biomechanics, chemistry, exercise physiology, engineering, industrial design, sustainability and related fields, we also utilize research committees and advisory boards made up of athletes, coaches, trainers, equipment managers, orthopedists, podiatrists and other experts who consult with us and review designs, materials, concepts for product and manufacturing process improvements and compliance with product safety regulations around the world. Employee athletes, athletes engaged under sports marketing contracts and other athletes wear-test and evaluate products during the design and development process. +As we continue to develop new technologies, we are simultaneously focused on the design of innovative products incorporating such technologies throughout our product categories. Using market intelligence and research, our various design teams identify opportunities to leverage new technologies in existing categories responding to consumer preferences. The proliferation of NIKE Air, Lunar, Zoom, Free, Flywire, Dri-Fit, Flyknit, Flyweave and NIKE+ technologies through Running, NIKE Basketball, the Jordan Brand, Football (Soccer), Men's Training, Women's Training and Sportswear, among others, typifies our dedication to designing innovative products. +Manufacturing +We are supplied by approximately 142 footwear factories located in 15 countries. The largest single footwear factory accounted for approximately 7% of total fiscal 2016 NIKE Brand footwear production. Virtually all of our footwear is manufactured outside of the United States by independent contract manufacturers who often operate multiple factories. In fiscal 2016 , contract factories in Vietnam, China and Indonesia manufactured approximately 44%, 29% and 21% of total NIKE Brand footwear, respectively. We also have manufacturing agreements with independent factories in Argentina, India, Brazil and Mexico to manufacture footwear for sale primarily within those countries. In fiscal 2016 , five footwear contract manufacturers each accounted for greater than 10% of footwear production and in aggregate accounted for approximately 69% of NIKE Brand footwear production. +We are supplied by approximately 394 apparel factories located in 39 countries. The largest single apparel factory accounted for approximately 12% of total fiscal 2016 NIKE Brand apparel production. Virtually all of our apparel is manufactured outside of the United States by independent contract manufacturers which often operate multiple factories. In fiscal 2016 , contract factories in China, Vietnam and Indonesia produced approximately 26%, 23% and 9% of total NIKE Brand apparel, respectively. In fiscal 2016 , one apparel contract manufacturer accounted for more than 10% of apparel production, and the top five contract manufacturers in aggregate accounted for approximately 39% of NIKE Brand apparel production. +The principal materials used in our footwear products are natural and synthetic rubber, plastic compounds, foam cushioning materials, natural and synthetic leather, nylon, polyester and canvas, as well as polyurethane films used to make NIKE Air-Sole cushioning components. During fiscal 2016 , NIKE IHM, Inc., a wholly-owned subsidiary of NIKE, Inc., with facilities near Beaverton, Oregon and in St. Charles, Missouri, as well as independent contractors in China and Vietnam, were our largest suppliers of the Air-Sole cushioning components used in footwear. The principal materials used in our apparel products are natural and synthetic fabrics and threads (both virgin and recycled); specialized performance fabrics designed to efficiently wick moisture away from the body, retain heat and repel rain and/or snow; and plastic and metal hardware. NIKE’s independent contractors and suppliers buy raw materials for the manufacturing of our footwear, apparel and equipment products. Most raw materials are available and purchased by those independent contractors and suppliers in the countries where manufacturing takes place. NIKE's independent contract manufacturers and suppliers have thus far experienced little difficulty in satisfying raw material requirements for the production of our products. +3 +Table of Contents +Since 1972, Sojitz Corporation of America (“Sojitz America”), a large Japanese trading company and the sole owner of our redeemable preferred stock, has performed significant import-export financing services for us. During fiscal 2016 , Sojitz America provided financing and purchasing services for NIKE Brand products sold in certain NIKE markets including Argentina, Uruguay, Brazil, Canada, India, South Africa and Thailand, excluding products produced and sold in the same country. Approximately 6% of NIKE Brand sales occurred in those countries. Any failure of Sojitz America to provide these services or any failure of Sojitz America’s banks could disrupt our ability to acquire products from our suppliers and to deliver products to our customers in those markets. Such a disruption could result in canceled orders that would adversely affect sales and profitability. However, we believe that any such disruption would be short-term in duration due to the ready availability of alternative sources of financing at competitive rates. Our current agreements with Sojitz America expire on May 31, 2018 and contain a provision allowing us to extend the agreements to May 31, 2019. +International Operations and Trade +Our international operations and sources of supply are subject to the usual risks of doing business abroad, such as possible increases in import duties, anti-dumping measures, quotas, safeguard measures, trade restrictions, restrictions on the transfer of funds and, in certain parts of the world, political instability and terrorism. We have not, to date, been materially affected by any such risk, but cannot predict the likelihood of such material effects occurring in the future. +In recent years, uncertain global and regional economic conditions have affected international trade and caused a rise in protectionist actions around the world. These trends are affecting many global manufacturing and service sectors, and the footwear and apparel industries, as a whole, are not immune. Companies in our industry are facing trade protectionism in many different regions, and in nearly all cases we are working together with industry groups to address trade issues and reduce the impact to the industry, while observing applicable competition laws. Notwithstanding our efforts, protectionist measures have resulted in increases in the cost of our products, and additional measures, if implemented, could adversely affect sales and/or profitability for NIKE as well as the imported footwear and apparel industry as a whole. +We monitor protectionist trends and developments throughout the world that may materially impact our industry, and we engage in administrative and judicial processes to mitigate trade restrictions. We are actively monitoring actions that may result in additional anti-dumping measures and could affect our industry. We are also monitoring for and advocating against other impediments that may limit or delay customs clearance for imports of footwear, apparel and equipment. Moreover, with respect to trade restrictions targeting China, which represents an important sourcing country and consumer market for us, we are working with a broad coalition of global businesses and trade associations representing a wide variety of sectors to help ensure that any legislation enacted and implemented (i) addresses legitimate and core concerns, (ii) is consistent with international trade rules, and (iii) reflects and considers China's domestic economy and the important role it has in the global economic community. +Where trade protection measures are implemented, we believe that we have the ability to develop, over a period of time, adequate alternative sources of supply for the products obtained from our present suppliers. If events prevented us from acquiring products from our suppliers in a particular country, our operations could be temporarily disrupted and we could experience an adverse financial impact. However, we believe we could abate any such disruption, and that much of the adverse impact on supply would, therefore, be of a short-term nature, although alternate sources of supply might not be as cost-effective and could have an ongoing adverse impact on profitability. +NIKE advocates for trade liberalization for footwear and apparel in a number of regional and bilateral free trade agreements. The Trans-Pacific Partnership (TPP), if ultimately ratified, has the potential to reduce or eliminate high rates of customs duties for imports into the United States of NIKE products sourced from TPP countries (primarily footwear and apparel from Vietnam and apparel from Malaysia). Similarly, the European Union has concluded a free trade agreement with Vietnam that, if approved, could lead to duty reduction or elimination for footwear and apparel. +Competition +The athletic footwear, apparel and equipment industry is highly competitive on a worldwide basis. We compete internationally with a significant number of athletic and leisure footwear companies, athletic and leisure apparel companies, sports equipment companies and large companies having diversified lines of athletic and leisure footwear, apparel and equipment, including adidas, ASICS, Li Ning, lululemon athletica, Puma, V.F. Corporation and Under Armour, among others. The intense competition and the rapid changes in technology and consumer preferences in the markets for athletic and leisure footwear and apparel and athletic equipment, constitute significant risk factors in our operations. +NIKE is the largest seller of athletic footwear, apparel and equipment in the world. Important aspects of competition in this industry are: +• +Product attributes such as quality; performance and reliability; new product innovation and development and consumer price/value. +• +Consumer connection and affinity for brands and products, developed through marketing and promotion; social media interaction; customer support and service; identification with prominent and influential athletes, coaches, teams, colleges and sports leagues who endorse our brands and use our products and active engagement through sponsored sporting events and clinics. +• +Effective sourcing and distribution of products, with attractive merchandising and presentation at retail, both in-store and online. +We believe that we are competitive in all of these areas. +Trademarks and Patents +We utilize trademarks on nearly all of our products and believe having distinctive marks that are readily identifiable is an important factor in creating a market for our goods, in identifying our brands and the Company and in distinguishing our goods from the goods of others. We consider our NIKE and Swoosh Design trademarks to be among our most valuable assets and we have registered these trademarks in almost 170 jurisdictions worldwide. In addition, we own many other trademarks that we utilize in marketing our products. We own common law rights in the trade dress of several significant shoe designs and elements. For certain trade dress, we have sought and obtained trademark registrations. +We have copyright protection in our design, graphics and other original works. When appropriate, we have sought registrations for this content. +We own patents and have a patent license, facilitating our use of “Air” technologies. +4 +Table of Contents +We also file and maintain many U.S. and foreign utility patents, as well as many U.S. and foreign design patents protecting components, manufacturing techniques, features and industrial design used in various athletic and leisure footwear and apparel, athletic equipment, digital devices and golf products. These patents expire at various times; patents issued for original applications filed this calendar year in the United States may last until 2031 for design patents and until 2036 for utility patents. +We believe our success depends upon our capabilities in areas such as design, research and development, production and marketing rather than exclusively upon our patent and trade secret positions. However, we have followed a policy of filing patent applications for the United States and select foreign countries on inventions, designs and improvements that we deem valuable. We also continue to vigorously protect our trademarks and patents against third-party infringement. +Employees +As of May 31, 2016 , we had approximately 70,700 employees worldwide, including retail and part-time employees. Management considers its relationship with employees to be excellent. None of our employees are represented by a union, except for certain employees in the Emerging Markets geography, where local law requires those employees to be represented by a trade union. Also, in some countries outside of the United States, local laws require employee representation by works councils (which may be entitled to information and consultation on certain Company decisions) or by organizations similar to a union. In certain European countries, we are required by local law to enter into and/or comply with industry-wide or national collective bargaining agreements. NIKE has never experienced a material interruption of operations due to labor disagreements. +Executive Officers of the Registrant +The executive officers of NIKE, Inc. as of July 15, 2016 are as follows: +Mark G. Parker, Chairman, President and Chief Executive Officer — Mr. Parker, 60, was appointed President and Chief Executive Officer in January 2006 and named Chairman of the Board in June 2016. He has been employed by NIKE since 1979 with primary responsibilities in product research, design and development, marketing and brand management. Mr. Parker was appointed divisional Vice President in charge of product development in 1987, corporate Vice President in 1989, General Manager in 1993, Vice President of Global Footwear in 1998 and President of the NIKE Brand in 2001. +Chris L. Abston, Vice President and Corporate Controller — Mr. Abston, 53, joined NIKE in 2015 from Wal-Mart Stores, Inc., where he served as Vice President, Global Controls and Governance since February 2015. Prior to that he was Vice President and Controller of Walmart International from February 2013 to January 2015, responsible for the oversight of international accounting and reporting, and Vice President and Assistant Controller of Wal-Mart Stores, Inc. from May 2011 to January 2013. Before joining Wal-Mart, Mr. Abston spent 25 years in public accounting with Ernst & Young LLP, most recently leading its Strategic Growth Markets practice as a Partner in the Dallas office. +David J. Ayre, Executive Vice President, Global Human Resources — Mr. Ayre, 56, joined NIKE as Vice President, Global Human Resources in 2007. Prior to joining NIKE, he held a number of senior human resource positions with PepsiCo, Inc. since 1990, most recently as head of Talent and Performance Rewards. +Andrew Campion, Executive Vice President and Chief Financial Officer — Mr. Campion, 44, joined NIKE in 2007 as Vice President of Global Planning and Development, leading strategic and financial planning. He was appointed Chief Financial Officer of the NIKE Brand in 2010, responsible for leading all aspects of financial management for the Company's flagship brand. In 2014, he was appointed Senior Vice President, Strategy, Finance and Investor Relations in addition to his role as Chief Financial Officer of NIKE Brand. Mr. Campion assumed the role of Executive Vice President and Chief Financial Officer in August 2015. Prior to joining NIKE, he held leadership roles in strategic planning, mergers and acquisitions, financial planning and analysis, operations and planning, investor relations and tax at The Walt Disney Company from 1996 to 2007. +Trevor A. Edwards, President, NIKE Brand — Mr. Edwards, 53, joined NIKE in 1992. He was appointed Marketing Manager, Strategic Accounts for Foot Locker in 1993, Director of Marketing for the Americas in 1995, Director of Marketing for Europe in 1997, Vice President, Marketing for Europe, Middle East and Africa in 1999 and Vice President, U.S. Brand Marketing in 2000. Mr. Edwards was appointed corporate Vice President, Global Brand Management in 2002, Vice President, Global Brand and Category Management in 2006 and President, NIKE Brand in 2013. Prior to NIKE, Mr. Edwards was with the Colgate-Palmolive Company. +Jeanne P. Jackson, President & Strategic Advisor — Ms. Jackson, 64, joined NIKE in 2009. She was appointed President & Strategic Advisor in June 2016. She was appointed President, Product and Merchandising in 2013 and President, Direct to Consumer in 2009. Ms. Jackson also served as a member of the NIKE, Inc. Board of Directors from 2001 through 2009. She founded and served as Chief Executive Officer of MSP Capital, a private investment company, from 2002 to 2009. Ms. Jackson was Chief Executive Officer of Walmart.com from March 2000 to January 2002. She was with Gap, Inc., as President and Chief Executive Officer of Banana Republic from 1995 to 2000, also serving as Chief Executive Officer of Gap, Inc. Direct from 1998 to 2000. Since 1978, she has held various retail management positions with Victoria’s Secret, The Walt Disney Company, Saks Fifth Avenue and Federated Department Stores. +Hilary K. Krane, Executive Vice President, Chief Administrative Officer and General Counsel — Ms. Krane, 52, joined NIKE as Vice President and General Counsel in April 2010. In 2011, her responsibilities expanded and she became Vice President, General Counsel and Corporate Affairs. Ms. Krane was appointed Executive Vice President, Chief Administrative Officer and General Counsel in 2013. Prior to joining NIKE, Ms. Krane was General Counsel and Senior Vice President for Corporate Affairs at Levi Strauss & Co. from 2006 to 2010. From 1996 to 2006, she was a partner and assistant general counsel at PricewaterhouseCoopers LLP. +John F. Slusher, Executive Vice President, Global Sports Marketing — Mr. Slusher, 47, has been employed by NIKE since 1998 with primary responsibilities in global sports marketing. Mr. Slusher was appointed Director of Sports Marketing for the Asia Pacific and Americas in 2006, divisional Vice President of Asia Pacific & Americas Sports Marketing in September 2007 and Vice President, Global Sports Marketing in November 2007. Prior to joining NIKE, Mr. Slusher was an attorney at the law firm of O’Melveny & Myers from 1995 to 1998. +Michael Spillane, President, Product and Merchandising — Mr. Spillane, 56, joined NIKE in 2007. He was appointed President, Product and Merchandising in 2016. He has served the Company in various roles including Vice President and General Manager of Greater China, Chief Executive Officer of Umbro and Converse and most recently as Vice President and General Manager of Footwear. Prior to joining NIKE, Mr. Spillane held leadership roles at Polartec, Maiden Mills Industries, Inc. and Tommy Hilfiger Licensing, LLC. +5 +Table of Contents +Eric D. Sprunk, Chief Operating Officer — Mr. Sprunk, 52, joined NIKE in 1993. He was appointed Finance Director and General Manager of the Americas in 1994, Finance Director for NIKE Europe in 1995, Regional General Manager of NIKE Europe Footwear in 1998 and Vice President & General Manager of the Americas in 2000. Mr. Sprunk was appointed Vice President of Global Footwear in 2001, Vice President of Merchandising and Product in 2009 and Chief Operating Officer in 2013. Prior to joining NIKE, Mr. Sprunk was a certified public accountant with Price Waterhouse from 1987 to 1993. +6 +Table of Contents \ No newline at end of file diff --git a/raw/filings/0000320187/2015/0000320187-16-000336/item13.txt b/raw/filings/0000320187/2015/0000320187-16-000336/item13.txt new file mode 100644 index 0000000000000000000000000000000000000000..20d5ad3646289798f1cc08498e54c6754eec3f7e --- /dev/null +++ b/raw/filings/0000320187/2015/0000320187-16-000336/item13.txt @@ -0,0 +1,2 @@ +ITEM 13. Certain Relationships and Related Transactions and Director Independence +The information required by Items 404 and 407(a) of Regulation S-K is included under “Election of Directors — Transactions with Related Persons” and “Corporate Governance — Director Independence” in the definitive Proxy Statement for our 2016 Annual Meeting of Shareholders and is incorporated herein by reference. \ No newline at end of file diff --git a/raw/filings/0000320187/2015/0000320187-16-000336/item9a.txt b/raw/filings/0000320187/2015/0000320187-16-000336/item9a.txt new file mode 100644 index 0000000000000000000000000000000000000000..fdd7faf126731420f6b37b0b9ae02d4cd2dd92c9 --- /dev/null +++ b/raw/filings/0000320187/2015/0000320187-16-000336/item9a.txt @@ -0,0 +1,6 @@ +ITEM 9A. Controls and Procedures +We maintain disclosure controls and procedures that are designed to ensure information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. +We carry out a variety of ongoing procedures, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, to evaluate the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of May 31, 2016 . +“Management’s Annual Report on Internal Control Over Financial Reporting” is included in Item 8 of this Report. +We have commenced several transformation initiatives to centralize and simplify our business processes and systems. These are long-term initiatives, which we believe will enhance our internal control over financial reporting due to increased automation and further integration of related processes. We will continue to monitor our internal control over financial reporting for effectiveness throughout the transformation. +There have not been any other changes in our internal control over financial reporting during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. \ No newline at end of file diff --git a/raw/filings/0000320187/2015/0000320187-16-000336/rp_note.txt b/raw/filings/0000320187/2015/0000320187-16-000336/rp_note.txt new file mode 100644 index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391 diff --git a/raw/filings/0000320187/2015/0000320187-16-000336/rpt_disclosure.txt b/raw/filings/0000320187/2015/0000320187-16-000336/rpt_disclosure.txt new file mode 100644 index 0000000000000000000000000000000000000000..4e76a695213609e8179341015c1648a2c5629db2 --- /dev/null +++ b/raw/filings/0000320187/2015/0000320187-16-000336/rpt_disclosure.txt @@ -0,0 +1,9 @@ +Transactions with Related Persons +Mr. Howard S. Slusher, the father of John Slusher, Executive Vice President of Sports Marketing, and the Company are parties to a Consulting Agreement pursuant to which Howard Slusher manages the planning, design, and construction of new buildings at, and improvements to, NIKE’s World Headquarters. Howard Slusher was selected due to his deep history and experience with the Company, as he has managed several significant construction projects for the Company, including the original World Headquarters construction and later expansions. In addition, Howard Slusher’s previous engagement with the Company garnered the trust of management and makes him uniquely qualified to oversee the project. During fiscal 2016, the Company paid Howard Slusher $3,408,837 for these services. +Pursuant to the terms of a past consulting agreement with the Company, the Company agreed to pay for health and life insurance policies for Howard Slusher following expiration of the agreement. During fiscal 2016, the Company paid $123,574 for life insurance premiums. +Three of Mr. Parker’s siblings, each with over 25 years of service to the Company, were employed by the Company in non-executive roles in fiscal 2016. Ann Parker was an Executive Talent Scout, Bob Parker was a Marketplace Director, and Stephen Parker held a Vice President role with Converse. During fiscal 2016, the Company paid aggregate compensation to each of Ann Parker and Stephen Parker in the amounts of $317,642 and $525,491, respectively, comprising of salary, bonuses, the grant date fair value of stock options granted during the fiscal year estimated using the Black-Scholes pricing model, profit sharing and matching contributions to Company-sponsored retirement plans. Additionally, the Company paid aggregate compensation to Bob Parker in the amount of approximately $506,948, comprising of approximately $504,144 paid in connection with his termination of services as well as the compensation components listed above. The compensation and benefits received by each of Mr. Parker’s siblings, including the separation benefits received by Bob Parker, were consistent with compensation paid to other employees holding similar positions. +Mr. Thompson’s son, John Thompson III, head basketball coach at Georgetown University, and the Company are parties to a contract pursuant to which Mr. Thompson III provides certain endorsement and consulting services to the Company. The terms of this agreement, effective August 2014 through August 2019, provide for annual base compensation of $200,000, and up to $112,500 per year of product and merchandise, for use by him, the basketball staff and team. In addition, there are annual incentive payments based upon his team’s performance of up to $100,000. +Ms. Lindsay A. Jackson, the daughter of Jeanne Jackson, President of Product and Merchandising during fiscal 2016, was employed by the Company in a non-executive role in fiscal 2016 as a Brand Director. During fiscal 2016, the Company paid aggregate compensation to Ms. Lindsay Jackson of $152,861, comprising salary, bonuses, the grant date fair value of stock options granted during the fiscal year estimated using the Black-Scholes pricing model, profit sharing and matching contributions to Company-sponsored retirement plans. The compensation and benefits received by Ms. Lindsay Jackson was consistent with compensation paid to other employees holding similar positions. +On June 30, 2016 Mr. Philip Knight, the father of NIKE director Travis Knight, retired from the Board of Directors. Effective immediately upon his retirement, the Board has appointed Mr. Philip Knight to the position of Chairman Emeritus, which provides a standing invitation for Mr. Philip Knight to attend meetings of the Board and its committees as a non-voting observer. Pursuant to serving as the Chairman Emeritus, Mr. Knight will receive medical and dental insurance coverage available to employees and will receive an annual salary of $500,000. +The Company’s written policy requires the Nominating and Corporate Governance Committee to review any transaction or proposed transaction with a related person that would be required to be reported under Item 404(a) of Regulation S-K, and to determine whether to ratify or approve the transaction, with ratification or approval to occur only if the Committee determines that the transaction is fair to the Company or that approval or ratification of the transaction is in the interest of the Company. +NIKE, INC. Ÿ 2016 Notice of Annual Meeting 14 \ No newline at end of file diff --git a/raw/filings/0000320187/2016/0000320187-17-000090/filing.txt b/raw/filings/0000320187/2016/0000320187-17-000090/filing.txt new file mode 100644 index 0000000000000000000000000000000000000000..2314040a750d3b2965f1f1698a9d12fbb01772c9 --- /dev/null +++ b/raw/filings/0000320187/2016/0000320187-17-000090/filing.txt @@ -0,0 +1,6267 @@ +10-K +1 +nke-5312017x10k.htm +10-K +Document +Table of Contents +UNITED STATES +SECURITIES AND EXCHANGE COMMISSION +Washington, D.C. 20549 +FORM 10-K +(Mark One) +þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 +FOR THE FISCAL YEAR ENDED May 31, 2017 +OR +¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 +FOR THE TRANSITION PERIOD FROM TO . +Commission File No. 1-10635 +NIKE, Inc . +(Exact name of Registrant as specified in its charter) +OREGON +93-0584541 +(State or other jurisdiction of incorporation) +(IRS Employer Identification No.) +One Bowerman Drive, Beaverton, Oregon +97005-6453 +(Address of principal executive offices) +(Zip Code) +(503) 671-6453 +(Registrant’s Telephone Number, Including Area Code) +SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: +Class B Common Stock +New York Stock Exchange +(Title of Each Class) +(Name of Each Exchange on Which Registered) +SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: +NONE +Indicate by check mark: +YES +NO +• +if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. +¨ +þ +• +if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. +¨ +þ +• +whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. +þ +¨ +• +whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). +þ +¨ +• +if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. +þ +• +whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. +Large accelerated filer þ +Accelerated filer ¨ +Non-accelerated filer ¨ +Smaller reporting company ¨ +Emerging growth company ¨ +• +if an emerging growth company, if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. +¨ +• +whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). +¨ +þ +As of November 30, 2016, the aggregate market values of the Registrant’s Common Stock held by non-affiliates were: +Class A +$ +3,617,645,223 +Class B +66,325,855,280 +$ +69,943,500,503 +As of July 17, 2017, the number of shares of the Registrant’s Common Stock outstanding were: +Class A +329,245,752 +Class B +1,313,949,313 +1,643,195,065 +DOCUMENTS INCORPORATED BY REFERENCE: +Parts of Registrant’s Proxy Statement for the Annual Meeting of Shareholders to be held on September 21, 2017 are incorporated by reference into Part III of this Report . +Table of Contents +NIKE, INC. +ANNUAL REPORT ON FORM 10-K +Table of Contents +Page +PART I +1 +ITEM 1. +Business +1 +General +1 +Products +1 +Sales and Marketing +2 +United States Market +2 +International Markets +2 +Significant Customer +3 +Orders +3 +Product Research, Design and Development +3 +Manufacturing +3 +International Operations and Trade +4 +Competition +4 +Trademarks and Patents +5 +Employees +5 +Executive Officers of the Registrant +5 +ITEM 1A. +Risk Factors +7 +ITEM 1B. +Unresolved Staff Comments +16 +ITEM 2. +Properties +16 +ITEM 3. +Legal Proceedings +16 +ITEM 4. +Mine Safety Disclosures +16 +PART II +17 +ITEM 5. +Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities +17 +ITEM 6. +Selected Financial Data +19 +ITEM 7. +Management’s Discussion and Analysis of Financial Condition and Results of Operations +21 +ITEM 7A. +Quantitative and Qualitative Disclosures about Market Risk +42 +ITEM 8. +Financial Statements and Supplementary Data +43 +ITEM 9. +Changes in and Disagreements with Accountants on Accounting and Financial Disclosure +74 +ITEM 9A. +Controls and Procedures +74 +ITEM 9B. +Other Information +74 +PART III +75 +(Except for the information set forth under “Executive Officers of the Registrant” in Item 1 above, Part III is incorporated by reference from the Proxy Statement for the NIKE, Inc. 2017 Annual Meeting of Shareholders.) +ITEM 10. +Directors, Executive Officers and Corporate Governance +75 +ITEM 11. +Executive Compensation +75 +ITEM 12. +Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters +75 +ITEM 13. +Certain Relationships and Related Transactions and Director Independence +75 +ITEM 14. +Principal Accountant Fees and Services +75 +PART IV +76 +ITEM 15. +Exhibits and Financial Statement Schedules +76 +ITEM 16. +Form 10-K Summary +78 +Signatures +81 +Table of Contents +PART I +ITEM 1. Business +General +NIKE, Inc. was incorporated in 1967 under the laws of the State of Oregon. As used in this report, the terms “we,” “us,” “NIKE,” and the “Company” refer to NIKE, Inc. and its predecessors, subsidiaries and affiliates, collectively, unless the context indicates otherwise. Our NIKE digital commerce website is located at www.nike.com. On our NIKE corporate website, located at investors.nike.com, we post the following filings as soon as reasonably practicable after they are electronically filed with, or furnished to, the United States Securities and Exchange Commission (the “SEC”): our annual report on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities and Exchange Act of 1934, as amended. Our definitive Proxy Statements are also posted on our corporate website. All such filings on our corporate website are available free of charge. Copies of these filings may also be obtained by visiting the Public Reference Room of the SEC at 100 F Street, NE, Washington, D.C. 20549, or by calling the SEC at 1-800-SEC-0330 and are available on the SEC's website ( www.sec.gov ). Also available on our corporate website are the charters of the committees of our Board of Directors, as well as our corporate governance guidelines and code of ethics; copies of any of these documents will be provided in print to any shareholder who submits a request in writing to NIKE Investor Relations, One Bowerman Drive, Beaverton, Oregon 97005-6453. +Our principal business activity is the design, development and worldwide marketing and selling of athletic footwear, apparel, equipment, accessories and services. NIKE is the largest seller of athletic footwear and apparel in the world. We sell our products to retail accounts, through NIKE-owned retail stores, internet websites, and mobile applications (which we refer to collectively as our “Direct to Consumer” or “DTC” operations), and through a mix of independent distributors and licensees throughout the world. Virtually all of our products are manufactured by independent contractors. Nearly all footwear and apparel products are produced outside the United States, while equipment products are produced both in the United States and abroad. +Products +We focus our NIKE Brand product offerings in nine key categories: Running, NIKE Basketball, the Jordan Brand, Football (Soccer), Men’s Training, Women’s Training, Action Sports, Sportswear (our sports-inspired lifestyle products) and Golf. Men's Training includes our baseball and American football product offerings. We also market products designed for kids, as well as for other athletic and recreational uses such as cricket, lacrosse, tennis, volleyball, wrestling, walking and outdoor activities. +NIKE’s athletic footwear products are designed primarily for specific athletic use, although a large percentage of the products are worn for casual or leisure purposes. We place considerable emphasis on innovation and high-quality construction in the development and manufacturing of our products. Sportswear, Running and the Jordan Brand are currently our top-selling footwear categories and we expect them to continue to lead in footwear sales. +We also sell sports apparel covering the above-mentioned categories, which feature the same trademarks and are sold predominantly through the same marketing and distribution channels as athletic footwear. Our sports apparel, similar to our athletic footwear products, is designed primarily for athletic use and exemplifies our commitment to innovation and high-quality construction. Sportswear, Men’s Training and Running are currently our top-selling apparel categories and we expect them to continue to lead in apparel sales. We often market footwear, apparel and accessories in “collections” of similar use or by category. We also market apparel with licensed college and professional team and league logos. +We sell a line of performance equipment and accessories under the NIKE Brand name, including bags, socks, sport balls, eyewear, timepieces, digital devices, bats, gloves, protective equipment and other equipment designed for sports activities. We also sell small amounts of various plastic products to other manufacturers through our wholly-owned subsidiary, NIKE IHM, Inc., doing business as Air Manufacturing Innovation. +Our Jordan Brand designs, distributes and licenses athletic and casual footwear, apparel and accessories predominantly focused on basketball using the Jumpman trademark. Sales and operating results for Jordan Brand products are reported within the respective NIKE Brand geographic operating segments. +One of our wholly-owned subsidiary brands, Hurley, headquartered in Costa Mesa, California, designs and distributes a line of action sports and youth lifestyle apparel and accessories under the Hurley trademark. Sales and operating results for Hurley products are included within the NIKE Brand's North America geographic operating segment with sales reported within the Action Sports category. +Another of our wholly-owned subsidiary brands, Converse, headquartered in Boston, Massachusetts, designs, distributes and licenses casual sneakers, apparel and accessories under the Converse, Chuck Taylor, All Star, One Star, Star Chevron and Jack Purcell trademarks. Operating results of the Converse brand are reported on a stand-alone basis. +In addition to the products we sell to our wholesale customers and directly to consumers through our DTC operations, we have also entered into license agreements that permit unaffiliated parties to manufacture and sell, using NIKE-owned trademarks, certain apparel, digital devices and applications and other equipment designed for sports activities. +1 +Table of Contents +Sales and Marketing +Financial information about geographic and segment operations appears in Note 17 — Operating Segments and Related Information of the accompanying Notes to the Consolidated Financial Statements. +We experience moderate fluctuations in aggregate sales volume during the year. Historically, revenues in the first and fourth fiscal quarters have slightly exceeded those in the second and third quarters. However, the mix of product sales may vary considerably as a result of changes in seasonal and geographic demand for particular types of footwear, apparel and equipment, as well as other macroeconomic, operating and logistics-related factors. +Because NIKE is a consumer products company, the relative popularity of various sports and fitness activities and changing design trends affect the demand for our products. We must, therefore, respond to trends and shifts in consumer preferences by adjusting the mix of existing product offerings, developing new products, styles and categories and influencing sports and fitness preferences through extensive marketing. Failure to respond in a timely and adequate manner could have a material adverse effect on our sales and profitability. This is a continuing risk. Refer to Item 1A. Risk Factors. +We report our NIKE Brand operations based on our internal geographic organization. Each NIKE Brand geography operates predominantly in one industry: the design, development, marketing and selling of athletic footwear, apparel, equipment, accessories and services. For fiscal 2017, our reportable operating segments for the NIKE Brand are: North America, Western Europe, Central & Eastern Europe, Greater China, Japan and Emerging Markets. In June 2017, we announced a new company alignment designed to allow NIKE to better serve the consumer personally, at scale. As a result of this organizational realignment, beginning in fiscal 2018, the Company's reportable operating segments for the NIKE Brand will be: North America; Europe, Middle East and Africa; Greater China; and Asia Pacific and Latin America. Our NIKE Brand Direct to Consumer operations are, and will continue to be, managed within each geographic operating segment. +Converse is, and will continue to be, a reportable segment and operates in one industry: the design, marketing, licensing and selling of casual sneakers, apparel and accessories. Converse Direct to Consumer operations, including digital commerce, are reported within the Converse operating segment results. +United States Market +For fiscal 2017 , NIKE Brand and Converse sales in the United States accounted for approximately 46% of total revenues, compared to 47% and 46% for fiscal 2016 and fiscal 2015 , respectively. We sell our NIKE Brand, Jordan Brand, Hurley and Converse products to thousands of retail accounts in the United States, including a mix of footwear stores, sporting goods stores, athletic specialty stores, department stores, skate, tennis and golf shops and other retail accounts. In the United States, we utilize NIKE sales offices to solicit such sales. During fiscal 2017 , our three largest customers accounted for approximately 23% of sales in the United States. +Our Direct to Consumer operations sell NIKE Brand, Jordan Brand, Hurley and Converse products to consumers through our digital commerce website, www.nike.com and through mobile applications. In addition, our Direct to Consumer operations sell through the following number of retail stores in the United States: +U.S. Retail Stores +Number +NIKE Brand factory stores +209 +NIKE Brand in-line stores (including employee-only stores) +34 +Converse stores (including factory stores) +112 +Hurley stores (including factory and employee stores) +29 +TOTAL +384 +In the United States, NIKE has six significant distribution centers located in Memphis, Tennessee, two of which are owned and four of which are leased. NIKE Brand apparel and equipment products are also shipped from our leased Foothill Ranch, California distribution center. Converse and Hurley products are shipped primarily from leased facilities in Ontario, California, as well as from Memphis, Tennessee. Smaller leased distribution facilities are located in various parts of the United States. +We also operate a futures ordering program, which allows retailers to order five to six months in advance of delivery with the commitment that their orders will be delivered within a set time period at a fixed price. For fiscal 2017 , orders under the futures program represented 83% of our U.S. wholesale footwear revenues, compared to 84% for fiscal 2016 and 87% for fiscal 2015 . For fiscal 2017 , futures orders represented 66% of our U.S. wholesale apparel revenues, compared to 66% for fiscal 2016 and 67% for fiscal 2015 . +International Markets +For fiscal 2017 , non-U.S. NIKE Brand and Converse sales accounted for 54% of total revenues, compared to 53% and 54% for fiscal 2016 and fiscal 2015 , respectively. We sell our products to retail accounts, through our own Direct to Consumer operations and through a mix of independent distributors, licensees and sales representatives around the world. We sell to thousands of retail accounts and ship products from 60 distribution centers outside of the United States. In many countries and regions, including Canada, Asia, Europe and some Latin American countries, we have a futures ordering program for retailers similar to the United States futures ordering program described above. During fiscal 2017 , NIKE’s three largest customers outside of the United States accounted for approximately 12% of total non-U.S. sales. +2 +Table of Contents +In addition to NIKE and Converse owned digital commerce websites in over 45 countries, our Direct to Consumer business operates the following number of retail stores outside the United States: +Non-U.S. Retail Stores +Number +NIKE Brand factory stores +642 +NIKE Brand in-line stores (including employee-only stores) +71 +Converse stores (including factory stores) +45 +TOTAL +758 +International branch offices and subsidiaries of NIKE are located in Argentina, Australia, Austria, Belgium, Bermuda, Brazil, Canada, Chile, China, Croatia, the Czech Republic, Denmark, Finland, France, Germany, Greece, Hong Kong, Hungary, India, Indonesia, Ireland, Israel, Italy, Japan, Korea, Macau, Malaysia, Mexico, the Netherlands, New Zealand, Norway, Panama, the Philippines, Poland, Portugal, Russia, Singapore, Slovakia, Slovenia, South Africa, Spain, Sri Lanka, Sweden, Switzerland, Taiwan, Thailand, Turkey, the United Arab Emirates, the United Kingdom, Uruguay and Vietnam. +Significant Customer +No customer accounted for 10% or more of our worldwide net revenues during fiscal 2017 . +Orders +Futures orders for NIKE Brand footwear and apparel scheduled for delivery from June through November 2017 were $14.7 billion compared to $15.0 billion for the same period last year. NIKE Brand futures orders include (1) orders from external wholesale customers and (2) internal orders from our DTC in-line stores and digital commerce operations which are reflected at prices that are comparable to prices charged to external wholesale customers. The U.S. Dollar futures orders amount is calculated based upon our internal forecast of the actual currency exchange rates under which our revenues will be translated during this period. Reported futures orders are not necessarily indicative of our expectation of revenues for this period and have become less correlated due to our evolving business model. This is due to year-over-year changes in shipment timing, changes in the mix of orders between futures and orders with shorter lead times, and because the fulfillment of certain orders may fall outside of the schedule noted above. In addition, foreign currency exchange rate fluctuations as well as differing levels of order cancellations, discounts and returns can cause differences in the comparisons between futures orders and actual revenues. A portion of our revenue is not derived from futures orders, including sales with short lead times, closeout NIKE Brand footwear and apparel, all sales of NIKE Brand equipment, the difference between retail sales and internal orders from our DTC in-line stores and digital commerce operations, and sales from Converse, NIKE Golf and Hurley. +Product Research, Design and Development +We believe our research, design and development efforts are key factors in our success. Technical innovation in the design and manufacturing process of footwear, apparel and athletic equipment receive continued emphasis as we strive to produce products that help to enhance athletic performance, reduce injury and maximize comfort while reducing waste. +In addition to our own staff of specialists in the areas of biomechanics, chemistry, exercise physiology, engineering, industrial design, sustainability and related fields, we also utilize research committees and advisory boards made up of athletes, coaches, trainers, equipment managers, orthopedists, podiatrists and other experts who consult with us and review designs, materials, concepts for product and manufacturing process improvements and compliance with product safety regulations around the world. Employee athletes, athletes engaged under sports marketing contracts and other athletes wear-test and evaluate products during the design and development process. +As we continue to develop new technologies, we are simultaneously focused on the design of innovative products incorporating such technologies throughout our product categories. Using market intelligence and research, our various design teams identify opportunities to leverage new technologies in existing categories responding to consumer preferences. The proliferation of NIKE Air, Lunar, Zoom, Free, Flywire, Dri-Fit, Flyknit, Flyweave, ZoomX, React and NIKE+ technologies throughout our Running, NIKE Basketball, the Jordan Brand, Football (Soccer), Men's Training, Women's Training and Sportswear categories, among others, typifies our dedication to designing innovative products. +Manufacturing +We are supplied by approximately 127 footwear factories located in 15 countries. The largest single footwear factory accounted for approximately 8% of total fiscal 2017 NIKE Brand footwear production. Virtually all of our footwear is manufactured outside of the United States by independent contract manufacturers who often operate multiple factories. For fiscal 2017 , contract factories in Vietnam, China and Indonesia manufactured approximately 46%, 27% and 21% of total NIKE Brand footwear, respectively. We also have manufacturing agreements with independent contract manufacturers in Argentina, India, Brazil, Mexico and Italy to manufacture footwear for sale primarily within those countries. For fiscal 2017 , five footwear contract manufacturers each accounted for greater than 10% of footwear production and in the aggregate accounted for approximately 69% of NIKE Brand footwear production. +We are supplied by approximately 363 apparel factories located in 37 countries. The largest single apparel factory accounted for approximately 13% of total fiscal 2017 NIKE Brand apparel production. Virtually all of our apparel is manufactured outside of the United States by independent contract manufacturers which often operate multiple factories. For fiscal 2017 , contract factories in China, Vietnam and Thailand produced approximately 26%, 16% and 10% of total NIKE Brand apparel, respectively. For fiscal 2017 , one apparel contract manufacturer accounted for more than 10% of apparel production, and the top five contract manufacturers in the aggregate accounted for approximately 43% of NIKE Brand apparel production. +3 +Table of Contents +The principal materials used in our footwear products are natural and synthetic rubber, plastic compounds, foam cushioning materials, natural and synthetic leather, nylon, polyester and canvas, as well as polyurethane films used to make NIKE Air-Sole cushioning components. During fiscal 2017 , Air Manufacturing Innovation, with facilities near Beaverton, Oregon and in St. Charles, Missouri, as well as independent contractors in China and Vietnam, were our suppliers of the Air-Sole cushioning components used in footwear. The principal materials used in our apparel products are natural and synthetic fabrics and threads (both virgin and recycled); specialized performance fabrics designed to efficiently wick moisture away from the body, retain heat and repel rain and/or snow; and plastic and metal hardware. NIKE’s independent contractors and suppliers buy raw materials for the manufacturing of our footwear, apparel and equipment products. Most raw materials are available and purchased by those independent contractors and suppliers in the countries where manufacturing takes place. NIKE's independent contract manufacturers and suppliers have thus far experienced little difficulty in satisfying raw material requirements for the production of our products. +Since 1972, Sojitz Corporation of America (“Sojitz America”), a large Japanese trading company and the sole owner of our redeemable preferred stock, has performed significant import-export financing services for us. During fiscal 2017 , Sojitz America provided financing and purchasing services for NIKE Brand products sold in certain NIKE markets including Argentina, Brazil, Canada, India, South Africa, Thailand and Uruguay, excluding products produced and sold in the same country. Approximately 6% of NIKE Brand sales occurred in those countries. Any failure of Sojitz America to provide these services or any failure of Sojitz America’s banks could disrupt our ability to acquire products from our suppliers and to deliver products to our customers in those markets. Such a disruption could result in canceled orders that would adversely affect sales and profitability. However, we believe that any such disruption would be short-term in duration due to the ready availability of alternative sources of financing at competitive rates. Our current agreements with Sojitz America expire on May 31, 2018 and contain a provision allowing us to extend the agreements to May 31, 2019. +International Operations and Trade +Our international operations and sources of supply are subject to the usual risks of doing business abroad, such as possible increases in import duties, anti-dumping measures, quotas, safeguard measures, trade restrictions, restrictions on the transfer of funds and, in certain parts of the world, political instability and terrorism. We have not, to date, been materially affected by any such risk, but cannot predict the likelihood of such material effects occurring in the future. +In recent years, uncertain global and regional economic and political conditions have affected international trade and increased protectionist actions around the world. These trends are affecting many global manufacturing and service sectors, and the footwear and apparel industries, as a whole, are not immune. Companies in our industry are facing trade protectionism in many different regions, and in nearly all cases we are working together with industry groups to address trade issues and reduce the impact to the industry, while observing applicable competition laws. Notwithstanding our efforts, protectionist measures have resulted in increases in the cost of our products, and additional measures, if implemented, could adversely affect sales and/or profitability for NIKE as well as the imported footwear and apparel industry as a whole. +We monitor protectionist trends and developments throughout the world that may materially impact our industry, and we engage in administrative and judicial processes to mitigate trade restrictions. We are actively monitoring actions that may result in additional anti-dumping measures and could affect our industry. We are also monitoring for and advocating against other impediments that may limit or delay customs clearance for imports of footwear, apparel and equipment. Current U.S. policy proposals, including potential tariffs or penalties on imported goods, if enacted, may negatively affect U.S. corporations with production activities outside the U.S., including NIKE. There have also been discussions and commentary regarding potential changes to U.S. trade policies. If any of these reforms are implemented, it may become necessary for us to change the way we conduct business which may adversely affect our results of operations. In addition , with respect to trade restrictions targeting China, which represents an important sourcing country and consumer market for us, we are working with a broad coalition of global businesses and trade associations representing a wide variety of sectors to help ensure that any legislation enacted and implemented (i) addresses legitimate and core concerns, (ii) is consistent with international trade rules and (iii) reflects and considers China's domestic economy and the important role it has in the global economic community. +Where trade protection measures are implemented, we believe that we have the ability to develop, over a period of time, adequate alternative sources of supply for the products obtained from our present suppliers. If events prevented us from acquiring products from our suppliers in a particular country, our operations could be temporarily disrupted and we could experience an adverse financial impact. However, we believe we could abate any such disruption, and that much of the adverse impact on supply would, therefore, be of a short-term nature, although alternate sources of supply might not be as cost-effective and could have an ongoing adverse impact on profitability. +NIKE advocates for trade liberalization for footwear and apparel in a number of regional and bilateral free trade agreements. +Competition +The athletic footwear, apparel and equipment industry is highly competitive on a worldwide basis. We compete internationally with a significant number of athletic and leisure footwear companies, athletic and leisure apparel companies, sports equipment companies and large companies having diversified lines of athletic and leisure footwear, apparel and equipment, including adidas, ASICS, Li Ning, lululemon athletica, Puma, Under Armour and V.F. Corporation, among others. The intense competition and the rapid changes in technology and consumer preferences in the markets for athletic and leisure footwear and apparel and athletic equipment, constitute significant risk factors in our operations. +NIKE is the largest seller of athletic footwear and apparel in the world. Important aspects of competition in this industry are: +• +Product attributes such as quality; performance and reliability; new product innovation and development and consumer price/value. +• +Consumer connection and affinity for brands and products, developed through marketing and promotion; social media interaction; customer support and service; identification with prominent and influential athletes, public figures, coaches, teams, colleges and sports leagues who endorse our brands and use our products and active engagement through sponsored sporting events and clinics. +• +Effective sourcing and distribution of products, with attractive merchandising and presentation at retail, both in-store and online. +We believe that we are competitive in all of these areas. +4 +Table of Contents +Trademarks and Patents +We believe that our intellectual property rights are important to our brand, our success, and our competitive position. We pursue available protections of these rights and vigorously protect them against third-party theft and infringement. +We utilize trademarks on nearly all of our products and believe having distinctive marks that are readily identifiable is an important factor in creating a market for our goods, in identifying our brands and the Company, and in distinguishing our goods from the goods of others. We consider our NIKE and Swoosh trademarks to be among our most valuable assets and we have registered these trademarks in almost 170 jurisdictions worldwide. In addition, we own many other trademarks that we utilize in marketing our products. We own common law rights in the trade dress of several significant shoe designs and elements. For certain trade dress, we have sought and obtained trademark registrations. +We have copyright protection in our design, graphics and other original works. In some instances, we also obtain registered copyrights. +We own patents and have a patent license, facilitating our use of “Air” technologies. +We file for, own and maintain many U.S. and foreign utility patents, as well as many U.S. and foreign design patents protecting components, technologies, manufacturing techniques, features and industrial design used in various athletic and leisure footwear and apparel, athletic equipment and digital devices. These patents expire at various times. +We believe our success depends upon our capabilities in areas such as design, research and development, production and marketing rather than exclusively upon our patent and trade secret positions. +However, we have followed a policy of filing patent applications for the United States and select foreign countries on inventions, designs and improvements that we deem valuable. We also continue to vigorously protect our trademarks and patents against third-party infringement. +Employees +As of May 31, 2017 , we had approximately 74,400 employees worldwide, including retail and part-time employees. Management considers its relationship with employees to be excellent. None of our employees are represented by a union, except for certain employees in the Emerging Markets geography, where local law requires those employees to be represented by a trade union. Also, in some countries outside of the United States, local laws require employee representation by works councils (which may be entitled to information and consultation on certain Company decisions) or by organizations similar to a union. In certain European countries, we are required by local law to enter into and/or comply with industry-wide or national collective bargaining agreements. NIKE has never experienced a material interruption of operations due to labor disagreements. +Executive Officers of the Registrant +The executive officers of NIKE, Inc. as of July 20, 2017 are as follows: +Mark G. Parker, Chairman, President and Chief Executive Officer — Mr. Parker, 61, was appointed President and Chief Executive Officer in January 2006 and named Chairman of the Board in June 2016. He has been employed by NIKE since 1979 with primary responsibilities in product research, design and development, marketing and brand management. Mr. Parker was appointed divisional Vice President in charge of product development in 1987, corporate Vice President in 1989, General Manager in 1993, Vice President of Global Footwear in 1998 and President of the NIKE Brand in 2001. +Chris L. Abston, Vice President and Corporate Controller — Mr. Abston, 54, joined NIKE in 2015 from Wal-Mart Stores, Inc., where he served as Vice President, Global Controls and Governance since February 2015. Prior to that he was Vice President and Controller of Walmart International from February 2013 to January 2015, responsible for the oversight of international accounting and reporting, and Vice President and Assistant Controller of Wal-Mart Stores, Inc. from May 2011 to January 2013. Before joining Wal-Mart, Mr. Abston spent 25 years in public accounting with Ernst & Young LLP, most recently leading its Strategic Growth Markets practice as a Partner in the Dallas office. +David J. Ayre, Executive Vice President, Global Human Resources — Mr. Ayre, 57, joined NIKE as Vice President, Global Human Resources in 2007. Prior to joining NIKE, he held a number of senior human resource positions with PepsiCo, Inc. since 1990, most recently as head of Talent and Performance Rewards. +Andrew Campion, Executive Vice President and Chief Financial Officer — Mr. Campion, 45, joined NIKE in 2007 as Vice President of Global Planning and Development, leading strategic and financial planning. He was appointed Chief Financial Officer of the NIKE Brand in 2010, responsible for leading all aspects of financial management for the Company's flagship brand. In 2014, he was appointed Senior Vice President, Strategy, Finance and Investor Relations in addition to his role as Chief Financial Officer of NIKE Brand. Mr. Campion assumed the role of Executive Vice President and Chief Financial Officer in August 2015. Prior to joining NIKE, he held leadership roles in strategic planning, mergers and acquisitions, financial planning and analysis, operations and planning, investor relations and tax at The Walt Disney Company from 1996 to 2007. +Trevor A. Edwards, President, NIKE Brand — Mr. Edwards, 54, joined NIKE in 1992. He was appointed Marketing Manager, Strategic Accounts for Foot Locker in 1993, Director of Marketing for the Americas in 1995, Director of Marketing for Europe in 1997, Vice President, Marketing for Europe, Middle East and Africa in 1999 and Vice President, U.S. Brand Marketing in 2000. Mr. Edwards was appointed corporate Vice President, Global Brand Management in 2002, Vice President, Global Brand and Category Management in 2006 and President, NIKE Brand in 2013. Prior to NIKE, Mr. Edwards was with the Colgate-Palmolive Company. +Hilary K. Krane, Executive Vice President, Chief Administrative Officer and General Counsel — Ms. Krane, 53, joined NIKE as Vice President and General Counsel in April 2010. In 2011, her responsibilities expanded and she became Vice President, General Counsel and Corporate Affairs. Ms. Krane was appointed Executive Vice President, Chief Administrative Officer and General Counsel in 2013. Prior to joining NIKE, Ms. Krane was General Counsel and Senior Vice President for Corporate Affairs at Levi Strauss & Co. from 2006 to 2010. From 1996 to 2006, she was a Partner and Assistant General Counsel at PricewaterhouseCoopers LLP. +5 +Table of Contents +John F. Slusher, Executive Vice President, Global Sports Marketing — Mr. Slusher, 48, has been employed by NIKE since 1998 with primary responsibilities in global sports marketing. Mr. Slusher was appointed Director of Sports Marketing for Asia Pacific and Americas in 2006, divisional Vice President of Asia Pacific & Americas Sports Marketing in September 2007 and Vice President, Global Sports Marketing in November 2007. Prior to joining NIKE, Mr. Slusher was an attorney at the law firm of O’Melveny & Myers from 1995 to 1998. +Eric D. Sprunk, Chief Operating Officer — Mr. Sprunk, 53, joined NIKE in 1993. He was appointed Finance Director and General Manager of the Americas in 1994, Finance Director for NIKE Europe in 1995, Regional General Manager of NIKE Europe Footwear in 1998 and Vice President & General Manager of the Americas in 2000. Mr. Sprunk was appointed Vice President of Global Footwear in 2001, Vice President of Merchandising and Product in 2009 and Chief Operating Officer in 2013. Prior to joining NIKE, Mr. Sprunk was a certified public accountant with Price Waterhouse from 1987 to 1993. +As recently announced by the Company, Mr. Ayre will retire at the end of the calendar year. Succeeding Mr. Ayre as Executive Vice President, Global Human Resources, will be Monique Matheson. Ms. Matheson, 50, has been employed by NIKE since 1998, with primary responsibilities in the human resources function and most recently serving as Vice President, Chief Talent and Diversity Officer. +6 +Table of Contents +ITEM 1A. Risk Factors +Special Note Regarding Forward-Looking Statements and Analyst Reports +Certain written and oral statements, other than purely historic information, including estimates, projections, statements relating to NIKE’s business plans, objectives and expected operating results and the assumptions upon which those statements are based, made or incorporated by reference from time to time by NIKE or its representatives in this report, other reports, filings with the SEC, press releases, conferences or otherwise, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements include, without limitation, any statement that may predict, forecast, indicate or imply future results, performance or achievements, and may contain the words “believe,” “anticipate,” “expect,” “estimate,” “project,” “will be,” “will continue,” “will likely result” or words or phrases of similar meaning. Forward-looking statements involve risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. The risks and uncertainties are detailed from time to time in reports filed by NIKE with the SEC, including reports filed on Forms 8-K, 10-Q and 10-K, and include, among others, the following: international, national and local general economic and market conditions; the size and growth of the overall athletic footwear, apparel and equipment markets; intense competition among designers, marketers, distributors and sellers of athletic footwear, apparel and equipment for consumers and endorsers; demographic changes; changes in consumer preferences; popularity of particular designs, categories of products and sports; seasonal and geographic demand for NIKE products; difficulties in anticipating or forecasting changes in consumer preferences, consumer demand for NIKE products and the various market factors described above; difficulties in implementing, operating and maintaining NIKE’s increasingly complex information systems and controls, including, without limitation, the systems related to demand and supply planning and inventory control; interruptions in data and information technology systems; consumer data security; fluctuations and difficulty in forecasting operating results, including, without limitation, the fact that advance futures orders may not be indicative of future revenues due to changes in shipment timing, the changing mix of futures and orders with shorter lead times, and discounts, order cancellations and returns; the ability of NIKE to sustain, manage or forecast its growth and inventories; the size, timing and mix of purchases of NIKE’s products; increases in the cost of materials, labor and energy used to manufacture products; new product development and introduction; the ability to secure and protect trademarks, patents and other intellectual property; product performance and quality; customer service; adverse publicity; the loss of significant customers or suppliers; dependence on distributors and licensees; business disruptions; increased costs of freight and transportation to meet delivery deadlines; increases in borrowing costs due to any decline in NIKE’s debt ratings; changes in business strategy or development plans; general risks associated with doing business outside of the United States, including, without limitation, exchange rate fluctuations, import duties, tariffs, quotas, political and economic instability and terrorism; proposed changes to U.S. tax laws or policy, tariff and import/export regulations; changes in government regulations; the impact of, including business and legal developments relating to, climate change and natural disasters; litigation, regulatory proceedings and other claims asserted against NIKE; the ability to attract and retain qualified personnel; the effects of NIKE’s decision to invest in or divest of businesses and other factors referenced or incorporated by reference in this report and other reports. +The risks included here are not exhaustive. Other sections of this report may include additional factors which could adversely affect NIKE’s business and financial performance. Moreover, NIKE operates in a very competitive and rapidly changing environment. New risks emerge from time to time and it is not possible for management to predict all such risks, nor can it assess the impact of all such risks on NIKE’s business or the extent to which any risk, or combination of risks, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results. +Investors should also be aware that while NIKE does, from time to time, communicate with securities analysts, it is against NIKE’s policy to disclose to them any material non-public information or other confidential commercial information. Accordingly, shareholders should not assume that NIKE agrees with any statement or report issued by any analyst irrespective of the content of the statement or report. Furthermore, NIKE has a policy against issuing or confirming financial forecasts or projections issued by others. Thus, to the extent that reports issued by securities analysts contain any projections, forecasts or opinions, such reports are not the responsibility of NIKE. +Our products face intense competition. +NIKE is a consumer products company and the relative popularity of various sports and fitness activities and changing design trends affect the demand for our products. The athletic footwear, apparel and equipment industry is highly competitive both in the United States and worldwide. We compete internationally with a significant number of athletic and leisure footwear companies, athletic and leisure apparel companies, sports equipment companies and large companies having diversified lines of athletic and leisure footwear, apparel and equipment. We also compete with other companies for the production capacity of independent manufacturers that produce our products. Our DTC operations, both through our digital commerce operations and retail stores, also compete with multi-brand retailers selling our products. +Product offerings, technologies, marketing expenditures (including expenditures for advertising and endorsements), pricing, costs of production, customer service, digital commerce platforms and social media presence are areas of intense competition. This, in addition to rapid changes in technology and consumer preferences in the markets for athletic and leisure footwear and apparel and athletic equipment, constitute significant risk factors in our operations. In addition, the competitive nature of retail including shifts in the ways in which consumers are shopping, and the rising trend of digital commerce, constitutes a risk factor implicating our DTC and wholesale operations. If we do not adequately and timely anticipate and respond to our competitors, our costs may increase or the consumer demand for our products may decline significantly. +Failure to maintain our reputation and brand image could negatively impact our business. +Our iconic brands have worldwide recognition, and our success depends on our ability to maintain and enhance our brand image and reputation. Maintaining, promoting and growing our brands will depend on our design and marketing efforts, including advertising and consumer campaigns, product innovation and product quality. Our commitment to product innovation and quality and our continuing investment in design (including materials) and marketing may not have the desired impact on our brand image and reputation. We could be adversely impacted if we fail to achieve any of these objectives or if the reputation or image of any of our brands is tarnished or receives negative publicity. In addition, adverse publicity about regulatory or legal action against us, or by us, could damage our reputation and brand image, undermine consumer confidence in us and reduce long-term demand for our products, even if the regulatory or legal action is unfounded or not material to our operations. +In addition, our success in maintaining, extending and expanding our brand image depends on our ability to adapt to a rapidly changing media environment, including our increasing reliance on social media and digital dissemination of advertising campaigns. Negative posts or comments about us on social networking applications or websites could seriously damage our reputation and brand image. If we do not maintain, extend and expand our brand image, then our product sales, financial condition and results of operations could be materially and adversely affected. +7 +Table of Contents +If we are unable to anticipate consumer preferences and develop new products, we may not be able to maintain or increase our revenues and profits. +Our success depends on our ability to identify, originate and define product trends as well as to anticipate, gauge and react to changing consumer demands in a timely manner. However, lead times for many of our products may make it more difficult for us to respond rapidly to new or changing product trends or consumer preferences. All of our products are subject to changing consumer preferences that cannot be predicted with certainty. Our new products may not receive consumer acceptance as consumer preferences could shift rapidly to different types of performance products or away from these types of products altogether, and our future success depends in part on our ability to anticipate and respond to these changes. If we fail to anticipate accurately and respond to trends and shifts in consumer preferences by adjusting the mix of existing product offerings, developing new products, designs, styles and categories, and influencing sports and fitness preferences through aggressive marketing, we could experience lower sales, excess inventories or lower profit margins, any of which could have an adverse effect on our results of operations and financial condition. In addition, we market our products globally through a diverse spectrum of advertising and promotional programs and campaigns, including social media, mobile applications and online advertising. If we do not successfully market our products or if advertising and promotional costs increase, these factors could have an adverse effect on our business, financial condition and results of operations. +We rely on technical innovation and high-quality products to compete in the market for our products. +Technical innovation and quality control in the design and manufacturing process of footwear, apparel and athletic equipment is essential to the commercial success of our products. Research and development play a key role in technical innovation. We rely upon specialists in the fields of biomechanics, chemistry, exercise physiology, engineering, industrial design, sustainability and related fields, as well as research committees and advisory boards made up of athletes, coaches, trainers, equipment managers, orthopedists, podiatrists and other experts to develop and test cutting-edge performance products. While we strive to produce products that help to enhance athletic performance, reduce injury and maximize comfort, if we fail to introduce technical innovation in our products, consumer demand for our products could decline, and if we experience problems with the quality of our products, we may incur substantial expense to remedy the problems. +Failure to continue to obtain or maintain high-quality endorsers of our products could harm our business. +We establish relationships with professional athletes, sports teams and leagues, as well as other public figures, to develop, evaluate and promote our products, as well as establish product authenticity with consumers. However, as competition in our industry has increased, the costs associated with establishing and retaining such sponsorships and other relationships have increased. If we are unable to maintain our current associations with professional athletes, sports teams and leagues, or other public figures, or to do so at a reasonable cost, we could lose the high visibility or on-field authenticity associated with our products, and we may be required to modify and substantially increase our marketing investments. As a result, our brands, net revenues, expenses and profitability could be harmed. +Furthermore, if certain endorsers were to stop using our products contrary to their endorsement agreements, our business could be adversely affected. In addition, actions taken by athletes, teams or leagues, or other endorsers, associated with our products that harm the reputations of those athletes, teams or leagues, or endorsers, could also seriously harm our brand image with consumers and, as a result, could have an adverse effect on our sales and financial condition. In addition, poor performance by our endorsers, a failure to continue to correctly identify promising athletes, or public figures, to use and endorse our products or a failure to enter into cost-effective endorsement arrangements with prominent athletes, public figures, and sports organizations could adversely affect our brand, sales and profitability. +Currency exchange rate fluctuations could result in lower revenues, higher costs and decreased margins and earnings. +A majority of our products are manufactured and sold outside of the United States. As a result, we conduct purchase and sale transactions in various currencies, which increases our exposure to fluctuations in foreign currency exchange rates globally. Additionally, there has been, and may continue to be, volatility in currency exchange rates as a result of the United Kingdom's impending exit from the European Union, commonly referred to as “Brexit” and current U.S. policy proposals. Our international revenues and expenses generally are derived from sales and operations in foreign currencies, and these revenues and expenses could be affected by currency fluctuations, specifically amounts recorded in foreign currencies and translated into U.S. Dollars for consolidated financial reporting, as weakening of foreign currencies relative to the U.S. Dollar adversely affects the U.S. Dollar value of the Company's foreign currency-denominated sales and earnings. Currency exchange rate fluctuations could also disrupt the business of the independent manufacturers that produce our products by making their purchases of raw materials more expensive and more difficult to finance. Foreign currency fluctuations have adversely affected and could continue to have an adverse effect on our results of operations and financial condition. +We may hedge certain foreign currency exposures to lessen and delay, but not to completely eliminate, the effects of foreign currency fluctuations on our financial results. Since the hedging activities are designed to lessen volatility, they not only reduce the negative impact of a stronger U.S. Dollar or other trading currency, but they also reduce the positive impact of a weaker U.S. Dollar or other trading currency. Our future financial results could be significantly affected by the value of the U.S. Dollar in relation to the foreign currencies in which we conduct business. The degree to which our financial results are affected for any given time period will depend in part upon our hedging activities. +8 +Table of Contents +Global economic conditions could have a material adverse effect on our business, operating results and financial condition. +The uncertain state of the global economy continues to impact businesses around the world, most acutely in emerging markets and developing economies. If global economic and financial market conditions do not improve or deteriorate, the following factors could have a material adverse effect on our business, operating results and financial condition: +• +Slower consumer spending may result in reduced demand for our products, reduced orders from retailers for our products, order cancellations, lower revenues, higher discounts, increased inventories and lower gross margins. +• +In the future, we may be unable to access financing in the credit and capital markets at reasonable rates in the event we find it desirable to do so. +• +We conduct transactions in various currencies, which increases our exposure to fluctuations in foreign currency exchange rates relative to the U.S. Dollar. Continued volatility in the markets and exchange rates for foreign currencies and contracts in foreign currencies, including in response to certain policies advocated by the U.S. presidential administration, could have a significant impact on our reported operating results and financial condition. +• +Continued volatility in the availability and prices for commodities and raw materials we use in our products and in our supply chain (such as cotton or petroleum derivatives) could have a material adverse effect on our costs, gross margins and profitability. +• +If retailers of our products experience declining revenues or experience difficulty obtaining financing in the capital and credit markets to purchase our products, this could result in reduced orders for our products, order cancellations, late retailer payments, extended payment terms, higher accounts receivable, reduced cash flows, greater expense associated with collection efforts and increased bad debt expense. +• +If retailers of our products experience severe financial difficulty, some may become insolvent and cease business operations, which could negatively impact the sale of our products to consumers. +• +If contract manufacturers of our products or other participants in our supply chain experience difficulty obtaining financing in the capital and credit markets to purchase raw materials or to finance capital equipment and other general working capital needs, it may result in delays or non-delivery of shipments of our products. +Our business is affected by seasonality, which could result in fluctuations in our operating results. +We experience moderate fluctuations in aggregate sales volume during the year. Historically, revenues in the first and fourth fiscal quarters have slightly exceeded those in the second and third fiscal quarters. However, the mix of product sales may vary considerably from time to time as a result of changes in seasonal and geographic demand for particular types of footwear, apparel and equipment and in connection with the timing of significant sporting events, such as the Olympics or the European Football Championship, among others. In addition, our customers may cancel orders, change delivery schedules or change the mix of products ordered with minimal notice. As a result, we may not be able to accurately predict our quarterly sales. Accordingly, our results of operations are likely to fluctuate significantly from period to period. This seasonality, along with other factors that are beyond our control, including general economic conditions, changes in consumer preferences, weather conditions, availability of import quotas, transportation disruptions and currency exchange rate fluctuations, could adversely affect our business and cause our results of operations to fluctuate. Our operating margins are also sensitive to a number of additional factors that are beyond our control, including manufacturing and transportation costs, shifts in product sales mix and geographic sales trends, all of which we expect to continue. Results of operations in any period should not be considered indicative of the results to be expected for any future period. +Futures orders may not be an accurate indication of our future revenues. +We utilize a futures ordering program, which allows retailers to order five to six months in advance of delivery with the commitment that their orders will be delivered within a set period of time at a fixed price. Our futures ordering program allows us to minimize the amount of products we hold in inventory, purchasing costs, the time necessary to fill customer orders and the risk of non-delivery. We currently report changes in futures orders in our periodic financial reports. Reported futures orders are not necessarily indicative of our expectation of revenues for any future period, and the relationship between reported futures and reported revenues in a given period has become less correlated over time based on our evolving business model. Differences are also due to year-over-year changes in shipment timing, changes in the mix of orders between futures and orders with shorter lead times and because the fulfillment of certain orders may fall outside of the schedule noted above. In addition, foreign currency exchange rate fluctuations, as well as differing levels of order cancellations, discounts and returns can cause differences in the comparisons between futures orders and actual revenues. Moreover, a portion of our revenue is not derived from futures orders, including sales with short lead times, closeout NIKE Brand footwear and apparel, all sales of NIKE Brand equipment, the difference between retail sales and internal orders from our Direct to Consumer in-line stores and digital commerce operations, and sales from Converse, NIKE Golf and Hurley. +Our futures ordering program does not prevent excess inventories or inventory shortages, which could result in decreased operating margins, reduced cash flows and harm to our business. +We purchase products from manufacturers outside of our futures ordering program and in advance of customer orders, which we hold in inventory and resell to customers. There is a risk we may be unable to sell excess products ordered from manufacturers. Inventory levels in excess of customer demand may result in inventory write-downs, and the sale of excess inventory at discounted prices could significantly impair our brand image and have an adverse effect on our operating results, financial condition and cash flows. Conversely, if we underestimate consumer demand for our products or if our manufacturers fail to supply products we require at the time we need them, we may experience inventory shortages. Inventory shortages might delay shipments to customers, negatively impact retailer, distributor and consumer relationships and diminish brand loyalty. +The difficulty in forecasting demand also makes it difficult to estimate our future results of operations, financial condition and cash flows from period to period. A failure to accurately predict the level of demand for our products could adversely affect our net revenues and net income, and we are unlikely to forecast such effects with any certainty in advance. +9 +Table of Contents +We may be adversely affected by the financial health of our customers. +We extend credit to our customers based on an assessment of a customer’s financial condition, generally without requiring collateral. To assist in the scheduling of production and the shipping of our products, we offer certain customers the opportunity to place orders five to six months ahead of delivery under our futures ordering program. These advance orders may be canceled under certain conditions, and the risk of cancellation may increase when dealing with financially unstable retailers or retailers struggling with economic uncertainty. In the past, some customers have experienced financial difficulties up to and including bankruptcies, which have had an adverse effect on our sales, our ability to collect on receivables and our financial condition. When the retail economy weakens or as consumer behavior shifts, retailers may be more cautious with orders. A slowing or changing economy in our key markets could adversely affect the financial health of our customers, which in turn could have an adverse effect on our results of operations and financial condition. In addition, product sales are dependent in part on high quality merchandising and an appealing retail environment to attract consumers, which requires continuing investments by retailers. Retailers that experience financial difficulties may fail to make such investments or delay them, resulting in lower sales and orders for our products. +Consolidation of retailers or concentration of retail market share among a few retailers may increase and concentrate our credit risk and impair our ability to sell products. +The athletic footwear, apparel and equipment retail markets in some countries are dominated by a few large athletic footwear, apparel and equipment retailers with many stores. These retailers have in the past increased their market share by expanding through acquisitions and construction of additional stores. These situations concentrate our credit risk with a relatively small number of retailers, and, if any of these retailers were to experience a shortage of liquidity or consumer behavior shifts away from traditional retail, it would increase the risk that their outstanding payables to us may not be paid. In addition, increasing market share concentration among one or a few retailers in a particular country or region increases the risk that if any one of them substantially reduces their purchases of our products, we may be unable to find a sufficient number of other retail outlets for our products to sustain the same level of sales and revenues. +Our Direct to Consumer operations have required and will continue to require a substantial investment and commitment of resources and are subject to numerous risks and uncertainties. +Our Direct to Consumer stores have required substantial fixed investment in equipment and leasehold improvements, information systems, inventory and personnel. We have entered into substantial operating lease commitments for retail space. Certain stores have been designed and built to serve as high-profile venues to promote brand awareness and marketing activities. Because of their unique design elements, locations and size, these stores require substantially more investment than other stores. Due to the high fixed-cost structure associated with our Direct to Consumer operations, a decline in sales, a shift in consumer behavior away from brick-and-mortar retail, or the closure or poor performance of individual or multiple stores could result in significant lease termination costs, write-offs of equipment and leasehold improvements and employee-related costs. +Many factors unique to retail operations, some of which are beyond the Company’s control, pose risks and uncertainties. Risks include, but are not limited to: credit card fraud; mismanagement of existing retail channel partners; and inability to manage costs associated with store construction and operation. In addition, extreme weather conditions in the areas in which our stores are located could adversely affect our business. +If the technology-based systems that give our customers the ability to shop with us online do not function effectively, our operating results, as well as our ability to grow our digital commerce business globally, could be materially adversely affected. +Many of our customers shop with us through our digital commerce website and mobile applications. Increasingly, customers are using tablets and smart phones to shop online with us and with our competitors and to do comparison shopping. We are increasingly using social media and proprietary mobile applications to interact with our customers and as a means to enhance their shopping experience. Any failure on our part to provide attractive, effective, reliable, user-friendly digital commerce platforms that offer a wide assortment of merchandise with rapid delivery options and that continually meet the changing expectations of online shoppers could place us at a competitive disadvantage, result in the loss of digital commerce and other sales, harm our reputation with customers, have a material adverse impact on the growth of our digital commerce business globally and could have a material adverse impact on our business and results of operations. +Risks specific to our digital commerce business also include diversion of sales from our and our retailers' brick and mortar stores, difficulty in recreating the in-store experience through direct channels and liability for online content. Our failure to successfully respond to these risks might adversely affect sales in our digital commerce business, as well as damage our reputation and brands. +Failure to adequately protect or enforce our intellectual property rights could adversely affect our business. +We periodically discover products that are counterfeit reproductions of our products or that otherwise infringe our intellectual property rights. If we are unsuccessful in enforcing our intellectual property, continued sales of these products could adversely affect our sales and our brand and could result in a shift of consumer preference away from our products. +The actions we take to establish and protect our intellectual property rights may not be adequate to prevent imitation of our products by others. We also may be unable to prevent others from seeking to block sales of our products as violations of proprietary rights. +We may be subject to liability if third parties successfully claim that we infringe their intellectual property rights. Defending infringement claims could be expensive and time-consuming and might result in our entering into costly license agreements. We also may be subject to significant damages or injunctions against development, use, importation and/or sale of certain products. +We take various actions to prevent the unauthorized use and/or disclosure of our confidential information and intellectual property rights. Such actions include contractual measures such as entering into non-disclosure and non-compete agreements and agreements relating to our collaborations with third parties, and providing confidential information awareness training. Our controls and efforts to prevent unauthorized use and/or disclosure of confidential information and intellectual property rights might not always be effective. For example, confidential information that is related to business strategy, new technologies, mergers and acquisitions, unpublished financial results or personal data could be prematurely or inadvertently used and/or disclosed, resulting in a loss of reputation, a decline in our stock price and/or a negative impact on our market position, and could lead to damages, fines, penalties or injunctions. +10 +Table of Contents +In addition, the laws of certain countries may not protect or allow enforcement of intellectual property rights to the same extent as the laws of the United States. We may face significant expenses and liability in connection with the protection of our intellectual property rights, including outside the United States, and if we are unable to successfully protect our rights or resolve intellectual property conflicts with others, our business or financial condition may be adversely affected. +We are subject to the risk that our licensees may not generate expected sales or maintain the value of our brands. +We currently license, and expect to continue licensing, certain of our proprietary rights, such as trademarks or copyrighted material, to third parties. If our licensees fail to successfully market and sell licensed products, or fail to obtain sufficient capital or effectively manage their business operations, customer relationships, labor relationships, supplier relationships or credit risks, it could adversely affect our revenues, both directly from reduced royalties received and indirectly from reduced sales of our other products. +We also rely on our licensees to help preserve the value of our brands. Although we attempt to protect our brands through approval rights over the design, production processes, quality, packaging, merchandising, distribution, advertising and promotion of our licensed products, we cannot completely control the use of our licensed brands by our licensees. The misuse of a brand by a licensee could have a material adverse effect on that brand and on us. +We are subject to data security and privacy risks that could negatively affect our results, operations or reputation. +In addition to our own sensitive and proprietary business information, we collect transactional and personal information about our customers and users of our digital experiences, which include online distribution channels and product engagement and personal fitness applications. Hackers and data thieves are increasingly sophisticated and operate large-scale and complex automated attacks. Any breach of our network, or vendor systems, may result in the loss of confidential business and financial data, misappropriation of our consumers’, users' or employees’ personal information or a disruption of our business. Any of these outcomes could have a material adverse effect on our business, including, unwanted media attention, impairment of our consumer and customer relationships, damage to our reputation and result in lost sales and consumers, fines, or lawsuits. We also may need to expend significant resources to protect against, respond to and/or redress problems caused by any breach. +In addition, we must comply with increasingly complex and rigorous regulatory standards enacted to protect business and personal data. Compliance with existing and proposed laws and regulations can be costly, and any failure to comply with these regulatory standards could subject us to legal and reputational risks. Misuse of or failure to secure personal information could also result in violation of data privacy laws and regulations, proceedings against the Company by governmental entities or others, damage to our reputation and credibility and could have a negative impact on revenues and profits. +Failure of our contractors or our licensees’ contractors to comply with our code of conduct, local laws and other standards could harm our business. +We work with hundreds of contractors outside of the United States to manufacture our products, and we also have license agreements that permit unaffiliated parties to manufacture or contract for the manufacture of products using our intellectual property. We require the contractors that directly manufacture our products and our licensees that make products using our intellectual property (including, indirectly, their contract manufacturers) to comply with a code of conduct and other environmental, health and safety standards for the benefit of workers. We also require these contractors to comply with applicable standards for product safety. Notwithstanding their contractual obligations, from time to time contractors may not comply with such standards or applicable local law or our licensees may fail to enforce such standards or applicable local law on their contractors. Significant or continuing noncompliance with such standards and laws by one or more contractors could harm our reputation or result in a product recall and, as a result, could have an adverse effect on our sales and financial condition. +Our international operations involve inherent risks which could result in harm to our business. +Virtually all of our athletic footwear and apparel is manufactured outside of the United States, and the majority of our products are sold outside of the United States. Accordingly, we are subject to the risks generally associated with global trade and doing business abroad, which include foreign laws and regulations, varying consumer preferences across geographic regions, political unrest, disruptions or delays in cross-border shipments and changes in economic conditions in countries in which our products are manufactured or where we sell products. This includes, for example, the uncertainty surrounding the effect of Brexit, including changes to the legal and regulatory framework that apply to the United Kingdom and its relationship with the European Union, as well as the current proposals affecting trade policy in the U.S. The U.S. presidential administration has indicated a focus on policy reforms that discourage U.S. corporations from outsourcing manufacturing and production activities to foreign jurisdictions, including through potential tariffs or penalties on goods manufactured outside the U.S. If any of these reforms are implemented, it may become necessary for us to change the way we conduct business which may adversely affect our results of operations. The administration has also targeted the specific practices of certain U.S. multinational corporations in public statements which, if directed at us, could harm our reputation or otherwise negatively impact our business. +In addition, disease outbreaks, terrorist acts and military conflict have increased the risks of doing business abroad. These factors, among others, could affect our ability to manufacture products or procure materials, our ability to import products, our ability to sell products in international markets and our cost of doing business. If any of these or other factors make the conduct of business in a particular country undesirable or impractical, our business could be adversely affected. In addition, many of our imported products are subject to duties, tariffs or quotas that affect the cost and quantity of various types of goods imported into the United States and other countries. Any country in which our products are produced or sold may eliminate, adjust or impose new quotas, duties, tariffs, safeguard measures, anti-dumping duties, cargo restrictions to prevent terrorism, restrictions on the transfer of currency, climate change legislation, product safety regulations or other charges or restrictions, any of which could have an adverse effect on our results of operations and financial condition. +11 +Table of Contents +We could be subject to changes in tax rates, adoption of new tax laws or additional tax liabilities. +We are subject to the tax laws in the United States and numerous foreign jurisdictions. Current economic and political conditions make tax rules in any jurisdiction, including the United States, subject to significant change. There have been proposals to reform U.S. and foreign tax laws that could significantly impact how U.S. multinational corporations are taxed on foreign earnings. Although we cannot predict whether or in what form these proposals will pass, several of the proposals considered, if enacted into law, could have an adverse impact on our income tax expense and cash flows. We earn a substantial portion of our income in foreign countries and are subject to the tax laws of those jurisdictions. If our capital or financing needs in the United States require us to repatriate earnings from foreign jurisdictions above our current levels, our effective income tax rates for the affected periods could be negatively impacted. +Portions of our operations are subject to a reduced tax rate or are free of tax under various tax holidays and rulings that expire in whole or in part from time to time. These tax holidays and rulings may be extended when certain conditions are met, or terminated if certain conditions are not met. If the tax holidays and rulings are not extended, or if we fail to satisfy the conditions of the reduced tax rate, our effective income tax rate would increase in the future. +We are also subject to the examination of our tax returns by the United States Internal Revenue Service (“IRS”) and other tax authorities. We regularly assess the likelihood of an adverse outcome resulting from these examinations to determine the adequacy of its provision for income taxes. Although we believe our tax provisions are adequate, the final determination of tax audits and any related disputes could be materially different from our historical income tax provisions and accruals. The results of audits or related disputes could have an adverse effect on our financial statements for the period or periods for which the applicable final determinations are made. For example, we and our subsidiaries are engaged in a number of intercompany transactions across multiple tax jurisdictions. Although we believe we have clearly reflected the economics of these transactions and the proper local transfer pricing documentation is in place, tax authorities may propose and sustain adjustments that could result in changes that may impact our mix of earnings in countries with differing statutory tax rates. +Proposed changes to U.S. tax law or policy, tariff and import/export regulations may have a material adverse effect on our business, financial condition and results of operations. +During, and following, the recent U.S. presidential election, there has been discussion and commentary regarding potential significant changes to U.S. trade policies, legislation, treaties and tariffs, including NAFTA and trade policies and tariffs affecting China. There have also been discussions of a disallowance of tax deductions for imported merchandise or the imposition of unilateral tariffs on imported products. It is unknown at this time whether and to what extent new legislation will be passed into law, pending or new regulatory proposals will be adopted, international trade agreements will be negotiated, or the effect that any such action would have, either positively or negatively, on our industry, or on us. The Company, similar to many other multinational corporations, does a significant amount of business that would be impacted by these changes. If any new legislation and/or regulations are implemented, or if existing trade agreements are renegotiated, it may be time-consuming and expensive for us to alter our business operations in order to adapt to or comply with such changes. Such operational changes could have a material adverse effect on our business, financial condition and results of operations. +If one or more of our counterparty financial institutions default on their obligations to us or fail, we may incur significant losses. +As part of our hedging activities, we enter into transactions involving derivative financial instruments, which may include forward contracts, commodity futures contracts, option contracts, collars and swaps with various financial institutions. In addition, we have significant amounts of cash, cash equivalents and other investments on deposit or in accounts with banks or other financial institutions in the United States and abroad. As a result, we are exposed to the risk of default by or failure of counterparty financial institutions. The risk of counterparty default or failure may be heightened during economic downturns and periods of uncertainty in the financial markets. If one of our counterparties were to become insolvent or file for bankruptcy, our ability to recover losses incurred as a result of default or our assets that are deposited or held in accounts with such counterparty may be limited by the counterparty’s liquidity or the applicable laws governing the insolvency or bankruptcy proceedings. In the event of default or failure of one or more of our counterparties, we could incur significant losses, which could negatively impact our results of operations and financial condition. +We rely on a concentrated source base of contract manufacturers to supply a significant portion of our footwear products. +NIKE is supplied by approximately 127 footwear factories located in 15 countries. We do not own or operate any of our own footwear manufacturing facilities and depend upon independent contract manufacturers to manufacture all of the footwear products we sell. In fiscal 2017 , five footwear contract manufacturers each accounted for greater than 10% of fiscal 2017 footwear production and in aggregate accounted for approximately 69% of NIKE Brand footwear production in fiscal 2017 . Our ability to meet our customers' needs depends on our ability to maintain a steady supply of products from our independent contract manufacturers. If one or more of our significant suppliers were to sever their relationship with us or significantly alter the terms of our relationship, we may not be able to obtain replacement products in a timely manner, which could have a material adverse effect on our sales, financial condition or results of operations. Additionally, if any of our primary contract manufacturers fail to make timely shipments, do not meet our quality standards or otherwise fail to deliver us product in accordance with our plans, there could be a material adverse effect on our results of operations. +Our products are subject to risks associated with overseas sourcing, manufacturing and financing. +The principal materials used in our apparel products — natural and synthetic fabrics and threads, specialized performance fabrics designed to efficiently wick moisture away from the body, retain heat or repel rain and/or snow as well as plastic and metal hardware — are available in countries where our manufacturing takes place. The principal materials used in our footwear products — natural and synthetic rubber, plastic compounds, foam cushioning materials, natural and synthetic leather, natural and synthetic fabrics and threads, nylon, canvas and polyurethane films — are also locally available to manufacturers. Both our apparel and footwear products are dependent upon the ability of our unaffiliated contract manufacturers to locate, train, employ and retain adequate personnel. NIKE contractors and suppliers buy raw materials and are subject to wage rates that are oftentimes regulated by the governments of the countries in which our products are manufactured. +12 +Table of Contents +There could be a significant disruption in the supply of fabrics or raw materials from current sources or, in the event of a disruption, our contract manufacturers might not be able to locate alternative suppliers of materials of comparable quality at an acceptable price or at all. Further, our unaffiliated contract manufacturers have experienced and may continue to experience in the future, unexpected increases in work wages, whether government mandated or otherwise and increases in compliance costs due to governmental regulation concerning certain metals used in the manufacturing of our products. In addition, we cannot be certain that our unaffiliated manufacturers will be able to fill our orders in a timely manner. If we experience significant increases in demand, or reductions in the availability of materials, or need to replace an existing manufacturer, there can be no assurance that additional supplies of fabrics or raw materials or additional manufacturing capacity will be available when required on terms that are acceptable to us, or at all, or that any supplier or manufacturer would allocate sufficient capacity to us in order to meet our requirements. In addition, even if we are able to expand existing or find new manufacturing or sources of materials, we may encounter delays in production and added costs as a result of the time it takes to train suppliers and manufacturers in our methods, products, quality control standards and labor, health and safety standards. Any delays, interruption or increased costs in labor or wages, or the supply of materials or manufacture of our products could have an adverse effect on our ability to meet retail customer and consumer demand for our products and result in lower revenues and net income both in the short- and long-term. +Because independent manufacturers make a majority of our products outside of our principal sales markets, our products must be transported by third parties over large geographic distances. Delays in the shipment or delivery of our products due to the availability of transportation, work stoppages, port strikes, infrastructure congestion or other factors, and costs and delays associated with consolidating or transitioning between manufacturers, could adversely impact our financial performance. In addition, manufacturing delays or unexpected demand for our products may require us to use faster, but more expensive, transportation methods such as air freight, which could adversely affect our profit margins. The cost of oil is a significant component in manufacturing and transportation costs, so increases in the price of petroleum products can adversely affect our profit margins. Current U.S. trade policy proposals, including potential changes to import tariffs and existing trade policies and agreements, could also have a significant impact on our activities in foreign jurisdictions, and could adversely affect our results of operations. +In addition, Sojitz America performs significant import-export financing services for the Company. During fiscal 2017, Sojitz America provided financing and purchasing services for NIKE Brand products sold in certain NIKE markets including Argentina, Uruguay, Brazil, Canada, India, South Africa and Thailand (collectively the “Sojitz Markets”), excluding products produced and sold in the same country. Any failure of Sojitz America to provide these services or any failure of Sojitz America’s banks could disrupt our ability to acquire products from our suppliers and to deliver products to our customers in the Sojitz Markets. Such a disruption could result in canceled orders that would adversely affect sales and profitability. +Our success depends on our global distribution facilities. +We distribute our products to customers directly from the factory and through distribution centers located throughout the world. Our ability to meet customer expectations, manage inventory, complete sales and achieve objectives for operating efficiencies and growth, particularly in emerging markets, depends on the proper operation of our distribution facilities, the development or expansion of additional distribution capabilities and the timely performance of services by third parties (including those involved in shipping product to and from our distribution facilities). Our distribution facilities could be interrupted by information technology problems and disasters such as earthquakes or fires. Any significant failure in our distribution facilities could result in an adverse effect on our business. We maintain business interruption insurance, but it may not adequately protect us from adverse effects that could be caused by significant disruptions in our distribution facilities. +We rely significantly on information technology to operate our business, including our supply chain and retail operations, and any failure, inadequacy or interruption of that technology could harm our ability to effectively operate our business. +We are heavily dependent on information technology systems and networks, including the Internet and third-party services (“Information Technology Systems”), across our supply chain, including product design, production, forecasting, ordering, manufacturing, transportation, sales and distribution, as well as for processing financial information for external and internal reporting purposes, retail operations and other business activities. Information Technology Systems are critical to many of our operating activities and our business processes and may be negatively impacted by any service interruption or shutdown. For example, our ability to effectively manage and maintain our inventory and to ship products to customers on a timely basis depends significantly on the reliability of these Information Technology Systems. Over a number of years, we have implemented Information Technology Systems in all of the geographical regions in which we operate. Our work to integrate, secure and enhance these systems and related processes in our global operations is ongoing and NIKE will continue to invest in these efforts. The failure of these systems to operate effectively, including as a result of security breaches, viruses, hackers, malware, natural disasters, vendor business interruptions or other causes, or failure to properly maintain, protect, repair or upgrade systems, or problems with transitioning to upgraded or replacement systems could cause delays in product fulfillment and reduced efficiency of our operations, could require significant capital investments to remediate the problem and may have an adverse effect on our reputation, results of operations and financial condition. +We also use Information Technology Systems to process financial information and results of operations for internal reporting purposes and to comply with regulatory financial reporting, legal and tax requirements. If Information Technology Systems suffer severe damage, disruption or shutdown and our business continuity plans, or those of our vendors, do not effectively resolve the issues in a timely manner, we could experience delays in reporting our financial results, which could result in lost revenues and profits, as well as reputational damage. Furthermore, we depend on Information Technology Systems and personal data collection and use for digital marketing, digital commerce, consumer engagement and the marketing and use of our digital products and services. We also rely on our ability to engage in electronic communications throughout the world between and among our employees as well as with other third parties, including customers, suppliers, vendors and consumers. Any interruption in Information Technology Systems may impede our ability to engage in the digital space and result in lost revenues, damage to our reputation, and loss of users. +13 +Table of Contents +The market for prime real estate is competitive. +Our ability to effectively obtain real estate to open new retail stores and otherwise conduct our operations, both domestically and internationally, depends on the availability of real estate that meets our criteria for traffic, square footage, co-tenancies, lease economics, demographics and other factors. We also must be able to effectively renew our existing real estate leases. In addition, from time to time, we seek to downsize, consolidate, reposition or close some of our real estate locations, which may require modification of an existing lease. Failure to secure adequate new locations or successfully modify leases for existing locations, or failure to effectively manage the profitability of our existing fleet of retail stores, could have an adverse effect on our operating results and financial condition. +Additionally, the economic environment may at times make it difficult to determine the fair market rent of real estate properties domestically and internationally. This could impact the quality of our decisions to exercise lease options at previously negotiated rents and to renew expiring leases at negotiated rents. Any adverse effect on the quality of these decisions could impact our ability to retain real estate locations adequate to meet our targets or efficiently manage the profitability of our existing fleet of stores, which could have an adverse effect on our operating results and financial condition. +Extreme weather conditions and natural disasters could negatively impact our operating results and financial condition. +Extreme weather conditions in the areas in which our retail stores, suppliers, customers, distribution centers and vendors are located could adversely affect our operating results and financial condition. Moreover, natural disasters such as earthquakes, hurricanes and tsunamis, whether occurring in the United States or abroad, and their related consequences and effects, including energy shortages and public health issues, could disrupt our operations, the operations of our vendors and other suppliers or result in economic instability that may negatively impact our operating results and financial condition. +Our financial results may be adversely affected if substantial investments in businesses and operations fail to produce expected returns. +From time to time, we may invest in technology, business infrastructure, new businesses, product offering and manufacturing innovation and expansion of existing businesses, such as our digital commerce operations, which require substantial cash investments and management attention. We believe cost-effective investments are essential to business growth and profitability. However, significant investments are subject to typical risks and uncertainties inherent in developing a new business or expanding an existing business. The failure of any significant investment to provide expected returns or profitability could have a material adverse effect on our financial results and divert management attention from more profitable business operations. +We are subject to litigation and other legal and regulatory proceedings, which could have an adverse effect on our business, financial condition and results of operations. +As a multinational corporation with operations and distribution channels throughout the world, we are involved in various types of claims, lawsuits, regulatory proceedings and government investigations relating to our business, our products and the actions of our employees and representatives, including contractual and employment relationships, product liability claims, trademark rights and a variety of other matters. It is not possible to predict with certainty the outcome of any such legal or regulatory proceedings or investigations, and we could in the future incur judgments, fines or penalties, or enter into settlements of lawsuits and claims that could have a material adverse effect on our business, financial condition and results of operations and negatively impact our reputation. The global nature of our business means that legal and compliance risks will continue to exist and additional legal proceedings and other contingencies will arise from time to time, which could adversely affect us. In addition, any current or future legal or regulatory proceedings could divert management’s attention from our operations and result in substantial legal fees. +We depend on key personnel, the loss of whom would harm our business. +Our future success will depend in part on the continued service of key executive officers and personnel. The loss of the services of any key individual could harm our business. Our future success also depends on our ability to recruit, retain and engage our personnel sufficiently, both to maintain our current business and to execute our strategic initiatives. Competition for employees in our industry is intense and we may not be successful in attracting and retaining such personnel. +The sale of a large number of shares of common stock by our principal stockholder could depress the market price of our common stock. +As of June 30, 2017, Swoosh, LLC beneficially owned more than 78% of our Class A Common Stock. If, on June 30, 2017, all of these shares were converted into Class B Common Stock, the commensurate ownership percentage of our Class B Common Stock would be approximately 16%. The shares are available for resale, subject to the requirements of the U.S. securities laws and the terms of the limited liability company agreement governing Swoosh, LLC. The sale or prospect of a sale of a substantial number of these shares could have an adverse effect on the market price of our common stock. Swoosh, LLC was formed by Philip H. Knight, our Chairman Emeritus, to hold the majority of his shares of Class A Common Stock. On June 30, 2016, Mr. Knight sold his voting interest in Swoosh, LLC to a trust controlled by his son and NIKE director, Travis Knight. +Changes in our credit ratings or macroeconomic conditions may affect our liquidity, increasing borrowing costs and limiting our financing options. +Our long-term debt is currently rated Investment Grade by Standard & Poor’s and Moody’s Investors Service. If our credit ratings are lowered, borrowing costs for future long-term debt or short-term credit facilities may increase and our financing options, including our access to the unsecured credit market, could be limited. We may also be subject to restrictive covenants that would reduce our flexibility to, among other things, incur additional indebtedness, make restricted payments, pledge assets as security, make investments, loans, advances, guarantees and acquisitions, undergo fundamental changes and enter into transactions with affiliates. Failure to comply with such covenants could result in a default, and as a result, the commitments of our lenders under our credit agreements may be terminated and the maturity of amounts owed may be accelerated. In addition, macroeconomic conditions, such as increased volatility or disruption in the credit markets, could adversely affect our ability to refinance existing debt. +14 +Table of Contents +If our internal controls are ineffective, our operating results could be adversely affected. +Our internal control over financial reporting may not prevent or detect misstatements because of its inherent limitations, including the possibility of human error, the circumvention or overriding of controls or fraud. Even effective internal controls can provide only reasonable assurance with respect to the preparation and fair presentation of financial statements. If we fail to maintain the adequacy of our internal controls, including any failure to implement required new or improved controls, or if we experience difficulties in their implementation, our business and operating results could be harmed and we could fail to meet our financial reporting obligations. +If our estimates or judgments relating to our critical accounting policies prove to be incorrect, our operating results could be adversely affected. +The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, as provided in “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The results of these estimates form the basis for making judgments about the carrying values of assets, liabilities and equity, and the amount of revenue and expenses that are not readily apparent from other sources. Significant assumptions and estimates used in preparing our consolidated financial statements include those related to revenue recognition, allowance for uncollectible accounts receivable, inventory reserves, contingent payments under endorsement contracts, accounting for property, plant and equipment and definite-lived assets, hedge accounting for derivatives, stock-based compensation, income taxes and other contingencies. Our operating results may be adversely affected if our assumptions change or if actual circumstances differ from those in our assumptions, which could cause our operating results to fall below the expectations of securities analysts and investors, resulting in a decline in the price of our Class B Common Stock. +Anti-takeover provisions may impair an acquisition of the Company or reduce the price of our common stock. +There are provisions of our articles of incorporation and Oregon law that are intended to protect shareholder interests by providing the Board of Directors a means to attempt to deny coercive takeover attempts or to negotiate with a potential acquirer in order to obtain more favorable terms. Such provisions include a control share acquisition statute, a freeze-out statute, two classes of stock that vote separately on certain issues, and the fact that holders of Class A Common Stock elect three-quarters of the Board of Directors rounded down to the next whole number. However, such provisions could discourage, delay or prevent an unsolicited merger, acquisition or other change in control of our company that some shareholders might believe to be in their best interests or in which shareholders might receive a premium for their common stock over the prevailing market price. These provisions could also discourage proxy contests for control of the Company. +We may fail to meet market expectations, which could cause the price of our stock to decline. +Our Class B Common Stock is traded publicly, and at any given time various securities analysts follow our financial results and issue reports on us. These reports include information about our historical financial results as well as analysts’ estimates of our future performance. Analysts’ estimates are based upon their own opinions and are often different from our estimates or expectations. If our operating results are below the estimates or expectations of public market analysts and investors, our stock price could decline. In the past, securities class action litigation has been brought against NIKE and other companies following a decline in the market price of their securities. If our stock price is volatile for any reason, we may become involved in this type of litigation in the future. Any litigation could result in reputational damage, substantial costs and a diversion of management’s attention and resources that are needed to successfully run our business. +15 +Table of Contents +ITEM 1B. Unresolved Staff Comments +None. +ITEM 2. Properties +The following is a summary of principal properties owned or leased by NIKE: +The NIKE World Campus, owned by NIKE and located near Beaverton, Oregon, USA, is a 400-acre site consisting of over 40 buildings which, together with adjacent leased properties, functions as our world headquarters and is occupied by approximately 10,800 employees engaged in management, research, design, development, marketing, finance and other administrative functions serving nearly all of our divisions. We also lease various office facilities in the surrounding metropolitan area. We lease a similar, but smaller, administrative facility in Hilversum, the Netherlands, which serves as the headquarters for the Western Europe and Central & Eastern Europe geographies and management of certain brand functions for our non-U.S. operations. We also lease an office complex in Shanghai, China, our headquarters for Greater China, occupied by employees focused on implementing our wholesale, DTC and merchandising strategies in the region, among other functions. In the United States, NIKE has six significant distribution centers located in Memphis, Tennessee, two of which are owned and four are leased. NIKE Brand apparel and equipment are also shipped from our Foothill Ranch, California distribution center, which we lease. Smaller leased distribution facilities are located in various parts of the United States. We also own or lease distribution and customer service facilities outside the United States. The most significant are the distribution facilities located in Laakdal, Belgium; Taicang, China; Tomisato, Japan and Incheon, Korea, all of which we own. +Air Manufacturing Innovation manufactures Air-Sole cushioning components at NIKE-owned facilities and one leased facility located near Beaverton, Oregon and in St. Charles, Missouri. Air Manufacturing Innovation also manufactures and sells small amounts of various other plastic products to other manufacturers. +Aside from the principal properties described above, we lease many offices worldwide for sales and administrative purposes. We lease approximately 1,141 retail stores worldwide, which consist primarily of factory outlet stores. See “United States Market” and “International Markets” in Part I of this Report. Our leases expire at various dates through the year 2033. +ITEM 3. Legal Proceedings +There are no material pending legal proceedings, other than ordinary routine litigation incidental to our business, to which we are a party or of which any of our property is the subject. +ITEM 4. Mine Safety Disclosures +Not applicable. +16 +Table of Contents +PART II +ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities +NIKE’s Class B Common Stock is listed on the New York Stock Exchange and trades under the symbol NKE. At July 17, 2017, there were 22,698 holders of record of our Class B Common Stock and 15 holders of record of our Class A Common Stock. These figures do not include beneficial owners who hold shares in nominee name. The Class A Common Stock is not publicly traded but each share is convertible upon request of the holder into one share of Class B Common Stock. Refer to Selected Quarterly Financial Data in Part II, Item 6 of this Report for information regarding quarterly high and low sales prices for the Class B Common Stock as reported on the New York Stock Exchange Composite Tape, and dividends declared on the Class A and Class B Common Stock. +In November 2015, the Board of Directors approved a four-year, $12 billion share repurchase program. As of May 31, 2017 , the Company had repurchased 79.8 million shares at an average price of $55.63 per share for a total approximate cost of $4.4 billion under this program. We intend to use excess cash, future cash from operations and/or proceeds from debt to fund repurchases. +The following table presents a summary of share repurchases made by NIKE under this program during the quarter ended May 31, 2017 : +Period +Total Number of Shares Purchased +Average Price +Paid per Share +Total Number of Shares +Purchased as Part of +Publicly Announced +Plans or Programs +Maximum Number +(or Approximate Dollar Value) +of Shares that May Yet +Be Purchased Under the +Plans or Programs +(In millions) +March 1 — March 31, 2017 +3,450,000 +$ +56.87 +3,450,000 +$ +8,186 +April 1 — April 30, 2017 +4,628,851 +$ +55.68 +4,628,851 +$ +7,929 +May 1 — May 31, 2017 +6,829,025 +$ +53.61 +6,829,025 +$ +7,563 +14,907,876 +$ +55.00 +14,907,876 +17 +Table of Contents +Performance Graph +The following graph demonstrates a five-year comparison of cumulative total returns for NIKE’s Class B Common Stock, the Standard & Poor’s 500 Stock Index, the Standard & Poor’s Apparel, Accessories & Luxury Goods Index and the Dow Jones U.S. Footwear Index. The graph assumes an investment of $100 on May 31, 2012 in each of our Class B Common Stock, and the stocks comprising the Standard & Poor’s 500 Stock Index, the Standard & Poor’s Apparel, Accessories & Luxury Goods Index and the Dow Jones U.S. Footwear Index. Each of the indices assumes that all dividends were reinvested on the day of issuance. +COMPARISON OF 5-YEAR CUMULATIVE TOTAL RETURN AMONG NIKE, INC.; S&P 500 INDEX; S&P APPAREL, ACCESSORIES & LUXURY GOODS INDEX AND THE DOW JONES U.S. FOOTWEAR INDEX +The Dow Jones U.S. Footwear Index consists of NIKE, Deckers Outdoor Corp., Wolverine World Wide, Inc., Skechers U.S.A., Inc. and Steven Madden, Ltd., among other companies. Because NIKE is part of the Dow Jones U.S. Footwear Index, the price and returns of NIKE stock have a substantial effect on this index. The Standard & Poor’s Apparel, Accessories & Luxury Goods Index consists of V.F. Corporation, Coach, Inc., Ralph Lauren Corporation, Under Armour, Inc. and Michael Kors Holdings Limited, among other companies. The Dow Jones U.S. Footwear Index and the Standard & Poor’s Apparel, Accessories & Luxury Goods Index include companies in two major lines of business in which the Company competes. The indices do not encompass all of the Company’s competitors, nor all product categories and lines of business in which the Company is engaged. +The stock performance shown on the performance graph above is not necessarily indicative of future performance. The Company will not make or endorse any predictions as to future stock performance. +The performance graph above is being furnished solely to accompany this Report pursuant to Item 201(e) of Regulation S-K, and is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing. +18 +Table of Contents +ITEM 6. Selected Financial Data +Unless otherwise indicated, the following disclosures reflect the Company’s continuing operations. All share and per share amounts are reflective of the two-for-one stock splits that began trading at split-adjusted prices on December 24, 2015 and December 26, 2012. +(In millions, except per share data and financial ratios) +Financial History +2017 +2016 +2015 +2014 +2013 +Year Ended May 31, +Revenues +$ +34,350 +$ +32,376 +$ +30,601 +$ +27,799 +$ +25,313 +Gross profit +15,312 +14,971 +14,067 +12,446 +11,034 +Gross margin +44.6 +% +46.2 +% +46.0 +% +44.8 +% +43.6 +% +Net income from continuing operations +4,240 +3,760 +3,273 +2,693 +2,451 +Net income (loss) from discontinued operations +— +— +— +— +21 +Net income +4,240 +3,760 +3,273 +2,693 +2,472 +Earnings per common share from continuing operations: +Basic +2.56 +2.21 +1.90 +1.52 +1.37 +Diluted +2.51 +2.16 +1.85 +1.49 +1.34 +Earnings per common share from discontinued operations: +Basic +— +— +— +— +0.01 +Diluted +— +— +— +— +0.01 +Weighted average common shares outstanding +1,657.8 +1,697.9 +1,723.5 +1,766.7 +1,794.6 +Diluted weighted average common shares outstanding +1,692.0 +1,742.5 +1,768.8 +1,811.6 +1,832.9 +Cash dividends declared per common share +0.70 +0.62 +0.54 +0.47 +0.41 +Cash flow from operations, inclusive of discontinued operations +3,640 +3,096 +4,680 +3,013 +3,032 +Price range of common stock: +High +60.33 +68.19 +52.75 +40.13 +32.96 +Low +49.01 +47.25 +36.57 +29.56 +21.95 +At May 31, +Cash and equivalents +$ +3,808 +$ +3,138 +$ +3,852 +$ +2,220 +$ +3,337 +Short-term investments +2,371 +2,319 +2,072 +2,922 +2,628 +Inventories +5,055 +4,838 +4,337 +3,947 +3,484 +Working capital, excluding assets and liabilities of discontinued operations (1) +10,587 +9,667 +9,225 +8,319 +9,391 +Total assets, excluding assets of discontinued operations (1)(2) +23,259 +21,379 +21,590 +18,579 +17,531 +Long-term debt (2) +3,471 +1,993 +1,072 +1,191 +1,201 +Capital lease obligations (3) +27 +15 +5 +74 +81 +Redeemable preferred stock +0.3 +0.3 +0.3 +0.3 +0.3 +Shareholders’ equity +12,407 +12,258 +12,707 +10,824 +11,081 +Year-end stock price +52.99 +55.22 +50.84 +38.46 +30.83 +Market capitalization +87,084 +92,867 +87,044 +66,921 +55,124 +Financial Ratios: +Return on equity +34.4 +% +30.1 +% +27.8 +% +24.6 +% +23.1 +% +Return on assets (2) +19.0 +% +17.5 +% +16.3 +% +14.9 +% +15.3 +% +Inventory turns +3.8 +3.8 +4.0 +4.1 +4.2 +Current ratio at May 31 +2.9 +2.8 +2.5 +2.7 +3.4 +Price/Earnings ratio at May 31 +21.1 +25.6 +27.5 +25.9 +22.8 +(1) +Liabilities of discontinued operations were $0 million, $0 million, $0 million, $0 million and $18 million for the years ended May 31, 2017 , 2016 , 2015 , 2014 and 2013 , respectively. There were no assets of discontinued operations for the years presented. +(2) +Prior year amounts have been updated to reflect the adoption of Accounting Standards Update No. 2015-03, Interest — Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs , which requires all debt issuance costs to be presented as a direct deduction from the carrying amount of the corresponding debt liability on the balance sheet. Refer to Recently Adopted Accounting Standards in Note 1 — Summary of Significant Accounting Policies in the accompanying Notes to the Consolidated Financial Statements. +(3) +During the fiscal year ended May 31, 2015, the Company restructured the terms of certain capital leases, which subsequently qualified as operating leases. +19 +Table of Contents +Selected Quarterly Financial Data +(Unaudited) +(In millions, except per share data) +1st Quarter +2nd Quarter +3rd Quarter +4th Quarter +2017 +2016 +2017 +2016 +2017 +2016 +2017 +2016 +Revenues +$ +9,061 +$ +8,414 +$ +8,180 +$ +7,686 +$ +8,432 +$ +8,032 +$ +8,677 +$ +8,244 +Gross profit +4,123 +3,995 +3,616 +3,501 +3,750 +3,689 +3,823 +3,786 +Gross margin +45.5 +% +47.5 +% +44.2 +% +45.6 +% +44.5 +% +45.9 +% +44.1 +% +45.9 +% +Net income +1,249 +1,179 +842 +785 +1,141 +950 +1,008 +846 +Earnings per common share: +Basic +0.75 +0.69 +0.51 +0.46 +0.69 +0.56 +0.61 +0.50 +Diluted +0.73 +0.67 +0.50 +0.45 +0.68 +0.55 +0.60 +0.49 +Weighted average common shares outstanding +1,672.0 +1,709.0 +1,659.1 +1,706.5 +1,653.1 +1,693.8 +1,646.9 +1,682.4 +Diluted weighted average common shares outstanding +1,708.9 +1,754.5 +1,693.2 +1,751.4 +1,686.3 +1,737.3 +1,678.6 +1,723.1 +Cash dividends declared per common share +0.16 +0.14 +0.18 +0.16 +0.18 +0.16 +0.18 +0.16 +Price range of common stock: +High +60.33 +58.86 +59.18 +67.65 +58.42 +68.19 +59.00 +65.44 +Low +51.48 +47.25 +49.01 +54.01 +50.06 +53.64 +50.81 +55.17 +20 +Table of Contents +ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations +NIKE designs, develops, markets and sells athletic footwear, apparel, equipment, accessories and services worldwide. We are the largest seller of athletic footwear and apparel in the world. We sell our products to retail accounts, through NIKE-owned in-line and factory retail stores and NIKE-owned internet websites and mobile applications (which we refer to collectively as our “Direct to Consumer” or “DTC” operations), and through a mix of independent distributors, licensees and sales representatives in virtually all countries around the world. Our goal is to deliver value to our shareholders by building a profitable global portfolio of branded footwear, apparel, equipment and accessories businesses. Our strategy is to achieve long-term revenue growth by creating innovative, “must have” products, building deep personal consumer connections with our brands and delivering compelling consumer experiences at retail, online and through mobile applications. +In June 2017, we announced the Consumer Direct Offense, a new company alignment designed to allow NIKE to better serve the consumer personally, at scale. Leveraging the power of digital, NIKE will drive growth — by accelerating innovation and product creation, moving even closer to the consumer through key cities, and deepening one-to-one connections. +In addition to achieving long-term, sustainable revenue growth, we continue to strive to deliver shareholder value by driving operational excellence in several key areas: +• +Expanding gross margin by: +- Delivering innovative, premium products that command higher prices while maintaining a balanced price-to-value equation for consumers; +- Reducing product costs through a continued focus on manufacturing efficiency, product design and innovation; +- Making our supply chain a competitive advantage by investing in new technologies that increase automation, help reduce waste and have long-term potential to increase both customization of our products and speed to market; and +- Driving growth in our higher gross margin DTC business, led by digital commerce, as part of an integrated marketplace growth strategy across our DTC and wholesale operations. +• +Optimizing selling and administrative expense by focusing on: +- Investments in consumer engagement that drive economic returns in the form of incremental revenue and gross profit; +- Infrastructure investments that improve the efficiency and effectiveness of our operations; and +- Investments in key areas of future growth, including our DTC business. +• +Managing working capital efficiency; and +• +Deploying capital effectively. +Through execution of this strategy, our long-term financial goals through fiscal 2020, on average per year, are as follows: +• +High single-digit to low double-digit revenue growth; +• +Mid-teens earnings per share growth; +• +High-twenties to low-thirties percentage rate of return on invested capital; +• +Free cash flow growing faster than net income; and +• +Sustainable, profitable, long-term growth through effective management of our diversified portfolio of businesses. +Over the past ten years, we have achieved many of our financial goals. During this time, revenues and diluted earnings per common share for NIKE, Inc., inclusive of both continuing and discontinued operations, have grown 8% and 13%, respectively, on an annual compounded basis. We expanded gross margin by approximately 70 basis points, and our return on invested capital has increased from 21.9% to 34.7%. +On November 19, 2015, we announced a two -for-one split of both NIKE Class A and Class B Common Stock. The stock split was in the form of a 100 percent stock dividend payable on December 23, 2015 to shareholders of record at the close of business on December 9, 2015. Common stock began trading at the split-adjusted price on December 24, 2015. All share and per share amounts presented reflect the stock split. +Our fiscal 2017 results demonstrated the power of the NIKE, Inc. portfolio to deliver continued growth and expanding profitability. Despite foreign currency headwinds, we achieved record revenues and earnings per share for fiscal 2017. NIKE, Inc. Revenues grew 6% to $34.4 billion, Net income increased 13% and diluted earnings per common share grew 16% to $2.51. We also delivered strong cash returns to shareholders while investing for long-term growth. +Earnings before interest and income taxes (“EBIT”) increased 7% for fiscal 2017, driven by revenue growth and selling and administrative expense leverage, partially offset by gross margin contraction. The increase in revenues was driven by growth across all NIKE Brand geographies and Converse, footwear and apparel, and several key categories. This broad-based growth was primarily fueled by: +• +Innovative performance and sportswear products, incorporating proprietary technology platforms such as NIKE Air, Free, Zoom, Lunar, Flywire, Dri-Fit and Flyknit; +• +Deep brand connections with consumers through our category offense, reinforced by investments in endorsements by high-profile athletes, sports teams and leagues, high-impact marketing around global sporting events and digital marketing; and +• +Strong category retail presentation through digital commerce and NIKE-owned and retail partner stores. +NIKE, Inc. gross margin decreased 160 basis points primarily due to higher product costs and foreign currency exchange rate headwinds, which more than offset higher full-price average selling price (ASP). At current rates, we anticipate foreign currency exchange rate headwinds will continue to negatively impact gross margin and Net income in fiscal 2018. +21 +Table of Contents +Converse revenues increased 4% and EBIT declined 2%, as growth in direct distribution markets and lower selling and administrative expense were more than offset by lower gross margin, primarily a result of the negative impact of changes in foreign currency exchange rates and higher product costs, as well as the unfavorable impact of lower licensing revenues primarily due to market transitions. +For fiscal 2017, the growth in Net income was positively affected by a year-over-year decrease in our effective tax rate of 550 basis points primarily due to a one-time benefit in the first quarter of the fiscal year related to the resolution with the U.S. Internal Revenue Service (IRS) of a foreign tax credit matter and a decrease in foreign earnings taxed in the United States. Diluted earnings per common share grew at a higher rate than Net income due to a 3% decrease in the weighted average diluted common shares outstanding, driven by our share repurchase program. +While foreign currency markets remain volatile, we continue to see opportunities to drive future growth and profitability, and remain committed to effectively managing our business to achieve our financial goals over the long-term by executing against the operational strategies outlined above. +Use of Non-GAAP Financial Measures +Throughout this Annual Report on Form 10-K, we discuss non-GAAP financial measures, including references to wholesale equivalent revenues and currency-neutral revenues, which should be considered in addition to, and not in lieu of, the financial measures calculated and presented in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). References to wholesale equivalent revenues are intended to provide context as to the total size of our NIKE Brand market footprint if we had no Direct to Consumer operations. NIKE Brand wholesale equivalent revenues consist of (1) sales to external wholesale customers and (2) internal sales from our wholesale operations to our Direct to Consumer operations, which are charged at prices that are comparable to prices charged to external wholesale customers. Additionally, currency-neutral revenues are calculated using actual exchange rates in use during the comparative prior year period to enhance the visibility of the underlying business trends excluding the impact of translation arising from foreign currency exchange rate fluctuations. +Management uses these non-GAAP financial measures when evaluating the Company ’ s performance, including when making financial and operating decisions. Additionally, management believes these non-GAAP financial measures provide investors with additional financial information that should be considered when assessing our underlying business performance and trends. However, references to wholesale equivalent revenues and currency-neutral revenues should not be considered in isolation or as a substitute for other financial measures calculated and presented in accordance with U.S. GAAP and may not be comparable to similarly titled non-GAAP measures used by other companies. +Results of Operations +(Dollars in millions, except per share data) +Fiscal 2017 +Fiscal 2016 +% Change +Fiscal 2015 +% Change +Revenues +$ +34,350 +$ +32,376 +6 +% +$ +30,601 +6 +% +Cost of sales +19,038 +17,405 +9 +% +16,534 +5 +% +Gross profit +15,312 +14,971 +2 +% +14,067 +6 +% +Gross margin +44.6 +% +46.2 +% +46.0 +% +Demand creation expense +3,341 +3,278 +2 +% +3,213 +2 +% +Operating overhead expense +7,222 +7,191 +0 +% +6,679 +8 +% +Total selling and administrative expense +10,563 +10,469 +1 +% +9,892 +6 +% +% of revenues +30.8 +% +32.3 +% +32.3 +% +Interest expense (income), net +59 +19 +— +28 +— +Other (income) expense, net +(196 +) +(140 +) +— +(58 +) +— +Income before income taxes +4,886 +4,623 +6 +% +4,205 +10 +% +Income tax expense +646 +863 +-25 +% +932 +-7 +% +Effective tax rate +13.2 +% +18.7 +% +22.2 +% +NET INCOME +$ +4,240 +$ +3,760 +13 +% +$ +3,273 +15 +% +Diluted earnings per common share +$ +2.51 +$ +2.16 +16 +% +$ +1.85 +17 +% +22 +Table of Contents +Consolidated Operating Results +Revenues +(Dollars in millions) +Fiscal 2017 +Fiscal 2016 (1) +% Change +% Change Excluding Currency Changes (2) +Fiscal 2015 (1) +% Change +% Change Excluding Currency Changes (2) +NIKE, Inc. Revenues: +NIKE Brand Revenues by: +Footwear +$ +21,081 +$ +19,871 +6 +% +8 +% +$ +18,318 +8 +% +15 +% +Apparel +9,654 +9,067 +6 +% +9 +% +8,637 +5 +% +11 +% +Equipment +1,425 +1,496 +-5 +% +-3 +% +1,631 +-8 +% +-2 +% +Global Brand Divisions (3) +73 +73 +0 +% +2 +% +115 +-37 +% +-30 +% +Total NIKE Brand Revenues +32,233 +30,507 +6 +% +8 +% +28,701 +6 +% +13 +% +Converse +2,042 +1,955 +4 +% +6 +% +1,982 +-1 +% +2 +% +Corporate (4) +75 +(86 +) +— +— +(82 +) +— +— +TOTAL NIKE, INC. REVENUES +$ +34,350 +$ +32,376 +6 +% +8 +% +$ +30,601 +6 +% +12 +% +Supplemental NIKE Brand Revenues Details: +NIKE Brand Revenues by: +Sales to Wholesale Customers +$ +23,078 +$ +22,577 +2 +% +5 +% +$ +21,952 +3 +% +9 +% +Sales Direct to Consumer +9,082 +7,857 +16 +% +18 +% +6,634 +18 +% +25 +% +Global Brand Divisions (3) +73 +73 +0 +% +2 +% +115 +-37 +% +-30 +% +TOTAL NIKE BRAND REVENUES +$ +32,233 +$ +30,507 +6 +% +8 +% +$ +28,701 +6 +% +13 +% +NIKE Brand Revenues on a Wholesale Equivalent Basis: (5) +Sales to Wholesale Customers +$ +23,078 +$ +22,577 +2 +% +5 +% +$ +21,952 +3 +% +9 +% +Sales from our Wholesale Operations to Direct to Consumer Operations +5,616 +4,672 +20 +% +22 +% +3,881 +20 +% +27 +% +TOTAL NIKE BRAND WHOLESALE EQUIVALENT REVENUES +$ +28,694 +$ +27,249 +5 +% +8 +% +$ +25,833 +5 +% +12 +% +NIKE Brand Wholesale Equivalent Revenues by: (5) +Men's +$ +16,041 +$ +15,410 +4 +% +6 +% +$ +14,689 +5 +% +11 +% +Women's +6,644 +6,296 +6 +% +8 +% +5,732 +10 +% +17 +% +Young Athletes' +4,838 +4,560 +6 +% +8 +% +4,301 +6 +% +11 +% +Others (6) +1,171 +983 +19 +% +21 +% +1,111 +-12 +% +-4 +% +TOTAL NIKE BRAND WHOLESALE EQUIVALENT REVENUES +$ +28,694 +$ +27,249 +5 +% +8 +% +$ +25,833 +5 +% +12 +% +NIKE Brand Wholesale Equivalent Revenues by: (5) +Running +$ +5,278 +$ +5,017 +5 +% +8 +% +$ +4,863 +3 +% +10 +% +NIKE Basketball +1,292 +1,378 +-6 +% +-5 +% +1,385 +-1 +% +2 +% +Jordan Brand +3,099 +2,753 +13 +% +13 +% +2,329 +18 +% +21 +% +Football (Soccer) +1,987 +2,143 +-7 +% +-4 +% +2,250 +-5 +% +7 +% +Men’s Training +2,617 +2,611 +0 +% +1 +% +2,545 +3 +% +6 +% +Women’s Training +1,265 +1,344 +-6 +% +-4 +% +1,281 +5 +% +11 +% +Action Sports +596 +655 +-9 +% +-7 +% +667 +-2 +% +3 +% +Sportswear +8,587 +7,513 +14 +% +17 +% +6,604 +14 +% +22 +% +Golf +579 +706 +-18 +% +-18 +% +769 +-8 +% +-6 +% +Others (7) +3,394 +3,129 +8 +% +11 +% +3,140 +0 +% +6 +% +TOTAL NIKE BRAND WHOLESALE EQUIVALENT REVENUES +$ +28,694 +$ +27,249 +5 +% +8 +% +$ +25,833 +5 +% +12 +% +23 +Table of Contents +(1) +Certain prior year amounts have been reclassified to conform to fiscal 2017 presentation. These changes had no impact on previously reported results of operations or shareholders' equity. +(2) +Results have been restated using actual exchange rates in use during the comparative prior year period to enhance the visibility of the underlying business trends excluding the impact of translation arising from foreign currency exchange rate fluctuations, which is considered a non-GAAP financial measure. +(3) +Global Brand Divisions revenues are primarily attributable to NIKE Brand licensing businesses that are not part of a geographic operating segment. +(4) +Corporate revenues primarily consist of foreign currency hedge gains and losses related to revenues generated by entities within the NIKE Brand geographic operating segments and Converse but managed through our central foreign exchange risk management program. +(5) +References to NIKE Brand wholesale equivalent revenues, which are considered non-GAAP financial measures, are intended to provide context as to the total size of our NIKE Brand market footprint if we had no Direct to Consumer operations. NIKE Brand wholesale equivalent revenues consist of (1) sales to external wholesale customers and (2) internal sales from our wholesale operations to our Direct to Consumer operations, which are charged at prices that are comparable to prices charged to external wholesale customers. +(6) +Others include all unisex products, equipment and other products not allocated to Men’s, Women’s and Young Athletes’, as well as certain adjustments that are not allocated to products designated by gender or age. +(7) +Others include all other categories and certain adjustments that are not allocated at the category level. +Fiscal 2017 Compared to Fiscal 2016 +On a constant-currency basis, NIKE, Inc. Revenues grew 8% for fiscal 2017, primarily driven by higher revenues for the NIKE Brand and Converse. All NIKE Brand geographies delivered higher revenues for fiscal 2017 as our category offense continued to deliver innovative products, deep brand connections and compelling retail experiences to consumers online and at NIKE-owned and retail partner stores, driving demand for NIKE Brand products. Revenue growth was broad-based as Greater China, Western Europe, Emerging Markets and North America each contributed approximately 2 percentage points of the increase in NIKE, Inc. Revenues . +On a currency-neutral basis, NIKE Brand footwear and apparel revenues increased 8% and 9%, respectively, for fiscal 2017, while NIKE Brand equipment revenues decreased 3%. On a category basis, the increase in NIKE Brand footwear revenues was driven by strong growth in Sportswear, the Jordan Brand and Running. Footwear unit sales for fiscal 2017 increased 7%, with higher ASP per pair contributing approximately 1 percentage point of footwear revenue growth, primarily driven by higher full-price and off-price ASPs, partially offset by the impact of higher off-price sales. +The constant-currency increase in NIKE Brand apparel revenues for fiscal 2017 was fueled by growth in several key categories, most notably Sportswear, Men’s Training and Running. Unit sales of apparel increased 6%, while higher ASP per unit contributed approximately 3 percentage points of apparel revenue growth, primarily due to higher full-price ASP and, to a lesser extent, growth in our higher-priced DTC business. +While wholesale revenues remain the largest component of overall NIKE Brand revenues, we continue to expand our DTC businesses in each of our geographies. Our NIKE Brand DTC operations include NIKE-owned in-line and factory stores, as well as NIKE-owned digital commerce. For fiscal 2017, DTC revenues represented approximately 28% of our total NIKE Brand revenues compared to 26% for fiscal 2016. On a currency-neutral basis, DTC revenues increased 18% for fiscal 2017, driven by strong digital commerce sales growth of 30%, the addition of new stores and 7% comparable store sales growth. Comparable store sales include revenues from NIKE-owned in-line and factory stores for which all three of the following requirements have been met: (1) the store has been open at least one year, (2) square footage has not changed by more than 15% within the past year and (3) the store has not been permanently repositioned within the past year. On a reported basis, digital commerce sales through NIKE-owned websites and mobile applications, which are not included in comparable store sales, were $2.2 billion for fiscal 2017 compared to $1.7 billion for fiscal 2016 and represented approximately 24% of our total NIKE Brand DTC revenues for fiscal 2017 compared to 22% for fiscal 2016. +On a wholesale equivalent and currency-neutral basis, fiscal 2017 NIKE Brand Men’s revenues increased 6%, driven by significant growth in Sportswear, Running and the Jordan Brand, while Women's revenues increased 8%, led by growth in Sportswear and Running. Revenues for our Young Athletes' business increased 8%, with growth across multiple categories, most notably the Jordan Brand. +Fiscal 2016 Compared to Fiscal 2015 +On a currency-neutral basis, NIKE, Inc. Revenues grew 12% for fiscal 2016, primarily driven by higher revenues for the NIKE Brand. Every NIKE Brand geography grew revenues for fiscal 2016. North America contributed approximately 4 percentage points of the increase in NIKE, Inc. Revenues , while Greater China and Western Europe each contributed approximately 3 percentage points, Emerging Markets contributed approximately 2 percentage points and Central & Eastern Europe contributed approximately 1 percentage point. +On a constant-currency basis, NIKE Brand footwear and apparel revenues increased 15% and 11%, respectively, for fiscal 2016, while NIKE Brand equipment revenues decreased 2%. The increase in NIKE Brand footwear revenues for fiscal 2016 was driven by growth in nearly every key category, including strong growth in Sportswear, the Jordan Brand and Running. Footwear unit sales for fiscal 2016 increased 9%, with higher ASP per pair contributing approximately 6 percentage points of footwear revenue growth. Higher ASP per pair was driven by higher full-price ASP, and to a lesser extent, the favorable impact of an increase in the proportion of revenues from our higher-priced DTC business. +The constant-currency increase in NIKE Brand apparel revenues for fiscal 2016 was attributable to growth in most key categories, led by Sportswear, Men’s Training, Running, Women’s Training and Football (Soccer). Apparel unit sales for fiscal 2016 increased 7%. Higher ASP per unit contributed approximately 4 percentage points of apparel revenue growth, primarily due to higher full-price ASP and growth in our higher-priced DTC business. +For fiscal 2016, DTC revenues represented approximately 26% of our total NIKE Brand revenues compared to 23% in fiscal 2015. On a currency-neutral basis, DTC revenues increased 25% for fiscal 2016, driven by strong digital commerce sales growth, the addition of new stores and comparable store sales growth of 10%. Digital commerce sales through NIKE-owned websites, which are not included in comparable store sales, grew 51% in fiscal 2016. Digital commerce sales grew 59% in fiscal 2015. For fiscal 2016, digital commerce sales represented approximately 22% of our total NIKE Brand DTC revenues compared to 18% for fiscal 2015. +On a wholesale equivalent basis and excluding the effects of changes in foreign currency exchange rates, fiscal 2016 NIKE Brand Men’s revenues increased 11%, driven by growth in Sportswear and the Jordan Brand, while Women’s revenues increased 17%, led by Sportswear, Running and Women’s Training. Revenues for our Young Athletes’ business increased 11%, with growth across multiple categories, most notably the Jordan Brand. +24 +Table of Contents +Futures Orders +Futures orders for NIKE Brand footwear and apparel scheduled for delivery from June through November 2017 totaled $ 14.7 billion , 2% lower than the orders reported for the comparable prior year period. NIKE Brand futures orders include (1) orders from external wholesale customers and (2) internal orders from our DTC in-line stores and digital commerce operations, which are reflected at prices that are comparable to prices charged to external wholesale customers. The U.S. Dollar futures orders amount is calculated based upon our internal forecast of the currency exchange rates under which our revenues will be translated during this period. +By geography, futures orders were as follows: +Reported Futures Orders +Excluding Currency Changes (1) +North America +-10 +% +-10 +% +Western Europe +1 +% +3 +% +Central & Eastern Europe +-3 +% +-1 +% +Greater China +7 +% +12 +% +Japan +-7 +% +3 +% +Emerging Markets +9 +% +12 +% +TOTAL NIKE BRAND FUTURES ORDERS +-2 +% +0 +% +(1) +Futures orders have been calculated using prior year exchange rates for the comparative period to enhance the visibility of the underlying business trends excluding the impact of foreign currency exchange rate fluctuations. +Reported futures orders are not necessarily indicative of our expectation of revenue growth during this period and have become less correlated due to our evolving business model. This is due to year-over-year changes in shipment timing, changes in the mix of orders between futures and orders with shorter lead times, and because the fulfillment of certain orders may fall outside of the schedule noted above. In addition, foreign currency exchange rate fluctuations as well as differing levels of order cancellations, discounts and returns can cause differences in the comparisons between futures orders and actual revenues. A portion of our revenue is not derived from futures orders, including sales with short lead times, closeout NIKE Brand footwear and apparel, all sales of NIKE Brand equipment, the difference between retail sales and internal orders from our DTC in-line stores and digital commerce operations, and sales from Converse, NIKE Golf and Hurley. +Gross Margin +(Dollars in millions) +Fiscal 2017 +Fiscal 2016 +% Change +Fiscal 2015 +% Change +Gross profit +$ +15,312 +$ +14,971 +2 +% +$ +14,067 +6 +% +Gross margin +44.6 +% +46.2 +% +(160) bps +46.0 +% +20 bps +Fiscal 2017 Compared to Fiscal 2016 +For fiscal 2017, our consolidated gross margin was 160 basis points lower than fiscal 2016, primarily driven by the following factors: +• +Higher NIKE Brand full-price ASP, net of discounts, (increasing gross margin approximately 70 basis points) aligned with our strategy to deliver innovative, premium products to the consumer; +• +Higher NIKE Brand product costs (decreasing gross margin approximately 100 basis points) as an increase in the mix of higher cost products and labor input cost inflation more than offset lower material input costs; +• +Unfavorable changes in foreign currency exchange rates, net of hedges, (decreasing gross margin approximately 90 basis points); and +• +Lower NIKE Brand DTC margins (decreasing gross margin approximately 20 basis points) reflecting the impact of higher off-price sales. +Fiscal 2016 Compared to Fiscal 2015 +For fiscal 2016, our consolidated gross margin was 20 basis points higher than fiscal 2015, primarily attributable to the following factors: +• +Higher NIKE Brand full-price ASP, net of discounts, (increasing gross margin approximately 190 basis points) aligned with our strategy to deliver innovative, premium products with higher prices and, to a lesser extent, due to price increases reflecting inflationary conditions in certain territories; +• +Growth in our higher-margin DTC business (increasing gross margin approximately 20 basis points); +• +Higher NIKE Brand product costs (decreasing gross margin approximately 70 basis points) as shifts in mix to higher-cost products and labor input cost inflation were only partially offset by lower material input costs; +• +Higher off-price mix (decreasing gross margin approximately 30 basis points), primarily reflecting the impacts from clearing excess inventory in North America; +• +Unfavorable changes in foreign currency exchange rates, net of hedges, (decreasing gross margin approximately 40 basis points); +• +Higher other costs (decreasing gross margin approximately 20 basis points), primarily due to higher product design and development costs; and +• +Lower gross margin from Converse (decreasing gross margin approximately 20 basis points), primarily resulting from shifts in mix to lower-margin products. +25 +Table of Contents +Total Selling and Administrative Expense +(Dollars in millions) +Fiscal 2017 +Fiscal 2016 +% Change +Fiscal 2015 +% Change +Demand creation expense (1) +$ +3,341 +$ +3,278 +2 +% +$ +3,213 +2 +% +Operating overhead expense +7,222 +7,191 +0 +% +6,679 +8 +% +Total selling and administrative expense +$ +10,563 +$ +10,469 +1 +% +$ +9,892 +6 +% +% of revenues +30.8 +% +32.3 +% +(150) bps +32.3 +% +— +(1) +Demand creation expense consists of advertising and promotion costs, including costs of endorsement contracts, television, digital and print advertising, brand events and retail brand presentation. +Fiscal 2017 Compared to Fiscal 2016 +Demand creation expense increased 2% for fiscal 2017 compared to fiscal 2016, driven by higher sports marketing costs, as well as higher marketing and advertising costs, primarily to support key sporting events including the Rio Olympics and European Football Championship. These increases were partially offset by lower retail brand presentation costs. Changes in foreign currency exchange rates reduced Demand creation expense by approximately 1 percentage point. +Operating overhead expense was flat compared to fiscal 2016 as continued investments in our growing DTC business were offset by administrative cost efficiencies and lower variable compensation. Changes in foreign currency exchange rates reduced Operating overhead expense by approximately 1 percentage point for fiscal 2017. +Fiscal 2016 Compared to Fiscal 2015 +Demand creation expense increased 2% for fiscal 2016 compared to fiscal 2015, primarily due to investments in digital brand marketing, including for our DTC business, as well as support for key brand events and initiatives, and sports marketing investments, partially offset by lower advertising expense. For fiscal 2016, changes in foreign currency exchange rates decreased growth in Demand creation expense by approximately 6 percentage points. +Operating overhead expense increased 8% compared to fiscal 2015, primarily as a result of continued investments in our DTC business, including new store openings and higher variable expenses, as well as higher wage-related expenses and investments in consumer-focused digital capabilities, partially offset by lower variable compensation. Changes in foreign currency exchange rates decreased growth in Operating overhead expense by approximately 4 percentage points for fiscal 2016. +Other (Income) Expense, Net +(In millions) +Fiscal 2017 +Fiscal 2016 +Fiscal 2015 +Other (income) expense, net +$ +(196 +) +$ +(140 +) +$ +(58 +) +Other (income) expense, net comprises foreign currency conversion gains and losses from the re-measurement of monetary assets and liabilities denominated in non-functional currencies and the impact of certain foreign currency derivative instruments, as well as unusual or non-operating transactions that are outside the normal course of business. +Fiscal 2017 Compared to Fiscal 2016 +Other (income) expense, net increased from $140 million of other income, net for fiscal 2016 to $196 million of other income, net for fiscal 2017, primarily due to a $56 million net beneficial change in foreign currency conversion gains and losses. +We estimate the combination of the translation of foreign currency-denominated profits from our international businesses and the year-over-year change in foreign currency-related gains and losses included in Other (income) expense, net had an unfavorable impact on our Income before income taxes of $59 million for fiscal 2017. +Fiscal 2016 Compared to Fiscal 2015 +Other (income) expense, net increased from $58 million of other income, net for fiscal 2015 to $140 million of other income, net for fiscal 2016, driven by a $26 million net change in foreign currency conversion gains and losses, a favorable settlement of a legal judgment related to a bankruptcy case in Western Europe and net gains from other non-operating items. +We estimate the combination of the translation of foreign currency-denominated profits from our international businesses and the year-over-year change in foreign currency-related gains and losses included in Other (income) expense, net had an unfavorable impact on our Income before income taxes of $423 million for fiscal 2016. +Income Taxes +Fiscal 2017 +Fiscal 2016 +% Change +Fiscal 2015 +% Change +Effective tax rate +13.2 +% +18.7 +% +(550) bps +22.2 +% +(350) bps +Fiscal 2017 Compared to Fiscal 2016 +The 550 basis point decrease in our effective tax rate for the fiscal year was primarily due to a one-time benefit in the first quarter of the fiscal year related to the resolution with the IRS of a foreign tax credit matter and a decrease in foreign earnings taxed in the United States. +26 +Table of Contents +Fiscal 2016 Compared to Fiscal 2015 +The 350 basis point decrease in our effective tax rate for the fiscal year was primarily due to an increase in the proportion of earnings from operations outside the United States, which are generally subject to a lower tax rate. +Operating Segments +Our operating segments are evidence of the structure of the Company's internal organization. The NIKE Brand segments are defined by geographic regions for operations participating in NIKE Brand sales activity. +Each NIKE Brand geographic segment operates predominantly in one industry: the design, development, marketing and selling of athletic footwear, apparel and equipment. The Company’s reportable operating segments for the NIKE Brand are: North America, Western Europe, Central & Eastern Europe, Greater China, Japan and Emerging Markets, and include results for the NIKE, Jordan and Hurley brands. The Company’s NIKE Brand DTC operations are managed within each geographic operating segment. Converse is also a reportable segment for the Company and operates in one industry: the design, marketing, licensing and selling of casual sneakers, apparel and accessories. +As part of our centrally managed foreign exchange risk management program, standard foreign currency rates are assigned twice per year to each NIKE Brand entity in our geographic operating segments and Converse. These rates are set approximately nine and twelve months in advance of the future selling seasons to which they relate (specifically, for each currency, one standard rate applies to the fall and holiday selling seasons and one standard rate applies to the spring and summer selling seasons) based on average market spot rates in the calendar month preceding the date they are established. Inventories and Cost of sales for geographic operating segments and Converse reflect the use of these standard rates to record non-functional currency product purchases into the entity’s functional currency. Differences between assigned standard foreign currency rates and actual market rates are included in Corporate, together with foreign currency hedge gains and losses generated from our centrally managed foreign exchange risk management program and other conversion gains and losses. +The breakdown of revenues is as follows: +(Dollars in millions) +Fiscal 2017 +Fiscal 2016 +% Change +% Change Excluding Currency Changes (1) +Fiscal 2015 +% Change +% Change Excluding Currency Changes (1) +North America +$ +15,216 +$ +14,764 +3 +% +3 +% +$ +13,740 +7 +% +8 +% +Western Europe +6,211 +5,884 +6 +% +11 +% +5,705 +3 +% +14 +% +Central & Eastern Europe +1,487 +1,431 +4 +% +7 +% +1,421 +1 +% +17 +% +Greater China +4,237 +3,785 +12 +% +17 +% +3,067 +23 +% +27 +% +Japan +1,014 +869 +17 +% +7 +% +755 +15 +% +22 +% +Emerging Markets +3,995 +3,701 +8 +% +14 +% +3,898 +-5 +% +13 +% +Global Brand Divisions (2) +73 +73 +0 +% +2 +% +115 +-37 +% +-30 +% +Total NIKE Brand Revenues +32,233 +30,507 +6 +% +8 +% +28,701 +6 +% +13 +% +Converse +2,042 +1,955 +4 +% +6 +% +1,982 +-1 +% +2 +% +Corporate (3) +75 +(86 +) +— +— +(82 +) +— +— +TOTAL NIKE, INC. REVENUES +$ +34,350 +$ +32,376 +6 +% +8 +% +$ +30,601 +6 +% +12 +% +(1) +Results have been restated using actual exchange rates in use during the comparative prior year period to enhance the visibility of the underlying business trends excluding the impact of translation arising from foreign currency exchange rate fluctuations, which is considered a non-GAAP financial measure. +(2) +Global Brand Divisions revenues are primarily attributable to NIKE Brand licensing businesses that are not part of a geographic operating segment. +(3) +Corporate revenues primarily consist of foreign currency hedge gains and losses related to revenues generated by entities within the NIKE Brand geographic operating segments and Converse but managed through our central foreign exchange risk management program. +The primary financial measure used by the Company to evaluate performance of individual operating segments is earnings before interest and taxes (commonly referred to as “EBIT”), which represents Net income before Interest expense (income), net and Income tax expense in the Consolidated Statements of Income. As discussed in Note 17 — Operating Segments and Related Information in the accompanying Notes to the Consolidated Financial Statements, certain corporate costs are not included in EBIT of our operating segments. +27 +Table of Contents +The breakdown of earnings before interest and taxes is as follows: +(Dollars in millions) +Fiscal 2017 +Fiscal 2016 +% Change +Fiscal 2015 +% Change +North America +$ +3,875 +$ +3,763 +3 +% +$ +3,645 +3 +% +Western Europe +1,203 +1,434 +-16 +% +1,275 +12 +% +Central & Eastern Europe +244 +289 +-16 +% +249 +16 +% +Greater China +1,507 +1,372 +10 +% +993 +38 +% +Japan +224 +174 +29 +% +100 +74 +% +Emerging Markets +816 +892 +-9 +% +818 +9 +% +Global Brand Divisions +(2,677 +) +(2,596 +) +-3 +% +(2,267 +) +-15 +% +Total NIKE Brand +5,192 +5,328 +-3 +% +4,813 +11 +% +Converse +477 +487 +-2 +% +517 +-6 +% +Corporate +(724 +) +(1,173 +) +38 +% +(1,097 +) +-7 +% +TOTAL NIKE, INC. EARNINGS +BEFORE INTEREST AND TAXES +4,945 +4,642 +7 +% +4,233 +10 +% +Interest expense (income), net +59 +19 +— +28 +— +TOTAL NIKE, INC. INCOME +BEFORE INCOME TAXES +$ +4,886 +$ +4,623 +6 +% +$ +4,205 +10 +% +North America +(Dollars in millions) +Fiscal 2017 +Fiscal 2016 +% Change +% Change Excluding Currency Changes +Fiscal 2015 +% Change +% Change Excluding Currency Changes +Revenues by: +Footwear +$ +9,684 +$ +9,299 +4 +% +4 +% +$ +8,506 +9 +% +10 +% +Apparel +4,886 +4,746 +3 +% +3 +% +4,410 +8 +% +8 +% +Equipment +646 +719 +-10 +% +-10 +% +824 +-13 +% +-13 +% +TOTAL REVENUES +$ +15,216 +$ +14,764 +3 +% +3 +% +$ +13,740 +7 +% +8 +% +Revenues by: +Sales to Wholesale Customers +$ +10,756 +$ +10,674 +1 +% +1 +% +$ +10,243 +4 +% +5 +% +Sales Direct to Consumer +4,460 +4,090 +9 +% +9 +% +3,497 +17 +% +17 +% +TOTAL REVENUES +$ +15,216 +$ +14,764 +3 +% +3 +% +$ +13,740 +7 +% +8 +% +EARNINGS BEFORE INTEREST +AND TAXES +$ +3,875 +$ +3,763 +3 +% +$ +3,645 +3 +% +Fiscal 2017 Compared to Fiscal 2016 +North America revenues increased 3%, driven by growth in our Sportswear and Jordan Brand categories, partially offset by declines in other categories, including NIKE Basketball. DTC revenues increased 9% for fiscal 2017 due to digital commerce sales growth, the addition of new stores and comparable store sales growth of 3%. The broader retail marketplace in North America is being impacted by several significant trends, including shifting consumer traffic patterns across digital and physical channels, retail consolidation and a promotional environment. +Footwear revenue growth for fiscal 2017 was attributable to higher revenues in our Sportswear and Jordan Brand categories, partially offset by declines in other categories. Unit sales of footwear increased 4%, while ASP per pair was flat as higher off-price ASP was offset by unfavorable off-price mix. +The increase in apparel revenues for fiscal 2017 was due to growth concentrated in Sportswear, partially offset by declines in several other categories. Unit sales of apparel grew 2% and higher ASP per unit contributed approximately 1 percentage point of apparel revenue growth, primarily due to higher full-price ASP. +EBIT grew 3% for fiscal 2017 as revenue growth and gross margin expansion were partially offset by higher selling and administrative expense as a percent of revenues. Gross margin increased 10 basis points as higher full-price ASP and favorable off-price margin more than offset higher product costs and increased off-price mix as a result of clearing excess inventories through off-price channels, including through our DTC business. Selling and administrative expense grew due to higher operating overhead as continued investments in our growing DTC business were partially offset by lower bad debt expense. Demand creation was flat as higher sports marketing and retail brand presentation costs offset lower marketing and advertising costs. +Fiscal 2016 Compared to Fiscal 2015 +On a constant-currency basis, North America revenues increased 8% primarily due to growth in our Sportswear, Jordan Brand and Running categories. DTC revenues grew 17% for fiscal 2016, fueled by strong digital commerce sales growth, the addition of new stores and comparable store sales growth of 6%. +28 +Table of Contents +Currency-neutral footwear revenue growth was attributable to higher revenues in most key categories, led by the Jordan Brand, Sportswear, Running and Women's Training, partially offset by a slight decline in NIKE Basketball. Fiscal 2016 unit sales of footwear increased 8%. Higher ASP per pair contributed approximately 2 percentage points of footwear revenue growth, driven by higher full-price ASP and the favorable impact of an increase in the proportion of revenues from our higher-priced DTC business, partially offset by higher off-price mix. +Apparel revenue growth for fiscal 2016 was primarily driven by our Sportswear and Men's Training categories. For fiscal 2016, unit sales of apparel grew 7%. Higher ASP per unit contributed approximately 1 percentage point of apparel revenue growth, primarily attributable to higher full-price ASP. +EBIT increased 3% for fiscal 2016 as higher revenues were largely offset by lower gross margin and higher selling and administrative expense as a percent of revenues. Gross margin declined 80 basis points as higher off-price mix, higher warehousing and inventory obsolescence costs, as well as higher product input costs more than offset higher full-price ASP. Selling and administrative expense increased as a percent of revenues as higher operating overhead to support our growing DTC operations and bad debt expense related to customer bankruptcies was partially offset by lower variable compensation. Demand creation also grew at a faster rate than revenues due to higher spending for sports marketing, DTC marketing and key brand events and initiatives, partially offset by lower advertising expense. +Western Europe +(Dollars in millions) +Fiscal 2017 +Fiscal 2016 +% Change +% Change Excluding Currency Changes +Fiscal 2015 +% Change +% Change Excluding Currency Changes +Revenues by: +Footwear +$ +4,068 +$ +3,985 +2 +% +7 +% +$ +3,876 +3 +% +14 +% +Apparel +1,868 +1,628 +15 +% +21 +% +1,552 +5 +% +16 +% +Equipment +275 +271 +1 +% +7 +% +277 +-2 +% +8 +% +TOTAL REVENUES +$ +6,211 +$ +5,884 +6 +% +11 +% +$ +5,705 +3 +% +14 +% +Revenues by: +Sales to Wholesale Customers +$ +4,443 +$ +4,429 +0 +% +5 +% +$ +4,451 +0 +% +10 +% +Sales Direct to Consumer +1,768 +1,455 +22 +% +28 +% +1,254 +16 +% +28 +% +TOTAL REVENUES +$ +6,211 +$ +5,884 +6 +% +11 +% +$ +5,705 +3 +% +14 +% +EARNINGS BEFORE INTEREST AND TAXES +$ +1,203 +$ +1,434 +-16 +% +$ +1,275 +12 +% +Fiscal 2017 Compared to Fiscal 2016 +On a currency-neutral basis, Western Europe revenues for fiscal 2017 increased 11%. Revenue growth was broad-based across all territories, led by Western Europe’s largest territory, the UK & Ireland, which grew 11%. On a category basis, revenues increased for nearly all key categories, most notably Sportswear, Running and the Jordan Brand. DTC revenues grew 28% for fiscal 2017 due to strong digital commerce sales growth, comparable store sales growth of 16% and the addition of new stores. +The constant-currency increase in footwear revenues was led by Sportswear, Running and the Jordan Brand, partially offset by declines concentrated in Football (Soccer). For fiscal 2017, unit sales of footwear increased 5% and higher ASP per pair contributed approximately 2 percentage points of footwear revenue growth. Higher ASP per pair was primarily due to the favorable impact of growth in our DTC business. +Currency-neutral apparel revenue growth was due to higher revenues for nearly every key category, most notably Sportswear and, to a lesser extent, Football (Soccer). Unit sales of apparel for fiscal 2017 increased 16%, while higher ASP per unit contributed approximately 5 percentage points of apparel revenue growth. The increase in ASP per unit was primarily attributable to the favorable impact of growth in our DTC business and higher full-price ASP. +Reported EBIT decreased 16% for fiscal 2017, in part reflecting the negative impact of weakening foreign currency exchange rates. Higher revenues and selling and administrative expense leverage were more than offset by significant gross margin contraction. Gross margin declined 550 basis points primarily driven by the effects of significant unfavorable standard foreign currency exchange rates. Selling and administrative expense increased due to higher demand creation expense, as increased sports marketing and advertising expenses more than offset lower marketing costs. Operating overhead also increased due to continued investments in our growing DTC business, partially offset by administrative cost efficiencies and lower variable compensation costs. +Fiscal 2016 Compared to Fiscal 2015 +On a constant-currency basis, Western Europe revenues for fiscal 2016 increased 14% with double-digit growth in every territory. Growth was led by our largest territories, the UK & Ireland and AGS (Austria, Germany and Switzerland), which grew 12% and 16%, respectively. On a category basis, revenues grew for every key category, most notably Sportswear, Football (Soccer) and the Jordan Brand. DTC revenues grew 28% for fiscal 2016, due to strong digital commerce sales growth, the addition of new stores and comparable store sales growth of 13%. +Currency-neutral footwear revenue growth was fueled by increases in most key categories, led by Sportswear and the Jordan Brand. For fiscal 2016, unit sales of footwear increased 10%. Higher ASP per pair contributed approximately 4 percentage points of footwear revenue growth, driven by higher full-price ASP and the favorable impact of an increase in the proportion of revenues from our higher-priced DTC business, partially offset by higher off-price mix. +The constant-currency apparel revenue growth was attributable to increases in every key category, most notably Sportswear, with Football (Soccer) also providing strong growth. Unit sales of apparel for fiscal 2016 increased 11%. Higher ASP per unit contributed approximately 5 percentage points of apparel revenue growth, primarily driven by the favorable impact of an increase in the proportion of revenues from our higher-priced DTC business and higher full-price ASP. +29 +Table of Contents +On a reported basis, EBIT grew 12% for fiscal 2016, despite the negative translation impact from changes in foreign currency exchange rates, most notably the Euro. EBIT grew at a higher rate than revenue as selling and administrative expense leverage and the favorable settlement of a legal judgment related to a bankruptcy case reflected in Other (income) expense, net , were only partially offset by lower gross margin. Gross margin declined 10 basis points as unfavorable standard foreign currency exchange rates and higher off-price mix were mostly offset by higher full-price ASP, shifts in mix to lower-cost products and growth in our higher-margin DTC business. Selling and administrative expense was lower as a percent of revenues despite higher operating overhead, primarily to support DTC expansion. Demand creation increased slightly as higher spending for DTC and other demand creation costs more than offset lower sports marketing costs. +Central & Eastern Europe +(Dollars in millions) +Fiscal 2017 +Fiscal 2016 +% Change +% Change Excluding Currency Changes +Fiscal 2015 +% Change +% Change Excluding Currency Changes +Revenues by: +Footwear +$ +927 +$ +882 +5 +% +9 +% +$ +827 +7 +% +23 +% +Apparel +471 +463 +2 +% +4 +% +499 +-7 +% +9 +% +Equipment +89 +86 +3 +% +6 +% +95 +-9 +% +7 +% +TOTAL REVENUES +$ +1,487 +$ +1,431 +4 +% +7 +% +$ +1,421 +1 +% +17 +% +Revenues by: +Sales to Wholesale Customers +$ +1,237 +$ +1,215 +2 +% +5 +% +$ +1,241 +-2 +% +13 +% +Sales Direct to Consumer +250 +216 +16 +% +19 +% +180 +20 +% +46 +% +TOTAL REVENUES +$ +1,487 +$ +1,431 +4 +% +7 +% +$ +1,421 +1 +% +17 +% +EARNINGS BEFORE INTEREST AND TAXES +$ +244 +$ +289 +-16 +% +$ +249 +16 +% +Fiscal 2017 Compared to Fiscal 2016 +On a constant-currency basis, Central & Eastern Europe revenues increased 7%, with double-digit growth in nearly every territory. Revenue growth was led by two of Central & Eastern Europe's largest territories, Turkey and Russia, which each increased 14%, while revenues for our distributors business decreased 9%. On a category basis, revenue growth was fueled by higher revenues, primarily in Sportswear, which more than offset declines in several other categories. DTC revenues increased 19%, driven by comparable store sales growth of 9%, the addition of new stores and digital commerce sales growth. +The constant-currency footwear revenue growth for fiscal 2017 was primarily attributable to higher Sportswear revenues, partially offset by declines in most other categories. Unit sales of footwear increased 7%. Higher ASP per pair contributed approximately 2 percentage points of footwear revenue growth, driven by higher off-price and DTC ASPs. +Currency-neutral apparel revenue growth for fiscal 2017 was primarily due to growth in Sportswear. Unit sales of apparel increased 2%, while higher ASP per unit contributed approximately 2 percentage points of apparel revenue growth. ASP per unit increased as lower full-price ASP resulting from higher discounts was more than offset by the favorable impact of growth in our DTC business. +Reported EBIT decreased 16% for fiscal 2017 as revenue growth and selling and administrative expense leverage were more than offset by lower gross margin. Gross margin declined 490 basis points primarily due to significant unfavorable standard foreign currency exchange rates. Selling and administrative expense decreased as a percent of revenues despite higher demand creation expense driven by higher advertising and sports marketing costs, partially offset by lower retail brand presentation costs. Operating overhead expense decreased primarily due to lower administrative and variable compensation costs, partially offset by continued investments in our DTC business. +Fiscal 2016 Compared to Fiscal 2015 +On a currency-neutral basis, fiscal 2016 revenues for Central & Eastern Europe increased 17%, with double-digit growth in nearly every territory. Revenue growth was led by two of our largest territories, Turkey and Russia, which increased 26% and 18%, respectively, while our distributors business also grew 16%. Revenues grew in nearly every key category, driven by Sportswear, Running and Football (Soccer). DTC revenues increased 46%, fueled by comparable store sales growth of 27% and the addition of new stores. +Constant-currency footwear revenue growth in fiscal 2016 was driven by growth in nearly every key category, led by Sportswear and Running. Fiscal 2016 unit sales of footwear increased 7%. Higher ASP per pair contributed approximately 16 percentage points of footwear revenue growth, primarily driven by higher full-price ASP, largely reflecting inflationary conditions in certain territories. +The currency-neutral growth in apparel revenue in fiscal 2016 was attributable to growth in nearly all key categories, most notably Football (Soccer) and Running. Unit sales of apparel decreased 2% for fiscal 2016. Higher ASP per unit contributed approximately 11 percentage points of apparel revenue growth, primarily driven by higher full-price ASP, largely reflecting inflationary conditions in certain territories. +On a reported basis, EBIT increased 16% for fiscal 2016, despite the negative impact of changes in foreign currency exchange rates, primarily the Russian Ruble and Turkish Lira. EBIT grew faster than reported revenues due to significant gross margin expansion and selling and administrative expense leverage. Gross margin increased 140 basis points as significantly higher full-price ASP, warehousing efficiencies and the favorable impact of a higher proportion of revenues from our higher-margin DTC business more than offset unfavorable standard foreign currency exchange rates and shifts in mix to higher-cost products. Selling and administrative expense decreased as a percent of revenues despite higher operating overhead to support DTC expansion and higher demand creation expense due to increased sports marketing costs and spending to support brand events. +30 +Table of Contents +Greater China +(Dollars in millions) +Fiscal 2017 +Fiscal 2016 +% Change +% Change Excluding Currency Changes +Fiscal 2015 +% Change +% Change Excluding Currency Changes +Revenues by: +Footwear +$ +2,920 +$ +2,599 +12 +% +18 +% +$ +2,016 +29 +% +33 +% +Apparel +1,188 +1,055 +13 +% +18 +% +925 +14 +% +17 +% +Equipment +129 +131 +-2 +% +3 +% +126 +4 +% +7 +% +TOTAL REVENUES +$ +4,237 +$ +3,785 +12 +% +17 +% +$ +3,067 +23 +% +27 +% +Revenues by: +Sales to Wholesale Customers +$ +2,774 +$ +2,623 +6 +% +11 +% +$ +2,234 +17 +% +21 +% +Sales Direct to Consumer +1,463 +1,162 +26 +% +32 +% +833 +39 +% +44 +% +TOTAL REVENUES +$ +4,237 +$ +3,785 +12 +% +17 +% +$ +3,067 +23 +% +27 +% +EARNINGS BEFORE INTEREST AND TAXES +$ +1,507 +$ +1,372 +10 +% +$ +993 +38 +% +Fiscal 2017 Compared to Fiscal 2016 +On a currency-neutral basis, Greater China revenues for fiscal 2017 increased 17%, driven by higher revenues in nearly all key categories, led by Sportswear, Running and the Jordan Brand. DTC revenues increased 32%, driven by strong digital commerce sales growth, the addition of new stores and comparable store sales growth of 9%. +The constant-currency increase in footwear revenue for fiscal 2017 was driven by growth in nearly all key categories, most notably Running, Sportswear and the Jordan Brand. Unit sales of footwear increased 21%, while lower ASP per pair reduced footwear revenue growth by approximately 3 percentage points as higher off-price ASP was more than offset by lower DTC ASP and unfavorable off-price mix. +The currency-neutral apparel revenue growth for fiscal 2017 was due to higher revenues in nearly all key categories, led by Sportswear and Running. Unit sales of apparel increased 15% and higher ASP per unit increased apparel revenue growth by approximately 3 percentage points. The increase in ASP per unit was attributable to higher full-price ASP, partially offset by lower ASP in our DTC business and unfavorable off-price mix. +Despite the negative impact of translation, reported EBIT increased 10% for fiscal 2017 driven by higher revenues and selling and administrative expense leverage, partially offset by lower gross margin. Gross margin contracted 240 basis points primarily due to unfavorable standard foreign currency exchange rates and higher product costs. Selling and administrative expense increased due to higher operating overhead to support DTC growth. Demand creation expense also increased as higher marketing costs more than offset lower retail brand presentation and sports marketing expenses. +Fiscal 2016 Compared to Fiscal 2015 +On a currency-neutral basis, Greater China revenues for fiscal 2016 increased 27%, driven by higher revenues in nearly every key category, led by Sportswear, Running, NIKE Basketball and the Jordan Brand. DTC revenues increased 44%, driven by significant digital commerce sales growth, the addition of new stores and comparable store sales growth of 19%. +The constant-currency increase in footwear revenue for fiscal 2016 was driven by growth in nearly every key category, most notably Sportswear, Running, NIKE Basketball and the Jordan Brand. For fiscal 2016, unit sales of footwear increased 27%. Higher ASP per pair contributed approximately 6 percentage points of footwear revenue growth, driven by higher full-price ASP and the favorable impact of an increase in the proportion of revenues from our higher-priced DTC business. +Constant-currency apparel revenue growth for fiscal 2016 was attributable to higher revenues in nearly every key category, led by Running and Sportswear. Unit sales of apparel increased 17% for fiscal 2016 while ASP per unit was flat. +On a reported basis, EBIT increased 38% for fiscal 2016 due to strong revenue growth, gross margin expansion and selling and administrative expense leverage. Gross margin increased 80 basis points due to higher full-price ASP and an increase in the proportion of revenues from our higher-margin DTC business, partially offset by shifts in mix to higher-cost products and unfavorable standard foreign currency exchange rates. Selling and administrative expense decreased as a percent of revenues despite higher operating overhead and demand creation expense. Operating overhead increased largely due to support for our growing DTC operations, while demand creation was also higher, primarily due to retail brand presentation costs to re-profile category and consumer-focused retail stores as well as spending for key brand events. +31 +Table of Contents +Japan +(Dollars in millions) +Fiscal 2017 +Fiscal 2016 +% Change +% Change Excluding Currency Changes +Fiscal 2015 +% Change +% Change Excluding Currency Changes +Revenues by: +Footwear +$ +666 +$ +570 +17 +% +7 +% +$ +452 +26 +% +34 +% +Apparel +275 +228 +21 +% +10 +% +230 +-1 +% +5 +% +Equipment +73 +71 +3 +% +-6 +% +73 +-3 +% +3 +% +TOTAL REVENUES +$ +1,014 +$ +869 +17 +% +7 +% +$ +755 +15 +% +22 +% +Revenues by: +Sales to Wholesale Customers +$ +668 +$ +587 +14 +% +4 +% +$ +536 +10 +% +16 +% +Sales Direct to Consumer +346 +282 +23 +% +12 +% +219 +29 +% +37 +% +TOTAL REVENUES +$ +1,014 +$ +869 +17 +% +7 +% +$ +755 +15 +% +22 +% +EARNINGS BEFORE INTEREST AND TAXES +$ +224 +$ +174 +29 +% +$ +100 +74 +% +Fiscal 2017 Compared to Fiscal 2016 +On a constant-currency basis, revenues for Japan increased 7% for fiscal 2017. Most key categories grew, led by Sportswear and Running, partially offset by declines in Golf. DTC revenue growth of 12% was driven by comparable store sales growth of 10%, digital commerce sales growth and the addition of new stores. +On a reported basis, EBIT increased 29%, in part reflecting the impact of the stronger Yen. Reported revenue growth and selling and administrative expense leverage were only partially offset by lower gross margin. Gross margin declined 150 basis points as lower product costs were more than offset by the impact of unfavorable standard foreign currency exchange rates, unfavorable off-price margin and lower DTC margin. Selling and administrative expense grew due to higher operating overhead and demand creation expense. Operating overhead increased as lower wage-related, administrative and variable compensation costs were more than offset by increased investments in our growing DTC business and the impact of changes in foreign currency exchange rates. Demand creation expense increased as the negative impact of changes in foreign currency exchange rates more than offset lower sports marketing, advertising and marketing costs. +Fiscal 2016 Compared to Fiscal 2015 +On a currency-neutral basis, revenues for Japan increased 22% for fiscal 2016, driven by growth in most key categories, led by Sportswear, Running and the Jordan Brand. DTC revenues were 37% higher, due to strong digital commerce sales growth, comparable store sales growth of 17% and the addition of new stores. +Reported EBIT increased 74%, despite the weaker Yen. EBIT growth was driven by higher reported revenues, gross margin expansion and significant selling and administrative expense leverage. Gross margin expanded 270 basis points due to higher full-price ASP, in part due to lower discounts, as well as growth in our higher-margin DTC business, lower product input costs and warehousing efficiencies, which more than offset unfavorable standard foreign currency exchange rates. Selling and administrative expense decreased as a percent of revenues despite investments in operating overhead to support our growing DTC business. Demand creation spending for DTC marketing and brand events was largely offset by lower spending for retail brand presentation and advertising costs. +Emerging Markets +(Dollars in millions) +Fiscal 2017 +Fiscal 2016 +% Change +% Change Excluding Currency Changes +Fiscal 2015 +% Change +% Change Excluding Currency Changes +Revenues by: +Footwear +$ +2,816 +$ +2,536 +11 +% +17 +% +$ +2,641 +-4 +% +14 +% +Apparel +966 +947 +2 +% +8 +% +1,021 +-7 +% +11 +% +Equipment +213 +218 +-2 +% +2 +% +236 +-8 +% +11 +% +TOTAL REVENUES +$ +3,995 +$ +3,701 +8 +% +14 +% +$ +3,898 +-5 +% +13 +% +Revenues by: +Sales to Wholesale Customers +$ +3,200 +$ +3,049 +5 +% +11 +% +$ +3,247 +-6 +% +11 +% +Sales Direct to Consumer +795 +652 +22 +% +26 +% +651 +0 +% +23 +% +TOTAL REVENUES +$ +3,995 +$ +3,701 +8 +% +14 +% +$ +3,898 +-5 +% +13 +% +EARNINGS BEFORE INTEREST +AND TAXES +$ +816 +$ +892 +-9 +% +$ +818 +9 +% +32 +Table of Contents +Fiscal 2017 Compared to Fiscal 2016 +On a currency-neutral basis, Emerging Markets revenues increased 14%, driven by higher revenues in every territory. Revenues for three of Emerging Market’s largest territories, SOCO (which includes Argentina, Uruguay and Chile), Korea and Mexico, grew 34%, 14% and 18%, respectively. Additionally, revenues increased in most key categories, led by Sportswear and Running. DTC revenues increased 26%, fueled by the addition of new stores, comparable store sales growth of 11% and higher digital commerce sales. +The increase in constant-currency footwear revenue for fiscal 2017 was attributable to growth in most key categories, most notably Sportswear and Running. Unit sales of footwear increased 7%. Higher ASP per pair contributed approximately 10 percentage points of footwear revenue growth, primarily attributable to higher full-price ASP, in part reflecting inflationary conditions in certain territories. +Currency-neutral growth in apparel revenue was fueled by increases in most key categories, led by Sportswear and Running. For fiscal 2017, unit sales of apparel were flat while higher ASP per unit contributed approximately 8 percentage points of apparel revenue growth. The increase in ASP per unit was primarily driven by higher full-price ASP, in part reflecting inflationary conditions in certain territories. +Reported EBIT decreased 9%, in part reflecting the negative impact of changes in foreign currency exchange rates, primarily the Argentine Peso and Mexican Peso. Reported revenue growth and selling and administrative expense leverage were more than offset by lower gross margin. Gross margin decreased 430 basis points as higher full-price ASP was more than offset by unfavorable standard foreign currency exchange rates and higher product costs. Selling and administrative expense increased due to higher operating overhead costs primarily resulting from ongoing investments in our growing DTC business, partially offset by administrative cost efficiencies. Demand creation expense also increased as lower advertising costs were more than offset by increased marketing support for the Rio Olympics in the first quarter, as well as higher sports marketing costs. +Fiscal 2016 Compared to Fiscal 2015 +On a currency-neutral basis, fiscal 2016 revenues for Emerging Markets increased 13%. Growth was attributable to higher revenues in 7 of 9 territories, led by one of our largest territories, SOCO (which includes Argentina, Uruguay and Chile), which grew 32%, and by Mexico and Pacific (which includes Australia and New Zealand), which grew 31% and 27%, respectively. Revenues declined 5% in Brazil, primarily reflecting on-going macroeconomic challenges. On a category basis, revenues grew in nearly every key category, led by Sportswear and Running. DTC revenues increased 23%, driven by the addition of new stores, comparable store sales growth of 7% and digital commerce sales growth. +The constant-currency growth in footwear revenue for fiscal 2016 was driven by higher revenues in nearly every key category, most notably Sportswear and Running. For fiscal 2016, unit sales of footwear increased 1%, while higher ASP per pair contributed approximately 13 percentage points of footwear revenue growth. Higher ASP was attributable to higher full-price ASP, primarily reflecting inflationary conditions in certain territories, and to a lesser extent, the favorable impact of an increase in the proportion of revenues from our higher-priced DTC business. +The constant-currency growth in apparel revenue was due to increases in most key categories, led by Sportswear, Running and Women's Training. Fiscal 2016 unit sales of apparel decreased 2%, while higher ASP per unit contributed approximately 13 percentage points of apparel revenue growth. Higher ASP was due to higher full-price ASP, primarily reflecting inflationary conditions in certain territories, and to a lesser extent, the favorable impact of an increase in the proportion of revenues from our higher-priced DTC business. +On a reported basis, EBIT increased 9%, despite the negative impact of foreign currency exchange rates, primarily the Argentine Peso, Mexican Peso and Korean Won, as gross margin expansion more than offset lower reported revenues and higher selling and administrative expense as a percent of revenues. Gross margin expanded 350 basis points due to higher full-price ASP, lower warehousing and obsolescence costs, and growth in our higher-margin DTC business, partially offset by shifts in mix to higher-cost products and unfavorable standard foreign currency exchange rates. Selling and administrative expense declined on a reported basis, but was higher as a percent of revenues as higher operating overhead due to additional investments in our DTC business and higher wage-related and variable compensation expenses were more than offset by changes in foreign currency exchange rates. Demand creation expense also increased driven by sports marketing and digital brand marketing costs, offset by the impact of foreign currency exchange rates. +Global Brand Divisions +(Dollars in millions) +Fiscal 2017 +Fiscal 2016 +% Change +% Change Excluding Currency Changes +Fiscal 2015 +% Change +% Change Excluding Currency Changes +Revenues +$ +73 +$ +73 +0 +% +2 +% +$ +115 +-37 +% +-30 +% +(Loss) Before Interest and Taxes +$ +(2,677 +) +$ +(2,596 +) +3 +% +$ +(2,267 +) +15 +% +Global Brand Divisions primarily represent demand creation, operating overhead and product creation and design expenses that are centrally managed for the NIKE Brand. Revenues for Global Brand Divisions are primarily attributable to NIKE Brand licensing businesses that are not part of a geographic operating segment. +Fiscal 2017 Compared to Fiscal 2016 +Global Brand Divisions’ loss before interest and taxes increased 3% for fiscal 2017 primarily due to higher demand creation expense, which was only partially offset by a decline in operating overhead expense. The increase in demand creation expense was due to higher marketing and advertising expenses for key brand and sporting events, including the Rio Olympics and the European Football Championship in the first quarter. Operating overhead expense decreased as higher wage-related expenses were more than offset by administrative cost efficiencies and lower variable compensation. +Fiscal 2016 Compared to Fiscal 2015 +Global Brand Divisions’ loss before interest and taxes increased 15% for fiscal 2016 due to higher operating overhead and demand creation expense, and to a lesser extent, lower revenues, largely resulting from the expiration of certain football club endorsement agreements. Operating overhead increased due to higher wage-related expenses and consumer-focused digital capabilities, partially offset by lower variable compensation expenses. Demand creation expense increased due to higher advertising and digital brand marketing expenses. +33 +Table of Contents +Converse +(Dollars in millions) +Fiscal 2017 +Fiscal 2016 +% Change +% Change Excluding Currency Changes +Fiscal 2015 +% Change +% Change Excluding Currency Changes +Revenues +$ +2,042 +$ +1,955 +4 +% +6 +% +$ +1,982 +-1 +% +2 +% +Earnings Before Interest and Taxes +$ +477 +$ +487 +-2 +% +$ +517 +-6 +% +In territories we define as “direct distribution markets” Converse designs, markets and sells products directly to distributors and wholesale customers, and to consumers through DTC operations. The largest direct distribution markets are the United States, the United Kingdom and China. We do not own the Converse trademarks in Japan and accordingly do not earn revenues in Japan. Territories other than direct distribution markets and Japan are serviced by third-party licensees who pay royalty revenues to Converse for the use of its registered trademarks and other intellectual property rights. +Fiscal 2017 Compared to Fiscal 2016 +On a currency-neutral basis, revenues for Converse increased 6% for fiscal 2017. Comparable direct distribution markets (i.e. markets served under a direct distribution model for comparable periods in the current and prior fiscal years) grew 4%, contributing approximately 4 percentage points of total Converse revenue growth for fiscal 2017. Comparable direct distribution market unit sales increased 2%, while higher ASP per unit contributed approximately 2 percentage points of direct distribution markets revenue growth. On a territory basis, the increase in comparable direct distribution market revenues was primarily attributable to growth in the United States, partially offset by lower revenues in Europe. Conversion of markets from licensed to direct distribution increased total Converse revenues by approximately 2 percentage points for fiscal 2017, primarily driven by the market transition in Italy. Revenues from comparable licensed markets decreased 5%, having an insignificant impact to total Converse revenue. The decrease in comparable licensed markets revenues is primarily due to lower revenues in Latin America. +Reported EBIT declined 2% for fiscal 2017 as revenue growth and lower selling and administrative expense were more than offset by gross margin contraction. Gross margin decreased 300 basis points as higher full-price ASP was more than offset by unfavorable standard foreign currency exchange rates and higher product costs primarily due to a shift in mix to lower margin products. Gross margin also contracted due to the unfavorable impact of lower licensing revenues, primarily due to market transitions. Selling and administrative expense decreased due to lower demand creation expense, primarily as a result of lower retail brand presentation costs, partially offset by higher advertising expense. Operating overhead increased as higher wage-related expenses were only partially offset by lower administrative costs. +Fiscal 2016 Compared to Fiscal 2015 +Excluding changes in foreign currency exchange rates, Converse revenues increased 2% for fiscal 2016. Comparable direct distribution markets grew 4%, contributing approximately 3 percentage points of total Converse revenue growth for fiscal 2016. Comparable direct distribution market unit sales decreased 2%, while higher ASP per unit contributed approximately 6 percentage points of direct distribution market revenue growth. On a territory basis, growth in the United States and Asia Pacific was partially offset by declines in Europe, primarily the United Kingdom. Conversion of markets from licensed to direct distribution markets had an insignificant impact on total Converse revenue growth for fiscal 2016. Revenues from comparable licensed markets decreased 15% for fiscal 2016, reducing total Converse revenue growth by approximately 1 percentage point. The decrease in comparable licensed markets revenues was primarily due to poor macroeconomic conditions in Latin America. +Reported EBIT for Converse decreased 6% for fiscal 2016 as a decrease in reported revenues and lower gross margin more than offset selling and administrative expense leverage. Gross margin declined 220 basis points as unfavorable standard foreign currency exchange rates, shifts in mix to higher-cost products and higher off-price mix more than offset higher full-price ASP. Selling and administrative expense declined faster than reported revenues primarily due to lower demand creation, which more than offset slightly higher operating overhead due to higher wage-related expenses. +Corporate +(Dollars in millions) +Fiscal 2017 +Fiscal 2016 +% Change +Fiscal 2015 +% Change +Revenues +$ +75 +$ +(86 +) +— +$ +(82 +) +— +(Loss) Before Interest and Taxes +$ +(724 +) +$ +(1,173 +) +-38 +% +$ +(1,097 +) +7 +% +Corporate revenues primarily consist of foreign currency hedge gains and losses related to revenues generated by entities within the NIKE Brand geographic operating segments and Converse, but managed through our central foreign exchange risk management program. +The Corporate loss before interest and taxes consists largely of unallocated general and administrative expenses, including expenses associated with centrally managed departments; depreciation and amortization related to our corporate headquarters; unallocated insurance, benefit and compensation programs, including stock-based compensation; and certain foreign currency gains and losses. +In addition to the foreign currency gains and losses recognized in Corporate revenues, foreign currency results in Corporate include gains and losses resulting from the difference between actual foreign currency rates and standard rates used to record non-functional currency denominated product purchases within the NIKE Brand geographic operating segments and Converse; related foreign currency hedge results; conversion gains and losses arising from re-measurement of monetary assets and liabilities in non-functional currencies; and certain other foreign currency derivative instruments. +34 +Table of Contents +Fiscal 2017 Compared to Fiscal 2016 +For fiscal 2017, Corporate's loss before interest and taxes decreased $449 million primarily due to the following: +• +a beneficial change of $280 million related to the difference between actual foreign currency exchange rates and standard foreign currency exchange rates assigned to the NIKE Brand geographic operating segments and Converse, net of hedge gains and losses; these results are reported as a component of consolidated gross margin; +• +a beneficial change of $115 million, primarily driven by lower variable compensation and administrative costs in operating overhead expense; and +• +an increase in net foreign currency gains of $54 million related to the re-measurement of monetary assets and liabilities denominated in non-functional currencies and the impact of certain foreign currency derivative instruments, reported as a component of consolidated Other (income) expense, net. +Fiscal 2016 Compared to Fiscal 2015 +For fiscal 2016, Corporate's loss before interest and taxes increased $76 million primarily due to the following: +• +an increase of $179 million, primarily driven by higher operating overhead expense to support corporate growth initiatives; +• +a beneficial change of $76 million from net foreign currency losses to net foreign currency gains related to the difference between actual foreign currency exchange rates and standard foreign currency exchange rates assigned to the NIKE Brand geographic operating segments and Converse, net of hedge gains; these gains are reported as a component of consolidated gross margin; and +• +a beneficial change of $27 million in net foreign currency gains related to the re-measurement of monetary assets and liabilities denominated in non-functional currencies and the impact of certain foreign currency derivative instruments, reported as a component of consolidated Other (income) expense, net. +Foreign Currency Exposures and Hedging Practices +Overview +As a global company with significant operations outside the United States, in the normal course of business we are exposed to risk arising from changes in currency exchange rates. Our primary foreign currency exposures arise from the recording of transactions denominated in non-functional currencies and the translation of foreign currency denominated results of operations, financial position and cash flows into U.S. Dollars. +Our foreign exchange risk management program is intended to lessen both the positive and negative effects of currency fluctuations on our consolidated results of operations, financial position and cash flows. We manage global foreign exchange risk centrally on a portfolio basis to address those risks that are material to NIKE, Inc. We manage these exposures by taking advantage of natural offsets and currency correlations that exist within the portfolio and, where practical and material, by hedging a portion of the remaining exposures using derivative instruments such as forward contracts and options. As described below, the implementation of the NIKE Trading Company (“NTC”) and our foreign currency adjustment program enhanced our ability to manage our foreign exchange risk by increasing the natural offsets and currency correlation benefits that exist within our portfolio of foreign exchange exposures. Our hedging policy is designed to partially or entirely offset the impact of exchange rate changes on the underlying net exposures being hedged. Where exposures are hedged, our program has the effect of delaying the impact of exchange rate movements on our Consolidated Financial Statements; the length of the delay is dependent upon hedge horizons. We do not hold or issue derivative instruments for trading or speculative purposes. +Transactional Exposures +We conduct business in various currencies and have transactions which subject us to foreign currency risk. Our most significant transactional foreign currency exposures are: +• +Product Costs — NIKE’s product costs are exposed to fluctuations in foreign currencies in the following ways: +1. +Product purchases denominated in currencies other than the functional currency of the transacting entity: +a. +Certain NIKE entities purchase product from the NTC, a wholly-owned sourcing hub that buys NIKE branded products from third-party factories, predominantly in U.S. Dollars. The NTC, whose functional currency is the U.S. Dollar, then sells the products to NIKE entities in their respective functional currencies. When the NTC sells to a NIKE entity with a different functional currency, the result is a foreign currency exposure for the NTC. +b. +Other NIKE entities purchase product directly from third-party factories in U.S. Dollars. These purchases generate a foreign currency exposure for those NIKE entities with a functional currency other than the U.S. Dollar. +In both purchasing scenarios, a weaker U.S. Dollar decreases the inventory cost incurred by NIKE whereas a stronger U.S. Dollar increases its cost. +35 +Table of Contents +2. +Factory input costs: NIKE operates a foreign currency adjustment program with certain factories. The program is designed to more effectively manage foreign currency risk by assuming certain of the factories’ foreign currency exposures, some of which are natural offsets to our existing foreign currency exposures. Under this program, our payments to these factories are adjusted for rate fluctuations in the basket of currencies (“factory currency exposure index”) in which the labor, materials and overhead costs incurred by the factories in the production of NIKE branded products (“factory input costs”) are denominated. +For the currency within the factory currency exposure indices that is the local or functional currency of the factory, the currency rate fluctuation affecting the product cost is recorded within Inventories and is recognized in Cost of sales when the related product is sold to a third-party. All currencies within the indices, excluding the U.S. Dollar and the local or functional currency of the factory, are recognized as embedded derivative contracts and are recorded at fair value through Other (income) expense, net . Refer to Note 16 — Risk Management and Derivatives in the accompanying Notes to the Consolidated Financial Statements for additional detail. +As an offset to the impacts of the fluctuating U.S. Dollar on our non-functional currency denominated product purchases described above, a strengthe ning U.S. Dollar against the foreign currencies within the factory currency exposure indices decreases NIKE’s U.S. Dollar inventory cost. Conversely, a weakening U.S. Dollar against the indexed foreign currencies increases our inventory cost. +• +Non-Functional Currency Denominated External Sales — A portion of our Western Europe and Central & Eastern Europe geography revenues, as well as a portion of our Converse European operations revenues, are earned in currencies other than the Euro (e.g. the British Pound) but are recognized at a subsidiary that uses the Euro as its functional currency. These sales generate a foreign currency exposure. +• +Other Costs — Non-functional currency denominated costs, such as endorsement contracts, also generate foreign currency risk, though to a lesser extent. In certain cases, the Company has also entered into other contractual agreements which have payments that are indexed to foreign currencies and create embedded derivative contracts that are recorded at fair value through Other (income) expense, net . Refer to Note 16 — Risk Management and Derivatives in the accompanying Notes to the Consolidated Financial Statements for additional detail. +• +Non-Functional Currency Denominated Monetary Assets and Liabilities — Our global subsidiaries have various assets and liabilities, primarily receivables and payables, including intercompany receivables and payables, denominated in currencies other than their functional currencies. These balance sheet items are subject to re-measurement which may create fluctuations in Other (income) expense, net within our consolidated results of operations. +Managing Transactional Exposures +Transactional exposures are managed on a portfolio basis within our foreign currency risk management program. We manage these exposures by taking advantage of natural offsets and currency correlations that exist within the portfolio and may also elect to use currency forward and option contracts to hedge the remaining effect of exchange rate fluctuations on probable forecasted future cash flows, including certain product cost exposures, non-functional currency denominated external sales and other costs described above. Generally, these are accounted for as cash flow hedges in accordance with U.S. GAAP, except for hedges of the embedded derivatives components of the product cost exposures and other contractual agreements as discussed above. +Certain currency forward contracts used to manage the foreign exchange exposure of non-functional currency denominated monetary assets and liabilities subject to re-measurement and embedded derivative contracts are not formally designated as hedging instruments under U.S. GAAP. Accordingly, changes in fair value of these instruments are immediately recognized in Other (income) expense, net and are intended to offset the foreign currency impact of the re-measurement of the related non-functional currency denominated asset or liability or the embedded derivative contract being hedged. +Refer to Note 6 — Fair Value Measurements and Note 16 — Risk Management and Derivatives in the accompanying Notes to the Consolidated Financial Statements for additional description of how the above financial instruments are valued and recorded, as well as the fair value of outstanding derivatives at each reported period end. +Translational Exposures +Many of our foreign subsidiaries operate in functional currencies other than the U.S. Dollar. Fluctuations in currency exchange rates create volatility in our reported results as we are required to translate the balance sheets, operational results and cash flows of these subsidiaries into U.S. Dollars for consolidated reporting. The translation of foreign subsidiaries’ non-U.S. Dollar denominated balance sheets into U.S. Dollars for consolidated reporting results in a cumulative translation adjustment to Accumulated other comprehensive income within the Consolidated Statements of Shareholders’ Equity. In the translation of our Consolidated Statements of Income, a weaker U.S. Dollar in relation to foreign functional currencies benefits our consolidated earnings whereas a stronger U.S. Dollar reduces our consolidated earnings. The impact of foreign exchange rate fluctuations on the translation of our consolidated Revenues was a detriment of approximately $542 million and $1,985 million for the years ended May 31, 2017 and 2016, respectively. The impact of foreign exchange rate fluctuations on the translation of our Income before income taxes was a detriment of approximately $115 million and $449 million for the years ended May 31, 2017 and 2016, respectively. +Managing Translational Exposures +To minimize the impact of translating foreign currency denominated revenues and expenses into U.S. Dollars for consolidated reporting, certain foreign subsidiaries use excess cash to purchase U.S. Dollar denominated available-for-sale investments. The variable future cash flows associated with the purchase and subsequent sale of these U.S. Dollar denominated securities at non-U.S. Dollar functional currency subsidiaries creates a foreign currency exposure that qualifies for hedge accounting under the accounting standards for derivatives and hedging. We utilize forward contracts and/or options to mitigate the variability of the forecasted future purchases and sales of these U.S. Dollar investments. The combination of the purchase and sale of the U.S. Dollar investment and the hedging instrument has the effect of partially offsetting the year-over-year foreign currency translation impact on net earnings in the period the investments are sold. Hedges of available-for-sale investments are accounted for as cash flow hedges. +36 +Table of Contents +Refer to Note 6 — Fair Value Measurements and Note 16 — Risk Management and Derivatives in the accompanying Notes to the Consolidated Financial Statements for additional description of how the above financial instruments are valued and recorded as well as the fair value of outstanding derivatives at each reported period end. +We estimate the combination of translation of foreign currency-denominated profits from our international businesses and the year-over-year change in foreign currency related gains and losses included in Other (income) expense, net had an unfavorable impact of approximately $59 million and $423 million on our Income before income taxes for the years ended May 31, 2017 and 2016, respectively. +Net Investments in Foreign Subsidiaries +We are also exposed to the impact of foreign exchange fluctuations on our investments in wholly-owned foreign subsidiaries denominated in a currency other than the U.S. Dollar, which could adversely impact the U.S. Dollar value of these investments and therefore the value of future repatriated earnings. We have, in the past, hedged and may, in the future, hedge net investment positions in certain foreign subsidiaries to mitigate the effects of foreign exchange fluctuations on these net investments. These hedges are accounted for in accordance with U.S. GAAP. There were no outstanding net investment hedges as of May 31, 2017 and 2016. There were no cash flows from net investment hedge settlements for the years ended May 31, 2017 and 2016. +Liquidity and Capital Resources +Cash Flow Activity +Cash provided by operations was $3,640 million for fiscal 2017 compared to $3,096 million for fiscal 2016 . Net income, adjusted for non-cash items, generated $4,781 million of operating cash flow in fiscal 2017 compared to $4,676 million for fiscal 2016 . Our fiscal 2017 change in working capital was a cash outflow of $1,141 million compared to an outflow of $1,580 million for fiscal 2016 . The change in working capital was primarily due to the net change in cash collateral with derivative counterparties as a result of hedging activities. For fiscal 2017, cash collateral received from counterparties, which is recorded in Accrued liabilities on the Consolidated Balance Sheets, decreased $105 million compared to a decrease of $863 million during fiscal 2016. Refer to the Credit Risk section of Note 16 — Risk Management and Derivatives in the accompanying Notes to the Consolidated Financial Statements for additional detail. This decrease in cash collateral was partially offset by a $486 million increase in Accounts Receivable, net driven by higher revenues. +Cash used by investing activities was $1,008 million for fiscal 2017 compared to $1,034 million for fiscal 2016 , driven primarily by the net change in short-term investments and reverse repurchase agreements, as well as additions of property, plant and equipment. During fiscal 2017 , the net change in investments (including sales, maturities and purchases) resulted in a cash inflow of $118 million compared to an outflow of $57 million in fiscal 2016 . This change was partially offset by the maturity of reverse repurchase agreements of $150 million in fiscal 2016 which did not recur in fiscal 2017 . Additions of property, plant and equipment were $1,105 million in fiscal 2017 compared to $1,143 million in fiscal 2016 . +In fiscal 2018, we plan to continue investing in our infrastructure to support future growth, including corporate facilities, new DTC stores, and expanding our digital capabilities. We continue to expect such investments will be approximately 4% of revenues, on average. +Cash used by financing activities was $1,942 million for fiscal 2017 compared to $2,671 million for fiscal 2016 . The decrease in Cash used by financing activities was primarily driven by increased proceeds from the issuance of debt and commercial paper in fiscal 2017, partially offset by higher dividends and lower excess tax benefits from share-based payment arrangements. +In fiscal 2017 , we purchased 59.7 million shares of NIKE’s Class B Common Stock for $3,249 million (an average price of $ 54.43 per share) under the four-year, $12 billion program approved by the Board of Directors in November 2015. As of May 31, 2017, we had repurchased 79.8 million shares at a cost of approximately $4,437 million (an average price of $55.63 per share) under this program. We continue to expect funding of share repurchases will come from operating cash flows, excess cash and/or proceeds from debt. The timing and the amount of shares purchased will be dictated by our capital needs and stock market conditions. +Capital Resources +On October 21, 2016, we issued $1.5 billion of senior notes with tranches maturing in 2026 and 2046. The 2026 senior notes were issued in an initial aggregate principal amount of $1.0 billion at a 2.375% fixed, annual interest rate and will mature on November 1, 2026. The 2046 senior notes were issued in an initial aggregate principal amount of $500 million at a 3.375% fixed, annual interest rate and will mature on November 1, 2046. Interest on the senior notes is payable semi-annually on May 1 and November 1 of each year. The issuance resulted in proceeds before expenses of $1,493 million. Refer to Note 8 — Long-Term Debt in the accompanying Notes to the Consolidated Financial Statements for additional detail on Long-term debt . +On August 28, 2015, we entered into a committed credit facility agreement with a syndicate of banks, which provides for up to $2 billion of borrowings. The facility matures August 28, 2020, with a one year extension option prior to any anniversary of the closing date, provided that in no event shall it extend beyond August 28, 2022. As of and for the periods ended May 31, 2017 and 2016 , we had no amounts outstanding under the committed credit facility. +We currently have long-term debt ratings of AA- and A1 from Standard and Poor's Corporation and Moody's Investor Services, respectively. If our long-term debt ratings were to decline, the facility fee and interest rate under our committed credit facility would increase. Conversely, if our long-term debt ratings were to improve, the facility fee and interest rate would decrease. Changes in our long-term debt ratings would not trigger acceleration of maturity of any then-outstanding borrowings or any future borrowings under the committed credit facility. Under this committed revolving credit facility, we have agreed to various covenants. These covenants include limits on our disposal of fixed assets and the amount of debt secured by liens we may incur, as well as limits on the indebtedness we can incur relative to our net worth. In the event we were to have any borrowings outstanding under this facility and failed to meet any covenant, and were unable to obtain a waiver from a majority of the banks in the syndicate, any borrowings would become immediately due and payable. As of May 31, 2017 , we were in full compliance with each of these covenants and believe it is unlikely we will fail to meet any of these covenants in the foreseeable future. +37 +Table of Contents +Liquidity is also provided by our $2 billion commercial paper program. During the year ended May 31, 2017 , the maximum amount of commercial paper borrowings outstanding at any point was $919 million. As of May 31, 2017 , there were $325 million of outstanding borrowings under this program. We may continue to issue commercial paper or other debt securities during fiscal 2018 depending on general corporate needs. We currently have short-term debt ratings of A1+ and P1 from Standard and Poor's Corporation and Moody's Investor Services, respectively. +As of May 31, 2017 , we had cash, cash equivalents and short-term investments totaling $6.2 billion , of which $5.8 billion was held by our foreign subsidiaries. Cash equivalents and Short-term investments consist primarily of deposits held at major banks, money market funds, commercial paper, corporate notes, U.S. Treasury obligations, U.S. government sponsored enterprise obligations and other investment grade fixed-income securities. Our fixed-income investments are exposed to both credit and interest rate risk. All of our investments are investment grade to minimize our credit risk. While individual securities have varying durations, as of May 31, 2017 , the average duration of our cash equivalents and short-term investments portfolio was 65 days. +To date we have not experienced difficulty accessing the credit markets or incurred higher interest costs. Future volatility in the capital markets, however, may increase costs associated with issuing commercial paper or other debt instruments or affect our ability to access those markets. We believe that existing cash, cash equivalents, short-term investments and cash generated by operations, together with access to external sources of funds as described above, will be sufficient to meet our domestic and foreign capital needs in the foreseeable future. +We utilize a variety of tax planning and financing strategies to manage our worldwide cash and deploy funds to locations where they are needed. We routinely repatriate a portion of our foreign earnings for which U.S. taxes have previously been provided. We also indefinitely reinvest a significant portion of our foreign earnings, and our current plans do not demonstrate a need to repatriate these earnings. Should we require additional capital in the United States, we may elect to repatriate indefinitely reinvested foreign funds or raise capital in the United States through debt. If we were to repatriate indefinitely reinvested foreign funds, we would be required to accrue and pay additional U.S. taxes less applicable foreign tax credits. If we elect to raise capital in the United States through debt, we would incur additional interest expense. +Off-Balance Sheet Arrangements +In connection with various contracts and agreements, we routinely provide indemnification relating to the enforceability of intellectual property rights, coverage for legal issues that arise and other items where we are acting as the guarantor. Currently, we have several such agreements in place. However, based on our historical experience and the estimated probability of future loss, we have determined that the fair value of such indemnification is not material to our financial position or results of operations. +Contractual Obligations +Our significant long-term contractual obligations as of May 31, 2017 and significant endorsement contracts, including related marketing commitments, entered into through the date of this report are as follows: +Description of Commitment +Cash Payments Due During the Year Ending May 31, +(In millions) +2018 +2019 +2020 +2021 +2022 +Thereafter +Total +Operating Leases +$ +537 +$ +509 +$ +438 +$ +399 +$ +350 +$ +1,672 +$ +3,905 +Capital Leases and Other Financing Obligations (1) +34 +32 +28 +25 +26 +225 +370 +Long-Term Debt (2) +115 +115 +115 +112 +109 +5,322 +5,888 +Endorsement Contracts (3) +1,323 +1,214 +1,054 +889 +1,032 +4,338 +9,850 +Product Purchase Obligations (4) +4,521 +— +— +— +— +— +4,521 +Other Purchase Obligations (5) +1,000 +373 +182 +106 +75 +179 +1,915 +TOTAL +$ +7,530 +$ +2,243 +$ +1,817 +$ +1,531 +$ +1,592 +$ +11,736 +$ +26,449 +(1) +Capital leases and other financing obligations include payments related to build-to-suit lease arrangements. +(2) +The cash payments due for long-term debt include estimated interest payments. Estimates of interest payments are based on outstanding principal amounts, applicable fixed interest rates or currently effective interest rates as of May 31, 2017 (if variable), timing of scheduled payments and the term of the debt obligations. +(3) +The amounts listed for endorsement contracts represent approximate amounts of base compensation and minimum guaranteed royalty fees we are obligated to pay athlete, public figure, sport team and league endorsers of our products. Actual payments under some contracts may be higher than the amounts listed as these contracts provide for bonuses to be paid to the endorsers based upon athletic achievements and/or royalties on product sales in future periods. Actual payments under some contracts may also be lower as these contracts include provisions for reduced payments if athletic performance declines in future periods. +In addition to the cash payments, we are obligated to furnish our endorsers with NIKE product for their use. It is not possible to determine how much we will spend on this product on an annual basis as the contracts generally do not stipulate a specific amount of cash to be spent on the product. The amount of product provided to the endorsers will depend on many factors, including general playing conditions, the number of sporting events in which they participate and our own decisions regarding product and marketing initiatives. In addition, the costs to design, develop, source and purchase the products furnished to the endorsers are incurred over a period of time and are not necessarily tracked separately from similar costs incurred for products sold to customers. +(4) +We generally order product at least four to five months in advance of sale based primarily on futures orders received from external wholesale customers and internal orders from our DTC in-line stores and digital commerce operations. The amounts listed for product purchase obligations represent agreements (including open purchase orders) to purchase products in the ordinary course of business that are enforceable and legally binding and that specify all significant terms. In some cases, prices are subject to change throughout the production process. +(5) +Other purchase obligations primarily include construction, service and marketing commitments, including marketing commitments associated with endorsement contracts, made in the ordinary course of business. The amounts represent the minimum payments required by legally binding contracts and agreements that specify all significant terms, including open purchase orders for non-product purchases. +38 +Table of Contents +In addition to the above, we have long-term obligations for uncertain tax positions and various post-retirement benefits for which we are not able to reasonably estimate when cash payments will occur. Refer to Note 9 — Income Taxes and Note 13 — Benefit Plans in the accompanying Notes to the Consolidated Financial Statements for further information related to uncertain tax positions and post-retirement benefits, respectively. +We also have the following outstanding short-term debt obligations as of May 31, 2017 . Refer to Note 7 — Short-Term Borrowings and Credit Lines in the accompanying Notes to the Consolidated Financial Statements for further description and interest rates related to the short-term debt obligations listed below. +Outstanding as +of May 31, 2017 +(In millions) +Notes payable, due at mutually agreed-upon dates within one year of issuance or on demand +$ +325 +Payable to Sojitz America for the purchase of inventories, generally due 60 days after shipment of goods from a foreign port +51 +As of May 31, 2017 , the Company had letters of credit outstanding totaling $152 million . These letters of credit were issued primarily for the purchase of inventory and as guarantees of the Company’s performance under certain self-insurance and other programs. +New Accounting Pronouncements +Refer to Note 1 — Summary of Significant Accounting Policies in the accompanying Notes to the Consolidated Financial Statements for recently adopted and recently issued accounting standards. +Critical Accounting Policies +Our previous discussion and analysis of our financial condition and results of operations are based upon our Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. Note 1 — Summary of Significant Accounting Policies in the accompanying Notes to the Consolidated Financial Statements describes the significant accounting policies and methods used in the preparation of our Consolidated Financial Statements. +We believe that the estimates, assumptions and judgments involved in the accounting policies described below have the greatest potential impact on our financial statements, so we consider these to be our critical accounting policies and estimates. Management has reviewed and discussed these critical accounting policies with the Audit Committee of the Board of Directors. These policies require that we make estimates in the preparation of our financial statements as of a given date. However, since our business cycle is relatively short, actual results related to these estimates are generally known within the six-month period following the financial statement date. Thus, these policies generally affect only the timing of reported amounts across two to three fiscal quarters. +Because of the uncertainty inherent in these matters, actual results could differ from the estimates we use in applying the critical accounting policies. Within the context of these critical accounting policies, we are not currently aware of any reasonably likely events or circumstances that would result in materially different amounts being reported. +Revenue Recognition +We record wholesale revenues when title passes and the risks and rewards of ownership have passed to the customer, based on the terms of sale. Title passes generally upon shipment or upon receipt by the customer depending on the country of the sale and the agreement with the customer. Retail store revenues are recorded at the time of sale and digital commerce revenues are recorded upon delivery to the customer. +In some instances, we ship product directly from our supplier to the customer and recognize revenue when the product is delivered to and accepted by the customer. Our revenues may fluctuate in cases when our customers delay accepting shipment of product for periods of up to several weeks. +In certain countries outside of the United States, precise information regarding the date of receipt by the customer is not readily available. In these cases, we estimate the date of receipt by the customer based upon historical delivery times by geographic location. On the basis of our tests of actual transactions, we have no indication that these estimates have been materially inaccurate historically. +As part of our revenue recognition policy, we record estimated sales returns, discounts and miscellaneous claims from customers as reductions to revenues at the time revenues are recorded. Our post invoice sales discounts consist of contractual programs with certain customers or discretionary discounts that are expected to be granted to certain customers at a later date. We base our estimates on (1) historical rates of product returns, discounts and claims, (2) specific identification of outstanding claims and outstanding returns not yet received from customers and (3) estimated returns, discounts and claims expected but not yet finalized with our customers. Actual returns, discounts and claims in any future period are inherently uncertain and thus may differ from our estimates. If actual or expected future returns, discounts and claims are significantly greater or lower than established reserves, we record a reduction or increase to net revenues in the period in which we make such determination. +Allowance for Uncollectible Accounts Receivable +We make ongoing estimates relating to the ability to collect our accounts receivable and maintain an allowance for estimated losses resulting from the inability of our customers to make required payments. In determining the amount of the allowance, we consider our historical level of credit losses and make judgments about the creditworthiness of significant customers based on ongoing credit evaluations. Since we cannot predict future changes in the financial stability of our customers, actual future losses from uncollectible accounts may differ from our estimates. If the financial condition of our customers were to deteriorate, resulting in their inability to make payments, a larger allowance might be required. In the event we determine that a smaller or larger allowance is appropriate, we would record a credit or a charge to Operating overhead expense in the period in which such a determination is made. +39 +Table of Contents +Inventory Reserves +We also make ongoing estimates relating to the net realizable value of inventories based upon our assumptions about future demand and market conditions. If we estimate that the net realizable value of our inventory is less than the cost of the inventory recorded on our books, we record a reserve equal to the difference between the cost of the inventory and the estimated net realizable value. This reserve is recorded as a charge to Cost of sales . If changes in market conditions result in reductions in the estimated net realizable value of our inventory below our previous estimate, we would increase our reserve in the period in which we made such a determination and record a charge to Cost of sales . +Contingent Payments under Endorsement Contracts +A significant portion of our Demand creation expense relates to payments under endorsement contracts. In general, endorsement payments are expensed uniformly over the term of the contract. However, certain contract elements may be accounted for differently, based upon the facts and circumstances of each individual contract. +Certain contracts provide for contingent payments to endorsers based upon specific achievements in their sports (e.g., winning a championship). We record demand creation expense for these amounts when the endorser achieves the specific goal. +Certain contracts provide for variable payments based upon endorsers maintaining a level of performance in their sport over an extended period of time (e.g., maintaining a specified ranking in a sport for a year). When we determine payments are probable, the amounts are recorded in Demand creation expense ratably over the contract period based on our best estimate of the endorser's performance. In these instances, to the extent that actual payments to the endorser differ from our estimate due to changes in the endorser’s performance, increased or decreased Demand creation expense may be recorded in a future period. +Certain contracts provide for royalty payments to endorsers based upon a predetermined percent of sales of particular products. We expense these payments in Cost of sales as the related sales occur. In certain contracts, we offer minimum guaranteed royalty payments. For contracts for which we estimate we will not meet the minimum guaranteed amount of royalty fees through sales of product, we record the amount of the guaranteed payment in excess of that earned through sales of product in Demand creation expense uniformly over the contract term. +Property, Plant and Equipment and Definite-Lived Assets +We review the carrying value of long-lived assets or asset groups to be used in operations whenever events or changes in circumstances indicate that the carrying amount of the assets might not be recoverable. Factors that would necessitate an impairment assessment include a significant adverse change in the extent or manner in which an asset is used, a significant adverse change in legal factors or the business climate that could affect the value of the asset or a significant decline in the observable market value of an asset, among others. If such facts indicate a potential impairment, we would assess the recoverability of an asset group by determining if the carrying value of the asset group exceeds the sum of the projected undiscounted cash flows expected to result from the use and eventual disposition of the assets over the remaining economic life of the primary asset in the asset group. If the recoverability test indicates that the carrying value of the asset group is not recoverable, we will estimate the fair value of the asset group using appropriate valuation methodologies that would typically include an estimate of discounted cash flows. Any impairment would be measured as the difference between the asset group’s carrying amount and its estimated fair value. +Hedge Accounting for Derivatives +We use derivative contracts to hedge certain anticipated foreign currency and interest rate transactions as well as certain non-functional currency monetary assets and liabilities. When the specific criteria to qualify for hedge accounting has been met, changes in the fair value of contracts hedging probable forecasted future cash flows are recorded in Other comprehensive income , rather than Net income , until the underlying hedged transaction affects Net income . In most cases, this results in gains and losses on hedge derivatives being released from Other comprehensive income into Net income sometime after the maturity of the derivative. One of the criteria for this accounting treatment is that the notional value of these derivative contracts should not be in excess of specifically identified anticipated transactions. By their very nature, our estimates of anticipated transactions may fluctuate over time and may ultimately vary from actual transactions. When anticipated transaction estimates or actual transaction amounts decline below hedged levels, or if it is no longer probable that a forecasted transaction will occur by the end of the originally specified time period or within an additional two-month period of time thereafter, we are required to reclassify the cumulative change in fair value of the over-hedged portion of the related hedge contract from Other comprehensive income to Other (income) expense, net during the quarter in which the decrease occurs. +Stock-based Compensation +We account for stock-based compensation by estimating the fair value of stock-based compensation on the date of grant using the Black-Scholes option pricing model. The Black-Scholes option pricing model requires the input of highly subjective assumptions including volatility. Expected volatility is estimated based on implied volatility in market traded options on our common stock with a term greater than one year, along with other factors. Our decision to use implied volatility was based on the availability of actively traded options on our common stock and our assessment that implied volatility is more representative of future stock price trends than historical volatility. If factors change and we use different assumptions for estimating stock-based compensation expense in future periods, stock-based compensation expense may differ materially in the future from that recorded in the current period. +Income Taxes +We record valuation allowances against our deferred tax assets, when necessary. Realization of deferred tax assets (such as net operating loss carry-forwards) is dependent on future taxable earnings and is therefore uncertain. At least quarterly, we assess the likelihood that our deferred tax asset balance will be recovered from future taxable income. To the extent we believe that recovery is not likely, we establish a valuation allowance against our net deferred tax asset, which increases our Income tax expense in the period when such determination is made. +In addition, we have not recorded U.S. income tax expense for foreign earnings that we have determined to be indefinitely reinvested outside the United States, thus reducing our overall Income tax expense . The amount of earnings designated as indefinitely reinvested offshore is based upon the actual deployment of such earnings in our offshore assets and our expectations of the future cash needs of our U.S. and foreign entities. Income tax considerations are also a factor in determining the amount of foreign earnings to be indefinitely reinvested offshore. +40 +Table of Contents +We carefully review all factors that drive the ultimate disposition of foreign earnings determined to be reinvested offshore and apply stringent standards to overcome the presumption of repatriation. Despite this approach, because the determination involves our future plans and expectations of future events, the possibility exists that amounts declared as indefinitely reinvested offshore may ultimately be repatriated. For instance, the actual cash needs of our U.S. entities may exceed our current expectations, or the actual cash needs of our foreign entities may be less than our current expectations. This would result in additional Income tax expense in the year we determined that amounts were no longer indefinitely reinvested offshore. Conversely, our approach may also result in a determination that accumulated foreign earnings (for which U.S. income taxes have been provided) will be indefinitely reinvested offshore. In this case, our Income tax expense would be reduced in the year of such determination. +On an interim basis, we estimate what our effective tax rate will be for the full fiscal year. This estimated annual effective tax rate is then applied to the year-to-date Income before income taxes excluding infrequently occurring or unusual items, to determine the year-to-date Income tax expense . The income tax effects of infrequent or unusual items are recognized in the interim period in which they occur. As the fiscal year progresses, we continually refine our estimate based upon actual events and earnings by jurisdiction during the year. This continual estimation process periodically results in a change to our expected effective tax rate for the fiscal year. When this occurs, we adjust the income tax provision during the quarter in which the change in estimate occurs. +On a quarterly basis, we evaluate the probability that a tax position will be effectively sustained and the appropriateness of the amount recognized for uncertain tax positions based on factors including changes in facts or circumstances, changes in tax law, settled audit issues and new audit activity. Changes in our assessment may result in the recognition of a tax benefit or an additional charge to the tax provision in the period our assessment changes. We recognize interest and penalties related to income tax matters in Income tax expense . +Other Contingencies +In the ordinary course of business, we are involved in legal proceedings regarding contractual and employment relationships, product liability claims, trademark rights and a variety of other matters. We record contingent liabilities resulting from claims against us when a loss is assessed to be probable and the amount of the loss is reasonably estimable. Assessing probability of loss and estimating probable losses requires analysis of multiple factors, including in some cases judgments about the potential actions of third-party claimants and courts. Recorded contingent liabilities are based on the best information available and actual losses in any future period are inherently uncertain. If future adjustments to estimated probable future losses or actual losses exceed our recorded liability for such claims, we would record additional charges during the period in which the actual loss or change in estimate occurred. In addition to contingent liabilities recorded for probable losses, we disclose contingent liabilities when there is a reasonable possibility that the ultimate loss will materially exceed the recorded liability. While we cannot predict the outcome of pending legal matters with certainty, we do not believe any currently identified claim, proceeding or litigation, either individually or in aggregate, will have a material impact on our results of operations, financial position or cash flows. +41 +Table of Contents +ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk +In the normal course of business and consistent with established policies and procedures, we employ a variety of financial instruments to manage exposure to fluctuations in the value of foreign currencies and interest rates. It is our policy to utilize these financial instruments only where necessary to finance our business and manage such exposures; we do not enter into these transactions for trading or speculative purposes. +We are exposed to foreign currency fluctuations, primarily as a result of our international sales, product sourcing and funding activities. Our foreign exchange risk management program is intended to lessen both the positive and negative effects of currency fluctuations on our consolidated results of operations, financial position and cash flows. We use forward and option contracts to hedge certain anticipated, but not yet firmly committed, transactions as well as certain firm commitments and the related receivables and payables, including third-party and intercompany transactions. We have, in the past, and may in the future, also use forward or options contracts to hedge our investment in the net assets of certain international subsidiaries to offset foreign currency translation adjustments related to our net investment in those subsidiaries. Where exposures are hedged, our program has the effect of delaying the impact of exchange rate movements on our Consolidated Financial Statements. +The timing for hedging exposures, as well as the type and duration of the hedge instruments employed, are guided by our hedging policies and determined based upon the nature of the exposure and prevailing market conditions. Typically, the Company may enter into hedge contracts starting up to 12 to 24 months in advance of the forecasted transaction and may place incremental hedges up to 100% of the exposure by the time the forecasted transaction occurs. The majority of derivatives outstanding as of May 31, 2017 are designated as foreign currency cash flow hedges, primarily for Euro/U.S. Dollar, British Pound/Euro and Japanese Yen/U.S. Dollar currency pairs. Refer to Note 16 — Risk Management and Derivatives in the accompanying Notes to the Consolidated Financial Statements for additional detail. +Our earnings are also exposed to movements in short- and long-term market interest rates. Our objective in managing this interest rate exposure is to limit the impact of interest rate changes on earnings and cash flows and to reduce overall borrowing costs. To achieve these objectives, we maintain a mix of commercial paper, bank loans, and fixed-rate debt of varying maturities. +Market Risk Measurement +We monitor foreign exchange risk, interest rate risk and related derivatives using a variety of techniques including a review of market value, sensitivity analysis and Value-at-Risk (“VaR”). Our market-sensitive derivative and other financial instruments are foreign currency forward contracts, foreign currency option contracts, interest rate swaps, intercompany loans denominated in non-functional currencies, fixed interest rate U.S. Dollar denominated debt and fixed interest rate Japanese Yen denominated debt. +We use VaR to monitor the foreign exchange risk of our foreign currency forward and foreign currency option derivative instruments only. The VaR determines the maximum potential one-day loss in the fair value of these foreign exchange rate-sensitive financial instruments. The VaR model estimates assume normal market conditions and a 95% confidence level. There are various modeling techniques that can be used in the VaR computation. Our computations are based on interrelationships between currencies and interest rates (a “variance/co-variance” technique). These interrelationships are a function of foreign exchange currency market changes and interest rate changes over the preceding one year period. The value of foreign currency options does not change on a one-to-one basis with changes in the underlying currency rate. We adjust the potential loss in option value for the estimated sensitivity (the “delta” and “gamma”) to changes in the underlying currency rate. This calculation reflects the impact of foreign currency rate fluctuations on the derivative instruments only and does not include the impact of such rate fluctuations on non-functional currency transactions (such as anticipated transactions, firm commitments, cash balances and accounts and loans receivable and payable), including those which are hedged by these instruments. +The VaR model is a risk analysis tool and does not purport to represent actual losses in fair value that we will incur nor does it consider the potential effect of favorable changes in market rates. It also does not represent the full extent of the possible loss that may occur. Actual future gains and losses will differ from those estimated because of changes or differences in market rates and interrelationships, hedging instruments and hedge percentages, timing and other factors. +The estimated maximum one-day loss in fair value on our foreign currency sensitive derivative financial instruments, derived using the VaR model, was $97 million and $109 million at May 31, 2017 and 2016, respectively. The VAR decreased year-over-year as a result of a decrease in foreign currency volatilities at May 31, 2017. Such a hypothetical loss in the fair value of our derivatives would be offset by increases in the value of the underlying transactions being hedged. The average monthly change in the fair values of foreign currency forward and foreign currency option derivative instruments was $161 million and $209 million during fiscal 2017 and fiscal 2016, respectively. +The instruments not included in the VaR are intercompany loans denominated in non-functional currencies, fixed interest rate Japanese Yen denominated debt, fixed interest rate U.S. Dollar denominated debt and interest rate swaps. Intercompany loans and related interest amounts are eliminated in consolidation. Furthermore, our non-functional currency intercompany loans are substantially hedged against foreign exchange risk through the use of forward contracts, which are included in the VaR calculation above. Therefore, we consider the interest rate and foreign currency market risks associated with our non-functional currency intercompany loans to be immaterial to our consolidated financial position, results from operations and cash flows. +Details of third-party debt are provided in the table below. The table presents principal cash flows and related weighted average interest rates by expected maturity dates. +42 +Table of Contents +Expected Maturity Date +Year Ending May 31, +(Dollars in millions) +2018 +2019 +2020 +2021 +2022 +Thereafter +Total +Fair +Value +Foreign Exchange Risk +Japanese Yen Functional Currency +Long-term Japanese Yen debt — Fixed rate +Principal payments +$ +6 +$ +6 +$ +6 +$ +3 +$ +— +$ +— +$ +21 +$ +22 +Average interest rate +2.4 +% +2.4 +% +2.4 +% +2.4 +% +0.0 +% +0.0 +% +2.4 +% +Interest Rate Risk +Japanese Yen Functional Currency +Long-term Japanese Yen debt — Fixed rate +Principal payments +$ +6 +$ +6 +$ +6 +$ +3 +$ +— +$ +— +$ +21 +$ +22 +Average interest rate +2.4 +% +2.4 +% +2.4 +% +2.4 +% +0.0 +% +0.0 +% +2.4 +% +U.S. Dollar Functional Currency +Long-term U.S. Dollar debt — Fixed rate +Principal payments +$ +— +$ +— +$ +— +$ +— +$ +— +$ +3,500 +$ +3,500 +$ +3,379 +Average interest rate +0.0 +% +0.0 +% +0.0 +% +0.0 +% +0.0 +% +3.1 +% +3.1 +% +The fixed interest rate Japanese Yen denominated debt instruments were issued by and are accounted for by one of our Japanese subsidiaries. Accordingly, the monthly translation of these instruments, which varies due to changes in foreign exchange rates, is recognized in Accumulated other comprehensive income upon consolidation of this subsidiary. +ITEM 8. Financial Statements and Supplementary Data +Management of NIKE, Inc. is responsible for the information and representations contained in this report. The financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and include certain amounts based on our best estimates and judgments. Other financial information in this report is consistent with these financial statements. +Our accounting systems include controls designed to reasonably assure assets are safeguarded from unauthorized use or disposition and provide for the preparation of financial statements in conformity with U.S. GAAP. These systems are supplemented by the selection and training of qualified financial personnel and an organizational structure providing for appropriate segregation of duties. +An internal Corporate Audit department reviews the results of its work with the Audit Committee of the Board of Directors, presently comprised of four outside, independent directors. The Audit Committee is responsible for the appointment of the independent registered public accounting firm and reviews, with the independent registered public accounting firm, management and the internal audit staff, the scope and the results of the annual audit, the effectiveness of the accounting control system and other matters relating to the financial affairs of NIKE as the Audit Committee deems appropriate. The independent registered public accounting firm and the internal auditors have full access to the Audit Committee, with and without the presence of management, to discuss any appropriate matters. +43 +Table of Contents +Management’s Annual Report on Internal Control Over Financial Reporting +Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13(a) - 15(f) and Rule 15(d) - 15(f) of the Securities Exchange Act of 1934, as amended. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the financial statements for external purposes in accordance with generally accepted accounting principles in the United States of America. Internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of assets of the Company that could have a material effect on the financial statements. +While “reasonable assurance” is a high level of assurance, it does not mean absolute assurance. Because of its inherent limitations, internal control over financial reporting may not prevent or detect every misstatement and instance of fraud. Controls are susceptible to manipulation, especially in instances of fraud caused by the collusion of two or more people, including our senior management. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +Under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, our management conducted an evaluation of the effectiveness of our internal control over financial reporting based upon the framework in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on the results of our evaluation, our management concluded that our internal control over financial reporting was effective as of May 31, 2017 . +PricewaterhouseCoopers LLP, an independent registered public accounting firm, has audited (1) the Consolidated Financial Statements and (2) the effectiveness of our internal control over financial reporting as of May 31, 2017 , as stated in their report herein. +Mark G. Parker +Andrew Campion +Chairman, President and Chief Executive Officer +Chief Financial Officer +44 +Table of Contents +Report of Independent Registered Public Accounting Firm +To the Board of Directors and Shareholders of NIKE, Inc.: +In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)(1) present fairly, in all material respects, the financial position of NIKE, Inc. and its subsidiaries as of May 31, 2017 and 2016 , and the results of their operations and their cash flows for each of the three years in the period ended May 31, 2017 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of May 31, 2017 , based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Annual Report on Internal Control over Financial Reporting appearing under Item 8. Our responsibility is to express opinions on these financial statements, on the financial statement schedule and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. +A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. +Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +/S/ PRICEWATERHOUSECOOPERS LLP +Portland, Oregon +July 20, 2017 +45 +Table of Contents +NIKE, Inc. Consolidated Statements of Income +Year Ended May 31, +(In millions, except per share data) +2017 +2016 +2015 +Revenues +$ +34,350 +$ +32,376 +$ +30,601 +Cost of sales +19,038 +17,405 +16,534 +Gross profit +15,312 +14,971 +14,067 +Demand creation expense +3,341 +3,278 +3,213 +Operating overhead expense +7,222 +7,191 +6,679 +Total selling and administrative expense +10,563 +10,469 +9,892 +Interest expense (income), net +59 +19 +28 +Other (income) expense, net +(196 +) +(140 +) +(58 +) +Income before income taxes +4,886 +4,623 +4,205 +Income tax expense +646 +863 +932 +NET INCOME +$ +4,240 +$ +3,760 +$ +3,273 +Earnings per common share: +Basic +$ +2.56 +$ +2.21 +$ +1.90 +Diluted +$ +2.51 +$ +2.16 +$ +1.85 +Dividends declared per common share +$ +0.70 +$ +0.62 +$ +0.54 +The accompanying Notes to the Consolidated Financial Statements are an integral part of this statement. +46 +Table of Contents +NIKE, Inc. Consolidated Statements of Comprehensive Income +Year Ended May 31, +(In millions) +2017 +2016 +2015 +Net income +$ +4,240 +$ +3,760 +$ +3,273 +Other comprehensive income (loss), net of tax: +Change in net foreign currency translation adjustment +16 +(176 +) +(20 +) +Change in net gains (losses) on cash flow hedges +(515 +) +(757 +) +1,188 +Change in net gains (losses) on other +(32 +) +5 +(7 +) +Total other comprehensive income (loss), net of tax +(531 +) +(928 +) +1,161 +TOTAL COMPREHENSIVE INCOME +$ +3,709 +$ +2,832 +$ +4,434 +The accompanying Notes to the Consolidated Financial Statements are an integral part of this statement. +47 +Table of Contents +NIKE, Inc. Consolidated Balance Sheets +May 31, +(In millions) +2017 +2016 +ASSETS +Current assets: +Cash and equivalents +$ +3,808 +$ +3,138 +Short-term investments +2,371 +2,319 +Accounts receivable, net +3,677 +3,241 +Inventories +5,055 +4,838 +Prepaid expenses and other current assets +1,150 +1,489 +Total current assets +16,061 +15,025 +Property, plant and equipment, net +3,989 +3,520 +Identifiable intangible assets, net +283 +281 +Goodwill +139 +131 +Deferred income taxes and other assets +2,787 +2,422 +TOTAL ASSETS +$ +23,259 +$ +21,379 +LIABILITIES AND SHAREHOLDERS’ EQUITY +Current liabilities: +Current portion of long-term debt +$ +6 +$ +44 +Notes payable +325 +1 +Accounts payable +2,048 +2,191 +Accrued liabilities +3,011 +3,037 +Income taxes payable +84 +85 +Total current liabilities +5,474 +5,358 +Long-term debt +3,471 +1,993 +Deferred income taxes and other liabilities +1,907 +1,770 +Commitments and contingencies +Redeemable preferred stock +— +— +Shareholders’ equity: +Common stock at stated value: +Class A convertible — 329 and 353 shares outstanding +— +— +Class B — 1,314 and 1,329 shares outstanding +3 +3 +Capital in excess of stated value +8,638 +7,786 +Accumulated other comprehensive (loss) income +(213 +) +318 +Retained earnings +3,979 +4,151 +Total shareholders’ equity +12,407 +12,258 +TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY +$ +23,259 +$ +21,379 +The accompanying Notes to the Consolidated Financial Statements are an integral part of this statement. +48 +Table of Contents +NIKE, Inc. Consolidated Statements of Cash Flows +Year Ended May 31, +(In millions) +2017 +2016 +2015 +Cash provided by operations: +Net income +$ +4,240 +$ +3,760 +$ +3,273 +Income charges (credits) not affecting cash: +Depreciation +706 +649 +606 +Deferred income taxes +(273 +) +(80 +) +(113 +) +Stock-based compensation +215 +236 +191 +Amortization and other +10 +13 +43 +Net foreign currency adjustments +(117 +) +98 +424 +Changes in certain working capital components and other assets and liabilities: +(Increase) decrease in accounts receivable +(426 +) +60 +(216 +) +(Increase) in inventories +(231 +) +(590 +) +(621 +) +(Increase) in prepaid expenses and other current assets +(120 +) +(161 +) +(144 +) +(Decrease) increase in accounts payable, accrued liabilities and income taxes payable +(364 +) +(889 +) +1,237 +Cash provided by operations +3,640 +3,096 +4,680 +Cash used by investing activities: +Purchases of short-term investments +(5,928 +) +(5,367 +) +(4,936 +) +Maturities of short-term investments +3,623 +2,924 +3,655 +Sales of short-term investments +2,423 +2,386 +2,216 +Investments in reverse repurchase agreements +— +150 +(150 +) +Additions to property, plant and equipment +(1,105 +) +(1,143 +) +(963 +) +Disposals of property, plant and equipment +13 +10 +3 +Other investing activities +(34 +) +6 +— +Cash used by investing activities +(1,008 +) +(1,034 +) +(175 +) +Cash used by financing activities: +Net proceeds from long-term debt issuance +1,482 +981 +— +Long-term debt payments, including current portion +(44 +) +(106 +) +(7 +) +Increase (decrease) in notes payable +327 +(67 +) +(63 +) +Payments on capital lease and other financing obligations +(17 +) +(7 +) +(19 +) +Proceeds from exercise of stock options and other stock issuances +489 +507 +514 +Excess tax benefits from share-based payment arrangements +177 +281 +218 +Repurchase of common stock +(3,223 +) +(3,238 +) +(2,534 +) +Dividends — common and preferred +(1,133 +) +(1,022 +) +(899 +) +Cash used by financing activities +(1,942 +) +(2,671 +) +(2,790 +) +Effect of exchange rate changes on cash and equivalents +(20 +) +(105 +) +(83 +) +Net increase (decrease) in cash and equivalents +670 +(714 +) +1,632 +Cash and equivalents, beginning of year +3,138 +3,852 +2,220 +CASH AND EQUIVALENTS, END OF YEAR +$ +3,808 +$ +3,138 +$ +3,852 +Supplemental disclosure of cash flow information: +Cash paid during the year for: +Interest, net of capitalized interest +$ +98 +$ +70 +$ +53 +Income taxes +703 +748 +1,262 +Non-cash additions to property, plant and equipment +266 +252 +206 +Dividends declared and not paid +300 +271 +240 +The accompanying Notes to the Consolidated Financial Statements are an integral part of this statement. +49 +Table of Contents +NIKE, Inc. Consolidated Statements of Shareholders’ Equity +Common Stock +Capital in +Excess +of Stated +Value +Accumulated +Other +Comprehensive +Income +Retained +Earnings +Total +Class A +Class B +(In millions, except per share data) +Shares +Amount +Shares +Amount +Balance at May 31, 2014 +355 +$ +— +1,385 +$ +3 +$ +5,865 +$ +85 +$ +4,871 +$ +10,824 +Stock options exercised +27 +639 +639 +Repurchase of Class B Common Stock +(58 +) +(9 +) +(2,525 +) +(2,534 +) +Dividends on common stock ($0.54 per share) and preferred stock ($0.10 per share) +(931 +) +(931 +) +Issuance of shares to employees, net of shares withheld for employee taxes +3 +87 +(3 +) +84 +Stock-based compensation +191 +191 +Net income +3,273 +3,273 +Other comprehensive income (loss) +1,161 +1,161 +Balance at May 31, 2015 +355 +$ +— +1,357 +$ +3 +$ +6,773 +$ +1,246 +$ +4,685 +$ +12,707 +Stock options exercised +22 +680 +680 +Conversion to Class B Common Stock +(2 +) +— +2 +— +— +Repurchase of Class B Common Stock +(55 +) +(8 +) +(3,230 +) +(3,238 +) +Dividends on common stock ($0.62 per share) and preferred stock ($0.10 per share) +(1,053 +) +(1,053 +) +Issuance of shares to employees, net of shares withheld for employee taxes +3 +105 +(11 +) +94 +Stock-based compensation +236 +236 +Net income +3,760 +3,760 +Other comprehensive income (loss) +(928 +) +(928 +) +Balance at May 31, 2016 +353 +$ +— +1,329 +$ +3 +$ +7,786 +$ +318 +$ +4,151 +$ +12,258 +Stock options exercised +17 +525 +525 +Conversion to Class B Common Stock +(24 +) +— +24 +— +— +Repurchase of Class B Common Stock +(60 +) +(9 +) +(3,240 +) +(3,249 +) +Dividends on common stock ($0.70 per share) and preferred stock ($0.10 per share) +(1,159 +) +(1,159 +) +Issuance of shares to employees, net of shares withheld for employee taxes +4 +121 +(13 +) +108 +Stock-based compensation +215 +215 +Net income +4,240 +4,240 +Other comprehensive income (loss) +(531 +) +(531 +) +Balance at May 31, 2017 +329 +$ +— +1,314 +$ +3 +$ +8,638 +$ +(213 +) +$ +3,979 +$ +12,407 +The accompanying Notes to the Consolidated Financial Statements are an integral part of this statement. +50 +Table of Contents +Notes to Consolidated Financial Statements +Note 1 +Summary of Significant Accounting Policies +52 +Note 2 +Inventories +56 +Note 3 +Property, Plant and Equipment +57 +Note 4 +Identifiable Intangible Assets and Goodwill +57 +Note 5 +Accrued Liabilities +57 +Note 6 +Fair Value Measurements +57 +Note 7 +Short-Term Borrowings and Credit Lines +59 +Note 8 +Long-Term Debt +60 +Note 9 +Income Taxes +60 +Note 10 +Redeemable Preferred Stock +63 +Note 11 +Common Stock and Stock-Based Compensation +63 +Note 12 +Earnings Per Share +65 +Note 13 +Benefit Plans +65 +Note 14 +Accumulated Other Comprehensive Income +65 +Note 15 +Commitments and Contingencies +66 +Note 16 +Risk Management and Derivatives +67 +Note 17 +Operating Segments and Related Information +70 +51 +Table of Contents +NOTE 1 — Summary of Significant Accounting Policies +Description of Business +NIKE, Inc. is a worldwide leader in the design, development and worldwide marketing and selling of athletic footwear, apparel, equipment, accessories and services. NIKE, Inc. portfolio brands include the NIKE Brand, Jordan Brand, Hurley and Converse. The NIKE Brand is focused on performance athletic footwear, apparel, equipment, accessories and services across a wide range of sport categories, amplified with sport-inspired sportswear products carrying the Swoosh trademark as well as other NIKE Brand trademarks. The Jordan Brand is focused on athletic and casual footwear, apparel and accessories using the Jumpman trademark. Sales and operating results of Jordan Brand products are reported within the respective NIKE Brand geographic operating segments. The Hurley brand is focused on surf and action sports and youth lifestyle footwear, apparel and accessories, using the Hurley trademark. Sales and operating results of Hurley brand products are reported within the NIKE Brand’s North America geographic operating segment. Converse designs, distributes, markets and sells casual sneakers, apparel and accessories under the Converse, Chuck Taylor, All Star, One Star, Star Chevron and Jack Purcell trademarks. In some markets outside the U.S., these trademarks are licensed to third parties who design, distribute, market and sell similar products. Operating results of the Converse brand are reported on a stand-alone basis. +Basis of Consolidation +The Consolidated Financial Statements include the accounts of NIKE, Inc. and its subsidiaries (the “Company”). All significant intercompany transactions and balances have been eliminated. +On November 19, 2015, the Company announced a two -for-one split of both NIKE Class A and Class B Common Stock. The stock split was in the form of a 100 percent stock dividend payable on December 23, 2015 to shareholders of record at the close of business on December 9, 2015. Common stock began trading at the split-adjusted price on December 24, 2015. All share and per share amounts presented reflect the stock split. +Reclassifications +Certain prior year amounts have been reclassified to conform to fiscal 2017 presentation. +Revenue Recognition +Wholesale revenues are recognized when title and the risks and rewards of ownership have passed to the customer, based on the terms of sale. This occurs upon shipment or upon receipt by the customer depending on the country of the sale and the agreement with the customer. Retail store revenues are recorded at the time of sale and online store revenues are recorded upon delivery to the customer. Provisions for post-invoice sales discounts, returns and miscellaneous claims from customers are estimated and recorded as a reduction to revenue at the time of sale. Post-invoice sales discounts consist of contractual programs with certain customers or discretionary discounts that are expected to be granted to certain customers at a later date. Estimates of discretionary discounts, returns and claims are based on (1) historical rates, (2) specific identification of outstanding claims and outstanding returns not yet received from customers and (3) estimated discounts, returns and claims expected, but not yet finalized with customers. As of May 31, 2017 and 2016 , the Company’s reserve balances for post-invoice sales discounts, returns and miscellaneous claims were $643 million and $789 million , respectively. +Cost of Sales +Cost of sales consists primarily of inventory costs, as well as warehousing costs (including the cost of warehouse labor), third-party royalties, certain foreign currency hedge gains and losses and research, design and development costs. Outbound shipping and handling costs are expensed as incurred and included in Cost of sales . +Demand Creation Expense +Demand creation expense consists of advertising and promotion costs, including costs of endorsement contracts, television, digital and print advertising, brand events and retail brand presentation. Advertising production costs are expensed the first time an advertisement is run. Advertising communication costs are expensed when the advertisement appears. Costs related to brand events are expensed when the event occurs. Costs related to retail brand presentation are expensed when the presentation is completed and delivered. +A significant amount of the Company’s promotional expenses result from payments under endorsement contracts. Accounting for endorsement payments is based upon specific contract provisions. Generally, endorsement payments are expensed on a straight-line basis over the term of the contract after giving recognition to periodic performance compliance provisions of the contracts. Prepayments made under contracts are included in Prepaid expenses and other current assets or Deferred income taxes and other assets depending on the period to which the prepayment applies. +Certain contracts provide for contingent payments to endorsers based upon specific achievements in their sports (e.g., winning a championship). The Company records demand creation expense for these amounts when the endorser achieves the specific goal. +Certain contracts provide for variable payments based upon endorsers maintaining a level of performance in their sport over an extended period of time (e.g., maintaining a specified ranking in a sport for a year). When the Company determines payments are probable, the amounts are reported in Demand creation expense ratably over the contract period based on the Company’s best estimate of the endorser’s performance. In these instances, to the extent that actual payments to the endorser differ from the Company’s estimate due to changes in the endorser’s performance, increased or decreased demand creation expense may be recorded in a future period. +Certain contracts provide for royalty payments to endorsers based upon a predetermined percent of sales of particular products. The Company expenses these payments in Cost of sales as the related sales occur. In certain contracts, the Company offers minimum guaranteed royalty payments. For contracts for which the Company estimates it will not meet the minimum guaranteed amount of royalty fees through sales of product, the Company records the amount of the guaranteed payment in excess of that earned through sales of product in Demand creation expense uniformly over the contract period. +52 +Table of Contents +Through cooperative advertising programs, the Company reimburses customers for certain costs of advertising the Company’s products. The Company records these costs in Demand creation expense at the point in time when it is obligated to its customers for the costs. This obligation may arise prior to the related advertisement being run. +Total advertising and promotion expenses were $3,341 million , $3,278 million and $3,213 million for the years ended May 31, 2017 , 2016 and 2015 , respectively. Prepaid advertising and promotion expenses totaled $558 million and $540 million at May 31, 2017 and 2016 , respectively, of which $311 million and $272 million , respectively, was recorded in Prepaid expenses and other current assets , and $247 million and $268 million , respectively, was recorded in Deferred income taxes and other assets, depending on the period to which the prepayment applies. +Operating Overhead Expense +Operating overhead expense consists primarily of wage and benefit-related expenses as well as other administrative costs, such as rent, depreciation and amortization, professional services and meetings and travel. +Cash and Equivalents +Cash and equivalents represent cash and short-term, highly liquid investments, that are both readily convertible to known amounts of cash, and so near their maturity that they present insignificant risk of changes in value because of changes in interest rates, including commercial paper, U.S. Treasury, U.S. Agency, money market funds, time deposits and corporate debt securities with maturities of 90 days or less at the date of purchase. +Short-Term Investments +Short-term investments consist of highly liquid investments, including commercial paper, U.S. Treasury, U.S. Agency, time deposits and corporate debt securities, with maturities over 90 days at the date of purchase. Debt securities that the Company has the ability and positive intent to hold to maturity are carried at amortized cost. At May 31, 2017 and 2016 , the Company did not hold any short-term investments that were classified as trading or held-to-maturity. +At May 31, 2017 and 2016 , Short-term investments consisted of available-for-sale securities. Available-for-sale securities are recorded at fair value with unrealized gains and losses reported, net of tax, in Accumulated other comprehensive income , unless unrealized losses are determined to be other than temporary. Realized gains and losses on the sale of securities are determined by specific identification. The Company considers all available-for-sale securities, including those with maturity dates beyond 12 months, as available to support current operational liquidity needs and therefore classifies all securities with maturity dates beyond 90 days at the date of purchase as current assets within Short-term investments on the Consolidated Balance Sheets. +Refer to Note 6 — Fair Value Measurements for more information on the Company’s short-term investments. +Allowance for Uncollectible Accounts Receivable +Accounts receivable, net consist primarily of amounts receivable from customers. The Company makes ongoing estimates relating to the collectability of its accounts receivable and maintains an allowance for estimated losses resulting from the inability of its customers to make required payments. In determining the amount of the allowance, the Company considers historical levels of credit losses and makes judgments about the creditworthiness of significant customers based on ongoing credit evaluations. Accounts receivable with anticipated collection dates greater than 12 months from the balance sheet date and related allowances are considered non-current and recorded in Deferred income taxes and other assets . The allowance for uncollectible accounts receivable was $19 million and $43 million at May 31, 2017 and 2016 , respectively. +Inventory Valuation +Inventories are stated at lower of cost or market and valued on either an average or specific identification cost basis. For inventories in transit that represent direct shipments to customers, the related inventory and cost of sales are recognized on a specific identification basis. Inventory costs primarily consist of product cost from the Company's suppliers, as well as inbound freight, import duties, taxes, insurance and logistics and other handling fees. +Property, Plant and Equipment and Depreciation +Property, plant and equipment are recorded at cost. Depreciation is determined on a straight-line basis for land improvements, buildings and leasehold improvements over 2 to 40 years and for machinery and equipment over 2 to 15 years. +Depreciation and amortization of assets used in manufacturing, warehousing and product distribution are recorded in Cost of sales . Depreciation and amortization of all other assets are recorded in Operating overhead expense . +Software Development Costs +Internal Use Software : Expenditures for major software purchases and software developed for internal use are capitalized and amortized over a 2 to 12 year period on a straight-line basis. The Company’s policy provides for the capitalization of external direct costs of materials and services associated with developing or obtaining internal use computer software. In addition, the Company also capitalizes certain payroll and payroll-related costs for employees who are directly associated with internal use computer software projects. The amount of capitalizable payroll costs with respect to these employees is limited to the time directly spent on such projects. Costs associated with preliminary project stage activities, training, maintenance and all other post-implementation stage activities are expensed as incurred. +Computer Software to be Sold, Leased or Otherwise Marketed : Development costs of computer software to be sold, leased or otherwise marketed as an integral part of a product are subject to capitalization beginning when a product’s technological feasibility has been established and ending when a product is available for general release to customers. In most instances, the Company’s products are released soon after technological feasibility has been established. Therefore, software development costs incurred subsequent to achievement of technological feasibility are usually not significant, and generally most software development costs have been expensed as incurred. +53 +Table of Contents +Impairment of Long-Lived Assets +The Company reviews the carrying value of long-lived assets or asset groups to be used in operations whenever events or changes in circumstances indicate that the carrying amount of the assets might not be recoverable. Factors that would necessitate an impairment assessment include a significant adverse change in the extent or manner in which an asset is used, a significant adverse change in legal factors or the business climate that could affect the value of the asset or a significant decline in the observable market value of an asset, among others. If such facts indicate a potential impairment, the Company would assess the recoverability of an asset group by determining if the carrying value of the asset group exceeds the sum of the projected undiscounted cash flows expected to result from the use and eventual disposition of the assets over the remaining economic life of the primary asset in the asset group. If the recoverability test indicates that the carrying value of the asset group is not recoverable, the Company will estimate the fair value of the asset group using appropriate valuation methodologies, which would typically include an estimate of discounted cash flows. Any impairment would be measured as the difference between the asset group’s carrying amount and its estimated fair value. +Goodwill and Indefinite-Lived Intangible Assets +The Company performs annual impairment tests on goodwill and intangible assets with indefinite lives in the fourth quarter of each fiscal year or when events occur or circumstances change that would, more likely than not, reduce the fair value of a reporting unit or an intangible asset with an indefinite life below its carrying value. Events or changes in circumstances that may trigger interim impairment reviews include significant changes in business climate, operating results, planned investments in the reporting unit, planned divestitures or an expectation that the carrying amount may not be recoverable, among other factors. The Company may first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events and circumstances, the Company determines that it is more likely than not that the fair value of the reporting unit is greater than its carrying amount, the two-step impairment test is unnecessary. The two-step impairment test first requires the Company to estimate the fair value of its reporting units. If the carrying value of a reporting unit exceeds its fair value, the goodwill of that reporting unit is potentially impaired and the Company proceeds to step two of the impairment analysis. In step two of the analysis, the Company measures and records an impairment loss equal to the excess of the carrying value of the reporting unit's goodwill over its implied fair value, if any. +Indefinite-lived intangible assets primarily consist of acquired trade names and trademarks. The Company may first perform a qualitative assessment to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired. If, after assessing the totality of events and circumstances, the C ompany determines that it is more likely than not that the indefinite-lived intangible asset is not impaired, no quantitative fair value measurement is necessary. If a quantitative fair value measurement calculation is required for these intangible assets, the Company utilizes the relief-from-royalty method. This method assumes that trade names and trademarks have value to the extent that their owner is relieved of the obligation to pay royalties for the benefits received from them. This method requires the Company to estimate the future revenue for the related brands, the appropriate royalty rate and the weighted average cost of capital. +Operating Leases +The Company leases retail store space, certain distribution and warehouse facilities, office space and other non-real estate assets under operating leases. Operating lease agreements may contain rent escalation clauses, renewal options, rent holidays or certain landlord incentives, including tenant improvement allowances. Rent expense for non-cancelable operating leases with scheduled rent increases or landlord incentives are recognized on a straight-line basis over the lease term, beginning with the effective lease commencement date, which is generally the date in which the Company takes possession of or controls the physical use of the property. Certain leases also provide for contingent rent, which is generally determined as a percent of sales in excess of specified levels. A contingent rent liability is recognized together with the corresponding rent expense when specified levels have been achieved or when the Company determines that achieving the specified levels during the period is probable. +Fair Value Measurements +The Company measures certain financial assets and liabilities at fair value on a recurring basis, including derivatives and available-for-sale securities. Fair value is the price the Company would receive to sell an asset or pay to transfer a liability in an orderly transaction with a market participant at the measurement date. The Company uses a three-level hierarchy established by the Financial Accounting Standards Board (FASB) that prioritizes fair value measurements based on the types of inputs used for the various valuation techniques (market approach, income approach and cost approach). +The levels of the fair value hierarchy are described below: +• +Level 1: Quoted prices in active markets for identical assets or liabilities. +• +Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly; these include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active. +• +Level 3: Unobservable inputs for which there is little or no market data available, which require the reporting entity to develop its own assumptions. +The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. Financial assets and liabilities are classified in their entirety based on the most conservative level of input that is significant to the fair value measurement. +Pricing vendors are utilized for a majority of Level 1 and Level 2 investments. These vendors either provide a quoted market price in an active market or use observable inputs without applying significant adjustments in their pricing. Observable inputs include broker quotes, interest rates and yield curves observable at commonly quoted intervals, volatilities and credit risks. The fair value of derivative contracts is determined using observable market inputs such as the daily market foreign currency rates, forward pricing curves, currency volatilities, currency correlations and interest rates and considers nonperformance risk of the Company and that of its counterparties. +54 +Table of Contents +Level 1 investments include U.S. Treasury securities. Assets and liabilities included within Level 2 include commercial paper, U.S. Agency securities, money market funds, time deposits, corporate debt securities and derivative contracts. Level 3 investments are valued using internally developed models with unobservable inputs and are an immaterial portion of our portfolio. +The Company’s fair value measurement process includes comparing fair values to another independent pricing vendor to ensure appropriate fair values are recorded. +Refer to Note 6 — Fair Value Measurements for additional information. +Foreign Currency Translation and Foreign Currency Transactions +Adjustments resulting from translating foreign functional currency financial statements into U.S. Dollars are included in the foreign currency translation adjustment, a component of Accumulated other comprehensive income in Total shareholders’ equity . +The Company’s global subsidiaries have various assets and liabilities, primarily receivables and payables, which are denominated in currencies other than their functional currency. These balance sheet items are subject to re-measurement, the impact of which is recorded in Other (income) expense, net , within the Consolidated Statements of Income. +Accounting for Derivatives and Hedging Activities +The Company uses derivative financial instruments to reduce its exposure to changes in foreign currency exchange rates and interest rates. All derivatives are recorded at fair value on the Consolidated Balance Sheets and changes in the fair value of derivative financial instruments are either recognized in Accumulated other comprehensive income (a component of Total shareholders’ equity ), Long-term debt or Net income depending on the nature of the underlying exposure, whether the derivative is formally designated as a hedge and, if designated, the extent to which the hedge is effective. The Company classifies the cash flows at settlement from derivatives in the same category as the cash flows from the related hedged items. For undesignated hedges and designated cash flow hedges, this is primarily within the Cash provided by operations component of the Consolidated Statements of Cash Flows. For designated net investment hedges, this is within the Cash used by investing activities component of the Consolidated Statements of Cash Flows. For the Company’s fair value hedges, which are interest rate swaps used to mitigate the change in fair value of its fixed-rate debt attributable to changes in interest rates, the related cash flows from periodic interest payments are reflected within the Cash provided by operations component of the Consolidated Statements of Cash Flows. Refer to Note 16 — Risk Management and Derivatives for more information on the Company’s risk management program and derivatives. +Stock-Based Compensation +The Company estimates the fair value of options and stock appreciation rights granted under the NIKE, Inc. Stock Incentive Plan and employees’ purchase rights under the Employee Stock Purchase Plans (ESPPs) using the Black-Scholes option pricing model. The Company recognizes this fair value, net of estimated forfeitures, as Operating overhead expense in the Consolidated Statements of Income over the vesting period using the straight-line method. +Refer to Note 11 — Common Stock and Stock-Based Compensation for more information on the Company’s stock-based compensation programs. +Income Taxes +The Company accounts for income taxes using the asset and liability method. This approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of assets and liabilities. The Company records a valuation allowance to reduce deferred tax assets to the amount management believes is more likely than not to be realized. United States income taxes are provided currently on financial statement earnings of non-U.S. subsidiaries that are expected to be repatriated. The Company determines annually the amount of undistributed non-U.S. earnings to invest indefinitely in its non-U.S. operations. +The Company recognizes a tax benefit from uncertain tax positions in the financial statements only when it is more likely than not that the position will be sustained upon examination by relevant tax authorities. The Company recognizes interest and penalties related to income tax matters in Income tax expense . +Refer to Note 9 — Income Taxes for further discussion. +Earnings Per Share +Basic earnings per common share is calculated by dividing Net income by the weighted average number of common shares outstanding during the year. Diluted earnings per common share is calculated by adjusting weighted average outstanding shares, assuming conversion of all potentially dilutive stock options and awards. +Refer to Note 12 — Earnings Per Share for further discussion. +Management Estimates +The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates, including estimates relating to assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. +55 +Table of Contents +Recently Adopted Accounting Standards +In April 2015, the FASB issued Accounting Standards Update (ASU) No. 2015-03, Interest — Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. The updated guidance requires debt issuance costs to be presented as a direct deduction from the carrying amount of the corresponding debt liability on the balance sheet. The Company adopted the standard on a retrospective basis in the first quarter of fiscal 2017. The adoption of this standard reduced both Deferred income taxes and other assets and Long-term debt by $17 million on the Consolidated Balance Sheet as of May 31, 2016 . +Recently Issued Accounting Standards +In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory . The updated guidance requires companies to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. Income tax effects of intra-entity transfers of inventory will continue to be deferred until the inventory has been sold to a third party. The ASU is effective for the Company beginning June 1, 2018, using a modified retrospective approach, with the cumulative effect recognized through retained earnings at the date of adoption. Early adoption is permitted as of the beginning of an annual reporting period for which interim or annual financial statements have not been issued. The Company is evaluating the impact this update will have on its existing accounting policies and the Consolidated Financial Statements. The Company anticipates the updated guidance could have a material impact on the Consolidated Financial Statements at adoption through the recognition of a cumulative-effect adjustment to retained earnings of previously deferred charges. +In March 2016, the FASB issued ASU No. 2016-09, Compensation — Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting , which changes how companies account for certain aspects of share-based payment awards to employees. The updated guidance requires excess tax benefits and deficiencies from share-based payment awards to be recorded in income tax expense in the income statement. Currently, excess tax benefits and deficiencies are recognized in shareholders’ equity on the balance sheet. This change is required to be applied prospectively. In addition, the updated guidance also changes the accounting for statutory tax withholding requirements, classification in the statement of cash flows and provides an option to continue to estimate forfeitures or account for forfeitures as they occur. The Company will adopt the standard on June 1, 2017 and will elect to continue to estimate forfeitures. The ASU is expected to result in increased volatility to the Company’s income tax expense in future periods dependent upon, among other variables, the price of its common stock and the timing and volume of share-based payment award activity, such as employee exercises of stock options and vesting of restricted stock awards. +In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) , that replaces existing lease accounting guidance. The new standard is intended to provide enhanced transparency and comparability by requiring lessees to record right-of-use assets and corresponding lease liabilities on the balance sheet. The new guidance will require the Company to continue to classify leases as either operating or financing, with classification affecting the pattern of expense recognition in the income statement. The Company will adopt the standard on June 1, 2019. The ASU is required to be applied using a modified retrospective approach at the beginning of the earliest period presented, with optional practical expedients. The Company is in the process of evaluating the effect the guidance will have on its existing accounting policies and the Consolidated Financial Statements, but expects there will be an increase in assets and liabilities on the Consolidated Balance Sheets at adoption due to the recording of right-of-use assets and corresponding lease liabilities, which may be material. Refer to Note 15 — Commitments and Contingencies for information about the Company’s lease obligations. +In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments — Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities . The updated guidance enhances the reporting model for financial instruments, which includes amendments to address aspects of recognition, measurement, presentation and disclosure. The update to the standard is effective for the Company beginning June 1, 2018. The Company does not expect the adoption to have a material impact on the Consolidated Financial Statements. +In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) , that replaces existing revenue recognition guidance. The updated guidance requires companies to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, the new standard requires that reporting companies disclose the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The Company will adopt the standard on June 1, 2018 using a modified retrospective approach with the cumulative effective of initially applying the new standard recognized in retained earnings at the date of initial application. The Company is in the process of evaluating the new standard against its existing accounting policies, including the timing of revenue recognition, and its contracts with customers, to determine the effect the guidance will have on the Consolidated Financial Statements. +NOTE 2 — Inventories +Inventory balances of $5,055 million and $4,838 million at May 31, 2017 and 2016 , respectively, were substantially all finished goods. +56 +Table of Contents +NOTE 3 — Property, Plant and Equipment +Property, plant and equipment, net included the following: +As of May 31, +(In millions) +2017 +2016 +Land and improvements +$ +285 +$ +286 +Buildings +1,564 +1,467 +Machinery, equipment and internal-use software +3,867 +3,510 +Leasehold improvements +1,484 +1,338 +Construction in process +758 +437 +Total property, plant and equipment, gross +7,958 +7,038 +Less accumulated depreciation +3,969 +3,518 +TOTAL PROPERTY, PLANT AND EQUIPMENT, NET +$ +3,989 +$ +3,520 +Capitalized interest was not material for the years ended May 31, 2017 , 2016 and 2015 . +NOTE 4 — Identifiable Intangible Assets and Goodwill +Identifiable intangible assets, net consist of indefinite-lived trademarks, which are not subject to amortization, and acquired trademarks and other intangible assets, which are subject to amortization. Indefinite-lived trademarks were $281 million at May 31, 2017 and 2016 . Gross acquired trademarks and other intangible assets were $19 million and $16 million at May 31, 2017 and 2016 , respectively, and the related accumulated amortization was $17 million and $16 million , respectively. Goodwill was $139 million and $131 million at May 31, 2017 and 2016 , respectively, of which $65 million was included in the Converse segment for each of the respective periods. The remaining amounts were included in Global Brand Divisions for segment reporting purposes. There were no accumulated impairment balances for goodwill as of either period end. +NOTE 5 — Accrued Liabilities +Accrued liabilities included the following: +As of May 31, +(In millions) +2017 +2016 +Compensation and benefits, excluding taxes +$ +871 +$ +943 +Endorsement compensation +396 +393 +Dividends payable +300 +271 +Import and logistics costs +257 +198 +Taxes other than income taxes payable +196 +159 +Fair value of derivatives +168 +162 +Advertising and marketing +125 +119 +Collateral received from counterparties to hedging instruments +— +105 +Other (1) +698 +687 +TOTAL ACCRUED LIABILITIES +$ +3,011 +$ +3,037 +(1) +Other consists of various accrued expenses with no individual item accounting for more than 5% of the total Accrued liabilities balance at May 31, 2017 and 2016 . +NOTE 6 — Fair Value Measurements +The following tables present information about the Company's financial assets and liabilities measured at fair value on a recurring basis as of May 31, 2017 and 2016 , and indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value. Refer to Note 1 — Summary of Significant Accounting Policies for additional detail regarding the Company’s fair value measurement methodology. +57 +Table of Contents +As of May 31, 2017 +(In millions) +Assets at Fair Value +Cash Equivalents +Short-term Investments +Other Long-term Assets +Cash +$ +505 +$ +505 +$ +— +$ +— +Level 1: +U.S. Treasury securities +1,545 +159 +1,386 +— +Level 2: +Time deposits +813 +769 +44 +— +U.S. Agency securities +522 +150 +372 +— +Commercial paper and bonds +820 +251 +569 +— +Money market funds +1,974 +1,974 +— +— +Total level 2 +4,129 +3,144 +985 +— +Level 3: +Non-marketable preferred stock +10 +— +— +10 +TOTAL +$ +6,189 +$ +3,808 +$ +2,371 +$ +10 +As of May 31, 2016 +(In millions) +Assets at Fair Value +Cash Equivalents +Short-term Investments +Other Long-term Assets +Cash +$ +774 +$ +774 +$ +— +$ +— +Level 1: +U.S. Treasury securities +1,265 +100 +1,165 +— +Level 2: +Time deposits +831 +827 +4 +— +U.S. Agency securities +679 +— +679 +— +Commercial paper and bonds +733 +262 +471 +— +Money market funds +1,175 +1,175 +— +— +Total level 2 +3,418 +2,264 +1,154 +— +Level 3: +Non-marketable preferred stock +10 +— +— +10 +TOTAL +$ +5,467 +$ +3,138 +$ +2,319 +$ +10 +The Company elects to record the gross assets and liabilities of its derivative financial instruments on the Consolidated Balance Sheets. The Company’s derivative financial instruments are subject to master netting arrangements that allow for the offset of assets and liabilities in the event of default or early termination of the contract. Any amounts of cash collateral received related to these instruments associated with the Company's credit-related contingent features are recorded in Cash and equivalents and Accrued liabilities , the latter of which would further offset against the Company’s derivative asset balance (refer to Note 16 — Risk Management and Derivatives ). Any amounts of cash collateral posted related to these instruments associated with the Company's credit-related contingent features are recorded in Prepaid expenses and other current assets , which would further offset against the Company's derivative liability balance (refer to Note 16 — Risk Management and Derivatives ). Cash collateral received or posted related to the Company's credit related contingent features is presented in the Cash provided by operations component of the Consolidated Statements of Cash Flows. Any amounts of non-cash collateral received, such as securities, are not recorded on the Consolidated Balance Sheets pursuant to U.S. GAAP. +The following tables present information about the Company’s derivative assets and liabilities measured at fair value on a recurring basis as of May 31, 2017 and 2016 , and indicate the level in the fair value hierarchy in which the Company classifies the fair value measurement. +As of May 31, 2017 +Derivative Assets +Derivative Liabilities +(In millions) +Assets at Fair Value +Other Current Assets +Other Long-term Assets +Liabilities at Fair Value +Accrued Liabilities +Other Long-term Liabilities +Level 2: +Foreign exchange forwards and options (1) +$ +231 +$ +216 +$ +15 +$ +246 +$ +166 +$ +80 +Embedded derivatives +10 +1 +9 +8 +2 +6 +Interest rate swaps +— +— +— +— +— +— +TOTAL +$ +241 +$ +217 +$ +24 +$ +254 +$ +168 +$ +86 +(1) +If the foreign exchange derivative instruments had been netted in the Consolidated Balance Sheets, the asset and liability positions each would have been reduced by $187 million as of May 31, 2017 . As of that date, no amount of cash collateral had been received or posted on the derivative asset and liability balances related to these foreign exchange derivative instruments. +58 +Table of Contents +As of May 31, 2016 +Derivative Assets +Derivative Liabilities +(In millions) +Assets at Fair Value +Other Current Assets +Other Long-term Assets +Liabilities at Fair Value +Accrued Liabilities +Other Long-term Liabilities +Level 2: +Foreign exchange forwards and options (1) +$ +603 +$ +487 +$ +116 +$ +145 +$ +115 +$ +30 +Embedded derivatives +7 +2 +5 +9 +2 +7 +Interest rate swaps (2) +7 +7 +— +45 +45 +— +TOTAL +$ +617 +$ +496 +$ +121 +$ +199 +$ +162 +$ +37 +(1) +If the foreign exchange derivative instruments had been netted in the Consolidated Balance Sheets, the asset and liability positions each would have been reduced by $136 million as of May 31, 2016 . As of that date, the Company had received $105 million of cash collateral from various counterparties related to these foreign exchange derivative instruments. No amount of collateral was posted on the Company’s derivative liability balance as of May 31, 2016 . +(2) +As of May 31, 2016 , no amount of cash collateral had been received or posted on the derivative asset and liability balances related to its interest rate swaps. +Available-for-sale securities comprise investments in U.S. Treasury and Agency securities, time deposits, money market funds, corporate commercial paper and bonds. These securities are valued using market prices on both active markets (Level 1) and less active markets (Level 2). As of May 31, 2017 , the Company held $2,125 million of available-for-sale securities with maturity dates within one year and $246 million with maturity dates over one year and less than five years within Short-term investments on the Consolidated Balance Sheets. The gross realized gains and losses on sales of available-for-sale securities were immaterial for the fiscal years ended May 31, 2017 and 2016 . Unrealized gains and losses on available-for-sale securities included in Accumulated other comprehensive income were immaterial as of May 31, 2017 and 2016 . The Company regularly reviews its available-for-sale securities for other-than-temporary impairment. For the years ended May 31, 2017 and 2016 , the Company did not consider its securities to be other-than-temporarily impaired and accordingly, did not recognize any impairment losses. +Included in Interest expense (income), net was interest income related to the Company's available-for-sale securities of $27 million , $12 million and $6 million for the years ended May 31, 2017 , 2016 and 2015 , respectively. +The Company’s Level 3 assets comprise investments in certain non-marketable preferred stock. These Level 3 investments are an immaterial portion of the Company's portfolio. Changes in Level 3 investment assets were immaterial during the years ended May 31, 2017 and 2016 . +No transfers among the levels within the fair value hierarchy occurred during the years ended May 31, 2017 or 2016 . +Derivative financial instruments include foreign exchange forwards and options, embedded derivatives and interest rate swaps. Refer to Note 16 — Risk Management and Derivatives for additional detail. For fair value information regarding Notes payable and Long-term debt , refer to Note 7 — Short-Term Borrowings and Credit Lines and Note 8 — Long-Term Debt , respectively. The carrying amounts of other current financial assets and other current financial liabilities approximate fair value. +As of May 31, 2017 and 2016 , assets or liabilities that were required to be measured at fair value on a non-recurring basis were immaterial. +NOTE 7 — Short-Term Borrowings and Credit Lines +Notes payable and interest-bearing accounts payable to Sojitz Corporation of America (“Sojitz America”) as of May 31, 2017 and 2016 are summarized below: +As of May 31, +2017 +2016 +(Dollars in millions) +Borrowings +Interest Rate +Borrowings +Interest Rate +Notes payable: +Commercial paper +$ +325 +0.86 +% +$ +— +0.00 +% +U.S. operations +— +0.00 +% +(1) +— +0.00 +% +(1) +Non-U.S. operations +— +0.00 +% +(1) +1 +13.00 +% +(1) +TOTAL NOTES PAYABLE +$ +325 +$ +1 +Interest-bearing accounts payable: +Sojitz America +$ +51 +1.78 +% +$ +39 +1.27 +% +(1) +Weighted average interest rate includes non-interest bearing overdrafts. +The carrying amounts reflected in the Consolidated Balance Sheets for Notes payable approximate fair value. +The Company purchases through Sojitz America certain NIKE Brand products it acquires from non-U.S. suppliers. These purchases are for products sold in certain countries in the Company's Emerging Markets geographic operating segment and Canada, excluding products produced and sold in the same country. Accounts payable to Sojitz America are generally due up to 60 days after shipment of goods from the foreign port. The interest rate on such accounts payable is the 60 -day London Interbank Offered Rate (“LIBOR”) as of the beginning of the month of the invoice date, plus 0.75% . +As of May 31, 2017 , the Company had $325 million outstanding under its $2 billion commercial paper program at a weighted average interest rate of 0.86% . No borrowings were outstanding at May 31, 2016 . +59 +Table of Contents +On August 28, 2015, the Company entered into a committed credit facility agreement with a syndicate of banks which provides for up to $2 billion of borrowings. The facility matures August 28, 2020, with a one year extension option prior to any anniversary of the closing date, provided that in no event shall it extend beyond August 28, 2022. Based on the Company’s current long-term senior unsecured debt ratings of AA- and A1 from Standard and Poor’s Corporation and Moody’s Investor Services, respectively, the interest rate charged on any outstanding borrowings would be the prevailing LIBOR plus 0.455% . The facility fee is 0.045% of the total commitment. Under this committed credit facility, the Company must maintain certain financial ratios, among other things, with which the Company was in compliance at May 31, 2017 . No amounts were outstanding under the committed credit facility as of May 31, 2017 or 2016 . +NOTE 8 — Long-Term Debt +Long-term debt , net of unamortized premiums, discounts and debt issuance costs, comprises the following : +Book Value Outstanding +as of May 31, +Scheduled Maturity (Dollars and Yen in millions) +Original +Principal +Interest +Rate +Interest +Payments +2017 +2016 +Corporate Bond Payables: (1)(2) +May 1, 2023 +$ +500 +2.25 +% +Semi-Annually +497 +497 +November 1, 2026 +$ +1,000 +2.38 +% +Semi-Annually +993 +— +May 1, 2043 +$ +500 +3.63 +% +Semi-Annually +495 +494 +November 1, 2045 +$ +1,000 +3.88 +% +Semi-Annually +981 +981 +November 1, 2046 +$ +500 +3.38 +% +Semi-Annually +490 +— +Promissory Notes: +April 1, 2017 +$ +40 +6.20 +% +Monthly +— +38 +Japanese Yen Notes: (3) +August 20, 2001 through November 20, 2020 +¥ +9,000 +2.60 +% +Quarterly +14 +18 +August 20, 2001 through November 20, 2020 +¥ +4,000 +2.00 +% +Quarterly +7 +9 +Total +3,477 +2,037 +Less current maturities +6 +44 +TOTAL LONG-TERM DEBT +$ +3,471 +$ +1,993 +(1) +These senior unsecured obligations rank equally with the Company’s other unsecured and unsubordinated indebtedness. +(2) +The bonds are redeemable at the Company’s option up to three months prior to the scheduled maturity date for the bonds maturing in 2023 and 2026, and up to six months prior to the scheduled maturity date for the bonds maturing in 2043, 2045 and 2046, at a price equal to the greater of (i) 100% of the aggregate principal amount of the notes to be redeemed or (ii) the sum of the present values of the remaining scheduled payments, plus in each case, accrued and unpaid interest. Within three and six months to scheduled maturity, respectively, the bonds also feature a par call provision, which allows for the bonds to be redeemed at a price equal to 100% of the aggregate principal amount of the notes being redeemed, plus accrued and unpaid interest. +(3) +NIKE Logistics YK assumed a total of ¥13.0 billion in loans as part of its agreement to purchase a distribution center in Japan, which serves as collateral for the loans. These loans mature in equal quarterly installments during the period August 20, 2001 through November 20, 2020. +The scheduled maturity of Long-term debt in each of the years ending May 31, 2018 through 2022 are $6 million , $6 million , $6 million , $3 million and $0 million , respectively, at face value. +The Company's Long-term debt is recorded at adjusted cost, net of unamortized premiums, discounts and debt issuance costs. The fair value of Long-term debt is estimated based upon quoted prices for similar instruments or quoted prices for identical instruments in inactive markets (Level 2). The fair value of the Company’s Long-term debt , including the current portion, was approximately $3,401 million at May 31, 2017 and $2,125 million at May 31, 2016 . +NOTE 9 — Income Taxes +Income before income taxes is as follows: +Year Ended May 31, +(In millions) +2017 +2016 +2015 +Income before income taxes: +United States +$ +1,240 +$ +956 +$ +1,967 +Foreign +3,646 +3,667 +2,238 +TOTAL INCOME BEFORE INCOME TAXES +$ +4,886 +$ +4,623 +$ +4,205 +60 +Table of Contents +The provision for income taxes is as follows: +Year Ended May 31, +(In millions) +2017 +2016 +2015 +Current: +United States +Federal +$ +398 +$ +304 +$ +596 +State +82 +71 +80 +Foreign +439 +568 +369 +Total +919 +943 +1,045 +Deferred: +United States +Federal +(279 +) +(57 +) +(66 +) +State +(9 +) +(16 +) +(11 +) +Foreign +15 +(7 +) +(36 +) +Total +(273 +) +(80 +) +(113 +) +TOTAL INCOME TAX EXPENSE +$ +646 +$ +863 +$ +932 +A reconciliation from the U.S. statutory federal income tax rate to the effective income tax rate is as follows: +Year Ended May 31, +2017 +2016 +2015 +Federal income tax rate +35.0 +% +35.0 +% +35.0 +% +State taxes, net of federal benefit +1.1 +% +1.1 +% +0.9 +% +Foreign earnings +-20.7 +% +-18.2 +% +-14.8 +% +Resolution of a U.S. tax matter +-3.2 +% +— +% +— +% +Other, net +1.0 +% +0.8 +% +1.1 +% +EFFECTIVE INCOME TAX RATE +13.2 +% +18.7 +% +22.2 +% +The effective tax rate for the year ended May 31, 2017 was 550 basis points lower than the effective tax rate for the year ended May 31, 2016 primarily due to a one-time benefit in the first quarter of the fiscal year related to the resolution with the U.S. Internal Revenue Service (IRS) of a foreign tax credit matter and a decrease in foreign earnings taxed in the United States. +The effective tax rate for the year ended May 31, 2016 was 350 basis points lower than the effective tax rate for the year ended May 31, 2015 primarily due to an increase in the proportion of earnings from operations outside of the United States, which are generally subject to a lower tax rate. +61 +Table of Contents +Deferred tax assets and liabilities comprise the following: +As of May 31, +(In millions) +2017 +2016 +Deferred tax assets: +Allowance for doubtful accounts +$ +4 +$ +5 +Inventories +90 +88 +Sales return reserves +130 +182 +Deferred compensation +348 +274 +Stock-based compensation +225 +206 +Reserves and accrued liabilities +84 +78 +Net operating loss carry-forwards +84 +44 +Foreign tax credit carry-forwards +208 +— +Undistributed earnings of foreign subsidiaries +173 +179 +Other +106 +72 +Total deferred tax assets +1,452 +1,128 +Valuation allowance +(82 +) +(52 +) +Total deferred tax assets after valuation allowance +1,370 +1,076 +Deferred tax liabilities: +Property, plant and equipment +(254 +) +(268 +) +Intangibles +(90 +) +(92 +) +Other +(2 +) +(4 +) +Total deferred tax liability +(346 +) +(364 +) +NET DEFERRED TAX ASSET +$ +1,024 +$ +712 +The following is a reconciliation of the changes in the gross balance of unrecognized tax benefits: +As of May 31, +(In millions) +2017 +2016 +2015 +Unrecognized tax benefits, beginning of the period +$ +506 +$ +438 +$ +506 +Gross increases related to prior period tax positions +31 +49 +32 +Gross decreases related to prior period tax positions +(163 +) +(20 +) +(123 +) +Gross increases related to current period tax positions +115 +81 +82 +Gross decreases related to current period tax positions +— +— +(9 +) +Settlements +(12 +) +(13 +) +(27 +) +Lapse of statute of limitations +(21 +) +(17 +) +(10 +) +Changes due to currency translation +5 +(12 +) +(13 +) +UNRECOGNIZED TAX BENEFITS, END OF THE PERIOD +$ +461 +$ +506 +$ +438 +As of May 31, 2017 , total gross unrecognized tax benefits, excluding related interest and penalties, were $461 million , $230 million of which would affect the Company's effective tax rate if recognized in future periods. +The Company recognizes interest and penalties related to income tax matters in Income tax expense . The liability for payment of interest and penalties decreased by $38 million during the year ended May 31, 2017 , increased by $45 million during the year ended May 31, 2016 and decreased by $3 million during the year ended May 31, 2015 . As of May 31, 2017 and 2016 , accrued interest and penalties related to uncertain tax positions were $171 million and $209 million , respectively (excluding federal benefit). +The Company is subject to taxation in the United States as well as various state and foreign jurisdictions. As previously disclosed, the Company received statutory notices of deficiency from the IRS for fiscal 2011 and fiscal 2012 proposing a total increase in tax of $254 million , subject to interest, related to a foreign tax credit matter. The Company contested these deficiencies by filing petitions with the U.S Tax Court. During the three months ended August 31, 2016, the Company reached a resolution with the IRS on this matter. Decisions were subsequently filed in U.S. District Tax Court stating there is no deficiency in income tax due from the Company. In the current period, the Company closed all U.S. federal income tax matters for fiscal years 2013 and 2014, with the exception of certain transfer pricing adjustments. The Company is currently under audit by the IRS for fiscal years 2015 and 2016 . +The Company’s major foreign jurisdictions, China and the Netherlands, have concluded substantially all income tax matters through calendar 2006 and fiscal 2010, respectively. Although the timing of resolution of audits is not certain, the Company evaluates all domestic and foreign audit issues in the aggregate, along with the expiration of applicable statutes of limitations, and estimates that it is reasonably possible the total gross unrecognized tax benefits could decrease by up to $69 million within the next 12 months. +62 +Table of Contents +The Company provides for U.S. income taxes on the undistributed earnings of foreign subsidiaries unless they are considered indefinitely reinvested outside the United States. At May 31, 2017 , the indefinitely reinvested earnings in foreign subsidiaries upon which United States income taxes have not been provided were approximately $12.2 billion . If these undistributed earnings were repatriated to the United States or if the shares of the relevant foreign subsidiaries were sold or otherwise transferred, they would generate foreign tax credits that would reduce the federal tax liability associated with the foreign dividend or the otherwise taxable transaction. Assuming a full utilization of the foreign tax credits, the potential net deferred tax liability associated with these temporary differences of undistributed earnings would be approximately $4.1 billion at May 31, 2017 . +A portion of the Company's foreign operations are benefiting from a tax holiday, which is set to expire in 2021 . This tax holiday may be extended when certain conditions are met or may be terminated early if certain conditions are not met. The tax benefit attributable to this tax holiday was $187 million , $173 million and $174 million for the fiscal years ended May 31, 2017 , 2016 and 2015 , respectively. The benefit of the tax holiday on diluted earnings per common share was $0.11 , $0.10 and $0.10 for the fiscal years ended May 31, 2017 , 2016 and 2015 , respectively. +Deferred tax assets at May 31, 2017 and 2016 were reduced by a valuation allowance primarily relating to tax benefits of certain entities with operating losses. There was a $30 million net increase in the valuation allowance for the year ended May 31, 2017 , compared to a net increase of $43 million for the year ended May 31, 2016 and no net change for the year ended May 31, 2015 . +The Company has recorded deferred tax assets of $208 million at May 31, 2017 for foreign tax credit carry-forwards which expire in 2027. +The Company has available domestic and foreign loss carry-forwards of $266 million at May 31, 2017 . Such losses will expire as follows: +Year Ending May 31, +(In millions) +2018 +2019 +2020 +2021 +2022-2035 +Indefinite +Total +Net operating losses +$ +5 +$ +1 +$ +1 +$ +1 +$ +62 +$ +196 +$ +266 +During the years ended May 31, 2017 , 2016 and 2015 , income tax benefits attributable to employee stock-based compensation transactions of $177 million , $281 million and $224 million , respectively, were allocated to Total shareholders’ equity . +NOTE 10 — Redeemable Preferred Stock +Sojitz America is the sole owner of the Company’s authorized redeemable preferred stock, $1 par value, which is redeemable at the option of Sojitz America or the Company at par value aggregating $0.3 million . A cumulative dividend of $0.10 per share is payable annually on May 31 and no dividends may be declared or paid on the common stock of the Company unless dividends on the redeemable preferred stock have been declared and paid in full. There have been no changes in the redeemable preferred stock in the three years ended May 31, 2017 , 2016 and 2015 . As the holder of the redeemable preferred stock, Sojitz America does not have general voting rights, but does have the right to vote as a separate class on the sale of all or substantially all of the assets of the Company and its subsidiaries, on merger, consolidation, liquidation or dissolution of the Company or on the sale or assignment of the NIKE trademark for athletic footwear sold in the United States. The redeemable preferred stock has been fully issued to Sojitz America and is not blank check preferred stock. The Company's articles of incorporation do not permit the issuance of additional preferred stock. +NOTE 11 — Common Stock and Stock-Based Compensation +The authorized number of shares of Class A Common Stock, no par value, and Class B Common Stock, no par value, are 400 million and 2,400 million , respectively. Each share of Class A Common Stock is convertible into one share of Class B Common Stock. Voting rights of Class B Common Stock are limited in certain circumstances with respect to the election of directors. There are no differences in the dividend and liquidation preferences or participation rights of the holders of Class A and Class B Common Stock. +The NIKE, Inc. Stock Incentive Plan (the “Stock Incentive Plan”) provides for the issuance of up to 718 million previously unissued shares of Class B Common Stock in connection with stock options and other awards granted under the Stock Incentive Plan. The Stock Incentive Plan authorizes the grant of non-statutory stock options, incentive stock options, stock appreciation rights, restricted stock, restricted stock units and performance-based awards. The exercise price for stock options and stock appreciation rights may not be less than the fair market value of the underlying shares on the date of grant. A committee of the Board of Directors administers the Stock Incentive Plan. The committee has the authority to determine the employees to whom awards will be made, the amount of the awards and the other terms and conditions of the awards. Substantially all stock option grants outstanding under the Stock Incentive Plan are granted in the first quarter of each fiscal year, vest ratably over four years and expire ten years from the date of grant. +The following table summarizes the Company’s total stock-based compensation expense recognized in Operating overhead expense : +Year Ended May 31, +(In millions) +2017 +2016 +2015 +Stock options (1) +$ +145 +$ +171 +$ +136 +ESPPs +36 +31 +24 +Restricted stock +34 +34 +31 +TOTAL STOCK-BASED COMPENSATION EXPENSE +$ +215 +$ +236 +$ +191 +(1) +Expense for stock options includes the expense associated with stock appreciation rights. Accelerated stock option expense is recorded for employees eligible for accelerated stock option vesting upon retirement. Accelerated stock option expense was $14 million , $30 million and $19 million for the years ended May 31, 2017 , 2016 and 2015 , respectively. +As of May 31, 2017 , the Company had $201 million of unrecognized compensation costs from stock options, net of estimated forfeitures, to be recognized in Operating overhead expense over a weighted average remaining period of 1.9 years. +63 +Table of Contents +The weighted average fair value per share of the options granted during the years ended May 31, 2017 , 2016 and 2015 , computed as of the grant date using the Black-Scholes pricing model, was $9.38 , $12.66 and $8.48 , respectively. The weighted average assumptions used to estimate these fair values are as follows: +Year Ended May 31, +2017 +2016 +2015 +Dividend yield +1.1 +% +1.0 +% +1.2 +% +Expected volatility +17.4 +% +23.6 +% +23.6 +% +Weighted average expected life (in years) +6.0 +5.8 +5.8 +Risk-free interest rate +1.3 +% +1.7 +% +1.7 +% +The Company estimates the expected volatility based on the implied volatility in market traded options on the Company’s common stock with a term greater than one year, along with other factors. The weighted average expected life of options is based on an analysis of historical and expected future exercise patterns. The interest rate is based on the U.S. Treasury (constant maturity) risk-free rate in effect at the date of grant for periods corresponding with the expected term of the options. +The following summarizes the stock option transactions under the plan discussed above: +Shares (1) +Weighted Average +Option Price +(In millions) +Options outstanding May 31, 2014 +127.1 +$ +19.64 +Exercised +(27.2 +) +15.39 +Forfeited +(2.1 +) +29.51 +Granted +18.4 +38.84 +Options outstanding May 31, 2015 +116.2 +23.50 +Exercised +(22.5 +) +17.75 +Forfeited +(2.3 +) +39.96 +Granted +20.6 +56.41 +Options outstanding May 31, 2016 +112.0 +30.38 +Exercised +(17.1 +) +20.42 +Forfeited +(2.3 +) +49.47 +Granted +12.2 +57.81 +Options outstanding May 31, 2017 +104.8 +$ +34.79 +Options exercisable at May 31, +2015 +68.6 +$ +18.26 +2016 +66.5 +21.48 +2017 +67.9 +26.03 +(1) +Includes stock appreciation rights transactions. +The weighted average contractual life remaining for options outstanding and options exercisable at May 31, 2017 was 5.7 years and 4.5 years, respectively. The aggregate intrinsic value for options outstanding and exercisable at May 31, 2017 was $2,027 million and $1,846 million , respectively. The aggregate intrinsic value was the amount by which the market value of the underlying stock exceeded the exercise price of the options. The total intrinsic value of the options exercised during the years ended May 31, 2017 , 2016 and 2015 was $594 million , $946 million and $795 million , respectively. +In addition to the Stock Incentive Plan, the Company gives employees the right to purchase shares at a discount to the market price under employee stock purchase plans (ESPPs). Subject to the annual statutory limit, employees are eligible to participate through payroll deductions of up to 10% of their compensation. At the end of each six -month offering period, shares are purchased by the participants at 85% of the lower of the fair market value at the beginning or the end of the offering period. Employees purchased 3.1 million , 2.5 million and 2.7 million shares during each of the three years ended May 31, 2017 , 2016 and 2015 , respectively. +From time to time, the Company grants restricted stock and restricted stock units to key employees under the Stock Incentive Plan. The number of shares underlying such awards granted to employees during the years ended May 31, 2017 , 2016 and 2015 were 0.4 million , 1.0 million and 0.5 million , respectively, with weighted average values per share of $57.59 , $54.87 and $39.69 , respectively. Recipients of restricted stock are entitled to cash dividends and to vote their respective shares throughout the period of restriction. Recipients of restricted stock units are entitled to dividend equivalent cash payments upon vesting. The value of all grants of restricted stock and restricted stock units was established by the market price on the date of grant. During the years ended May 31, 2017 , 2016 and 2015 , the aggregate fair value of restricted stock and restricted stock units vested was $60 million , $49 million and $20 million , respectively, determined as of the date of vesting. As of May 31, 2017 , the Company had $43 million of unrecognized compensation costs from restricted stock and restricted stock units to be recognized in Operating overhead expense over a weighted average period of 2.4 years. +64 +Table of Contents +NOTE 12 — Earnings Per Share +The following is a reconciliation from basic earnings per common share to diluted earnings per common share. The computations of diluted earnings per common share excluded options, including shares under employee stock purchase plans, to purchase an additional 30.5 million , 0.2 million and 1.7 million shares of common stock outstanding for the years ended May 31, 2017 , 2016 and 2015 , respectively, because the options were anti-dilutive. +Year Ended May 31, +(In millions, except per share data) +2017 +2016 +2015 +Determination of shares: +Weighted average common shares outstanding +1,657.8 +1,697.9 +1,723.5 +Assumed conversion of dilutive stock options and awards +34.2 +44.6 +45.3 +DILUTED WEIGHTED AVERAGE COMMON SHARES OUTSTANDING +1,692.0 +1,742.5 +1,768.8 +Earnings per common share: +Basic +$ +2.56 +$ +2.21 +$ +1.90 +Diluted +$ +2.51 +$ +2.16 +$ +1.85 +NOTE 13 — Benefit Plans +The Company has a qualified 401(k) Savings and Profit Sharing Plan, in which all U.S. employees are able to participate. The Company matches a portion of employee contributions to the savings plan. Company contributions to the savings plan were $75 million , $72 million and $58 million and included in Operating overhead expense for the years ended May 31, 2017 , 2016 and 2015 , respectively. The terms of the plan also allow for annual discretionary profit sharing contributions, as determined by the Board of Directors, to the accounts of eligible U.S. employees who work at least 1,000 hours in a year. Profit sharing contributions of $68 million , $64 million and $58 million were made to the plan and included in Operating overhead expense for the years ended May 31, 2017 , 2016 and 2015 , respectively. +The Company also has a Long-Term Incentive Plan (LTIP) that was adopted by the Board of Directors and approved by shareholders in September 1997 and later amended and approved in fiscal 2007 and fiscal 2012. The Company recognized $21 million , $85 million and $68 million of Operating overhead expense related to cash awards under the LTIP during the years ended May 31, 2017 , 2016 and 2015 , respectively. +The Company allows certain highly compensated employees and non-employee directors of the Company to defer compensation under a nonqualified deferred compensation plan. Deferred compensation plan liabilities were $569 million and $475 million at May 31, 2017 and 2016 , respectively, and primarily classified as long-term in Deferred income taxes and other liabilities . +The Company has pension plans in various countries worldwide. The pension plans are only available to local employees and are generally government mandated. The liability related to the unfunded pension liabilities of the plans was $107 million and $93 million at May 31, 2017 and 2016 , respectively, and primarily classified as long-term in Deferred income taxes and other liabilities . +NOTE 14 — Accumulated Other Comprehensive Income +The changes in Accumulated other comprehensive income , net of tax, were as follows: +(In millions) +Foreign Currency Translation Adjustment (1) +Cash Flow Hedges +Net Investment Hedges (1) +Other +Total +Balance at May 31, 2016 +$ +(207 +) +$ +463 +$ +115 +$ +(53 +) +$ +318 +Other comprehensive gains (losses) before reclassifications (2) +15 +118 +— +(14 +) +119 +Reclassifications to net income of previously deferred (gains) losses (3) +1 +(633 +) +— +(18 +) +(650 +) +Other comprehensive income (loss) +16 +(515 +) +— +(32 +) +(531 +) +Balance at May 31, 2017 +$ +(191 +) +$ +(52 +) +$ +115 +$ +(85 +) +$ +(213 +) +(1) +The accumulated foreign currency translation adjustment and net investment hedge gains/losses related to an investment in a foreign subsidiary are reclassified to Net income upon sale or upon complete or substantially complete liquidation of the respective entity. +(2) +Net of tax benefit (expense) of $ 0 million , $ 24 million , $ 0 million , $ 3 million and $ 27 million , respectively. +(3) +Net of tax (benefit) expense of $ 0 million , $ (3) million , $ 0 million , $ (3) million and $ (6) million , respectively. +65 +Table of Contents +(In millions) +Foreign Currency Translation Adjustment (1) +Cash Flow Hedges +Net Investment Hedges (1) +Other +Total +Balance at May 31, 2015 +$ +(31 +) +$ +1,220 +$ +115 +$ +(58 +) +$ +1,246 +Other comprehensive gains (losses) before reclassifications (2) +(178 +) +(47 +) +— +6 +(219 +) +Reclassifications to net income of previously deferred (gains) losses (3) +2 +(710 +) +— +(1 +) +(709 +) +Other comprehensive income (loss) +(176 +) +(757 +) +— +5 +(928 +) +Balance at May 31, 2016 +$ +(207 +) +$ +463 +$ +115 +$ +(53 +) +$ +318 +(1) +The accumulated foreign currency translation adjustment and net investment hedge gains/losses related to an investment in a foreign subsidiary are reclassified to Net income upon sale or upon complete or substantially complete liquidation of the respective entity. +(2) +Net of tax benefit (expense) of $ 0 million , $ 28 million , $ 0 million , $ (2) million and $ 26 million , respectively. +(3) +Net of tax (benefit) expense of $ 0 million , $ 7 million , $ 0 million , $ 2 million and $ 9 million , respectively. +The following table summarizes the reclassifications from Accumulated other comprehensive income to the Consolidated Statements of Income: +Amount of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income into Income +Location of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income into Income +Year Ended May 31, +(In millions) +2017 +2016 +Gains (losses) on foreign currency translation adjustment +(1 +) +(2 +) +Other (income) expense, net +Total before tax +(1 +) +(2 +) +Tax (expense) benefit +— +— +Gain (loss) net of tax +(1 +) +(2 +) +Gains (losses) on cash flow hedges: +Foreign exchange forwards and options +96 +(88 +) +Revenues +Foreign exchange forwards and options +339 +586 +Cost of sales +Foreign exchange forwards and options +— +— +Total selling and administrative expense +Foreign exchange forwards and options +199 +219 +Other (income) expense, net +Interest rate swaps +(4 +) +— +Interest expense (income), net +Total before tax +630 +717 +Tax (expense) benefit +3 +(7 +) +Gain (loss) net of tax +633 +710 +Gains (losses) on other +15 +3 +Other (income) expense, net +Total before tax +15 +3 +Tax (expense) benefit +3 +(2 +) +Gain (loss) net of tax +18 +1 +Total net gain (loss) reclassified for the period +$ +650 +$ +709 +Refer to Note 16 — Risk Management and Derivatives for more information on the Company's risk management program and derivatives. +NOTE 15 — Commitments and Contingencies +The Company leases retail store space, certain distribution and warehouse facilities, and office space and other non-real estate assets under operating leases expiring from 1 to 17 years after May 31, 2017 . Rent expense was $731 million , $661 million and $594 million for the years ended May 31, 2017 , 2016 and 2015 , respectively. Amounts of minimum future annual commitments under non-cancelable operating and capital leases are as follows (in millions): +2018 +2019 +2020 +2021 +2022 +Thereafter +Total +Operating leases +$ +537 +$ +509 +$ +438 +$ +399 +$ +350 +$ +1,672 +$ +3,905 +Capital leases and other financing obligations (1) +$ +34 +$ +32 +$ +28 +$ +25 +$ +26 +$ +225 +$ +370 +(1) +Capital leases and other financing obligations include payments related to build-to-suit lease arrangements. +As of May 31, 2017 and 2016 , the Company had letters of credit outstanding totaling $152 million and $157 million , respectively. These letters of credit were generally issued for the purchase of inventory and guarantees of the Company’s performance under certain self-insurance and other programs. +66 +Table of Contents +In connection with various contracts and agreements, the Company provides routine indemnification relating to the enforceability of intellectual property rights, coverage for legal issues that arise and other items where the Company is acting as the guarantor. Currently, the Company has several such agreements in place. However, based on the Company’s historical experience and the estimated probability of future loss, the Company has determined that the fair value of such indemnification is not material to the Company’s financial position or results of operations. +In the ordinary course of its business, the Company is involved in various legal proceedings involving contractual and employment relationships, product liability claims, trademark rights and a variety of other matters. While the Company cannot predict the outcome of its pending legal matters with certainty, the Company does not believe any currently identified claim, proceeding or litigation, either individually or in aggregate, will have a material impact on the Company’s results of operations, financial position or cash flows. +NOTE 16 — Risk Management and Derivatives +The Company is exposed to global market risks, including the effect of changes in foreign currency exchange rates and interest rates, and uses derivatives to manage financial exposures that occur in the normal course of business. The Company does not hold or issue derivatives for trading or speculative purposes. +The Company may elect to designate certain derivatives as hedging instruments under the accounting standards for derivatives and hedging. The Company formally documents all relationships between designated hedging instruments and hedged items as well as its risk management objectives and strategies for undertaking hedge transactions. This process includes linking all derivatives designated as hedges to either recognized assets or liabilities or forecasted transactions. +The majority of derivatives outstanding as of May 31, 2017 are designated as foreign currency cash flow hedges, primarily for Euro/U.S. Dollar, British Pound/Euro and Japanese Yen/U.S. Dollar currency pairs . All derivatives are recognized on the Consolidated Balance Sheets at fair value and classified based on the instrument’s maturity date. +The following table presents the fair values of derivative instruments included within the Consolidated Balance Sheets as of May 31, 2017 and 2016 : +Asset Derivatives +Liability Derivatives +(In millions) +Balance Sheet +Location +2017 +2016 +Balance Sheet +Location +2017 +2016 +Derivatives formally designated as hedging instruments: +Foreign exchange forwards and options +Prepaid expenses and other current assets +$ +113 +$ +447 +Accrued liabilities +$ +59 +$ +38 +Interest rate swaps +Prepaid expenses and other current assets +— +7 +Accrued liabilities +— +45 +Foreign exchange forwards and options +Deferred income taxes and other assets +13 +90 +Deferred income taxes and other liabilities +73 +12 +Interest rate swaps +Deferred income taxes and other assets +— +— +Deferred income taxes and other liabilities +— +— +Total derivatives formally designated as hedging instruments +126 +544 +132 +95 +Derivatives not designated as hedging instruments: +Foreign exchange forwards and options +Prepaid expenses and other current assets +103 +40 +Accrued liabilities +107 +76 +Embedded derivatives +Prepaid expenses and other current assets +1 +2 +Accrued liabilities +2 +2 +Foreign exchange forwards and options +Deferred income taxes and other assets +2 +26 +Deferred income taxes and other liabilities +7 +19 +Embedded derivatives +Deferred income taxes and other assets +9 +5 +Deferred income taxes and other liabilities +6 +7 +Total derivatives not designated as hedging instruments +115 +73 +122 +104 +TOTAL DERIVATIVES +$ +241 +$ +617 +$ +254 +$ +199 +67 +Table of Contents +The following tables present the amounts affecting the Consolidated Statements of Income for the years ended May 31, 2017 , 2016 and 2015 : +(In millions) +Amount of Gain (Loss) +Recognized in Other +Comprehensive Income +on Derivatives (1) +Amount of Gain (Loss) +Reclassified from Accumulated +Other Comprehensive Income into Income (1) +Year Ended May 31, +Location of Gain (Loss) Reclassified From +Accumulated Other Comprehensive Income into Income +Year Ended May 31, +2017 +2016 +2015 +2017 +2016 +2015 +Derivatives designated as cash flow hedges: +Foreign exchange forwards and options +$ +72 +$ +90 +$ +(202 +) +Revenues +$ +96 +$ +(88 +) +$ +(95 +) +Foreign exchange forwards and options +43 +(57 +) +1,109 +Cost of sales +339 +586 +220 +Foreign exchange forwards and options +(4 +) +— +— +Total selling and administrative expense +— +— +— +Foreign exchange forwards and options +37 +(25 +) +497 +Other (income) expense, net +199 +219 +136 +Interest rate swaps +(54 +) +(83 +) +76 +Interest expense (income), net +(4 +) +— +— +Total designated cash flow hedges +94 +(75 +) +1,480 +630 +717 +261 +(1) +For the years ended May 31, 2017 , 2016 and 2015 , the amounts recorded in Other (income) expense, net as a result of hedge ineffectiveness and the discontinuance of cash flow hedges because the forecasted transactions were no longer probable of occurring were immaterial. +Amount of Gain (Loss) Recognized in +Income on Derivatives +Location of Gain (Loss) +Recognized in Income on Derivatives +Year Ended May 31, +(In millions) +2017 +2016 +2015 +Derivatives designated as fair value hedges: +Interest rate swaps (1) +$ +— +$ +2 +$ +5 +Interest expense (income), net +Derivatives not designated as hedging instruments: +Foreign exchange forwards and options +(44 +) +(68 +) +611 +Other (income) expense, net +Embedded derivatives +$ +(2 +) +$ +(2 +) +$ +(1 +) +Other (income) expense, net +(1) +All interest rate swaps designated as fair value hedges meet the shortcut method requirements under the accounting standards for derivatives and hedging. Accordingly, changes in the fair values of the interest rate swaps are considered to exactly offset changes in the fair value of the underlying long-term debt. Refer to “Fair Value Hedges” in this note for additional detail. +Refer to Note 6 — Fair Value Measurements for a description of how the above financial instruments are valued and Note 14 — Accumulated Other Comprehensive Income and the Consolidated Statements of Shareholders’ Equity for additional information on changes in Accumulated other comprehensive income for the years ended May 31, 2017 , 2016 and 2015 . +Cash Flow Hedges +The purpose of the Company's foreign exchange risk management program is to lessen both the positive and negative effects of currency fluctuations on the Company's consolidated results of operations, financial position and cash flows. Foreign currency exposures that the Company may elect to hedge in this manner include product cost exposures, non-functional currency denominated external and intercompany revenues, selling and administrative expenses, investments in U.S. Dollar-denominated available-for-sale debt securities and certain other intercompany transactions. +Product cost exposures are primarily generated through non-functional currency denominated product purchases and the foreign currency adjustment program described below. NIKE entities primarily purchase products in two ways: (1) Certain NIKE entities purchase product from the NIKE Trading Company (“NTC”), a wholly owned sourcing hub that buys NIKE branded products from third party factories, predominantly in U.S. Dollars. The NTC, whose functional currency is the U.S. Dollar, then sells the product to NIKE entities in their respective functional currencies. When the NTC sells to a NIKE entity with a different functional currency, the result is a foreign currency exposure for the NTC. (2) Other NIKE entities purchase product directly from third party factories in U.S. Dollars. These purchases generate a foreign currency exposure for those NIKE entities with a functional currency other than the U.S. Dollar. +The Company operates a foreign currency adjustment program with certain factories. The program is designed to more effectively manage foreign currency risk by assuming certain of the factories’ foreign currency exposures, some of which are natural offsets to the Company's existing foreign currency exposures. Under this program, the Company’s payments to these factories are adjusted for rate fluctuations in the basket of currencies (“factory currency exposure index”) in which the labor, materials and overhead costs incurred by the factories in the production of NIKE branded products (“factory input costs”) are denominated. For the portion of the indices denominated in the local or functional currency of the factory, the Company may elect to place formally designated cash flow hedges. For all currencies within the indices, excluding the U.S. Dollar and the local or functional currency of the factory, an embedded derivative contract is created upon the factory’s acceptance of NIKE’s purchase order. Embedded derivative contracts are separated from the related purchase order, as further described within the Embedded Derivatives section below. +The Company’s policy permits the utilization of derivatives to reduce its foreign currency exposures where internal netting or other strategies cannot be effectively employed. Typically, the Company may enter into hedge contracts starting up to 12 to 24 months in advance of the forecasted transaction and may place incremental hedges up to 100% of the exposure by the time the forecasted transaction occurs. The total notional amount of outstanding foreign currency derivatives designated as cash flow hedges was $11.1 billion as of May 31, 2017 . +During the second quarter of fiscal 2017, the Company terminated all forward-starting interest rate swap agreements with a total notional amount of $1.5 billion in connection with the October 21, 2016 debt issuance (refer to Note 8 - Long-Term Debt). Upon termination of these forward-starting swaps, the Company made cash payments to the related counterparties of $92 million , which was recorded in Accumulated other comprehensive +68 +Table of Contents +income and will be released through Interest expense (income), net as interest expense is incurred over the term of the issued debt. During the second quarter of fiscal 2016, the Company terminated certain forward-starting interest rate swaps with a total notional amount of $1 billion in connection with the October 29, 2015 debt issuance (refer to Note 8 — Long-Term Debt ). Upon termination of these forward-starting swaps, the Company received cash payments from the related counterparties of $34 million , which was recorded in Accumulated other comprehensive income and will be released through Interest expense (income), net as interest expense is incurred over the term of the issued debt. +All changes in fair value of derivatives designated as cash flow hedges, excluding any ineffective portion, are recorded in Accumulated other comprehensive income until Net income is affected by the variability of cash flows of the hedged transaction. In most cases, amounts recorded in Accumulated other comprehensive income will be released to Net income in periods following the maturity of the related derivative, rather than at maturity. Effective hedge results are classified within the Consolidated Statements of Income in the same manner as the underlying exposure. The results of hedges of non-functional currency denominated revenues and product cost exposures, excluding embedded derivatives, are recorded in Revenues or Cost of sales when the underlying hedged transaction affects consolidated Net income . Results of hedges of selling and administrative expense are recorded together with those costs when the related expense is recorded. Amounts recorded in Accumulated other comprehensive income related to forward-starting interest rate swaps will be released through Interest expense (income), net as interest expense is incurred over the term of the issued debt. Results of hedges of anticipated purchases and sales of U.S. Dollar-denominated available-for-sale securities are recorded in Other (income) expense, net when the securities are sold. Results of hedges of certain anticipated intercompany transactions are recorded in Other (income) expense, net when the transaction occurs. The Company classifies the cash flows at settlement from these designated cash flow hedge derivatives in the same category as the cash flows from the related hedged items, primarily within the Cash provided by operations component of the Consolidated Statements of Cash Flows. +Premiums paid or received on options are initially recorded as deferred charges or deferred credits, respectively. The Company assesses the effectiveness of options based on the total cash flows method and records total changes in the options’ fair value to Accumulated other comprehensive income to the degree they are effective. +The Company formally assesses, both at a hedge’s inception and on an ongoing basis, whether the derivatives that are used in the hedging transaction have been highly effective in offsetting changes in the cash flows of hedged items and whether those derivatives may be expected to remain highly effective in future periods. Effectiveness for cash flow hedges is assessed based on changes in forward rates . Ineffectiveness was immaterial for the years ended May 31, 2017 , 2016 and 2015 . +The Company discontinues hedge accounting prospectively when: (1) it determines that the derivative is no longer highly effective in offsetting changes in the cash flows of a hedged item (including hedged items such as firm commitments or forecasted transactions); (2) the derivative expires or is sold, terminated or exercised; (3) it is no longer probable that the forecasted transaction will occur; or (4) management determines that designating the derivative as a hedging instrument is no longer appropriate. +When the Company discontinues hedge accounting because it is no longer probable that the forecasted transaction will occur in the originally expected period, but is expected to occur within an additional two -month period of time thereafter, the gain or loss on the derivative remains in Accumulated other comprehensive income and is reclassified to Net income when the forecasted transaction affects consolidated Net income . However, if it is probable that a forecasted transaction will not occur by the end of the originally specified time period or within an additional two-month period of time thereafter, the gains and losses that were in Accumulated other comprehensive income will be recognized immediately in Other (income) expense, net . In all situations in which hedge accounting is discontinued and the derivative remains outstanding, the Company will carry the derivative at its fair value on the Consolidated Balance Sheets, recognizing future changes in the fair value in Other (income) expense, net . For the years ended May 31, 2017 , 2016 and 2015 , the amounts recorded in Other (income) expense, net as a result of the discontinuance of cash flow hedging because the forecasted transaction was no longer probable of occurring were immaterial . +As of May 31, 2017 , $100 million of deferred net gains (net of tax) on both outstanding and matured derivatives in Accumulated other comprehensive income are expected to be reclassified to Net income during the next 12 months concurrent with the underlying hedged transactions also being recorded in Net income . Actual amounts ultimately reclassified to Net income are dependent on the exchange rates in effect when derivative contracts that are currently outstanding mature. As of May 31, 2017 , the maximum term over which the Company is hedging exposures to the variability of cash flows for its forecasted transactions was 24 months. +Fair Value Hedges +The Company has, in the past, been exposed to the risk of changes in the fair value of certain fixed-rate debt attributable to changes in interest rates. Derivatives used by the Company to hedge this risk are receive-fixed, pay-variable interest rate swaps. All interest rate swaps designated as fair value hedges of the related long-term debt meet the shortcut method requirements under U.S. GAAP. Accordingly, changes in the fair values of the interest rate swaps are considered to exactly offset changes in the fair value of the underlying long-term debt. The cash flows associated with the Company’s fair value hedges are periodic interest payments while the swaps are outstanding, which are reflected within the Cash provided by operations component of the Consolidated Statements of Cash Flows. The Company recorded no ineffectiveness from its interest rate swaps designated as fair value hedges for the years ended May 31, 2017 , 2016 or 2015 . On October 15, 2015, the Company repaid the long-term debt which had previously been hedged with these interest rate swaps. Accordingly, a s of May 31, 2017 , the Company had no interest rate swaps designated as fair value hedges. +Net Investment Hedges +The Company has, in the past, hedged and may, in the future, hedge the risk of variability in foreign-currency-denominated net investments in wholly-owned international operations. All changes in fair value of the derivatives designated as net investment hedges, except ineffective portions, are reported in Accumulated other comprehensive income along with the foreign currency translation adjustments on those investments. The Company classifies the cash flows at settlement of its net investment hedges within the Cash used by investing activities component of the Consolidated Statements of Cash Flows. The Company assesses hedge effectiveness based on changes in forward rates. The Company recorded no ineffectiveness from net investment hedges for the years ended May 31, 2017 , 2016 or 2015 . The Company had no outstanding net investment hedges as of May 31, 2017 . +69 +Table of Contents +Undesignated Derivative Instruments +The Company may elect to enter into foreign exchange forwards to mitigate the change in fair value of specific assets and liabilities on the Consolidated Balance Sheets and/or the embedded derivative contracts. These forwards are not designated as hedging instruments under U.S. GAAP. Accordingly, these undesignated instruments are recorded at fair value as a derivative asset or liability on the Consolidated Balance Sheets with their corresponding change in fair value recognized in Other (income) expense, net , together with the re-measurement gain or loss from the hedged balance sheet position or embedded derivative contract. The Company classifies the cash flows at settlement from undesignated instruments in the same category as the cash flows from the related hedged items, primarily within the Cash provided by operations component of the Consolidated Statements of Cash Flows. The total notional amount of outstanding undesignated derivative instruments was $10.5 billion as of May 31, 2017 . +Embedded Derivatives +As part of the foreign currency adjustment program described above, an embedded derivative contract is created upon the factory’s acceptance of NIKE’s purchase order for currencies within the factory currency exposure indices that are neither the U.S. Dollar nor the local or functional currency of the factory. Embedded derivative contracts are treated as foreign currency forward contracts that are bifurcated from the related purchase order and recorded at fair value as a derivative asset or liability on the Consolidated Balance Sheets with their corresponding change in fair value recognized in Other (income) expense, net , from the date a purchase order is accepted by a factory through the date the purchase price is no longer subject to foreign currency fluctuations. +In addition, the Company has entered into certain other contractual agreements which have payments that are indexed to currencies that are not the functional currency of either substantial party to the contracts. These payment terms expose NIKE to variability in foreign exchange rates and create embedded derivative contracts that must be bifurcated from the related contract and recorded at fair value as derivative assets or liabilities on the Consolidated Balance Sheets with their corresponding changes in fair value recognized in Other (income) expense, net until each payment is settled. +At May 31, 2017 , the total notional amount of all embedded derivatives outstanding was approximately $265 million . +Credit Risk +The Company is exposed to credit-related losses in the event of nonperformance by counterparties to hedging instruments. The counterparties to all derivative transactions are major financial institutions with investment grade credit ratings. However, this does not eliminate the Company’s exposure to credit risk with these institutions. This credit risk is limited to the unrealized gains in such contracts should any of these counterparties fail to perform as contracted. To manage this risk, the Company has established strict counterparty credit guidelines that are continually monitored. +The Company’s derivative contracts contain credit risk-related contingent features designed to protect against significant deterioration in counterparties’ creditworthiness and their ultimate ability to settle outstanding derivative contracts in the normal course of business. The Company’s bilateral credit-related contingent features generally require the owing entity, either the Company or the derivative counterparty, to post collateral for the portion of the fair value in excess of $50 million should the fair value of outstanding derivatives per counterparty be greater than $50 million . Additionally, a certain level of decline in credit rating of either the Company or the counterparty could also trigger collateral requirements. As of May 31, 2017 , the Company was in compliance with all credit risk-related contingent features and had derivative instruments with credit risk-related contingent features in a net liability position of $59 million . However, no derivative instruments with credit risk-related contingent features in a net liability position were greater than $50 million by counterparty. Accordingly, the Company was not required to post any collateral as a result of these contingent features. Further, as of May 31, 2017 , the Company had received no cash collateral from various counterparties to its derivative contracts (refer to Note 6 — Fair Value Measurements ). Given the considerations described above, the Company considers the impact of the risk of counterparty default to be immaterial . +NOTE 17 — Operating Segments and Related Information +The Company’s operating segments are evidence of the structure of the Company's internal organization. The NIKE Brand segments are defined by geographic regions for operations participating in NIKE Brand sales activity. +Each NIKE Brand geographic segment operates predominantly in one industry: the design, development, marketing and selling of athletic footwear, apparel and equipment. The Company’s reportable operating segments for the NIKE Brand are: North America, Western Europe, Central & Eastern Europe, Greater China, Japan and Emerging Markets, and include results for the NIKE, Jordan and Hurley brands. +In June 2017, NIKE, Inc. announced a new company alignment designed to allow NIKE to better serve the consumer personally, at scale. As a result of this organizational realignment, beginning in fiscal 2018, the Company's reportable operating segments for the NIKE Brand will be: North America; Europe, Middle East and Africa; Greater China; and Asia Pacific and Latin America. +The Company’s NIKE Brand Direct to Consumer (DTC) operations are, and will continue to be, managed within each geographic operating segment. Converse is also a reportable segment for the Company, and operates in one industry: the design, marketing, licensing and selling of casual sneakers, apparel and accessories. +Global Brand Divisions is included within the NIKE Brand for presentation purposes to align with the way management views the Company. Global Brand Divisions primarily represents NIKE Brand licensing businesses that are not part of a geographic operating segment, and demand creation, operating overhead and product creation and design expenses that are centrally managed for the NIKE Brand. +Corporate consists largely of unallocated general and administrative expenses, including expenses associated with centrally managed departments; depreciation and amortization related to the Company’s headquarters; unallocated insurance, benefit and compensation programs, including stock-based compensation; and certain foreign currency gains and losses, including certain hedge gains and losses. +70 +Table of Contents +The primary financial measure used by the Company to evaluate performance of individual operating segments is earnings before interest and taxes (commonly referred to as “EBIT”), which represents Net income before Interest expense (income), net and Income tax expense in the Consolidated Statements of Income. +As part of the Company's centrally managed foreign exchange risk management program, standard foreign currency rates are assigned twice per year to each NIKE Brand entity in the Company's geographic operating segments and to Converse. These rates are set approximately nine and twelve months in advance of the future selling seasons to which they relate (specifically, for each currency, one standard rate applies to the fall and holiday selling seasons and one standard rate applies to the spring and summer selling seasons) based on average market spot rates in the calendar month preceding the date they are established. Inventories and Cost of sales for geographic operating segments and Converse reflect the use of these standard rates to record non-functional currency product purchases in the entity’s functional currency. Differences between assigned standard foreign currency rates and actual market rates are included in Corporate, together with foreign currency hedge gains and losses generated from the Company's centrally managed foreign exchange risk management program and other conversion gains and losses. +Accounts receivable, net , Inventories and Property, plant and equipment, net for operating segments are regularly reviewed by management and are therefore provided below. Additions to long-lived assets as presented in the following table represent capital expenditures. +71 +Table of Contents +Year Ended May 31, +(In millions) +2017 +2016 +2015 +REVENUES +North America +$ +15,216 +$ +14,764 +$ +13,740 +Western Europe +6,211 +5,884 +5,705 +Central & Eastern Europe +1,487 +1,431 +1,421 +Greater China +4,237 +3,785 +3,067 +Japan +1,014 +869 +755 +Emerging Markets +3,995 +3,701 +3,898 +Global Brand Divisions +73 +73 +115 +Total NIKE Brand +32,233 +30,507 +28,701 +Converse +2,042 +1,955 +1,982 +Corporate +75 +(86 +) +(82 +) +TOTAL NIKE, INC. REVENUES +$ +34,350 +$ +32,376 +$ +30,601 +EARNINGS BEFORE INTEREST AND TAXES +North America +$ +3,875 +$ +3,763 +$ +3,645 +Western Europe +1,203 +1,434 +1,275 +Central & Eastern Europe +244 +289 +249 +Greater China +1,507 +1,372 +993 +Japan +224 +174 +100 +Emerging Markets +816 +892 +818 +Global Brand Divisions +(2,677 +) +(2,596 +) +(2,267 +) +Total NIKE Brand +5,192 +5,328 +4,813 +Converse +477 +487 +517 +Corporate +(724 +) +(1,173 +) +(1,097 +) +Total NIKE, Inc. Earnings Before Interest and Taxes +4,945 +4,642 +4,233 +Interest expense (income), net +59 +19 +28 +TOTAL NIKE, INC. INCOME BEFORE INCOME TAXES +$ +4,886 +$ +4,623 +$ +4,205 +ADDITIONS TO LONG-LIVED ASSETS +North America +$ +223 +$ +242 +$ +208 +Western Europe +162 +215 +216 +Central & Eastern Europe +10 +17 +20 +Greater China +51 +44 +69 +Japan +21 +13 +15 +Emerging Markets +39 +51 +37 +Global Brand Divisions +278 +258 +225 +Total NIKE Brand +784 +840 +790 +Converse +30 +39 +69 +Corporate +387 +312 +144 +TOTAL ADDITIONS TO LONG-LIVED ASSETS +$ +1,201 +$ +1,191 +$ +1,003 +DEPRECIATION +North America +$ +140 +$ +133 +$ +121 +Western Europe +91 +72 +75 +Central & Eastern Europe +13 +12 +12 +Greater China +54 +48 +46 +Japan +18 +18 +22 +Emerging Markets +38 +25 +27 +Global Brand Divisions +233 +230 +210 +Total NIKE Brand +587 +538 +513 +Converse +28 +27 +18 +Corporate +91 +84 +75 +TOTAL DEPRECIATION +$ +706 +$ +649 +$ +606 +72 +Table of Contents +As of May 31, +(In millions) +2017 +2016 +ACCOUNTS RECEIVABLE, NET +North America +$ +1,798 +$ +1,689 +Western Europe +410 +378 +Central & Eastern Europe +228 +194 +Greater China +102 +74 +Japan +151 +129 +Emerging Markets +594 +409 +Global Brand Divisions +86 +76 +Total NIKE Brand +3,369 +2,949 +Converse +297 +270 +Corporate +11 +22 +TOTAL ACCOUNTS RECEIVABLE, NET +$ +3,677 +$ +3,241 +INVENTORIES +North America +$ +2,218 +$ +2,363 +Western Europe +1,035 +929 +Central & Eastern Europe +251 +210 +Greater China +463 +375 +Japan +127 +146 +Emerging Markets +608 +478 +Global Brand Divisions +68 +35 +Total NIKE Brand +4,770 +4,536 +Converse +286 +306 +Corporate +(1 +) +(4 +) +TOTAL INVENTORIES +$ +5,055 +$ +4,838 +PROPERTY, PLANT AND EQUIPMENT, NET +North America +$ +819 +$ +742 +Western Europe +658 +589 +Central & Eastern Europe +48 +50 +Greater China +225 +234 +Japan +223 +223 +Emerging Markets +120 +109 +Global Brand Divisions +533 +511 +Total NIKE Brand +2,626 +2,458 +Converse +125 +125 +Corporate +1,238 +937 +TOTAL PROPERTY, PLANT AND EQUIPMENT, NET +$ +3,989 +$ +3,520 +Revenues by Major Product Lines +Revenues from external customers for NIKE Brand products are attributable to sales of footwear, apparel and equipment. Other revenues from external customers consist primarily of sales by Converse. +Year Ended May 31, +(In millions) +2017 +2016 +2015 +Footwear +$ +21,081 +$ +19,871 +$ +18,318 +Apparel +9,654 +9,067 +8,637 +Equipment +1,425 +1,496 +1,631 +Other +2,190 +1,942 +2,015 +TOTAL NIKE, INC. REVENUES +$ +34,350 +$ +32,376 +$ +30,601 +73 +Table of Contents +Revenues and Long-Lived Assets by Geographic Area +After allocation of revenues for Global Brand Divisions, Converse and Corporate to geographical areas based on the location where the sales originated, revenues by geographical area are essentially the same as reported above for the NIKE Brand operating segments with the exception of the United States. Revenues derived in the United States were $15,778 million , $15,304 million and $14,180 million for the years ended May 31, 2017 , 2016 and 2015 , respectively. The Company’s largest concentrations of long-lived assets primarily consist of the Company’s world headquarters and distribution facilities in the United States and distribution facilities in Belgium, China and Japan. Long-lived assets attributable to operations in the United States, which are primarily composed of net property, plant & equipment, were $2,629 million and $2,241 million at May 31, 2017 and 2016 , respectively. Long-lived assets attributable to operations in Belgium were $390 million and $348 million at May 31, 2017 and 2016 , respectively. Long-lived assets attributable to operations in China were $232 million and $240 million at May 31, 2017 and 2016 , respectively. Long-lived assets attributable to operations in Japan were $223 million and $223 million at May 31, 2017 and 2016 , respectively. +Major Customers +No customer accounted for 10% or more of the Company’s net revenues during the years ended May 31, 2017 , 2016 and 2015 . +ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure +There has been no change of accountants nor any disagreements with accountants on any matter of accounting principles or practices or financial statement disclosure required to be reported under this Item. +ITEM 9A. Controls and Procedures +We maintain disclosure controls and procedures that are designed to ensure information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. +We carry out a variety of ongoing procedures, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, to evaluate the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of May 31, 2017 . +“Management’s Annual Report on Internal Control Over Financial Reporting” is included in Item 8 of this Report. +We have continued several transformation initiatives to centralize and simplify our business processes and systems. These are long-term initiatives, which we believe will enhance our internal control over financial reporting due to increased automation and further integration of related processes. We will continue to monitor our internal control over financial reporting for effectiveness throughout the transformation. +There have not been any other changes in our internal control over financial reporting during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. +ITEM 9B. Other Information +No disclosure is required under this Item. +74 +Table of Contents +PART III +ITEM 10. Directors, Executive Officers and Corporate Governance +The information required by Item 401 of Regulation S-K regarding directors is included under “Election of Directors” in the definitive Proxy Statement for our 2017 Annual Meeting of Shareholders and is incorporated herein by reference. The information required by Item 401 of Regulation S-K regarding executive officers is included under “Executive Officers of the Registrant” in Item 1 of this Report. The information required by Item 405 of Regulation S-K is included under “Election of Directors — Section 16(a) Beneficial Ownership Reporting Compliance” in the definitive Proxy Statement for our 2017 Annual Meeting of Shareholders and is incorporated herein by reference. The information required by Item 406 of Regulation S-K is included under “Corporate Governance — Code of Business Conduct and Ethics” in the definitive Proxy Statement for our 2017 Annual Meeting of Shareholders and is incorporated herein by reference. The information required by Items 407(d)(4) and (d)(5) of Regulation S-K regarding the Audit Committee of the Board of Directors is included under “Corporate Governance — Board Committees” in the definitive Proxy Statement for our 2017 Annual Meeting of Shareholders and is incorporated herein by reference. +ITEM 11. Executive Compensation +The information required by Items 402, 407(e)(4) and 407(e)(5) of Regulation S-K regarding executive compensation is included under “Election of Directors — Director Compensation for Fiscal 2017 ,” “Compensation Discussion and Analysis,” “Executive Compensation,” “Election of Directors — Compensation Committee Interlocks and Insider Participation,” and “Compensation Committee Report” in the definitive Proxy Statement for our 2017 Annual Meeting of Shareholders and is incorporated herein by reference. +ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters +The information required by Item 201(d) of Regulation S-K is included under “Executive Compensation — Equity Compensation Plans” in the definitive Proxy Statement for our 2017 Annual Meeting of Shareholders and is incorporated herein by reference. The information required by Item 403 of Regulation S-K is included under “Election of Directors — Stock Holdings of Certain Owners and Management” in the definitive Proxy Statement for our 2017 Annual Meeting of Shareholders and is incorporated herein by reference. +ITEM 13. Certain Relationships and Related Transactions and Director Independence +The information required by Items 404 and 407(a) of Regulation S-K is included under “Election of Directors — Transactions with Related Persons” and “Corporate Governance — Director Independence” in the definitive Proxy Statement for our 2017 Annual Meeting of Shareholders and is incorporated herein by reference. +ITEM 14. Principal Accountant Fees and Services +The information required by Item 9(e) of Schedule 14A is included under “Ratification of Independent Registered Public Accounting Firm” in the definitive Proxy Statement for our 2017 Annual Meeting of Shareholders and is incorporated herein by reference. +75 +Table of Contents +PART IV +ITEM 15. Exhibits and Financial Statement Schedules +(a) +The following documents are filed as part of this report: +Form 10-K +Page No. +1. +Financial Statements: +Report of Independent Registered Public Accounting Firm +45 +Consolidated Statements of Income for each of the three years ended May 31, 2017, May 31, 2016 and May 31, 2015 +46 +Consolidated Statements of Comprehensive Income for each of the three years ended May 31, 2017, May 31, 2016 and May 31, 2015 +47 +Consolidated Balance Sheets at May 31, 2017 and May 31, 2016 +48 +Consolidated Statements of Cash Flows for each of the three years ended May 31, 2017, May 31, 2016 and May 31, 2015 +49 +Consolidated Statements of Shareholders’ Equity for each of the three years ended May 31, 2017, May 31, 2016 and May 31, 2015 +50 +Notes to Consolidated Financial Statements +51 +2. +Financial Statement Schedule: +II — Valuation and Qualifying Accounts +79 +All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. +3. +Exhibits: +3.1 +Restated Articles of Incorporation, as amended (incorporated by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended November 30, 2015). +3.2 +Fourth Restated Bylaws, as amended (incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K filed April 24, 2017). +4.1 +Restated Articles of Incorporation, as amended (see Exhibit 3.1). +4.2 +Fourth Restated Bylaws, as amended (see Exhibit 3.2). +4.3 +Indenture dated as of April 26, 2013, by and between NIKE, Inc. and Deutsche Bank Trust Company Americas, as trustee (incorporated by reference to Exhibit 4.1 to the Company's Form 8-K filed April 26, 2013). +4.4 +Second Supplemental Indenture, dated as of October 29, 2015, by and between NIKE, Inc. and Deutsche Bank Trust Company Americas, as trustee, including the form of 3.875% Notes due 2045 (incorporated by reference to Exhibit 4.2 to the Company's Form 8-K filed October 29, 2015). +4.5 +Third Supplemental Indenture, dated as of October 21, 2016, by and between NIKE, Inc. and Deutsche Bank Trust Company Americas, as trustee, including the form of 2.375% Notes due 2026 and form of 3.375% Notes due 2046 (incorporated by reference to Exhibit 4.2 to the Company's Form 8-K filed October 21, 2016). +10.1 +Form of Non-Statutory Stock Option Agreement for options granted to non-employee directors prior to May 31, 2010 under the 1990 Stock Incentive Plan (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed June 21, 2005).* +10.2 +Form of Non-Statutory Stock Option Agreement for options granted to non-employee directors after May 31, 2010 under the 1990 Stock Incentive Plan (incorporated by reference to Exhibit 10.2 to the Company’s Annual Report on Form 10-K for the fiscal year ended May 31, 2010).* +10.3 +Form of Non-Statutory Stock Option Agreement for options granted to executives prior to May 31, 2010 under the 1990 Stock Incentive Plan (incorporated by reference to Exhibit 10.1 to the Company’s Annual Report on Form 10-K for the fiscal year ended May 31, 2009).* +10.4 +Form of Restricted Stock Agreement for non-employee directors under the 1990 Stock Incentive Plan (incorporated by reference to Exhibit 10.4 to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 2014).* +10.5 +Form of Non-Statutory Stock Option Agreement for options granted to executives after May 31, 2010 under the Stock Incentive Plan (incorporated by reference to Exhibit 10.5 to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 2015).* +10.6 +Form of Indemnity Agreement entered into between the Company and each of its officers and directors (incorporated by reference to Exhibit 10.2 to the Company’s Annual Report on Form 10-K for the fiscal year ended May 31, 2008).* +76 +Table of Contents +10.7 +NIKE, Inc. 1990 Stock Incentive Plan (incorporated by reference to Exhibit 10.7 to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 2014).* +10.8 +NIKE, Inc. Executive Performance Sharing Plan (incorporated by reference to Exhibit 10.7 to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 2012).* +10.9 +NIKE, Inc. Long-Term Incentive Plan (incorporated by reference to Exhibit 10.9 to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 2015).* +10.10 +NIKE, Inc. Deferred Compensation Plan (Amended and Restated effective April 1, 2013) (incorporated by reference to Exhibit 10.9 to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 2013).* +10.11 +NIKE, Inc. Deferred Compensation Plan (Amended and Restated effective June 1, 2004) (applicable to amounts deferred before January 1, 2005) (incorporated by reference to Exhibit 10.6 to the Company’s Annual Report on Form 10-K for the fiscal year ended May 31, 2004).* +10.12 +Amendment No. 1 effective January 1, 2008 to the NIKE, Inc. Deferred Compensation Plan (June 1, 2004 Restatement) (incorporated by reference to Exhibit 10.9 to the Company’s Annual Report on Form 10-K for the fiscal year ended May 31, 2009).* +10.13 +NIKE, Inc. Foreign Subsidiary Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended November 30, 2008).* +10.14 +Amended and Restated Covenant Not to Compete and Non-Disclosure Agreement between NIKE, Inc. and Mark G. Parker dated July 24, 2008 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed July 24, 2008).* +10.15 +Form of Restricted Stock Agreement under the Stock Incentive Plan for awards after May 31, 2010 (incorporated by reference to Exhibit 10.15 to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 2015).* +10.16 +Form of Restricted Stock Unit Agreement under the Stock Incentive Plan (incorporated by reference to Exhibit 10.16 to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 2015).* +10.17 +Covenant Not to Compete and Non-Disclosure Agreement between NIKE, Inc. and Andrew Campion dated July 17, 2015 (incorporated by reference to Exhibit 10.17 to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 2016).* +10.18 +Covenant Not to Compete and Non-Disclosure Agreement between NIKE, Inc. and Eric D. Sprunk dated April 18, 2001 (incorporated by reference to Exhibit 10.23 to the Company’s Annual Report on Form 10-K for the fiscal year ended May 31, 2010).* +10.19 +Covenant Not to Compete and Non-Disclosure Agreement between NIKE, Inc. and Trevor A. Edwards dated November 14, 2002 (incorporated by reference to Exhibit 10.19 to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 2008).* +10.20 +Covenant Not to Compete and Non-Disclosure Agreement between NIKE, Inc. and Michael Spillane dated April 26, 2015.* +10.21 +Policy for Recoupment of Incentive Compensation (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed July 20, 2010).* +10.22 +Credit Agreement dated as of August 28, 2015 among NIKE, Inc., Bank of America, N.A., as Administrative Agent, Citibank N.A., as Syndication Agent, Deutsche Bank A.G. New York Branch and HSBC Bank USA, National Association, as Co-Documentation Agents, and the other Banks named therein (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed September 2, 2015). +10.23 +Executive Performance Sharing Plan (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed September 23, 2015).* +10.24 +Stock Incentive Plan, as amended (incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K filed September 23, 2015).* +12.1 +Computation of Ratio of Earnings to Fixed Charges. +21 +Subsidiaries of the Registrant. +23 +Consent of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm (included within this Annual Report on Form 10-K). +31.1 +Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer. +31.2 +Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer. +32 +Section 1350 Certifications. +101.INS +XBRL Instance Document +101.SCH +XBRL Taxonomy Extension Schema +101.CAL +XBRL Taxonomy Extension Calculation Linkbase +101.DEF +XBRL Taxonomy Extension Definition Document +101.LAB +XBRL Taxonomy Extension Label Linkbase +101.PRE +XBRL Taxonomy Extension Presentation Linkbase +* Management contract or compensatory plan or arrangement. +The Exhibits filed herewith do not include certain instruments with respect to long-term debt of NIKE and its subsidiaries, inasmuch as the total amount of debt authorized under any such instrument does not exceed 10 percent of the total assets of NIKE and its subsidiaries on a consolidated basis. NIKE agrees, pursuant to Item 601(b)(4)(iii) of Regulation S-K, that it will furnish a copy of any such instrument to the SEC upon request. +Upon written request to Investor Relations, NIKE, Inc., One Bowerman Drive, Beaverton, Oregon 97005-6453, NIKE will furnish shareholders with a copy of any Exhibit upon payment of $0.10 per page, which represents our reasonable expenses in furnishing Exhibits. +77 +Table of Contents +ITEM 16. Form 10-K Summary +None. +78 +Table of Contents +SCHEDULE II — Valuation and Qualifying Accounts +(In millions) +Balance at +Beginning of Period +Charged to Costs +and Expenses +Charged to Other Accounts (1) +Write-Offs, Net +Balance at End +of Period +Sales returns reserve +For the year ended May 31, 2015 +$ +308 +$ +726 +$ +(35 +) +$ +(620 +) +$ +379 +For the year ended May 31, 2016 +379 +788 +(15 +) +(708 +) +444 +For the year ended May 31, 2017 +444 +696 +3 +(800 +) +343 +Allowance for doubtful accounts (2) +For the year ended May 31, 2015 +$ +78 +$ +35 +$ +(15 +) +$ +(20 +) +$ +78 +For the year ended May 31, 2016 +78 +52 +(2 +) +(85 +) +43 +For the year ended May 31, 2017 +43 +16 +— +(40 +) +19 +(1) +Amounts included in this column primarily relate to foreign currency translation. +(2) +Includes both current and non-current portions of the allowance for doubtful accounts. The non-current portion is included in Deferred income taxes and other assets on the Consolidated Balance Sheets. +79 +Table of Contents +Consent of Independent Registered Public Accounting Firm +We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (No. 333-212617) and Form S-8 (Nos. 033-63995, 333-63581, 333-63583, 333-68864, 333-68886, 333-71660, 333-104822, 333-117059, 333-133360, 333-164248, 333-171647, 333-173727, 333-208900 and 333-215439) of NIKE, Inc. of our report dated July 20, 2017 relating to the financial statements, financial statement schedule and the effectiveness of internal control over financial reporting, which appears in this Form 10-K. +/s/ PRICEWATERHOUSECOOPERS LLP +Portland, Oregon +July 20, 2017 +80 +Table of Contents +Signatures +Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. +NIKE, INC. +By: +/s/ MARK G. PARKER +Mark G. Parker +Chairman, President and Chief Executive Officer +Date: +July 20, 2017 +Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. +Signature +Title +Date +PRINCIPAL EXECUTIVE OFFICER AND DIRECTOR: +/s/ MARK G. PARKER +Mark G. Parker +Chairman, President and Chief Executive Officer +July 20, 2017 +PRINCIPAL FINANCIAL OFFICER: +/s/ ANDREW CAMPION +Andrew Campion +Chief Financial Officer +July 20, 2017 +PRINCIPAL ACCOUNTING OFFICER: +/s/ CHRIS L. ABSTON +Chris L. Abston +Corporate Controller +July 20, 2017 +DIRECTORS: +/s/ ELIZABETH J. COMSTOCK +Elizabeth J. Comstock +Director +July 20, 2017 +/s/ JOHN G. CONNORS +John G. Connors +Director +July 20, 2017 +/s/ TIMOTHY D. COOK +Timothy D. Cook +Director +July 20, 2017 +/s/ JOHN J. DONAHOE II +John J. Donahoe II +Director +July 20, 2017 +/s/ ALAN B. GRAF, JR. +Alan B. Graf, Jr. +Director +July 20, 2017 +/s/ TRAVIS A. KNIGHT +Travis A. Knight +Director +July 20, 2017 +/s/ JOHN C. LECHLEITER +John C. Lechleiter +Director +July 20, 2017 +/s/ MICHELLE A. PELUSO +Michelle A. Peluso +Director +July 20, 2017 +/s/ JOHNATHAN A. RODGERS +Johnathan A. Rodgers +Director +July 20, 2017 +/s/ JOHN R. THOMPSON, JR. +John R. Thompson, Jr. +Director +July 20, 2017 +/s/ PHYLLIS M. WISE +Phyllis M. Wise +Director +July 20, 2017 +81 \ No newline at end of file diff --git a/raw/filings/0000320187/2016/0000320187-17-000090/filing_metadata.csv b/raw/filings/0000320187/2016/0000320187-17-000090/filing_metadata.csv new file mode 100644 index 0000000000000000000000000000000000000000..37a602d0076609db49eac766a78c6d6a3284123e --- /dev/null +++ b/raw/filings/0000320187/2016/0000320187-17-000090/filing_metadata.csv @@ -0,0 +1,2 @@ +cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing +0000320187,NKE,"NIKE, Inc.",10-K,2017-07-20,2017-05-31,2017-07-21T00:18:16.000Z,0000320187-17-000090,nke-5312017x10k.htm,10-K,14463966,1,0,https://www.sec.gov/Archives/edgar/data/320187/000032018717000090/nke-5312017x10k.htm,https://www.sec.gov/Archives/edgar/data/320187/000032018717000090/,2016,2016,1 diff --git a/raw/filings/0000320187/2016/0000320187-17-000090/item1.txt b/raw/filings/0000320187/2016/0000320187-17-000090/item1.txt new file mode 100644 index 0000000000000000000000000000000000000000..a689814b2d2fac8a4e89c15c7ef1717abea109ed --- /dev/null +++ b/raw/filings/0000320187/2016/0000320187-17-000090/item1.txt @@ -0,0 +1,112 @@ +ITEM 1. Business +General +NIKE, Inc. was incorporated in 1967 under the laws of the State of Oregon. As used in this report, the terms “we,” “us,” “NIKE,” and the “Company” refer to NIKE, Inc. and its predecessors, subsidiaries and affiliates, collectively, unless the context indicates otherwise. Our NIKE digital commerce website is located at www.nike.com. On our NIKE corporate website, located at investors.nike.com, we post the following filings as soon as reasonably practicable after they are electronically filed with, or furnished to, the United States Securities and Exchange Commission (the “SEC”): our annual report on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities and Exchange Act of 1934, as amended. Our definitive Proxy Statements are also posted on our corporate website. All such filings on our corporate website are available free of charge. Copies of these filings may also be obtained by visiting the Public Reference Room of the SEC at 100 F Street, NE, Washington, D.C. 20549, or by calling the SEC at 1-800-SEC-0330 and are available on the SEC's website ( www.sec.gov ). Also available on our corporate website are the charters of the committees of our Board of Directors, as well as our corporate governance guidelines and code of ethics; copies of any of these documents will be provided in print to any shareholder who submits a request in writing to NIKE Investor Relations, One Bowerman Drive, Beaverton, Oregon 97005-6453. +Our principal business activity is the design, development and worldwide marketing and selling of athletic footwear, apparel, equipment, accessories and services. NIKE is the largest seller of athletic footwear and apparel in the world. We sell our products to retail accounts, through NIKE-owned retail stores, internet websites, and mobile applications (which we refer to collectively as our “Direct to Consumer” or “DTC” operations), and through a mix of independent distributors and licensees throughout the world. Virtually all of our products are manufactured by independent contractors. Nearly all footwear and apparel products are produced outside the United States, while equipment products are produced both in the United States and abroad. +Products +We focus our NIKE Brand product offerings in nine key categories: Running, NIKE Basketball, the Jordan Brand, Football (Soccer), Men’s Training, Women’s Training, Action Sports, Sportswear (our sports-inspired lifestyle products) and Golf. Men's Training includes our baseball and American football product offerings. We also market products designed for kids, as well as for other athletic and recreational uses such as cricket, lacrosse, tennis, volleyball, wrestling, walking and outdoor activities. +NIKE’s athletic footwear products are designed primarily for specific athletic use, although a large percentage of the products are worn for casual or leisure purposes. We place considerable emphasis on innovation and high-quality construction in the development and manufacturing of our products. Sportswear, Running and the Jordan Brand are currently our top-selling footwear categories and we expect them to continue to lead in footwear sales. +We also sell sports apparel covering the above-mentioned categories, which feature the same trademarks and are sold predominantly through the same marketing and distribution channels as athletic footwear. Our sports apparel, similar to our athletic footwear products, is designed primarily for athletic use and exemplifies our commitment to innovation and high-quality construction. Sportswear, Men’s Training and Running are currently our top-selling apparel categories and we expect them to continue to lead in apparel sales. We often market footwear, apparel and accessories in “collections” of similar use or by category. We also market apparel with licensed college and professional team and league logos. +We sell a line of performance equipment and accessories under the NIKE Brand name, including bags, socks, sport balls, eyewear, timepieces, digital devices, bats, gloves, protective equipment and other equipment designed for sports activities. We also sell small amounts of various plastic products to other manufacturers through our wholly-owned subsidiary, NIKE IHM, Inc., doing business as Air Manufacturing Innovation. +Our Jordan Brand designs, distributes and licenses athletic and casual footwear, apparel and accessories predominantly focused on basketball using the Jumpman trademark. Sales and operating results for Jordan Brand products are reported within the respective NIKE Brand geographic operating segments. +One of our wholly-owned subsidiary brands, Hurley, headquartered in Costa Mesa, California, designs and distributes a line of action sports and youth lifestyle apparel and accessories under the Hurley trademark. Sales and operating results for Hurley products are included within the NIKE Brand's North America geographic operating segment with sales reported within the Action Sports category. +Another of our wholly-owned subsidiary brands, Converse, headquartered in Boston, Massachusetts, designs, distributes and licenses casual sneakers, apparel and accessories under the Converse, Chuck Taylor, All Star, One Star, Star Chevron and Jack Purcell trademarks. Operating results of the Converse brand are reported on a stand-alone basis. +In addition to the products we sell to our wholesale customers and directly to consumers through our DTC operations, we have also entered into license agreements that permit unaffiliated parties to manufacture and sell, using NIKE-owned trademarks, certain apparel, digital devices and applications and other equipment designed for sports activities. +1 +Table of Contents +Sales and Marketing +Financial information about geographic and segment operations appears in Note 17 — Operating Segments and Related Information of the accompanying Notes to the Consolidated Financial Statements. +We experience moderate fluctuations in aggregate sales volume during the year. Historically, revenues in the first and fourth fiscal quarters have slightly exceeded those in the second and third quarters. However, the mix of product sales may vary considerably as a result of changes in seasonal and geographic demand for particular types of footwear, apparel and equipment, as well as other macroeconomic, operating and logistics-related factors. +Because NIKE is a consumer products company, the relative popularity of various sports and fitness activities and changing design trends affect the demand for our products. We must, therefore, respond to trends and shifts in consumer preferences by adjusting the mix of existing product offerings, developing new products, styles and categories and influencing sports and fitness preferences through extensive marketing. Failure to respond in a timely and adequate manner could have a material adverse effect on our sales and profitability. This is a continuing risk. Refer to Item 1A. Risk Factors. +We report our NIKE Brand operations based on our internal geographic organization. Each NIKE Brand geography operates predominantly in one industry: the design, development, marketing and selling of athletic footwear, apparel, equipment, accessories and services. For fiscal 2017, our reportable operating segments for the NIKE Brand are: North America, Western Europe, Central & Eastern Europe, Greater China, Japan and Emerging Markets. In June 2017, we announced a new company alignment designed to allow NIKE to better serve the consumer personally, at scale. As a result of this organizational realignment, beginning in fiscal 2018, the Company's reportable operating segments for the NIKE Brand will be: North America; Europe, Middle East and Africa; Greater China; and Asia Pacific and Latin America. Our NIKE Brand Direct to Consumer operations are, and will continue to be, managed within each geographic operating segment. +Converse is, and will continue to be, a reportable segment and operates in one industry: the design, marketing, licensing and selling of casual sneakers, apparel and accessories. Converse Direct to Consumer operations, including digital commerce, are reported within the Converse operating segment results. +United States Market +For fiscal 2017 , NIKE Brand and Converse sales in the United States accounted for approximately 46% of total revenues, compared to 47% and 46% for fiscal 2016 and fiscal 2015 , respectively. We sell our NIKE Brand, Jordan Brand, Hurley and Converse products to thousands of retail accounts in the United States, including a mix of footwear stores, sporting goods stores, athletic specialty stores, department stores, skate, tennis and golf shops and other retail accounts. In the United States, we utilize NIKE sales offices to solicit such sales. During fiscal 2017 , our three largest customers accounted for approximately 23% of sales in the United States. +Our Direct to Consumer operations sell NIKE Brand, Jordan Brand, Hurley and Converse products to consumers through our digital commerce website, www.nike.com and through mobile applications. In addition, our Direct to Consumer operations sell through the following number of retail stores in the United States: +U.S. Retail Stores +Number +NIKE Brand factory stores +209 +NIKE Brand in-line stores (including employee-only stores) +34 +Converse stores (including factory stores) +112 +Hurley stores (including factory and employee stores) +29 +TOTAL +384 +In the United States, NIKE has six significant distribution centers located in Memphis, Tennessee, two of which are owned and four of which are leased. NIKE Brand apparel and equipment products are also shipped from our leased Foothill Ranch, California distribution center. Converse and Hurley products are shipped primarily from leased facilities in Ontario, California, as well as from Memphis, Tennessee. Smaller leased distribution facilities are located in various parts of the United States. +We also operate a futures ordering program, which allows retailers to order five to six months in advance of delivery with the commitment that their orders will be delivered within a set time period at a fixed price. For fiscal 2017 , orders under the futures program represented 83% of our U.S. wholesale footwear revenues, compared to 84% for fiscal 2016 and 87% for fiscal 2015 . For fiscal 2017 , futures orders represented 66% of our U.S. wholesale apparel revenues, compared to 66% for fiscal 2016 and 67% for fiscal 2015 . +International Markets +For fiscal 2017 , non-U.S. NIKE Brand and Converse sales accounted for 54% of total revenues, compared to 53% and 54% for fiscal 2016 and fiscal 2015 , respectively. We sell our products to retail accounts, through our own Direct to Consumer operations and through a mix of independent distributors, licensees and sales representatives around the world. We sell to thousands of retail accounts and ship products from 60 distribution centers outside of the United States. In many countries and regions, including Canada, Asia, Europe and some Latin American countries, we have a futures ordering program for retailers similar to the United States futures ordering program described above. During fiscal 2017 , NIKE’s three largest customers outside of the United States accounted for approximately 12% of total non-U.S. sales. +2 +Table of Contents +In addition to NIKE and Converse owned digital commerce websites in over 45 countries, our Direct to Consumer business operates the following number of retail stores outside the United States: +Non-U.S. Retail Stores +Number +NIKE Brand factory stores +642 +NIKE Brand in-line stores (including employee-only stores) +71 +Converse stores (including factory stores) +45 +TOTAL +758 +International branch offices and subsidiaries of NIKE are located in Argentina, Australia, Austria, Belgium, Bermuda, Brazil, Canada, Chile, China, Croatia, the Czech Republic, Denmark, Finland, France, Germany, Greece, Hong Kong, Hungary, India, Indonesia, Ireland, Israel, Italy, Japan, Korea, Macau, Malaysia, Mexico, the Netherlands, New Zealand, Norway, Panama, the Philippines, Poland, Portugal, Russia, Singapore, Slovakia, Slovenia, South Africa, Spain, Sri Lanka, Sweden, Switzerland, Taiwan, Thailand, Turkey, the United Arab Emirates, the United Kingdom, Uruguay and Vietnam. +Significant Customer +No customer accounted for 10% or more of our worldwide net revenues during fiscal 2017 . +Orders +Futures orders for NIKE Brand footwear and apparel scheduled for delivery from June through November 2017 were $14.7 billion compared to $15.0 billion for the same period last year. NIKE Brand futures orders include (1) orders from external wholesale customers and (2) internal orders from our DTC in-line stores and digital commerce operations which are reflected at prices that are comparable to prices charged to external wholesale customers. The U.S. Dollar futures orders amount is calculated based upon our internal forecast of the actual currency exchange rates under which our revenues will be translated during this period. Reported futures orders are not necessarily indicative of our expectation of revenues for this period and have become less correlated due to our evolving business model. This is due to year-over-year changes in shipment timing, changes in the mix of orders between futures and orders with shorter lead times, and because the fulfillment of certain orders may fall outside of the schedule noted above. In addition, foreign currency exchange rate fluctuations as well as differing levels of order cancellations, discounts and returns can cause differences in the comparisons between futures orders and actual revenues. A portion of our revenue is not derived from futures orders, including sales with short lead times, closeout NIKE Brand footwear and apparel, all sales of NIKE Brand equipment, the difference between retail sales and internal orders from our DTC in-line stores and digital commerce operations, and sales from Converse, NIKE Golf and Hurley. +Product Research, Design and Development +We believe our research, design and development efforts are key factors in our success. Technical innovation in the design and manufacturing process of footwear, apparel and athletic equipment receive continued emphasis as we strive to produce products that help to enhance athletic performance, reduce injury and maximize comfort while reducing waste. +In addition to our own staff of specialists in the areas of biomechanics, chemistry, exercise physiology, engineering, industrial design, sustainability and related fields, we also utilize research committees and advisory boards made up of athletes, coaches, trainers, equipment managers, orthopedists, podiatrists and other experts who consult with us and review designs, materials, concepts for product and manufacturing process improvements and compliance with product safety regulations around the world. Employee athletes, athletes engaged under sports marketing contracts and other athletes wear-test and evaluate products during the design and development process. +As we continue to develop new technologies, we are simultaneously focused on the design of innovative products incorporating such technologies throughout our product categories. Using market intelligence and research, our various design teams identify opportunities to leverage new technologies in existing categories responding to consumer preferences. The proliferation of NIKE Air, Lunar, Zoom, Free, Flywire, Dri-Fit, Flyknit, Flyweave, ZoomX, React and NIKE+ technologies throughout our Running, NIKE Basketball, the Jordan Brand, Football (Soccer), Men's Training, Women's Training and Sportswear categories, among others, typifies our dedication to designing innovative products. +Manufacturing +We are supplied by approximately 127 footwear factories located in 15 countries. The largest single footwear factory accounted for approximately 8% of total fiscal 2017 NIKE Brand footwear production. Virtually all of our footwear is manufactured outside of the United States by independent contract manufacturers who often operate multiple factories. For fiscal 2017 , contract factories in Vietnam, China and Indonesia manufactured approximately 46%, 27% and 21% of total NIKE Brand footwear, respectively. We also have manufacturing agreements with independent contract manufacturers in Argentina, India, Brazil, Mexico and Italy to manufacture footwear for sale primarily within those countries. For fiscal 2017 , five footwear contract manufacturers each accounted for greater than 10% of footwear production and in the aggregate accounted for approximately 69% of NIKE Brand footwear production. +We are supplied by approximately 363 apparel factories located in 37 countries. The largest single apparel factory accounted for approximately 13% of total fiscal 2017 NIKE Brand apparel production. Virtually all of our apparel is manufactured outside of the United States by independent contract manufacturers which often operate multiple factories. For fiscal 2017 , contract factories in China, Vietnam and Thailand produced approximately 26%, 16% and 10% of total NIKE Brand apparel, respectively. For fiscal 2017 , one apparel contract manufacturer accounted for more than 10% of apparel production, and the top five contract manufacturers in the aggregate accounted for approximately 43% of NIKE Brand apparel production. +3 +Table of Contents +The principal materials used in our footwear products are natural and synthetic rubber, plastic compounds, foam cushioning materials, natural and synthetic leather, nylon, polyester and canvas, as well as polyurethane films used to make NIKE Air-Sole cushioning components. During fiscal 2017 , Air Manufacturing Innovation, with facilities near Beaverton, Oregon and in St. Charles, Missouri, as well as independent contractors in China and Vietnam, were our suppliers of the Air-Sole cushioning components used in footwear. The principal materials used in our apparel products are natural and synthetic fabrics and threads (both virgin and recycled); specialized performance fabrics designed to efficiently wick moisture away from the body, retain heat and repel rain and/or snow; and plastic and metal hardware. NIKE’s independent contractors and suppliers buy raw materials for the manufacturing of our footwear, apparel and equipment products. Most raw materials are available and purchased by those independent contractors and suppliers in the countries where manufacturing takes place. NIKE's independent contract manufacturers and suppliers have thus far experienced little difficulty in satisfying raw material requirements for the production of our products. +Since 1972, Sojitz Corporation of America (“Sojitz America”), a large Japanese trading company and the sole owner of our redeemable preferred stock, has performed significant import-export financing services for us. During fiscal 2017 , Sojitz America provided financing and purchasing services for NIKE Brand products sold in certain NIKE markets including Argentina, Brazil, Canada, India, South Africa, Thailand and Uruguay, excluding products produced and sold in the same country. Approximately 6% of NIKE Brand sales occurred in those countries. Any failure of Sojitz America to provide these services or any failure of Sojitz America’s banks could disrupt our ability to acquire products from our suppliers and to deliver products to our customers in those markets. Such a disruption could result in canceled orders that would adversely affect sales and profitability. However, we believe that any such disruption would be short-term in duration due to the ready availability of alternative sources of financing at competitive rates. Our current agreements with Sojitz America expire on May 31, 2018 and contain a provision allowing us to extend the agreements to May 31, 2019. +International Operations and Trade +Our international operations and sources of supply are subject to the usual risks of doing business abroad, such as possible increases in import duties, anti-dumping measures, quotas, safeguard measures, trade restrictions, restrictions on the transfer of funds and, in certain parts of the world, political instability and terrorism. We have not, to date, been materially affected by any such risk, but cannot predict the likelihood of such material effects occurring in the future. +In recent years, uncertain global and regional economic and political conditions have affected international trade and increased protectionist actions around the world. These trends are affecting many global manufacturing and service sectors, and the footwear and apparel industries, as a whole, are not immune. Companies in our industry are facing trade protectionism in many different regions, and in nearly all cases we are working together with industry groups to address trade issues and reduce the impact to the industry, while observing applicable competition laws. Notwithstanding our efforts, protectionist measures have resulted in increases in the cost of our products, and additional measures, if implemented, could adversely affect sales and/or profitability for NIKE as well as the imported footwear and apparel industry as a whole. +We monitor protectionist trends and developments throughout the world that may materially impact our industry, and we engage in administrative and judicial processes to mitigate trade restrictions. We are actively monitoring actions that may result in additional anti-dumping measures and could affect our industry. We are also monitoring for and advocating against other impediments that may limit or delay customs clearance for imports of footwear, apparel and equipment. Current U.S. policy proposals, including potential tariffs or penalties on imported goods, if enacted, may negatively affect U.S. corporations with production activities outside the U.S., including NIKE. There have also been discussions and commentary regarding potential changes to U.S. trade policies. If any of these reforms are implemented, it may become necessary for us to change the way we conduct business which may adversely affect our results of operations. In addition , with respect to trade restrictions targeting China, which represents an important sourcing country and consumer market for us, we are working with a broad coalition of global businesses and trade associations representing a wide variety of sectors to help ensure that any legislation enacted and implemented (i) addresses legitimate and core concerns, (ii) is consistent with international trade rules and (iii) reflects and considers China's domestic economy and the important role it has in the global economic community. +Where trade protection measures are implemented, we believe that we have the ability to develop, over a period of time, adequate alternative sources of supply for the products obtained from our present suppliers. If events prevented us from acquiring products from our suppliers in a particular country, our operations could be temporarily disrupted and we could experience an adverse financial impact. However, we believe we could abate any such disruption, and that much of the adverse impact on supply would, therefore, be of a short-term nature, although alternate sources of supply might not be as cost-effective and could have an ongoing adverse impact on profitability. +NIKE advocates for trade liberalization for footwear and apparel in a number of regional and bilateral free trade agreements. +Competition +The athletic footwear, apparel and equipment industry is highly competitive on a worldwide basis. We compete internationally with a significant number of athletic and leisure footwear companies, athletic and leisure apparel companies, sports equipment companies and large companies having diversified lines of athletic and leisure footwear, apparel and equipment, including adidas, ASICS, Li Ning, lululemon athletica, Puma, Under Armour and V.F. Corporation, among others. The intense competition and the rapid changes in technology and consumer preferences in the markets for athletic and leisure footwear and apparel and athletic equipment, constitute significant risk factors in our operations. +NIKE is the largest seller of athletic footwear and apparel in the world. Important aspects of competition in this industry are: +• +Product attributes such as quality; performance and reliability; new product innovation and development and consumer price/value. +• +Consumer connection and affinity for brands and products, developed through marketing and promotion; social media interaction; customer support and service; identification with prominent and influential athletes, public figures, coaches, teams, colleges and sports leagues who endorse our brands and use our products and active engagement through sponsored sporting events and clinics. +• +Effective sourcing and distribution of products, with attractive merchandising and presentation at retail, both in-store and online. +We believe that we are competitive in all of these areas. +4 +Table of Contents +Trademarks and Patents +We believe that our intellectual property rights are important to our brand, our success, and our competitive position. We pursue available protections of these rights and vigorously protect them against third-party theft and infringement. +We utilize trademarks on nearly all of our products and believe having distinctive marks that are readily identifiable is an important factor in creating a market for our goods, in identifying our brands and the Company, and in distinguishing our goods from the goods of others. We consider our NIKE and Swoosh trademarks to be among our most valuable assets and we have registered these trademarks in almost 170 jurisdictions worldwide. In addition, we own many other trademarks that we utilize in marketing our products. We own common law rights in the trade dress of several significant shoe designs and elements. For certain trade dress, we have sought and obtained trademark registrations. +We have copyright protection in our design, graphics and other original works. In some instances, we also obtain registered copyrights. +We own patents and have a patent license, facilitating our use of “Air” technologies. +We file for, own and maintain many U.S. and foreign utility patents, as well as many U.S. and foreign design patents protecting components, technologies, manufacturing techniques, features and industrial design used in various athletic and leisure footwear and apparel, athletic equipment and digital devices. These patents expire at various times. +We believe our success depends upon our capabilities in areas such as design, research and development, production and marketing rather than exclusively upon our patent and trade secret positions. +However, we have followed a policy of filing patent applications for the United States and select foreign countries on inventions, designs and improvements that we deem valuable. We also continue to vigorously protect our trademarks and patents against third-party infringement. +Employees +As of May 31, 2017 , we had approximately 74,400 employees worldwide, including retail and part-time employees. Management considers its relationship with employees to be excellent. None of our employees are represented by a union, except for certain employees in the Emerging Markets geography, where local law requires those employees to be represented by a trade union. Also, in some countries outside of the United States, local laws require employee representation by works councils (which may be entitled to information and consultation on certain Company decisions) or by organizations similar to a union. In certain European countries, we are required by local law to enter into and/or comply with industry-wide or national collective bargaining agreements. NIKE has never experienced a material interruption of operations due to labor disagreements. +Executive Officers of the Registrant +The executive officers of NIKE, Inc. as of July 20, 2017 are as follows: +Mark G. Parker, Chairman, President and Chief Executive Officer — Mr. Parker, 61, was appointed President and Chief Executive Officer in January 2006 and named Chairman of the Board in June 2016. He has been employed by NIKE since 1979 with primary responsibilities in product research, design and development, marketing and brand management. Mr. Parker was appointed divisional Vice President in charge of product development in 1987, corporate Vice President in 1989, General Manager in 1993, Vice President of Global Footwear in 1998 and President of the NIKE Brand in 2001. +Chris L. Abston, Vice President and Corporate Controller — Mr. Abston, 54, joined NIKE in 2015 from Wal-Mart Stores, Inc., where he served as Vice President, Global Controls and Governance since February 2015. Prior to that he was Vice President and Controller of Walmart International from February 2013 to January 2015, responsible for the oversight of international accounting and reporting, and Vice President and Assistant Controller of Wal-Mart Stores, Inc. from May 2011 to January 2013. Before joining Wal-Mart, Mr. Abston spent 25 years in public accounting with Ernst & Young LLP, most recently leading its Strategic Growth Markets practice as a Partner in the Dallas office. +David J. Ayre, Executive Vice President, Global Human Resources — Mr. Ayre, 57, joined NIKE as Vice President, Global Human Resources in 2007. Prior to joining NIKE, he held a number of senior human resource positions with PepsiCo, Inc. since 1990, most recently as head of Talent and Performance Rewards. +Andrew Campion, Executive Vice President and Chief Financial Officer — Mr. Campion, 45, joined NIKE in 2007 as Vice President of Global Planning and Development, leading strategic and financial planning. He was appointed Chief Financial Officer of the NIKE Brand in 2010, responsible for leading all aspects of financial management for the Company's flagship brand. In 2014, he was appointed Senior Vice President, Strategy, Finance and Investor Relations in addition to his role as Chief Financial Officer of NIKE Brand. Mr. Campion assumed the role of Executive Vice President and Chief Financial Officer in August 2015. Prior to joining NIKE, he held leadership roles in strategic planning, mergers and acquisitions, financial planning and analysis, operations and planning, investor relations and tax at The Walt Disney Company from 1996 to 2007. +Trevor A. Edwards, President, NIKE Brand — Mr. Edwards, 54, joined NIKE in 1992. He was appointed Marketing Manager, Strategic Accounts for Foot Locker in 1993, Director of Marketing for the Americas in 1995, Director of Marketing for Europe in 1997, Vice President, Marketing for Europe, Middle East and Africa in 1999 and Vice President, U.S. Brand Marketing in 2000. Mr. Edwards was appointed corporate Vice President, Global Brand Management in 2002, Vice President, Global Brand and Category Management in 2006 and President, NIKE Brand in 2013. Prior to NIKE, Mr. Edwards was with the Colgate-Palmolive Company. +Hilary K. Krane, Executive Vice President, Chief Administrative Officer and General Counsel — Ms. Krane, 53, joined NIKE as Vice President and General Counsel in April 2010. In 2011, her responsibilities expanded and she became Vice President, General Counsel and Corporate Affairs. Ms. Krane was appointed Executive Vice President, Chief Administrative Officer and General Counsel in 2013. Prior to joining NIKE, Ms. Krane was General Counsel and Senior Vice President for Corporate Affairs at Levi Strauss & Co. from 2006 to 2010. From 1996 to 2006, she was a Partner and Assistant General Counsel at PricewaterhouseCoopers LLP. +5 +Table of Contents +John F. Slusher, Executive Vice President, Global Sports Marketing — Mr. Slusher, 48, has been employed by NIKE since 1998 with primary responsibilities in global sports marketing. Mr. Slusher was appointed Director of Sports Marketing for Asia Pacific and Americas in 2006, divisional Vice President of Asia Pacific & Americas Sports Marketing in September 2007 and Vice President, Global Sports Marketing in November 2007. Prior to joining NIKE, Mr. Slusher was an attorney at the law firm of O’Melveny & Myers from 1995 to 1998. +Eric D. Sprunk, Chief Operating Officer — Mr. Sprunk, 53, joined NIKE in 1993. He was appointed Finance Director and General Manager of the Americas in 1994, Finance Director for NIKE Europe in 1995, Regional General Manager of NIKE Europe Footwear in 1998 and Vice President & General Manager of the Americas in 2000. Mr. Sprunk was appointed Vice President of Global Footwear in 2001, Vice President of Merchandising and Product in 2009 and Chief Operating Officer in 2013. Prior to joining NIKE, Mr. Sprunk was a certified public accountant with Price Waterhouse from 1987 to 1993. +As recently announced by the Company, Mr. Ayre will retire at the end of the calendar year. Succeeding Mr. Ayre as Executive Vice President, Global Human Resources, will be Monique Matheson. Ms. Matheson, 50, has been employed by NIKE since 1998, with primary responsibilities in the human resources function and most recently serving as Vice President, Chief Talent and Diversity Officer. +6 +Table of Contents \ No newline at end of file diff --git a/raw/filings/0000320187/2016/0000320187-17-000090/item13.txt b/raw/filings/0000320187/2016/0000320187-17-000090/item13.txt new file mode 100644 index 0000000000000000000000000000000000000000..48a0288ea46b7c02c6fd8dbb022157bde258ae88 --- /dev/null +++ b/raw/filings/0000320187/2016/0000320187-17-000090/item13.txt @@ -0,0 +1,2 @@ +ITEM 13. Certain Relationships and Related Transactions and Director Independence +The information required by Items 404 and 407(a) of Regulation S-K is included under “Election of Directors — Transactions with Related Persons” and “Corporate Governance — Director Independence” in the definitive Proxy Statement for our 2017 Annual Meeting of Shareholders and is incorporated herein by reference. \ No newline at end of file diff --git a/raw/filings/0000320187/2016/0000320187-17-000090/item9a.txt b/raw/filings/0000320187/2016/0000320187-17-000090/item9a.txt new file mode 100644 index 0000000000000000000000000000000000000000..13ce078d30d85f1dbd3d027ab54b3f84d96e325d --- /dev/null +++ b/raw/filings/0000320187/2016/0000320187-17-000090/item9a.txt @@ -0,0 +1,6 @@ +ITEM 9A. Controls and Procedures +We maintain disclosure controls and procedures that are designed to ensure information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. +We carry out a variety of ongoing procedures, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, to evaluate the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of May 31, 2017 . +“Management’s Annual Report on Internal Control Over Financial Reporting” is included in Item 8 of this Report. +We have continued several transformation initiatives to centralize and simplify our business processes and systems. These are long-term initiatives, which we believe will enhance our internal control over financial reporting due to increased automation and further integration of related processes. We will continue to monitor our internal control over financial reporting for effectiveness throughout the transformation. +There have not been any other changes in our internal control over financial reporting during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. \ No newline at end of file diff --git a/raw/filings/0000320187/2016/0000320187-17-000090/rp_note.txt b/raw/filings/0000320187/2016/0000320187-17-000090/rp_note.txt new file mode 100644 index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391 diff --git a/raw/filings/0000320187/2016/0000320187-17-000090/rpt_disclosure.txt b/raw/filings/0000320187/2016/0000320187-17-000090/rpt_disclosure.txt new file mode 100644 index 0000000000000000000000000000000000000000..dc5c1f1579b32adabb81ac1c4d25833bd8913986 --- /dev/null +++ b/raw/filings/0000320187/2016/0000320187-17-000090/rpt_disclosure.txt @@ -0,0 +1,8 @@ +Transactions with Related Persons +During fiscal 2017, Howard S. Slusher, the father of John Slusher, Executive Vice President of Sports Marketing, and the Company were parties to a Consulting Agreement pursuant to which Howard Slusher managed the planning, design, and construction of new buildings at, and improvements to, NIKE’s World Headquarters. Howard Slusher was selected due to his deep history and experience with the Company, as he managed several significant construction projects for the Company, including the original World Headquarters construction and later expansions. During fiscal 2017, the Company paid Howard Slusher $2,024,592 for these services. +Pursuant to the terms of a past consulting agreement with the Company, the Company agreed to pay for health and life insurance policies for Howard Slusher following expiration of the agreement. During fiscal 2017, the Company paid $71,970 for life insurance premiums. +Two of Mr. Parker’s siblings, each with over 25 years of service to the Company, were employed by the Company in non-executive roles in fiscal 2017. Ann Parker was a Design Talent Scout, and Stephen Parker held a Vice President role with Converse. During fiscal 2017, the Company paid aggregate compensation to each of Ann Parker and Stephen Parker in the amounts of $289,894 and $540,820, respectively, comprising of salary, bonuses, the grant date fair value of stock options granted during the fiscal year estimated using the Black-Scholes pricing model, profit sharing and matching contributions to Company-sponsored retirement plans. The compensation and benefits received by each of Mr. Parker’s siblings, were consistent with compensation paid to other employees holding similar positions. +Mr. Thompson’s son, John Thompson III, former head basketball coach at Georgetown University, and the Company are parties to a contract pursuant to which Mr. Thompson III provides certain endorsement and consulting services to the Company. The terms of this agreement, effective August 2014 through August 2019, provide for annual base compensation of $200,000, and up to $112,500 per year of product and merchandise. In addition, there are annual incentive payments based upon team performance. +On June 30, 2016, Philip H. Knight, the father of NIKE director Travis A. Knight, retired from the Board of Directors. Effective immediately upon his retirement, the Board has appointed Philip H. Knight to the position of Chairman Emeritus, which provides a standing invitation for Philip H. Knight to attend meetings of the Board and its committees as a non-voting observer. As the Chairman Emeritus, Mr. Knight receives medical and dental insurance coverage available to employees and receives an annual salary of $500,000. Philip H. Knight received $567,172 in salary and profit sharing and matching contributions to Company-sponsored retirement plans. +The Company’s written policy requires the Nominating and Corporate Governance Committee to review any transaction or proposed transaction with a related person that would be required to be reported under Item 404(a) of Regulation S-K, and to determine whether to ratify or approve the transaction, with ratification or approval to occur only if the Committee determines that the transaction is fair to the Company or that approval or ratification of the transaction is in the interest of the Company. +NIKE, INC. Ÿ 2017 Notice of Annual Meeting 13 \ No newline at end of file diff --git a/raw/filings/0000320187/2017/0000320187-18-000142/filing.txt b/raw/filings/0000320187/2017/0000320187-18-000142/filing.txt new file mode 100644 index 0000000000000000000000000000000000000000..149e27d1583f90eed30fc7ee0d090f9f1ab23236 --- /dev/null +++ b/raw/filings/0000320187/2017/0000320187-18-000142/filing.txt @@ -0,0 +1,5869 @@ +10-K +1 +nke-5312018x10k.htm +10-K +Document +Table of Contents +UNITED STATES +SECURITIES AND EXCHANGE COMMISSION +Washington, D.C. 20549 +FORM 10-K +(Mark One) +þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 +FOR THE FISCAL YEAR ENDED May 31, 2018 +OR +¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 +FOR THE TRANSITION PERIOD FROM TO . +Commission File No. 1-10635 +NIKE, Inc . +(Exact name of Registrant as specified in its charter) +OREGON +93-0584541 +(State or other jurisdiction of incorporation) +(IRS Employer Identification No.) +One Bowerman Drive, Beaverton, Oregon +97005-6453 +(Address of principal executive offices) +(Zip Code) +(503) 671-6453 +(Registrant’s telephone number, including area code) +SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: +Class B Common Stock +New York Stock Exchange +(Title of each class) +(Name of each exchange on which registered) +SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: +NONE +Indicate by check mark: +YES +NO +• +if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. +þ +¨ +• +if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. +¨ +þ +• +whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. +þ +¨ +• +whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). +þ +¨ +• +if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant ’ s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. +þ +• +whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. +Large accelerated filer þ +Accelerated filer ¨ +Non-accelerated filer ¨ +Smaller reporting company ¨ +Emerging growth company ¨ +• +if an emerging growth company, if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. +¨ +• +whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). +¨ +þ +As of November 30, 2017, the aggregate market values of the Registrant ’ s Common Stock held by non-affiliates were: +Class A +$ +4,475,052,736 +Class B +78,093,099,655 +$ +82,568,152,391 +As of July 20, 2018, the number of shares of the Registrant ’ s Common Stock outstanding were: +Class A +320,065,752 +Class B +1,280,488,786 +1,600,554,538 +DOCUMENTS INCORPORATED BY REFERENCE: +Parts of Registrant ’ s Proxy Statement for the Annual Meeting of Shareholders to be held on September 20, 2018 are incorporated by reference into Part III of this Report . +Table of Contents +NIKE, INC. +ANNUAL REPORT ON FORM 10-K +Table of Contents +Page +PART I +1 +ITEM 1. +Business +1 +General +1 +Products +1 +Sales and Marketing +2 +United States Market +2 +International Markets +2 +Significant Customer +3 +Product Research, Design and Development +3 +Manufacturing +3 +International Operations and Trade +3 +Competition +4 +Trademarks and Patents +4 +Employees +5 +Executive Officers of the Registrant +5 +ITEM 1A. +Risk Factors +6 +ITEM 1B. +Unresolved Staff Comments +15 +ITEM 2. +Properties +15 +ITEM 3. +Legal Proceedings +15 +ITEM 4. +Mine Safety Disclosures +15 +PART II +16 +ITEM 5. +Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities +16 +ITEM 6. +Selected Financial Data +18 +ITEM 7. +Management’s Discussion and Analysis of Financial Condition and Results of Operations +20 +ITEM 7A. +Quantitative and Qualitative Disclosures about Market Risk +40 +ITEM 8. +Financial Statements and Supplementary Data +41 +ITEM 9. +Changes in and Disagreements with Accountants on Accounting and Financial Disclosure +73 +ITEM 9A. +Controls and Procedures +73 +ITEM 9B. +Other Information +73 +PART III +74 +(Except for the information set forth under “Executive Officers of the Registrant” in Item 1 above, Part III is incorporated by reference from the Proxy Statement for the NIKE, Inc. 2018 Annual Meeting of Shareholders.) +ITEM 10. +Directors, Executive Officers and Corporate Governance +74 +ITEM 11. +Executive Compensation +74 +ITEM 12. +Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters +74 +ITEM 13. +Certain Relationships and Related Transactions and Director Independence +74 +ITEM 14. +Principal Accountant Fees and Services +74 +PART IV +75 +ITEM 15. +Exhibits and Financial Statement Schedules +75 +ITEM 16. +Form 10-K Summary +78 +Signatures +80 +Table of Contents +PART I +ITEM 1. Business +General +NIKE, Inc. was incorporated in 1967 under the laws of the State of Oregon. As used in this report, the terms “we,” “us,” “NIKE” and the “Company” refer to NIKE, Inc. and its predecessors, subsidiaries and affiliates, collectively, unless the context indicates otherwise. Our NIKE digital commerce website is located at www.nike.com. On our NIKE corporate website, located at investors.nike.com, we post the following filings as soon as reasonably practicable after they are electronically filed with, or furnished to, the United States Securities and Exchange Commission (the “SEC”): our annual report on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities and Exchange Act of 1934, as amended. Our definitive Proxy Statements are also posted on our corporate website. All such filings on our corporate website are available free of charge. Copies of these filings may also be obtained by visiting the Public Reference Room of the SEC at 100 F Street, NE, Washington, D.C. 20549, or by calling the SEC at 1-800-SEC-0330 and are available on the SEC’s website ( www.sec.gov ). Also available on our corporate website are the charters of the committees of our Board of Directors, as well as our corporate governance guidelines and code of ethics; copies of any of these documents will be provided in print to any shareholder who submits a request in writing to NIKE Investor Relations, One Bowerman Drive, Beaverton, Oregon 97005-6453. +Our principal business activity is the design, development and worldwide marketing and selling of athletic footwear, apparel, equipment, accessories and services. NIKE is the largest seller of athletic footwear and apparel in the world. We sell our products through NIKE-owned retail stores and through digital platforms (which we refer to collectively as our “NIKE Direct” operations), to retail accounts and a mix of independent distributors, licensees and sales representatives in virtually all countries around the world. Virtually all of our products are manufactured by independent contractors. Nearly all footwear and apparel products are produced outside the United States, while equipment products are produced both in the United States and abroad. +Products +We focus our NIKE Brand product offerings in six key categories: Running, NIKE Basketball, the Jordan Brand, Football (Soccer), Training and Sportswear (our sports-inspired lifestyle products). We also market products designed for kids, as well as for other athletic and recreational uses such as American football, baseball, cricket, lacrosse, skateboarding, tennis, volleyball, wrestling, walking and outdoor activities. +NIKE’s athletic footwear products are designed primarily for specific athletic use, although a large percentage of the products are worn for casual or leisure purposes. We place considerable emphasis on innovation and high-quality construction in the development and manufacturing of our products. Sportswear, Running and the Jordan Brand are currently our top-selling footwear categories and we expect them to continue to lead in footwear sales. +We also sell sports apparel covering the above-mentioned categories, which feature the same trademarks and are sold predominantly through the same marketing and distribution channels as athletic footwear. Our sports apparel, similar to our athletic footwear products, is designed primarily for athletic use and exemplifies our commitment to innovation and high-quality construction. Sportswear, Training and Running are currently our top-selling apparel categories and we expect them to continue to lead in apparel sales. We often market footwear, apparel and accessories in “collections” of similar use or by category. We also market apparel with licensed college and professional team and league logos. +We sell a line of performance equipment and accessories under the NIKE Brand name, including bags, socks, sport balls, eyewear, timepieces, digital devices, bats, gloves, protective equipment and other equipment designed for sports activities. We also sell small amounts of various plastic products to other manufacturers through our wholly-owned subsidiary, NIKE IHM, Inc., doing business as Air Manufacturing Innovation. +Our Jordan Brand designs, distributes and licenses athletic and casual footwear, apparel and accessories predominantly focused on basketball using the Jumpman trademark. Sales and operating results for Jordan Brand products are reported within the respective NIKE Brand geographic operating segments. +One of our wholly-owned subsidiary brands, Converse, headquartered in Boston, Massachusetts, designs, distributes and licenses casual sneakers, apparel and accessories under the Converse, Chuck Taylor, All Star, One Star, Star Chevron and Jack Purcell trademarks. Operating results of the Converse brand are reported on a stand-alone basis. +Another of our wholly-owned subsidiary brands, Hurley, headquartered in Costa Mesa, California, designs and distributes a line of action sports and youth lifestyle apparel and accessories under the Hurley trademark. Sales and operating results for Hurley products are included within the NIKE Brand’s North America geographic operating segment. +In addition to the products we sell to our wholesale customers and directly to consumers through our NIKE Direct operations, we have also entered into license agreements that permit unaffiliated parties to manufacture and sell, using NIKE-owned trademarks, certain apparel, digital devices and applications and other equipment designed for sports activities. +1 +Table of Contents +Sales and Marketing +Financial information about geographic and segment operations appears in Note 17 — Operating Segments and Related Information of the accompanying Notes to the Consolidated Financial Statements. +We experience moderate fluctuations in aggregate sales volume during the year. Historically, revenues in the first and fourth fiscal quarters have slightly exceeded those in the second and third quarters. However, the mix of product sales may vary considerably as a result of changes in seasonal and geographic demand for particular types of footwear, apparel and equipment, as well as other macroeconomic, operating and logistics-related factors. +Because NIKE is a consumer products company, the relative popularity of various sports and fitness activities and changing design trends affect the demand for our products. We must, therefore, respond to trends and shifts in consumer preferences by adjusting the mix of existing product offerings, developing new products, styles and categories and influencing sports and fitness preferences through extensive marketing. Failure to respond in a timely and adequate manner could have a material adverse effect on our sales and profitability. This is a continuing risk. Refer to Item 1A. Risk Factors. +We report our NIKE Brand operations based on our internal geographic organization. Each NIKE Brand geographic segment operates predominantly in one industry: the design, development, marketing and selling of athletic footwear, apparel and equipment. In June 2017, we announced a new company alignment designed to allow NIKE to better serve the consumer personally, at scale. As a result of this organizational realignment, the Company’s reportable operating segments for the NIKE Brand are: North America; Europe, Middle East & Africa (EMEA); Greater China; and Asia Pacific & Latin America (APLA), and include results for the NIKE, Jordan and Hurley brands. Sales through our NIKE Direct operations are managed within each geographic operating segment. +Converse is also a reportable segment and operates in one industry: the design, marketing, licensing and selling of casual sneakers, apparel and accessories. Converse direct to consumer operations, including digital commerce, are reported within the Converse operating segment results. +United States Market +For fiscal 2018 , NIKE Brand and Converse sales in the United States accounted for approximately 42% of total revenues, compared to 46% and 47% for fiscal 2017 and fiscal 2016 , respectively. We sell our NIKE Brand, Jordan Brand, Hurley and Converse products to thousands of retail accounts in the United States, including a mix of footwear stores, sporting goods stores, athletic specialty stores, department stores, skate, tennis and golf shops and other retail accounts. In the United States, we utilize NIKE sales offices to solicit such sales. During fiscal 2018 , our three largest customers accounted for approximately 21% of sales in the United States. +Our NIKE Direct and Converse direct to consumer operations sell NIKE Brand, Jordan Brand, Hurley and Converse products to consumers through various digital platforms. In addition, our NIKE Direct and Converse direct to consumer operations sell through the following number of retail stores in the United States: +U.S. Retail Stores +Number +NIKE Brand factory stores +220 +NIKE Brand in-line stores (including employee-only stores) +31 +Converse stores (including factory stores) +112 +Hurley stores (including factory and employee stores) +29 +TOTAL +392 +In the United States, NIKE has seven significant distribution centers. Five are located in Memphis, Tennessee, two of which are owned and three of which are leased. Two other distribution centers, one located in Indianapolis, Indiana, and one located in Dayton, Tennessee, are leased and operated by third-party logistics providers. NIKE Brand apparel and equipment are also shipped from our Foothill Ranch, California distribution center, which we lease. Smaller leased, and third-party leased and operated, distribution facilities are located in various parts of the United States. +International Markets +For fiscal 2018 , non-U.S. NIKE Brand and Converse sales accounted for approximately 58% of total revenues, compared to 54% and 53% for fiscal 2017 and fiscal 2016 , respectively. We sell our products to retail accounts, through our own NIKE Direct operations and through a mix of independent distributors, licensees and sales representatives around the world. We sell to thousands of retail accounts and ship products from 62 distribution centers outside of the United States. During fiscal 2018 , NIKE’s three largest customers outside of the United States accounted for approximately 13% of total non-U.S. sales. +In addition to NIKE and Converse owned digital commerce platforms in over 45 countries, our NIKE Direct and Converse direct to consumer businesses operate the following number of retail stores outside the United States: +Non-U.S. Retail Stores +Number +NIKE Brand factory stores +664 +NIKE Brand in-line stores (including employee-only stores) +65 +Converse stores (including factory stores) +61 +TOTAL +790 +2 +Table of Contents +International branch offices and subsidiaries of NIKE are located in Argentina, Australia, Austria, Belgium, Bermuda, Brazil, Canada, Chile, China, Croatia, the Czech Republic, Denmark, Finland, France, Germany, Greece, Hong Kong, Hungary, India, Indonesia, Ireland, Israel, Italy, Japan, Korea, Macau, Malaysia, Mexico, the Netherlands, New Zealand, Norway, Panama, the Philippines, Poland, Portugal, Russia, Singapore, Slovakia, Slovenia, South Africa, Spain, Sri Lanka, Sweden, Switzerland, Taiwan, Thailand, Turkey, the United Arab Emirates, the United Kingdom, Uruguay and Vietnam. +Significant Customer +No customer accounted for 10% or more of our worldwide net revenues during fiscal 2018 . +Product Research, Design and Development +We believe our research, design and development efforts are key factors in our success. Technical innovation in the design and manufacturing process of footwear, apparel and athletic equipment receives continued emphasis as we strive to produce products that help to enhance athletic performance, reduce injury and maximize comfort, while reducing waste. +In addition to our own staff of specialists in the areas of biomechanics, chemistry, exercise physiology, engineering, industrial design, sustainability and related fields, we also utilize research committees and advisory boards made up of athletes, coaches, trainers, equipment managers, orthopedists, podiatrists and other experts who consult with us and review designs, materials, concepts for product and manufacturing process improvements and compliance with product safety regulations around the world. Employee athletes, athletes engaged under sports marketing contracts and other athletes wear-test and evaluate products during the design and development process. +As we continue to develop new technologies, we are simultaneously focused on the design of innovative products incorporating such technologies throughout our product categories. Using market intelligence and research, our various design teams identify opportunities to leverage new technologies in existing categories responding to consumer preferences. The proliferation of NIKE Air, Lunar, Zoom, Free, Flywire, Dri-Fit, Flyknit, Flyweave, ZoomX, React and NIKE+ technologies throughout our Running, NIKE Basketball, Jordan Brand, Football (Soccer), Training and Sportswear categories, among others, typifies our dedication to designing innovative products. +Manufacturing +We are supplied by 124 footwear factories located in 13 countries. The largest single footwear factory accounted for approximately 9% of total fiscal 2018 NIKE Brand footwear production. Virtually all of our footwear is manufactured outside of the United States by independent contract manufacturers which often operate multiple factories. For fiscal 2018 , contract factories in Vietnam, China and Indonesia manufactured approximately 47%, 26% and 21% of total NIKE Brand footwear, respectively. We also have manufacturing agreements with independent contract manufacturers in Argentina, India, Brazil, Mexico and Italy to manufacture footwear for sale primarily within those countries. For fiscal 2018 , five footwear contract manufacturers each accounted for greater than 10% of footwear production and in the aggregate accounted for approximately 69% of NIKE Brand footwear production. +We are supplied by 328 apparel factories located in 37 countries. The largest single apparel factory accounted for approximately 13% of total fiscal 2018 NIKE Brand apparel production. Virtually all of our apparel is manufactured outside of the United States by independent contract manufacturers which often operate multiple factories. For fiscal 2018 , contract factories in China, Vietnam and Thailand produced approximately 26%, 18% and 10% of total NIKE Brand apparel, respectively. For fiscal 2018 , one apparel contract manufacturer accounted for more than 10% of apparel production, and the top five contract manufacturers in the aggregate accounted for approximately 47% of NIKE Brand apparel production. +The principal materials used in our footwear products are natural and synthetic rubber, plastic compounds, foam cushioning materials, natural and synthetic leather, nylon, polyester and canvas, as well as polyurethane films used to make NIKE Air-Sole cushioning components. During fiscal 2018 , Air Manufacturing Innovation, with facilities near Beaverton, Oregon and in St. Charles, Missouri, as well as independent contractors in China and Vietnam, were our suppliers of the Air-Sole cushioning components used in footwear. The principal materials used in our apparel products are natural and synthetic fabrics and threads (both virgin and recycled); specialized performance fabrics designed to efficiently wick moisture away from the body, retain heat and repel rain and/or snow; and plastic and metal hardware. NIKE’s independent contractors and suppliers buy raw materials for the manufacturing of our footwear, apparel and equipment products. Most raw materials are available and purchased by those independent contractors and suppliers in the countries where manufacturing takes place. NIKE’s independent contract manufacturers and suppliers have thus far experienced little difficulty in satisfying raw material requirements for the production of our products. +Since 1972, Sojitz Corporation of America (“Sojitz America”), a large Japanese trading company and the sole owner of our redeemable preferred stock, has performed significant import-export financing services for us. During fiscal 2018 , Sojitz America provided financing and purchasing services for NIKE Brand products sold in certain NIKE markets including Argentina, Brazil, Canada, India, South Africa and Uruguay, excluding products produced and sold in the same country. Approximately 6% of NIKE Brand sales occurred in those countries. Any failure of Sojitz America to provide these services or any failure of Sojitz America’s banks could disrupt our ability to acquire products from our suppliers and to deliver products to our customers in those markets. Such a disruption could result in canceled orders that would adversely affect sales and profitability. However, we believe that any such disruption would be short-term in duration due to the ready availability of alternative sources of financing at competitive rates. Our current agreements with Sojitz America expire on May 31, 2019. +International Operations and Trade +Our international operations and sources of supply are subject to the usual risks of doing business abroad, such as the implementation of, or potential changes in, foreign and domestic trade policies, increases in import duties, anti-dumping measures, quotas, safeguard measures, trade restrictions, restrictions on the transfer of funds and, in certain parts of the world, political instability and terrorism. We have not, to date, been materially affected by any such risk, but cannot predict the likelihood of such material effects occurring in the future. +3 +Table of Contents +In recent years, uncertain global and regional economic and political conditions have affected international trade and increased protectionist actions around the world. These trends are affecting many global manufacturing and service sectors, and the footwear and apparel industries, as a whole, are not immune. Companies in our industry are facing trade protectionism in many different regions, and in nearly all cases we are working together with industry groups to address trade issues and reduce the impact to the industry, while observing applicable competition laws. Notwithstanding our efforts, protectionist measures have resulted in increases in the cost of our products, and additional measures, if implemented, could adversely affect sales and/or profitability for NIKE, as well as the imported footwear and apparel industry as a whole. +We monitor protectionist trends and developments throughout the world that may materially impact our industry, and we engage in administrative and judicial processes to mitigate trade restrictions. We are actively monitoring actions that may result in additional anti-dumping measures and could affect our industry. We are also monitoring for and advocating against other impediments that may limit or delay customs clearance for imports of footwear, apparel and equipment. Changes in U.S. trade policies, including new and potential tariffs or penalties on imported goods, may negatively affect U.S. corporations with production activities outside the U.S., including NIKE. There have also been discussions and commentary regarding retaliatory actions by countries affected by the new tariffs and other changes in U.S. trade policy, and certain foreign governments have instituted or are considering imposing trade sanctions on certain U.S. goods, which could negatively affect U.S. corporations with business operations and/or consumer markets in those countries. Depending on the extent that certain new or proposed reforms are implemented by the U.S. government and the manner in which foreign governments respond to such reforms, it may become necessary for us to change the way we conduct business, which may adversely affect our results of operations. In addition , with respect to proposed trade restrictions targeting China, which represents an important sourcing country and consumer market for us, we are working with a broad coalition of global businesses and trade associations representing a wide variety of sectors to help ensure that any legislation enacted and implemented (i) addresses legitimate and core concerns, (ii) is consistent with international trade rules and (iii) reflects and considers China ’ s domestic economy and the important role it has in the global economic community. +Where trade protection measures are implemented, we believe that we have the ability to develop, over a period of time, adequate alternative sources of supply for the products obtained from our present suppliers. If events prevented us from acquiring products from our suppliers in a particular country, our operations could be temporarily disrupted and we could experience an adverse financial impact. However, we believe we could abate any such disruption, and that much of the adverse impact on supply would, therefore, be of a short-term nature, although alternate sources of supply might not be as cost-effective and could have an ongoing adverse impact on profitability. +NIKE advocates for trade liberalization for footwear and apparel in a number of regional and bilateral free trade agreements. +Our international operations are also subject to compliance with the U.S. Foreign Corrupt Practices Act, or FCPA, and other anti-bribery laws applicable to our operations. We source a significant portion of our products from, and have important consumer markets, outside of the United States, and we have policies and procedures to address compliance with the FCPA and similar laws by us, our employees, agents, suppliers and other partners. +Competition +The athletic footwear, apparel and equipment industry is highly competitive on a worldwide basis. We compete internationally with a significant number of athletic and leisure footwear companies, athletic and leisure apparel companies, sports equipment companies and large companies having diversified lines of athletic and leisure footwear, apparel and equipment, including adidas, Anta, ASICS, Li Ning, lululemon athletica, Puma, Under Armour and V.F. Corporation, among others. The intense competition and the rapid changes in technology and consumer preferences in the markets for athletic and leisure footwear and apparel and athletic equipment, constitute significant risk factors in our operations. +NIKE is the largest seller of athletic footwear and apparel in the world. Important aspects of competition in this industry are: +• +Product attributes such as quality; performance and reliability; new product innovation and development and consumer price/value. +• +Consumer connection and affinity for brands and products, developed through marketing and promotion; social media interaction; customer support and service; identification with prominent and influential athletes, public figures, coaches, teams, colleges and sports leagues who endorse our brands and use our products and active engagement through sponsored sporting events and clinics. +• +Effective sourcing and distribution of products, with attractive merchandising and presentation at retail, both in-store and online. +We believe that we are competitive in all of these areas. +Trademarks and Patents +We believe that our intellectual property rights are important to our brand, our success and our competitive position. We pursue available protections of these rights and vigorously protect them against third-party theft and infringement. +We utilize trademarks on nearly all of our products and believe having distinctive marks that are readily identifiable is an important factor in creating a market for our goods, in identifying our brands and the Company, and in distinguishing our goods from the goods of others. We consider our NIKE and Swoosh trademarks to be among our most valuable assets and we have registered these trademarks in almost 170 jurisdictions worldwide. In addition, we own many other trademarks that we utilize in marketing our products. We own common law rights in the trade dress of several significant shoe designs and elements. For certain trade dress, we have sought and obtained trademark registrations. +We have copyright protection in our design, graphics and other original works. In some instances, we also obtain registered copyrights. +We own patents and have a license under other patents, which facilitate our use of “Air” technologies. +We file for, own and maintain many U.S. and foreign utility patents, as well as many U.S. and foreign design patents protecting components, technologies, materials, manufacturing techniques, features, functionality, and industrial and aesthetic designs used in and for the manufacture of various athletic and leisure footwear and apparel, athletic equipment and digital devices and related software applications. These patents expire at various times. +4 +Table of Contents +We believe our success depends upon our capabilities in areas such as design, research and development, production and marketing rather than exclusively upon our patent and trade secret positions. +However, we have followed a policy of filing patent applications in the United States and select foreign countries on inventions, designs and improvements that we deem valuable. We also continue to vigorously protect our trademarks and patents against third-party infringement. +Employees +As of May 31, 2018 , we had approximately 73,100 employees worldwide, including retail and part-time employees. Management is committed to maintaining an environment where all NIKE employees have the opportunity to reach their full potential. None of our employees are represented by a union, except for certain employees in the Asia Pacific & Latin America geography, where local law requires those employees to be represented by a trade union. Also, in some countries outside of the United States, local laws require employee representation by works councils (which may be entitled to information and consultation on certain Company decisions) or by organizations similar to a union. In certain European countries, we are required by local law to enter into and/or comply with industry-wide or national collective bargaining agreements. NIKE has never experienced a material interruption of operations due to labor disagreements. +Executive Officers of the Registrant +The executive officers of NIKE, Inc. as of July 24, 2018 are as follows: +Mark G. Parker, Chairman, President and Chief Executive Officer — Mr. Parker, 62, was appointed President and Chief Executive Officer in January 2006 and named Chairman of the Board in June 2016. He has been employed by NIKE since 1979 with primary responsibilities in product research, design and development, marketing and brand management. Mr. Parker was appointed divisional Vice President in charge of product development in 1987, corporate Vice President in 1989, General Manager in 1993, Vice President of Global Footwear in 1998 and President of the NIKE Brand in 2001. +Chris L. Abston, Vice President and Corporate Controller — Mr. Abston, 55, joined NIKE in 2015 from Wal-Mart Stores, Inc., where he served as Vice President, Global Controls and Governance since February 2015. Prior to that he was Vice President and Controller of Walmart International from February 2013 to January 2015, responsible for the oversight of international accounting and reporting, and Vice President and Assistant Controller of Wal-Mart Stores, Inc. from May 2011 to January 2013. Before joining Wal-Mart, Mr. Abston spent 25 years in public accounting with Ernst & Young LLP, most recently leading its Strategic Growth Markets practice as a Partner in the Dallas office. +Andrew Campion, Executive Vice President and Chief Financial Officer — Mr. Campion, 46, joined NIKE in 2007 as Vice President of Global Planning and Development, leading strategic and financial planning. He was appointed Chief Financial Officer of the NIKE Brand in 2010, responsible for leading all aspects of financial management for the Company’s flagship brand. In 2014, he was appointed Senior Vice President, Strategy, Finance and Investor Relations in addition to his role as Chief Financial Officer of NIKE Brand. Mr. Campion assumed the role of Executive Vice President and Chief Financial Officer in August 2015. Prior to joining NIKE, he held leadership roles in strategic planning, mergers and acquisitions, financial planning and analysis, operations and planning, investor relations and tax at The Walt Disney Company from 1996 to 2007. +Elliott Hill, President, Consumer and Marketplace — Mr. Hill, 54, joined NIKE in 1988, with primary responsibilities in sales and retail. He has served as Apparel Sales Director in Europe, Retail Development Director in Europe, Vice President of Sales and Retail in EMEA, General Manager of US Retail, Vice President of US Sales, Retail and NIKE.com, and Vice President of Global Retail. M ost recently, Mr. Hill served as President of Geographies and Sales and Vice President and General Manager of North America. Mr. Hill was appointed President, Consumer and Marketplace in March 2018. +Hilary K. Krane, Executive Vice President, Chief Administrative Officer and General Counsel — Ms. Krane, 54, joined NIKE as Vice President and General Counsel in April 2010. In 2011, her responsibilities expanded, and she became Vice President, General Counsel and Corporate Affairs. Ms. Krane was appointed Executive Vice President, Chief Administrative Officer and General Counsel in 2013. Prior to joining NIKE, Ms. Krane was General Counsel and Senior Vice President for Corporate Affairs at Levi Strauss & Co. from 2006 to 2010. From 1996 to 2006, she was a Partner and Assistant General Counsel at PricewaterhouseCoopers LLP. +Monique S. Matheson, Executive Vice President, Global Human Resources — Ms. Matheson, 51, joined NIKE in 1998, with primary responsibilities in the human resources function. She was appointed as Vice President and Senior Business Partner in 2011 and Vice President, Chief Talent and Diversity Officer in 2012. Ms. Matheson was appointed Executive Vice President, Global Human Resources in July 2017 . +John F. Slusher, Executive Vice President, Global Sports Marketing — Mr. Slusher, 49, joined NIKE in 1998, with primary responsibilities in global sports marketing. Mr. Slusher was appointed Director of Sports Marketing for Asia Pacific and Americas in 2006, divisional Vice President of Asia Pacific & Americas Sports Marketing in September 2007 and Vice President, Global Sports Marketing in November 2007. Prior to joining NIKE, Mr. Slusher was an attorney at the law firm of O’Melveny & Myers from 1995 to 1998. +Eric D. Sprunk, Chief Operating Officer — Mr. Sprunk, 54, joined NIKE in 1993. He was appointed Finance Director and General Manager of the Americas in 1994, Finance Director for NIKE Europe in 1995, Regional General Manager of NIKE Europe Footwear in 1998 and Vice President & General Manager of the Americas in 2000. Mr. Sprunk was appointed Vice President of Global Footwear in 2001, Vice President of Merchandising and Product in 2009 and Chief Operating Officer in 2013. Prior to joining NIKE, Mr. Sprunk was a certified public accountant with Price Waterhouse from 1987 to 1993. +5 +Table of Contents +ITEM 1A. Risk Factors +Special Note Regarding Forward-Looking Statements and Analyst Reports +Certain written and oral statements, other than purely historic information, including estimates, projections, statements relating to NIKE’s business plans, objectives and expected operating results and the assumptions upon which those statements are based, made or incorporated by reference from time to time by NIKE or its representatives in this report, other reports, filings with the SEC, press releases, conferences or otherwise, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements include, without limitation, any statement that may predict, forecast, indicate or imply future results, performance or achievements, and may contain the words “believe,” “anticipate,” “expect,” “estimate,” “project,” “will be,” “will continue,” “will likely result” or words or phrases of similar meaning. Forward-looking statements involve risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. The risks and uncertainties are detailed from time to time in reports filed by NIKE with the SEC, including reports filed on Forms 8-K, 10-Q and 10-K, and include, among others, the following: international, national and local general economic and market conditions; the size and growth of the overall athletic footwear, apparel and equipment markets; intense competition among designers, marketers, distributors and sellers of athletic footwear, apparel and equipment for consumers and endorsers; demographic changes; changes in consumer preferences; popularity of particular designs, categories of products and sports; seasonal and geographic demand for NIKE products; difficulties in anticipating or forecasting changes in consumer preferences, consumer demand for NIKE products and the various market factors described above; difficulties in implementing, operating and maintaining NIKE’s increasingly complex information technology systems and controls, including, without limitation, the systems related to demand and supply planning and inventory control; interruptions in data and information technology systems; consumer data security; fluctuations and difficulty in forecasting operating results, including, without limitation, the fact that advance orders may not be indicative of future revenues due to changes in shipment timing, the changing mix of orders with shorter lead times, and discounts, order cancellations and returns; the ability of NIKE to sustain, manage or forecast its growth and inventories; the size, timing and mix of purchases of NIKE’s products; increases in the cost of materials, labor and energy used to manufacture products; new product development and introduction; the ability to secure and protect trademarks, patents and other intellectual property; product performance and quality; customer service; adverse publicity, including without limitation, through social media or in connection with brand damaging events; the loss of significant customers or suppliers; dependence on distributors and licensees; business disruptions; increased costs of freight and transportation to meet delivery deadlines; increases in borrowing costs due to any decline in NIKE’s debt ratings; changes in business strategy or development plans; general risks associated with doing business outside of the United States, including, without limitation, exchange rate fluctuations, inflation, import duties, tariffs, quotas, political and economic instability and terrorism; the impact of recent U.S. tax reform legislation on our results of operations; the potential impact of new laws, regulations or policy, including, without limitation, tariffs, import/export, trade and immigration regulations or policies; changes in government regulations; the impact of, including business and legal developments relating to, climate change and natural disasters; litigation, regulatory proceedings and other claims asserted against NIKE; the ability to attract and retain qualified employees, and any negative public perception with respect to key personnel; the effects of NIKE’s decision to invest in or divest of businesses and other factors referenced or incorporated by reference in this report and other reports. +The risks included here are not exhaustive. Other sections of this report may include additional factors which could adversely affect NIKE’s business and financial performance. Moreover, NIKE operates in a very competitive and rapidly changing environment. New risks emerge from time to time and it is not possible for management to predict all such risks, nor can it assess the impact of all such risks on NIKE’s business or the extent to which any risk, or combination of risks, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results. +Investors should also be aware that while NIKE does, from time to time, communicate with securities analysts, it is against NIKE’s policy to disclose to them any material non-public information or other confidential commercial information. Accordingly, shareholders should not assume that NIKE agrees with any statement or report issued by any analyst irrespective of the content of the statement or report. Furthermore, NIKE has a policy against issuing or confirming financial forecasts or projections issued by others. Thus, to the extent that reports issued by securities analysts contain any projections, forecasts or opinions, such reports are not the responsibility of NIKE. +Our products face intense competition. +NIKE is a consumer products company and the relative popularity of various sports and fitness activities and changing design trends affect the demand for our products. The athletic footwear, apparel and equipment industry is highly competitive both in the United States and worldwide. We compete internationally with a significant number of athletic and leisure footwear companies, athletic and leisure apparel companies, sports equipment companies and large companies having diversified lines of athletic and leisure footwear, apparel and equipment. We also compete with other companies for the production capacity of independent manufacturers that produce our products. Our NIKE Direct operations, both through our digital commerce operations and retail stores, also compete with multi-brand retailers selling our products. +Product offerings, technologies, marketing expenditures (including expenditures for advertising and endorsements), pricing, costs of production, customer service, digital commerce platforms and social media presence are areas of intense competition. This, in addition to rapid changes in technology and consumer preferences in the markets for athletic and leisure footwear and apparel and athletic equipment, constitute significant risk factors in our operations. In addition, the competitive nature of retail including shifts in the ways in which consumers are shopping, and the rising trend of digital commerce, constitutes a risk factor implicating our NIKE Direct and wholesale operations. If we do not adequately and timely anticipate and respond to our competitors, our costs may increase or the consumer demand for our products may decline significantly. +Failure to maintain our reputation and brand image could negatively impact our business. +Our iconic brands have worldwide recognition, and our success depends on our ability to maintain and enhance our brand image and reputation. Maintaining, promoting and growing our brands will depend on our design and marketing efforts, including advertising and consumer campaigns, product innovation and product quality. Our commitment to product innovation and quality and our continuing investment in design (including materials) and marketing may not have the desired impact on our brand image and reputation. In addition, our success in maintaining, extending and expanding our brand image depends on our ability to adapt to a rapidly changing media environment, including our increasing reliance on social media and digital dissemination of advertising campaigns. We could be adversely impacted if we fail to achieve any of these objectives. +6 +Table of Contents +Our brand value also depends on our ability to maintain a positive consumer perception of our corporate integrity and brand culture. Negative claims or publicity involving us, our products or any of our key employees, endorsers, sponsors or suppliers could seriously damage our reputation and brand image, regardless of whether such claims are accurate. Social media, which accelerates and potentially amplifies the scope of negative publicity, can increase the challenges of responding to negative claims. Adverse publicity about regulatory or legal action against us, or by us, could also damage our reputation and brand image, undermine consumer confidence in us and reduce long-term demand for our products, even if the regulatory or legal action is unfounded or not material to our operations. If the reputation or image of any of our brands is tarnished or if we receive negative publicity, then our product sales, financial condition and results of operations could be materially and adversely affected. +If we are unable to anticipate consumer preferences and develop new products, we may not be able to maintain or increase our revenues and profits. +Our success depends on our ability to identify, originate and define product trends as well as to anticipate, gauge and react to changing consumer demands in a timely manner. However, lead times for many of our products may make it more difficult for us to respond rapidly to new or changing product trends or consumer preferences. All of our products are subject to changing consumer preferences that cannot be predicted with certainty. Our new products may not receive consumer acceptance as consumer preferences could shift rapidly to different types of performance products or away from these types of products altogether, and our future success depends in part on our ability to anticipate and respond to these changes. If we fail to anticipate accurately and respond to trends and shifts in consumer preferences by adjusting the mix of existing product offerings, developing new products, designs, styles and categories, and influencing sports and fitness preferences through extensive marketing, we could experience lower sales, excess inventories or lower profit margins, any of which could have an adverse effect on our results of operations and financial condition. In addition, we market our products globally through a diverse spectrum of advertising and promotional programs and campaigns, including social media, mobile applications and online advertising. If we do not successfully market our products or if advertising and promotional costs increase, these factors could have an adverse effect on our business, financial condition and results of operations. +We rely on technical innovation and high-quality products to compete in the market for our products. +Technical innovation and quality control in the design and manufacturing process of footwear, apparel and athletic equipment is essential to the commercial success of our products. Research and development play a key role in technical innovation. We rely upon specialists in the fields of biomechanics, chemistry, exercise physiology, engineering, industrial design, sustainability and related fields, as well as research committees and advisory boards made up of athletes, coaches, trainers, equipment managers, orthopedists, podiatrists and other experts to develop and test cutting-edge performance products. While we strive to produce products that help to enhance athletic performance, reduce injury and maximize comfort, if we fail to introduce technical innovation in our products, consumer demand for our products could decline, and if we experience problems with the quality of our products, we may incur substantial expense to remedy the problems. +Failure to continue to obtain or maintain high-quality endorsers of our products could harm our business. +We establish relationships with professional athletes, sports teams and leagues, as well as other public figures, to develop, evaluate and promote our products, as well as establish product authenticity with consumers. However, as competition in our industry has increased, the costs associated with establishing and retaining such sponsorships and other relationships have increased. If we are unable to maintain our current associations with professional athletes, sports teams and leagues, or other public figures, or to do so at a reasonable cost, we could lose the high visibility or on-field authenticity associated with our products, and we may be required to modify and substantially increase our marketing investments. As a result, our brands, net revenues, expenses and profitability could be harmed. +Furthermore, if certain endorsers were to stop using our products contrary to their endorsement agreements, our business could be adversely affected. In addition, actions taken by athletes, teams or leagues, or other endorsers, associated with our products that harm the reputations of those athletes, teams or leagues, or endorsers, could also seriously harm our brand image with consumers and, as a result, could have an adverse effect on our sales and financial condition. In addition, poor performance by our endorsers, a failure to continue to correctly identify promising athletes, or public figures, to use and endorse our products or a failure to enter into cost-effective endorsement arrangements with prominent athletes, public figures, and sports organizations could adversely affect our brand, sales and profitability. +General economic factors beyond our control, and changes in the global economic environment, including fluctuations in inflation and currency exchange rates, could result in lower revenues, higher costs and decreased margins and earnings. +A majority of our products are manufactured and sold outside of the United States, and we conduct purchase and sale transactions in various currencies, which increases our exposure to the volatility of global economic conditions, including fluctuations in inflation and foreign currency exchange rates. Additionally, there has been, and may continue to be, volatility in currency exchange rates as a result of the United Kingdom’s impending exit from the European Union, commonly referred to as “Brexit” and new or proposed U.S. policy changes. Our international revenues and expenses generally are derived from sales and operations in foreign currencies, and these revenues and expenses could be affected by currency fluctuations, specifically amounts recorded in foreign currencies and translated into U.S. Dollars for consolidated financial reporting, as weakening of foreign currencies relative to the U.S. Dollar adversely affects the U.S. Dollar value of the Company’s foreign currency-denominated sales and earnings. Currency exchange rate fluctuations could also disrupt the business of the independent manufacturers that produce our products by making their purchases of raw materials more expensive and more difficult to finance. Foreign currency fluctuations have adversely affected and could continue to have an adverse effect on our results of operations and financial condition. +We may hedge certain foreign currency exposures to lessen and delay, but not to completely eliminate, the effects of foreign currency fluctuations on our financial results. Since the hedging activities are designed to lessen volatility, they not only reduce the negative impact of a stronger U.S. Dollar or other trading currency, but they also reduce the positive impact of a weaker U.S. Dollar or other trading currency. Our future financial results could be significantly affected by the value of the U.S. Dollar in relation to the foreign currencies in which we conduct business. The degree to which our financial results are affected for any given time period will depend in part upon our hedging activities. +7 +Table of Contents +Global economic conditions could have a material adverse effect on our business, operating results and financial condition. +The uncertain state of the global economy continues to impact businesses around the world, most acutely in emerging markets and developing economies. If global economic and financial market conditions do not improve or deteriorate, the following factors could have a material adverse effect on our business, operating results and financial condition: +• +Slower consumer spending may result in reduced demand for our products, reduced orders from retailers for our products, order cancellations, lower revenues, higher discounts, increased inventories and lower gross margins. +• +In the future, we may be unable to access financing in the credit and capital markets at reasonable rates in the event we find it desirable to do so. +• +We conduct transactions in various currencies, which increases our exposure to fluctuations in foreign currency exchange rates relative to the U.S. Dollar. Continued volatility in the markets and exchange rates for foreign currencies and contracts in foreign currencies, including in response to certain policies advocated or implemented by the U.S. presidential administration, could have a significant impact on our reported operating results and financial condition. +• +Continued volatility in the availability and prices for commodities and raw materials we use in our products and in our supply chain (such as cotton or petroleum derivatives) could have a material adverse effect on our costs, gross margins and profitability. +• +If retailers of our products experience declining revenues or experience difficulty obtaining financing in the capital and credit markets to purchase our products, this could result in reduced orders for our products, order cancellations, late retailer payments, extended payment terms, higher accounts receivable, reduced cash flows, greater expense associated with collection efforts and increased bad debt expense. +• +If retailers of our products experience severe financial difficulty, some may become insolvent and cease business operations, which could negatively impact the sale of our products to consumers. +• +If contract manufacturers of our products or other participants in our supply chain experience difficulty obtaining financing in the capital and credit markets to purchase raw materials or to finance capital equipment and other general working capital needs, it may result in delays or non-delivery of shipments of our products. +Our business is affected by seasonality, which could result in fluctuations in our operating results. +We experience moderate fluctuations in aggregate sales volume during the year. Historically, revenues in the first and fourth fiscal quarters have slightly exceeded those in the second and third fiscal quarters. However, the mix of product sales may vary considerably from time to time as a result of changes in seasonal and geographic demand for particular types of footwear, apparel and equipment and in connection with the timing of significant sporting events, such as the NBA Finals, Olympics or the World Cup, among others. In addition, our customers may cancel orders, change delivery schedules or change the mix of products ordered with minimal notice. As a result, we may not be able to accurately predict our quarterly sales. Accordingly, our results of operations are likely to fluctuate significantly from period to period. This seasonality, along with other factors that are beyond our control, including general economic conditions, changes in consumer preferences, weather conditions, availability of import quotas, transportation disruptions and currency exchange rate fluctuations, could adversely affect our business and cause our results of operations to fluctuate. Our operating margins are also sensitive to a number of additional factors that are beyond our control, including manufacturing and transportation costs, shifts in product sales mix and geographic sales trends, all of which we expect to continue. Results of operations in any period should not be considered indicative of the results to be expected for any future period. +We may be adversely affected by the financial health of our customers. +We extend credit to our customers based on an assessment of a customer’s financial condition, generally without requiring collateral. To assist in the scheduling of production and the shipping of our products, we offer certain customers the opportunity to place orders five to six months ahead of delivery under our futures ordering program. These advance orders may be canceled under certain conditions, and the risk of cancellation may increase when dealing with financially unstable retailers or retailers struggling with economic uncertainty. In the past, some customers have experienced financial difficulties up to and including bankruptcies, which have had an adverse effect on our sales, our ability to collect on receivables and our financial condition. When the retail economy weakens or as consumer behavior shifts, retailers may be more cautious with orders. A slowing or changing economy in our key markets could adversely affect the financial health of our customers, which in turn could have an adverse effect on our results of operations and financial condition. In addition, product sales are dependent in part on high quality merchandising and an appealing retail environment to attract consumers, which requires continuing investments by retailers. Retailers that experience financial difficulties may fail to make such investments or delay them, resulting in lower sales and orders for our products. +Failure to accurately forecast consumer demand could lead to excess inventories or inventory shortages, which could result in decreased operating margins, reduced cash flows and harm to our business. +To meet anticipated demand for our products, we purchase products from manufacturers outside of our futures ordering program and in advance of customer orders, which we hold in inventory and resell to customers. There is a risk we may be unable to sell excess products ordered from manufacturers. Inventory levels in excess of customer demand may result in inventory write-downs, and the sale of excess inventory at discounted prices could significantly impair our brand image and have an adverse effect on our operating results, financial condition and cash flows. Conversely, if we underestimate consumer demand for our products or if our manufacturers fail to supply products we require at the time we need them, we may experience inventory shortages. Inventory shortages might delay shipments to customers, negatively impact retailer, distributor and consumer relationships and diminish brand loyalty. The difficulty in forecasting demand also makes it difficult to estimate our future results of operations, financial condition and cash flows from period to period. A failure to accurately predict the level of demand for our products could adversely affect our net revenues and net income, and we are unlikely to forecast such effects with any certainty in advance. +8 +Table of Contents +Consolidation of retailers or concentration of retail market share among a few retailers may increase and concentrate our credit risk and impair our ability to sell products. +The athletic footwear, apparel and equipment retail markets in some countries are dominated by a few large athletic footwear, apparel and equipment retailers with many stores. These retailers have in the past increased their market share by expanding through acquisitions and construction of additional stores. These situations concentrate our credit risk with a relatively small number of retailers, and, if any of these retailers were to experience a shortage of liquidity or consumer behavior shifts away from traditional retail, it would increase the risk that their outstanding payables to us may not be paid. In addition, increasing market share concentration among one or a few retailers in a particular country or region increases the risk that if any one of them substantially reduces their purchases of our products, we may be unable to find a sufficient number of other retail outlets for our products to sustain the same level of sales and revenues. +Our NIKE Direct operations have required and will continue to require a substantial investment and commitment of resources and are subject to numerous risks and uncertainties. +Our NIKE Direct stores have required substantial fixed investment in equipment and leasehold improvements, information systems and personnel. We have entered into substantial operating lease commitments for retail space. Certain stores have been designed and built to serve as high-profile venues to promote brand awareness and marketing activities. Because of their unique design elements, locations and size, these stores require substantially more investment than other stores. Due to the high fixed-cost structure associated with our NIKE Direct operations, a decline in sales, a shift in consumer behavior away from brick-and-mortar retail, or the closure or poor performance of individual or multiple stores could result in significant lease termination costs, write-offs of equipment and leasehold improvements and employee-related costs. +Many factors unique to retail operations, some of which are beyond the Company’s control, pose risks and uncertainties. Risks include, but are not limited to: credit card fraud; mismanagement of existing retail channel partners; and inability to manage costs associated with store construction and operation. In addition, extreme weather conditions in the areas in which our stores are located could adversely affect our business. +If the technology-based systems that give our customers the ability to shop with us online do not function effectively, our operating results, as well as our ability to grow our digital commerce business globally, could be materially adversely affected. +Many of our customers shop with us through our digital platforms. Increasingly, customers are using mobile-based devices and applications to shop online with us and with our competitors, and to do comparison shopping. We are increasingly using social media and proprietary mobile applications to interact with our customers and as a means to enhance their shopping experience. Any failure on our part to provide attractive, effective, reliable, user-friendly digital commerce platforms that offer a wide assortment of merchandise with rapid delivery options and that continually meet the changing expectations of online shoppers could place us at a competitive disadvantage, result in the loss of digital commerce and other sales, harm our reputation with customers, have a material adverse impact on the growth of our digital commerce business globally and could have a material adverse impact on our business and results of operations. +Risks specific to our digital commerce business also include diversion of sales from our and our retailers’ brick and mortar stores, difficulty in recreating the in-store experience through direct channels and liability for online content. Our failure to successfully respond to these risks might adversely affect sales in our digital commerce business, as well as damage our reputation and brands. +Failure to adequately protect or enforce our intellectual property rights could adversely affect our business. +We periodically discover counterfeit reproductions of our products or products that otherwise infringe our intellectual property rights. If we are unsuccessful in enforcing our intellectual property rights, continued sales of these products could adversely affect our sales and our brand and could result in a shift of consumer preference away from our products. +The actions we take to establish and protect our intellectual property rights may not be adequate to prevent imitation of our products by others. We also may be unable to prevent others from seeking to block sales of our products as violations of proprietary rights. +We may be subject to liability if third parties successfully claim we infringe on their intellectual property rights. Defending infringement claims could be expensive and time-consuming and might result in our entering into costly license agreements. We also may be subject to significant damages or injunctions against development, use, importation and/or sale of certain products. +We take various actions to prevent the unauthorized use and/or disclosure of our confidential information and intellectual property rights. These actions include contractual measures such as entering into non-disclosure and non-compete agreements and agreements relating to our collaborations with third parties and providing confidential information awareness training. Our controls and efforts to prevent unauthorized use and/or disclosure of confidential information and intellectual property rights might not always be effective. For example, confidential information related to business strategy, new technologies, mergers and acquisitions, unpublished financial results or personal data could be prematurely or inadvertently used and/or disclosed, resulting in a loss of reputation, a decline in our stock price and/or a negative impact on our market position, and could lead to damages, fines, penalties or injunctions. +In addition, the laws of certain countries may not protect or allow enforcement of intellectual property rights to the same extent as the laws of the United States. We may face significant expenses and liability in connection with the protection of our intellectual property rights, including outside the United States, and if we are unable to successfully protect our rights or resolve intellectual property conflicts with others, our business or financial condition may be adversely affected. +We are subject to the risk our licensees may not generate expected sales or maintain the value of our brands. +We currently license, and expect to continue licensing, certain of our proprietary rights, such as trademarks or copyrighted material, to third parties. If our licensees fail to successfully market and sell licensed products, or fail to obtain sufficient capital or effectively manage their business operations, customer relationships, labor relationships, supplier relationships or credit risks, it could adversely affect our revenues, both directly from reduced royalties received and indirectly from reduced sales of our other products. +9 +Table of Contents +We also rely on our licensees to help preserve the value of our brands. Although we attempt to protect our brands through approval rights over the design, production processes, quality, packaging, merchandising, distribution, advertising and promotion of our licensed products, we cannot completely control the use of our licensed brands by our licensees. The misuse of a brand by or negative publicity involving a licensee could have a material adverse effect on that brand and on us. +We are subject to data security and privacy risks that could negatively affect our results, operations or reputation. +In addition to our own sensitive and proprietary business information, we collect transactional and personal information about our customers and users of our digital experiences, which include online distribution channels and product engagement and personal fitness applications. Hackers and data thieves are increasingly sophisticated and operate large-scale and complex automated attacks. Any breach of our or our service providers’ network, or other vendor systems, may result in the loss of confidential business and financial data, misappropriation of our consumers’, users’ or employees’ personal information or a disruption of our business. Any of these outcomes could have a material adverse effect on our business, including unwanted media attention, impairment of our consumer and customer relationships, damage to our reputation; resulting in lost sales and consumers, fines, lawsuits, or significant legal and remediation expenses. We also may need to expend significant resources to protect against, respond to and/or redress problems caused by any breach. +In addition, we must comply with increasingly complex and rigorous regulatory standards enacted to protect business and personal data in the U.S., Europe and elsewhere. For example, the European Union adopted the General Data Protection Regulation (the “GDPR”), which became effective on May 25, 2018. The GDPR imposes additional obligations on companies regarding the handling of personal data and provides certain individual privacy rights to persons whose data is stored. Compliance with existing, proposed and recently enacted laws (including implementation of the privacy and process enhancements called for under GDPR) and regulations can be costly; any failure to comply with these regulatory standards could subject us to legal and reputational risks. Misuse of or failure to secure personal information could also result in violation of data privacy laws and regulations, proceedings against the Company by governmental entities or others, damage to our reputation and credibility and could have a negative impact on revenues and profits. +Failure of our contractors or our licensees’ contractors to comply with our code of conduct, local laws and other standards could harm our business. +We work with hundreds of contractors outside of the United States to manufacture our products, and we also have license agreements that permit unaffiliated parties to manufacture or contract for the manufacture of products using our intellectual property. We require the contractors that directly manufacture our products and our licensees that make products using our intellectual property (including, indirectly, their contract manufacturers) to comply with a code of conduct and other environmental, health and safety standards for the benefit of workers. We also require these contractors to comply with applicable standards for product safety. Notwithstanding their contractual obligations, from time to time contractors may not comply with such standards or applicable local law or our licensees may fail to enforce such standards or applicable local law on their contractors. Significant or continuing noncompliance with such standards and laws by one or more contractors could harm our reputation or result in a product recall and, as a result, could have an adverse effect on our sales and financial condition. Negative publicity regarding production methods, alleged practices or workplace or related conditions of any of our suppliers, manufacturers or licensees could adversely affect our brand image and sales and force us to locate alternative suppliers, manufacturers or licenses. +Our international operations involve inherent risks which could result in harm to our business. +Virtually all of our athletic footwear and apparel is manufactured outside of the United States, and the majority of our products are sold outside of the United States. Accordingly, we are subject to the risks generally associated with global trade and doing business abroad, which include foreign laws and regulations, varying consumer preferences across geographic regions, political unrest, disruptions or delays in cross-border shipments and changes in economic conditions in countries in which our products are manufactured or where we sell products. This includes, for example, the uncertainty surrounding the effect of Brexit, including changes to the legal and regulatory framework that apply to the United Kingdom and its relationship with the European Union, as well as new and proposed changes affecting tax laws and trade policy in the U.S. and elsewhere as further described below under “ We could be subject to changes in tax rates, adoption of new tax laws, additional tax liabilities or increased volatility in our effective tax rate ” and “ Changes to U.S. trade policy, tariff and import/export regulations may have a material adverse effect on our business, financial condition and results of operations . ” The U.S. presidential administration has indicated a focus on policy reforms that discourage U.S. corporations from outsourcing manufacturing and production activities to foreign jurisdictions, including through tariffs or penalties on goods manufactured outside the U.S., which may require us to change the way we conduct business and adversely affect our results of operations. The administration has also targeted the specific practices of certain U.S. multinational corporations in public statements which, if directed at us, could harm our reputation or otherwise negatively impact our business. +In addition, disease outbreaks, terrorist acts and military conflict have increased the risks of doing business abroad. These factors, among others, could affect our ability to manufacture products or procure materials, our ability to import products, our ability to sell products in international markets and our cost of doing business. If any of these or other factors make the conduct of business in a particular country undesirable or impractical, our business could be adversely affected. In addition, many of our imported products are subject to duties, tariffs or quotas that affect the cost and quantity of various types of goods imported into the United States and other countries. Any country in which our products are produced or sold may eliminate, adjust or impose new quotas, duties, tariffs, safeguard measures, anti-dumping duties, cargo restrictions to prevent terrorism, restrictions on the transfer of currency, climate change legislation, product safety regulations or other charges or restrictions, any of which could have an adverse effect on our results of operations and financial condition. +We could be subject to changes in tax rates, adoption of new tax laws, additional tax liabilities or increased volatility in our effective tax rate. +We are subject to the tax laws in the United States and numerous foreign jurisdictions. Current economic and political conditions make tax laws and regulations, or their interpretation and application, in any jurisdiction subject to significant change. On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (the “Tax Act”), which includes a number of significant changes to previous U.S. tax laws that impact us, including provisions for a one-time transition tax on deemed repatriation of undistributed foreign earnings, and a reduction in the corporate tax rate from 35% to 21% for tax years beginning after December 31, 2017, among other changes. The Tax Act also transitions U.S. international taxation from a worldwide system to a modified territorial system and includes base erosion prevention measures on non-U.S. earnings, which has the effect of subjecting certain earnings of our foreign subsidiaries to U.S. taxation. +10 +Table of Contents +Implementation of the Tax Act required us to record incremental provisional tax expense in fiscal 2018, which increased our effective tax rate in fiscal 2018. Adjustments to the incremental provisional tax expense may be made in future periods as actual amounts may differ due to, among other factors, a change in interpretation of the applicable revisions to the U.S. tax code and related tax accounting guidance, changes in assumptions made in developing these estimates, regulatory guidance that may be issued with respect to the applicable revisions to the U.S. tax code, and state tax implications. As we complete our analysis of the Tax Act, we may make adjustments to provisional amounts we have recorded, which could negatively impact our business, results of operations or financial condition. Changes or challenges to or the repeal of the Tax Act cannot be predicted with certainty and could have a material impact on our future tax expense. +We earn a substantial portion of our income in foreign countries and are subject to the tax laws of those jurisdictions. There have been proposals to reform foreign tax laws that could significantly impact how U.S. multinational corporations are taxed on foreign earnings. Although we cannot predict whether or in what form these proposals will pass, several of the proposals considered, if enacted into law, could have an adverse impact on our income tax expense and cash flows. +Portions of our operations are subject to a reduced tax rate or are free of tax under various tax holidays and rulings that expire in whole or in part from time to time. These tax holidays and rulings may be extended when certain conditions are met, or terminated if certain conditions are not met. If the tax holidays and rulings are not extended, or if we fail to satisfy the conditions of the reduced tax rate, our effective income tax rate would increase in the future. +We are also subject to the examination of our tax returns by the United States Internal Revenue Service (“IRS”) and other tax authorities. We regularly assess the likelihood of an adverse outcome resulting from these examinations to determine the adequacy of its provision for income taxes. Although we believe our tax provisions are adequate, the final determination of tax audits and any related disputes could be materially different from our historical income tax provisions and accruals, particularly in light of the enactment of the Tax Act. The results of audits or related disputes could have an adverse effect on our financial statements for the period or periods for which the applicable final determinations are made. For example, we and our subsidiaries are engaged in a number of intercompany transactions across multiple tax jurisdictions. Although we believe we have clearly reflected the economics of these transactions and the proper local transfer pricing documentation is in place, tax authorities may propose and sustain adjustments that could result in changes that may impact our mix of earnings in countries with differing statutory tax rates. +Changes to U.S. trade policy, tariff and import/export regulations may have a material adverse effect on our business, financial condition and results of operations. +Changes in U.S. or international social, political, regulatory and economic conditions or in laws and policies governing foreign trade, manufacturing, development and investment in the territories or countries where we currently sell our products or conduct our business, as well as any negative sentiment toward the U.S. as a result of such changes, could adversely affect our business. The U.S. presidential administration has instituted or proposed changes in trade policies that include the negotiation or termination of trade agreements, the imposition of higher tariffs on imports into the U.S., economic sanctions on individuals, corporations or countries, and other government regulations affecting trade between the U.S. and other countries where we conduct our business. It may be time-consuming and expensive for us to alter our business operations in order to adapt to or comply with any such changes. +As a result of recent policy changes of the U.S. presidential administration and recent U.S. government proposals, there may be greater restrictions and economic disincentives on international trade. The new tariffs and other changes in U.S. trade policy could trigger retaliatory actions by affected countries, and certain foreign governments have instituted or are considering imposing trade sanctions on certain U.S. goods. The Company, similar to many other multinational corporations, does a significant amount of business that would be impacted by changes to the trade policies of the U.S. and foreign countries (including governmental action related to tariffs, international trade agreements, or economic sanctions). Such changes have the potential to adversely impact the U.S. economy or certain sectors thereof, our industry and the global demand for our products, and as a result, could have a material adverse effect on our business, financial condition and results of operations. +If one or more of our counterparty financial institutions default on their obligations to us or fail, we may incur significant losses. +As part of our hedging activities, we enter into transactions involving derivative financial instruments, which may include forward contracts, commodity futures contracts, option contracts, collars and swaps with various financial institutions. In addition, we have significant amounts of cash, cash equivalents and other investments on deposit or in accounts with banks or other financial institutions in the United States and abroad. As a result, we are exposed to the risk of default by or failure of counterparty financial institutions. The risk of counterparty default or failure may be heightened during economic downturns and periods of uncertainty in the financial markets. If one of our counterparties were to become insolvent or file for bankruptcy, our ability to recover losses incurred as a result of default, or our assets deposited or held in accounts with such counterparty, may be limited by the counterparty’s liquidity or the applicable laws governing the insolvency or bankruptcy proceedings. In the event of default or failure of one or more of our counterparties, we could incur significant losses, which could negatively impact our results of operations and financial condition. +We rely on a concentrated source base of contract manufacturers to supply a significant portion of our footwear products. +NIKE is supplied by 124 footwear factories located in 13 countries. We do not own or operate any of the footwear manufacturing facilities and depend upon independent contract manufacturers to manufacture all of the footwear products we sell. In fiscal 2018 , five footwear contract manufacturers each accounted for greater than 10% of fiscal 2018 footwear production and in aggregate accounted for approximately 69% of NIKE Brand footwear production in fiscal 2018 . Our ability to meet our customers’ needs depends on our ability to maintain a steady supply of products from our independent contract manufacturers. If one or more of our significant suppliers were to sever their relationship with us or significantly alter the terms of our relationship, including due to changes in applicable trade policies, we may not be able to obtain replacement products in a timely manner, which could have a material adverse effect on our sales, financial condition or results of operations. Additionally, if any of our primary contract manufacturers fail to make timely shipments, do not meet our quality standards or otherwise fail to deliver us product in accordance with our plans, there could be a material adverse effect on our results of operations. +11 +Table of Contents +Our products are subject to risks associated with overseas sourcing, manufacturing and financing. +The principal materials used in our apparel products — natural and synthetic fabrics and threads, specialized performance fabrics designed to efficiently wick moisture away from the body, retain heat or repel rain and/or snow as well as plastic and metal hardware — are available in countries where our manufacturing takes place. The principal materials used in our footwear products — natural and synthetic rubber, plastic compounds, foam cushioning materials, natural and synthetic leather, natural and synthetic fabrics and threads, nylon, canvas and polyurethane films — are also locally available to manufacturers. Both our apparel and footwear products are dependent upon the ability of our unaffiliated contract manufacturers to locate, train, employ and retain adequate personnel. NIKE contractors and suppliers buy raw materials and are subject to wage rates that are oftentimes regulated by the governments of the countries in which our products are manufactured. +There could be a significant disruption in the supply of fabrics or raw materials from current sources or, in the event of a disruption, our contract manufacturers might not be able to locate alternative suppliers of materials of comparable quality at an acceptable price or at all. Further, our unaffiliated contract manufacturers have experienced and may continue to experience in the future, unexpected increases in work wages, whether government mandated or otherwise and increases in compliance costs due to governmental regulation concerning certain metals used in the manufacturing of our products. In addition, we cannot be certain that our unaffiliated manufacturers will be able to fill our orders in a timely manner. If we experience significant increases in demand, or reductions in the availability of materials, or need to replace an existing manufacturer, there can be no assurance additional supplies of fabrics or raw materials or additional manufacturing capacity will be available when required on terms acceptable to us, or at all, or that any supplier or manufacturer would allocate sufficient capacity to us in order to meet our requirements. In addition, even if we are able to expand existing or find new manufacturing or sources of materials, we may encounter delays in production and added costs as a result of the time it takes to train suppliers and manufacturers in our methods, products, quality control standards and labor, health and safety standards. Any delays, interruption or increased costs in labor or wages, or the supply of materials or manufacture of our products could have an adverse effect on our ability to meet retail customer and consumer demand for our products and result in lower revenues and net income both in the short- and long-term. +Because independent manufacturers make a majority of our products outside of our principal sales markets, our products must be transported by third parties over large geographic distances. Delays in the shipment or delivery of our products due to the availability of transportation, work stoppages, port strikes, infrastructure congestion or other factors, and costs and delays associated with consolidating or transitioning between manufacturers, could adversely impact our financial performance. In addition, manufacturing delays or unexpected demand for our products may require us to use faster, but more expensive, transportation methods such as air freight, which could adversely affect our profit margins. The cost of oil is a significant component in manufacturing and transportation costs, so increases in the price of petroleum products can adversely affect our profit margins. Changes in U.S. trade policies, including new and potential changes to import tariffs and existing trade policies and agreements, could also have a significant impact on our activities in foreign jurisdictions, and could adversely affect our results of operations. +In addition, Sojitz America performs significant import-export financing services for the Company. During fiscal 2018, Sojitz America provided financing and purchasing services for NIKE Brand products sold in certain NIKE markets including Argentina, Brazil, Canada, India, South Africa and Uruguay (collectively the “Sojitz Markets”), excluding products produced and sold in the same country. Any failure of Sojitz America to provide these services or any failure of Sojitz America’s banks could disrupt our ability to acquire products from our suppliers and to deliver products to our customers in the Sojitz Markets. Such a disruption could result in canceled orders that would adversely affect sales and profitability. +Our success depends on our global distribution facilities. +We distribute our products to customers directly from the factory and through distribution centers located throughout the world. Our ability to meet customer expectations, manage inventory, complete sales and achieve objectives for operating efficiencies and growth, particularly in emerging markets, depends on the proper operation of our distribution facilities, the development or expansion of additional distribution capabilities and the timely performance of services by third parties (including those involved in shipping product to and from our distribution facilities). Our distribution facilities could be interrupted by information technology problems and disasters such as earthquakes or fires. Any significant failure in our distribution facilities could result in an adverse effect on our business. We maintain business interruption insurance, but it may not adequately protect us from adverse effects caused by significant disruptions in our distribution facilities. +We rely significantly on information technology to operate our business, including our supply chain and retail operations, and any failure, inadequacy or interruption of that technology could harm our ability to effectively operate our business. +We are heavily dependent on information technology systems and networks, including the Internet and third-party services (“Information Technology Systems”), across our supply chain, including product design, production, forecasting, ordering, manufacturing, transportation, sales and distribution, as well as for processing financial information for external and internal reporting purposes, retail operations and other business activities. Information Technology Systems are critical to many of our operating activities and our business processes and may be negatively impacted by any service interruption or shutdown. For example, our ability to effectively manage and maintain our inventory and to ship products to customers on a timely basis depends significantly on the reliability of these Information Technology Systems. Over a number of years, we have implemented Information Technology Systems in all of the geographical regions in which we operate. Our work to integrate, secure and enhance these systems and related processes in our global operations is ongoing and NIKE will continue to invest in these efforts. The failure of these systems to operate effectively, including as a result of security breaches, viruses, hackers, malware, natural disasters, vendor business interruptions or other causes, or failure to properly maintain, protect, repair or upgrade systems, or problems with transitioning to upgraded or replacement systems could cause delays in product fulfillment and reduced efficiency of our operations, could require significant capital investments to remediate the problem, and may have an adverse effect on our reputation, results of operations and financial condition. +We also use Information Technology Systems to process financial information and results of operations for internal reporting purposes and to comply with regulatory financial reporting, legal and tax requirements. If Information Technology Systems suffer severe damage, disruption or shutdown and our business continuity plans, or those of our vendors, do not effectively resolve the issues in a timely manner, we could experience delays in reporting our financial results, which could result in lost revenues and profits, as well as reputational damage. Furthermore, we depend on Information Technology Systems and personal data collection for digital marketing, digital commerce, consumer engagement and the marketing and use of our digital products and services. We also rely on our ability to engage in electronic communications throughout the world between and among our employees as well as with other third parties, including customers, suppliers, vendors and consumers. Any interruption in Information Technology Systems may impede our ability to engage in the digital space and result in lost revenues, damage to our reputation, and loss of users. +12 +Table of Contents +The market for prime real estate is competitive. +Our ability to effectively obtain real estate to open new retail stores and otherwise conduct our operations, both domestically and internationally, depends on the availability of real estate that meets our criteria for traffic, square footage, co-tenancies, lease economics, demographics and other factors. We also must be able to effectively renew our existing real estate leases. In addition, from time to time, we seek to downsize, consolidate, reposition or close some of our real estate locations, which may require modification of an existing lease. Failure to secure adequate new locations or successfully modify leases for existing locations, or failure to effectively manage the profitability of our existing fleet of retail stores, could have an adverse effect on our operating results and financial condition. +Additionally, the economic environment may make it difficult to determine the fair market rent of real estate properties domestically and internationally. This could impact the quality of our decisions to exercise lease options at previously negotiated rents and to renew expiring leases at negotiated rents. Any adverse effect on the quality of these decisions could impact our ability to retain real estate locations adequate to meet our targets or efficiently manage the profitability of our existing fleet of stores, which could have an adverse effect on our operating results and financial condition. +Extreme weather conditions and natural disasters could negatively impact our operating results and financial condition. +Extreme weather conditions in the areas in which our retail stores, suppliers, customers, distribution centers and vendors are located could adversely affect our operating results and financial condition. Moreover, natural disasters such as earthquakes, hurricanes and tsunamis, whether occurring in the United States or abroad, and their related consequences and effects, including energy shortages and public health issues, could disrupt our operations, the operations of our vendors and other suppliers or result in economic instability that may negatively impact our operating results and financial condition. +Our financial results may be adversely affected if substantial investments in businesses and operations fail to produce expected returns. +From time to time, we may invest in technology, business infrastructure, new businesses, product offering and manufacturing innovation and expansion of existing businesses, such as our digital commerce operations, which require substantial cash investments and management attention. We believe cost-effective investments are essential to business growth and profitability; however, significant investments are subject to typical risks and uncertainties inherent in developing a new business or expanding an existing business. The failure of any significant investment to provide expected returns or profitability could have a material adverse effect on our financial results and divert management attention from more profitable business operations. +We are subject to litigation and other legal and regulatory proceedings, which could have an adverse effect on our business, financial condition and results of operations. +As a multinational corporation with operations and distribution channels throughout the world, we are subject to extensive laws and regulations in the U.S. and other jurisdictions in which we have operations and distribution channels. We are involved in various types of claims, lawsuits, regulatory proceedings and government investigations relating to our business, our products and the actions of our employees and representatives, including contractual and employment relationships, product liability, antitrust, trademark rights and a variety of other matters. It is not possible to predict with certainty the outcome of any such legal or regulatory proceedings or investigations, and we could in the future incur judgments, fines or penalties, or enter into settlements of lawsuits and claims that could have a material adverse effect on our business, financial condition and results of operations and negatively impact our reputation. The global nature of our business means legal and compliance risks will continue to exist and additional legal proceedings and other contingencies will arise from time to time, which could adversely affect us. In addition, the adoption of new laws or regulations, or changes in the interpretation of existing laws or regulations, may result in significant unanticipated legal and reputational risks. Any current or future legal or regulatory proceedings could divert management’s attention from our operations and result in substantial legal fees. +The success of our business depends, in part, on high-quality employees, including key personnel. +Our success depends in part on the continued service of high-quality employees, including key executive officers and personnel. The loss of the services of key individuals, or any negative perception with respect to these individuals, could harm our business. Our success also depends on our ability to recruit, retain and engage our personnel sufficiently, both to maintain our current business and to execute our strategic initiatives. Competition for employees in our industry is intense and we may not be successful in attracting and retaining such personnel. In addition, shifts in U.S. immigration policy could negatively impact our ability to attract, hire and retain highly skilled employees who are from outside the U.S. +The sale of a large number of shares of common stock by our principal stockholder could depress the market price of our common stock. +As of June 30, 2018, Swoosh, LLC beneficially owned more than 77% of our Class A Common Stock. If, on June 30, 2018, all of these shares were converted into Class B Common Stock, the commensurate ownership percentage of our Class B Common Stock would be approximately 17%. The shares are available for resale, subject to the requirements of the U.S. securities laws and the terms of the limited liability company agreement governing Swoosh, LLC. The sale or prospect of a sale of a substantial number of these shares could have an adverse effect on the market price of our common stock. Swoosh, LLC was formed by Philip H. Knight, our Chairman Emeritus, to hold the majority of his shares of Class A Common Stock. Swoosh, LLC is controlled by Mr. Knight's son and NIKE director, Travis Knight. +Changes in our credit ratings or macroeconomic conditions may affect our liquidity, increasing borrowing costs and limiting our financing options. +Our long-term debt is currently rated Investment Grade by Standard & Poor’s and Moody’s Investors Service. If our credit ratings are lowered, borrowing costs for future long-term debt or short-term credit facilities may increase and our financing options, including our access to the unsecured credit market, could be limited. We may also be subject to restrictive covenants that would reduce our flexibility to, among other things, incur additional indebtedness, make restricted payments, pledge assets as security, make investments, loans, advances, guarantees and acquisitions, undergo fundamental changes and enter into transactions with affiliates. Failure to comply with such covenants could result in a default, and as a result, the commitments of our lenders under our credit agreements may be terminated and the maturity of amounts owed may be accelerated. In addition, macroeconomic conditions, such as increased volatility or disruption in the credit markets, could adversely affect our ability to refinance existing debt. +13 +Table of Contents +If our internal controls are ineffective, our operating results could be adversely affected. +Our internal control over financial reporting may not prevent or detect misstatements because of its inherent limitations, including the possibility of human error, the circumvention or overriding of controls or fraud. Even effective internal controls can provide only reasonable assurance with respect to the preparation and fair presentation of financial statements. If we fail to maintain the adequacy of our internal controls, including any failure to implement required new or improved controls, or if we experience difficulties in their implementation, our business and operating results could be harmed and we could fail to meet our financial reporting obligations. +If our estimates or judgments relating to our critical accounting policies prove to be incorrect, our operating results could be adversely affected. +The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. We base our estimates on historical experience and on various other assumptions we believe to be reasonable under the circumstances, as provided in “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The results of these estimates form the basis for making judgments about the carrying values of assets, liabilities and equity, and the amount of revenue and expenses that are not readily apparent from other sources. Significant assumptions and estimates used in preparing our consolidated financial statements include those related to revenue recognition, allowance for uncollectible accounts receivable, inventory reserves, contingent payments under endorsement contracts, accounting for property, plant and equipment and definite-lived assets, hedge accounting for derivatives, stock-based compensation, income taxes and other contingencies. Our operating results may be adversely affected if our assumptions change or if actual circumstances differ from those in our assumptions, which could cause our operating results to fall below the expectations of securities analysts and investors, resulting in a decline in the price of our Class B Common Stock. +Anti-takeover provisions may impair an acquisition of the Company or reduce the price of our common stock. +There are provisions within our articles of incorporation and Oregon law intended to protect shareholder interests by providing the Board of Directors a means to attempt to deny coercive takeover attempts or to negotiate with a potential acquirer in order to obtain more favorable terms. Such provisions include a control share acquisition statute, a freeze-out statute, two classes of stock that vote separately on certain issues, and the fact that holders of Class A Common Stock elect three-quarters of the Board of Directors rounded down to the next whole number. However, such provisions could discourage, delay or prevent an unsolicited merger, acquisition or other change in control of our company that some shareholders might believe to be in their best interests or in which shareholders might receive a premium for their common stock over the prevailing market price. These provisions could also discourage proxy contests for control of the Company. +We may fail to meet market expectations, which could cause the price of our stock to decline. +Our Class B Common Stock is traded publicly, and at any given time various securities analysts follow our financial results and issue reports on us. These reports include information about our historical financial results as well as analysts’ estimates of our future performance. Analysts’ estimates are based upon their own opinions and are often different from our estimates or expectations. If our operating results are below the estimates or expectations of public market analysts and investors, our stock price could decline. In the past, securities class action litigation has been brought against NIKE and other companies following a decline in the market price of their securities. If our stock price is volatile for any reason, we may become involved in this type of litigation in the future. Any litigation could result in reputational damage, substantial costs and a diversion of management’s attention and resources needed to successfully run our business. +14 +Table of Contents +ITEM 1B. Unresolved Staff Comments +None. +ITEM 2. Properties +The following is a summary of principal properties owned or leased by NIKE: +The NIKE World Campus, owned by NIKE and located near Beaverton, Oregon, USA, is an approximately 400-acre site consisting of over 40 buildings which, together with adjacent leased properties, functions as our world headquarters and is occupied by approximately 11,200 employees engaged in management, research, design, development, marketing, finance and other administrative functions serving nearly all of our divisions. We also lease various office facilities in the surrounding metropolitan area. We lease a similar, but smaller, administrative facility in Hilversum, the Netherlands, which serves as the headquarters for the Europe, Middle East & Africa geography and management of certain brand functions for our non-U.S. operations. We also lease an office complex in Shanghai, China, our headquarters for Greater China, occupied by employees focused on implementing our wholesale, NIKE Direct and merchandising strategies in the region, among other functions. +In the United States, NIKE has seven significant distribution centers. Five are located in Memphis, Tennessee, two of which are owned and three of which are leased. Two other distribution centers, one located in Indianapolis, Indiana, and one located in Dayton, Tennessee, are leased and operated by third-party logistics providers. NIKE Brand apparel and equipment are also shipped from our Foothill Ranch, California distribution center, which we lease. Smaller leased, and third-party leased and operated, distribution facilities are located in various parts of the United States. NIKE has several distribution facilities outside the United States, some of which are leased and operated by third-party logistics providers. The most significant distribution facilities outside the United States are located in Laakdal, Belgium; Taicang, China; Tomisato, Japan and Incheon, Korea, all of which we own. +Air Manufacturing Innovation manufactures Air-Sole cushioning components at NIKE-owned facilities and one leased facility located near Beaverton, Oregon and in St. Charles, Missouri. Air Manufacturing Innovation also manufactures and sells small amounts of various other plastic products to other manufacturers. +Aside from the principal properties described above, we lease many offices worldwide for sales and administrative purposes. We lease 1,181 retail stores worldwide, which primarily consist of factory stores. See “United States Market” and “International Markets” in Part I of this Report. Our leases expire at various dates through the year 2035. +ITEM 3. Legal Proceedings +There are no material pending legal proceedings, other than ordinary routine litigation incidental to our business, to which we are a party or of which any of our property is the subject. +ITEM 4. Mine Safety Disclosures +Not applicable. +15 +Table of Contents +PART II +ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities +NIKE’s Class B Common Stock is listed on the New York Stock Exchange and trades under the symbol NKE. At July 20, 2018, there were 22,271 holders of record of our Class B Common Stock and 15 holders of record of our Class A Common Stock. These figures do not include beneficial owners who hold shares in nominee name. The Class A Common Stock is not publicly traded, but each share is convertible upon request of the holder into one share of Class B Common Stock. Refer to Selected Quarterly Financial Data in Part II, Item 6 of this Report for information regarding quarterly high and low sales prices for the Class B Common Stock as reported on the New York Stock Exchange Composite Tape, and for dividends declared on the Class A and Class B Common Stock. +In November 2015, the Board of Directors approved a four-year, $12 billion share repurchase program. As of May 31, 2018 , the Company had repurchased 149.4 million shares at an average price of $58.25 per share for a total approximate cost of $8.7 billion under this program. The Company intends to use excess cash, future cash from operations and/or proceeds from debt to fund repurchases. +The following table presents a summary of share repurchases made by NIKE under this program during the quarter ended May 31, 2018 : +Period +Total Number of Shares Purchased +Average Price +Paid per Share +Total Number of Shares +Purchased as Part of +Publicly Announced +Plans or Programs +Maximum Number +(or Approximate Dollar Value) +of Shares that May Yet +Be Purchased Under the +Plans or Programs +(In millions) +March 1 — March 31, 2018 +8,602,814 +$ +65.94 +8,602,814 +$ +4,282 +April 1 — April 30, 2018 +7,823,991 +$ +67.08 +7,823,991 +$ +3,757 +May 1 — May 31, 2018 +6,625,000 +$ +69.63 +6,625,000 +$ +3,296 +23,051,805 +$ +67.39 +23,051,805 +16 +Table of Contents +Performance Graph +The following graph demonstrates a five-year comparison of cumulative total returns for NIKE’s Class B Common Stock; the Standard & Poor’s 500 Stock Index; the Standard & Poor’s Apparel, Accessories & Luxury Goods Index; and the Dow Jones U.S. Footwear Index. The graph assumes an investment of $100 on May 31, 2013 in each of our Class B Common Stock and the stocks comprising the Standard & Poor’s 500 Stock Index; the Standard & Poor’s Apparel, Accessories & Luxury Goods Index; and the Dow Jones U.S. Footwear Index. Each of the indices assumes that all dividends were reinvested on the day of issuance. +COMPARISON OF 5-YEAR CUMULATIVE TOTAL RETURN AMONG NIKE, INC.; S&P 500 INDEX; S&P APPAREL, ACCESSORIES & LUXURY GOODS INDEX; AND THE DOW JONES U.S. FOOTWEAR INDEX +The Dow Jones U.S. Footwear Index consists of NIKE, Deckers Outdoor Corporation, Skechers U.S.A., Inc., Steven Madden, Ltd. and Wolverine World Wide, Inc. Because NIKE is part of the Dow Jones U.S. Footwear Index, the price and returns of NIKE stock have a substantial effect on this index. The Standard & Poor’s Apparel, Accessories & Luxury Goods Index consists of Michael Kors Holdings Limited, Ralph Lauren Corporation, Tapestry, Inc., Under Armour, Inc. and V.F. Corporation, among other companies. The Dow Jones U.S. Footwear Index and the Standard & Poor’s Apparel, Accessories & Luxury Goods Index include companies in two major lines of business in which the Company competes. The indices do not encompass all of the Company’s competitors, nor all product categories and lines of business in which the Company is engaged. +The stock performance shown on the performance graph above is not necessarily indicative of future performance. The Company will not make or endorse any predictions as to future stock performance. +The performance graph above is being furnished solely to accompany this Report pursuant to Item 201(e) of Regulation S-K, is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing. +17 +Table of Contents +ITEM 6. Selected Financial Data +All share and per share amounts are reflective of the two-for-one stock split that began trading at the split-adjusted price on December 24, 2015. +(In millions, except per share data and financial ratios) +Financial History +2018 +2017 +2016 +2015 +2014 +Year Ended May 31, +Revenues +$ +36,397 +$ +34,350 +$ +32,376 +$ +30,601 +$ +27,799 +Gross profit +15,956 +15,312 +14,971 +14,067 +12,446 +Gross margin +43.8 +% +44.6 +% +46.2 +% +46.0 +% +44.8 +% +Net income +1,933 +4,240 +3,760 +3,273 +2,693 +Earnings per common share: +Basic +1.19 +2.56 +2.21 +1.90 +1.52 +Diluted +1.17 +2.51 +2.16 +1.85 +1.49 +Weighted average common shares outstanding +1,623.8 +1,657.8 +1,697.9 +1,723.5 +1,766.7 +Diluted weighted average common shares outstanding +1,659.1 +1,692.0 +1,742.5 +1,768.8 +1,811.6 +Cash dividends declared per common share +0.78 +0.70 +0.62 +0.54 +0.47 +Cash flow from operations (1) +4,955 +3,846 +3,399 +4,906 +3,158 +Price range of common stock: +High +73.49 +60.33 +68.19 +52.75 +40.13 +Low +50.35 +49.01 +47.25 +36.57 +29.56 +At May 31, +Cash and equivalents +$ +4,249 +$ +3,808 +$ +3,138 +$ +3,852 +$ +2,220 +Short-term investments +996 +2,371 +2,319 +2,072 +2,922 +Inventories +5,261 +5,055 +4,838 +4,337 +3,947 +Working capital +9,094 +10,587 +9,667 +9,225 +8,319 +Total assets +22,536 +23,259 +21,379 +21,590 +18,579 +Long-term debt +3,468 +3,471 +1,993 +1,072 +1,191 +Capital lease obligations +75 +27 +15 +5 +74 +Redeemable preferred stock +0.3 +0.3 +0.3 +0.3 +0.3 +Shareholders’ equity +9,812 +12,407 +12,258 +12,707 +10,824 +Year-end stock price +71.80 +52.99 +55.22 +50.84 +38.46 +Market capitalization +114,983 +87,084 +92,867 +87,044 +66,921 +Financial Ratios: +Return on equity (2) +17.4 +% +34.4 +% +30.1 +% +27.8 +% +24.6 +% +Return on assets (2) +8.4 +% +19.0 +% +17.5 +% +16.3 +% +14.9 +% +Inventory turns +4.0 +3.8 +3.8 +4.0 +4.1 +Current ratio at May 31 +2.5 +2.9 +2.8 +2.5 +2.7 +Price/Earnings ratio at May 31 (2) +61.4 +21.1 +25.6 +27.5 +25.9 +(1) +Prior year amounts have been updated to reflect the adoption of Accounting Standards Update No. 2016-09, Compensation — Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. As a result of adoption, the Company reclassified cash inflows of $177 million, $281 million, $218 million and $132 million for the years ended May 31, 2017, 2016, 2015 and 2014, respectively, related to excess tax benefits from share-based payment awards, from Cash used by financing activities to Cash provided by operations. Additionally, the Company reclassified cash outflows of $29 million, $22 million, $8 million and $13 million for the years ended May 31, 2017, 2016, 2015 and 2014, respectively, related to tax payments for the net settlement of share-based payment awards, from Cash provided by operations to Cash used by financing activities within the Consolidated Statements of Cash Flows. Refer to Note 1 — Summary of Significant Accounting Policies for additional information. +(2) +Certain fiscal 2018 financial ratios reflect the impact of the Tax Cuts and Jobs Act. Refer to Note 9 — Income Taxes for additional information. +18 +Table of Contents +Selected Quarterly Financial Data +(Unaudited) +(In millions, except per share data) +1st Quarter +2nd Quarter +3rd Quarter +4th Quarter +2018 +2017 +2018 +2017 +2018 (1) +2017 +2018 +2017 +Revenues +$ +9,070 +$ +9,061 +$ +8,554 +$ +8,180 +$ +8,984 +$ +8,432 +$ +9,789 +$ +8,677 +Gross profit +3,962 +4,123 +3,678 +3,616 +3,938 +3,750 +4,378 +3,823 +Gross margin +43.7 +% +45.5 +% +43.0 +% +44.2 +% +43.8 +% +44.5 +% +44.7 +% +44.1 +% +Net income (loss) +950 +1,249 +767 +842 +(921 +) +1,141 +1,137 +1,008 +Earnings (loss) per common share: +Basic +0.58 +0.75 +0.47 +0.51 +(0.57 +) +0.69 +0.71 +0.61 +Diluted +0.57 +0.73 +0.46 +0.50 +(0.57 +) +0.68 +0.69 +0.60 +Weighted average common shares outstanding +1,639.1 +1,672.0 +1,627.0 +1,659.1 +1,623.5 +1,653.1 +1,605.7 +1,646.9 +Diluted weighted average common shares outstanding +1,676.9 +1,708.9 +1,660.9 +1,693.2 +1,623.5 +1,686.3 +1,641.2 +1,678.6 +Cash dividends declared per common share +0.18 +0.16 +0.20 +0.18 +0.20 +0.18 +0.20 +0.18 +Price range of common stock: +High +60.53 +60.33 +61.21 +59.18 +70.25 +58.42 +73.49 +59.00 +Low +50.79 +51.48 +50.35 +49.01 +59.24 +50.06 +63.21 +50.81 +(1) +The third quarter of fiscal 2018 reflects the impact from the enactment of the Tax Cuts and Jobs Act. Refer to Note 9 — Income Taxes for additional information. +19 +Table of Contents +ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations +NIKE designs, develops, markets and sells athletic footwear, apparel, equipment, accessories and services worldwide. We are the largest seller of athletic footwear and apparel in the world. We sell our products through NIKE-owned retail stores and through digital platforms (which we refer to collectively as our “NIKE Direct” operations), to retail accounts and a mix of independent distributors, licensees and sales representatives in virtually all countries around the world. Our goal is to deliver value to our shareholders by building a profitable global portfolio of branded footwear, apparel, equipment and accessories businesses. Our strategy is to achieve long-term revenue growth by creating innovative, “must have” products, building deep personal consumer connections with our brands and delivering compelling consumer experiences through digital platforms and at retail. +In June 2017, we announced the Consumer Direct Offense, a new company alignment designed to allow NIKE to better serve the consumer personally, at scale. Leveraging the power of digital, NIKE plans to drive growth — by accelerating innovation and product creation, moving even closer to the consumer through key cities, and deepening one-to-one connections. As a result of this organizational realignment, beginning in fiscal 2018, the Company’s reportable operating segments for the NIKE Brand are: North America; Europe, Middle East & Africa (EMEA); Greater China; and Asia Pacific & Latin America (APLA). +Through the Consumer Direct Offense, we are focusing on our Triple Double strategy, with the objective of doubling the impact of innovation, increasing our speed to market and growing our direct connections with consumers. As a result of the execution of this strategy, our long-term financial goals through fiscal 2023, on average, per year, are as follows: +• +High single-digit revenue growth; +• +Gross margin expansion of as much as 50 basis points ; +• +Slight selling and administrative expense leverage; +• +Mid-teens earnings per share growth; and +• +Low-thirties percentage rate of return on invested capital. +Over the past ten years, we have achieved strong growth in many of these metrics. During this time, revenues for NIKE, Inc. have grown 7% on an annual compounded basis, annual gross margin has ranged from 43.5% to 46.4%, diluted earnings per common share has grown steadily and our return on invested capital has been as high as 34.7%. +Our fiscal 2018 results demonstrated the power of the NIKE, Inc. portfolio to generate revenue growth, while investing in capabilities in support of our Triple Double strategy to fuel our next phase of long-term growth and profitability. We achieved record revenues for fiscal 2018, growing 6% to $36.4 billion. The NIKE Brand, which represents over 90% of NIKE, Inc. Revenues , delivered 7% revenue growth. On a currency-neutral basis, NIKE Brand revenues grew 5%, driven by strong revenue growth across all international geographies and NIKE Direct, as well as growth in footwear, apparel and most key categories. Revenues for Converse decreased 8% and 11% on a reported and currency-neutral basis, respectively, primarily driven by lower revenues in North America. +Income before income taxes decreased 11% for fiscal 2018, in part reflecting the negative impact of weakening foreign currency exchange rates. Revenue growth was more than offset by higher selling and administrative expense, gross margin contraction, and a shift to other expense, net from other income, net for fiscal 2017. NIKE, Inc. gross margin decreased 80 basis points primarily due to foreign currency exchange rate headwinds. Selling and administrative expense was higher as a percent of revenues, reflecting investments in digital capabilities, consumer experiences and product and brand marketing to drive long-term growth under the Consumer Direct Offense. +Diluted earnings per common share reflects a 2% decline in the weighted average diluted common shares outstanding, driven by our share repurchase program. +While foreign currency markets remain volatile, we continue to see opportunities to drive future growth and profitability, and remain committed to effectively managing our business to achieve our financial goals over the long-term by executing against the operational strategies outlined above. +Use of Non-GAAP Financial Measures +Throughout this Annual Report on Form 10-K, we discuss non-GAAP financial measures, including references to wholesale equivalent revenues and currency-neutral revenues, which should be considered in addition to, and not in lieu of, the financial measures calculated and presented in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). References to wholesale equivalent revenues are intended to provide context as to the total size of our NIKE Brand market footprint if we had no NIKE Direct operations. NIKE Brand wholesale equivalent revenues consist of (1) sales to external wholesale customers and (2) internal sales from our wholesale operations to our NIKE Direct operations, which are charged at prices comparable to those charged to external wholesale customers. Additionally, currency-neutral revenues are calculated using actual exchange rates in use during the comparative prior year period to enhance the visibility of the underlying business trends excluding the impact of translation arising from foreign currency exchange rate fluctuations. +Management uses these non-GAAP financial measures when evaluating the Company ’ s performance, including when making financial and operating decisions. Additionally, management believes these non-GAAP financial measures provide investors with additional financial information that should be considered when assessing our underlying business performance and trends. However, references to wholesale equivalent revenues and currency-neutral revenues should not be considered in isolation or as a substitute for other financial measures calculated and presented in accordance with U.S. GAAP and may not be comparable to similarly titled non-GAAP measures used by other companies. +20 +Table of Contents +Results of Operations +(Dollars in millions, except per share data) +Fiscal 2018 +Fiscal 2017 +% Change +Fiscal 2016 +% Change +Revenues +$ +36,397 +$ +34,350 +6 +% +$ +32,376 +6 +% +Cost of sales +20,441 +19,038 +7 +% +17,405 +9 +% +Gross profit +15,956 +15,312 +4 +% +14,971 +2 +% +Gross margin +43.8 +% +44.6 +% +46.2 +% +Demand creation expense +3,577 +3,341 +7 +% +3,278 +2 +% +Operating overhead expense +7,934 +7,222 +10 +% +7,191 +0 +% +Total selling and administrative expense +11,511 +10,563 +9 +% +10,469 +1 +% +% of revenues +31.6 +% +30.8 +% +32.3 +% +Interest expense (income), net +54 +59 +— +19 +— +Other expense (income), net +66 +(196 +) +— +(140 +) +— +Income before income taxes +4,325 +4,886 +-11 +% +4,623 +6 +% +Income tax expense +2,392 +646 +270 +% +863 +-25 +% +Effective tax rate +55.3 +% +13.2 +% +18.7 +% +NET INCOME +$ +1,933 +$ +4,240 +-54 +% +$ +3,760 +13 +% +Diluted earnings per common share +$ +1.17 +$ +2.51 +-53 +% +$ +2.16 +16 +% +21 +Table of Contents +Consolidated Operating Results +Revenues +(Dollars in millions) +Fiscal 2018 +Fiscal 2017 (1) +% Change +% Change Excluding Currency Changes (2) +Fiscal 2016 (1) +% Change +% Change Excluding Currency Changes (2) +NIKE, Inc. Revenues: +NIKE Brand Revenues by: +Footwear +$ +22,268 +$ +21,081 +6 +% +4 +% +$ +19,871 +6 +% +8 +% +Apparel +10,733 +9,654 +11 +% +9 +% +9,067 +6 +% +9 +% +Equipment +1,396 +1,425 +-2 +% +-4 +% +1,496 +-5 +% +-3 +% +Global Brand Divisions (3) +88 +73 +21 +% +12 +% +73 +0 +% +2 +% +Total NIKE Brand Revenues +34,485 +32,233 +7 +% +5 +% +30,507 +6 +% +8 +% +Converse +1,886 +2,042 +-8 +% +-11 +% +1,955 +4 +% +6 +% +Corporate (4) +26 +75 +— +— +(86 +) +— +— +TOTAL NIKE, INC. REVENUES +$ +36,397 +$ +34,350 +6 +% +4 +% +$ +32,376 +6 +% +8 +% +Supplemental NIKE Brand Revenues Details: +NIKE Brand Revenues by: +Sales to Wholesale Customers +$ +23,969 +$ +23,078 +4 +% +2 +% +$ +22,577 +2 +% +5 +% +Sales through NIKE Direct +10,428 +9,082 +15 +% +12 +% +7,857 +16 +% +18 +% +Global Brand Divisions (3) +88 +73 +21 +% +12 +% +73 +0 +% +2 +% +TOTAL NIKE BRAND REVENUES +$ +34,485 +$ +32,233 +7 +% +5 +% +$ +30,507 +6 +% +8 +% +NIKE Brand Revenues on a Wholesale Equivalent Basis: (5) +Sales to Wholesale Customers +$ +23,969 +$ +23,078 +4 +% +2 +% +$ +22,577 +2 +% +5 +% +Sales from our Wholesale Operations to NIKE Direct Operations +6,332 +5,616 +13 +% +10 +% +4,672 +20 +% +22 +% +TOTAL NIKE BRAND WHOLESALE EQUIVALENT REVENUES +$ +30,301 +$ +28,694 +6 +% +4 +% +$ +27,249 +5 +% +8 +% +NIKE Brand Wholesale Equivalent Revenues by: (5) +Men’s +$ +17,114 +$ +16,041 +7 +% +5 +% +$ +15,410 +4 +% +6 +% +Women’s +6,915 +6,644 +4 +% +2 +% +6,296 +6 +% +8 +% +Young Athletes’ +4,906 +4,838 +1 +% +-1 +% +4,560 +6 +% +8 +% +Others (6) +1,366 +1,171 +17 +% +13 +% +983 +19 +% +21 +% +TOTAL NIKE BRAND WHOLESALE EQUIVALENT REVENUES +$ +30,301 +$ +28,694 +6 +% +4 +% +$ +27,249 +5 +% +8 +% +NIKE Brand Wholesale Equivalent Revenues by: (5) +Running +$ +5,198 +$ +4,860 +7 +% +5 +% +$ +4,401 +10 +% +13 +% +NIKE Basketball +1,494 +1,292 +16 +% +14 +% +1,378 +-6 +% +-5 +% +Jordan Brand +2,856 +3,098 +-8 +% +-9 +% +2,753 +13 +% +13 +% +Football (Soccer) +2,146 +1,984 +8 +% +5 +% +2,143 +-7 +% +-4 +% +Training +3,126 +3,080 +1 +% +0 +% +3,150 +-2 +% +-1 +% +Sportswear +10,018 +8,988 +11 +% +8 +% +8,129 +11 +% +14 +% +Others (7) +5,463 +5,392 +1 +% +0 +% +5,295 +2 +% +3 +% +TOTAL NIKE BRAND WHOLESALE EQUIVALENT REVENUES +$ +30,301 +$ +28,694 +6 +% +4 +% +$ +27,249 +5 +% +8 +% +22 +Table of Contents +(1) +Certain prior year amounts have been reclassified to conform to fiscal 2018 presentation. These changes had no impact on previously reported consolidated results of operations or shareholders’ equity. +(2) +The percent change has been calculated using actual exchange rates in use during the comparative prior year period to enhance the visibility of the underlying business trends by excluding the impact of translation arising from foreign currency exchange rate fluctuations, which is considered a non-GAAP financial measure. +(3) +Global Brand Divisions revenues are primarily attributable to NIKE Brand licensing businesses that are not part of a geographic operating segment. +(4) +Corporate revenues primarily consist of foreign currency hedge gains and losses related to revenues generated by entities within the NIKE Brand geographic operating segments and Converse, but managed through our central foreign exchange risk management program. +(5) +References to NIKE Brand wholesale equivalent revenues, which are considered non-GAAP financial measures, are intended to provide context as to the total size of our NIKE Brand market footprint if we had no NIKE Direct operations. NIKE Brand wholesale equivalent revenues consist of (1) sales to external wholesale customers and (2) internal sales from our wholesale operations to our NIKE Direct operations, which are charged at prices comparable to those charged to external wholesale customers. +(6) +Others include all unisex products, equipment and other products not allocated to Men’s, Women’s and Young Athletes’, as well as certain adjustments that are not allocated to products designated by gender or age. +(7) +Others include all other categories and certain adjustments that are not allocated at the category level. +Fiscal 2018 Compared to Fiscal 2017 +On a currency-neutral basis, NIKE, Inc. Revenues grew 4% for fiscal 2018, driven by growth in the NIKE Brand. All international NIKE Brand geographies delivered higher revenues for fiscal 2018 as our Consumer Direct Offense delivered innovative products, deep brand connections and compelling retail experiences to consumers through digital platforms and at NIKE-owned and retail partner stores, driving demand for NIKE Brand products. Revenue growth was broad-based, as Greater China, EMEA and APLA each contributed approximately 2 percentage points of the increase in NIKE, Inc. Revenues . For fiscal 2018, lower revenues from North America and Converse each reduced NIKE, Inc. Revenues by approximately 1 percentage point. +On a currency-neutral basis, NIKE Brand footwear and apparel revenues increased 4% and 9%, respectively, for fiscal 2018, while NIKE Brand equipment revenues decreased 4%. On a category basis, the increase in NIKE Brand footwear revenues was due to strong growth in Sportswear and Running, which was partially offset by lower revenues in several other categories, most notably the Jordan Brand. Footwear unit sales for fiscal 2018 increased 2% and higher average selling price (ASP) per pair contributed approximately 2 percentage points of footwear revenue growth, primarily due to the favorable impact of growth in our NIKE Direct business. +The currency-neutral increase in NIKE Brand apparel revenues for fiscal 2018 was fueled by growth in nearly all key categories, most notably Sportswear, NIKE Basketball and Football (Soccer). Unit sales of apparel increased 4% and higher ASP per unit contributed approximately 5 percentage points of apparel revenue growth, primarily due to higher ASPs from full-price, off-price and NIKE Direct sales. +For fiscal 2018, NIKE Direct revenues represented approximately 30% of our total NIKE Brand revenues compared to 28% for fiscal 2017. On a currency-neutral basis, NIKE Direct revenues increased 12% for fiscal 2018, driven by strong digital commerce sales growth of 25%, the addition of new stores and 4% comparable store sales growth. Comparable store sales include revenues from NIKE-owned in-line and factory stores for which all three of the following requirements have been met: (1) the store has been open at least one year, (2) square footage has not changed by more than 15% within the past year and (3) the store has not been permanently repositioned within the past year. On a reported basis, digital commerce sales, which are not included in comparable store sales, were $2.8 billion for fiscal 2018 compared to $2.2 billion for fiscal 2017, and represented approximately 27% of our total NIKE Brand NIKE Direct revenues for fiscal 2018 compared to 24% for fiscal 2017. +On a wholesale equivalent and currency-neutral basis, fiscal 2018 NIKE Brand Men’s revenues increased 5%, as growth in Sportswear, Running and NIKE Basketball more than offset lower Football (Soccer) and Jordan Brand revenues. Women’s revenues increased 2%, led by growth in Sportswear, partially offset by a decline in Training. Revenues for our Young Athletes’ business decreased 1%, as growth in Football (Soccer), was more than offset by lower revenues in the Jordan Brand. +Fiscal 2017 Compared to Fiscal 2016 +On a currency-neutral basis, NIKE, Inc. Revenues grew 8% for fiscal 2017, driven by higher revenues for all NIKE Brand geographies and Converse. Revenue growth was broad-based, as EMEA, Greater China, APLA and North America each contributed approximately 2 percentage points of the increase in NIKE, Inc. Revenues . +On a currency-neutral basis, NIKE Brand footwear and apparel revenues increased 8% and 9%, respectively, for fiscal 2017, while NIKE Brand equipment revenues decreased 3%. On a category basis, the increase in NIKE Brand footwear revenues was driven by strong growth in Sportswear, Running and the Jordan Brand. Footwear unit sales for fiscal 2017 increased 7%, with higher ASP per pair contributing approximately 1 percentage point of footwear revenue growth, primarily driven by higher full-price and off-price ASPs, partially offset by the impact of higher off-price sales. +The currency-neutral increase in NIKE Brand apparel revenues for fiscal 2017 was fueled by growth in all key categories, led by Sportswear, Running and Training. Unit sales of apparel increased 6%, while higher ASP per unit contributed approximately 3 percentage points of apparel revenue growth, primarily due to higher full-price ASP and, to a lesser extent, growth in our higher-priced NIKE Direct business. +For fiscal 2017, NIKE Direct revenues represented approximately 28% of our total NIKE Brand revenues compared to 26% for fiscal 2016. On a currency-neutral basis, NIKE Direct revenues increased 18% for fiscal 2017, driven by strong digital commerce sales growth of 30%, the addition of new stores and 7% comparable store sales growth. On a reported basis, digital commerce sales, which are not included in comparable store sales, were $2.2 billion for fiscal 2017 compared to $1.7 billion for fiscal 2016 and represented approximately 24% of our total NIKE Direct revenues for fiscal 2017 compared to 22% for fiscal 2016. +On a wholesale equivalent and currency-neutral basis, fiscal 2017 NIKE Brand Men’s revenues increased 6%, driven by significant growth in Sportswear, Running and the Jordan Brand, while Women ’ s revenues increased 8%, led by growth in Sportswear and Running. Revenues for our Young Athletes ’ business increased 8%, with growth across multiple categories, most notably the Jordan Brand. +23 +Table of Contents +Gross Margin +(Dollars in millions) +Fiscal 2018 +Fiscal 2017 +% Change +Fiscal 2016 +% Change +Gross profit +$ +15,956 +$ +15,312 +4 +% +$ +14,971 +2 +% +Gross margin +43.8 +% +44.6 +% +(80 +) bps +46.2 +% +(160 +) bps +Fiscal 2018 Compared to Fiscal 2017 +For fiscal 2018, our consolidated gross margin was 80 basis points lower than fiscal 2017, primarily reflecting the following factors: +• +Unfavorable changes in net foreign currency exchange rates, including hedges (decreasing gross margin approximately 90 basis points); +• +Lower NIKE Direct margin (decreasing gross margin approximately 10 basis points) reflecting higher mix of off-price sales in the first half of fiscal 2018, which was partially offset by margin expansion in the second half of fiscal 2018; +• +NIKE Brand full-price ASP, net of discounts, on a wholesale equivalent basis, which was flat for fiscal 2018 as higher discounts in the first half of fiscal 2018 were offset by higher full-price ASP in the second half of the year; and +• +NIKE Brand product costs, on a wholesale equivalent basis, which were flat. +Fiscal 2017 Compared to Fiscal 2016 +For fiscal 2017, our consolidated gross margin was 160 basis points lower than fiscal 2016, primarily driven by the following factors: +• +Higher NIKE Brand full-price ASP, net of discounts, on a wholesale equivalent basis (increasing gross margin approximately 70 basis points) aligned with our strategy to deliver innovative, premium products to the consumer; +• +Higher NIKE Brand product costs (decreasing gross margin approximately 100 basis points) as an increase in the mix of higher cost products and labor input cost inflation more than offset lower material input costs; +• +Unfavorable changes in net foreign currency exchange rates, including hedges (decreasing gross margin approximately 90 basis points); and +• +Lower NIKE Direct margins (decreasing gross margin approximately 20 basis points) reflecting the impact of higher off-price sales. +Total Selling and Administrative Expense +(Dollars in millions) +Fiscal 2018 +Fiscal 2017 +% Change +Fiscal 2016 +% Change +Demand creation expense (1) +$ +3,577 +$ +3,341 +7 +% +$ +3,278 +2 +% +Operating overhead expense +7,934 +7,222 +10 +% +7,191 +0 +% +Total selling and administrative expense +$ +11,511 +$ +10,563 +9 +% +$ +10,469 +1 +% +% of revenues +31.6 +% +30.8 +% +80 +bps +32.3 +% +(150 +) bps +(1) +Demand creation expense consists of advertising and promotion costs, including costs of endorsement contracts, complimentary product, television, digital and print advertising and media costs, brand events and retail brand presentation. +Fiscal 2018 Compared to Fiscal 2017 +Demand creation expense increased 7% for fiscal 2018 compared to fiscal 2017, driven by higher sports marketing costs. Changes in foreign currency exchange rates increased Demand creation expense by approximately 3 percentage points for fiscal 2018. +Operating overhead expense increased 10% compared to fiscal 2017, due to higher administrative costs, continued investments in our growing NIKE Direct business and one-time wage-related costs associated with the Consumer Direct Offense organizational realignment. Changes in foreign currency exchange rates increased Operating overhead expense by approximately 2 percentage points for fiscal 2018. +Fiscal 2017 Compared to Fiscal 2016 +Demand creation expense increased 2% for fiscal 2017 compared to fiscal 2016, driven by higher sports marketing costs, as well as higher marketing and advertising costs, primarily to support key sporting events including the Rio Olympics and European Football Championship. These increases were partially offset by lower retail brand presentation costs. Changes in foreign currency exchange rates reduced Demand creation expense by approximately 1 percentage point. +Operating overhead expense was flat compared to fiscal 2016 as continued investments in our growing NIKE Direct business were offset by administrative cost efficiencies and lower variable compensation. Changes in foreign currency exchange rates reduced Operating overhead expense by approximately 1 percentage point for fiscal 2017. +Other Expense (Income), Net +(In millions) +Fiscal 2018 +Fiscal 2017 +Fiscal 2016 +Other expense (income), net +$ +66 +$ +(196 +) +$ +(140 +) +Other expense (income), net comprises foreign currency conversion gains and losses from the re-measurement of monetary assets and liabilities denominated in non-functional currencies, and the impact of certain foreign currency derivative instruments, as well as unusual or non-operating transactions outside the normal course of business. +24 +Table of Contents +Fiscal 2018 Compared to Fiscal 2017 +Other expense (income), net changed from $196 million of other income, net for fiscal 2017 to $66 million of other expense, net for fiscal 2018, primarily due to a $287 million net detrimental change in foreign currency conversion gains and losses, including hedges. +We estimate the combination of the translation of foreign currency-denominated profits from our international businesses and the year-over-year change in foreign currency-related gains and losses included in Other expense (income), net had an unfavorable impact on our Income before income taxes of $110 million for fiscal 2018. +Fiscal 2017 Compared to Fiscal 2016 +Other expense (income), net increased from $140 million of other income, net for fiscal 2016 to $196 million of other income, net for fiscal 2017, primarily due to a $56 million net beneficial change in foreign currency conversion gains and losses. +We estimate the combination of the translation of foreign currency-denominated profits from our international businesses and the year-over-year change in foreign currency-related gains and losses included in Other expense (income), net had an unfavorable impact on our Income before income taxes of $59 million for fiscal 2017. +Income Taxes +Fiscal 2018 +Fiscal 2017 +% Change +Fiscal 2016 +% Change +Effective tax rate +55.3 +% +13.2 +% +4,210 +bps +18.7 +% +(550 +) bps +Fiscal 2018 Compared to Fiscal 2017 +Our effective tax rate was 55.3% for fiscal 2018, reflecting the impact of the Tax Cuts and Jobs Act (the “Tax Act”). The impact of the Tax Act primarily reflects provisional expense of $1,875 million for the one-time transition tax on the deemed repatriation of undistributed foreign earnings and $158 million resulting from the remeasurement of deferred tax assets and liabilities. The remaining provisions of the Tax Act, which were a net benefit to the effective tax rate, did not have a material impact on our Consolidated Financial Statements during fiscal 2018. The increase in the effective tax rate resulting from the Tax Act was partially offset by the tax benefit from stock-based compensation in the current period as a result of the adoption of Accounting Standards Update (ASU) 2016-09 in the first quarter of fiscal 2018. +Refer to Note 1 — Summary of Significant Accounting Policies in the accompanying Notes to the Consolidated Financial Statements for additional information on the impact of ASU 2016-09, and Note 9 — Income Taxes for additional information on the impact of the Tax Act. +Fiscal 2017 Compared to Fiscal 2016 +The 550 basis point decrease in our effective tax rate for the fiscal year was primarily due to a one-time benefit in the first quarter of the fiscal year related to the resolution with the IRS of a foreign tax credit matter and a decrease in foreign earnings taxed in the United States. +Operating Segments +Our operating segments are evidence of the structure of the Company’s internal organization. The NIKE Brand segments are defined by geographic regions for operations participating in NIKE Brand sales activity. +Each NIKE Brand geographic segment operates predominantly in one industry: the design, development, marketing and selling of athletic footwear, apparel and equipment. The Company’s reportable operating segments for the NIKE Brand are: North America; Europe, Middle East & Africa; Greater China; and Asia Pacific & Latin America, and include results for the NIKE, Jordan and Hurley brands. +The Company’s NIKE Direct operations are managed within each geographic operating segment. Converse is also a reportable segment for the Company and operates in one industry: the design, marketing, licensing and selling of casual sneakers, apparel and accessories. +As part of our centrally managed foreign exchange risk management program, standard foreign currency rates are assigned twice per year to each NIKE Brand entity in our geographic operating segments and Converse. These rates are set approximately nine and twelve months in advance of the future selling seasons to which they relate (specifically, for each currency, one standard rate applies to the fall and holiday selling seasons and one standard rate applies to the spring and summer selling seasons) based on average market spot rates in the calendar month preceding the date they are established. Inventories and Cost of sales for geographic operating segments and Converse reflect the use of these standard rates to record non-functional currency product purchases into the entity’s functional currency. Differences between assigned standard foreign currency rates and actual market rates are included in Corporate, together with foreign currency hedge gains and losses generated from our centrally managed foreign exchange risk management program and other conversion gains and losses. +25 +Table of Contents +The breakdown of revenues is as follows: +(Dollars in millions) +Fiscal 2018 +Fiscal 2017 (1) +% Change +% Change Excluding Currency Changes (2) +Fiscal 2016 (1) +% Change +% Change Excluding Currency Changes (2) +North America +$ +14,855 +$ +15,216 +-2 +% +-2 +% +$ +14,764 +3 +% +3 +% +Europe, Middle East & Africa +9,242 +7,970 +16 +% +9 +% +7,568 +5 +% +10 +% +Greater China +5,134 +4,237 +21 +% +18 +% +3,785 +12 +% +17 +% +Asia Pacific & Latin America +5,166 +4,737 +9 +% +10 +% +4,317 +10 +% +13 +% +Global Brand Divisions (3) +88 +73 +21 +% +12 +% +73 +0 +% +2 +% +TOTAL NIKE BRAND +34,485 +32,233 +7 +% +5 +% +30,507 +6 +% +8 +% +Converse +1,886 +2,042 +-8 +% +-11 +% +1,955 +4 +% +6 +% +Corporate (4) +26 +75 +— +— +(86 +) +— +— +TOTAL NIKE, INC. REVENUES +$ +36,397 +$ +34,350 +6 +% +4 +% +$ +32,376 +6 +% +8 +% +(1) +Certain prior year amounts have been reclassified to conform to fiscal 2018 presentation. This includes reclassified operating segment data to reflect the changes in the Company ’ s operating structure, which became effective June 1, 2017. These changes had no impact on previously reported consolidated results of operations or shareholders’ equity. +(2) +The percent change has been calculated using actual exchange rates in use during the comparative prior year period to enhance the visibility of the underlying business trends excluding the impact of translation arising from foreign currency exchange rate fluctuations, which is considered a non-GAAP financial measure. +(3) +Global Brand Divisions revenues are primarily attributable to NIKE Brand licensing businesses that are not part of a geographic operating segment. +(4) +Corporate revenues primarily consist of foreign currency hedge gains and losses related to revenues generated by entities within the NIKE Brand geographic operating segments and Converse, but managed through our central foreign exchange risk management program. +The primary financial measure used by the Company to evaluate performance of individual operating segments is earnings before interest and taxes (commonly referred to as “EBIT”), which represents Net income before Interest expense (income), net and Income tax expense in the Consolidated Statements of Income. As discussed in Note 17 — Operating Segments and Related Information in the accompanying Notes to the Consolidated Financial Statements, certain corporate costs are not included in EBIT of our operating segments. +The breakdown of earnings before interest and taxes is as follows: +(Dollars in millions) +Fiscal 2018 +Fiscal 2017 (1) +% Change +Fiscal 2016 (1) +% Change +North America +$ +3,600 +$ +3,875 +-7 +% +$ +3,763 +3 +% +Europe, Middle East & Africa +1,587 +1,507 +5 +% +1,787 +-16 +% +Greater China +1,807 +1,507 +20 +% +1,372 +10 +% +Asia Pacific & Latin America +1,189 +980 +21 +% +1,002 +-2 +% +Global Brand Divisions +(2,658 +) +(2,677 +) +1 +% +(2,596 +) +-3 +% +TOTAL NIKE BRAND +5,525 +5,192 +6 +% +5,328 +-3 +% +Converse +310 +477 +-35 +% +487 +-2 +% +Corporate +(1,456 +) +(724 +) +-101 +% +(1,173 +) +38 +% +TOTAL NIKE, INC. EARNINGS BEFORE INTEREST AND TAXES +4,379 +4,945 +-11 +% +4,642 +7 +% +Interest expense (income), net +54 +59 +— +19 +— +TOTAL NIKE, INC. INCOME BEFORE INCOME TAXES +$ +4,325 +$ +4,886 +-11 +% +$ +4,623 +6 +% +(1) +Certain prior year amounts have been reclassified to conform to fiscal 2018 presentation. This includes reclassified operating segment data to reflect the changes in the Company ’ s operating structure, which became effective June 1, 2017. These changes had no impact on previously reported consolidated results of operations or shareholders’ equity. +26 +Table of Contents +North America +(Dollars in millions) +Fiscal 2018 +Fiscal 2017 +% Change +% Change Excluding Currency Changes +Fiscal 2016 +% Change +% Change Excluding Currency Changes +Revenues by: +Footwear +$ +9,322 +$ +9,684 +-4 +% +-4 +% +$ +9,299 +4 +% +4 +% +Apparel +4,938 +4,886 +1 +% +1 +% +4,746 +3 +% +3 +% +Equipment +595 +646 +-8 +% +-8 +% +719 +-10 +% +-10 +% +TOTAL REVENUES +$ +14,855 +$ +15,216 +-2 +% +-2 +% +$ +14,764 +3 +% +3 +% +Revenues by: +Sales to Wholesale Customers +$ +10,159 +$ +10,756 +-6 +% +-6 +% +$ +10,674 +1 +% +1 +% +Sales through NIKE Direct +4,696 +4,460 +5 +% +5 +% +4,090 +9 +% +9 +% +TOTAL REVENUES +$ +14,855 +$ +15,216 +-2 +% +-2 +% +$ +14,764 +3 +% +3 +% +EARNINGS BEFORE INTEREST +AND TAXES +$ +3,600 +$ +3,875 +-7 +% +$ +3,763 +3 +% +In the current marketplace environment, we believe there has been a meaningful shift in the way consumers shop for product and make purchasing decisions. Consumers are demanding a constant flow of fresh and innovative product, and have an expectation for superior service and real-time delivery, all fueled by the shift toward digital. Specifically, in North America we anticipate continued evolution within the retail landscape, driven by shifting consumer traffic patterns across digital and physical channels. The evolution of the North America marketplace has resulted in third-party retail store closures; however, we are currently seeing stabilization and momentum building in our business, fueled by innovative product and NIKE Brand consumer experiences, leveraging digital. +Fiscal 2018 Compared to Fiscal 2017 +North America revenues decreased 2%, as growth in our Sportswear and NIKE Basketball categories was more than offset by declines in all other categories, most notably the Jordan Brand and Running. NIKE Direct revenues increased 5% for fiscal 2018 due to digital commerce sales growth and the addition of new stores. +Footwear revenues declined 4% for fiscal 2018, as lower revenues in nearly all categories, most notably the Jordan Brand, more than offset higher revenues in Sportswear. Unit sales of footwear decreased 5%, while ASP per pair contributed approximately 1 percentage point of footwear growth, driven by the favorable impact of growth in our NIKE Direct business. +Apparel revenue growth of 1% for fiscal 2018 was attributable to higher revenues in our Sportswear and NIKE Basketball categories, which was only partially offset by declines in nearly all other categories. Unit sales of apparel decreased 4%, while higher ASP per unit contributed approximately 5 percentage points of apparel revenue growth, primarily due to the favorable impact of growth in our NIKE Direct business and, to a lesser extent, higher full-price ASP and favorable changes in off-price sales. +EBIT declined 7% for fiscal 2018, primarily reflecting lower revenues and higher selling and administrative expense. Gross margin declined 10 basis points as lower full-price ASP more than offset the favorable impact of growth in our NIKE Direct business. Selling and administrative expense grew due to higher operating overhead expense resulting from continued investments in our growing NIKE Direct business. Demand creation expense also increased, as higher sports marketing costs were only partially offset by lower retail brand presentation costs. +Fiscal 2017 Compared to Fiscal 2016 +North America revenues increased 3%, driven by growth in our Sportswear and Jordan Brand categories, partially offset by declines in other categories, including NIKE Basketball. NIKE Direct revenues increased 9% for fiscal 2017 due to digital commerce sales growth, the addition of new stores and comparable store sales growth of 3%. +Footwear revenue growth for fiscal 2017 was attributable to higher revenues in our Sportswear and Jordan Brand categories, partially offset by declines in other categories. Unit sales of footwear increased 4%, while ASP per pair was flat as higher off-price ASP was offset by unfavorable off-price mix. +The increase in apparel revenues for fiscal 2017 was due to growth concentrated in Sportswear, partially offset by declines in other categories. Unit sales of apparel grew 2% and higher ASP per unit contributed approximately 1 percentage point of apparel revenue growth, primarily due to higher full-price ASP. +EBIT grew 3% for fiscal 2017 as revenue growth and gross margin expansion were partially offset by higher selling and administrative expense as a percent of revenues. Gross margin increased 10 basis points as higher full-price ASP and favorable off-price margin more than offset higher product costs and increased off-price mix as a result of clearing excess inventories through off-price channels, including through our NIKE Direct business. Selling and administrative expense grew due to higher operating overhead as continued investments in our growing NIKE Direct business were partially offset by lower bad debt expense. Demand creation was flat as higher sports marketing and retail brand presentation costs offset lower marketing and advertising costs. +27 +Table of Contents +Europe, Middle East & Africa +(Dollars in millions) +Fiscal 2018 +Fiscal 2017 +% Change +% Change Excluding Currency Changes +Fiscal 2016 +% Change +% Change Excluding Currency Changes +Revenues by: +Footwear +$ +5,875 +$ +5,192 +13 +% +6 +% +$ +5,043 +3 +% +8 +% +Apparel +2,940 +2,395 +23 +% +16 +% +2,149 +11 +% +17 +% +Equipment +427 +383 +11 +% +6 +% +376 +2 +% +7 +% +TOTAL REVENUES +$ +9,242 +$ +7,970 +16 +% +9 +% +$ +7,568 +5 +% +10 +% +Revenues by: +Sales to Wholesale Customers +$ +6,765 +$ +5,917 +14 +% +8 +% +$ +5,869 +1 +% +5 +% +Sales through NIKE Direct +2,477 +2,053 +21 +% +13 +% +1,699 +21 +% +27 +% +TOTAL REVENUES +$ +9,242 +$ +7,970 +16 +% +9 +% +$ +7,568 +5 +% +10 +% +EARNINGS BEFORE INTEREST AND TAXES +$ +1,587 +$ +1,507 +5 +% +$ +1,787 +-16 +% +Fiscal 2018 Compared to Fiscal 2017 +On a currency-neutral basis, EMEA revenues for fiscal 2018 increased 9%, driven by higher revenues in every territory, most notably our UK & Ireland territory, which grew 21%. Revenues increased in nearly all key categories, led by Sportswear and Football (Soccer). NIKE Direct revenues grew 13% for fiscal 2018 due to strong digital commerce sales growth, comparable store sales growth of 6% and the addition of new stores. +The 6% increase in currency-neutral footwear revenues for fiscal 2018 was due to growth in most key categories, led by Sportswear. For fiscal 2018, unit sales of footwear increased 6% while ASP per pair was flat, as higher off-price ASP was offset by lower full-price ASP. +Currency-neutral apparel revenues grew 16% for fiscal 2018, driven by higher revenues in all key categories, most notably Sportswear and Football (Soccer). Unit sales of apparel increased 12% and higher ASP per unit contributed approximately 4 percentage points of apparel revenue growth. The increase in ASP per unit was primarily attributable to higher full-price ASP. +Reported EBIT increased 5% for fiscal 2018 due to revenue growth and slight selling and administrative expense leverage, which was partially offset by gross margin contraction. Gross margin declined 180 basis points as lower product costs were more than offset by unfavorable standard foreign currency exchange rates, lower full-price ASP due to product mix, and lower NIKE Direct margin. Selling and administrative expense increased due to higher demand creation expense driven by sports marketing and advertising costs. Operating overhead also increased primarily due to continued investments in our growing NIKE Direct business and, to a lesser extent, higher administrative costs. +Fiscal 2017 Compared to Fiscal 2016 +On a currency-neutral basis, EMEA revenues for fiscal 2017 increased 10%. Revenue growth was broad-based across all territories, led by the UK & Ireland, which grew 11%. On a category basis, revenues increased for nearly all key categories, led by Sportswear and, to a lesser extent, Running and the Jordan Brand. NIKE Direct revenues grew 27% for fiscal 2017 due to comparable store sales growth of 15%, strong digital commerce sales growth and the addition of new stores. +The currency-neutral increase in footwear revenues was led by Sportswear, Running and the Jordan Brand, partially offset by declines in Football (Soccer) and Training. For fiscal 2017, unit sales of footwear increased 5% and higher ASP per pair contributed approximately 3 percentage points of footwear revenue growth. Higher ASP per pair was primarily due to the favorable impact of growth in our NIKE Direct business. +Currency-neutral apparel revenue growth was driven by higher revenues in all key categories, most notably Sportswear and, to a lesser extent, Training and Football (Soccer). Unit sales of apparel for fiscal 2017 increased 12%, while higher ASP per unit contributed approximately 5 percentage points of apparel revenue growth. The increase in ASP per unit was primarily attributable to the favorable impact of growth in our NIKE Direct business and higher full-price ASP. +Reported EBIT decreased 16% for fiscal 2017, in part reflecting the negative impact of weakening foreign currency exchange rates. Higher revenues and selling and administrative expense leverage were more than offset by significant gross margin contraction. Gross margin declined 530 basis points primarily driven by the effects of significant unfavorable standard foreign currency exchange rates. Selling and administrative expense increased due to higher demand creation expense, as increased sports marketing and advertising expenses more than offset lower marketing costs. Operating overhead also increased due to continued investments in our growing NIKE Direct business, partially offset by administrative cost efficiencies and lower variable compensation costs. +28 +Table of Contents +Greater China +(Dollars in millions) +Fiscal 2018 +Fiscal 2017 +% Change +% Change Excluding Currency Changes +Fiscal 2016 +% Change +% Change Excluding Currency Changes +Revenues by: +Footwear +$ +3,496 +$ +2,920 +20 +% +16 +% +$ +2,599 +12 +% +18 +% +Apparel +1,508 +1,188 +27 +% +23 +% +1,055 +13 +% +18 +% +Equipment +130 +129 +1 +% +-1 +% +131 +-2 +% +3 +% +TOTAL REVENUES +$ +5,134 +$ +4,237 +21 +% +18 +% +$ +3,785 +12 +% +17 +% +Revenues by: +Sales to Wholesale Customers +$ +3,216 +$ +2,774 +16 +% +13 +% +$ +2,623 +6 +% +11 +% +Sales through NIKE Direct +1,918 +1,463 +31 +% +27 +% +1,162 +26 +% +32 +% +TOTAL REVENUES +$ +5,134 +$ +4,237 +21 +% +18 +% +$ +3,785 +12 +% +17 +% +EARNINGS BEFORE INTEREST AND TAXES +$ +1,807 +$ +1,507 +20 +% +$ +1,372 +10 +% +Fiscal 2018 Compared to Fiscal 2017 +On a currency-neutral basis, Greater China revenues for fiscal 2018 increased 18%, driven by higher revenues in all key categories, led by Running, Sportswear and the Jordan Brand. NIKE Direct revenues increased 27%, driven by strong digital commerce sales growth, the addition of new stores and comparable store sales growth of 10%. +Currency-neutral footwear revenues increased 16% for fiscal 2018, driven by growth in nearly all key categories, most notably Running and the Jordan Brand. Unit sales of footwear increased 19%, while lower ASP per pair reduced footwear revenue growth by approximately 3 percentage points, driven by lower full-price ASP resulting from product mix, as well as unfavorable off-price mix. +The currency-neutral apparel revenue growth of 23% for fiscal 2018 was fueled by higher revenues in all key categories, most notably Sportswear and, to a lesser extent, NIKE Basketball, the Jordan Brand and Running. Unit sales of apparel increased 20% and higher ASP per unit increased apparel revenue growth by approximately 3 percentage points. The increase in ASP per unit was attributable to higher full-price, off-price and NIKE Direct ASPs. +Reported EBIT increased 20% for fiscal 2018, driven by higher revenues and selling and administrative expense leverage, partially offset by lower gross margin. Gross margin contracted 210 basis points primarily due to unfavorable standard foreign currency exchange rates and lower off-price margin, including through our NIKE Direct business. Selling and administrative expense increased due to growth in operating overhead expense, primarily reflecting ongoing investments in our NIKE Direct business. Demand creation expense also grew, primarily driven by higher retail brand presentation costs. +Fiscal 2017 Compared to Fiscal 2016 +On a currency-neutral basis, Greater China revenues for fiscal 2017 increased 17%, driven by higher revenues in nearly all key categories, led by Running, Sportswear and the Jordan Brand. NIKE Direct revenues increased 32%, driven by strong digital commerce sales growth, the addition of new stores and comparable store sales growth of 9%. +The currency-neutral increase in footwear revenue for fiscal 2017 was driven by growth in nearly all key categories, most notably Running, Sportswear and the Jordan Brand. Unit sales of footwear increased 21%, while lower ASP per pair reduced footwear revenue growth by approximately 3 percentage points as higher off-price ASP was more than offset by lower NIKE Direct ASP and unfavorable off-price mix. +The currency-neutral apparel revenue growth for fiscal 2017 was due to higher revenues in nearly all key categories, led by Sportswear and Running. Unit sales of apparel increased 15% and higher ASP per unit increased apparel revenue growth by approximately 3 percentage points. The increase in ASP per unit was attributable to higher full-price ASP, partially offset by lower ASP in our NIKE Direct business and unfavorable off-price mix. +Despite the negative impact of translation, reported EBIT increased 10% for fiscal 2017 driven by higher revenues and selling and administrative expense leverage, partially offset by lower gross margin. Gross margin contracted 240 basis points primarily due to unfavorable standard foreign currency exchange rates and higher product costs. Selling and administrative expense increased due to higher operating overhead to support NIKE Direct growth. Demand creation expense also increased as higher marketing costs more than offset lower retail brand presentation and sports marketing expenses. +29 +Table of Contents +Asia Pacific & Latin America +(Dollars in millions) +Fiscal 2018 +Fiscal 2017 +% Change +% Change Excluding Currency Changes +Fiscal 2016 +% Change +% Change Excluding Currency Changes +Revenues by: +Footwear +$ +3,575 +$ +3,285 +9 +% +9 +% +$ +2,930 +12 +% +16 +% +Apparel +1,347 +1,185 +14 +% +15 +% +1,117 +6 +% +9 +% +Equipment +244 +267 +-9 +% +-8 +% +270 +-1 +% +-1 +% +TOTAL REVENUES +$ +5,166 +$ +4,737 +9 +% +10 +% +$ +4,317 +10 +% +13 +% +Revenues by: +Sales to Wholesale Customers +$ +3,829 +$ +3,631 +5 +% +6 +% +$ +3,411 +6 +% +10 +% +Sales through NIKE Direct +1,337 +1,106 +21 +% +21 +% +906 +22 +% +21 +% +TOTAL REVENUES +$ +5,166 +$ +4,737 +9 +% +10 +% +$ +4,317 +10 +% +13 +% +EARNINGS BEFORE INTEREST +AND TAXES +$ +1,189 +$ +980 +21 +% +$ +1,002 +-2 +% +Fiscal 2018 Compared to Fiscal 2017 +On a currency-neutral basis, APLA revenues increased 10%, driven by higher revenues in every territory. Territory revenue growth was broad-based, led by SOCO (which comprises Argentina, Uruguay and Chile), which grew 19%. Revenues increased in all key categories, led by Sportswear and Running. NIKE Direct revenues increased 21%, fueled by comparable store sales growth of 11%, strong digital commerce sales growth and the addition of new stores. +The 9% increase in currency-neutral footwear revenues for fiscal 2018 was attributable to growth in every key category, led by Sportswear and Running. Unit sales of footwear increased 5% and higher ASP per pair contributed approximately 4 percentage points of footwear revenue growth, driven by higher full-price, off-price and NIKE Direct ASPs. +Currency-neutral apparel revenues grew 15% for fiscal 2018, driven by higher revenues in every key category, most notably Sportswear and, to a lesser extent, Football (Soccer), Training and NIKE Basketball. Unit sales of apparel increased 11% and higher ASP per unit contributed approximately 4 percentage points of apparel revenue growth. The increase in ASP per unit was primarily driven by higher full-price ASP and, to a lesser extent, favorable off-price mix and higher off-price ASP. +Reported EBIT increased 21% due to revenue growth, strong selling and administrative expense leverage and gross margin expansion. Gross margin increased 90 basis points as higher full-price ASP and favorable standard foreign currency exchange rates more than offset higher product costs. Selling and administrative expense increased as higher operating overhead costs resulting from continued investments in our growing NIKE Direct business more than offset lower demand creation expense. The decrease in demand creation expense was primarily attributable to lower marketing costs as a result of prior year investments to support the Rio Olympics. +Fiscal 2017 Compared to Fiscal 2016 +On a currency-neutral basis, APLA revenues for fiscal 2017 increased 13%. Revenue growth was broad-based across all territories, led by SOCO, Korea and Mexico, which grew 34%, 14% and 18%, respectively. Additionally, revenues increased in all key categories, led by Running and Sportswear. NIKE Direct revenues increased 21%, fueled by the addition of new stores, comparable store sales growth of 11% and higher digital commerce sales. +The increase in currency-neutral footwear revenue for fiscal 2017 was attributable to growth in all key categories, most notably Running and Sportswear. Unit sales of footwear increased 9%. Higher ASP per pair contributed approximately 7 percentage points of footwear revenue growth, primarily attributable to higher full-price ASP, in part reflecting inflationary conditions in certain territories. +Currency-neutral growth in apparel revenue was fueled by increases in all key categories, led by Sportswear and Running. For fiscal 2017, unit sales of apparel increased 3% and higher ASP per unit contributed approximately 6 percentage points of apparel revenue growth. The increase in ASP per unit was primarily driven by higher full-price ASP, in part reflecting inflationary conditions in certain territories. +Reported EBIT decreased 2%, in part reflecting the negative impact of changes in foreign currency exchange rates, primarily the Argentine Peso and Mexican Peso. Reported revenue growth and selling and administrative expense leverage were more than offset by lower gross margin. Gross margin decreased 370 basis points as higher full-price ASP was more than offset by unfavorable standard foreign currency exchange rates and higher product costs. Selling and administrative expense increased due to higher operating overhead costs primarily resulting from ongoing investments in our growing NIKE Direct business, partially offset by administrative cost efficiencies. Demand creation expense also increased as lower advertising costs were more than offset by increased marketing support for the Rio Olympics in the first quarter, as well as higher sports marketing costs. +30 +Table of Contents +Global Brand Divisions +(Dollars in millions) +Fiscal 2018 +Fiscal 2017 +% Change +% Change Excluding Currency Changes +Fiscal 2016 +% Change +% Change Excluding Currency Changes +Revenues +$ +88 +$ +73 +21 +% +12 +% +$ +73 +0 +% +2 +% +(Loss) Before Interest and Taxes +$ +(2,658 +) +$ +(2,677 +) +-1 +% +$ +(2,596 +) +3 +% +Global Brand Divisions primarily represent demand creation, operating overhead and product creation and design expenses that are centrally managed for the NIKE Brand. Revenues for Global Brand Divisions are primarily attributable to NIKE Brand licensing businesses that are not part of a geographic operating segment. +Fiscal 2018 Compared to Fiscal 2017 +Global Brand Divisions’ loss before interest and taxes decreased 1% for fiscal 2018 as total selling and administrative expense was largely unchanged compared to fiscal 2017. Operating overhead expense increased due to higher administrative costs, which more than offset lower wage-related expenses. Demand creation expense decreased driven by lower advertising and marketing costs, largely resulting from prior year investments to support the Rio Olympics and the European Football Championship, which were only partially offset by higher sports marketing costs. +Fiscal 2017 Compared to Fiscal 2016 +Global Brand Divisions’ loss before interest and taxes increased 3% for fiscal 2017 primarily due to higher demand creation expense, which was only partially offset by a decline in operating overhead expense. The increase in demand creation expense was due to higher marketing and advertising expenses for key brand and sporting events, including the Rio Olympics and the European Football Championship in the first quarter. Operating overhead expense decreased as higher wage-related expenses were more than offset by administrative cost efficiencies and lower variable compensation. +Converse +(Dollars in millions) +Fiscal 2018 +Fiscal 2017 +% Change +% Change Excluding Currency Changes +Fiscal 2016 +% Change +% Change Excluding Currency Changes +Revenues +$ +1,886 +$ +2,042 +-8 +% +-11 +% +$ +1,955 +4 +% +6 +% +Earnings Before Interest and Taxes +$ +310 +$ +477 +-35 +% +$ +487 +-2 +% +In territories we define as “direct distribution markets,” Converse designs, markets and sells products directly to distributors and wholesale customers, and to consumers through direct to consumer operations. The largest direct distribution markets are the United States, the United Kingdom and China. We do not own the Converse trademarks in Japan and accordingly do not earn revenues in Japan. Territories other than direct distribution markets and Japan are serviced by third-party licensees who pay royalty revenues to Converse for the use of its registered trademarks and other intellectual property rights. +Fiscal 2018 Compared to Fiscal 2017 +On a currency-neutral basis, revenues for Converse declined 11% for fiscal 2018. Comparable direct distribution markets (i.e., markets served under a direct distribution model for comparable periods in the current and prior fiscal years) declined 12%, reducing total Converse revenues by approximately 11 percentage points for fiscal 2018. Comparable direct distribution market unit sales decreased 14%, while higher ASP per unit contributed approximately 2 percentage points of direct distribution markets revenue growth. On a territory basis, the decrease in comparable direct distribution market revenues was primarily attributable to declines in both the United States and Europe , in part reflecting efforts to manage inventory levels in the marketplace , partially offset by revenue growth in Asia. Conversion of markets from licensed to direct distribution increased total Converse revenues by approximately 1 percentage point for fiscal 2018. Revenues from comparable licensed markets decreased 14%, reducing total Converse revenues by approximately 1 percentage point, driven by lower revenues in Latin America. +Reported EBIT declined 35% for fiscal 2018 driven by lower revenues, higher selling and administrative expense and, to a lesser extent, gross margin contraction. Gross margin decreased 100 basis points as higher full-price ASP was more than offset by higher product costs and the unfavorable impact of lower licensing revenues. Selling and administrative expense increased due to higher operating overhead and demand creation expense. Higher operating overhead expense was due to continued investment in our direct to consumer business and, to a lesser extent, higher wage-related costs, while higher demand creation expense was due to increased marketing support for initiatives to drive growth. +Fiscal 2017 Compared to Fiscal 2016 +On a currency-neutral basis, revenues for Converse increased 6% for fiscal 2017. Comparable direct distribution markets grew 4%, contributing approximately 4 percentage points of total Converse revenue growth for fiscal 2017. Comparable direct distribution market unit sales increased 2%, while higher ASP per unit contributed approximately 2 percentage points of direct distribution markets revenue growth. On a territory basis, the increase in comparable direct distribution market revenues was primarily attributable to growth in the United States, partially offset by lower revenues in Europe. Conversion of markets from licensed to direct distribution increased total Converse revenues by approximately 2 percentage points for fiscal 2017, primarily driven by the market transition in Italy. Revenues from comparable licensed markets decreased 5%, having an insignificant impact to total Converse revenue. The decrease in comparable licensed markets revenues is primarily due to lower revenues in Latin America. +31 +Table of Contents +Reported EBIT declined 2% for fiscal 2017 as revenue growth and lower selling and administrative expense were more than offset by gross margin contraction. Gross margin decreased 300 basis points as higher full-price ASP was more than offset by unfavorable standard foreign currency exchange rates and higher product costs, primarily due to a shift in mix to lower margin products. Gross margin also contracted due to the unfavorable impact of lower licensing revenues, primarily due to market transitions. Selling and administrative expense decreased due to lower demand creation expense, primarily as a result of lower retail brand presentation costs, partially offset by higher advertising expense. Operating overhead increased as higher wage-related expenses were only partially offset by lower administrative costs. +Corporate +(Dollars in millions) +Fiscal 2018 +Fiscal 2017 +% Change +Fiscal 2016 +% Change +Revenues +$ +26 +$ +75 +— +$ +(86 +) +— +(Loss) Before Interest and Taxes +$ +(1,456 +) +$ +(724 +) +101 +% +$ +(1,173 +) +-38 +% +Corporate revenues primarily consist of foreign currency hedge gains and losses related to revenues generated by entities within the NIKE Brand geographic operating segments and Converse, but managed through our central foreign exchange risk management program. +The Corporate loss before interest and taxes largely consists of unallocated general and administrative expenses, including expenses associated with centrally managed departments; depreciation and amortization related to our corporate headquarters; unallocated insurance, benefit and compensation programs, including stock-based compensation; and certain foreign currency gains and losses. +In addition to the foreign currency gains and losses recognized in Corporate revenues, foreign currency results in Corporate include gains and losses resulting from the difference between actual foreign currency rates and standard rates used to record non-functional currency denominated product purchases within the NIKE Brand geographic operating segments and Converse; related foreign currency hedge results; conversion gains and losses arising from re-measurement of monetary assets and liabilities in non-functional currencies; and certain other foreign currency derivative instruments. +Fiscal 2018 Compared to Fiscal 2017 +For fiscal 2018, Corporate’s loss before interest and taxes increased $732 million primarily due to the following: +• +a detrimental change in net foreign currency gains and losses of $281 million related to the re-measurement of monetary assets and liabilities denominated in non-functional currencies and the impact of certain foreign currency derivative instruments, reported as a component of consolidated Other expense (income), net ; +• +an unfavorable change of $255 million, primarily due to higher operating overhead expense driven by higher wage-related costs, in part reflecting one-time costs associated with our organizational realignment in the first half of fiscal 2018, as well as higher administrative costs; and +• +a detrimental change of $196 million related to the difference between actual foreign currency exchange rates and standard foreign currency exchange rates assigned to the NIKE Brand geographic operating segments and Converse, net of hedge gains and losses; these results are reported as a component of consolidated gross margin. +Fiscal 2017 Compared to Fiscal 2016 +For fiscal 2017, Corporate’s loss before interest and taxes decreased $449 million primarily due to the following: +• +a beneficial change of $280 million related to the difference between actual foreign currency exchange rates and standard foreign currency exchange rates assigned to the NIKE Brand geographic operating segments and Converse, net of hedge gains and losses; these results are reported as a component of consolidated gross margin; +• +a beneficial change of $115 million, primarily driven by lower variable compensation and administrative costs in operating overhead expense; and +• +an increase in net foreign currency gains of $54 million related to the re-measurement of monetary assets and liabilities denominated in non-functional currencies and the impact of certain foreign currency derivative instruments, reported as a component of consolidated Other expense (income), net. +Foreign Currency Exposures and Hedging Practices +Overview +As a global company with significant operations outside the United States, in the normal course of business we are exposed to risk arising from changes in currency exchange rates. Our primary foreign currency exposures arise from the recording of transactions denominated in non-functional currencies and the translation of foreign currency denominated results of operations, financial position and cash flows into U.S. Dollars. +Our foreign exchange risk management program is intended to lessen both the positive and negative effects of currency fluctuations on our consolidated results of operations, financial position and cash flows. We manage global foreign exchange risk centrally on a portfolio basis to address those risks material to NIKE, Inc. We manage these exposures by taking advantage of natural offsets and currency correlations existing within the portfolio and, where practical and material, by hedging a portion of the remaining exposures using derivative instruments such as forward contracts and options. As described below, the implementation of the NIKE Trading Company (“NTC”) and our foreign currency adjustment program enhanced our ability to manage our foreign exchange risk by increasing the natural offsets and currency correlation benefits existing within our portfolio of foreign exchange exposures. Our hedging policy is designed to partially or entirely offset the impact of exchange rate changes on the underlying net exposures being hedged. Where exposures are hedged, our program has the effect of delaying the impact of exchange rate movements on our Consolidated Financial Statements; the length of the delay is dependent upon hedge horizons. We do not hold or issue derivative instruments for trading or speculative purposes. +32 +Table of Contents +Refer to Note 6 — Fair Value Measurements and Note 16 — Risk Management and Derivatives in the accompanying Notes to the Consolidated Financial Statements for additional description of how the above financial instruments are valued and recorded, as well as the fair value of outstanding derivatives at each reported period end. +Transactional Exposures +We conduct business in various currencies and have transactions which subject us to foreign currency risk. Our most significant transactional foreign currency exposures are: +• +Product Costs — NIKE’s product costs are exposed to fluctuations in foreign currencies in the following ways: +1. +Product purchases denominated in currencies other than the functional currency of the transacting entity: +a. +Certain NIKE entities purchase product from the NTC, a wholly-owned sourcing hub that buys NIKE branded products from third-party factories, predominantly in U.S. Dollars. The NTC, whose functional currency is the U.S. Dollar, then sells the products to NIKE entities in their respective functional currencies. NTC sales to a NIKE entity with a different functional currency result in a foreign currency exposure for the NTC. +b. +Other NIKE entities purchase product directly from third-party factories in U.S. Dollars. These purchases generate a foreign currency exposure for those NIKE entities with a functional currency other than the U.S. Dollar. +In both purchasing scenarios, a weaker U.S. Dollar decreases inventory costs incurred by NIKE whereas a stronger U.S. Dollar increases its cost. +2. +Factory input costs: NIKE operates a foreign currency adjustment program with certain factories. The program is designed to more effectively manage foreign currency risk by assuming certain of the factories’ foreign currency exposures, some of which are natural offsets to our existing foreign currency exposures. Under this program, our payments to these factories are adjusted for rate fluctuations in the basket of currencies (“factory currency exposure index”) in which the labor, materials and overhead costs incurred by the factories in the production of NIKE branded products (“factory input costs”) are denominated. +For the currency within the factory currency exposure indices that is the local or functional currency of the factory, the currency rate fluctuation affecting the product cost is recorded within Inventories and is recognized in Cost of sales when the related product is sold to a third-party. All currencies within the indices, excluding the U.S. Dollar and the local or functional currency of the factory, are recognized as embedded derivative contracts and are recorded at fair value through Other expense (income), net . Refer to Note 16 — Risk Management and Derivatives in the accompanying Notes to the Consolidated Financial Statements for additional detail. +As an offset to the impacts of the fluctuating U.S. Dollar on our non-functional currency denominated product purchases described above, a strengthe ning U.S. Dollar against the foreign currencies within the factory currency exposure indices decreases NIKE’s U.S. Dollar inventory cost. Conversely, a weakening U.S. Dollar against the indexed foreign currencies increases our inventory cost. +• +Non-Functional Currency Denominated External Sales — A portion of our EMEA geography revenues, as well as a portion of our Converse European operations revenues, are earned in currencies other than the Euro (e.g., the British Pound) but are recognized at a subsidiary that uses the Euro as its functional currency. These sales generate a foreign currency exposure. +• +Other Costs — Non-functional currency denominated costs, such as endorsement contracts, also generate foreign currency risk, though to a lesser extent. In certain cases, the Company has entered into contractual agreements which have payments indexed to foreign currencies that create embedded derivative contracts recorded at fair value through Other expense (income), net . Refer to Note 16 — Risk Management and Derivatives in the accompanying Notes to the Consolidated Financial Statements for additional detail. +• +Non-Functional Currency Denominated Monetary Assets and Liabilities — Our global subsidiaries have various assets and liabilities, primarily receivables and payables, including intercompany receivables and payables, denominated in currencies other than their functional currencies. These balance sheet items are subject to re-measurement which may create fluctuations in Other expense (income), net within our consolidated results of operations. +Managing Transactional Exposures +Transactional exposures are managed on a portfolio basis within our foreign currency risk management program. We manage these exposures by taking advantage of natural offsets and currency correlations that exist within the portfolio and may also elect to use currency forward and option contracts to hedge the remaining effect of exchange rate fluctuations on probable forecasted future cash flows, including certain product cost exposures, non-functional currency denominated external sales and other costs described above. Generally, these are accounted for as cash flow hedges in accordance with U.S. GAAP, except for hedges of the embedded derivatives components of the product cost exposures and other contractual agreements as discussed above. +Certain currency forward contracts used to manage the foreign exchange exposure of non-functional currency denominated monetary assets and liabilities subject to re-measurement and embedded derivative contracts are not formally designated as hedging instruments under U.S. GAAP. Accordingly, changes in fair value of these instruments are immediately recognized in Other expense (income), net and are intended to offset the foreign currency impact of the re-measurement of the related non-functional currency denominated asset or liability or the embedded derivative contract being hedged. +33 +Table of Contents +Translational Exposures +Many of our foreign subsidiaries operate in functional currencies other than the U.S. Dollar. Fluctuations in currency exchange rates create volatility in our reported results as we are required to translate the balance sheets, operational results and cash flows of these subsidiaries into U.S. Dollars for consolidated reporting. The translation of foreign subsidiaries’ non-U.S. Dollar denominated balance sheets into U.S. Dollars for consolidated reporting results in a cumulative translation adjustment to Accumulated other comprehensive income within the Consolidated Statements of Shareholders’ Equity. In the translation of our Consolidated Statements of Income, a weaker U.S. Dollar in relation to foreign functional currencies benefits our consolidated earnings whereas a stronger U.S. Dollar reduces our consolidated earnings. The impact of foreign exchange rate fluctuations on the translation of our consolidated Revenues was a benefit of approximately $832 million and a detriment of approximately $542 million for the years ended May 31, 2018 and 2017, respectively. The impact of foreign exchange rate fluctuations on the translation of our Income before income taxes was a benefit of approximately $177 million and a detriment of approximately $115 million for the years ended May 31, 2018 and 2017, respectively. +Management generally identifies hyper-inflationary markets as those markets whose cumulative inflation rate over a three-year period exceeds 100%. Beginning in fiscal 2019, we anticipate the functional currency of our Argentina subsidiary within our APLA operating segment will change from the local currency to U.S. Dollars as the subsidiary will be operating in a hyper-inflationary market. As a result, its non-U.S. Dollar denominated monetary assets and liabilities will now be subject to re-measurement and recorded in Other expense (income), net , within the Consolidated Statements of Income beginning in fiscal 2019. Although we continue to evaluate the impact, at current rates, we do not anticipate the re-measurement to have a material impact on our results of operations or financial condition. +Managing Translational Exposures +To minimize the impact of translating foreign currency denominated revenues and expenses into U.S. Dollars for consolidated reporting, certain foreign subsidiaries use excess cash to purchase U.S. Dollar denominated available-for-sale investments. The variable future cash flows associated with the purchase and subsequent sale of these U.S. Dollar denominated securities at non-U.S. Dollar functional currency subsidiaries creates a foreign currency exposure that qualifies for hedge accounting under the accounting standards for derivatives and hedging. We utilize forward contracts and/or options to mitigate the variability of the forecasted future purchases and sales of these U.S. Dollar investments. The combination of the purchase and sale of the U.S. Dollar investment and the hedging instrument has the effect of partially offsetting the year-over-year foreign currency translation impact on net earnings in the period the investments are sold. Hedges of available-for-sale investments are accounted for as cash flow hedges. +We estimate the combination of translation of foreign currency-denominated profits from our international businesses and the year-over-year change in foreign currency related gains and losses included in Other expense (income), net had an unfavorable impact of approximately $110 million and $59 million on our Income before income taxes for the years ended May 31, 2018 and 2017, respectively. +Net Investments in Foreign Subsidiaries +We are also exposed to the impact of foreign exchange fluctuations on our investments in wholly-owned foreign subsidiaries denominated in a currency other than the U.S. Dollar, which could adversely impact the U.S. Dollar value of these investments and therefore the value of future repatriated earnings. We have, in the past, hedged and may, in the future, hedge net investment positions in certain foreign subsidiaries to mitigate the effects of foreign exchange fluctuations on these net investments. These hedges are accounted for in accordance with U.S. GAAP. There were no outstanding net investment hedges as of May 31, 2018 and 2017. There were no cash flows from net investment hedge settlements for the years ended May 31, 2018 and 2017. +Liquidity and Capital Resources +Cash Flow Activity +Cash provided by operations was $4,955 million for fiscal 2018 compared to $3,846 million for fiscal 2017 . Net income, adjusted for non-cash items, generated $3,473 million of operating cash flow for fiscal 2018 compared to $4,781 million for fiscal 2017 . The net change in working capital and other assets and liabilities resulted in an increase of $1,482 million for fiscal 2018, compared to a decrease of $935 million for fiscal 2017. Impacting the change in working capital during fiscal 2018 was the accrual of $1,172 million for the transition tax under the Tax Act, which will be paid in cash over an eight-year period. Refer to Note 9 — Income Taxes for additional information on the Tax Act. Cash provided by operations was also impacted by the change in Accounts Receivable, net , which decreased $187 million , primarily due to improved collection timing, compared to an increase of $426 million in fiscal 2017. +Cash provided (used) by investing activities was an inflow of $276 million for fiscal 2018 , compared to an outflow of $1,008 million for fiscal 2017 , driven primarily by the net change in short-term investments. During fiscal 2018 , the net change in investments (including sales, maturities and purchases) resulted in a cash inflow of $1,326 million compared to an inflow of $118 million in fiscal 2017 . +In fiscal 2019, we plan to continue investing in our infrastructure to support future growth, including corporate facilities, expanding our digital capabilities and new NIKE Direct stores. We continue to expect such investments to approximate 3% to 4% of revenues, on average. +Cash used by financing activities was $4,835 million for fiscal 2018 compared to $2,148 million for fiscal 2017 . The increase in Cash used by financing activities was primarily driven by $1,482 million of net proceeds from the issuance of long-term debt in fiscal 2017, which did not recur in fiscal 2018. The increase in Cash used by financing activities was also impacted by increased repurchases of common stock, which resulted in a cash outflow of $4,254 million for fiscal 2018 compared to an outflow of $3,223 million for fiscal 2017 . +In fiscal 2018 , we purchased 69.7 million shares of NIKE’s Class B Common Stock for $4,267 million (an average price of $ 61.25 per share) under the four-year, $12 billion program approved by the Board of Directors in November 2015. As of May 31, 2018, we had repurchased 149.4 million shares at a cost of $8,704 million (an average price of $58.25 per share) under this program. Although the timing and number of shares purchased will be dictated by our capital needs and stock market conditions, we currently anticipate completing this program during fiscal 2019. In June 2018, our Board of Directors approved a new four-year, $15 billion program to repurchase shares of NIKE’s Class B Common Stock, which we anticipate will commence at the completion of our current program. We continue to expect funding of share repurchases will come from operating cash flows, excess cash and/or proceeds from debt. +34 +Table of Contents +Capital Resources +On July 21, 2016, we filed a shelf registration statement (the “Shelf”) with the SEC which permits us to issue an unlimited amount of debt securities from time to time. The Shelf expires on July 21, 2019. For additional detail refer to Note 8 — Long-Term Debt in the accompanying Notes to the Consolidated Financial Statements. +On August 28, 2015, we entered into a committed credit facility agreement with a syndicate of banks, which provides for up to $2 billion of borrowings. The facility matures August 28, 2020, with a one-year extension option prior to any anniversary of the closing date, provided that in no event shall it extend beyond August 28, 2022. As of and for the periods ended May 31, 2018 and 2017 , we had no amounts outstanding under the committed credit facility. +We currently have long-term debt ratings of AA- and A1 from Standard and Poor’s Corporation and Moody’s Investor Services, respectively. If our long-term debt ratings were to decline, the facility fee and interest rate under our committed credit facility would increase. Conversely, if our long-term debt ratings were to improve, the facility fee and interest rate would decrease. Changes in our long-term debt ratings would not trigger acceleration of maturity of any then-outstanding borrowings or any future borrowings under the committed credit facility. Under this facility, we have agreed to various covenants. These covenants include limits on our disposal of fixed assets and the amount of debt secured by liens we may incur as well as limits on the indebtedness we can incur relative to our net worth. In the event we were to have any borrowings outstanding under this facility and failed to meet any covenant, and were unable to obtain a waiver from a majority of the banks in the syndicate, any borrowings would become immediately due and payable. As of May 31, 2018 , we were in full compliance with each of these covenants and believe it is unlikely we will fail to meet any of these covenants in the foreseeable future. +Liquidity is also provided by our $2 billion commercial paper program. During the year ended May 31, 2018 , the maximum amount of commercial paper borrowings outstanding at any point was $1.4 billion. As of May 31, 2018 , there were $325 million of outstanding borrowings under this program. We may continue to issue commercial paper or other debt securities during fiscal 2019 depending on general corporate needs. We currently have short-term debt ratings of A1+ and P1 from Standard and Poor’s Corporation and Moody’s Investor Services, respectively. +To date, in fiscal 2018, we have not experienced difficulty accessing the credit markets or incurred higher interest costs; however, future volatility in the capital markets may increase costs associated with issuing commercial paper or other debt instruments or affect our ability to access those markets. +As of May 31, 2018 , we had cash, cash equivalents and short-term investments totaling $5.2 billion , primarily consisting of deposits held at major banks, money market funds, commercial paper, corporate notes, U.S. Treasury obligations, U.S. government sponsored enterprise obligations and other investment grade fixed-income securities. Our fixed-income investments are exposed to both credit and interest rate risk. All of our investments are investment grade to minimize our credit risk. While individual securities have varying durations, as of May 31, 2018 , the weighted-average days to maturity of our cash equivalents and short-term investments portfolio was 33 days. +We believe that existing cash, cash equivalents, short-term investments and cash generated by operations, together with access to external sources of funds as described above, will be sufficient to meet our domestic and foreign capital needs in the foreseeable future. +Off-Balance Sheet Arrangements +In connection with various contracts and agreements, we routinely provide indemnification relating to the enforceability of intellectual property rights, coverage for legal issues that arise and other items where we are acting as the guarantor. Currently, we have several such agreements in place. Based on our historical experience and the estimated probability of future loss, we have determined that the fair value of such indemnification is not material to our financial position or results of operations. +35 +Table of Contents +Contractual Obligations +Our significant long-term contractual obligations as of May 31, 2018 , and significant endorsement contracts, including related marketing commitments, entered into through the date of this report are as follows: +Description of Commitment +Cash Payments Due During the Year Ending May 31, +(In millions) +2019 +2020 +2021 +2022 +2023 +Thereafter +Total +Operating Leases +$ +589 +$ +523 +$ +472 +$ +412 +$ +361 +$ +1,608 +$ +3,965 +Capital Leases and Other Financing Obligations (1) +44 +37 +40 +38 +36 +229 +424 +Long-Term Debt (2) +115 +115 +112 +109 +609 +4,713 +5,773 +Endorsement Contracts (3) +1,391 +1,306 +1,158 +1,266 +942 +4,438 +10,501 +Product Purchase Obligations (4) +4,566 +— +— +— +— +— +4,566 +Other Purchase Obligations (5) +1,437 +512 +281 +92 +70 +254 +2,646 +Transition Tax Related to the Tax Act (6) +94 +94 +94 +94 +94 +702 +1,172 +TOTAL +$ +8,236 +$ +2,587 +$ +2,157 +$ +2,011 +$ +2,112 +$ +11,944 +$ +29,047 +(1) +Capital leases and other financing obligations include payments related to build-to-suit lease arrangements. +(2) +The cash payments due for long-term debt include estimated interest payments. Estimates of interest payments are based on outstanding principal amounts, applicable fixed interest rates or currently effective interest rates as of May 31, 2018 (if variable), timing of scheduled payments and the term of the debt obligations. +(3) +The amounts listed for endorsement contracts represent approximate amounts of base compensation and minimum guaranteed royalty fees we are obligated to pay athlete, public figure, sport team and league endorsers of our products. Actual payments under some contracts may be higher than the amounts listed as these contracts provide for bonuses to be paid to the endorsers based upon athletic achievements and/or royalties on product sales in future periods. Actual payments under some contracts may also be lower as these contracts include provisions for reduced payments if athletic performance declines in future periods. +In addition to the cash payments, we are obligated to furnish our endorsers with NIKE product for their use. It is not possible to determine how much we will spend on this product on an annual basis as the contracts generally do not stipulate a specific amount of cash to be spent on the product. The amount of product provided to the endorsers will depend on many factors, including general playing conditions, the number of sporting events in which they participate and our own decisions regarding product and marketing initiatives. In addition, the costs to design, develop, source and purchase the products furnished to the endorsers are incurred over a period of time and are not necessarily tracked separately from similar costs incurred for products sold to customers. +(4) +We generally order product at least four to five months in advance of sale based primarily on advanced orders received from external wholesale customers and internal orders from our NIKE Direct in-line stores and digital commerce operations. The amounts listed for product purchase obligations represent agreements (including open purchase orders) to purchase products in the ordinary course of business that are enforceable and legally binding and specify all significant terms. In some cases, prices are subject to change throughout the production process. +(5) +Other purchase obligations primarily include construction, service and marketing commitments, including marketing commitments associated with endorsement contracts, made in the ordinary course of business. The amounts represent the minimum payments required by legally binding contracts and agreements that specify all significant terms, including open purchase orders for non-product purchases. +(6) +Represents a provisional estimate of the future cash payments due as part of the transition tax on deemed repatriation of undistributed earnings of foreign subsidiaries, which is reflected net of foreign tax credits we expect to utilize. Actual amounts could vary as we complete our analysis of the Tax Act. Refer to Note 9 — Income Taxes in the accompanying Notes to the Financial Statements for additional information. +In addition to the above, we have long-term obligations for uncertain tax positions and various post-retirement benefits for which we are not able to reasonably estimate when cash payments will occur. Refer to Note 9 — Income Taxes and Note 13 — Benefit Plans in the accompanying Notes to the Consolidated Financial Statements for further information related to uncertain tax positions and post-retirement benefits, respectively. +We also have the following outstanding short-term debt obligations as of May 31, 2018 . Refer to Note 7 — Short-Term Borrowings and Credit Lines in the accompanying Notes to the Consolidated Financial Statements for further description and interest rates related to the short-term debt obligations listed below. +Outstanding as +of May 31, 2018 +(In millions) +Notes payable, due at mutually agreed-upon dates within one year of issuance or on demand +$ +336 +Payable to Sojitz America for the purchase of inventories, generally due 60 days after shipment of goods from a foreign port +61 +As of May 31, 2018 , the Company had letters of credit outstanding totaling $165 million . These letters of credit were issued primarily for the purchase of inventory and as guarantees of the Company’s performance under certain self-insurance and other programs. +New Accounting Pronouncements +Refer to Note 1 — Summary of Significant Accounting Policies in the accompanying Notes to the Consolidated Financial Statements for recently adopted and recently issued accounting standards. +36 +Table of Contents +Critical Accounting Policies +Our previous discussion and analysis of our financial condition and results of operations are based upon our Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. Note 1 — Summary of Significant Accounting Policies in the accompanying Notes to the Consolidated Financial Statements describes the significant accounting policies and methods used in the preparation of our Consolidated Financial Statements. +We believe the estimates, assumptions and judgments involved in the accounting policies described below have the greatest potential impact on our financial statements, so we consider these to be our critical accounting policies and estimates. Management has reviewed and discussed these critical accounting policies with the Audit & Finance Committee of the Board of Directors. +These policies require we make estimates in the preparation of our financial statements as of a given date. Because of the uncertainty inherent in these matters, actual results could differ from the estimates we use in applying the critical accounting policies. Within the context of these critical accounting policies, we are not currently aware of any reasonably likely events or circumstances that would result in materially different amounts being reported. +Revenue Recognition +We record wholesale revenues when title passes and the risks and rewards of ownership have passed to the customer, based on the terms of sale. Title passes generally upon shipment or upon receipt by the customer depending on the country of the sale and the agreement with the customer. Retail store revenues are recorded at the time of sale and digital commerce revenues are recorded upon delivery to the customer. +In some instances, we ship product directly from our supplier to the customer and recognize revenue when the product is delivered to and accepted by the customer. Our revenues may fluctuate in cases when our customers delay accepting shipment of product for periods of up to several weeks. +In certain countries, precise information regarding the date of receipt by the customer is not readily available. In these cases, we estimate the date of receipt by the customer based upon historical delivery times by geographic location. On the basis of our tests of actual transactions, we have no indication these estimates have been materially inaccurate historically. +As part of our revenue recognition policy, we record estimated sales returns, discounts and miscellaneous claims from customers as reductions to revenues at the time revenues are recorded. Our post invoice sales discounts consist of contractual programs with certain customers or discretionary discounts expected to be granted to certain customers at a later date. We base our estimates on (1) historical rates of product returns, discounts and claims, (2) specific identification of outstanding claims and outstanding returns not yet received from customers and (3) estimated returns, discounts and claims expected but not yet finalized with our customers. Actual returns, discounts and claims in any future period are inherently uncertain and thus may differ from our estimates. If actual or expected future returns, discounts and claims are significantly greater or lower than established reserves, we record a reduction or increase to net revenues in the period in which we make such determination. +Allowance for Uncollectible Accounts Receivable +We make ongoing estimates relating to the ability to collect our accounts receivable and maintain an allowance for estimated losses resulting from the inability of our customers to make required payments. In determining the amount of the allowance, we consider our historical level of credit losses and make judgments about the creditworthiness of significant customers based on ongoing credit evaluations. Since we cannot predict future changes in the financial stability of our customers, actual future losses from uncollectible accounts may differ from our estimates. If the financial condition of our customers were to deteriorate, resulting in their inability to make payments, a larger allowance might be required. In the event we determine a smaller or larger allowance is appropriate, we would record a credit or a charge to Operating overhead expense in the period in which such a determination is made. +Inventory Reserves +We also make ongoing estimates relating to the net realizable value of inventories based upon our assumptions about future demand and market conditions. If we estimate the net realizable value of our inventory is less than the cost of the inventory recorded on our books, we record a reserve equal to the difference between the cost of the inventory and the estimated net realizable value. This reserve is recorded as a charge to Cost of sales . If changes in market conditions result in reductions in the estimated net realizable value of our inventory below our previous estimate, we would increase our reserve in the period in which we made such a determination. +Contingent Payments under Endorsement Contracts +A significant amount of our Demand creation expense relates to payments under endorsement contracts. In general, endorsement payments are expensed on a straight-line basis over the term of the contract. However, certain contract elements may be accounted for differently based upon the facts and circumstances of each individual contract. +Certain contracts provide for contingent payments to endorsers based upon specific achievements in their sports (e.g., winning a championship). We record demand creation expense for these amounts when the endorser achieves the specific goal. +Certain contracts provide for variable payments based upon endorsers maintaining a level of performance in their sport over an extended period of time (e.g., maintaining a specified ranking in a sport for a year). When we determine payments are probable, the amounts are reported in Demand creation expense ratably over the contract period based on our best estimate of the endorser’s performance. In these instances, to the extent actual payments to the endorser differ from our estimate due to changes in the endorser’s performance, adjustments to Demand creation expense may be recorded in a future period. +37 +Table of Contents +Certain contracts provide for royalty payments to endorsers based upon a predetermined percent of sales of particular products. We expense these payments in Cost of sales as the related sales occur. In certain contracts, we offer minimum guaranteed royalty payments. For contracts for which we estimate we will not meet the minimum guaranteed amount of royalty fees through sales of product, we record the amount of the guaranteed payment in excess of that earned through sales of product in Demand creation expense uniformly over the contract term. +Property, Plant and Equipment and Definite-Lived Assets +We review the carrying value of long-lived assets or asset groups to be used in operations whenever events or changes in circumstances indicate the carrying amount of the assets might not be recoverable. Factors that would necessitate an impairment assessment include a significant adverse change in the extent or manner in which an asset is used, a significant adverse change in legal factors or the business climate that could affect the value of the asset or a significant decline in the observable market value of an asset, among others. If such facts indicate a potential impairment, we would assess the recoverability of an asset group by determining if the carrying value of the asset group exceeds the sum of the projected undiscounted cash flows expected to result from the use and eventual disposition of the assets over the remaining economic life of the primary asset in the asset group. If the recoverability test indicates the carrying value of the asset group is not recoverable, we will estimate the fair value of the asset group using appropriate valuation methodologies that would typically include an estimate of discounted cash flows. Any impairment would be measured as the difference between the asset group’s carrying amount and its estimated fair value. +Hedge Accounting for Derivatives +We use derivative contracts to hedge certain anticipated foreign currency and interest rate transactions as well as certain non-functional currency monetary assets and liabilities. When the specific criteria to qualify for hedge accounting has been met, changes in the fair value of contracts hedging probable forecasted future cash flows are recorded in Accumulated other comprehensive income , rather than Net income , until the underlying hedged transaction affects Net income . In most cases, this results in gains and losses on hedge derivatives being released from Other comprehensive income into Net income sometime after the maturity of the derivative. One of the criteria for this accounting treatment is that the notional value of these derivative contracts should not be in excess of specifically identified anticipated transactions. By their very nature, our estimates of anticipated transactions may fluctuate over time and may ultimately vary from actual transactions. When anticipated transaction estimates or actual transaction amounts decline below hedged levels, or if it is no longer probable a forecasted transaction will occur by the end of the originally specified time period or within an additional two-month period of time thereafter, we are required to reclassify the cumulative change in fair value of the over-hedged portion of the related hedge contract from Other comprehensive income to Other expense (income), net during the quarter in which the decrease occurs. +Stock-based Compensation +We account for stock-based compensation by estimating the fair value of stock-based compensation on the date of grant using the Black-Scholes option pricing model. The Black-Scholes option pricing model requires the input of highly subjective assumptions including volatility. Expected volatility is estimated based on implied volatility in market traded options on our common stock with a term greater than one year, along with other factors. Our decision to use implied volatility was based on the availability of actively traded options on our common stock and our assessment that implied volatility is more representative of future stock price trends than historical volatility. If factors change and we use different assumptions for estimating stock-based compensation expense in future periods, stock-based compensation expense may differ materially in the future from that recorded in the current period. +Income Taxes +We are subject to taxation in the United States, as well as various state and foreign jurisdictions. The determination of our provision for income taxes requires significant judgment, the use of estimates and the interpretation and application of complex tax laws. On an interim basis, we estimate what our effective tax rate will be for the full fiscal year. This estimated annual effective tax rate is then applied to the year-to-date Income before income taxes excluding infrequently occurring or unusual items, to determine the year-to-date Income tax expense . The income tax effects of infrequent or unusual items are recognized in the interim period in which they occur. As the fiscal year progresses, we continually refine our estimate based upon actual events and earnings by jurisdiction during the year. This continual estimation process periodically results in a change to our expected effective tax rate for the fiscal year. When this occurs, we adjust the income tax provision during the quarter in which the change in estimate occurs. +We record valuation allowances against our deferred tax assets, when necessary. Realization of deferred tax assets (such as net operating loss carry-forwards) is dependent on future taxable earnings and is therefore uncertain. At least quarterly, we assess the likelihood that our deferred tax asset balance will be recovered from future taxable income. To the extent we believe that recovery is not likely, we establish a valuation allowance against our net deferred tax asset, which increases our Income tax expense in the period when such determination is made. +On a quarterly basis, we evaluate the probability a tax position will be effectively sustained and the appropriateness of the amount recognized for uncertain tax positions based on factors including changes in facts or circumstances, changes in tax law, settled audit issues and new audit activity. Changes in our assessment may result in the recognition of a tax benefit or an additional charge to the tax provision in the period our assessment changes. We recognize interest and penalties related to income tax matters in Income tax expense . +On December 22, 2017, the United States enacted the Tax Act, which significantly changes previous U.S. tax laws, including provisions for a one-time transition tax on deemed repatriation of undistributed foreign earnings, a reduction in the corporate tax rate from 35% to 21%, as well as other changes. In accordance with U.S. Securities and Exchange Commission Staff Accounting Bulletin No. 118 (“SAB 118”), we recorded provisional amounts, which represent reasonable estimates of the effects of the Tax Act for which the analysis is not yet complete. As the Company completes its analysis of the Tax Act, including collecting, preparing and analyzing necessary information, performing and refining calculations and obtaining additional guidance from the U.S. Internal Revenue Services (IRS), U.S. Treasury Department, Financial Accounting Standards Board (FASB) or other standard setting and regulatory bodies on the Tax Act, it may record adjustments to the provisional amounts, which may be material. In accordance with SAB 118, the Company’s accounting for the tax effects of the Tax Act will be completed during the measurement period, which should not extend beyond one year from the enactment date. +Refer to Note 9 — Income Taxes in the accompanying Notes to the Consolidated Financial Statements for additional information. +38 +Table of Contents +Other Contingencies +In the ordinary course of business, we are involved in legal proceedings regarding contractual and employment relationships, product liability claims, trademark rights and a variety of other matters. We record contingent liabilities resulting from claims against us when a loss is assessed to be probable and the amount of the loss is reasonably estimable. Assessing probability of loss and estimating probable losses requires analysis of multiple factors, including in some cases judgments about the potential actions of third-party claimants and courts. Recorded contingent liabilities are based on the best information available and actual losses in any future period are inherently uncertain. If future adjustments to estimated probable future losses or actual losses exceed our recorded liability for such claims, we would record additional charges during the period in which the actual loss or change in estimate occurred. In addition to contingent liabilities recorded for probable losses, we disclose contingent liabilities when there is a reasonable possibility the ultimate loss will materially exceed the recorded liability. While we cannot predict the outcome of pending legal matters with certainty, we do not believe any currently identified claim, proceeding or litigation, either individually or in aggregate, will have a material impact on our results of operations, financial position or cash flows. +39 +Table of Contents +ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk +In the normal course of business and consistent with established policies and procedures, we employ a variety of financial instruments to manage exposure to fluctuations in the value of foreign currencies and interest rates. It is our policy to utilize these financial instruments only where necessary to finance our business and manage such exposures; we do not enter into these transactions for trading or speculative purposes. +We are exposed to foreign currency fluctuations, primarily as a result of our international sales, product sourcing and funding activities. Our foreign exchange risk management program is intended to lessen both the positive and negative effects of currency fluctuations on our consolidated results of operations, financial position and cash flows. We use forward and option contracts to hedge certain anticipated, but not yet firmly committed, transactions as well as certain firm commitments and the related receivables and payables, including third-party and intercompany transactions. We have, in the past, and may in the future, also use forward or options contracts to hedge our investment in the net assets of certain international subsidiaries to offset foreign currency translation adjustments related to our net investment in those subsidiaries. Where exposures are hedged, our program has the effect of delaying the impact of exchange rate movements on our Consolidated Financial Statements. +The timing for hedging exposures, as well as the type and duration of the hedge instruments employed, are guided by our hedging policies and determined based upon the nature of the exposure and prevailing market conditions. Typically, the Company may enter into hedge contracts starting up to 12 to 24 months in advance of the forecasted transaction and may place incremental hedges up to 100% of the exposure by the time the forecasted transaction occurs. The majority of derivatives outstanding as of May 31, 2018 are designated as foreign currency cash flow hedges, primarily for Euro/U.S. Dollar, British Pound/Euro and Japanese Yen/U.S. Dollar currency pairs. Refer to Note 16 — Risk Management and Derivatives in the accompanying Notes to the Consolidated Financial Statements for additional information. +Our earnings are also exposed to movements in short- and long-term market interest rates. Our objective in managing this interest rate exposure is to limit the impact of interest rate changes on earnings and cash flows and to reduce overall borrowing costs. To achieve these objectives, we maintain a mix of commercial paper, bank loans, and fixed-rate debt of varying maturities. +Market Risk Measurement +We monitor foreign exchange risk, interest rate risk and related derivatives using a variety of techniques including a review of market value, sensitivity analysis and Value-at-Risk (“VaR”). Our market-sensitive derivative and other financial instruments are foreign currency forward contracts, foreign currency option contracts, interest rate swaps, intercompany loans denominated in non-functional currencies, fixed interest rate U.S. Dollar denominated debt and fixed interest rate Japanese Yen denominated debt. +We use VaR to monitor the foreign exchange risk of our foreign currency forward and foreign currency option derivative instruments only. The VaR determines the maximum potential one-day loss in the fair value of these foreign exchange rate-sensitive financial instruments. The VaR model estimates assume normal market conditions and a 95% confidence level. There are various modeling techniques that can be used in the VaR computation. Our computations are based on interrelationships between currencies and interest rates (a “variance/co-variance” technique). These interrelationships are a function of foreign exchange currency market changes and interest rate changes over the preceding one-year period. The value of foreign currency options does not change on a one-to-one basis with changes in the underlying currency rate. We adjust the potential loss in option value for the estimated sensitivity (the “delta” and “gamma”) to changes in the underlying currency rate. This calculation reflects the impact of foreign currency rate fluctuations on the derivative instruments only and does not include the impact of such rate fluctuations on non-functional currency transactions (such as anticipated transactions, firm commitments, cash balances and accounts and loans receivable and payable), including those which are hedged by these instruments. +The VaR model is a risk analysis tool and does not purport to represent actual losses in fair value we will incur nor does it consider the potential effect of favorable changes in market rates. It also does not represent the full extent of the possible loss that may occur. Actual future gains and losses will differ from those estimated because of changes or differences in market rates and interrelationships, hedging instruments and hedge percentages, timing and other factors. +The estimated maximum one-day loss in fair value on our foreign currency sensitive derivative financial instruments, derived using the VaR model, was $93 million and $97 million at May 31, 2018 and 2017, respectively. The VAR decreased year-over-year as a result of a decrease in foreign currency volatilities at May 31, 2018. Such a hypothetical loss in the fair value of our derivatives would be offset by increases in the value of the underlying transactions being hedged. The average monthly change in the fair values of foreign currency forward and foreign currency option derivative instruments was $260 million and $161 million during fiscal 2018 and fiscal 2017, respectively. +The instruments not included in the VaR are intercompany loans denominated in non-functional currencies, fixed interest rate Japanese Yen denominated debt, fixed interest rate U.S. Dollar denominated debt and interest rate swaps. Intercompany loans and related interest amounts are eliminated in consolidation. Furthermore, our non-functional currency intercompany loans are substantially hedged against foreign exchange risk through the use of forward contracts, which are included in the VaR calculation above. Therefore, we consider the interest rate and foreign currency market risks associated with our non-functional currency intercompany loans to be immaterial to our consolidated financial position, results from operations and cash flows. +Details of third-party debt are provided in the table below. The table presents principal cash flows and related weighted average interest rates by expected maturity dates. +40 +Table of Contents +Expected Maturity Date +Year Ending May 31, +(Dollars in millions) +2019 +2020 +2021 +2022 +2023 +Thereafter +Total +Fair +Value +Foreign Exchange Risk +Japanese Yen Functional Currency +Long-term Japanese Yen debt — Fixed rate +Principal payments +$ +6 +$ +6 +$ +3 +$ +— +$ +— +$ +— +$ +15 +$ +16 +Average interest rate +2.4 +% +2.4 +% +2.4 +% +0.0 +% +0.0 +% +0.0 +% +2.4 +% +Interest Rate Risk +Japanese Yen Functional Currency +Long-term Japanese Yen debt — Fixed rate +Principal payments +$ +6 +$ +6 +$ +3 +$ +— +$ +— +$ +— +$ +15 +$ +16 +Average interest rate +2.4 +% +2.4 +% +2.4 +% +0.0 +% +0.0 +% +0.0 +% +2.4 +% +U.S. Dollar Functional Currency +Long-term U.S. Dollar debt — Fixed rate +Principal payments +$ +— +$ +— +$ +— +$ +— +$ +500 +$ +3,000 +$ +3,500 +$ +3,279 +Average interest rate +0.0 +% +0.0 +% +0.0 +% +0.0 +% +2.3 +% +3.3 +% +3.1 +% +The fixed interest rate Japanese Yen denominated debt instruments were issued by and are accounted for by one of our Japanese subsidiaries. Accordingly, the monthly translation of these instruments, which varies due to changes in foreign exchange rates, is recognized in Accumulated other comprehensive income upon consolidation of this subsidiary. +ITEM 8. Financial Statements and Supplementary Data +Management of NIKE, Inc. is responsible for the information and representations contained in this report. The financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and include certain amounts based on our best estimates and judgments. Other financial information in this report is consistent with these financial statements. +Our accounting systems include controls designed to reasonably assure assets are safeguarded from unauthorized use or disposition and provide for the preparation of financial statements in conformity with U.S. GAAP. These systems are supplemented by the selection and training of qualified financial personnel and an organizational structure providing for appropriate segregation of duties. +An internal corporate audit department reviews the results of its work with the Audit & Finance Committee of the Board of Directors, presently comprised of three outside, independent directors. The Audit & Finance Committee is responsible for the appointment of the independent registered public accounting firm and reviews, with the independent registered public accounting firm, management and the internal corporate audit staff, the scope and the results of the annual audit, the effectiveness of the accounting control system and other matters relating to the financial affairs of NIKE as the Audit & Finance Committee deems appropriate. The independent registered public accounting firm and the internal corporate auditors have full access to the Audit & Finance Committee, with and without the presence of management, to discuss any appropriate matters. +41 +Table of Contents +Management’s Annual Report on Internal Control Over Financial Reporting +Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13(a) - 15(f) and Rule 15(d) - 15(f) of the Securities Exchange Act of 1934, as amended. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the financial statements for external purposes in accordance with generally accepted accounting principles in the United States of America. Internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of assets of the Company that could have a material effect on the financial statements. +While “reasonable assurance” is a high level of assurance, it does not mean absolute assurance. Because of its inherent limitations, internal control over financial reporting may not prevent or detect every misstatement and instance of fraud. Controls are susceptible to manipulation, especially in instances of fraud caused by the collusion of two or more people, including our senior management. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +Under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, our management conducted an evaluation of the effectiveness of our internal control over financial reporting based upon the framework in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on the results of our evaluation, our management concluded that our internal control over financial reporting was effective as of May 31, 2018 . +PricewaterhouseCoopers LLP, an independent registered public accounting firm, has audited (1) the Consolidated Financial Statements and (2) the effectiveness of our internal control over financial reporting as of May 31, 2018 , as stated in their report herein. +Mark G. Parker +Andrew Campion +Chairman, President and Chief Executive Officer +Chief Financial Officer +42 +Table of Contents +Report of Independent Registered Public Accounting Firm +To the Board of Directors and Shareholders of NIKE, Inc. +Opinions on the Financial Statements and Internal Control over Financial Reporting +We have audited the accompanying consolidated balance sheets of NIKE, Inc. and its subsidiaries as of May 31, 2018 and 2017, and the related consolidated statements of income, comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended May 31, 2018, including the related notes and financial statement schedule listed in the index appearing under Item 15(a)(2) (collectively referred to as the “consolidated financial statements”). We also have audited the Company ’ s internal control over financial reporting as of May 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). +In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of May 31, 2018 and 2017 , and the results of their operations and their cash flows for each of the three years in the period ended May 31, 2018 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of May 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO. +Change in Accounting Principle +As discussed in Note 1 to the consolidated financial statements, the Company changed the manner in which it accounts for share-based payment awards to employees as of June 1, 2017. +Basis for Opinions +The Company ’ s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Annual Report on Internal Control over Financial Reporting appearing under Item 8. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company ’ s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. +Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. +Definition and Limitations of Internal Control over Financial Reporting +A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. +Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +/S/ PricewaterhouseCoopers LLP +Portland, Oregon +July 24, 2018 +We have served as the Company’s auditor since 1974. +43 +Table of Contents +NIKE, Inc. Consolidated Statements of Income +Year Ended May 31, +(In millions, except per share data) +2018 +2017 +2016 +Revenues +$ +36,397 +$ +34,350 +$ +32,376 +Cost of sales +20,441 +19,038 +17,405 +Gross profit +15,956 +15,312 +14,971 +Demand creation expense +3,577 +3,341 +3,278 +Operating overhead expense +7,934 +7,222 +7,191 +Total selling and administrative expense +11,511 +10,563 +10,469 +Interest expense (income), net +54 +59 +19 +Other expense (income), net +66 +(196 +) +(140 +) +Income before income taxes +4,325 +4,886 +4,623 +Income tax expense +2,392 +646 +863 +NET INCOME +$ +1,933 +$ +4,240 +$ +3,760 +Earnings per common share: +Basic +$ +1.19 +$ +2.56 +$ +2.21 +Diluted +$ +1.17 +$ +2.51 +$ +2.16 +Dividends declared per common share +$ +0.78 +$ +0.70 +$ +0.62 +The accompanying Notes to the Consolidated Financial Statements are an integral part of this statement. +44 +Table of Contents +NIKE, Inc. Consolidated Statements of Comprehensive Income +Year Ended May 31, +(In millions) +2018 +2017 +2016 +Net income +$ +1,933 +$ +4,240 +$ +3,760 +Other comprehensive income (loss), net of tax: +Change in net foreign currency translation adjustment +(6 +) +16 +(176 +) +Change in net gains (losses) on cash flow hedges +76 +(515 +) +(757 +) +Change in net gains (losses) on other +34 +(32 +) +5 +Total other comprehensive income (loss), net of tax +104 +(531 +) +(928 +) +TOTAL COMPREHENSIVE INCOME +$ +2,037 +$ +3,709 +$ +2,832 +The accompanying Notes to the Consolidated Financial Statements are an integral part of this statement. +45 +Table of Contents +NIKE, Inc. Consolidated Balance Sheets +May 31, +(In millions) +2018 +2017 +ASSETS +Current assets: +Cash and equivalents +$ +4,249 +$ +3,808 +Short-term investments +996 +2,371 +Accounts receivable, net +3,498 +3,677 +Inventories +5,261 +5,055 +Prepaid expenses and other current assets +1,130 +1,150 +Total current assets +15,134 +16,061 +Property, plant and equipment, net +4,454 +3,989 +Identifiable intangible assets, net +285 +283 +Goodwill +154 +139 +Deferred income taxes and other assets +2,509 +2,787 +TOTAL ASSETS +$ +22,536 +$ +23,259 +LIABILITIES AND SHAREHOLDERS’ EQUITY +Current liabilities: +Current portion of long-term debt +$ +6 +$ +6 +Notes payable +336 +325 +Accounts payable +2,279 +2,048 +Accrued liabilities +3,269 +3,011 +Income taxes payable +150 +84 +Total current liabilities +6,040 +5,474 +Long-term debt +3,468 +3,471 +Deferred income taxes and other liabilities +3,216 +1,907 +Commitments and contingencies (Note 15) +Redeemable preferred stock +— +— +Shareholders’ equity: +Common stock at stated value: +Class A convertible — 329 and 329 shares outstanding +— +— +Class B — 1,272 and 1,314 shares outstanding +3 +3 +Capital in excess of stated value +6,384 +5,710 +Accumulated other comprehensive loss +(92 +) +(213 +) +Retained earnings +3,517 +6,907 +Total shareholders’ equity +9,812 +12,407 +TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY +$ +22,536 +$ +23,259 +The accompanying Notes to the Consolidated Financial Statements are an integral part of this statement. +46 +Table of Contents +NIKE, Inc. Consolidated Statements of Cash Flows +Year Ended May 31, +(In millions) +2018 +2017 +2016 +Cash provided by operations: +Net income +$ +1,933 +$ +4,240 +$ +3,760 +Adjustments to reconcile net income to net cash provided by operations: +Depreciation +747 +706 +649 +Deferred income taxes +647 +(273 +) +(80 +) +Stock-based compensation +218 +215 +236 +Amortization and other +27 +10 +13 +Net foreign currency adjustments +(99 +) +(117 +) +98 +Changes in certain working capital components and other assets and liabilities: +Decrease (increase) in accounts receivable +187 +(426 +) +60 +(Increase) in inventories +(255 +) +(231 +) +(590 +) +Decrease (increase) in prepaid expenses and other current and non-current assets +35 +(120 +) +(161 +) +Increase (decrease) in accounts payable, accrued liabilities and other current and non-current liabilities +1,515 +(158 +) +(586 +) +Cash provided by operations +4,955 +3,846 +3,399 +Cash provided (used) by investing activities: +Purchases of short-term investments +(4,783 +) +(5,928 +) +(5,367 +) +Maturities of short-term investments +3,613 +3,623 +2,924 +Sales of short-term investments +2,496 +2,423 +2,386 +Investments in reverse repurchase agreements +— +— +150 +Additions to property, plant and equipment +(1,028 +) +(1,105 +) +(1,143 +) +Disposals of property, plant and equipment +3 +13 +10 +Other investing activities +(25 +) +(34 +) +6 +Cash provided (used) by investing activities +276 +(1,008 +) +(1,034 +) +Cash used by financing activities: +Net proceeds from long-term debt issuance +— +1,482 +981 +Long-term debt payments, including current portion +(6 +) +(44 +) +(106 +) +Increase (decrease) in notes payable +13 +327 +(67 +) +Payments on capital lease and other financing obligations +(23 +) +(17 +) +(7 +) +Proceeds from exercise of stock options and other stock issuances +733 +489 +507 +Repurchase of common stock +(4,254 +) +(3,223 +) +(3,238 +) +Dividends — common and preferred +(1,243 +) +(1,133 +) +(1,022 +) +Tax payments for net share settlement of equity awards +(55 +) +(29 +) +(22 +) +Cash used by financing activities +(4,835 +) +(2,148 +) +(2,974 +) +Effect of exchange rate changes on cash and equivalents +45 +(20 +) +(105 +) +Net increase (decrease) in cash and equivalents +441 +670 +(714 +) +Cash and equivalents, beginning of year +3,808 +3,138 +3,852 +CASH AND EQUIVALENTS, END OF YEAR +$ +4,249 +$ +3,808 +$ +3,138 +Supplemental disclosure of cash flow information: +Cash paid during the year for: +Interest, net of capitalized interest +$ +125 +$ +98 +$ +70 +Income taxes +529 +703 +748 +Non-cash additions to property, plant and equipment +294 +266 +252 +Dividends declared and not paid +320 +300 +271 +The accompanying Notes to the Consolidated Financial Statements are an integral part of this statement. +47 +Table of Contents +NIKE, Inc. Consolidated Statements of Shareholders’ Equity +Common Stock +Capital in +Excess +of Stated +Value +Accumulated +Other +Comprehensive +Income +Retained +Earnings +Total +Class A +Class B +(In millions, except per share data) +Shares +Amount +Shares +Amount +Balance at May 31, 2015 +355 +$ +— +1,357 +$ +3 +$ +4,165 +$ +1,246 +$ +7,293 +$ +12,707 +Stock options exercised +22 +680 +680 +Conversion to Class B Common Stock +(2 +) +— +2 +— +— +Repurchase of Class B Common Stock +(55 +) +(148 +) +(3,090 +) +(3,238 +) +Dividends on common stock ($0.62 per share) and preferred stock ($0.10 per share) +(1,053 +) +(1,053 +) +Issuance of shares to employees, net of shares withheld for employee taxes +3 +105 +(11 +) +94 +Stock-based compensation +236 +236 +Net income +3,760 +3,760 +Other comprehensive income (loss) +(928 +) +(928 +) +Balance at May 31, 2016 +353 +$ +— +1,329 +$ +3 +$ +5,038 +$ +318 +$ +6,899 +$ +12,258 +Stock options exercised +17 +525 +525 +Conversion to Class B Common Stock +(24 +) +— +24 +— +— +Repurchase of Class B Common Stock +(60 +) +(189 +) +(3,060 +) +(3,249 +) +Dividends on common stock ($0.70 per share) and preferred stock ($0.10 per share) +(1,159 +) +(1,159 +) +Issuance of shares to employees, net of shares withheld for employee taxes +4 +121 +(13 +) +108 +Stock-based compensation +215 +215 +Net income +4,240 +4,240 +Other comprehensive income (loss) +(531 +) +(531 +) +Balance at May 31, 2017 +329 +$ +— +1,314 +$ +3 +$ +5,710 +$ +(213 +) +$ +6,907 +$ +12,407 +Stock options exercised +24 +600 +600 +Conversion to Class B Common Stock +— +— +— +— +— +Repurchase of Class B Common Stock +(70 +) +(254 +) +(4,013 +) +(4,267 +) +Dividends on common stock ($0.78 per share) and preferred stock ($0.10 per share) +(1,265 +) +(1,265 +) +Issuance of shares to employees, net of shares withheld for employee taxes +4 +110 +(28 +) +82 +Stock-based compensation +218 +218 +Net income +1,933 +1,933 +Other comprehensive income (loss) +104 +104 +Reclassifications to retained earnings in accordance with ASU 2018-02 +17 +(17 +) +— +Balance at May 31, 2018 +329 +$ +— +1,272 +$ +3 +$ +6,384 +$ +(92 +) +$ +3,517 +$ +9,812 +The accompanying Notes to the Consolidated Financial Statements are an integral part of this statement. +48 +Table of Contents +Notes to Consolidated Financial Statements +Note 1 +Summary of Significant Accounting Policies +50 +Note 2 +Inventories +55 +Note 3 +Property, Plant and Equipment +55 +Note 4 +Identifiable Intangible Assets and Goodwill +55 +Note 5 +Accrued Liabilities +56 +Note 6 +Fair Value Measurements +56 +Note 7 +Short-Term Borrowings and Credit Lines +58 +Note 8 +Long-Term Debt +59 +Note 9 +Income Taxes +59 +Note 10 +Redeemable Preferred Stock +62 +Note 11 +Common Stock and Stock-Based Compensation +62 +Note 12 +Earnings Per Share +64 +Note 13 +Benefit Plans +64 +Note 14 +Accumulated Other Comprehensive Income +65 +Note 15 +Commitments and Contingencies +66 +Note 16 +Risk Management and Derivatives +66 +Note 17 +Operating Segments and Related Information +69 +49 +Table of Contents +NOTE 1 — Summary of Significant Accounting Policies +Description of Business +NIKE, Inc. is a worldwide leader in the design, development and worldwide marketing and selling of athletic footwear, apparel, equipment, accessories and services. NIKE, Inc. portfolio brands include the NIKE Brand, Jordan Brand, Hurley and Converse. The NIKE Brand is focused on performance athletic footwear, apparel, equipment, accessories and services across a wide range of sport categories, amplified with sport-inspired sportswear products carrying the Swoosh trademark, as well as other NIKE Brand trademarks. The Jordan Brand is focused on athletic and casual footwear, apparel and accessories using the Jumpman trademark. Sales and operating results of Jordan Brand products are reported within the respective NIKE Brand geographic operating segments. The Hurley brand is focused on surf and action sports and youth lifestyle footwear, apparel and accessories, using the Hurley trademark. Sales and operating results of Hurley brand products are reported within the NIKE Brand’s North America geographic operating segment. Converse designs, distributes, markets and sells casual sneakers, apparel and accessories under the Converse, Chuck Taylor, All Star, One Star, Star Chevron and Jack Purcell trademarks. In some markets outside the U.S., these trademarks are licensed to third parties who design, distribute, market and sell similar products. Operating results of the Converse brand are reported on a stand-alone basis. +Basis of Consolidation +The Consolidated Financial Statements include the accounts of NIKE, Inc. and its subsidiaries (the “Company”). All significant intercompany transactions and balances have been eliminated. +On November 19, 2015, the Company announced a two -for-one split of both NIKE Class A and Class B Common Stock. The stock split was in the form of a 100 percent stock dividend payable on December 23, 2015 to shareholders of record at the close of business on December 9, 2015. Common stock began trading at the split-adjusted price on December 24, 2015. All share and per share amounts presented reflect the stock split. +Reclassifications +Certain prior year amounts have been reclassified to conform to fiscal 2018 presentation, including reclassified geographic operating segment data to reflect the changes in the Company’s operating structure, which became effective on June 1, 2017. Refer to Note 17 — Operating Segments and Related Information for additional information. +During the fourth quarter of fiscal 2018, management identified a misstatement related to the historical allocation of repurchases of Class B Common stock between Capital in excess of stated value and Retained earnings . The Company assessed the materiality of these misstatements on prior period financial statements in accordance with U.S. Securities and Exchange Commission Staff Accounting Bulletin No. 99, Materiality, codified in ASC 250, Presentation of Financial Statements, and concluded that these misstatements were not material to any prior annual or interim period. As such, the Company has revised the Consolidated Balance Sheets as of May 31, 2017 , and has reduced Capital in excess of stated value by $2.9 billion and increased Retained earnings by the same amount. Within the Consolidated Statements of Shareholders’ Equity, the Company has made corresponding revisions of $2.6 billion , $0.1 billion and $0.2 billion for the periods ended May 31, 2015, 2016 and, 2017, respectively. +Revenue Recognition +Wholesale revenues are recognized when title and the risks and rewards of ownership have passed to the customer, based on the terms of sale. This occurs upon shipment or upon receipt by the customer depending on the country of the sale and the agreement with the customer. Retail store revenues are recorded at the time of sale and digital commerce revenues are recorded upon delivery to the customer. Amounts collected from customers for sales or value added tax are recorded on a net basis. Provisions for post-invoice sales discounts, returns and miscellaneous claims from customers are estimated and recorded as a reduction to revenue at the time of sale. Post-invoice sales discounts consist of contractual programs with certain customers or discretionary discounts expected to be granted to certain customers at a later date. Estimates of discretionary discounts, returns and claims are based on (1) historical rates, (2) specific identification of outstanding claims and outstanding returns not yet received from customers and (3) estimated discounts, returns and claims expected, but not yet finalized with customers. As of May 31, 2018 and 2017 , the Company’s reserve balances for post-invoice sales discounts, returns and miscellaneous claims were $675 million and $643 million , respectively. +Cost of Sales +Cost of sales consists primarily of inventory costs, as well as warehousing costs (including the cost of warehouse labor), third-party royalties, certain foreign currency hedge gains and losses and product design costs. Outbound shipping and handling costs are expensed as incurred and included in Cost of sales . +Demand Creation Expense +Demand creation expense consists of advertising and promotion costs, including costs of endorsement contracts, complimentary product, television, digital and print advertising and media costs, brand events and retail brand presentation. Advertising production costs are expensed the first time an advertisement is run. Advertising media costs are expensed when the advertisement appears. Costs related to brand events are expensed when the event occurs. Costs related to retail brand presentation are expensed when the presentation is complete and delivered. +A significant amount of the Company’s promotional expenses result from payments under endorsement contracts. In general, endorsement payments are expensed on a straight-line basis over the term of the contract. However, certain contract elements may be accounted for differently based upon the facts and circumstances of each individual contract. Prepayments made under contracts are included in Prepaid expenses and other current assets or Deferred income taxes and other assets depending on the period to which the prepayment applies. +Certain contracts provide for contingent payments to endorsers based upon specific achievements in their sports (e.g., winning a championship). The Company records Demand creation expense for these amounts when the endorser achieves the specific goal. +50 +Table of Contents +Certain contracts provide for variable payments based upon endorsers maintaining a level of performance in their sport over an extended period of time (e.g., maintaining a specified ranking in a sport for a year). When the Company determines payments are probable, the amounts are reported in Demand creation expense ratably over the contract period based on the Company’s best estimate of the endorser’s performance. In these instances, to the extent actual payments to the endorser differ from the Company’s estimate due to changes in the endorser’s performance, adjustments to Demand creation expense may be recorded in a future period. +Certain contracts provide for royalty payments to endorsers based upon a predetermined percent of sales of particular products. The Company expenses these payments in Cost of sales as the related sales occur. In certain contracts, the Company offers minimum guaranteed royalty payments. For contracts the Company estimates will not meet the minimum guaranteed amount of royalty fees through sales of product, the Company records the amount of the guaranteed payment in excess of that earned through sales of product in Demand creation expense uniformly over the contract period. +Through cooperative advertising programs, the Company reimburses customers for certain costs of advertising the Company’s products. The Company records these costs in Demand creation expense at the point in time when it is obligated to its customers for the costs. This obligation may arise prior to the related advertisement being run. +Total advertising and promotion expenses, which the Company refers to as Demand creation expense, were $3,577 million , $3,341 million and $3,278 million for the years ended May 31, 2018 , 2017 and 2016 , respectively. Prepaid advertising and promotion expenses totaled $730 million and $558 million at May 31, 2018 and 2017 , respectively, of which $359 million and $311 million , respectively, was recorded in Prepaid expenses and other current assets , and $371 million and $247 million , respectively, was recorded in Deferred income taxes and other assets, depending on the period to which the prepayment applies. +Operating Overhead Expense +Operating overhead expense consists primarily of wage and benefit-related expenses, research and development costs, as well as other administrative expenses, such as rent, depreciation and amortization, professional services, meetings and travel. +Cash and Equivalents +Cash and equivalents represent cash and short-term, highly liquid investments, that are both readily convertible to known amounts of cash, and so near their maturity they present insignificant risk of changes in value because of changes in interest rates, including commercial paper, U.S. Treasury, U.S. Agency, money market funds, time deposits and corporate debt securities with maturities of 90 days or less at the date of purchase. +Short-Term Investments +Short-term investments consist of highly liquid investments, including commercial paper, U.S. Treasury, U.S. Agency, time deposits and corporate debt securities, with maturities over 90 days at the date of purchase. Debt securities the Company has the ability and positive intent to hold to maturity are carried at amortized cost. At May 31, 2018 and 2017 , the Company did not hold any short-term investments classified as trading or held-to-maturity. +At May 31, 2018 and 2017 , Short-term investments consisted of available-for-sale securities. Available-for-sale securities are recorded at fair value with unrealized gains and losses reported, net of tax, in Accumulated other comprehensive income , unless unrealized losses are determined to be other than temporary. Realized gains and losses on the sale of securities are determined by specific identification. The Company considers all available-for-sale securities, including those with maturity dates beyond 12 months, as available to support current operational liquidity needs and, therefore, classifies all securities with maturity dates beyond 90 days at the date of purchase as current assets within Short-term investments on the Consolidated Balance Sheets. +Refer to Note 6 — Fair Value Measurements for more information on the Company’s short-term investments. +Allowance for Uncollectible Accounts Receivable +Accounts receivable, net consist primarily of amounts receivable from customers. The Company makes ongoing estimates relating to the collectability of its accounts receivable and maintains an allowance for estimated losses resulting from the inability of its customers to make required payments. In determining the amount of the allowance, the Company considers historical levels of credit losses and makes judgments about the creditworthiness of significant customers based on ongoing credit evaluations. Accounts receivable with anticipated collection dates greater than 12 months from the balance sheet date and related allowances are considered non-current and recorded in Deferred income taxes and other assets . The allowance for uncollectible accounts receivable was $30 million and $19 million at May 31, 2018 and 2017 , respectively. +Inventory Valuation +Inventories are stated at lower of cost and net realizable value, and valued on either an average or a specific identification cost basis. In some instances, we ship product directly from our supplier to the customer, with the related inventory and cost of sales recognized on a specific identification basis. Inventory costs primarily consist of product cost from the Company’s suppliers, as well as inbound freight, import duties, taxes, insurance and logistics and other handling fees. +Property, Plant and Equipment and Depreciation +Property, plant and equipment are recorded at cost. Depreciation is determined on a straight-line basis for land improvements, buildings and leasehold improvements over 2 to 40 years and for machinery and equipment over 2 to 15 years. +Depreciation and amortization of assets used in manufacturing, warehousing and product distribution are recorded in Cost of sales . Depreciation and amortization of all other assets are recorded in Operating overhead expense . +51 +Table of Contents +Software Development Costs +Internal Use Software : Expenditures for major software purchases and software developed for internal use are capitalized and amortized over a 2 to 12 -year period on a straight-line basis. The Company’s policy provides for the capitalization of external direct costs of materials and services associated with developing or obtaining internal use computer software. In addition, the Company also capitalizes certain payroll and payroll-related costs for employees who are directly associated with internal use computer software projects. The amount of capitalizable payroll costs with respect to these employees is limited to the time directly spent on such projects. Costs associated with preliminary project stage activities, training, maintenance and all other post-implementation stage activities are expensed as incurred. +Computer Software to be Sold, Leased or Otherwise Marketed : Development costs of computer software to be sold, leased or otherwise marketed as an integral part of a product are subject to capitalization beginning when a product’s technological feasibility has been established and ending when a product is available for general release to customers. In most instances, the Company’s products are released soon after technological feasibility has been established. Therefore, software development costs incurred subsequent to achievement of technological feasibility are usually not significant, and generally most software development costs have been expensed as incurred. +Impairment of Long-Lived Assets +The Company reviews the carrying value of long-lived assets or asset groups to be used in operations whenever events or changes in circumstances indicate the carrying amount of the assets might not be recoverable. Factors that would necessitate an impairment assessment include a significant adverse change in the extent or manner in which an asset is used, a significant adverse change in legal factors or the business climate that could affect the value of the asset or a significant decline in the observable market value of an asset, among others. If such facts indicate a potential impairment, the Company would assess the recoverability of an asset group by determining if the carrying value of the asset group exceeds the sum of the projected undiscounted cash flows expected to result from the use and eventual disposition of the assets over the remaining economic life of the primary asset in the asset group. If the recoverability test indicates that the carrying value of the asset group is not recoverable, the Company will estimate the fair value of the asset group using appropriate valuation methodologies, which would typically include an estimate of discounted cash flows. Any impairment would be measured as the difference between the asset group’s carrying amount and its estimated fair value. +Goodwill and Indefinite-Lived Intangible Assets +The Company performs annual impairment tests on goodwill and intangible assets with indefinite lives in the fourth quarter of each fiscal year or when events occur or circumstances change that would, more likely than not, reduce the fair value of a reporting unit or an intangible asset with an indefinite life below its carrying value. Events or changes in circumstances that may trigger interim impairment reviews include significant changes in business climate, operating results, planned investments in the reporting unit, planned divestitures or an expectation the carrying amount may not be recoverable, among other factors. The Company may first assess qualitative factors to determine whether it is more likely than not the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events and circumstances, the Company determines it is more likely than not the fair value of the reporting unit is greater than its carrying amount, the two-step impairment test is unnecessary. The two-step impairment test first requires the Company to estimate the fair value of its reporting units. If the carrying value of a reporting unit exceeds its fair value, the goodwill of that reporting unit is potentially impaired and the Company proceeds to step two of the impairment analysis. In step two of the analysis, the Company measures and records an impairment loss equal to the excess of the carrying value of the reporting unit’s goodwill over its implied fair value, if any. +Indefinite-lived intangible assets primarily consist of acquired trade names and trademarks. The Company may first perform a qualitative assessment to determine whether it is more likely than not an indefinite-lived intangible asset is impaired. If, after assessing the totality of events and circumstances, the C ompany determines it is more likely than not that the indefinite-lived intangible asset is not impaired, no quantitative fair value measurement is necessary. If a quantitative fair value measurement calculation is required for these intangible assets, the Company utilizes the relief-from-royalty method. This method assumes trade names and trademarks have value to the extent their owner is relieved of the obligation to pay royalties for the benefits received from them. This method requires the Company to estimate the future revenue for the related brands, the appropriate royalty rate and the weighted average cost of capital. +Operating Leases +The Company leases retail store space, certain distribution and warehouse facilities, office space, equipment and other non-real estate assets under operating leases. Operating lease agreements may contain rent escalation clauses, renewal options, rent holidays or certain landlord incentives, including tenant improvement allowances. Rent expense for non-cancelable operating leases with scheduled rent increases or landlord incentives are recognized on a straight-line basis over the lease term, beginning with the effective lease commencement date, which is generally the date in which the Company takes possession of or controls the physical use of the property. Certain leases also provide for contingent rent, which is generally determined as a percent of sales in excess of specified levels. A contingent rent liability is recognized together with the corresponding rent expense when specified levels have been achieved or when the Company determines that achieving the specified levels during the period is probable. +Fair Value Measurements +The Company measures certain financial assets and liabilities at fair value on a recurring basis, including derivatives and available-for-sale securities. Fair value is the price the Company would receive to sell an asset or pay to transfer a liability in an orderly transaction with a market participant at the measurement date. The Company uses a three-level hierarchy established by the Financial Accounting Standards Board (FASB) that prioritizes fair value measurements based on the types of inputs used for the various valuation techniques (market approach, income approach and cost approach). +52 +Table of Contents +The levels of the fair value hierarchy are described below: +• +Level 1: Quoted prices in active markets for identical assets or liabilities. +• +Level 2: Inputs other than observable quoted prices for the asset or liability, either directly or indirectly; these include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active. +• +Level 3: Unobservable inputs with little or no market data available, which require the reporting entity to develop its own assumptions. +The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. Financial assets and liabilities are classified in their entirety based on the most conservative level of input that is significant to the fair value measurement. +Pricing vendors are utilized for a majority of Level 1 and Level 2 investments. These vendors either provide a quoted market price in an active market or use observable inputs without applying significant adjustments in their pricing. Observable inputs include broker quotes, interest rates and yield curves observable at commonly quoted intervals, volatilities and credit risks. The fair value of derivative contracts is determined using observable market inputs such as the daily market foreign currency rates, forward pricing curves, currency volatilities, currency correlations and interest rates and considers nonperformance risk of the Company and its counterparties. +Level 1 investments include U.S. Treasury securities. Assets and liabilities included within Level 2 include commercial paper, U.S. Agency securities, money market funds, time deposits, corporate debt securities and derivative contracts. Level 3 investments are valued using internally developed models with unobservable inputs and are an immaterial portion of our portfolio. +The Company’s fair value measurement process includes comparing fair values to another independent pricing vendor to ensure appropriate fair values are recorded. +Refer to Note 6 — Fair Value Measurements for additional information. +Foreign Currency Translation and Foreign Currency Transactions +Adjustments resulting from translating foreign functional currency financial statements into U.S. Dollars are included in the foreign currency translation adjustment, a component of Accumulated other comprehensive income in Total shareholders’ equity . +The Company’s global subsidiaries have various assets and liabilities, primarily receivables and payables, which are denominated in currencies other than their functional currency. These balance sheet items are subject to re-measurement, the impact of which is recorded in Other expense (income), net , within the Consolidated Statements of Income. +Accounting for Derivatives and Hedging Activities +The Company uses derivative financial instruments to reduce its exposure to changes in foreign currency exchange rates and interest rates. All derivatives are recorded at fair value on the Consolidated Balance Sheets and changes in the fair value of derivative financial instruments are either recognized in Accumulated other comprehensive income (a component of Total shareholders’ equity ), Long-term debt or Net income depending on the nature of the underlying exposure, whether the derivative is formally designated as a hedge and, if designated, the extent to which the hedge is effective. The Company classifies the cash flows at settlement from derivatives in the same category as the cash flows from the related hedged items. For undesignated hedges and designated cash flow hedges, this is primarily within the Cash provided by operations component of the Consolidated Statements of Cash Flows. For designated net investment hedges, this is within the Cash used by investing activities component of the Consolidated Statements of Cash Flows. For the Company’s fair value hedges, which are interest rate swaps used to mitigate the change in fair value of its fixed-rate debt attributable to changes in interest rates, the related cash flows from periodic interest payments are reflected within the Cash provided by operations component of the Consolidated Statements of Cash Flows. Refer to Note 16 — Risk Management and Derivatives for additional information on the Company’s risk management program and derivatives. +Stock-Based Compensation +The Company accounts for stock-based compensation by estimating the fair value of options and stock appreciation rights granted under the NIKE, Inc. Stock Incentive Plan and employees’ purchase rights under the employee stock purchase plans (ESPPs) using the Black-Scholes option pricing model. The Company recognizes this fair value as Cost of sales or Operating overhead expense , as applicable, in the Consolidated Statements of Income over the vesting period using the straight-line method. +Refer to Note 11 — Common Stock and Stock-Based Compensation for additional information on the Company’s stock-based compensation programs. +Income Taxes +The Company accounts for income taxes using the asset and liability method. This approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of assets and liabilities. The Company records a valuation allowance to reduce deferred tax assets to the amount management believes is more likely than not to be realized. +The Company recognizes a tax benefit from uncertain tax positions in the financial statements only when it is more likely than not the position will be sustained upon examination by relevant tax authorities. The Company recognizes interest and penalties related to income tax matters in Income tax expense . +Refer to Note 9 — Income Taxes for further discussion. +53 +Table of Contents +Earnings Per Share +Basic earnings per common share is calculated by dividing Net income by the weighted average number of common shares outstanding during the year. Diluted earnings per common share is calculated by adjusting weighted average outstanding shares, assuming conversion of all potentially dilutive stock options and awards. +Refer to Note 12 — Earnings Per Share for further discussion. +Management Estimates +The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates, including estimates relating to assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. +Recently Adopted Accounting Standards +In February 2018, the FASB issued Accounting Standards Update (ASU) No. 2018-02, Income Statement — Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income . The standard allows for reclassification of stranded tax effects on items resulting from the Tax Cuts and Jobs Act (the “Tax Act”) from Accumulated other comprehensive income to Retained earnings . Tax effects unrelated to the Tax Act are released from Accumulated other comprehensive income using either the specific identification approach or the portfolio approach based on the nature of the underlying item. +The Company early adopted the ASU in the third quarter of fiscal 2018. As a result of the adoption, Retained earnings decreased by $17 million , with a corresponding increase to Accumulated other comprehensive income due to the reduction in the corporate tax rate from 35% to 21%. Refer to Note 9 — Income Taxes for additional information on the impact of the Tax Act. +In March 2016, the FASB issued ASU No. 2016-09, Compensation — Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting , which changes how companies account for certain aspects of share-based payment awards to employees. The Company adopted the ASU in the first quarter of fiscal 2018. The updated guidance requires excess tax benefits and deficiencies from share-based payment awards to be recorded in income tax expense in the income statement. Previously, excess tax benefits and deficiencies were recognized in shareholders’ equity on the balance sheet. This change is required to be applied prospectively. As a result of the adoption, during fiscal 2018, the Company recognized $230 million of excess tax benefits related to share-based payment awards in Income tax expense in the Consolidated Statements of Income. +Additionally, ASU 2016-09 modified the classification of certain share-based payment activities within the statement of cash flows, which the Company applied retrospectively. As a result, for fiscal 2017 and fiscal 2016, the Company reclassified cash inflows of $177 million and $281 million , respectively, related to excess tax benefits from share-based payment awards, from Cash used by financing activities to Cash provided by operations , and reclassified cash outflows of $29 million and $22 million , for the respective periods, related to tax payments for the net settlement of share-based payment awards, from Cash provided by operations to Cash used by financing activities within the Consolidated Statements of Cash Flows. +Recently Issued Accounting Standards +In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities , which expands and refines hedge accounting for both financial and non-financial risk components, aligns the recognition and presentation of the effects of hedging instruments and hedge items in the financial statements, and includes certain targeted improvements to ease the application of current guidance related to the assessment of hedge effectiveness. The update to the standard is effective for the Company on June 1, 2019, with early adoption permitted in any interim period. The Company is currently evaluating the updated guidance, but does not expect the adoption to have a material impact on the Consolidated Financial Statements. +In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory . The updated guidance requires companies to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. Income tax effects of intra-entity transfers of inventory will continue to be deferred until the inventory has been sold to a third party. The Company will adopt the standard on June 1, 2018, using a modified retrospective approach, with the cumulative effect of applying the new standard recognized in retained earnings at the date of adoption. Upon adoption, the Company will record a cumulative effect adjustment reducing Retained earnings , Deferred income taxes and other assets , and Prepaid expenses and other current assets by $507 million , $422 million and $45 million , respectively, and increasing Deferred income taxes and other liabilities by $40 million . +In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) , which replaces existing lease accounting guidance. The new standard is intended to provide enhanced transparency and comparability by requiring lessees to record right-of-use assets and corresponding lease liabilities on the balance sheet. The new guidance will require the Company to continue to classify leases as either operating or financing, with classification affecting the pattern of expense recognition in the income statement. The Company will adopt the standard on June 1, 2019. The ASU is required to be applied using a modified retrospective approach at the beginning of the earliest period presented, with optional practical expedients. The Company continues to assess the effect the guidance will have on its existing accounting policies and the Consolidated Financial Statements and expects there will be an increase in assets and liabilities on the Consolidated Balance Sheets at adoption due to the recording of right-of-use assets and corresponding lease liabilities, which may be material. Refer to Note 15 — Commitments and Contingencies for information about the Company’s lease obligations. +In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments — Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities . The updated guidance enhances the reporting model for financial instruments, which includes amendments to address aspects of recognition, measurement, presentation and disclosure. The update to the standard is effective for the Company beginning June 1, 2018. The Company does not expect the adoption to have a material impact on the Consolidated Financial Statements. +54 +Table of Contents +In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) , which replaces existing revenue recognition guidance. The updated guidance requires companies to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, the new standard requires reporting companies to disclose the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The Company will adopt the standard on June 1, 2018 using a modified retrospective approach with the cumulative effect of initially applying the new standard recognized in retained earnings at the date of adoption. +While the Company does not expect the adoption of this standard to have a material impact on the Company’s net Revenues in the Consolidated Statements of Income, revenues for certain wholesale transactions and substantially all digital commerce sales will be recognized upon shipment rather than upon delivery to the customer. Accordingly, the Company will record a cumulative effect adjustment increasing Retained earnings by approximately $23 million on June 1, 2018. +Additionally, provisions for post-invoice sales discounts, returns and miscellaneous claims will be recognized as accrued liabilities rather than as reductions to Accounts receivable, net ; and the estimated cost of inventory associated with the provision for sales returns will be recorded within Prepaid expenses and other current assets on the Consolidated Balance Sheets. The remaining provisions of the standard are not expected to have a material impact on the Company’s Consolidated Financial Statements. +NOTE 2 — Inventories +Inventory balances of $5,261 million and $5,055 million at May 31, 2018 and 2017 , respectively, were substantially all finished goods. +NOTE 3 — Property, Plant and Equipment +Property, plant and equipment, net included the following: +As of May 31, +(In millions) +2018 +2017 +Land and improvements +$ +331 +$ +285 +Buildings +2,195 +1,564 +Machinery, equipment and internal-use software +4,230 +3,867 +Leasehold improvements +1,494 +1,484 +Construction in process +641 +758 +Total property, plant and equipment, gross +8,891 +7,958 +Less accumulated depreciation +4,437 +3,969 +TOTAL PROPERTY, PLANT AND EQUIPMENT, NET +$ +4,454 +$ +3,989 +Capitalized interest was not material for the years ended May 31, 2018 , 2017 and 2016 . +NOTE 4 — Identifiable Intangible Assets and Goodwill +Identifiable intangible assets, net consist of indefinite-lived trademarks, which are not subject to amortization, and acquired trademarks and other intangible assets, which are subject to amortization. +The following table summarizes the Company’s Identifiable intangible assets, net balances as of May 31, 2018 and 2017 : +As of May 31, +2018 +2017 +(In millions) +Gross Carrying Amount +Accumulated Amortization +Net Carrying Amount +Gross Carrying Amount +Accumulated Amortization +Net Carrying Amount +Acquired trademarks and other +$ +22 +$ +18 +$ +4 +$ +19 +$ +17 +$ +2 +Indefinite-lived trademarks +281 +— +281 +281 +— +281 +INDENTIFIABLE INTANGIBLE ASSETS, NET +$ +303 +$ +18 +$ +285 +$ +300 +$ +17 +$ +283 +Goodwill was $154 million and $139 million at May 31, 2018 and 2017 , respectively, of which $65 million was included in the Converse segment for both periods. The remaining amounts were included in Global Brand Divisions for segment reporting purposes. There were no accumulated impairment balances for goodwill as of either period end. +55 +Table of Contents +NOTE 5 — Accrued Liabilities +Accrued liabilities included the following: +As of May 31, +(In millions) +2018 +2017 +Compensation and benefits, excluding taxes +$ +897 +$ +871 +Endorsement compensation +425 +396 +Dividends payable +320 +300 +Import and logistics costs +268 +257 +Taxes other than income taxes payable +224 +196 +Fair value of derivatives +184 +168 +Advertising and marketing +140 +125 +Collateral received from counterparties to hedging instruments +23 +— +Other (1) +788 +698 +TOTAL ACCRUED LIABILITIES +$ +3,269 +$ +3,011 +(1) +Other consists of various accrued expenses with no individual item accounting for more than 5% of the total Accrued liabilities balance at May 31, 2018 and 2017 . +NOTE 6 — Fair Value Measurements +The following tables present information about the Company’s financial assets and liabilities measured at fair value on a recurring basis as of May 31, 2018 and 2017 , and indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value. Refer to Note 1 — Summary of Significant Accounting Policies for additional detail regarding the Company’s fair value measurement methodology. +As of May 31, 2018 +(In millions) +Assets at Fair Value +Cash Equivalents +Short-term Investments +Other Long-term Assets +Cash +$ +415 +$ +415 +$ +— +$ +— +Level 1: +U.S. Treasury securities +1,178 +500 +678 +— +Level 2: +Time deposits +925 +907 +18 +— +U.S. Agency securities +102 +100 +2 +— +Commercial paper and bonds +451 +153 +298 +— +Money market funds +2,174 +2,174 +— +— +Total level 2 +3,652 +3,334 +318 +— +Level 3: +Non-marketable preferred stock +11 +— +— +11 +TOTAL +$ +5,256 +$ +4,249 +$ +996 +$ +11 +56 +Table of Contents +As of May 31, 2017 +(In millions) +Assets at Fair Value +Cash Equivalents +Short-term Investments +Other Long-term Assets +Cash +$ +505 +$ +505 +$ +— +$ +— +Level 1: +U.S. Treasury securities +1,545 +159 +1,386 +— +Level 2: +Time deposits +813 +769 +44 +— +U.S. Agency securities +522 +150 +372 +— +Commercial paper and bonds +820 +251 +569 +— +Money market funds +1,974 +1,974 +— +— +Total level 2 +4,129 +3,144 +985 +— +Level 3: +Non-marketable preferred stock +10 +— +— +10 +TOTAL +$ +6,189 +$ +3,808 +$ +2,371 +$ +10 +The Company elects to record the gross assets and liabilities of its derivative financial instruments on the Consolidated Balance Sheets. The Company’s derivative financial instruments are subject to master netting arrangements that allow for the offset of assets and liabilities in the event of default or early termination of the contract. Any amounts of cash collateral received related to these instruments associated with the Company ’ s credit-related contingent features are recorded in Cash and equivalents and Accrued liabilities , the latter of which would further offset against the Company’s derivative asset balance (refer to Note 16 — Risk Management and Derivatives ). Any amounts of cash collateral posted related to these instruments associated with the Company ’ s credit-related contingent features are recorded in Prepaid expenses and other current assets , which would further offset against the Company ’ s derivative liability balance (refer to Note 16 — Risk Management and Derivatives ). Cash collateral received or posted related to the Company ’ s credit related contingent features is presented in the Cash provided by operations component of the Consolidated Statements of Cash Flows. Any amounts of non-cash collateral received, such as securities, are not recorded on the Consolidated Balance Sheets pursuant to U.S. GAAP. +The following tables present information about the Company’s derivative assets and liabilities measured at fair value on a recurring basis as of May 31, 2018 and 2017 , and indicate the level in the fair value hierarchy in which the Company classifies the fair value measurement. +As of May 31, 2018 +Derivative Assets +Derivative Liabilities +(In millions) +Assets at Fair Value +Other Current Assets +Other Long-term Assets +Liabilities at Fair Value +Accrued Liabilities +Other Long-term Liabilities +Level 2: +Foreign exchange forwards and options (1) +$ +389 +$ +237 +$ +152 +$ +182 +$ +182 +$ +— +Embedded derivatives +11 +3 +8 +8 +2 +6 +TOTAL +$ +400 +$ +240 +$ +160 +$ +190 +$ +184 +$ +6 +(1) +If the foreign exchange derivative instruments had been netted in the Consolidated Balance Sheets, the asset and liability positions each would have been reduced by $182 million as of May 31, 2018 . As of that date, the Company had received $23 million of cash collateral from various counterparties related to these foreign exchange derivative instruments. No amount of collateral was posted on the Company ’ s derivative liability balance as of May 31, 2018. +As of May 31, 2017 +Derivative Assets +Derivative Liabilities +(In millions) +Assets at Fair Value +Other Current Assets +Other Long-term Assets +Liabilities at Fair Value +Accrued Liabilities +Other Long-term Liabilities +Level 2: +Foreign exchange forwards and options (1) +$ +231 +$ +216 +$ +15 +$ +246 +$ +166 +$ +80 +Embedded derivatives +10 +1 +9 +8 +2 +6 +TOTAL +$ +241 +$ +217 +$ +24 +$ +254 +$ +168 +$ +86 +(1) +If the foreign exchange derivative instruments had been netted in the Consolidated Balance Sheets, the asset and liability positions each would have been reduced by $187 million as of May 31, 2017 . As of that date, no amount of cash collateral had been received or posted on the derivative asset and liability balance related to these foreign exchange derivative instruments. +57 +Table of Contents +Available-for-sale securities comprise investments in U.S. Treasury and Agency securities, time deposits, money market funds, corporate commercial paper and bonds. These securities are valued using market prices on both active markets (Level 1) and less active markets (Level 2). As of May 31, 2018 , the Company held $960 million of available-for-sale securities with maturity dates within one year and $36 million with maturity dates over one year and less than five years within Short-term investments on the Consolidated Balance Sheets. The gross realized gains and losses on sales of available-for-sale securities were immaterial for the fiscal years ended May 31, 2018 and 2017 . Unrealized gains and losses on available-for-sale securities included in Accumulated other comprehensive income were immaterial as of May 31, 2018 and 2017 . The Company regularly reviews its available-for-sale securities for other-than-temporary impairment. For the years ended May 31, 2018 and 2017 , the Company did not consider its securities to be other-than-temporarily impaired, and accordingly, did not recognize any impairment losses. +Included in Interest expense (income), net was interest income related to the Company’s available-for-sale securities of $70 million , $27 million and $12 million for the years ended May 31, 2018 , 2017 and 2016 , respectively. +The Company’s Level 3 assets comprise investments in certain non-marketable preferred stock. These Level 3 investments are an immaterial portion of the Company’s portfolio. Changes in Level 3 investment assets were immaterial during the years ended May 31, 2018 and 2017 . +No transfers among the levels within the fair value hierarchy occurred during the years ended May 31, 2018 or 2017 . +For additional information related to the Company’s derivative financial instruments, refer to Note 16 — Risk Management and Derivatives . For fair value information regarding Notes Payable and Long-term debt , refer to Note 7 — Short-Term Borrowings and Credit Lines and Note 8 — Long-Term Debt , respectively. The carrying amounts of other current financial assets and other current financial liabilities approximate fair value. +As of May 31, 2018 and 2017 , assets or liabilities required to be measured at fair value on a non-recurring basis were immaterial. +NOTE 7 — Short-Term Borrowings and Credit Lines +Notes payable and interest-bearing accounts payable to Sojitz Corporation of America (“Sojitz America”) as of May 31, 2018 and 2017 are summarized below: +As of May 31, +2018 +2017 +(Dollars in millions) +Borrowings +Interest Rate +Borrowings +Interest Rate +Notes payable: +Commercial paper +$ +325 +1.77 +% +$ +325 +0.86 +% +U.S. operations +1 +0.00 +% +(1) +— +0.00 +% +(1) +Non-U.S. operations +10 +18.11 +% +(1) +— +0.00 +% +(1) +TOTAL NOTES PAYABLE +$ +336 +$ +325 +Interest-bearing accounts payable: +Sojitz America +$ +61 +2.82 +% +$ +51 +1.78 +% +(1) +Weighted average interest rate includes non-interest bearing overdrafts. +The carrying amounts reflected in the Consolidated Balance Sheets for Notes payable approximate fair value. +The Company purchases through Sojitz America certain NIKE Brand products it acquires from non-U.S. suppliers. These purchases are for products sold in certain countries in the Company’s Asia Pacific & Latin America geographic operating segment and Canada, excluding products produced and sold in the same country. Accounts payable to Sojitz America are generally due up to 60 days after shipment of goods from the foreign port. The interest rate on such accounts payable is the 60 -day London Interbank Offered Rate (“LIBOR”) as of the beginning of the month of the invoice date, plus 0.75% . +As of May 31, 2018 and 2017 , the Company had $325 million outstanding under its $2 billion commercial paper program at weighted average interest rates of 1.77% and 0.86% , respectively. +On August 28, 2015, the Company entered into a committed credit facility agreement with a syndicate of banks which provides for up to $2 billion of borrowings. The facility matures August 28, 2020, with a one -year extension option prior to any anniversary of the closing date, provided that in no event shall it extend beyond August 28, 2022. Based on the Company’s current long-term senior unsecured debt ratings of AA- and A1 from Standard and Poor’s Corporation and Moody’s Investor Services, respectively, the interest rate charged on any outstanding borrowings would be the prevailing LIBOR plus 0.455% . The facility fee is 0.045% of the total commitment. Under the committed credit facility, the Company must maintain certain financial ratios, among other things, with which the Company was in compliance at May 31, 2018 . No amounts were outstanding under the committed credit facility as of May 31, 2018 or 2017 . +58 +Table of Contents +NOTE 8 — Long-Term Debt +Long-term debt , net of unamortized premiums, discounts and debt issuance costs, comprises the following : +Book Value Outstanding +as of May 31, +Scheduled Maturity (Dollars and Yen in millions) +Original +Principal +Interest +Rate +Interest +Payments +2018 +2017 +Corporate Bond Payables: (1)(2) +May 1, 2023 +$ +500 +2.25 +% +Semi-Annually +$ +498 +$ +497 +November 1, 2026 +$ +1,000 +2.38 +% +Semi-Annually +994 +993 +May 1, 2043 +$ +500 +3.63 +% +Semi-Annually +495 +495 +November 1, 2045 +$ +1,000 +3.88 +% +Semi-Annually +982 +981 +November 1, 2046 +$ +500 +3.38 +% +Semi-Annually +490 +490 +Japanese Yen Notes: (3) +August 20, 2001 through November 20, 2020 +¥ +9,000 +2.60 +% +Quarterly +10 +14 +August 20, 2001 through November 20, 2020 +¥ +4,000 +2.00 +% +Quarterly +5 +7 +Total +3,474 +3,477 +Less current maturities +6 +6 +TOTAL LONG-TERM DEBT +$ +3,468 +$ +3,471 +(1) +These senior unsecured obligations rank equally with the Company’s other unsecured and unsubordinated indebtedness. +(2) +The bonds are redeemable at the Company’s option up to three months prior to the scheduled maturity date for the bonds maturing in 2023 and 2026, and up to six months prior to the scheduled maturity date for the bonds maturing in 2043, 2045 and 2046, at a price equal to the greater of (i) 100% of the aggregate principal amount of the notes to be redeemed or (ii) the sum of the present values of the remaining scheduled payments, plus in each case, accrued and unpaid interest. Within three and six months to scheduled maturity, respectively, the bonds also feature a par call provision, which allows for the bonds to be redeemed at a price equal to 100% of the aggregate principal amount of the notes being redeemed, plus accrued and unpaid interest. +(3) +NIKE Logistics YK assumed a total of ¥13.0 billion in loans as part of its agreement to purchase a distribution center in Japan, which serves as collateral for the loans. These loans mature in equal quarterly installments during the period August 20, 2001 through November 20, 2020. +The scheduled maturity of Long-term debt in each of the years ending May 31, 2019 through 2023 are $6 million , $6 million , $3 million , $0 million and $500 million , respectively, at face value. +The Company’s Long-term debt is recorded at adjusted cost, net of unamortized premiums, discounts and debt issuance costs. The fair value of Long-term debt is estimated based upon quoted prices for similar instruments or quoted prices for identical instruments in inactive markets (Level 2). The fair value of the Company’s Long-term debt , including the current portion, was approximately $3,294 million at May 31, 2018 and $3,401 million at May 31, 2017 . +NOTE 9 — Income Taxes +Income before income taxes is as follows: +Year Ended May 31, +(In millions) +2018 +2017 +2016 +Income before income taxes: +United States +$ +744 +$ +1,240 +$ +956 +Foreign +3,581 +3,646 +3,667 +TOTAL INCOME BEFORE INCOME TAXES +$ +4,325 +$ +4,886 +$ +4,623 +59 +Table of Contents +The provision for income taxes is as follows: +Year Ended May 31, +(In millions) +2018 +2017 +2016 +Current: +United States +Federal +$ +1,167 +$ +398 +$ +304 +State +45 +82 +71 +Foreign +533 +439 +568 +Total +1,745 +919 +943 +Deferred: +United States +Federal +595 +(279 +) +(57 +) +State +25 +(9 +) +(16 +) +Foreign +27 +15 +(7 +) +Total +647 +(273 +) +(80 +) +TOTAL INCOME TAX EXPENSE +$ +2,392 +$ +646 +$ +863 +On December 22, 2017, the United States enacted the Tax Act, which significantly changes previous U.S. tax laws, including provisions for a one-time transition tax on deemed repatriation of undistributed foreign earnings, a reduction in the corporate tax rate from 35% to 21%, as well as other changes. Under U.S. GAAP, accounting for the effect of tax legislation is required in the period of enactment. For fiscal 2018, the change in the corporate tax rate, effective January 1, 2018, results in a blended U.S. federal statutory rate for the Company of approximately 29% . The Tax Act also includes provisions not yet effective for the Company, including a provision to tax global intangible low-taxed income (GILTI) of foreign subsidiaries, which will be effective for the Company beginning June 1, 2018. In accordance with U.S. GAAP, the Company has made an accounting policy election to treat taxes due under the GILTI provision as a current period expense. +A reconciliation from the U.S. statutory federal income tax rate to the effective income tax rate is as follows: +Year Ended May 31, +2018 +2017 +2016 +Federal income tax rate +29.2 +% +35.0 +% +35.0 +% +State taxes, net of federal benefit +1.2 +% +1.1 +% +1.1 +% +Foreign earnings +-18.4 +% +-20.7 +% +-18.2 +% +Transition tax related to the Tax Act +43.3 +% +— +% +— +% +Remeasurement of deferred tax assets and liabilities related to the Tax Act +3.7 +% +— +% +— +% +Excess tax benefits from share-based compensation +-5.3 +% +— +% +— +% +Resolution of a U.S. tax matter +— +% +-3.2 +% +— +% +Other, net +1.6 +% +1.0 +% +0.8 +% +EFFECTIVE INCOME TAX RATE +55.3 +% +13.2 +% +18.7 +% +The effective tax rate for the year ended May 31, 2018 was higher than the effective tax rate for the year ended May 31, 2017 primarily due to the enactment of the Tax Act, which included provisional expense of $1,875 million for the one-time transition tax on the deemed repatriation of undistributed foreign earnings, and $158 million due to the remeasurement of deferred tax assets and liabilities. The remaining provisions of the Tax Act, which were a net benefit to the effective tax rate, did not have a material impact on the Company’s Consolidated Financial Statements during fiscal 2018. Additionally, the increase in the effective tax rate was partially offset by the tax benefit from share-based compensation in the current period as a result of the adoption of ASU 2016-09 in the first quarter of fiscal 2018. During the years ended May 31, 2017 and 2016, income tax benefits of $177 million and $281 million , respectively, attributable to employee share-based compensation were allocated to Total shareholders’ equity. As a result of the adoption of ASU 2016-09, beginning in fiscal 2018, income tax benefits from share-based compensation are reported in the Consolidated Statements of Income. +The effective tax rate for the year ended May 31, 2017 was 550 basis points lower than the effective tax rate for the year ended May 31, 2016 primarily due to a one-time benefit in the first quarter of the fiscal year related to the resolution with the U.S. Internal Revenue Service (IRS) of a foreign tax credit matter and a decrease in foreign earnings taxed in the United States. +In accordance with U.S. Securities and Exchange Commission Staff Accounting Bulletin No. 118 (“SAB 118”), the provisional amounts recorded represent reasonable estimates of the effects of the Tax Act for which the analysis is not yet complete. As the Company completes its analysis of the Tax Act, including collecting, preparing and analyzing necessary information, performing and refining calculations and obtaining additional guidance from the IRS, U.S. Treasury Department, FASB or other standard setting and regulatory bodies on the Tax Act, it may record adjustments to the provisional amounts, which may be material. In accordance with SAB 118, the Company’s accounting for the tax effects of the Tax Act will be completed during the measurement period, which should not extend beyond one year from the enactment date. At May 31, 2018, there were no provisions for which the Company was unable to record a reasonable estimate of the impact. +60 +Table of Contents +Transition Tax +During the third quarter of fiscal 2018, the Company recorded a provisional expense of $2,010 million related to the one-time transition tax on the deemed repatriation of undistributed foreign earnings. During the fourth quarter of fiscal 2018, as a result of further analysis of the provisions of the Tax Act and additional guidance, this provisional tax expense decreased by $135 million . The transition tax is based on the Company’s estimated total post-1986 undistributed foreign earnings at a tax rate of 15.5% for foreign cash and certain other specified assets, and 8% on the remaining earnings. The Company expects to pay the transition tax in installments over an eight -year period. Accordingly, the non-current portion of the provisional expense for the transition tax of $1,078 million , net of applicable foreign tax credits the Company expects to utilize, has been recorded in Deferred income taxes and other liabilities on the Consolidated Balance Sheets. +Impact of Changes in the Tax Rate +As a result of the reduction in the corporate tax rate from 35% to 21%, the Company remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to be realized. The total provisional expense recorded during the period for the remeasurement of deferred tax assets and liabilities was $158 million . +Deferred tax assets and liabilities comprise the following: +As of May 31, +(In millions) +2018 +2017 +Deferred tax assets: +Inventories +$ +73 +$ +90 +Sales return reserves +104 +130 +Deferred compensation +250 +348 +Stock-based compensation +135 +225 +Reserves and accrued liabilities +102 +88 +Net operating loss carry-forwards +88 +84 +Foreign tax credit carry-forwards +— +208 +Undistributed earnings of foreign subsidiaries +— +173 +Other +106 +106 +Total deferred tax assets +858 +1,452 +Valuation allowance +(95 +) +(82 +) +Total deferred tax assets after valuation allowance +763 +1,370 +Deferred tax liabilities: +Foreign withholding tax on undistributed earnings of foreign subsidiaries +(155 +) +— +Property, plant and equipment +(167 +) +(254 +) +Intangibles +(77 +) +(90 +) +Other +(26 +) +(2 +) +Total deferred tax liabilities +(425 +) +(346 +) +NET DEFERRED TAX ASSET +$ +338 +$ +1,024 +The following is a reconciliation of the changes in the gross balance of unrecognized tax benefits: +As of May 31, +(In millions) +2018 +2017 +2016 +Unrecognized tax benefits, beginning of the period +$ +461 +$ +506 +$ +438 +Gross increases related to prior period tax positions +19 +31 +49 +Gross decreases related to prior period tax positions +(12 +) +(163 +) +(20 +) +Gross increases related to current period tax positions +249 +115 +81 +Settlements +— +(12 +) +(13 +) +Lapse of statute of limitations +(20 +) +(21 +) +(17 +) +Changes due to currency translation +1 +5 +(12 +) +UNRECOGNIZED TAX BENEFITS, END OF THE PERIOD +$ +698 +$ +461 +$ +506 +As of May 31, 2018 , total gross unrecognized tax benefits, excluding related interest and penalties, were $698 million , $478 million of which would affect the Company’s effective tax rate if recognized in future periods. +The Company recognizes interest and penalties related to income tax matters in Income tax expense . The liability for payment of interest and penalties decreased by $14 million during the year ended May 31, 2018 , decreased by $38 million during the year ended May 31, 2017 and increased by $45 million during the year ended May 31, 2016 . As of May 31, 2018 and 2017 , accrued interest and penalties related to uncertain tax positions were $157 million and $171 million , respectively (excluding federal benefit). +The Company is subject to taxation in the United States, as well as various state and foreign jurisdictions. The Company has closed all U.S. federal income tax matters through fiscal 2014, with the exception of certain transfer pricing adjustments. The Company is currently under audit by the IRS for fiscal years 2015 and 2016. +61 +Table of Contents +The Company’s major foreign jurisdictions, China and the Netherlands, have concluded substantially all income tax matters through calendar 2007 and fiscal 2012, respectively. Although the timing of resolution of audits is not certain, the Company evaluates all domestic and foreign audit issues in the aggregate, along with the expiration of applicable statutes of limitations, and estimates that it is reasonably possible the total gross unrecognized tax benefits could decrease by up to $163 million within the next 12 months. +The Company historically provided for U.S. income taxes on the undistributed earnings of foreign subsidiaries unless they were considered indefinitely reinvested outside the United States. At May 31, 2017, the indefinitely reinvested earnings in foreign subsidiaries upon which United States income taxes had not been provided were approximately $12.2 billion . These undistributed foreign earnings were subject to the U.S. one-time mandatory transition tax and are eligible to be repatriated to the U.S. without additional U.S. tax under the Tax Act. The Company has reevaluated its historic indefinite reinvestment assertion as a result of the enactment of the Tax Act and determined that any historical or future undistributed earnings of foreign subsidiaries are no longer considered to be indefinitely reinvested . +A portion of the Company’s foreign operations are benefiting from a tax holiday, which is set to expire in 2021 . This tax holiday may be extended when certain conditions are met or may be terminated early if certain conditions are not met. The tax benefit attributable to this tax holiday was $126 million , $187 million and $173 million for the fiscal years ended May 31, 2018 , 2017 and 2016 , respectively. The benefit of the tax holiday on diluted earnings per common share was $0.08 , $0.11 and $0.10 for the fiscal years ended May 31, 2018 , 2017 and 2016 , respectively. +Deferred tax assets at May 31, 2018 and 2017 were reduced by a valuation allowance primarily relating to tax benefits of certain entities with operating losses. There was a $13 million net increase in the valuation allowance for the year ended May 31, 2018 , compared to a $30 million net increase for the year ended May 31, 2017 and $43 million net increase for the year ended May 31, 2016 . +The Company no longer has recorded deferred tax assets for foreign tax credit carry-forwards; the $208 million recorded at May 31, 2017 was fully utilized to offset the impacts of transition tax. +The Company has available domestic and foreign loss carry-forwards of $289 million at May 31, 2018 . Such losses will expire as follows: +Year Ending May 31, +(In millions) +2019 +2020 +2021 +2022 +2023-2039 +Indefinite +Total +Net operating losses +$ +1 +$ +5 +$ +2 +$ +1 +$ +91 +$ +189 +$ +289 +NOTE 10 — Redeemable Preferred Stock +Sojitz America is the sole owner of the Company’s authorized redeemable preferred stock, $1 par value, which is redeemable at the option of Sojitz America or the Company at par value aggregating $0.3 million . A cumulative dividend of $0.10 per share is payable annually on May 31 and no dividends may be declared or paid on the common stock of the Company unless dividends on the redeemable preferred stock have been declared and paid in full. There have been no changes in the redeemable preferred stock in the three years ended May 31, 2018 , 2017 and 2016 . As the holder of the redeemable preferred stock, Sojitz America does not have general voting rights, but does have the right to vote as a separate class on the sale of all or substantially all of the assets of the Company and its subsidiaries, on merger, consolidation, liquidation or dissolution of the Company, or on the sale or assignment of the NIKE trademark for athletic footwear sold in the United States. The redeemable preferred stock has been fully issued to Sojitz America and is not blank check preferred stock. The Company’s articles of incorporation do not permit the issuance of additional preferred stock. +NOTE 11 — Common Stock and Stock-Based Compensation +The authorized number of shares of Class A Common Stock, no par value, and Class B Common Stock, no par value, are 400 million and 2,400 million , respectively. Each share of Class A Common Stock is convertible into one share of Class B Common Stock. Voting rights of Class B Common Stock are limited in certain circumstances with respect to the election of directors. There are no differences in the dividend and liquidation preferences or participation rights of the holders of Class A and Class B Common Stock. From time to time, the Company’s Board of Directors authorizes share repurchase programs for the repurchase of Class B Common Stock. The value of repurchased shares is deducted from Total shareholders‘ equity through allocation to Capital in excess of stated value and Retained earnings . +The NIKE, Inc. Stock Incentive Plan (the “Stock Incentive Plan”) provides for the issuance of up to 718 million previously unissued shares of Class B Common Stock in connection with equity awards granted under the Stock Incentive Plan. The Stock Incentive Plan authorizes the grant of non-statutory stock options, incentive stock options, stock appreciation rights, restricted stock, restricted stock units and performance-based awards. The exercise price for stock options and stock appreciation rights may not be less than the fair market value of the underlying shares on the date of grant. A committee of the Board of Directors administers the Stock Incentive Plan. The committee has the authority to determine the employees to whom awards will be made, the amount of the awards and the other terms and conditions of the awards. Substantially all stock option grants outstanding under the Stock Incentive Plan are granted in the first quarter of each fiscal year, vest ratably over four years and expire ten years from the date of grant. +62 +Table of Contents +The following table summarizes the Company’s total stock-based compensation expense recognized in Cost of sales or Operating overhead expense , as applicable: +Year Ended May 31, +(In millions) +2018 +2017 +2016 +Stock options (1) +$ +149 +$ +145 +$ +171 +ESPPs +34 +36 +31 +Restricted stock +35 +34 +34 +TOTAL STOCK-BASED COMPENSATION EXPENSE +$ +218 +$ +215 +$ +236 +(1) +Expense for stock options includes the expense associated with stock appreciation rights. Accelerated stock option expense is recorded for employees eligible for accelerated stock option vesting upon retirement. Accelerated stock option expense was $18 million , $14 million and $30 million for the years ended May 31, 2018 , 2017 and 2016 , respectively. +As of May 31, 2018 , the Company had $195 million of unrecognized compensation costs from stock options, net of estimated forfeitures, to be recognized in Cost of sales or Operating overhead expense , as applicable, over a weighted average remaining period of 2.0 years. +The weighted average fair value per share of the options granted during the years ended May 31, 2018 , 2017 and 2016 , computed as of the grant date using the Black-Scholes pricing model, was $9.82 , $9.38 and $12.66 , respectively. The weighted average assumptions used to estimate these fair values are as follows: +Year Ended May 31, +2018 +2017 +2016 +Dividend yield +1.2 +% +1.1 +% +1.0 +% +Expected volatility +16.4 +% +17.4 +% +23.6 +% +Weighted average expected life (in years) +6.0 +6.0 +5.8 +Risk-free interest rate +2.0 +% +1.3 +% +1.7 +% +The Company estimates the expected volatility based on the implied volatility in market traded options on the Company’s common stock with a term greater than one year, along with other factors. The weighted average expected life of options is based on an analysis of historical and expected future exercise patterns. The interest rate is based on the U.S. Treasury (constant maturity) risk-free rate in effect at the date of grant for periods corresponding with the expected term of the options. +The following summarizes the stock option transactions under the plan discussed above: +Shares (1) +Weighted Average +Option Price +(In millions) +Options outstanding May 31, 2015 +116.2 +$ +23.50 +Exercised +(22.5 +) +17.75 +Forfeited +(2.3 +) +39.96 +Granted +20.6 +56.41 +Options outstanding May 31, 2016 +112.0 +30.38 +Exercised +(17.1 +) +20.42 +Forfeited +(2.3 +) +49.47 +Granted +12.2 +57.81 +Options outstanding May 31, 2017 +104.8 +34.79 +Exercised +(24.1 +) +25.07 +Forfeited +(4.3 +) +55.31 +Granted +16.8 +59.08 +Options outstanding May 31, 2018 +93.2 +$ +40.73 +Options exercisable at May 31, +2016 +66.5 +$ +21.48 +2017 +67.9 +26.03 +2018 +58.5 +31.60 +(1) +Includes stock appreciation rights transactions. +The weighted average contractual life remaining for options outstanding and options exercisable at May 31, 2018 was 5.7 years and 4.4 years, respectively. The aggregate intrinsic value for options outstanding and exercisable at May 31, 2018 was $2,896 million and $2,352 million , respectively. The aggregate intrinsic value was the amount by which the market value of the underlying stock exceeded the exercise price of the options. The total intrinsic value of the options exercised during the years ended May 31, 2018 , 2017 and 2016 was $889 million , $594 million and $946 million , respectively. +63 +Table of Contents +In addition to the Stock Incentive Plan, the Company gives employees the right to purchase shares at a discount to the market price under employee stock purchase plans (ESPPs). Subject to the annual statutory limit, employees are eligible to participate through payroll deductions of up to 10% of their compensation. At the end of each six -month offering period, shares are purchased by the participants at 85% of the lower of the fair market value at the beginning or the end of the offering period. Employees purchased 3.1 million , 3.1 million and 2.5 million shares during each of the three years ended May 31, 2018 , 2017 and 2016 , respectively. +From time to time, the Company grants restricted stock and restricted stock units to key employees under the Stock Incentive Plan. The number of shares underlying such awards granted to employees during the years ended May 31, 2018 , 2017 and 2016 were 1.8 million , 0.4 million and 1.0 million , respectively, with weighted average values per share of $62.51 , $57.59 and $54.87 , respectively. Recipients of restricted stock are entitled to cash dividends and to vote their respective shares throughout the period of restriction. Recipients of restricted stock units are entitled to dividend equivalent cash payments upon vesting. The value of all grants of restricted stock and restricted stock units was established by the market price on the date of grant. During the years ended May 31, 2018 , 2017 and 2016 , the aggregate fair value of restricted stock and restricted stock units vested was $113 million , $60 million and $49 million , respectively, determined as of the date of vesting. As of May 31, 2018 , the Company had $104 million of unrecognized compensation costs from restricted stock and restricted stock units to be recognized in Operating overhead expense over a weighted average period of 2.4 years. +NOTE 12 — Earnings Per Share +The following is a reconciliation from basic earnings per common share to diluted earnings per common share. The computations of diluted earnings per common share excluded options, including shares under employee stock purchase plans, to purchase an additional 42.9 million , 30.5 million and 0.2 million shares of common stock outstanding for the years ended May 31, 2018 , 2017 and 2016 , respectively, because the options were anti-dilutive. +Year Ended May 31, +(In millions, except per share data) +2018 +2017 +2016 +Determination of shares: +Weighted average common shares outstanding +1,623.8 +1,657.8 +1,697.9 +Assumed conversion of dilutive stock options and awards +35.3 +34.2 +44.6 +DILUTED WEIGHTED AVERAGE COMMON SHARES OUTSTANDING +1,659.1 +1,692.0 +1,742.5 +Earnings per common share: +Basic +$ +1.19 +$ +2.56 +$ +2.21 +Diluted +$ +1.17 +$ +2.51 +$ +2.16 +NOTE 13 — Benefit Plans +The Company has a qualified 401(k) Savings and Profit Sharing Plan, in which all U.S. employees are able to participate. The Company matches a portion of employee contributions to the savings plan. Company contributions to the savings plan were $80 million , $75 million and $72 million and included in Cost of sales or Operating overhead expense , as applicable, for the years ended May 31, 2018 , 2017 and 2016 , respectively. The terms of the plan also allow for annual discretionary profit sharing contributions, as determined by the Board of Directors, to the accounts of eligible U.S. employees who work at least 1,000 hours in a year. Profit sharing contributions of $59 million , $68 million and $64 million were made to the plan and included in Cost of sales or Operating overhead expense , as applicable, for the years ended May 31, 2018 , 2017 and 2016 , respectively. +The Company also has a Long-Term Incentive Plan (LTIP) adopted by the Board of Directors and approved by shareholders in September 1997 and later amended and approved in fiscal 2007 and fiscal 2012. The Company recognized $33 million , $21 million and $85 million of Operating overhead expense related to cash awards under the LTIP during the years ended May 31, 2018 , 2017 and 2016 , respectively. +The Company allows certain highly compensated employees and non-employee directors of the Company to defer compensation under a nonqualified deferred compensation plan. Deferred compensation plan liabilities were $641 million and $569 million at May 31, 2018 and 2017 , respectively, and primarily classified as non-current in Deferred income taxes and other liabilities . +The Company has pension plans in various countries worldwide. The pension plans are only available to local employees and are generally government mandated. The liability related to the unfunded pension liabilities of the plans was $70 million and $107 million at May 31, 2018 and 2017 , respectively, and primarily classified as non-current in Deferred income taxes and other liabilities . +64 +Table of Contents +NOTE 14 — Accumulated Other Comprehensive Income +The changes in Accumulated other comprehensive income , net of tax, were as follows: +(In millions) +Foreign Currency Translation Adjustment (1) +Cash Flow Hedges +Net Investment Hedges (1) +Other +Total +Balance at May 31, 2017 +$ +(191 +) +$ +(52 +) +$ +115 +$ +(85 +) +$ +(213 +) +Other comprehensive income (loss): +Other comprehensive gains (losses) before reclassifications (2) +(6 +) +(52 +) +— +2 +(56 +) +Reclassifications to net income of previously deferred (gains) losses (3) +— +128 +— +32 +160 +Total other comprehensive income (loss) +(6 +) +76 +— +34 +104 +Reclassifications to retained earnings in accordance with ASU 2018-02 (4) +24 +(7 +) +— +— +17 +Balance at May 31, 2018 +$ +(173 +) +$ +17 +$ +115 +$ +(51 +) +$ +(92 +) +(1) +The accumulated foreign currency translation adjustment and net investment hedge gains/losses related to an investment in a foreign subsidiary are reclassified to Net income upon sale or upon complete or substantially complete liquidation of the respective entity. +(2) +Net of tax benefit (expense) of $ (24) million , $ (3) million , $ 0 million , $ (4) million and $ (31) million , respectively. +(3) +Net of tax (benefit) expense of $ 0 million , $ (3) million , $ 0 million , $ 0 million and $ (3) million , respectively. +(4) +Refer to Note 1 — Summary of Significant Accounting Policies for additional information on the adoption of ASU 2018-02 during the third quarter of fiscal 2018. +(In millions) +Foreign Currency Translation Adjustment (1) +Cash Flow Hedges +Net Investment Hedges (1) +Other +Total +Balance at May 31, 2016 +$ +(207 +) +$ +463 +$ +115 +$ +(53 +) +$ +318 +Other comprehensive income (loss): +Other comprehensive gains (losses) before reclassifications (2) +15 +118 +— +(14 +) +119 +Reclassifications to net income of previously deferred (gains) losses (3) +1 +(633 +) +— +(18 +) +(650 +) +Total other comprehensive income (loss) +16 +(515 +) +— +(32 +) +(531 +) +Balance at May 31, 2017 +$ +(191 +) +$ +(52 +) +$ +115 +$ +(85 +) +$ +(213 +) +(1) +The accumulated foreign currency translation adjustment and net investment hedge gains/losses related to an investment in a foreign subsidiary are reclassified to Net income upon sale or upon complete or substantially complete liquidation of the respective entity. +(2) +Net of tax benefit (expense) of $ 0 million , $ 24 million , $ 0 million , $ 3 million and $ 27 million , respectively. +(3) +Net of tax (benefit) expense of $ 0 million , $ (3) million , $ 0 million , $ (3) million and $ (6) million , respectively. +65 +Table of Contents +The following table summarizes the reclassifications from Accumulated other comprehensive income to the Consolidated Statements of Income: +Amount of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income into Income +Location of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income into Income +Year Ended May 31, +(In millions) +2018 +2017 +Gains (losses) on foreign currency translation adjustment +$ +— +$ +(1 +) +Other expense (income), net +Total before tax +— +(1 +) +Tax (expense) benefit +— +— +Gain (loss) net of tax +— +(1 +) +Gains (losses) on cash flow hedges: +Foreign exchange forwards and options +34 +96 +Revenues +Foreign exchange forwards and options +(90 +) +339 +Cost of sales +Foreign exchange forwards and options +1 +— +Total selling and administrative expense +Foreign exchange forwards and options +(69 +) +199 +Other expense (income), net +Interest rate swaps +(7 +) +(4 +) +Interest expense (income), net +Total before tax +(131 +) +630 +Tax (expense) benefit +3 +3 +Gain (loss) net of tax +(128 +) +633 +Gains (losses) on other +(32 +) +15 +Other expense (income), net +Total before tax +(32 +) +15 +Tax (expense) benefit +— +3 +Gain (loss) net of tax +(32 +) +18 +Total net gain (loss) reclassified for the period +$ +(160 +) +$ +650 +Refer to Note 16 — Risk Management and Derivatives for more information on the Company’s risk management program and derivatives. +NOTE 15 — Commitments and Contingencies +The Company leases retail store space, certain distribution and warehouse facilities, office space, equipment and other non-real estate assets under operating leases expiring from 1 to 17 years after May 31, 2018 . Rent expense, excluding executory costs, was $820 million , $731 million and $661 million for the years ended May 31, 2018 , 2017 and 2016 , respectively. Amounts of minimum future annual commitments under non-cancelable operating and capital leases are as follows (in millions): +2019 +2020 +2021 +2022 +2023 +Thereafter +Total +Operating leases +$ +589 +$ +523 +$ +472 +$ +412 +$ +361 +$ +1,608 +$ +3,965 +Capital leases and other financing obligations (1) +$ +44 +$ +37 +$ +40 +$ +38 +$ +36 +$ +229 +$ +424 +(1) +Capital leases and other financing obligations include payments related to build-to-suit lease arrangements. +As of May 31, 2018 and 2017 , the Company had letters of credit outstanding totaling $165 million and $152 million , respectively. These letters of credit were generally issued for the purchase of inventory and guarantees of the Company’s performance under certain self-insurance and other programs. +In connection with various contracts and agreements, the Company provides routine indemnification relating to the enforceability of intellectual property rights, coverage for legal issues that arise and other items where the Company is acting as the guarantor. Currently, the Company has several such agreements in place. However, based on the Company’s historical experience and the estimated probability of future loss, the Company has determined the fair value of such indemnification is not material to the Company’s financial position or results of operations. +In the ordinary course of its business, the Company is involved in various legal proceedings involving contractual and employment relationships, product liability claims, trademark rights and a variety of other matters. While the Company cannot predict the outcome of its pending legal matters with certainty, the Company does not believe any currently identified claim, proceeding or litigation, either individually or in aggregate, will have a material impact on the Company’s results of operations, financial position or cash flows. +NOTE 16 — Risk Management and Derivatives +The Company is exposed to global market risks, including the effect of changes in foreign currency exchange rates and interest rates, and uses derivatives to manage financial exposures that occur in the normal course of business. The Company does not hold or issue derivatives for trading or speculative purposes. +The Company may elect to designate certain derivatives as hedging instruments under the accounting standards for derivatives and hedging. The Company formally documents all relationships between designated hedging instruments and hedged items as well as its risk management objectives and strategies for undertaking hedge transactions. This process includes linking all derivatives designated as hedges to either recognized assets or liabilities or forecasted transactions. +66 +Table of Contents +The majority of derivatives outstanding as of May 31, 2018 are designated as foreign currency cash flow hedges, primarily for Euro/U.S. Dollar, British Pound/Euro and Japanese Yen/U.S. Dollar currency pairs . All derivatives are recognized on the Consolidated Balance Sheets at fair value and classified based on the instrument’s maturity date. +The following table presents the fair values of derivative instruments included within the Consolidated Balance Sheets as of May 31, 2018 and 2017 : +Derivative Assets +Derivative Liabilities +(In millions) +Balance Sheet +Location +2018 +2017 +Balance Sheet +Location +2018 +2017 +Derivatives formally designated as hedging instruments: +Foreign exchange forwards and options +Prepaid expenses and other current assets +$ +118 +$ +113 +Accrued liabilities +$ +156 +$ +59 +Foreign exchange forwards and options +Deferred income taxes and other assets +152 +13 +Deferred income taxes and other liabilities +— +73 +Total derivatives formally designated as hedging instruments +270 +126 +156 +132 +Derivatives not designated as hedging instruments: +Foreign exchange forwards and options +Prepaid expenses and other current assets +119 +103 +Accrued liabilities +26 +107 +Embedded derivatives +Prepaid expenses and other current assets +3 +1 +Accrued liabilities +2 +2 +Foreign exchange forwards and options +Deferred income taxes and other assets +— +2 +Deferred income taxes and other liabilities +— +7 +Embedded derivatives +Deferred income taxes and other assets +8 +9 +Deferred income taxes and other liabilities +6 +6 +Total derivatives not designated as hedging instruments +130 +115 +34 +122 +TOTAL DERIVATIVES +$ +400 +$ +241 +$ +190 +$ +254 +The following tables present the amounts affecting the Consolidated Statements of Income for the years ended May 31, 2018 , 2017 and 2016 : +(In millions) +Amount of Gain (Loss) +Recognized in Other +Comprehensive Income +on Derivatives (1) +Amount of Gain (Loss) +Reclassified from Accumulated +Other Comprehensive Income into Income (1) +Year Ended May 31, +Location of Gain (Loss) Reclassified From +Accumulated Other Comprehensive Income into Income +Year Ended May 31, +2018 +2017 +2016 +2018 +2017 +2016 +Derivatives designated as cash flow hedges: +Foreign exchange forwards and options +$ +19 +$ +72 +$ +90 +Revenues +$ +34 +$ +96 +$ +(88 +) +Foreign exchange forwards and options +(50 +) +43 +(57 +) +Cost of sales +(90 +) +339 +586 +Foreign exchange forwards and options +1 +(4 +) +— +Total selling and administrative expense +1 +— +— +Foreign exchange forwards and options +(19 +) +37 +(25 +) +Other expense (income), net +(69 +) +199 +219 +Interest rate swaps (2) +— +(54 +) +(83 +) +Interest expense (income), net +(7 +) +(4 +) +— +Total designated cash flow hedges +$ +(49 +) +$ +94 +$ +(75 +) +$ +(131 +) +$ +630 +$ +717 +(1) +For the years ended May 31, 2018 , 2017 and 2016 , the amounts recorded in Other expense (income), net as a result of hedge ineffectiveness and the discontinuance of cash flow hedges because the forecasted transactions were no longer probable of occurring were immaterial. +(2) +Gains and losses associated with terminated interest rate swaps, which were previously designated as cash flow hedges and recorded in Accumulated other comprehensive income, will be released through Interest expense (income), net over the term of the issued debt. +67 +Table of Contents +Amount of Gain (Loss) Recognized in +Income on Derivatives +Location of Gain (Loss) +Recognized in Income on Derivatives +Year Ended May 31, +(In millions) +2018 +2017 +2016 +Derivatives designated as fair value hedges: +Interest rate swaps (1) +$ +— +$ +— +$ +2 +Interest expense (income), net +Derivatives not designated as hedging instruments: +Foreign exchange forwards and options +(57 +) +(44 +) +(68 +) +Other expense (income), net +Embedded derivatives +$ +(4 +) +$ +(2 +) +$ +(2 +) +Other expense (income), net +(1) +All interest rate swaps designated as fair value hedges meet the shortcut method requirements under the accounting standards for derivatives and hedging. Accordingly, changes in the fair values of the interest rate swaps are considered to exactly offset changes in the fair value of the underlying long-term debt. Refer to “Fair Value Hedges” in this note for additional detail. +Cash Flow Hedges +All changes in fair value of derivatives designated as cash flow hedges, excluding any ineffective portion, are recorded in Accumulated other comprehensive income until Net income is affected by the variability of cash flows of the hedged transaction. Effective hedge results are classified within the Consolidated Statements of Income in the same manner as the underlying exposure. The ineffective portion of the unrealized gains and losses on these contracts, if any, is recorded immediately in earnings. Derivative instruments designated as cash flow hedges must be discontinued when it is no longer probable the forecasted hedged transaction will occur in the initially identified time period. The gains and losses associated with discontinued derivative instruments in Accumulated other comprehensive income will be recognized immediately in Other expense (income), net , if it is probable the forecasted hedged transaction will not occur by the end of the initially identified time period or within an additional two -month period thereafter. In all situations in which hedge accounting is discontinued and the derivative remains outstanding, the Company will account for the derivative as an undesignated instrument as discussed below. +The purpose of the Company ’ s foreign exchange risk management program is to lessen both the positive and negative effects of currency fluctuations on the Company ’ s consolidated results of operations, financial position and cash flows. Foreign currency exposures the Company may elect to hedge in this manner include product cost exposures, non-functional currency denominated external and intercompany revenues, selling and administrative expenses, investments in U.S. Dollar-denominated available-for-sale debt securities and certain other intercompany transactions. +Product cost exposures are primarily generated through non-functional currency denominated product purchases and the foreign currency adjustment program described below. NIKE entities primarily purchase products in two ways: (1) Certain NIKE entities purchase product from the NIKE Trading Company (NTC), a wholly owned sourcing hub that buys NIKE branded products from third party factories, predominantly in U.S. Dollars. The NTC, whose functional currency is the U.S. Dollar, then sells the product to NIKE entities in their respective functional currencies. NTC sales to a NIKE entity with a different functional currency results in a foreign currency exposure for the NTC. (2) Other NIKE entities purchase product directly from third party factories in U.S. Dollars. These purchases generate a foreign currency exposure for those NIKE entities with a functional currency other than the U.S. Dollar. +The Company operates a foreign currency adjustment program with certain factories. The program is designed to more effectively manage foreign currency risk by assuming certain of the factories’ foreign currency exposures, some of which are natural offsets to the Company ’ s existing foreign currency exposures. Under this program, the Company’s payments to these factories are adjusted for rate fluctuations in the basket of currencies (“factory currency exposure index”) in which the labor, materials and overhead costs incurred by the factories in the production of NIKE branded products (“factory input costs”) are denominated. For the portion of the indices denominated in the local or functional currency of the factory, the Company may elect to place formally designated cash flow hedges. For all currencies within the indices, excluding the U.S. Dollar and the local or functional currency of the factory, an embedded derivative contract is created upon the factory’s acceptance of NIKE’s purchase order. Embedded derivative contracts are separated from the related purchase order, as further described within the Embedded Derivatives section below. +The Company’s policy permits the utilization of derivatives to reduce its foreign currency exposures where internal netting or other strategies cannot be effectively employed. Typically, the Company may enter into hedge contracts starting up to 12 to 24 months in advance of the forecasted transaction and may place incremental hedges up to 100% of the exposure by the time the forecasted transaction occurs. The total notional amount of outstanding foreign currency derivatives designated as cash flow hedges was $12.2 billion as of May 31, 2018 . +As of May 31, 2018 , $96 million of deferred net gains (net of tax) on both outstanding and matured derivatives in Accumulated other comprehensive income are expected to be reclassified to Net income during the next 12 months concurrent with the underlying hedged transactions also being recorded in Net income . Actual amounts ultimately reclassified to Net income are dependent on the exchange rates in effect when derivative contracts currently outstanding mature. As of May 31, 2018 , the maximum term over which the Company is hedging exposures to the variability of cash flows for its forecasted transactions was 24 months. +Fair Value Hedges +The Company has, in the past, been exposed to the risk of changes in the fair value of certain fixed-rate debt attributable to changes in interest rates. Derivatives used by the Company to hedge this risk are receive-fixed, pay-variable interest rate swaps. All interest rate swaps designated as fair value hedges of the related long-term debt meet the shortcut method requirements under U.S. GAAP. Accordingly, changes in the fair values of the interest rate swaps are considered to exactly offset changes in the fair value of the underlying long-term debt. The Company recorded no ineffectiveness from its interest rate swaps designated as fair value hedges for the years ended May 31, 2018 , 2017 or 2016 . The Company had no interest rate swaps designated as fair value hedges as of May 31, 2018. +68 +Table of Contents +Net Investment Hedges +The Company has, in the past, hedged and may, in the future, hedge the risk of variability in foreign currency-denominated net investments in wholly-owned international operations. All changes in fair value of the derivatives designated as net investment hedges, except ineffective portions, are reported in Accumulated other comprehensive income along with the foreign currency translation adjustments on those investments. The ineffective portion of the unrealized gains and losses on these contracts, if any, are recorded immediately in earnings. The Company recorded no ineffectiveness from net investment hedges for the years ended May 31, 2018 , 2017 or 2016 . The Company had no outstanding net investment hedges as of May 31, 2018 . +Undesignated Derivative Instruments +The Company may elect to enter into foreign exchange forwards to mitigate the change in fair value of specific assets and liabilities on the Consolidated Balance Sheets and/or the embedded derivative contracts. These undesignated instruments are recorded at fair value as a derivative asset or liability on the Consolidated Balance Sheets with their corresponding change in fair value recognized in Other expense (income), net , together with the re-measurement gain or loss from the hedged balance sheet position and/or embedded derivative contract. The total notional amount of outstanding undesignated derivative instruments was $6.1 billion as of May 31, 2018 . +Embedded Derivatives +As part of the foreign currency adjustment program described above, an embedded derivative contract is created upon the factory’s acceptance of NIKE’s purchase order for currencies within the factory currency exposure indices that are neither the U.S. Dollar nor the local or functional currency of the factory. In addition, embedded derivative contracts are created when the Company enters into certain other contractual agreements which have payments that are indexed to currencies that are not the functional currency of either substantial party to the contracts. Embedded derivative contracts are treated as foreign currency forward contracts that are bifurcated from the related purchase order and recorded at fair value as a derivative asset or liability on the Consolidated Balance Sheets with their corresponding change in fair value recognized in Other expense (income), net , through the date the foreign currency fluctuations cease to exist. +At May 31, 2018 , the total notional amount of all embedded derivatives outstanding was approximately $260 million . +Credit Risk +The Company is exposed to credit-related losses in the event of nonperformance by counterparties to hedging instruments. The counterparties to all derivative transactions are major financial institutions with investment grade credit ratings; however, this does not eliminate the Company’s exposure to credit risk with these institutions. This credit risk is limited to the unrealized gains in such contracts should any of these counterparties fail to perform as contracted. To manage this risk, the Company has established strict counterparty credit guidelines that are continually monitored. +The Company’s derivative contracts contain credit risk-related contingent features designed to protect against significant deterioration in counterparties’ creditworthiness and their ultimate ability to settle outstanding derivative contracts in the normal course of business. The Company’s bilateral credit-related contingent features generally require the owing entity, either the Company or the derivative counterparty, to post collateral for the portion of the fair value in excess of $50 million should the fair value of outstanding derivatives per counterparty be greater than $50 million . Additionally, a certain level of decline in credit rating of either the Company or the counterparty could also trigger collateral requirements. As of May 31, 2018 , the Company was in compliance with all credit risk-related contingent features and had no derivative instruments with credit risk-related contingent features in a net liability position. Accordingly, the Company was not required to post any collateral as a result of these contingent features. Further, as of May 31, 2018 , the Company had received $23 million of cash collateral from various counterparties to its derivative contracts (refer to Note 6 — Fair Value Measurements ). The Company considers the impact of the risk of counterparty default to be immaterial . +NOTE 17 — Operating Segments and Related Information +The Company’s operating segments are evidence of the structure of the Company’s internal organization. The NIKE Brand segments are defined by geographic regions for operations participating in NIKE Brand sales activity. +Each NIKE Brand geographic segment operates predominantly in one industry: the design, development, marketing and selling of athletic footwear, apparel and equipment. In June 2017, NIKE, Inc. announced a new company alignment designed to allow NIKE to better serve the consumer personally, at scale. As a result of this organizational realignment, the Company’s reportable operating segments for the NIKE Brand are: North America; Europe, Middle East & Africa; Greater China; and Asia Pacific & Latin America, and include results for the NIKE, Jordan and Hurley brands. Certain prior year amounts have been reclassified to conform to fiscal 2018 presentation. This includes reclassified operating segment data to reflect the changes in the Company’s operating structure, which became effective June 1, 2017. These changes had no impact on previously reported consolidated statements of income, balance sheets, statements of cash flows or statements of shareholders’ equity. +The Company’s NIKE Direct operations are managed within each NIKE Brand geographic operating segment. Converse is also a reportable segment for the Company, and operates in one industry: the design, marketing, licensing and selling of casual sneakers, apparel and accessories. +Global Brand Divisions is included within the NIKE Brand for presentation purposes to align with the way management views the Company. Global Brand Divisions primarily represents NIKE Brand licensing businesses that are not part of a geographic operating segment, and demand creation, operating overhead and product creation and design expenses that are centrally managed for the NIKE Brand. +Corporate consists largely of unallocated general and administrative expenses, including expenses associated with centrally managed departments; depreciation and amortization related to the Company’s headquarters; unallocated insurance, benefit and compensation programs, including stock-based compensation; and certain foreign currency gains and losses, including certain hedge gains and losses. +69 +Table of Contents +The primary financial measure used by the Company to evaluate performance of individual operating segments is earnings before interest and taxes (commonly referred to as “EBIT”), which represents Net income before Interest expense (income), net and Income tax expense in the Consolidated Statements of Income. +As part of the Company’s centrally managed foreign exchange risk management program, standard foreign currency rates are assigned twice per year to each NIKE Brand entity in the Company’s geographic operating segments and to Converse. These rates are set approximately nine and twelve months in advance of the future selling seasons to which they relate (specifically, for each currency, one standard rate applies to the fall and holiday selling seasons and one standard rate applies to the spring and summer selling seasons) based on average market spot rates in the calendar month preceding the date they are established. Inventories and Cost of sales for geographic operating segments and Converse reflect the use of these standard rates to record non-functional currency product purchases in the entity’s functional currency. Differences between assigned standard foreign currency rates and actual market rates are included in Corporate, together with foreign currency hedge gains and losses generated from the Company’s centrally managed foreign exchange risk management program and other conversion gains and losses. +Accounts receivable, net , Inventories and Property, plant and equipment, net for operating segments are regularly reviewed by management and, therefore, are provided below. Additions to long-lived assets as presented in the following table represent capital expenditures. +70 +Table of Contents +Year Ended May 31, +(In millions) +2018 +2017 +2016 +REVENUES +North America +$ +14,855 +$ +15,216 +$ +14,764 +Europe, Middle East & Africa +9,242 +7,970 +7,568 +Greater China +5,134 +4,237 +3,785 +Asia Pacific & Latin America +5,166 +4,737 +4,317 +Global Brand Divisions +88 +73 +73 +Total NIKE Brand +34,485 +32,233 +30,507 +Converse +1,886 +2,042 +1,955 +Corporate +26 +75 +(86 +) +TOTAL NIKE, INC. REVENUES +$ +36,397 +$ +34,350 +$ +32,376 +EARNINGS BEFORE INTEREST AND TAXES +North America +$ +3,600 +$ +3,875 +$ +3,763 +Europe, Middle East & Africa +1,587 +1,507 +1,787 +Greater China +1,807 +1,507 +1,372 +Asia Pacific & Latin America +1,189 +980 +1,002 +Global Brand Divisions +(2,658 +) +(2,677 +) +(2,596 +) +Total NIKE Brand +5,525 +5,192 +5,328 +Converse +310 +477 +487 +Corporate +(1,456 +) +(724 +) +(1,173 +) +Total NIKE, Inc. Earnings Before Interest and Taxes +4,379 +4,945 +4,642 +Interest expense (income), net +54 +59 +19 +TOTAL NIKE, INC. INCOME BEFORE INCOME TAXES +$ +4,325 +$ +4,886 +$ +4,623 +ADDITIONS TO LONG-LIVED ASSETS +North America +$ +196 +$ +223 +$ +242 +Europe, Middle East & Africa +240 +173 +234 +Greater China +76 +51 +44 +Asia Pacific & Latin America +49 +59 +62 +Global Brand Divisions +286 +278 +258 +Total NIKE Brand +847 +784 +840 +Converse +22 +30 +39 +Corporate +325 +387 +312 +TOTAL ADDITIONS TO LONG-LIVED ASSETS +$ +1,194 +$ +1,201 +$ +1,191 +DEPRECIATION +North America +$ +160 +$ +140 +$ +133 +Europe, Middle East & Africa +116 +106 +85 +Greater China +56 +54 +48 +Asia Pacific & Latin America +55 +54 +42 +Global Brand Divisions +217 +233 +230 +Total NIKE Brand +604 +587 +538 +Converse +33 +28 +27 +Corporate +110 +91 +84 +TOTAL DEPRECIATION +$ +747 +$ +706 +$ +649 +71 +Table of Contents +As of May 31, +(In millions) +2018 +2017 +ACCOUNTS RECEIVABLE, NET +North America +$ +1,443 +$ +1,798 +Europe, Middle East & Africa +870 +690 +Greater China +101 +102 +Asia Pacific & Latin America +720 +693 +Global Brand Divisions +102 +86 +Total NIKE Brand +3,236 +3,369 +Converse +240 +297 +Corporate +22 +11 +TOTAL ACCOUNTS RECEIVABLE, NET +$ +3,498 +$ +3,677 +INVENTORIES +North America +$ +2,270 +$ +2,218 +Europe, Middle East & Africa +1,433 +1,327 +Greater China +580 +463 +Asia Pacific & Latin America +687 +694 +Global Brand Divisions +91 +68 +Total NIKE Brand +5,061 +4,770 +Converse +268 +286 +Corporate +(68 +) +(1 +) +TOTAL INVENTORIES +$ +5,261 +$ +5,055 +PROPERTY, PLANT AND EQUIPMENT, NET +North America +$ +848 +$ +819 +Europe, Middle East & Africa +849 +709 +Greater China +256 +225 +Asia Pacific & Latin America +339 +340 +Global Brand Divisions +597 +533 +Total NIKE Brand +2,889 +2,626 +Converse +115 +125 +Corporate +1,450 +1,238 +TOTAL PROPERTY, PLANT AND EQUIPMENT, NET +$ +4,454 +$ +3,989 +Revenues by Major Product Lines +Revenues from external customers for NIKE Brand products are attributable to sales of footwear, apparel and equipment. Other revenues from external customers consist primarily of sales by Converse. +Year Ended May 31, +(In millions) +2018 +2017 +2016 +Footwear +$ +22,268 +$ +21,081 +$ +19,871 +Apparel +10,733 +9,654 +9,067 +Equipment +1,396 +1,425 +1,496 +Other +2,000 +2,190 +1,942 +TOTAL NIKE, INC. REVENUES +$ +36,397 +$ +34,350 +$ +32,376 +Revenues and Long-Lived Assets by Geographic Area +After allocation of revenues for Global Brand Divisions, Converse and Corporate to geographical areas based on the location where the sales originated, revenues by geographical area are essentially the same as reported above for the NIKE Brand operating segments with the exception of the United States. Revenues derived in the United States were $15,314 million , $15,778 million and $15,304 million for the years ended May 31, 2018 , 2017 and 2016 , respectively. The Company’s largest concentrations of long-lived assets primarily consist of the Company’s world headquarters and distribution facilities in the United States and distribution facilities in Belgium, China and Japan. Long-lived assets attributable to operations in the United States, which are primarily composed of net property, plant & equipment, were $2,930 million and $2,629 million at May 31, 2018 and 2017 , respectively. Long-lived assets attributable to operations in Belgium were $534 million and $390 million at May 31, 2018 and 2017 , respectively. Long-lived assets attributable to operations in China were $262 million and $232 million at May 31, 2018 and 2017 , respectively. Long-lived assets attributable to operations in Japan were $237 million and $223 million at May 31, 2018 and 2017 , respectively. +72 +Table of Contents +Major Customers +No customer accounted for 10% or more of the Company’s net revenues during the years ended May 31, 2018 , 2017 and 2016 . +ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure +There has been no change of accountants nor any disagreements with accountants on any matter of accounting principles or practices or financial statement disclosure required to be reported under this Item. +ITEM 9A. Controls and Procedures +We maintain disclosure controls and procedures designed to ensure information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. +We carry out a variety of ongoing procedures, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, to evaluate the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of May 31, 2018 . +“Management’s Annual Report on Internal Control Over Financial Reporting” is included in Item 8 of this Report. +We have continued several transformation initiatives to centralize and simplify our business processes and systems. These are long-term initiatives, which we believe will enhance our internal control over financial reporting due to increased automation and further integration of related processes. We will continue to monitor our internal control over financial reporting for effectiveness throughout the transformation. +There have not been any other changes in our internal control over financial reporting during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. +ITEM 9B. Other Information +On July 20, 2018, the Compensation Committee (the “Committee”) of the Board of Directors of NIKE, Inc. (the “Company”), approved a form of discretionary performance award agreement (the “DPA”) to enable the Company to award cash incentives to employees in recognition of Company and individual performance. The form of DPA is intended to enhance the Company’s ability to pay for performance on a case-by-case basis by supplementing the Company’s existing performance-based compensation plans, including the Amended and Restated Long-Term Incentive Plan (“LTIP”) and the Executive Performance Sharing Plan. The foregoing is qualified in its entirety by reference to the form of DPA, which is filed as Exhibit 10.22 hereto and incorporated by reference herein. +Additionally, on July 20, 2018, the Committee approved awards under the form of DPA to the Company’s continuing named executive officers (collectively, the “Officers”) as follows: Mark G. Parker, $1,295,000; Andrew Campion, $277,500; Eric D. Sprunk, $277,500; Hilary K. Krane, $185,000; and John F. Slusher, $185,000. As further described in the Company’s 2018 Proxy Statement, the Committee adjusted the payouts for LTIP awards covering the fiscal 2016-2018 performance period to primarily account for the impact of the Tax Cuts and Jobs Act. Because the terms of the LTIP awards, as applicable to the Company's named executive officers, did not contemplate the Tax Cuts and Jobs Act, the Committee determined to award these one-time DPA grants so as to put the Officers in the same position as the non-executive officer LTIP participants. +73 +Table of Contents +PART III +ITEM 10. Directors, Executive Officers and Corporate Governance +The information required by Item 401 of Regulation S-K regarding directors is included under “Election of Directors” in the definitive Proxy Statement for our 2018 Annual Meeting of Shareholders and is incorporated herein by reference. The information required by Item 401 of Regulation S-K regarding executive officers is included under “Executive Officers of the Registrant” in Item 1 of this Report. The information required by Item 405 of Regulation S-K is included under “Election of Directors — Section 16(a) Beneficial Ownership Reporting Compliance” in the definitive Proxy Statement for our 2018 Annual Meeting of Shareholders and is incorporated herein by reference. The information required by Item 406 of Regulation S-K is included under “Corporate Governance — Code of Business Conduct and Ethics” in the definitive Proxy Statement for our 2018 Annual Meeting of Shareholders and is incorporated herein by reference. The information required by Items 407(d)(4) and (d)(5) of Regulation S-K regarding the Audit & Finance Committee of the Board of Directors is included under “Corporate Governance — Board Committees” in the definitive Proxy Statement for our 2018 Annual Meeting of Shareholders and is incorporated herein by reference. +ITEM 11. Executive Compensation +The information required by Items 402, 407(e)(4) and 407(e)(5) of Regulation S-K regarding executive compensation is included under “Election of Directors — Director Compensation for Fiscal 2018 ,” “Compensation Discussion and Analysis,” “Executive Compensation,” “Election of Directors — Compensation Committee Interlocks and Insider Participation,” and “Compensation Committee Report” in the definitive Proxy Statement for our 2018 Annual Meeting of Shareholders and is incorporated herein by reference. +ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters +The information required by Item 201(d) of Regulation S-K is included under “Executive Compensation — Equity Compensation Plans” in the definitive Proxy Statement for our 2018 Annual Meeting of Shareholders and is incorporated herein by reference. The information required by Item 403 of Regulation S-K is included under “Election of Directors — Stock Holdings of Certain Owners and Management” in the definitive Proxy Statement for our 2018 Annual Meeting of Shareholders and is incorporated herein by reference. +ITEM 13. Certain Relationships and Related Transactions and Director Independence +The information required by Items 404 and 407(a) of Regulation S-K is included under “Election of Directors — Transactions with Related Persons” and “Corporate Governance — Director Independence” in the definitive Proxy Statement for our 2018 Annual Meeting of Shareholders and is incorporated herein by reference. +ITEM 14. Principal Accountant Fees and Services +The information required by Item 9(e) of Schedule 14A is included under “Ratification of Independent Registered Public Accounting Firm” in the definitive Proxy Statement for our 2018 Annual Meeting of Shareholders and is incorporated herein by reference. +74 +Table of Contents +PART IV +ITEM 15. Exhibits and Financial Statement Schedules +(a) +The following documents are filed as part of this report: +Form 10-K +Page No. +1. +Financial Statements: +Report of Independent Registered Public Accounting Firm +43 +Consolidated Statements of Income for each of the three years ended May 31, 2018, May 31, 2017 and May 31, 2016 +44 +Consolidated Statements of Comprehensive Income for each of the three years ended May 31, 2018, May 31, 2017 and May 31, 2016 +45 +Consolidated Balance Sheets at May 31, 2018 and May 31, 2017 +46 +Consolidated Statements of Cash Flows for each of the three years ended May 31, 2018, May 31, 2017 and May 31, 2016 +47 +Consolidated Statements of Shareholders’ Equity for each of the three years ended May 31, 2018, May 31, 2017 and May 31, 2016 +48 +Notes to Consolidated Financial Statements +49 +2. +Financial Statement Schedule: +II — Valuation and Qualifying Accounts for the years ended May 31, 2018, 2017 and 2016 +77 +All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. +3. +Exhibits: +3.1 +Restated Articles of Incorporation, as amended (incorporated by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended November 30, 2015). +3.2 +Fifth Restated Bylaws, as amended (incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K filed November 17, 2017). +4.1 +Restated Articles of Incorporation, as amended (see Exhibit 3.1). +4.2 +Fifth Restated Bylaws, as amended (see Exhibit 3.2). +4.3 +Indenture dated as of April 26, 2013, by and between NIKE, Inc. and Deutsche Bank Trust Company Americas, as trustee (incorporated by reference to Exhibit 4.1 to the Company’s Form 8-K filed April 26, 2013). +4.4 +Second Supplemental Indenture, dated as of October 29, 2015, by and between NIKE, Inc. and Deutsche Bank Trust Company Americas, as trustee, including the form of 3.875% Notes due 2045 (incorporated by reference to Exhibit 4.2 to the Company’s Form 8-K filed October 29, 2015). +4.5 +Third Supplemental Indenture, dated as of October 21, 2016, by and between NIKE, Inc. and Deutsche Bank Trust Company Americas, as trustee, including the form of 2.375% Notes due 2026 and form of 3.375% Notes due 2046 (incorporated by reference to Exhibit 4.2 to the Company’s Form 8-K filed October 21, 2016). +10.1 +Form of Non-Statutory Stock Option Agreement for options granted to non-employee directors prior to May 31, 2010 under the 1990 Stock Incentive Plan (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed June 21, 2005).* +10.2 +Form of Non-Statutory Stock Option Agreement for options granted to non-employee directors after May 31, 2010 under the 1990 Stock Incentive Plan (incorporated by reference to Exhibit 10.2 to the Company’s Annual Report on Form 10-K for the fiscal year ended May 31, 2010).* +10.3 +Form of Non-Statutory Stock Option Agreement for options granted to executives prior to May 31, 2010 under the 1990 Stock Incentive Plan (incorporated by reference to Exhibit 10.1 to the Company’s Annual Report on Form 10-K for the fiscal year ended May 31, 2009).* +10.4 +Form of Restricted Stock Agreement for non-employee directors under the 1990 Stock Incentive Plan (incorporated by reference to Exhibit 10.4 to the Company’s Annual Report on Form 10-K for the fiscal year ended May 31, 2014).* +10.5 +Form of Non-Statutory Stock Option Agreement for options granted to executives after May 31, 2010 under the Stock Incentive Plan (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended February 28, 2018).* +75 +Table of Contents +10.6 +Form of Indemnity Agreement entered into between the Company and each of its officers and directors (incorporated by reference to Exhibit 10.2 to the Company’s Annual Report on Form 10-K for the fiscal year ended May 31, 2008).* +10.7 +NIKE, Inc. 1990 Stock Incentive Plan (incorporated by reference to Exhibit 10.7 to the Company’s Annual Report on Form 10-K for the fiscal year ended May 31, 2014).* +10.8 +NIKE, Inc. Executive Performance Sharing Plan (incorporated by reference to Exhibit 10.7 to the Company’s Annual Report on Form 10-K for the fiscal year ended May 31, 2012).* +10.9 +NIKE, Inc. Long-Term Incentive Plan (incorporated by reference to Exhibit 10.9 to the Company’s Annual Report on Form 10-K for the fiscal year ended May 31, 2015).* +10.10 +NIKE, Inc. Deferred Compensation Plan (Amended and Restated effective April 1, 2013) (incorporated by reference to Exhibit 10.9 to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 2013).* +10.11 +NIKE, Inc. Deferred Compensation Plan (Amended and Restated effective June 1, 2004) (applicable to amounts deferred before January 1, 2005) (incorporated by reference to Exhibit 10.6 to the Company’s Annual Report on Form 10-K for the fiscal year ended May 31, 2004).* +10.12 +Amendment No. 1 effective January 1, 2008 to the NIKE, Inc. Deferred Compensation Plan (June 1, 2004 Restatement) (incorporated by reference to Exhibit 10.9 to the Company’s Annual Report on Form 10-K for the fiscal year ended May 31, 2009).* +10.13 +NIKE, Inc. Foreign Subsidiary Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended November 30, 2008).* +10.14 +Amended and Restated Covenant Not to Compete and Non-Disclosure Agreement between NIKE, Inc. and Mark G. Parker dated July 24, 2008 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed July 24, 2008).* +10.15 +Form of Restricted Stock Agreement under the Stock Incentive Plan for awards after May 31, 2010 (incorporated by reference to Exhibit 10.15 to the Company’s Annual Report on Form 10-K for the fiscal year ended May 31, 2015).* +10.16 +Form of Restricted Stock Unit Agreement under the Stock Incentive Plan (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended February 28, 2018).* +10.17 +Form of Covenant Not to Compete and Non-Disclosure Agreement between NIKE, Inc. and its executive officers (other than Mark G. Parker).* +10.18 +Policy for Recoupment of Incentive Compensation (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed July 20, 2010).* +10.19 +Credit Agreement dated as of August 28, 2015 among NIKE, Inc., Bank of America, N.A., as Administrative Agent, Citibank N.A., as Syndication Agent, Deutsche Bank A.G. New York Branch and HSBC Bank USA, National Association, as Co-Documentation Agents, and the other Banks named therein (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed September 2, 2015). +10.20 +Executive Performance Sharing Plan (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed September 23, 2015).* +10.21 +Stock Incentive Plan, as amended (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed September 23, 2015).* +10.22 +Form of Discretionary Performance Award Agreement.* +12.1 +Computation of Ratio of Earnings to Fixed Charges. +21 +Subsidiaries of the Registrant. +23 +Consent of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm (included within this Annual Report on Form 10-K). +31.1 +Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer. +31.2 +Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer. +32 +Section 1350 Certifications. +101.INS +XBRL Instance Document +101.SCH +XBRL Taxonomy Extension Schema +101.CAL +XBRL Taxonomy Extension Calculation Linkbase +101.DEF +XBRL Taxonomy Extension Definition Document +101.LAB +XBRL Taxonomy Extension Label Linkbase +101.PRE +XBRL Taxonomy Extension Presentation Linkbase +* Management contract or compensatory plan or arrangement. +The Exhibits filed herewith do not include certain instruments with respect to long-term debt of NIKE and its subsidiaries, inasmuch as the total amount of debt authorized under any such instrument does not exceed 10 percent of the total assets of NIKE and its subsidiaries on a consolidated basis. NIKE agrees, pursuant to Item 601(b)(4)(iii) of Regulation S-K, that it will furnish a copy of any such instrument to the SEC upon request. +Upon written request to Investor Relations, NIKE, Inc., One Bowerman Drive, Beaverton, Oregon 97005-6453, NIKE will furnish shareholders with a copy of any Exhibit upon payment of $0.10 per page, which represents our reasonable expenses in furnishing Exhibits. +76 +Table of Contents +SCHEDULE II — Valuation and Qualifying Accounts +(In millions) +Balance at +Beginning of Period +Charged to Costs +and Expenses +Charged to Other Accounts (1) +Write-Offs, Net +Balance at End +of Period +Sales returns reserve +For the year ended May 31, 2016 +$ +379 +$ +788 +$ +(15 +) +$ +(708 +) +$ +444 +For the year ended May 31, 2017 +444 +696 +3 +(800 +) +343 +For the year ended May 31, 2018 +343 +640 +5 +(658 +) +330 +Allowance for doubtful accounts (2) +For the year ended May 31, 2016 +$ +78 +$ +52 +$ +(2 +) +$ +(85 +) +$ +43 +For the year ended May 31, 2017 +43 +16 +— +(40 +) +19 +For the year ended May 31, 2018 +19 +19 +— +(8 +) +30 +(1) +Amounts included in this column primarily relate to foreign currency translation. +(2) +Includes both current and non-current portions of the allowance for doubtful accounts. The non-current portion is included in Deferred income taxes and other assets on the Consolidated Balance Sheets. +77 +Table of Contents +ITEM 16. Form 10-K Summary +None. +78 +Table of Contents +Consent of Independent Registered Public Accounting Firm +We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (No. 333-212617) and Form S-8 (Nos. 033-63995, 333-63581, 333-63583, 333-68864, 333-68886, 333-71660, 333-104822, 333-117059, 333-133360, 333-164248, 333-171647, 333-173727, 333-208900 and 333-215439) of NIKE, Inc. of our report dated July 24, 2018 relating to the financial statements, financial statement schedule and the effectiveness of internal control over financial reporting, which appears in this Form 10-K. +/s/ PricewaterhouseCoopers LLP +Portland, Oregon +July 24, 2018 +79 +Table of Contents +Signatures +Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. +NIKE, INC. +By: +/s/ MARK G. PARKER +Mark G. Parker +Chairman, President and Chief Executive Officer +Date: +July 24, 2018 +Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. +Signature +Title +Date +PRINCIPAL EXECUTIVE OFFICER AND DIRECTOR: +/s/ MARK G. PARKER +Mark G. Parker +Chairman, President and Chief Executive Officer +July 24, 2018 +PRINCIPAL FINANCIAL OFFICER: +/s/ ANDREW CAMPION +Andrew Campion +Chief Financial Officer +July 24, 2018 +PRINCIPAL ACCOUNTING OFFICER: +/s/ CHRIS L. ABSTON +Chris L. Abston +Corporate Controller +July 24, 2018 +DIRECTORS: +/s/ CATHLEEN A. BENKO +Cathleen A. Benko +Director +July 24, 2018 +/s/ ELIZABETH J. COMSTOCK +Elizabeth J. Comstock +Director +July 24, 2018 +/s/ JOHN G. CONNORS +John G. Connors +Director +July 24, 2018 +/s/ TIMOTHY D. COOK +Timothy D. Cook +Director +July 24, 2018 +/s/ JOHN J. DONAHOE II +John J. Donahoe II +Director +July 24, 2018 +/s/ ALAN B. GRAF, JR. +Alan B. Graf, Jr. +Director +July 24, 2018 +/s/ PETER B. HENRY +Peter B. Henry +Director +July 24, 2018 +/s/ TRAVIS A. KNIGHT +Travis A. Knight +Director +July 24, 2018 +/s/ JOHN C. LECHLEITER +John C. Lechleiter +Director +July 24, 2018 +/s/ MICHELLE A. PELUSO +Michelle A. Peluso +Director +July 24, 2018 +/s/ JOHNATHAN A. RODGERS +Johnathan A. Rodgers +Director +July 24, 2018 +/s/ JOHN R. THOMPSON, JR. +John R. Thompson, Jr. +Director +July 24, 2018 +80 \ No newline at end of file diff --git a/raw/filings/0000320187/2017/0000320187-18-000142/filing_metadata.csv b/raw/filings/0000320187/2017/0000320187-18-000142/filing_metadata.csv new file mode 100644 index 0000000000000000000000000000000000000000..35f770a71f0ff6f3389ca305eadcc936c8e253fb --- /dev/null +++ b/raw/filings/0000320187/2017/0000320187-18-000142/filing_metadata.csv @@ -0,0 +1,2 @@ +cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing +0000320187,NKE,"NIKE, Inc.",10-K,2018-07-25,2018-05-31,2018-07-25T02:22:39.000Z,0000320187-18-000142,nke-5312018x10k.htm,10-K,14457519,1,0,https://www.sec.gov/Archives/edgar/data/320187/000032018718000142/nke-5312018x10k.htm,https://www.sec.gov/Archives/edgar/data/320187/000032018718000142/,2017,2017,1 diff --git a/raw/filings/0000320187/2017/0000320187-18-000142/item1.txt b/raw/filings/0000320187/2017/0000320187-18-000142/item1.txt new file mode 100644 index 0000000000000000000000000000000000000000..0a329571b813cf09e7780f6a3ead39766450e067 --- /dev/null +++ b/raw/filings/0000320187/2017/0000320187-18-000142/item1.txt @@ -0,0 +1,107 @@ +ITEM 1. Business +General +NIKE, Inc. was incorporated in 1967 under the laws of the State of Oregon. As used in this report, the terms “we,” “us,” “NIKE” and the “Company” refer to NIKE, Inc. and its predecessors, subsidiaries and affiliates, collectively, unless the context indicates otherwise. Our NIKE digital commerce website is located at www.nike.com. On our NIKE corporate website, located at investors.nike.com, we post the following filings as soon as reasonably practicable after they are electronically filed with, or furnished to, the United States Securities and Exchange Commission (the “SEC”): our annual report on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities and Exchange Act of 1934, as amended. Our definitive Proxy Statements are also posted on our corporate website. All such filings on our corporate website are available free of charge. Copies of these filings may also be obtained by visiting the Public Reference Room of the SEC at 100 F Street, NE, Washington, D.C. 20549, or by calling the SEC at 1-800-SEC-0330 and are available on the SEC’s website ( www.sec.gov ). Also available on our corporate website are the charters of the committees of our Board of Directors, as well as our corporate governance guidelines and code of ethics; copies of any of these documents will be provided in print to any shareholder who submits a request in writing to NIKE Investor Relations, One Bowerman Drive, Beaverton, Oregon 97005-6453. +Our principal business activity is the design, development and worldwide marketing and selling of athletic footwear, apparel, equipment, accessories and services. NIKE is the largest seller of athletic footwear and apparel in the world. We sell our products through NIKE-owned retail stores and through digital platforms (which we refer to collectively as our “NIKE Direct” operations), to retail accounts and a mix of independent distributors, licensees and sales representatives in virtually all countries around the world. Virtually all of our products are manufactured by independent contractors. Nearly all footwear and apparel products are produced outside the United States, while equipment products are produced both in the United States and abroad. +Products +We focus our NIKE Brand product offerings in six key categories: Running, NIKE Basketball, the Jordan Brand, Football (Soccer), Training and Sportswear (our sports-inspired lifestyle products). We also market products designed for kids, as well as for other athletic and recreational uses such as American football, baseball, cricket, lacrosse, skateboarding, tennis, volleyball, wrestling, walking and outdoor activities. +NIKE’s athletic footwear products are designed primarily for specific athletic use, although a large percentage of the products are worn for casual or leisure purposes. We place considerable emphasis on innovation and high-quality construction in the development and manufacturing of our products. Sportswear, Running and the Jordan Brand are currently our top-selling footwear categories and we expect them to continue to lead in footwear sales. +We also sell sports apparel covering the above-mentioned categories, which feature the same trademarks and are sold predominantly through the same marketing and distribution channels as athletic footwear. Our sports apparel, similar to our athletic footwear products, is designed primarily for athletic use and exemplifies our commitment to innovation and high-quality construction. Sportswear, Training and Running are currently our top-selling apparel categories and we expect them to continue to lead in apparel sales. We often market footwear, apparel and accessories in “collections” of similar use or by category. We also market apparel with licensed college and professional team and league logos. +We sell a line of performance equipment and accessories under the NIKE Brand name, including bags, socks, sport balls, eyewear, timepieces, digital devices, bats, gloves, protective equipment and other equipment designed for sports activities. We also sell small amounts of various plastic products to other manufacturers through our wholly-owned subsidiary, NIKE IHM, Inc., doing business as Air Manufacturing Innovation. +Our Jordan Brand designs, distributes and licenses athletic and casual footwear, apparel and accessories predominantly focused on basketball using the Jumpman trademark. Sales and operating results for Jordan Brand products are reported within the respective NIKE Brand geographic operating segments. +One of our wholly-owned subsidiary brands, Converse, headquartered in Boston, Massachusetts, designs, distributes and licenses casual sneakers, apparel and accessories under the Converse, Chuck Taylor, All Star, One Star, Star Chevron and Jack Purcell trademarks. Operating results of the Converse brand are reported on a stand-alone basis. +Another of our wholly-owned subsidiary brands, Hurley, headquartered in Costa Mesa, California, designs and distributes a line of action sports and youth lifestyle apparel and accessories under the Hurley trademark. Sales and operating results for Hurley products are included within the NIKE Brand’s North America geographic operating segment. +In addition to the products we sell to our wholesale customers and directly to consumers through our NIKE Direct operations, we have also entered into license agreements that permit unaffiliated parties to manufacture and sell, using NIKE-owned trademarks, certain apparel, digital devices and applications and other equipment designed for sports activities. +1 +Table of Contents +Sales and Marketing +Financial information about geographic and segment operations appears in Note 17 — Operating Segments and Related Information of the accompanying Notes to the Consolidated Financial Statements. +We experience moderate fluctuations in aggregate sales volume during the year. Historically, revenues in the first and fourth fiscal quarters have slightly exceeded those in the second and third quarters. However, the mix of product sales may vary considerably as a result of changes in seasonal and geographic demand for particular types of footwear, apparel and equipment, as well as other macroeconomic, operating and logistics-related factors. +Because NIKE is a consumer products company, the relative popularity of various sports and fitness activities and changing design trends affect the demand for our products. We must, therefore, respond to trends and shifts in consumer preferences by adjusting the mix of existing product offerings, developing new products, styles and categories and influencing sports and fitness preferences through extensive marketing. Failure to respond in a timely and adequate manner could have a material adverse effect on our sales and profitability. This is a continuing risk. Refer to Item 1A. Risk Factors. +We report our NIKE Brand operations based on our internal geographic organization. Each NIKE Brand geographic segment operates predominantly in one industry: the design, development, marketing and selling of athletic footwear, apparel and equipment. In June 2017, we announced a new company alignment designed to allow NIKE to better serve the consumer personally, at scale. As a result of this organizational realignment, the Company’s reportable operating segments for the NIKE Brand are: North America; Europe, Middle East & Africa (EMEA); Greater China; and Asia Pacific & Latin America (APLA), and include results for the NIKE, Jordan and Hurley brands. Sales through our NIKE Direct operations are managed within each geographic operating segment. +Converse is also a reportable segment and operates in one industry: the design, marketing, licensing and selling of casual sneakers, apparel and accessories. Converse direct to consumer operations, including digital commerce, are reported within the Converse operating segment results. +United States Market +For fiscal 2018 , NIKE Brand and Converse sales in the United States accounted for approximately 42% of total revenues, compared to 46% and 47% for fiscal 2017 and fiscal 2016 , respectively. We sell our NIKE Brand, Jordan Brand, Hurley and Converse products to thousands of retail accounts in the United States, including a mix of footwear stores, sporting goods stores, athletic specialty stores, department stores, skate, tennis and golf shops and other retail accounts. In the United States, we utilize NIKE sales offices to solicit such sales. During fiscal 2018 , our three largest customers accounted for approximately 21% of sales in the United States. +Our NIKE Direct and Converse direct to consumer operations sell NIKE Brand, Jordan Brand, Hurley and Converse products to consumers through various digital platforms. In addition, our NIKE Direct and Converse direct to consumer operations sell through the following number of retail stores in the United States: +U.S. Retail Stores +Number +NIKE Brand factory stores +220 +NIKE Brand in-line stores (including employee-only stores) +31 +Converse stores (including factory stores) +112 +Hurley stores (including factory and employee stores) +29 +TOTAL +392 +In the United States, NIKE has seven significant distribution centers. Five are located in Memphis, Tennessee, two of which are owned and three of which are leased. Two other distribution centers, one located in Indianapolis, Indiana, and one located in Dayton, Tennessee, are leased and operated by third-party logistics providers. NIKE Brand apparel and equipment are also shipped from our Foothill Ranch, California distribution center, which we lease. Smaller leased, and third-party leased and operated, distribution facilities are located in various parts of the United States. +International Markets +For fiscal 2018 , non-U.S. NIKE Brand and Converse sales accounted for approximately 58% of total revenues, compared to 54% and 53% for fiscal 2017 and fiscal 2016 , respectively. We sell our products to retail accounts, through our own NIKE Direct operations and through a mix of independent distributors, licensees and sales representatives around the world. We sell to thousands of retail accounts and ship products from 62 distribution centers outside of the United States. During fiscal 2018 , NIKE’s three largest customers outside of the United States accounted for approximately 13% of total non-U.S. sales. +In addition to NIKE and Converse owned digital commerce platforms in over 45 countries, our NIKE Direct and Converse direct to consumer businesses operate the following number of retail stores outside the United States: +Non-U.S. Retail Stores +Number +NIKE Brand factory stores +664 +NIKE Brand in-line stores (including employee-only stores) +65 +Converse stores (including factory stores) +61 +TOTAL +790 +2 +Table of Contents +International branch offices and subsidiaries of NIKE are located in Argentina, Australia, Austria, Belgium, Bermuda, Brazil, Canada, Chile, China, Croatia, the Czech Republic, Denmark, Finland, France, Germany, Greece, Hong Kong, Hungary, India, Indonesia, Ireland, Israel, Italy, Japan, Korea, Macau, Malaysia, Mexico, the Netherlands, New Zealand, Norway, Panama, the Philippines, Poland, Portugal, Russia, Singapore, Slovakia, Slovenia, South Africa, Spain, Sri Lanka, Sweden, Switzerland, Taiwan, Thailand, Turkey, the United Arab Emirates, the United Kingdom, Uruguay and Vietnam. +Significant Customer +No customer accounted for 10% or more of our worldwide net revenues during fiscal 2018 . +Product Research, Design and Development +We believe our research, design and development efforts are key factors in our success. Technical innovation in the design and manufacturing process of footwear, apparel and athletic equipment receives continued emphasis as we strive to produce products that help to enhance athletic performance, reduce injury and maximize comfort, while reducing waste. +In addition to our own staff of specialists in the areas of biomechanics, chemistry, exercise physiology, engineering, industrial design, sustainability and related fields, we also utilize research committees and advisory boards made up of athletes, coaches, trainers, equipment managers, orthopedists, podiatrists and other experts who consult with us and review designs, materials, concepts for product and manufacturing process improvements and compliance with product safety regulations around the world. Employee athletes, athletes engaged under sports marketing contracts and other athletes wear-test and evaluate products during the design and development process. +As we continue to develop new technologies, we are simultaneously focused on the design of innovative products incorporating such technologies throughout our product categories. Using market intelligence and research, our various design teams identify opportunities to leverage new technologies in existing categories responding to consumer preferences. The proliferation of NIKE Air, Lunar, Zoom, Free, Flywire, Dri-Fit, Flyknit, Flyweave, ZoomX, React and NIKE+ technologies throughout our Running, NIKE Basketball, Jordan Brand, Football (Soccer), Training and Sportswear categories, among others, typifies our dedication to designing innovative products. +Manufacturing +We are supplied by 124 footwear factories located in 13 countries. The largest single footwear factory accounted for approximately 9% of total fiscal 2018 NIKE Brand footwear production. Virtually all of our footwear is manufactured outside of the United States by independent contract manufacturers which often operate multiple factories. For fiscal 2018 , contract factories in Vietnam, China and Indonesia manufactured approximately 47%, 26% and 21% of total NIKE Brand footwear, respectively. We also have manufacturing agreements with independent contract manufacturers in Argentina, India, Brazil, Mexico and Italy to manufacture footwear for sale primarily within those countries. For fiscal 2018 , five footwear contract manufacturers each accounted for greater than 10% of footwear production and in the aggregate accounted for approximately 69% of NIKE Brand footwear production. +We are supplied by 328 apparel factories located in 37 countries. The largest single apparel factory accounted for approximately 13% of total fiscal 2018 NIKE Brand apparel production. Virtually all of our apparel is manufactured outside of the United States by independent contract manufacturers which often operate multiple factories. For fiscal 2018 , contract factories in China, Vietnam and Thailand produced approximately 26%, 18% and 10% of total NIKE Brand apparel, respectively. For fiscal 2018 , one apparel contract manufacturer accounted for more than 10% of apparel production, and the top five contract manufacturers in the aggregate accounted for approximately 47% of NIKE Brand apparel production. +The principal materials used in our footwear products are natural and synthetic rubber, plastic compounds, foam cushioning materials, natural and synthetic leather, nylon, polyester and canvas, as well as polyurethane films used to make NIKE Air-Sole cushioning components. During fiscal 2018 , Air Manufacturing Innovation, with facilities near Beaverton, Oregon and in St. Charles, Missouri, as well as independent contractors in China and Vietnam, were our suppliers of the Air-Sole cushioning components used in footwear. The principal materials used in our apparel products are natural and synthetic fabrics and threads (both virgin and recycled); specialized performance fabrics designed to efficiently wick moisture away from the body, retain heat and repel rain and/or snow; and plastic and metal hardware. NIKE’s independent contractors and suppliers buy raw materials for the manufacturing of our footwear, apparel and equipment products. Most raw materials are available and purchased by those independent contractors and suppliers in the countries where manufacturing takes place. NIKE’s independent contract manufacturers and suppliers have thus far experienced little difficulty in satisfying raw material requirements for the production of our products. +Since 1972, Sojitz Corporation of America (“Sojitz America”), a large Japanese trading company and the sole owner of our redeemable preferred stock, has performed significant import-export financing services for us. During fiscal 2018 , Sojitz America provided financing and purchasing services for NIKE Brand products sold in certain NIKE markets including Argentina, Brazil, Canada, India, South Africa and Uruguay, excluding products produced and sold in the same country. Approximately 6% of NIKE Brand sales occurred in those countries. Any failure of Sojitz America to provide these services or any failure of Sojitz America’s banks could disrupt our ability to acquire products from our suppliers and to deliver products to our customers in those markets. Such a disruption could result in canceled orders that would adversely affect sales and profitability. However, we believe that any such disruption would be short-term in duration due to the ready availability of alternative sources of financing at competitive rates. Our current agreements with Sojitz America expire on May 31, 2019. +International Operations and Trade +Our international operations and sources of supply are subject to the usual risks of doing business abroad, such as the implementation of, or potential changes in, foreign and domestic trade policies, increases in import duties, anti-dumping measures, quotas, safeguard measures, trade restrictions, restrictions on the transfer of funds and, in certain parts of the world, political instability and terrorism. We have not, to date, been materially affected by any such risk, but cannot predict the likelihood of such material effects occurring in the future. +3 +Table of Contents +In recent years, uncertain global and regional economic and political conditions have affected international trade and increased protectionist actions around the world. These trends are affecting many global manufacturing and service sectors, and the footwear and apparel industries, as a whole, are not immune. Companies in our industry are facing trade protectionism in many different regions, and in nearly all cases we are working together with industry groups to address trade issues and reduce the impact to the industry, while observing applicable competition laws. Notwithstanding our efforts, protectionist measures have resulted in increases in the cost of our products, and additional measures, if implemented, could adversely affect sales and/or profitability for NIKE, as well as the imported footwear and apparel industry as a whole. +We monitor protectionist trends and developments throughout the world that may materially impact our industry, and we engage in administrative and judicial processes to mitigate trade restrictions. We are actively monitoring actions that may result in additional anti-dumping measures and could affect our industry. We are also monitoring for and advocating against other impediments that may limit or delay customs clearance for imports of footwear, apparel and equipment. Changes in U.S. trade policies, including new and potential tariffs or penalties on imported goods, may negatively affect U.S. corporations with production activities outside the U.S., including NIKE. There have also been discussions and commentary regarding retaliatory actions by countries affected by the new tariffs and other changes in U.S. trade policy, and certain foreign governments have instituted or are considering imposing trade sanctions on certain U.S. goods, which could negatively affect U.S. corporations with business operations and/or consumer markets in those countries. Depending on the extent that certain new or proposed reforms are implemented by the U.S. government and the manner in which foreign governments respond to such reforms, it may become necessary for us to change the way we conduct business, which may adversely affect our results of operations. In addition , with respect to proposed trade restrictions targeting China, which represents an important sourcing country and consumer market for us, we are working with a broad coalition of global businesses and trade associations representing a wide variety of sectors to help ensure that any legislation enacted and implemented (i) addresses legitimate and core concerns, (ii) is consistent with international trade rules and (iii) reflects and considers China ’ s domestic economy and the important role it has in the global economic community. +Where trade protection measures are implemented, we believe that we have the ability to develop, over a period of time, adequate alternative sources of supply for the products obtained from our present suppliers. If events prevented us from acquiring products from our suppliers in a particular country, our operations could be temporarily disrupted and we could experience an adverse financial impact. However, we believe we could abate any such disruption, and that much of the adverse impact on supply would, therefore, be of a short-term nature, although alternate sources of supply might not be as cost-effective and could have an ongoing adverse impact on profitability. +NIKE advocates for trade liberalization for footwear and apparel in a number of regional and bilateral free trade agreements. +Our international operations are also subject to compliance with the U.S. Foreign Corrupt Practices Act, or FCPA, and other anti-bribery laws applicable to our operations. We source a significant portion of our products from, and have important consumer markets, outside of the United States, and we have policies and procedures to address compliance with the FCPA and similar laws by us, our employees, agents, suppliers and other partners. +Competition +The athletic footwear, apparel and equipment industry is highly competitive on a worldwide basis. We compete internationally with a significant number of athletic and leisure footwear companies, athletic and leisure apparel companies, sports equipment companies and large companies having diversified lines of athletic and leisure footwear, apparel and equipment, including adidas, Anta, ASICS, Li Ning, lululemon athletica, Puma, Under Armour and V.F. Corporation, among others. The intense competition and the rapid changes in technology and consumer preferences in the markets for athletic and leisure footwear and apparel and athletic equipment, constitute significant risk factors in our operations. +NIKE is the largest seller of athletic footwear and apparel in the world. Important aspects of competition in this industry are: +• +Product attributes such as quality; performance and reliability; new product innovation and development and consumer price/value. +• +Consumer connection and affinity for brands and products, developed through marketing and promotion; social media interaction; customer support and service; identification with prominent and influential athletes, public figures, coaches, teams, colleges and sports leagues who endorse our brands and use our products and active engagement through sponsored sporting events and clinics. +• +Effective sourcing and distribution of products, with attractive merchandising and presentation at retail, both in-store and online. +We believe that we are competitive in all of these areas. +Trademarks and Patents +We believe that our intellectual property rights are important to our brand, our success and our competitive position. We pursue available protections of these rights and vigorously protect them against third-party theft and infringement. +We utilize trademarks on nearly all of our products and believe having distinctive marks that are readily identifiable is an important factor in creating a market for our goods, in identifying our brands and the Company, and in distinguishing our goods from the goods of others. We consider our NIKE and Swoosh trademarks to be among our most valuable assets and we have registered these trademarks in almost 170 jurisdictions worldwide. In addition, we own many other trademarks that we utilize in marketing our products. We own common law rights in the trade dress of several significant shoe designs and elements. For certain trade dress, we have sought and obtained trademark registrations. +We have copyright protection in our design, graphics and other original works. In some instances, we also obtain registered copyrights. +We own patents and have a license under other patents, which facilitate our use of “Air” technologies. +We file for, own and maintain many U.S. and foreign utility patents, as well as many U.S. and foreign design patents protecting components, technologies, materials, manufacturing techniques, features, functionality, and industrial and aesthetic designs used in and for the manufacture of various athletic and leisure footwear and apparel, athletic equipment and digital devices and related software applications. These patents expire at various times. +4 +Table of Contents +We believe our success depends upon our capabilities in areas such as design, research and development, production and marketing rather than exclusively upon our patent and trade secret positions. +However, we have followed a policy of filing patent applications in the United States and select foreign countries on inventions, designs and improvements that we deem valuable. We also continue to vigorously protect our trademarks and patents against third-party infringement. +Employees +As of May 31, 2018 , we had approximately 73,100 employees worldwide, including retail and part-time employees. Management is committed to maintaining an environment where all NIKE employees have the opportunity to reach their full potential. None of our employees are represented by a union, except for certain employees in the Asia Pacific & Latin America geography, where local law requires those employees to be represented by a trade union. Also, in some countries outside of the United States, local laws require employee representation by works councils (which may be entitled to information and consultation on certain Company decisions) or by organizations similar to a union. In certain European countries, we are required by local law to enter into and/or comply with industry-wide or national collective bargaining agreements. NIKE has never experienced a material interruption of operations due to labor disagreements. +Executive Officers of the Registrant +The executive officers of NIKE, Inc. as of July 24, 2018 are as follows: +Mark G. Parker, Chairman, President and Chief Executive Officer — Mr. Parker, 62, was appointed President and Chief Executive Officer in January 2006 and named Chairman of the Board in June 2016. He has been employed by NIKE since 1979 with primary responsibilities in product research, design and development, marketing and brand management. Mr. Parker was appointed divisional Vice President in charge of product development in 1987, corporate Vice President in 1989, General Manager in 1993, Vice President of Global Footwear in 1998 and President of the NIKE Brand in 2001. +Chris L. Abston, Vice President and Corporate Controller — Mr. Abston, 55, joined NIKE in 2015 from Wal-Mart Stores, Inc., where he served as Vice President, Global Controls and Governance since February 2015. Prior to that he was Vice President and Controller of Walmart International from February 2013 to January 2015, responsible for the oversight of international accounting and reporting, and Vice President and Assistant Controller of Wal-Mart Stores, Inc. from May 2011 to January 2013. Before joining Wal-Mart, Mr. Abston spent 25 years in public accounting with Ernst & Young LLP, most recently leading its Strategic Growth Markets practice as a Partner in the Dallas office. +Andrew Campion, Executive Vice President and Chief Financial Officer — Mr. Campion, 46, joined NIKE in 2007 as Vice President of Global Planning and Development, leading strategic and financial planning. He was appointed Chief Financial Officer of the NIKE Brand in 2010, responsible for leading all aspects of financial management for the Company’s flagship brand. In 2014, he was appointed Senior Vice President, Strategy, Finance and Investor Relations in addition to his role as Chief Financial Officer of NIKE Brand. Mr. Campion assumed the role of Executive Vice President and Chief Financial Officer in August 2015. Prior to joining NIKE, he held leadership roles in strategic planning, mergers and acquisitions, financial planning and analysis, operations and planning, investor relations and tax at The Walt Disney Company from 1996 to 2007. +Elliott Hill, President, Consumer and Marketplace — Mr. Hill, 54, joined NIKE in 1988, with primary responsibilities in sales and retail. He has served as Apparel Sales Director in Europe, Retail Development Director in Europe, Vice President of Sales and Retail in EMEA, General Manager of US Retail, Vice President of US Sales, Retail and NIKE.com, and Vice President of Global Retail. M ost recently, Mr. Hill served as President of Geographies and Sales and Vice President and General Manager of North America. Mr. Hill was appointed President, Consumer and Marketplace in March 2018. +Hilary K. Krane, Executive Vice President, Chief Administrative Officer and General Counsel — Ms. Krane, 54, joined NIKE as Vice President and General Counsel in April 2010. In 2011, her responsibilities expanded, and she became Vice President, General Counsel and Corporate Affairs. Ms. Krane was appointed Executive Vice President, Chief Administrative Officer and General Counsel in 2013. Prior to joining NIKE, Ms. Krane was General Counsel and Senior Vice President for Corporate Affairs at Levi Strauss & Co. from 2006 to 2010. From 1996 to 2006, she was a Partner and Assistant General Counsel at PricewaterhouseCoopers LLP. +Monique S. Matheson, Executive Vice President, Global Human Resources — Ms. Matheson, 51, joined NIKE in 1998, with primary responsibilities in the human resources function. She was appointed as Vice President and Senior Business Partner in 2011 and Vice President, Chief Talent and Diversity Officer in 2012. Ms. Matheson was appointed Executive Vice President, Global Human Resources in July 2017 . +John F. Slusher, Executive Vice President, Global Sports Marketing — Mr. Slusher, 49, joined NIKE in 1998, with primary responsibilities in global sports marketing. Mr. Slusher was appointed Director of Sports Marketing for Asia Pacific and Americas in 2006, divisional Vice President of Asia Pacific & Americas Sports Marketing in September 2007 and Vice President, Global Sports Marketing in November 2007. Prior to joining NIKE, Mr. Slusher was an attorney at the law firm of O’Melveny & Myers from 1995 to 1998. +Eric D. Sprunk, Chief Operating Officer — Mr. Sprunk, 54, joined NIKE in 1993. He was appointed Finance Director and General Manager of the Americas in 1994, Finance Director for NIKE Europe in 1995, Regional General Manager of NIKE Europe Footwear in 1998 and Vice President & General Manager of the Americas in 2000. Mr. Sprunk was appointed Vice President of Global Footwear in 2001, Vice President of Merchandising and Product in 2009 and Chief Operating Officer in 2013. Prior to joining NIKE, Mr. Sprunk was a certified public accountant with Price Waterhouse from 1987 to 1993. +5 +Table of Contents \ No newline at end of file diff --git a/raw/filings/0000320187/2017/0000320187-18-000142/item13.txt b/raw/filings/0000320187/2017/0000320187-18-000142/item13.txt new file mode 100644 index 0000000000000000000000000000000000000000..70e7c4dfa4118b7c45d41ff451dd582a75aa930d --- /dev/null +++ b/raw/filings/0000320187/2017/0000320187-18-000142/item13.txt @@ -0,0 +1,2 @@ +ITEM 13. Certain Relationships and Related Transactions and Director Independence +The information required by Items 404 and 407(a) of Regulation S-K is included under “Election of Directors — Transactions with Related Persons” and “Corporate Governance — Director Independence” in the definitive Proxy Statement for our 2018 Annual Meeting of Shareholders and is incorporated herein by reference. \ No newline at end of file diff --git a/raw/filings/0000320187/2017/0000320187-18-000142/item9a.txt b/raw/filings/0000320187/2017/0000320187-18-000142/item9a.txt new file mode 100644 index 0000000000000000000000000000000000000000..55a7c815aff8bed706c602edd32a3ace9c16a06b --- /dev/null +++ b/raw/filings/0000320187/2017/0000320187-18-000142/item9a.txt @@ -0,0 +1,6 @@ +ITEM 9A. Controls and Procedures +We maintain disclosure controls and procedures designed to ensure information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. +We carry out a variety of ongoing procedures, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, to evaluate the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of May 31, 2018 . +“Management’s Annual Report on Internal Control Over Financial Reporting” is included in Item 8 of this Report. +We have continued several transformation initiatives to centralize and simplify our business processes and systems. These are long-term initiatives, which we believe will enhance our internal control over financial reporting due to increased automation and further integration of related processes. We will continue to monitor our internal control over financial reporting for effectiveness throughout the transformation. +There have not been any other changes in our internal control over financial reporting during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. \ No newline at end of file diff --git a/raw/filings/0000320187/2017/0000320187-18-000142/rp_note.txt b/raw/filings/0000320187/2017/0000320187-18-000142/rp_note.txt new file mode 100644 index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391 diff --git a/raw/filings/0000320187/2017/0000320187-18-000142/rpt_disclosure.txt b/raw/filings/0000320187/2017/0000320187-18-000142/rpt_disclosure.txt new file mode 100644 index 0000000000000000000000000000000000000000..1eae6e75c3cad6132f8d845841f9872b0d21fbeb --- /dev/null +++ b/raw/filings/0000320187/2017/0000320187-18-000142/rpt_disclosure.txt @@ -0,0 +1,6 @@ +Transactions with Related Persons +In fiscal 2018, two of Mr. Parker’s siblings, each with over 25 years of service to the Company, were employed by the Company in non-executive roles. Ann Parker was a Design Talent Scout, and Stephen Parker held a Vice President role with Converse. During fiscal 2018, the Company paid aggregate compensation to Stephen Parker in the amount of $486,535, comprised of salary, bonuses, the value of stock awards granted during the fiscal year, a valued service award and associated tax reimbursement, profit sharing and matching contributions to Company-sponsored retirement plans. Additionally, the Company paid aggregate compensation to Ann Parker in the amount of approximately $487,367, comprised of approximately $306,037 paid in connection with her termination of service as well as the compensation components listed above. The compensation and benefits received by each of Mr. Parker’s siblings, including the separation benefits received by Ann Parker and the 30th anniversary service award received by Stephen Parker, were consistent with compensation paid to other similarly situated employees. +Eric Sprunk’s daughter, Nicole Sprunk, was employed by the Company in a non-executive role in fiscal 2018 as a Brand Director. During fiscal 2018, the Company paid aggregate compensation to Nicole Sprunk of $196,748, comprised of salary, bonus, the value of stock granted, profit sharing and matching contributions to the Company-sponsored retirement plan. The compensation and benefits received by Nicole Sprunk were consistent with compensation paid to other employees holding similar positions. +Philip H. Knight, the father of NIKE director Travis A. Knight, serves as Chairman Emeritus, which provides a standing invitation for Philip H. Knight to attend meetings of the Board and its committees as a non-voting observer. As Chairman Emeritus, Mr. Knight receives an annual salary of $500,000, and medical and dental insurance coverage generally available to employees. In fiscal 2018, Philip H. Knight received $516,819, comprised of salary, profit sharing and matching contributions to Company-sponsored retirement plans. +The Company’s written policy requires the Corporate Responsibility, Sustainability & Governance Committee to review any transaction or proposed transaction with a related person that would be required to be reported under Item 404(a) of Regulation S-K, and to determine whether to ratify or approve the transaction, with ratification or approval to occur only if the Committee determines that the transaction is fair to the Company or that approval or ratification of the transaction is in the interest of the Company. +NIKE, INC. Ÿ 2018 Notice of Annual Meeting 14 \ No newline at end of file diff --git a/raw/filings/0000320187/2018/0000320187-19-000051/filing.txt b/raw/filings/0000320187/2018/0000320187-19-000051/filing.txt new file mode 100644 index 0000000000000000000000000000000000000000..79946f2a01a036360cf3372c0cdd9c79b6b9a8af --- /dev/null +++ b/raw/filings/0000320187/2018/0000320187-19-000051/filing.txt @@ -0,0 +1,5894 @@ +10-K +1 +nke-531201910k.htm +10-K +Document +Table of Contents +UNITED STATES +SECURITIES AND EXCHANGE COMMISSION +Washington, D.C. 20549 +FORM 10-K +(Mark One) +þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 +FOR THE FISCAL YEAR ENDED MAY 31, 2019 +OR +¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 +FOR THE TRANSITION PERIOD FROM TO . +Commission File No. 1-10635 +NIKE, Inc. +(Exact name of Registrant as specified in its charter) +OREGON +93-0584541 +(State or other jurisdiction of incorporation) +(IRS Employer Identification No.) +One Bowerman Drive, Beaverton, Oregon +97005-6453 +(Address of principal executive offices) +(Zip Code) +(503) 671-6453 +(Registrant's telephone number, including area code) +SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: +Class B Common Stock +NKE +New York Stock Exchange +(Title of each class) +(Trading symbol) +(Name of each exchange on which registered) +SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: +NONE +Indicate by check mark: +YES +NO +• +if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. +þ +¨ +• +if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. +¨ +þ +• +whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. +þ +¨ +• +whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). +þ +¨ +• +whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. +Large accelerated filer +þ +Accelerated filer +¨ +Non-accelerated filer +¨ +Smaller reporting company +¨ +Emerging growth company +¨ +• +if an emerging growth company, if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. +¨ +• +whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). +¨ +þ +As of November 30, 2018, the aggregate market values of the Registrant's Common Stock held by non-affiliates were: +Class A +$ +5,260,259,370 +Class B +94,690,612,760 +$ +99,950,872,130 +As of July 19, 2019, the number of shares of the Registrant's Common Stock outstanding were: +Class A +315,024,752 +Class B +1,251,863,621 +1,566,888,373 +DOCUMENTS INCORPORATED BY REFERENCE: +Parts of Registrant's Proxy Statement for the Annual Meeting of Shareholders to be held on September 19, 2019 are incorporated by reference into Part III of this Report. +Table of Contents +NIKE, INC. +ANNUAL REPORT ON FORM 10-K +TABLE OF CONTE NTS +PAGE +PART I +1 +ITEM 1. +Business +1 +General +1 +Products +1 +Sales and Marketing +2 +United States Market +2 +International Markets +3 +Significant Customer +3 +Product Research, Design and Development +4 +Manufacturing +4 +International Operations and Trade +5 +Competition +5 +Trademarks and Patents +6 +Employees +6 +Information about our Executive Officers +7 +ITEM 1A. +Risk Factors +8 +ITEM 1B. +Unresolved Staff Comments +19 +ITEM 2. +Properties +19 +ITEM 3. +Legal Proceedings +19 +ITEM 4. +Mine Safety Disclosures +19 +PART II +20 +ITEM 5. +Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities +20 +ITEM 6. +Selected Financial Data +22 +ITEM 7. +Management's Discussion and Analysis of Financial Condition and Results of Operations +24 +ITEM 7A. +Quantitative and Qualitative Disclosures about Market Risk +43 +ITEM 8. +Financial Statements and Supplementary Data +45 +ITEM 9. +Changes in and Disagreements with Accountants on Accounting and Financial Disclosure +85 +ITEM 9A. +Controls and Procedures +85 +ITEM 9B. +Other Information +85 +PART III +86 +(Except for the information set forth under “Information about our Executive Officers” in Item 1 above, Part III is incorporated by reference from the Proxy Statement for the NIKE, Inc. 2019 Annual Meeting of Shareholders.) +ITEM 10. +Directors, Executive Officers and Corporate Governance +86 +ITEM 11. +Executive Compensation +86 +ITEM 12. +Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters +86 +ITEM 13. +Certain Relationships and Related Transactions and Director Independence +86 +ITEM 14. +Principal Accountant Fees and Services +86 +PART IV +87 +ITEM 15. +Exhibits and Financial Statement Schedules +87 +ITEM 16. +Form 10-K Summary +90 +Signatures +92 +Table of Contents +PART I +ITEM 1. BUSINESS +GENERAL +NIKE, Inc. was incorporated in 1967 under the laws of the State of Oregon. As used in this report, the terms “we,” “us,” “NIKE” and the “Company” refer to NIKE, Inc. and its predecessors, subsidiaries and affiliates, collectively, unless the context indicates otherwise. Our NIKE digital commerce website is located at www.nike.com . On our NIKE corporate website, located at investors.nike.com , we post the following filings as soon as reasonably practicable after they are electronically filed with, or furnished to, the United States Securities and Exchange Commission (the “SEC”): our annual report on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities and Exchange Act of 1934, as amended. Our definitive Proxy Statements are also posted on our corporate website. All such filings on our corporate website are available free of charge. Copies of these filings are also available on the SEC's website ( www.sec.gov ). Also available on our corporate website are the charters of the committees of our Board of Directors, as well as our corporate governance guidelines and code of ethics; copies of any of these documents will be provided in print to any shareholder who submits a request in writing to NIKE Investor Relations, One Bowerman Drive, Beaverton, Oregon 97005-6453. +Our principal business activity is the design, development and worldwide marketing and selling of athletic footwear, apparel, equipment, accessories and services. NIKE is the largest seller of athletic footwear and apparel in the world. We sell our products through NIKE-owned retail stores and through digital platforms (which we refer to collectively as our “NIKE Direct” operations), to retail accounts and a mix of independent distributors, licensees and sales representatives in virtually all countries around the world. Virtually all of our products are manufactured by independent contractors. Nearly all footwear and apparel products are produced outside the United States, while equipment products are produced both in the United States and abroad. +PRODUCTS +We focus our NIKE Brand product offerings in six key categories: Running, NIKE Basketball, the Jordan Brand, Football (Soccer), Training and Sportswear (our sports-inspired lifestyle products). We also market products designed for kids, as well as for other athletic and recreational uses such as American football, baseball, cricket, golf, lacrosse, skateboarding, tennis, volleyball, walking, wrestling and other outdoor activities. +NIKE's athletic footwear products are designed primarily for specific athletic use, although a large percentage of the products are worn for casual or leisure purposes. We place considerable emphasis on innovation and high-quality construction in the development and manufacturing of our products. Sportswear, Running and the Jordan Brand are currently our top-selling footwear categories and we expect them to continue to lead in footwear sales. +We also sell sports apparel covering the above-mentioned categories, which feature the same trademarks and are sold predominantly through the same marketing and distribution channels as athletic footwear. Our sports apparel, similar to our athletic footwear products, is designed primarily for athletic use and exemplifies our commitment to innovation and high-quality construction. Sportswear, Training and Running are currently our top-selling apparel categories and we expect them to continue to lead in apparel sales. We often market footwear, apparel and accessories in “collections” of similar use or by category. We also market apparel with licensed college and professional team and league logos. +We sell a line of performance equipment and accessories under the NIKE Brand name, including bags, socks, sport balls, eyewear, timepieces, digital devices, bats, gloves, protective equipment and other equipment designed for sports activities. We also sell small amounts of various plastic products to other manufacturers through our wholly-owned subsidiary, NIKE IHM, Inc., doing business as Air Manufacturing Innovation. +2019 FORM 10-K 1 +Table of Contents +Our Jordan Brand designs, distributes and licenses athletic and casual footwear, apparel and accessories predominantly focused on basketball using the Jumpman trademark. Sales and operating results for Jordan Brand products are reported within the respective NIKE Brand geographic operating segments. +One of our wholly-owned subsidiary brands, Converse, headquartered in Boston, Massachusetts, designs, distributes and licenses casual sneakers, apparel and accessories under the Converse, Chuck Taylor, All Star, One Star, Star Chevron and Jack Purcell trademarks. Operating results of the Converse brand are reported on a stand-alone basis. +Another of our wholly-owned subsidiary brands, Hurley, headquartered in Costa Mesa, California, designs and distributes a line of action sports and youth lifestyle apparel and accessories under the Hurley trademark. Sales and operating results for Hurley products are included within the NIKE Brand's North America geographic operating segment. +In addition to the products we sell to our wholesale customers and directly to consumers through our NIKE Direct operations, we have also entered into license agreements that permit unaffiliated parties to manufacture and sell, using NIKE-owned trademarks, certain apparel, digital devices and applications and other equipment designed for sports activities. +SALES AND MARKETING +We experience moderate fluctuations in aggregate sales volume during the year. Historically, revenues in the first and fourth fiscal quarters have slightly exceeded those in the second and third quarters. However, the mix of product sales may vary considerably as a result of changes in seasonal and geographic demand for particular types of footwear, apparel and equipment, as well as other macroeconomic, operating and logistics-related factors. +Because NIKE is a consumer products company, the relative popularity of various sports and fitness activities and changing design trends affect the demand for our products. We must, therefore, respond to trends and shifts in consumer preferences by adjusting the mix of existing product offerings, developing new products, styles and categories and influencing sports and fitness preferences through extensive marketing. Failure to respond in a timely and adequate manner could have a material adverse effect on our sales and profitability. This is a continuing risk. Refer to Item 1A. Risk Factors. +We report our NIKE Brand operations based on our internal geographic organization. Each NIKE Brand geographic segment operates predominantly in one industry: the design, development, marketing and selling of athletic footwear, apparel and equipment. The Company's reportable operating segments for the NIKE Brand are: North America; Europe, Middle East & Africa (EMEA); Greater China; and Asia Pacific & Latin America (APLA), and include results for the NIKE, Jordan and Hurley brands. Sales through our NIKE Direct operations are managed within each geographic operating segment. +Converse is also a reportable operating segment and operates predominately in one industry: the design, marketing, licensing and selling of casual sneakers, apparel and accessories. Converse direct to consumer operations, including digital commerce, are reported within the Converse operating segment results. +UNITED STATES MARKET +For fiscal 2019 , NIKE Brand and Converse sales in the United States accounted for approximately 41% of total revenues, compared to 42% and 46% for fiscal 2018 and fiscal 2017 , respectively. We sell our NIKE Brand, Jordan Brand, Hurley and Converse products to thousands of retail accounts in the United States, including a mix of footwear stores, sporting goods stores, athletic specialty stores, department stores, skate, tennis and golf shops and other retail accounts. In the United States, we utilize NIKE sales offices to solicit such sales. During fiscal 2019 , our three largest United States customers accounted for approximately 24% of sales in the United States. +2 NIKE, INC. +Table of Contents +Our NIKE Direct and Converse direct to consumer operations sell NIKE Brand, Jordan Brand, Hurley and Converse products to consumers through various digital platforms. In addition, our NIKE Direct and Converse direct to consumer operations sell through the following number of retail stores in the United States: +U.S. RETAIL STORES +NUMBER +NIKE Brand factory stores +217 +NIKE Brand in-line stores (including employee-only stores) +29 +Converse stores (including factory stores) +109 +Hurley stores (including factory and employee-only stores) +29 +TOTAL +384 +In the United States, NIKE has six significant distribution centers. Four are located in Memphis, Tennessee, two of which are owned and two of which are leased. Two other distribution centers, one located in Indianapolis, Indiana and one located in Dayton, Tennessee, are leased and operated by third-party logistics providers. NIKE Brand apparel and equipment are also shipped from our Foothill Ranch, California distribution center, which we lease. Smaller leased and third-party leased and operated distribution facilities are located in various parts of the United States. +INTERNATIONAL MARKETS +For fiscal 2019 , non-U.S. NIKE Brand and Converse sales accounted for approximately 59% of total revenues, compared to 58% and 54% for fiscal 2018 and fiscal 2017 , respectively. We sell our products to retail accounts, through our own NIKE Direct operations and through a mix of independent distributors, licensees and sales representatives around the world. We sell to thousands of retail accounts and ship products from 67 distribution centers outside of the United States. During fiscal 2019 , NIKE's three largest customers outside of the United States accounted for approximately 14% of total non-U.S. sales. +In addition to NIKE and Converse owned digital commerce platforms in over 45 countries, our NIKE Direct and Converse direct to consumer businesses operate the following number of retail stores outside the United States: +NON-U.S. RETAIL STORES +NUMBER +NIKE Brand factory stores +648 +NIKE Brand in-line stores (including employee-only stores) +57 +Converse stores (including factory stores) +63 +TOTAL +768 +International branch offices and subsidiaries of NIKE are located in Argentina, Australia, Austria, Belgium, Bermuda, Brazil, Canada, Chile, China, Croatia, the Czech Republic, Denmark, Finland, France, Germany, Greece, Hong Kong, Hungary, India, Indonesia, Ireland, Israel, Italy, Japan, Korea, Macau, Malaysia, Mexico, the Netherlands, New Zealand, Norway, Panama, the Philippines, Poland, Portugal, Russia, Singapore, Slovakia, Slovenia, South Africa, Spain, Sri Lanka, Sweden, Switzerland, Taiwan, Thailand, Turkey, the United Arab Emirates, the United Kingdom, Uruguay and Vietnam. +SIGNIFICANT CUSTOMER +No customer accounted for 10% or more of our worldwide net revenues during fiscal 2019 . +2019 FORM 10-K 3 +Table of Contents +PRODUCT RESEARCH, DESIGN AND DEVELOPMENT +We believe our research, design and development efforts are key factors in our success. Technical innovation in the design and manufacturing process of footwear, apparel and athletic equipment receives continued emphasis as we strive to produce products that help to enhance athletic performance, reduce injury and maximize comfort, while reducing waste. +In addition to our own staff of specialists in the areas of biomechanics, chemistry, exercise physiology, engineering, industrial design, sustainability and related fields, we also utilize research committees and advisory boards made up of athletes, coaches, trainers, equipment managers, orthopedists, podiatrists and other experts who consult with us and review designs, materials, concepts for product and manufacturing process improvements and compliance with product safety regulations around the world. Employee athletes, athletes engaged under sports marketing contracts and other athletes wear-test and evaluate products during the design and development process. +As we continue to develop new technologies, we are simultaneously focused on the design of innovative products incorporating such technologies throughout our product categories. Using market intelligence and research, our various design teams identify opportunities to leverage new technologies in existing categories responding to consumer preferences. The proliferation of NIKE Air, Lunar, Zoom, Free, Flywire, Dri-Fit, Flyknit, Flyweave, ZoomX, React, Adaptive and NIKE+ technologies, among others, throughout our Running, NIKE Basketball, Jordan Brand, Football (Soccer), Training and Sportswear categories typifies our dedication to designing innovative products. +MANUFACTURING +We are supplied by 112 footwear factories located in 12 countries. The largest single footwear factory accounted for approximately 9% of total fiscal 2019 NIKE Brand footwear production. Virtually all of our footwear is manufactured outside of the United States by independent contract manufacturers which often operate multiple factories. For fiscal 2019 , contract factories in Vietnam, China and Indonesia manufactured approximately 49%, 23% and 21% of total NIKE Brand footwear, respectively. We also have manufacturing agreements with independent contract manufacturers in Argentina and India to manufacture footwear for sale primarily within those countries. For fiscal 2019 , four footwear contract manufacturers each accounted for greater than 10% of footwear production and in the aggregate accounted for approximately 61% of NIKE Brand footwear production. +We are supplied by 334 apparel factories located in 36 countries. The largest single apparel factory accounted for approximately 14% of total fiscal 2019 NIKE Brand apparel production. Virtually all of our apparel is manufactured outside of the United States by independent contract manufacturers which often operate multiple factories. For fiscal 2019 , contract factories in China, Vietnam and Thailand produced approximately 27%, 22% and 10% of total NIKE Brand apparel, respectively. For fiscal 2019 , one apparel contract manufacturer accounted for more than 10% of apparel production, and the top five contract manufacturers in the aggregate accounted for approximately 49% of NIKE Brand apparel production. +The principal materials used in our footwear products are natural and synthetic rubber, plastic compounds, foam cushioning materials, natural and synthetic leather, nylon, polyester and canvas, as well as polyurethane films used to make NIKE Air-Sole cushioning components. During fiscal 2019 , Air Manufacturing Innovation, a wholly-owned subsidiary, with facilities near Beaverton, Oregon and in St. Charles, Missouri, as well as independent contractors in China and Vietnam, were our suppliers of the Air-Sole cushioning components used in footwear. The principal materials used in our apparel products are natural and synthetic fabrics and threads (both virgin and recycled); specialized performance fabrics designed to efficiently wick moisture away from the body, retain heat and repel rain and/or snow; and plastic and metal hardware. NIKE's independent contractors and suppliers buy raw materials for the manufacturing of our footwear, apparel and equipment products. Most raw materials are available and purchased by those independent contractors and suppliers in the countries where manufacturing takes place. NIKE's independent contract manufacturers and suppliers have thus far experienced little difficulty in satisfying raw material requirements for the production of our products. +Since 1972, Sojitz Corporation of America (“Sojitz America”), a large Japanese trading company and the sole owner of our redeemable preferred stock, has performed import-export financing services for us. During fiscal 2019 , Sojitz America provided financing and purchasing services for NIKE Brand products sold in certain NIKE markets including Argentina, Brazil, Canada, India, South Africa and Uruguay, excluding products produced and sold in the same country. Approximately 5% of NIKE Brand sales occurred in those countries. Any failure of Sojitz America to provide these services or any failure of Sojitz America's banks could disrupt our ability to acquire products from our suppliers and to deliver products to our customers in those markets. Such a disruption could result in canceled orders that would adversely affect sales and profitability. However, we believe that any such disruption would be short-term in duration due to the ready availability of alternative sources of financing at competitive rates. +4 NIKE, INC. +Table of Contents +INTERNATIONAL OPERATIONS AND TRADE +Our international operations and sources of supply are subject to the usual risks of doing business abroad, such as the implementation of, or potential changes in, foreign and domestic trade policies, increases in import duties, anti-dumping measures, quotas, safeguard measures, trade restrictions, restrictions on the transfer of funds and, in certain parts of the world, political instability and terrorism. We have not, to date, been materially affected by any such risk, but cannot predict the likelihood of such material effects occurring in the future. +In recent years, uncertain global and regional economic and political conditions have affected international trade and increased protectionist actions around the world. These trends are affecting many global manufacturing and service sectors, and the footwear and apparel industries, as a whole, are not immune. Companies in our industry are facing trade protectionism in many different regions, and in nearly all cases we are working together with industry groups to address trade issues and reduce the impact to the industry, while observing applicable competition laws. Notwithstanding our efforts, protectionist measures have resulted in increases in the cost of our products, and additional measures, if implemented, could adversely affect sales and/or profitability for NIKE, as well as the imported footwear and apparel industry as a whole. +We monitor protectionist trends and developments throughout the world that may materially impact our industry, and we engage in administrative and judicial processes to mitigate trade restrictions. We are actively monitoring actions that may result in additional anti-dumping measures and could affect our industry. We are also monitoring for and advocating against other impediments that may limit or delay customs clearance for imports of footwear, apparel and equipment. NIKE also advocates for trade liberalization for footwear and apparel in a number of regional and bilateral free trade agreements. Changes in U.S. trade policies, including new and potential tariffs or penalties on imported goods, may negatively affect U.S. corporations with production activities outside the U.S., including NIKE. There have also been discussions and commentary regarding retaliatory actions by countries affected by the new tariffs and other changes in U.S. trade policy, and certain foreign governments have instituted or are considering imposing retaliatory measures on certain U.S. goods, which could negatively affect U.S. corporations with business operations and/or consumer markets in those countries. Depending on the extent that certain new or proposed reforms are implemented by the U.S. government and the manner in which foreign governments respond to such reforms, it may become necessary for us to change the way we conduct business, which may adversely affect our results of operations. In addition, with respect to proposed trade restrictions targeting China, which represents an important sourcing country and consumer market for us, we are working with a broad coalition of global businesses and trade associations representing a wide variety of sectors to help ensure that any legislation enacted and implemented (i) addresses legitimate and core concerns, (ii) is consistent with international trade rules and (iii) reflects and considers China's domestic economy and the important role it has in the global economic community. +Where trade protection measures are implemented, we believe that we have the ability to develop, over a period of time, adequate alternative sources of supply for the products obtained from our present suppliers. If events prevented us from acquiring products from our suppliers in a particular country, our operations could be temporarily disrupted and we could experience an adverse financial impact. However, we believe we could abate any such disruption, and that much of the adverse impact on supply would, therefore, be of a short-term nature, although alternate sources of supply might not be as cost-effective and could have an ongoing adverse impact on profitability. +Our international operations are also subject to compliance with the U.S. Foreign Corrupt Practices Act, or "FCPA", and other anti-bribery laws applicable to our operations. We source a significant portion of our products from, and have important consumer markets, outside of the United States, and we have an ethics and compliance program to address compliance with the FCPA and similar laws by us, our employees, agents, suppliers and other partners. +COMPETITION +The athletic footwear, apparel and equipment industry is highly competitive on a worldwide basis. We compete internationally with a significant number of athletic and leisure footwear companies, athletic and leisure apparel companies, sports equipment companies and large companies having diversified lines of athletic and leisure footwear, apparel and equipment, including adidas, Anta, ASICS, Li Ning, lululemon athletica, Puma, Under Armour and V.F. Corporation, among others. The intense competition and the rapid changes in technology and consumer preferences in the markets for athletic and leisure footwear and apparel and athletic equipment, constitute significant risk factors in our operations. +2019 FORM 10-K 5 +Table of Contents +NIKE is the largest seller of athletic footwear and apparel in the world. Important aspects of competition in this industry are: +• +Product attributes such as quality; performance and reliability; new product innovation and development and consumer price/value. +• +Consumer connection and affinity for brands and products, developed through marketing and promotion; social media interaction; customer support and service; identification with prominent and influential athletes, public figures, coaches, teams, colleges and sports leagues who endorse our brands and use our products and active engagement through sponsored sporting events and clinics. +• +Effective sourcing and distribution of products, with attractive merchandising and presentation at retail, both in-store and digital platforms. +We believe that we are competitive in all of these areas. +TRADEMARKS AND PATENTS +We believe that our intellectual property rights are important to our brand, our success and our competitive position. We pursue available protections of these rights and vigorously protect them against third-party theft and infringement. +We use trademarks on nearly all of our products and believe having distinctive marks that are readily identifiable is an important factor in creating a market for our goods, in identifying our brands and the Company, and in distinguishing our goods from the goods of others. We consider our NIKE and Swoosh Design trademarks to be among our most valuable assets and we have registered these trademarks in almost 170 jurisdictions worldwide. In addition, we own many other trademarks that we use in marketing our products. We own common law rights in the trade dress of several significant shoe designs and elements. For certain trade dress, we have sought and obtained trademark registrations. +We have copyright protection in our design, graphics and other original works. In some instances, we also obtain registered copyrights. +We file for, own and maintain many U.S. and foreign utility and design patents protecting components, technologies, materials, manufacturing techniques, features, functionality, and industrial and aesthetic designs used in and for the manufacture of various athletic and leisure footwear and apparel, athletic equipment and digital devices and related software applications. These patents expire at various times. +We believe our success depends upon our capabilities in areas such as design, research and development, production and marketing and is supported by our intellectual property rights, such as trademarks, patents and trade secrets, among others. +We have followed a policy of applying for and registering intellectual property rights in the United States and select foreign countries on trademarks, inventions, innovations and designs that we deem valuable. We also continue to vigorously protect our intellectual property, including trademarks, patents and trade secrets against third-party infringement. +EMPLOYEES +As of May 31, 2019 , we had approximately 76,700 employees worldwide, including retail and part-time employees. Management is committed to maintaining an environment where all NIKE employees have the opportunity to reach their full potential. None of our employees are represented by a union, except for certain employees in the APLA geography, where local law requires those employees to be represented by a trade union. Also, in some countries outside of the United States, local laws require employee representation by works councils (which may be entitled to information and consultation on certain Company decisions) or by organizations similar to a union. In certain European countries, we are required by local law to enter into and/or comply with industry-wide or national collective bargaining agreements. NIKE has never experienced a material interruption of operations due to labor disagreements. +6 NIKE, INC. +Table of Contents +INFORMATION ABOUT OUR EXECUTIVE OFFICERS +The executive officers of NIKE, Inc. as of July 23, 2019 are as follows: +Mark G. Parker , Chairman, President and Chief Executive Officer — Mr. Parker, 63, was appointed President and Chief Executive Officer in January 2006 and named Chairman of the Board in 2016. He has been employed by NIKE since 1979 with primary responsibilities in product research, design and development, marketing and brand management. Mr. Parker was appointed divisional Vice President in charge of product development in 1987, corporate Vice President in 1989, General Manager in 1993, Vice President of Global Footwear in 1998 and President of the NIKE Brand in 2001. +Andrew Campion , Executive Vice President and Chief Financial Officer — Mr. Campion, 47, joined NIKE in 2007 as Vice President of Global Planning and Development, leading strategic and financial planning. He was appointed Chief Financial Officer of the NIKE Brand in 2010, responsible for leading all aspects of financial management for the Company's flagship brand. In 2014, he was appointed Senior Vice President, Strategy, Finance and Investor Relations in addition to his role as Chief Financial Officer of NIKE Brand. Mr. Campion assumed the role of Executive Vice President and Chief Financial Officer in August 2015. Prior to joining NIKE, he held leadership roles in strategic planning, mergers and acquisitions, financial planning and analysis, operations and planning, investor relations and tax at The Walt Disney Company from 1996 to 2007. +Elliott Hill , President, Consumer and Marketplace — Mr. Hill, 55, joined NIKE in 1988, with primary responsibilities in sales and retail. He has served as Apparel Sales Director in Europe, Retail Development Director in Europe, Vice President of Sales and Retail in EMEA, General Manager of US Retail, Vice President of US Sales, Retail and NIKE.com, and Vice President of Global Retail. Most recently, Mr. Hill served as President of Geographies and Sales and Vice President and General Manager of North America. Mr. Hill was appointed President, Consumer and Marketplace in 2018. +Hilary K. Krane , Executive Vice President, Chief Administrative Officer and General Counsel — Ms. Krane, 55, joined NIKE as Vice President and General Counsel in 2010. In 2011, her responsibilities expanded, and she became Vice President, General Counsel and Corporate Affairs. Ms. Krane was appointed Executive Vice President, Chief Administrative Officer and General Counsel in 2013. Prior to joining NIKE, Ms. Krane was General Counsel and Senior Vice President for Corporate Affairs at Levi Strauss & Co. from 2006 to 2010. From 1996 to 2006, she was a Partner and Assistant General Counsel at PricewaterhouseCoopers LLP. +Monique S. Matheson , Executive Vice President, Global Human Resources — Ms. Matheson, 52, joined NIKE in 1998, with primary responsibilities in the human resources function. She was appointed as Vice President and Senior Business Partner in 2011 and Vice President, Chief Talent and Diversity Officer in 2012. Ms. Matheson was appointed Executive Vice President, Global Human Resources in 2017. +John F. Slusher , Executive Vice President, Global Sports Marketing — Mr. Slusher, 50, joined NIKE in 1998, with primary responsibilities in global sports marketing. Mr. Slusher was appointed Director of Sports Marketing for Asia Pacific and Americas in 2006, divisional Vice President of Asia Pacific & Americas Sports Marketing in September 2007 and Vice President, Global Sports Marketing in November 2007. Prior to joining NIKE, Mr. Slusher was an attorney at the law firm of O'Melveny & Myers from 1995 to 1998. +Eric D. Sprunk , Chief Operating Officer — Mr. Sprunk, 55, joined NIKE in 1993. He was appointed Finance Director and General Manager of the Americas in 1994, Finance Director for NIKE Europe in 1995, Regional General Manager of NIKE Europe Footwear in 1998 and Vice President & General Manager of the Americas in 2000. Mr. Sprunk was appointed Vice President of Global Footwear in 2001, Vice President of Merchandising and Product in 2009 and Chief Operating Officer in 2013. Prior to joining NIKE, Mr. Sprunk was a certified public accountant with Price Waterhouse from 1987 to 1993. +2019 FORM 10-K 7 +Table of Contents +ITEM 1A. RISK FACTORS +Special Note Regarding Forward-Looking Statements and Analyst Reports +Certain written and oral statements, other than purely historic information, including estimates, projections, statements relating to NIKE's business plans, objectives and expected operating results and the assumptions upon which those statements are based, made or incorporated by reference from time to time by NIKE or its representatives in this report, other reports, filings with the SEC, press releases, conferences or otherwise, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements include, without limitation, any statement that may predict, forecast, indicate or imply future results, performance or achievements, and may contain the words “believe,” “anticipate,” “expect,” “estimate,” “project,” “will be,” “will continue,” “will likely result” or words or phrases of similar meaning. Forward-looking statements involve risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. The risks and uncertainties are detailed from time to time in reports filed by NIKE with the SEC, including reports filed on Forms 8-K, 10-Q and 10-K, and include, among others, the following: international, national and local general economic and market conditions; the size and growth of the overall athletic footwear, apparel and equipment markets; intense competition among designers, marketers, distributors and sellers of athletic footwear, apparel and equipment for consumers and endorsers; demographic changes; changes in consumer preferences; popularity of particular designs, categories of products and sports; seasonal and geographic demand for NIKE products; difficulties in anticipating or forecasting changes in consumer preferences, consumer demand for NIKE products and the various market factors described above; difficulties in implementing, operating and maintaining NIKE's increasingly complex information technology systems and controls, including, without limitation, the systems related to demand and supply planning and inventory control; interruptions in data and information technology systems; consumer data security; fluctuations and difficulty in forecasting operating results, including, without limitation, the fact that advance orders may not be indicative of future revenues due to changes in shipment timing, the changing mix of orders with shorter lead times, and discounts, order cancellations and returns; the ability of NIKE to sustain, manage or forecast its growth and inventories; the size, timing and mix of purchases of NIKE's products; increases in the cost of materials, labor and energy used to manufacture products; new product development and introduction; the ability to secure and protect trademarks, patents and other intellectual property; product performance and quality; customer service; adverse publicity, including without limitation, through social media or in connection with brand damaging events; the loss of significant customers or suppliers; dependence on distributors and licensees; business disruptions; increased costs of freight and transportation to meet delivery deadlines; increases in borrowing costs due to any decline in NIKE's debt ratings; changes in business strategy or development plans; general risks associated with doing business outside of the United States, including, without limitation, exchange rate fluctuations, inflation, import duties, tariffs, quotas, political and economic instability and terrorism; the impact of U.S. tax reform legislation on our results of operations; the potential impact of new laws, regulations or policy, including, without limitation, tariffs, import/export, trade and immigration regulations or policies; changes in government regulations; the impact of, including business and legal developments relating to, climate change and natural disasters; litigation, regulatory proceedings, sanctions or any other claims asserted against NIKE; the ability to attract and retain qualified employees, and any negative public perception with respect to key personnel; the effects of NIKE's decision to invest in or divest of businesses and other factors referenced or incorporated by reference in this report and other reports. +The risks included here are not exhaustive. Other sections of this report may include additional factors which could adversely affect NIKE's business and financial performance. Moreover, NIKE operates in a very competitive and rapidly changing environment. New risks emerge from time to time and it is not possible for management to predict all such risks, nor can it assess the impact of all such risks on NIKE's business or the extent to which any risk, or combination of risks, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results. +Investors should also be aware that while NIKE does, from time to time, communicate with securities analysts, it is against NIKE's policy to disclose to them any material non-public information or other confidential commercial information. Accordingly, shareholders should not assume that NIKE agrees with any statement or report issued by any analyst irrespective of the content of the statement or report. Furthermore, NIKE has a policy against confirming financial forecasts or projections issued by others. Thus, to the extent that reports issued by securities analysts contain any projections, forecasts or opinions, such reports are not the responsibility of NIKE. +Our products face intense competition. +NIKE is a consumer products company and the relative popularity of various sports and fitness activities and changing design trends affect the demand for our products. The athletic footwear, apparel and equipment industry is highly competitive both in the United States and worldwide. We compete internationally with a significant number of athletic and leisure footwear companies, athletic and leisure apparel companies, sports equipment companies and large companies having diversified lines of athletic and leisure footwear, apparel and equipment. We also compete with other companies for the production capacity of independent manufacturers that produce our products. Our NIKE Direct operations, both through our digital commerce operations and retail stores, also compete with multi-brand retailers selling our products. +8 NIKE, INC. +Table of Contents +Product offerings, technologies, marketing expenditures (including expenditures for advertising and endorsements), pricing, costs of production, customer service, digital commerce platforms and social media presence are areas of intense competition. This, in addition to rapid changes in technology and consumer preferences in the markets for athletic and leisure footwear and apparel and athletic equipment, constitute significant risk factors in our operations. In addition, the competitive nature of retail including shifts in the ways in which consumers are shopping, and the rising trend of digital commerce, constitutes a risk factor implicating our NIKE Direct and wholesale operations. If we do not adequately and timely anticipate and respond to our competitors, our costs may increase or the consumer demand for our products may decline significantly. +Failure to maintain our reputation and brand image could negatively impact our business. +Our iconic brands have worldwide recognition, and our success depends on our ability to maintain and enhance our brand image and reputation. Maintaining, promoting and growing our brands will depend on our design and marketing efforts, including advertising and consumer campaigns, product innovation and product quality. Our commitment to product innovation and quality and our continuing investment in design (including materials) and marketing may not have the desired impact on our brand image and reputation. In addition, our success in maintaining, extending and expanding our brand image depends on our ability to adapt to a rapidly changing media environment, including our increasing reliance on social media and digital dissemination of advertising campaigns. We could be adversely impacted if we fail to achieve any of these objectives. +Our brand value also depends on our ability to maintain a positive consumer perception of our corporate integrity and brand culture. Negative claims or publicity involving us, our products, consumer data, or any of our key employees, endorsers, sponsors or suppliers could seriously damage our reputation and brand image, regardless of whether such claims are accurate. For example, while we require our suppliers of our products to operate their business in compliance with applicable laws and regulations, we do not control their practices. Negative publicity relating to a violation or an alleged violation of policies or laws by such suppliers could damage our brand image. Social media, which accelerates and potentially amplifies the scope of negative publicity, can increase the challenges of responding to negative claims. Adverse publicity about regulatory or legal action against us, or by us, could also damage our reputation and brand image, undermine consumer confidence in us and reduce long-term demand for our products, even if the regulatory or legal action is unfounded or not material to our operations. If the reputation or image of any of our brands is tarnished or if we receive negative publicity, then our sales, financial condition and results of operations could be materially and adversely affected. +If we are unable to anticipate consumer preferences and develop new products, we may not be able to maintain or increase our revenues and profits. +Our success depends on our ability to identify, originate and define product trends as well as to anticipate, gauge and react to changing consumer demands in a timely manner. However, lead times for many of our products may make it more difficult for us to respond rapidly to new or changing product trends or consumer preferences. All of our products are subject to changing consumer preferences that cannot be predicted with certainty. Our new products may not receive consumer acceptance as consumer preferences could shift rapidly to different types of performance products or away from these types of products altogether, and our future success depends in part on our ability to anticipate and respond to these changes. If we fail to anticipate accurately and respond to trends and shifts in consumer preferences by adjusting the mix of existing product offerings, developing new products, designs, styles and categories, and influencing sports and fitness preferences through extensive marketing, we could experience lower sales, excess inventories or lower profit margins, any of which could have an adverse effect on our results of operations and financial condition. In addition, we market our products globally through a diverse spectrum of advertising and promotional programs and campaigns, including social media, mobile applications and online advertising. If we do not successfully market our products or if advertising and promotional costs increase, these factors could have an adverse effect on our business, financial condition and results of operations. +We rely on technical innovation and high-quality products to compete in the market for our products. +Technical innovation and quality control in the design and manufacturing process of footwear, apparel and athletic equipment is essential to the commercial success of our products. Research and development play a key role in technical innovation. We rely upon specialists in the fields of biomechanics, chemistry, exercise physiology, engineering, industrial design, sustainability and related fields, as well as research committees and advisory boards made up of athletes, coaches, trainers, equipment managers, orthopedists, podiatrists and other experts to develop and test cutting-edge performance products. While we strive to produce products that help to enhance athletic performance, reduce injury and maximize comfort, if we fail to introduce technical innovation in our products, consumer demand for our products could decline, and if we experience problems with the quality of our products, we may incur substantial expense to remedy the problems. +Failure to continue to obtain or maintain high-quality endorsers of our products could harm our business. +We establish relationships with professional athletes, sports teams and leagues, as well as other public figures, including artists, designers and influencers, to develop, evaluate and promote our products, as well as establish product authenticity with consumers. However, as competition in our industry has increased, the costs associated with establishing and retaining such sponsorships and other relationships have increased. If we are unable to maintain our current associations with professional +2019 FORM 10-K 9 +Table of Contents +athletes, sports teams and leagues, or other public figures, or to do so at a reasonable cost, we could lose the high visibility or on-field authenticity associated with our products, and we may be required to modify and substantially increase our marketing investments. As a result, our brands, net revenues, expenses and profitability could be harmed. +Furthermore, if certain endorsers were to stop using our products contrary to their endorsement agreements, our business could be adversely affected. In addition, actions taken by athletes, teams or leagues, or other endorsers, associated with our products that harm the reputations of those athletes, teams or leagues, or endorsers, could also seriously harm our brand image with consumers and, as a result, could have an adverse effect on our sales and financial condition. In addition, poor performance by our endorsers, a failure to continue to correctly identify promising athletes, public figures or sports organizations, to use and endorse our products or a failure to enter into cost-effective endorsement arrangements with prominent athletes, public figures, and sports organizations could adversely affect our brand, sales and profitability. +General economic factors beyond our control, and changes in the global economic environment, including fluctuations in inflation and currency exchange rates, could result in lower revenues, higher costs and decreased margins and earnings. +A majority of our products are manufactured and sold outside of the United States, and we conduct purchase and sale transactions in various currencies, which increases our exposure to the volatility of global economic conditions, including fluctuations in inflation and foreign currency exchange rates. Additionally, there has been, and may continue to be, volatility in currency exchange rates as a result of the United Kingdom's impending exit from the European Union, commonly referred to as “Brexit” or new or proposed U.S. policy changes that impact the U.S. Dollar value relative to other international currencies. Our international revenues and expenses generally are derived from sales and operations in foreign currencies, and these revenues and expenses could be affected by currency fluctuations, specifically amounts recorded in foreign currencies and translated into U.S. Dollars for consolidated financial reporting, as weakening of foreign currencies relative to the U.S. Dollar adversely affects the U.S. Dollar value of the Company's foreign currency-denominated sales and earnings. Currency exchange rate fluctuations could also disrupt the business of the independent manufacturers that produce our products by making their purchases of raw materials more expensive and more difficult to finance. Foreign currency fluctuations have adversely affected and could continue to have an adverse effect on our results of operations and financial condition. +We may hedge certain foreign currency exposures to lessen and delay, but not to completely eliminate, the effects of foreign currency fluctuations on our financial results. Since the hedging activities are designed to lessen volatility, they not only reduce the negative impact of a stronger U.S. Dollar or other trading currency, but they also reduce the positive impact of a weaker U.S. Dollar or other trading currency. Our future financial results could be significantly affected by the value of the U.S. Dollar in relation to the foreign currencies in which we conduct business. The degree to which our financial results are affected for any given time period will depend in part upon our hedging activities. +Global economic conditions could have a material adverse effect on our business, operating results and financial condition. +The uncertain state of the global economy continues to impact businesses around the world, most acutely in emerging markets and developing economies. If global economic and financial market conditions do not improve or deteriorate, the following factors could have a material adverse effect on our business, operating results and financial condition: +• +Slower consumer spending may result in reduced demand for our products, reduced orders from retailers for our products, order cancellations, lower revenues, higher discounts, increased inventories and lower gross margins. +• +In the future, we may be unable to access financing in the credit and capital markets at reasonable rates in the event we find it desirable to do so. +• +We conduct transactions in various currencies, which increases our exposure to fluctuations in foreign currency exchange rates relative to the U.S. Dollar. Continued volatility in the markets and exchange rates for foreign currencies and contracts in foreign currencies, including in response to certain policies advocated or implemented by the U.S. presidential administration, could have a significant impact on our reported operating results and financial condition. +• +Continued volatility in the availability and prices for commodities and raw materials we use in our products and in our supply chain (such as cotton or petroleum derivatives) could have a material adverse effect on our costs, gross margins and profitability. +• +If retailers of our products experience declining revenues or experience difficulty obtaining financing in the capital and credit markets to purchase our products, this could result in reduced orders for our products, order cancellations, late retailer payments, extended payment terms, higher accounts receivable, reduced cash flows, greater expense associated with collection efforts and increased bad debt expense. +• +If retailers of our products experience severe financial difficulty, some may become insolvent and cease business operations, which could negatively impact the sale of our products to consumers. +10 NIKE, INC. +Table of Contents +• +If contract manufacturers of our products or other participants in our supply chain experience difficulty obtaining financing in the capital and credit markets to purchase raw materials or to finance capital equipment and other general working capital needs, it may result in delays or non-delivery of shipments of our products. +Our business is affected by seasonality, which could result in fluctuations in our operating results. +We experience moderate fluctuations in aggregate sales volume during the year. Historically, revenues in the first and fourth fiscal quarters have slightly exceeded those in the second and third fiscal quarters. However, the mix of product sales may vary considerably from time to time as a result of changes in seasonal and geographic demand for particular types of footwear, apparel and equipment and in connection with the timing of significant sporting events, such as the NBA Finals, Olympics or the World Cup, among others. In addition, our customers may cancel orders, change delivery schedules or change the mix of products ordered with minimal notice. As a result, we may not be able to accurately predict our quarterly sales. Accordingly, our results of operations are likely to fluctuate significantly from period to period. This seasonality, along with other factors that are beyond our control, including general economic conditions, changes in consumer preferences, weather conditions, availability of import quotas, transportation disruptions and currency exchange rate fluctuations, could adversely affect our business and cause our results of operations to fluctuate. Our operating margins are also sensitive to a number of additional factors that are beyond our control, including manufacturing and transportation costs, shifts in product sales mix and geographic sales trends, all of which we expect to continue. Results of operations in any period should not be considered indicative of the results to be expected for any future period. +We may be adversely affected by the financial health of our customers. +We extend credit to our customers based on an assessment of a customer's financial condition, generally without requiring collateral. To assist in the scheduling of production and the shipping of our products, we offer certain customers the opportunity to place orders five to six months ahead of delivery under our futures ordering program. These advance orders may be canceled under certain conditions, and the risk of cancellation may increase when dealing with financially unstable retailers or retailers struggling with economic uncertainty. In the past, some customers have experienced financial difficulties up to and including bankruptcies, which have had an adverse effect on our sales, our ability to collect on receivables and our financial condition. When the retail economy weakens or as consumer behavior shifts, retailers may be more cautious with orders. A slowing or changing economy in our key markets could adversely affect the financial health of our customers, which in turn could have an adverse effect on our results of operations and financial condition. In addition, product sales are dependent in part on high quality merchandising and an appealing retail environment to attract consumers, which requires continuing investments by retailers. Retailers that experience financial difficulties may fail to make such investments or delay them, resulting in lower sales and orders for our products. +Failure to accurately forecast consumer demand could lead to excess inventories or inventory shortages, which could result in decreased operating margins, reduced cash flows and harm to our business. +To meet anticipated demand for our products, we purchase products from manufacturers outside of our futures ordering program and in advance of customer orders, which we hold in inventory and resell to customers. There is a risk we may be unable to sell excess products ordered from manufacturers. Inventory levels in excess of customer demand may result in inventory write-downs, and the sale of excess inventory at discounted prices could significantly impair our brand image and have an adverse effect on our operating results, financial condition and cash flows. Conversely, if we underestimate consumer demand for our products or if our manufacturers fail to supply products we require at the time we need them, we may experience inventory shortages. Inventory shortages might delay shipments to customers, negatively impact retailer, distributor and consumer relationships and diminish brand loyalty. The difficulty in forecasting demand also makes it difficult to estimate our future results of operations, financial condition and cash flows from period to period. A failure to accurately predict the level of demand for our products could adversely affect our net revenues and net income, and we are unlikely to forecast such effects with any certainty in advance. +Consolidation of retailers or concentration of retail market share among a few retailers may increase and concentrate our credit risk and impair our ability to sell products. +The athletic footwear, apparel and equipment retail markets in some countries are dominated by a few large athletic footwear, apparel and equipment retailers with many stores. These retailers have in the past increased their market share by expanding through acquisitions and construction of additional stores. These situations concentrate our credit risk with a relatively small number of retailers, and, if any of these retailers were to experience a shortage of liquidity or consumer behavior shifts away from traditional retail, it would increase the risk that their outstanding payables to us may not be paid. In addition, increasing market share concentration among one or a few retailers in a particular country or region increases the risk that if any one of them substantially reduces their purchases of our products, we may be unable to find a sufficient number of other retail outlets for our products to sustain the same level of sales and revenues. +2019 FORM 10-K 11 +Table of Contents +Our NIKE Direct operations have required and will continue to require a substantial investment and commitment of resources and are subject to numerous risks and uncertainties. +Our NIKE Direct stores have required substantial fixed investment in equipment and leasehold improvements, information systems and personnel. We have entered into substantial operating lease commitments for retail space. Certain stores have been designed and built to serve as high-profile venues to promote brand awareness and marketing activities. Because of their unique design elements, locations and size, these stores require substantially more investment than other stores. Due to the high fixed-cost structure associated with our NIKE Direct operations, a decline in sales, a shift in consumer behavior away from brick-and-mortar retail, or the closure or poor performance of individual or multiple stores could result in significant lease termination costs, write-offs of equipment and leasehold improvements and employee-related costs. +Many factors unique to retail operations, some of which are beyond the Company's control, pose risks and uncertainties. Risks include, but are not limited to: credit card fraud; mismanagement of existing retail channel partners; and inability to manage costs associated with store construction and operation. In addition, extreme weather conditions in the areas in which our stores are located could adversely affect our business. +If the technology-based systems that give our consumers the ability to shop with us online do not function effectively, our operating results, as well as our ability to grow our digital commerce business globally, could be materially adversely affected. +Many of our consumers shop with us through our digital platforms. Increasingly, consumers are using mobile-based devices and applications to shop online with us and with our competitors, and to do comparison shopping. We are increasingly using social media and proprietary mobile applications to interact with our consumers and as a means to enhance their shopping experience. Any failure on our part to provide attractive, effective, reliable, user-friendly digital commerce platforms that offer a wide assortment of merchandise with rapid delivery options and that continually meet the changing expectations of online shoppers could place us at a competitive disadvantage, result in the loss of digital commerce and other sales, harm our reputation with consumers, have a material adverse impact on the growth of our digital commerce business globally and could have a material adverse impact on our business and results of operations. +Risks specific to our digital commerce business also include diversion of sales from our and our retailers' brick and mortar stores, difficulty in recreating the in-store experience through direct channels and liability for online content. Our failure to successfully respond to these risks might adversely affect sales in our digital commerce business, as well as damage our reputation and brands. +Failure to adequately protect or enforce our intellectual property rights could adversely affect our business. +We periodically discover counterfeit reproductions of our products or products that otherwise infringe our intellectual property rights. If we are unsuccessful in enforcing our intellectual property rights, continued sales of these products could adversely affect our sales and our brand and could result in a shift of consumer preference away from our products. +The actions we take to establish and protect our intellectual property rights may not be adequate to prevent imitation of our products by others. We also may be unable to prevent others from seeking to block sales of our products as violations of proprietary rights. +We may be subject to liability if third parties successfully claim we infringe on their intellectual property rights. Defending infringement claims could be expensive and time-consuming and might result in our entering into costly license agreements. We also may be subject to significant damages or injunctions against development, use, importation and/or sale of certain products. +We take various actions to prevent the unauthorized use and/or disclosure of our confidential information and intellectual property rights. These actions include contractual measures such as entering into non-disclosure and non-compete agreements and agreements relating to our collaborations with third parties and providing confidential information awareness training. Our controls and efforts to prevent unauthorized use and/or disclosure of confidential information and intellectual property rights might not always be effective. For example, confidential information related to business strategy, new technologies, mergers and acquisitions, unpublished financial results or personal data could be prematurely, inadvertently, or improperly used and/or disclosed, resulting in a loss of reputation, a decline in our stock price and/or a negative impact on our market position, and could lead to damages, fines, penalties or injunctions. +In addition, the laws of certain countries may not protect or allow enforcement of intellectual property rights to the same extent as the laws of the United States. We may face significant expenses and liability in connection with the protection of our intellectual property rights, including outside the United States, and if we are unable to successfully protect our rights or resolve intellectual property conflicts with others, our business or financial condition may be adversely affected. +We are subject to data security and privacy risks that could negatively affect our results, operations or reputation. +In addition to our own sensitive and proprietary business information, we handle transactional and personal information about our customers and users of our digital experiences, which include online distribution channels and product engagement, adaptive products and personal fitness applications. Hackers and data thieves are increasingly sophisticated and operate social +12 NIKE, INC. +Table of Contents +engineering, such as phishing, and large-scale, complex automated attacks that can evade detection for long periods of time. Any breach of our or our service providers' network, or other vendor systems, may result in the loss of confidential business and financial data, misappropriation of our consumers', users' or employees' personal information or a disruption of our business. Any of these outcomes could have a material adverse effect on our business, including unwanted media attention, impairment of our consumer and customer relationships, damage to our reputation; resulting in lost sales and consumers, fines, lawsuits, or significant legal and remediation expenses. We also may need to expend significant resources to protect against, respond to and/or redress problems caused by any breach. +In addition, we must comply with increasingly complex and rigorous regulatory standards enacted to protect business and personal data in the U.S., Europe and elsewhere. For example, the European Union adopted the General Data Protection Regulation (the “GDPR”), which became effective on May 25, 2018; and California passed the California Consumer Privacy Act (the "CCPA") which will go into effect in 2020. These laws impose additional obligations on companies regarding the handling of personal data and provides certain individual privacy rights to persons whose data is stored. Compliance with existing, proposed and recently enacted laws (including implementation of the privacy and process enhancements called for under GDPR and CCPA) and regulations can be costly; any failure to comply with these regulatory standards could subject us to legal and reputational risks. Misuse of or failure to secure personal information could also result in violation of data privacy laws and regulations, proceedings against the Company by governmental entities or others, damage to our reputation and credibility and could have a negative impact on revenues and profits. +We are subject to the risk our licensees may not generate expected sales or maintain the value of our brands. +We currently license, and expect to continue licensing, certain of our proprietary rights, such as trademarks or copyrighted material, to third parties. If our licensees fail to successfully market and sell licensed products, or fail to obtain sufficient capital or effectively manage their business operations, customer relationships, labor relationships, supplier relationships or credit risks, it could adversely affect our revenues, both directly from reduced royalties received and indirectly from reduced sales of our other products. +We also rely on our licensees to help preserve the value of our brands. Although we attempt to protect our brands through approval rights over the design, production processes, quality, packaging, merchandising, distribution, advertising and promotion of our licensed products, we cannot completely control the use of our licensed brands by our licensees. The misuse of a brand by or negative publicity involving a licensee could have a material adverse effect on that brand and on us. +Failure of our contractors or our licensees' contractors to comply with our code of conduct, local laws and other standards could harm our business. +We work with hundreds of contractors outside of the United States to manufacture our products, and we also have license agreements that permit unaffiliated parties to manufacture or contract for the manufacture of products using our intellectual property. We require the contractors that directly manufacture our products and our licensees that make products using our intellectual property (including, indirectly, their contract manufacturers) to comply with a code of conduct and other environmental, health and safety standards for the benefit of workers. We also require these contractors to comply with applicable standards for product safety. Notwithstanding their contractual obligations, from time to time contractors may not comply with such standards or applicable local law or our licensees may fail to enforce such standards or applicable local law on their contractors. Significant or continuing noncompliance with such standards and laws by one or more contractors could harm our reputation or result in a product recall and, as a result, could have an adverse effect on our sales and financial condition. Negative publicity regarding production methods, alleged practices or workplace or related conditions of any of our suppliers, manufacturers or licensees could adversely affect our brand image and sales and force us to locate alternative suppliers, manufacturers or licenses. +Our international operations involve inherent risks which could result in harm to our business. +Virtually all of our athletic footwear and apparel is manufactured outside of the United States, and the majority of our products are sold outside of the United States. Accordingly, we are subject to the risks generally associated with global trade and doing business abroad, which include foreign laws and regulations, varying consumer preferences across geographic regions, political unrest, disruptions or delays in cross-border shipments and changes in economic conditions in countries in which our products are manufactured or where we sell products. This includes, for example, the uncertainty surrounding the effect of Brexit, including changes to the legal and regulatory framework that apply to the United Kingdom and its relationship with the European Union, as well as new and proposed changes affecting tax laws and trade policy in the U.S. and elsewhere as further described below under “We could be subject to changes in tax rates, adoption of new tax laws, additional tax liabilities or increased volatility in our effective tax rate” and “Changes to U.S. trade policy, tariff and import/export regulations may have a material adverse effect on our business, financial condition and results of operations.” The U.S. presidential administration has indicated a focus on policy reforms that discourage U.S. corporations from outsourcing manufacturing and production activities to foreign jurisdictions, including through tariffs or penalties on goods manufactured outside the U.S., which may require us to change the way we conduct business and adversely affect our results of operations. The administration has also targeted the specific practices of certain U.S. multinational corporations in public statements which, if directed at us, could harm our reputation or otherwise negatively impact our business. +2019 FORM 10-K 13 +Table of Contents +In addition, disease outbreaks, terrorist acts and military conflict have increased the risks of doing business abroad. These factors, among others, could affect our ability to manufacture products or procure materials, our ability to import products, our ability to sell products in international markets and our cost of doing business. If any of these or other factors make the conduct of business in a particular country undesirable or impractical, our business could be adversely affected. In addition, many of our imported products are subject to duties, tariffs or quotas that affect the cost and quantity of various types of goods imported into the United States and other countries. Any country in which our products are produced or sold may eliminate, adjust or impose new quotas, duties, tariffs, safeguard measures, anti-dumping duties, cargo restrictions to prevent terrorism, restrictions on the transfer of currency, climate change legislation, product safety regulations or other charges or restrictions, any of which could have an adverse effect on our results of operations and financial condition. +We could be subject to changes in tax rates, adoption of new tax laws, additional tax liabilities or increased volatility in our effective tax rate. +We are subject to the tax laws in the United States and numerous foreign jurisdictions. Current economic and political conditions make tax laws and regulations, or their interpretation and application, in any jurisdiction subject to significant change. On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (the “Tax Act”), which includes a number of significant changes to previous U.S. tax laws that impact us, including provisions for a one-time transition tax on deemed repatriation of undistributed foreign earnings, and a reduction in the corporate tax rate from 35% to 21% for tax years beginning after December 31, 2017, among other changes. The Tax Act also transitions U.S. international taxation from a worldwide system to a modified territorial system and includes base erosion prevention measures on non-U.S. earnings, which has the effect of subjecting certain earnings of our foreign subsidiaries to U.S. taxation. +Implementation of the Tax Act required us to record incremental provisional tax expense in fiscal 2018, which increased our effective tax rate in fiscal 2018. We completed our analysis of the Tax Act in the second quarter of fiscal 2019 and no adjustments were made to the provisional amounts recorded. +We earn a substantial portion of our income in foreign countries and are subject to the tax laws of those jurisdictions. There have been proposals to reform foreign tax laws that could significantly impact how U.S. multinational corporations are taxed on foreign earnings. Although we cannot predict whether or in what form these proposals will pass, several of the proposals considered, if enacted into law, could have an adverse impact on our income tax expense and cash flows. +Portions of our operations are subject to a reduced tax rate or are free of tax under various tax holidays and rulings. We also utilize tax rulings and other agreements to obtain certainty in treatment of certain tax matters. These holidays and rulings expire in whole or in part from time to time and may be extended when certain conditions are met, or terminated if certain conditions are not met. The impact of any changes in conditions would be the loss of certainty in treatment thus potentially impacting our effective income tax rate. For example, in January 2019, the European Commission opened a formal investigation to examine whether the Netherlands has breached State Aid rules when granting certain tax rulings to the Company. If this matter is adversely resolved, the Netherlands may be required to assess additional amounts with respect to current and prior periods and the Company's Netherlands income taxes in the future could increase. +We are also subject to the examination of our tax returns by the United States Internal Revenue Service (“IRS”) and other tax authorities. We regularly assess the likelihood of an adverse outcome resulting from these examinations to determine the adequacy of its provision for income taxes. Although we believe our tax provisions are adequate, the final determination of tax audits and any related disputes could be materially different from our historical income tax provisions and accruals. The results of audits or related disputes could have an adverse effect on our financial statements for the period or periods for which the applicable final determinations are made. For example, we and our subsidiaries are also engaged in a number of intercompany transactions across multiple tax jurisdictions. Although we believe we have clearly reflected the economics of these transactions and the proper local transfer pricing documentation is in place, tax authorities may propose and sustain adjustments that could result in changes that may impact our mix of earnings in countries with differing statutory tax rates. +Changes to U.S. trade policy, tariff and import/export regulations or our failure to comply with such regulations may have a material adverse effect on our reputation, business, financial condition and results of operations. +Changes in U.S. or international social, political, regulatory and economic conditions or in laws and policies governing foreign trade, manufacturing, development and investment in the territories or countries where we currently sell our products or conduct our business, as well as any negative sentiment toward the U.S. as a result of such changes, could adversely affect our business. The U.S. presidential administration has instituted or proposed changes in trade policies that include the negotiation or termination of trade agreements, the imposition of higher tariffs on imports into the U.S., economic sanctions on individuals, corporations or countries, and other government regulations affecting trade between the U.S. and other countries where we conduct our business. It may be time-consuming and expensive for us to alter our business operations in order to adapt to or comply with any such changes. +As a result of recent policy changes of the U.S. presidential administration and recent U.S. government proposals, there may be greater restrictions and economic disincentives on international trade. The new tariffs and other changes in U.S. trade policy has in the past and could continue to trigger retaliatory actions by affected countries, and certain foreign governments have instituted +14 NIKE, INC. +Table of Contents +or are considering imposing retaliatory measures on certain U.S. goods. The Company, similar to many other multinational corporations, does a significant amount of business that would be impacted by changes to the trade policies of the U.S. and foreign countries (including governmental action related to tariffs, international trade agreements, or economic sanctions). Such changes have the potential to adversely impact the U.S. economy or certain sectors thereof, our industry and the global demand for our products, and as a result, could have a material adverse effect on our business, financial condition and results of operations. +If one or more of our counterparty financial institutions default on their obligations to us or fail, we may incur significant losses. +As part of our hedging activities, we enter into transactions involving derivative financial instruments, which may include forward contracts, commodity futures contracts, option contracts, collars and swaps with various financial institutions. In addition, we have significant amounts of cash, cash equivalents and other investments on deposit or in accounts with banks or other financial institutions in the United States and abroad. As a result, we are exposed to the risk of default by or failure of counterparty financial institutions. The risk of counterparty default or failure may be heightened during economic downturns and periods of uncertainty in the financial markets. If one of our counterparties were to become insolvent or file for bankruptcy, our ability to recover losses incurred as a result of default, or our assets deposited or held in accounts with such counterparty, may be limited by the counterparty's liquidity or the applicable laws governing the insolvency or bankruptcy proceedings. In the event of default or failure of one or more of our counterparties, we could incur significant losses, which could negatively impact our results of operations and financial condition. +We rely on a concentrated source base of contract manufacturers to supply a significant portion of our footwear products. +NIKE is supplied by 112 footwear factories located in 12 countries. We do not own or operate any of the footwear manufacturing facilities and depend upon independent contract manufacturers to manufacture all of the footwear products we sell. In fiscal 2019 , four footwear contract manufacturers each accounted for greater than 10% of fiscal 2019 footwear production and in aggregate accounted for approximately 61% of NIKE Brand footwear production in fiscal 2019 . Our ability to meet our customers' needs depends on our ability to maintain a steady supply of products from our independent contract manufacturers. If one or more of our significant suppliers were to sever their relationship with us or significantly alter the terms of our relationship, including due to changes in applicable trade policies, we may not be able to obtain replacement products in a timely manner, which could have a material adverse effect on our sales, financial condition or results of operations. Additionally, if any of our primary contract manufacturers fail to make timely shipments, do not meet our quality standards or otherwise fail to deliver us product in accordance with our plans, there could be a material adverse effect on our results of operations. +Our products are subject to risks associated with overseas sourcing, manufacturing and financing. +The principal materials used in our apparel products — natural and synthetic fabrics and threads, specialized performance fabrics designed to efficiently wick moisture away from the body, retain heat or repel rain and/or snow as well as plastic and metal hardware — are available in countries where our manufacturing takes place. The principal materials used in our footwear products — natural and synthetic rubber, plastic compounds, foam cushioning materials, natural and synthetic leather, natural and synthetic fabrics and threads, nylon, canvas and polyurethane films — are also locally available to manufacturers. Both our apparel and footwear products are dependent upon the ability of our unaffiliated contract manufacturers to locate, train, employ and retain adequate personnel. NIKE contractors and suppliers buy raw materials and are subject to wage rates that are oftentimes regulated by the governments of the countries in which our products are manufactured. +There could be a significant disruption in the supply of fabrics or raw materials from current sources or, in the event of a disruption, our contract manufacturers might not be able to locate alternative suppliers of materials of comparable quality at an acceptable price or at all. Further, our unaffiliated contract manufacturers have experienced and may continue to experience in the future, unexpected increases in work wages, whether government mandated or otherwise and increases in compliance costs due to governmental regulation concerning certain metals used in the manufacturing of our products. In addition, we cannot be certain that our unaffiliated manufacturers will be able to fill our orders in a timely manner. If we experience significant increases in demand, or reductions in the availability of materials, or need to replace an existing manufacturer, there can be no assurance additional supplies of fabrics or raw materials or additional manufacturing capacity will be available when required on terms acceptable to us, or at all, or that any supplier or manufacturer would allocate sufficient capacity to us in order to meet our requirements. In addition, even if we are able to expand existing or find new manufacturing or sources of materials, we may encounter delays in production and added costs as a result of the time it takes to train suppliers and manufacturers in our methods, products, quality control standards and labor, health and safety standards. Any delays, interruption or increased costs in labor or wages, or the supply of materials or manufacture of our products could have an adverse effect on our ability to meet retail customer and consumer demand for our products and result in lower revenues and net income both in the short- and long-term. +2019 FORM 10-K 15 +Table of Contents +Because independent manufacturers make a majority of our products outside of our principal sales markets, our products must be transported by third parties over large geographic distances. Delays in the shipment or delivery of our products due to the availability of transportation, work stoppages, port strikes, infrastructure congestion or other factors, and costs and delays associated with consolidating or transitioning between manufacturers, could adversely impact our financial performance. In addition, manufacturing delays or unexpected demand for our products may require us to use faster, but more expensive, transportation methods such as air freight, which could adversely affect our profit margins. The cost of oil is a significant component in manufacturing and transportation costs, so increases in the price of petroleum products can adversely affect our profit margins. Changes in U.S. trade policies, including new and potential changes to import tariffs and existing trade policies and agreements, could also have a significant impact on our activities in foreign jurisdictions, and could adversely affect our results of operations. +In addition, Sojitz America performs significant import-export financing services for the Company. During fiscal 2019, Sojitz America provided financing and purchasing services for NIKE Brand products sold in certain NIKE markets including Argentina, Brazil, Canada, India, South Africa and Uruguay (collectively the “Sojitz Markets”), excluding products produced and sold in the same country. Any failure of Sojitz America to provide these services or any failure of Sojitz America's banks could disrupt our ability to acquire products from our suppliers and to deliver products to our customers in the Sojitz Markets. Such a disruption could result in canceled orders that would adversely affect sales and profitability. +Our success depends on our global distribution facilities. +We distribute our products to customers directly from the factory and through distribution centers located throughout the world. Our ability to meet customer expectations, manage inventory, complete sales and achieve objectives for operating efficiencies and growth, particularly in emerging markets, depends on the proper operation of our distribution facilities, the development or expansion of additional distribution capabilities and the timely performance of services by third parties (including those involved in shipping product to and from our distribution facilities). Our distribution facilities could be interrupted by information technology problems and disasters such as earthquakes or fires. Any significant failure in our distribution facilities could result in an adverse effect on our business. We maintain business interruption insurance, but it may not adequately protect us from adverse effects caused by significant disruptions in our distribution facilities. +We rely significantly on information technology to operate our business, including our supply chain and retail operations, and any failure, inadequacy or interruption of that technology could harm our ability to effectively operate our business. +We are heavily dependent on information technology systems and networks, including the Internet and third-party services (“Information Technology Systems”), across our supply chain, including product design, production, forecasting, ordering, manufacturing, transportation, sales and distribution, as well as for processing financial information for external and internal reporting purposes, retail operations and other business activities. Information Technology Systems are critical to many of our operating activities and our business processes and may be negatively impacted by any service interruption or shutdown. For example, our ability to effectively manage and maintain our inventory and to ship products to customers on a timely basis depends significantly on the reliability of these Information Technology Systems. Over a number of years, we have implemented Information Technology Systems in all of the geographical regions in which we operate. Our work to integrate, secure and enhance these systems and related processes in our global operations is ongoing and NIKE will continue to invest in these efforts. The failure of these systems to operate effectively, including as a result of security breaches, viruses, hackers, malware, natural disasters, vendor business interruptions or other causes, or failure to properly maintain, protect, repair or upgrade systems, or problems with transitioning to upgraded or replacement systems could cause delays in product fulfillment and reduced efficiency of our operations, could require significant capital investments to remediate the problem which may not be sufficient to cover all eventualities, and may have an adverse effect on our reputation, results of operations and financial condition. +We also use Information Technology Systems to process financial information and results of operations for internal reporting purposes and to comply with regulatory financial reporting, legal and tax requirements. If Information Technology Systems suffer severe damage, disruption or shutdown and our business continuity plans, or those of our vendors, do not effectively resolve the issues in a timely manner, we could experience delays in reporting our financial results, which could result in lost revenues and profits, as well as reputational damage. Furthermore, we depend on Information Technology Systems and personal data collection for digital marketing, digital commerce, consumer engagement and the marketing and use of our digital products and services. We also rely on our ability to engage in electronic communications throughout the world between and among our employees as well as with other third parties, including customers, suppliers, vendors and consumers. Any interruption in Information Technology Systems may impede our ability to engage in the digital space and result in lost revenues, damage to our reputation, and loss of users. +The market for prime real estate is competitive. +Our ability to effectively obtain real estate to open new retail stores and otherwise conduct our operations, both domestically and internationally, depends on the availability of real estate that meets our criteria for traffic, square footage, co-tenancies, lease +16 NIKE, INC. +Table of Contents +economics, demographics and other factors. We also must be able to effectively renew our existing real estate leases. In addition, from time to time, we seek to downsize, consolidate, reposition or close some of our real estate locations, which may require modification of an existing lease. Failure to secure adequate new locations or successfully modify leases for existing locations, or failure to effectively manage the profitability of our existing fleet of retail stores, could have an adverse effect on our operating results and financial condition. +Additionally, the economic environment may make it difficult to determine the fair market rent of real estate properties domestically and internationally. This could impact the quality of our decisions to exercise lease options at previously negotiated rents and to renew expiring leases at negotiated rents. Any adverse effect on the quality of these decisions could impact our ability to retain real estate locations adequate to meet our targets or efficiently manage the profitability of our existing fleet of stores, which could have an adverse effect on our operating results and financial condition. +Extreme weather conditions and natural disasters could negatively impact our operating results and financial condition. +Extreme weather conditions in the areas in which our retail stores, suppliers, customers, distribution centers, headquarters and vendors are located could adversely affect our operating results and financial condition. Moreover, natural disasters such as earthquakes, hurricanes and tsunamis, whether occurring in the United States or abroad, and their related consequences and effects, including energy shortages and public health issues, could disrupt our operations, the operations of our vendors and other suppliers or result in economic instability that may negatively impact our operating results and financial condition. +Our financial results may be adversely affected if substantial investments in businesses and operations fail to produce expected returns. +From time to time, we may invest in technology, business infrastructure, new businesses, product offering and manufacturing innovation and expansion of existing businesses, such as our digital commerce operations, which require substantial cash investments and management attention. We believe cost-effective investments are essential to business growth and profitability; however, significant investments are subject to typical risks and uncertainties inherent in developing a new business or expanding an existing business. The failure of any significant investment to provide expected returns or profitability could have a material adverse effect on our financial results and divert management attention from more profitable business operations. +We are subject to a complex array of laws and regulations and litigation and other legal and regulatory proceedings, which could have an adverse effect on our business, financial condition and results of operations. +As a multinational corporation with operations and distribution channels throughout the world, we are subject to and must comply with extensive laws and regulations in the U.S. and other jurisdictions in which we have operations and distribution channels. If we or our employees, agents, suppliers, and other partners fail to comply with any of these laws or regulations, such failure could subject us to fines, sanctions or other penalties that could negatively affect our reputation, business, financial condition and results of operations. We are involved in various types of claims, lawsuits, regulatory proceedings and government investigations relating to our business, our products and the actions of our employees and representatives, including contractual and employment relationships, product liability, antitrust, trademark rights and a variety of other matters. It is not possible to predict with certainty the outcome of any such legal or regulatory proceedings or investigations, and we could in the future incur judgments, fines or penalties, or enter into settlements of lawsuits and claims that could have a material adverse effect on our business, financial condition and results of operations and negatively impact our reputation. The global nature of our business means legal and compliance risks, such as anti-bribery, anti-corruption, fraud, trade, environmental, competition, privacy and other regulatory matters, will continue to exist and additional legal proceedings and other contingencies will arise from time to time, which could adversely affect us. In addition, the adoption of new laws or regulations, or changes in the interpretation of existing laws or regulations, may result in significant unanticipated legal and reputational risks. Any current or future legal or regulatory proceedings could divert management's attention from our operations and result in substantial legal fees. +The success of our business depends, in part, on high-quality employees, including key personnel. +Our success depends in part on the continued service of high-quality employees, including key executive officers and personnel. The loss of the services of key individuals, or any negative perception with respect to these individuals, could harm our business. Our success also depends on our ability to recruit, retain and engage our personnel sufficiently, both to maintain our current business and to execute our strategic initiatives. Competition for employees in our industry is intense and we may not be successful in attracting and retaining such personnel. In addition, shifts in U.S. immigration policy could negatively impact our ability to attract, hire and retain highly skilled employees who are from outside the U.S. +The sale of a large number of shares of common stock by our principal stockholder could depress the market price of our common stock. +As of June 30, 2019, Swoosh, LLC beneficially owned approximately 78% of our Class A Common Stock. If, on June 30, 2019, all of these shares were converted into Class B Common Stock, the commensurate ownership percentage of our Class B Common Stock would be approximately 16%. The shares are available for resale, subject to the requirements of the U.S. securities laws and the terms of the limited liability company agreement governing Swoosh, LLC. The sale or prospect of a sale of a substantial +2019 FORM 10-K 17 +Table of Contents +number of these shares could have an adverse effect on the market price of our common stock. Swoosh, LLC was formed by Philip H. Knight, our Chairman Emeritus, to hold the majority of his shares of Class A Common Stock. Swoosh, LLC is controlled by Mr. Knight's son and NIKE director, Travis Knight. +Changes in our credit ratings or macroeconomic conditions may affect our liquidity, increasing borrowing costs and limiting our financing options. +Our long-term debt is currently rated Investment Grade by Standard & Poor's and Moody's Investors Service. If our credit ratings are lowered, borrowing costs for future long-term debt or short-term credit facilities may increase and our financing options, including our access to the unsecured credit market, could be limited. We may also be subject to restrictive covenants that would reduce our flexibility to, among other things, incur additional indebtedness, make restricted payments, pledge assets as security, make investments, loans, advances, guarantees and acquisitions, undergo fundamental changes and enter into transactions with affiliates. Failure to comply with such covenants could result in a default, and as a result, the commitments of our lenders under our credit agreements may be terminated and the maturity of amounts owed may be accelerated. In addition, macroeconomic conditions, such as increased volatility or disruption in the credit markets, could adversely affect our ability to refinance existing debt. +If our internal controls are ineffective, our operating results could be adversely affected. +Our internal control over financial reporting may not prevent or detect misstatements because of its inherent limitations, including the possibility of human error, the circumvention or overriding of controls or fraud. Even effective internal controls can provide only reasonable assurance with respect to the preparation and fair presentation of financial statements. If we fail to maintain the adequacy of our internal controls, including any failure to implement required new or improved controls, or if we experience difficulties in their implementation, our business and operating results could be harmed and we could fail to meet our financial reporting obligations. +If our estimates or judgments relating to our critical accounting policies prove to be incorrect, our operating results could be adversely affected. +The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. We base our estimates on historical experience and on various other assumptions we believe to be reasonable under the circumstances, as provided in “Management's Discussion and Analysis of Financial Condition and Results of Operations.” The results of these estimates form the basis for making judgments about the carrying values of assets, liabilities and equity, and the amount of revenue and expenses that are not readily apparent from other sources. Significant assumptions and estimates used in preparing our consolidated financial statements include those related to revenue recognition, inventory reserves, contingent payments under endorsement contracts, accounting for property, plant and equipment and definite-lived assets, hedge accounting for derivatives, stock-based compensation, income taxes and other contingencies. Our operating results may be adversely affected if our assumptions change or if actual circumstances differ from those in our assumptions, which could cause our operating results to fall below the expectations of securities analysts and investors, resulting in a decline in the price of our Class B Common Stock. +Anti-takeover provisions may impair an acquisition of the Company or reduce the price of our common stock. +There are provisions within our articles of incorporation and Oregon law intended to protect shareholder interests by providing the Board of Directors a means to attempt to deny coercive takeover attempts or to negotiate with a potential acquirer in order to obtain more favorable terms. Such provisions include a control share acquisition statute, a freeze-out statute, two classes of stock that vote separately on certain issues, and the fact that holders of Class A Common Stock elect three-quarters of the Board of Directors rounded down to the next whole number. However, such provisions could discourage, delay or prevent an unsolicited merger, acquisition or other change in control of our company that some shareholders might believe to be in their best interests or in which shareholders might receive a premium for their common stock over the prevailing market price. These provisions could also discourage proxy contests for control of the Company. +We may fail to meet market expectations, which could cause the price of our stock to decline. +Our Class B Common Stock is traded publicly, and at any given time various securities analysts follow our financial results and issue reports on us. These reports include information about our historical financial results as well as analysts' opinions of our future performance, which may, in part, be based upon any guidance we have provided. Analysts' estimates are often different from our estimates or expectations. If our operating results are below the estimates or expectations of public market analysts and investors, our stock price could decline. In the past, securities class action litigation has been brought against NIKE and other companies following a decline in the market price of their securities. If our stock price is volatile for any reason, we may become involved in this type of litigation in the future. Any litigation could result in reputational damage, substantial costs and a diversion of management's attention and resources needed to successfully run our business. +18 NIKE, INC. +Table of Contents +ITEM 1B. UNRESOLVED STAFF COMMENTS +None. +ITEM 2. PROPERTIES +The following is a summary of principal properties owned or leased by NIKE: +The NIKE World Campus, owned by NIKE and located near Beaverton, Oregon, USA, is an approximately 400-acre site consisting of over 40 buildings which, together with adjacent leased properties, functions as our world headquarters and is occupied by approximately 12,600 employees engaged in management, research, design, development, marketing, finance and other administrative functions serving nearly all of our segments. We lease a similar, but smaller, administrative facility in Hilversum, the Netherlands, which serves as the headquarters for the Europe, Middle East & Africa geography and management of certain brand functions for our non-U.S. operations. We also lease an office complex in Shanghai, China, our headquarters for Greater China, occupied by employees focused on implementing our wholesale, NIKE Direct and merchandising strategies in the region, among other functions. +In the United States, NIKE has six significant distribution centers. Four are located in Memphis, Tennessee, two of which are owned and two of which are leased. Two other distribution centers, one located in Indianapolis, Indiana and one located in Dayton, Tennessee, are leased and operated by third-party logistics providers. NIKE Brand apparel and equipment are also shipped from our Foothill Ranch, California distribution center, which we lease. NIKE has several distribution facilities outside the United States, some of which are leased and operated by third-party logistics providers. The most significant distribution facilities outside the United States are located in Laakdal, Belgium; Taicang, China; Tomisato, Japan and Incheon, Korea, all of which we own. +Air Manufacturing Innovation manufactures Air-Sole cushioning components at NIKE-owned facilities and one leased facility located near Beaverton, Oregon and in St. Charles, Missouri. Air Manufacturing Innovation also manufactures and sells small amounts of various other plastic products to other manufacturers. +Aside from the principal properties described above, we lease many offices worldwide for sales and administrative purposes. We lease 1,147 retail stores worldwide, which primarily consist of factory stores. See “United States Market” and “International Markets” in Part I of this Report for additional information regarding our retail stores. Our leases expire at various dates through the year 2043 . +ITEM 3. LEGAL PROCEEDINGS +There are no material pending legal proceedings, other than ordinary routine litigation incidental to our business, to which we are a party or of which any of our property is the subject. +ITEM 4. MINE SAFETY DISCLOSURES +Not applicable. +2019 FORM 10-K 19 +Table of Contents +PART II +ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES +NIKE's Class B Common Stock is listed on the New York Stock Exchange and trades under the symbol NKE. At July 19, 2019, there were 23,305 holders of record of NIKE's Class B Common Stock and 13 holders of record of NIKE's Class A Common Stock. These figures do not include beneficial owners who hold shares in nominee name. The Class A Common Stock is not publicly traded, but each share is convertible upon request of the holder into one share of Class B Common Stock. Refer to Selected Quarterly Financial Data in Part II, Item 6 of this Report for dividends declared on the Class A and Class B Common Stock. +During the third quarter of fiscal 2019, the Company completed the previous four-year, $12 billion share repurchase program authorized by the Board of Directors in November 2015. Throughout this program the Company purchased a total of +192.1 million shares at an average price of $62.47 per share. Upon completion of this program, the Company began purchasing shares under the new four-year, $15 billion share repurchase program authorized by the Board of Directors in June 2018. As of May 31, 2019 , the Company had repurchased 11.6 million shares at an average price of $84.72 per share for a total approximate cost of $986 million under this new program. +All share repurchases were made under NIKE's publicly announced program and there are no other programs under which the Company repurchases shares. The following table presents a summary of share repurchases made during the quarter ended May 31, 2019 : +PERIOD +TOTAL NUMBER OF SHARES PURCHASED +AVERAGE PRICE +PAID PER SHARE +APPROXIMATE DOLLAR +VALUE OF SHARES THAT +MAY YET BE PURCHASED +UNDER THE PLANS +OR PROGRAMS +(IN MILLIONS) +March 1 — March 31, 2019 +2,939,869 +$ +85.33 +$ +14,660 +April 1 — April 30, 2019 +3,303,884 +$ +86.53 +$ +14,374 +May 1 — May 31, 2019 +4,346,128 +$ +82.85 +$ +14,014 +10,589,881 +$ +84.69 +20 NIKE, INC. +Table of Contents +PERFORMANCE GRAPH +The following graph demonstrates a five-year comparison of cumulative total returns for NIKE's Class B Common Stock; the Standard & Poor's 500 Stock Index; the Standard & Poor's Apparel, Accessories & Luxury Goods Index; and the Dow Jones U.S. Footwear Index. The graph assumes an investment of $100 on May 31, 2014 in each of the indices and our Class B Common Stock. Each of the indices assumes that all dividends were reinvested on the day of issuance. +COMPARISON OF 5-YEAR CUMULATIVE TOTAL RETURN AMONG NIKE, INC.; S&P 500 INDEX; THE DOW JONES U.S. FOOTWEAR INDEX; AND S&P APPAREL, ACCESSORIES & LUXURY GOODS INDEX +The Dow Jones U.S. Footwear Index consists of NIKE, Deckers Outdoor Corporation, Skechers U.S.A., Inc., Steven Madden, Ltd. and Wolverine World Wide, Inc. Because NIKE is part of the Dow Jones U.S. Footwear Index, the price and returns of NIKE stock have a substantial effect on this index. The Standard & Poor's Apparel, Accessories & Luxury Goods Index consists of Capri Holdings Limited, Hanesbrands Inc., PVH Corporation, Ralph Lauren Corporation, Tapestry, Inc., Under Armour, Inc. and V.F. Corporation. The Dow Jones U.S. Footwear Index and the Standard & Poor's Apparel, Accessories & Luxury Goods Index include companies in two major lines of business in which the Company competes. The indices do not encompass all of the Company's competitors, nor all product categories and lines of business in which the Company is engaged. +The stock performance shown on the performance graph above is not necessarily indicative of future performance. The Company will not make or endorse any predictions as to future stock performance. +The performance graph above is being furnished solely to accompany this Report pursuant to Item 201(e) of Regulation S-K, is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing. +2019 FORM 10-K 21 +Table of Contents +ITEM 6. SELECTED FINANCIAL DATA +All share and per share amounts are reflective of the two-for-one stock split that began trading at the split-adjusted price on December 24, 2015. +(In millions, except per share data and financial ratios) +FINANCIAL HISTORY +2019 +2018 +2017 +2016 +2015 +Year Ended May 31, +Revenues +$ +39,117 +$ +36,397 +$ +34,350 +$ +32,376 +$ +30,601 +Gross profit +17,474 +15,956 +15,312 +14,971 +14,067 +Gross margin +44.7 +% +43.8 +% +44.6 +% +46.2 +% +46.0 +% +Net income (1) +4,029 +1,933 +4,240 +3,760 +3,273 +Earnings per common share: (1) +Basic +2.55 +1.19 +2.56 +2.21 +1.90 +Diluted +2.49 +1.17 +2.51 +2.16 +1.85 +Weighted average common shares outstanding +1,579.7 +1,623.8 +1,657.8 +1,697.9 +1,723.5 +Diluted weighted average common shares outstanding +1,618.4 +1,659.1 +1,692.0 +1,742.5 +1,768.8 +Cash dividends declared per common share +0.86 +0.78 +0.70 +0.62 +0.54 +Cash provided by operations +5,903 +4,955 +3,846 +3,399 +4,906 +At May 31, +Cash and equivalents +$ +4,466 +$ +4,249 +$ +3,808 +$ +3,138 +$ +3,852 +Short-term investments +197 +996 +2,371 +2,319 +2,072 +Inventories +5,622 +5,261 +5,055 +4,838 +4,337 +Working capital +8,659 +9,094 +10,587 +9,667 +9,255 +Total assets (2)(3) +23,717 +22,536 +23,259 +21,379 +21,590 +Long-term debt +3,464 +3,468 +3,471 +1,993 +1,072 +Capital lease obligations +60 +75 +27 +15 +5 +Redeemable preferred stock +0.3 +0.3 +0.3 +0.3 +0.3 +Shareholders' equity (3) +9,040 +9,812 +12,407 +12,258 +12,707 +Market capitalization +120,951 +114,983 +87,084 +92,867 +87,044 +Financial Ratios: +Return on equity (1)(3) +42.7 +% +17.4 +% +34.4 +% +30.1 +% +27.8 +% +Return on assets (1)(2)(3) +17.4 +% +8.4 +% +19.0 +% +17.5 +% +16.3 +% +Inventory turns +4.0 +4.0 +3.8 +3.8 +4.0 +Current ratio at May 31 +2.1 +2.5 +2.9 +2.8 +2.5 +Price/Earnings ratio at May 31 (1) +31.0 +61.4 +21.1 +25.6 +27.5 +(1) +Fiscal 2018 reflects the impact from the enactment of the Tax Cuts and Jobs Act. Refer to Note 9 — Income Taxes in the accompanying Notes to the Consolidated Financial Statements for additional information. +(2) +Fiscal 2019 reflects the impact from the a doption of Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606). Refer to Note 1 — Summary of Significant Accounting Policies in the accompanying Notes to the Consolidated Financial Statements f or additional information. +(3) +Fiscal 2019 reflects the impact from the adoption of ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. Refer to Note 1 — Summary of Significant Accounting Policies in the accompanying Notes to the Consolidated Financial Statements for additional information. +22 NIKE, INC. +Table of Contents +SELECTED QUARTERLY FINANCIAL DATA +(UNAUDITED) +1ST QUARTER +2ND QUARTER +3RD QUARTER +4TH QUARTER +(In millions, except per share data) +2019 +2018 +2019 +2018 +2019 +2018 (1) +2019 +2018 +Revenues +$ +9,948 +$ +9,070 +$ +9,374 +$ +8,554 +$ +9,611 +$ +8,984 +$ +10,184 +$ +9,789 +Gross profit +4,397 +3,962 +4,105 +3,678 +4,339 +3,938 +4,633 +4,378 +Gross margin +44.2 +% +43.7 +% +43.8 +% +43.0 +% +45.1 % +43.8 % +45.5 +% +44.7 +% +Net income (loss) +1,092 +950 +847 +767 +1,101 +(921 +) +989 +1,137 +Earnings (loss) per common share: +Basic +0.69 +0.58 +0.54 +0.47 +0.70 +(0.57 +) +0.63 +0.71 +Diluted +0.67 +0.57 +0.52 +0.46 +0.68 +(0.57 +) +0.62 +0.69 +Weighted average common +shares outstanding +1,594.0 +1,639.1 +1,581.4 +1,627.0 +1,572.8 +1,623.5 +1,570.2 +1,605.7 +Diluted weighted average common +shares outstanding +1,634.4 +1,676.9 +1,620.7 +1,660.9 +1,609.6 +1,623.5 +1,607.5 +1,641.2 +Cash dividends declared per +common share +0.20 +0.18 +0.22 +0.20 +0.22 +0.20 +0.22 +0.20 +(1) +The third quarter of fiscal 2018 reflects the impact from the enactment of the Tax Cuts and Jobs Act. Refer to Note 9 — Income Taxes in the accompanying Notes to the Consolidated Financial Statements for additional information. +2019 FORM 10-K 23 +Table of Contents +ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS +NIKE designs, develops, markets and sells athletic footwear, apparel, equipment, accessories and services worldwide. We are the largest seller of athletic footwear and apparel in the world. We sell our products through NIKE-owned retail stores and through digital platforms (which we refer to collectively as our “NIKE Direct” operations), to retail accounts and to a mix of independent distributors, licensees and sales representatives in virtually all countries around the world. Our goal is to deliver value to our shareholders by building a profitable global portfolio of branded footwear, apparel, equipment and accessories businesses. Our strategy is to achieve long-term revenue growth by creating innovative, “must-have” products, building deep personal consumer connections with our brands and delivering compelling consumer experiences through digital platforms and at retail. +Through the Consumer Direct Offense, we are focusing on our Triple Double strategy, with the objective of doubling the impact of innovation, increasing our speed to market and growing our direct connections with consumers. As a result of the execution of this strategy, our long-term financial goals through fiscal 2023, on average, per year, are as follows: +• +High single-digit revenue growth; +• +Gross margin expansion of as much as 50 basis points; +• +Slight selling and administrative expense leverage; +• +Mid-teens earnings per share growth; and +• +Low-thirties percentage rate of return on invested capital. +Fiscal 2019 was our first full year executing against our new strategy and our results demonstrated the power of the NIKE, Inc. portfolio to generate revenue growth, while investing in capabilities to fuel our next phase of long-term growth and profitability. We achieved record revenues in fiscal 2019, growing 7% to $39.1 billion. The NIKE Brand, which represents over 90% of NIKE, Inc. Revenues , delivered 8% revenue growth fueled by investments in innovative products and digital platforms. On a currency-neutral basis, NIKE Brand revenues grew 11%, driven by growth across all geographies, NIKE Direct and wholesale, nearly all key categories and double-digit growth across footwear and apparel. Within our NIKE Direct business, digital outpaced all other channels, growing at 35% in fiscal 2019. Revenues for Converse increased 1% and 3% on a reported and currency-neutral basis, respectively, primarily driven by double-digit growth in Asia and digital, which was partially offset by declines in the U.S. and Europe. +Income before income taxes increased 11% for fiscal 2019, as revenue growth and gross margin expansion were partially offset by higher selling and administrative expense. NIKE, Inc. gross margin increased 90 basis points primarily due to higher full-price average selling price (ASP), on a wholesale equivalent basis, favorable changes in foreign currency exchange rates and growth in NIKE Direct. These benefits were partially offset by higher product costs. Selling and administrative expense was higher as a percent of revenues, reflecting investments in data and analytics capabilities, digital commerce platforms and an initial investment in a new enterprise resource planning tool to accelerate our end-to-end digital transformation. Additionally, we prioritized investments in global brand campaigns aimed at deepening our connection with consumers. +Diluted earnings per common share reflects a 2% decline in the weighted average diluted common shares outstanding, driven by our share repurchase program. +While foreign currency markets remain volatile, in part due to geopolitical dynamics leading to a stronger U.S. Dollar, we continue to see opportunities to drive future growth and profitability, and remain committed to effectively managing our business to achieve our financial goals over the long-term by executing against the operational strategies outlined above. +24 NIKE, INC. +Table of Contents +For discussion related to the results of operations and changes in financial condition for fiscal 2018 compared to fiscal 2017 refer to Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in our fiscal 2018 Form 10-K, which was filed with the United States Securities and Exchange Commission on July 25, 2018. +USE OF NON-GAAP FINANCIAL MEASURES +Throughout this Annual Report on Form 10-K, we discuss non-GAAP financial measures, including references to wholesale equivalent revenues and currency-neutral revenues, which should be considered in addition to, and not in lieu of, the financial measures calculated and presented in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). References to wholesale equivalent revenues are intended to provide context as to the total size of our NIKE Brand market footprint if we had no NIKE Direct operations. NIKE Brand wholesale equivalent revenues consist of (1) sales to external wholesale customers and (2) internal sales from our wholesale operations to our NIKE Direct operations, which are charged at prices comparable to those charged to external wholesale customers. Additionally, currency-neutral revenues are calculated using actual exchange rates in use during the comparative prior year period to enhance the visibility of the underlying business trends excluding the impact of translation arising from foreign currency exchange rate fluctuations. +Management uses these non-GAAP financial measures when evaluating the Company's performance, including when making financial and operating decisions. Additionally, management believes these non-GAAP financial measures provide investors with additional financial information that should be considered when assessing our underlying business performance and trends. However, references to wholesale equivalent revenues and currency-neutral revenues should not be considered in isolation or as a substitute for other financial measures calculated and presented in accordance with U.S. GAAP and may not be comparable to similarly titled non-GAAP measures used by other companies. +2019 FORM 10-K 25 +Table of Contents +RESULTS OF OPERATIONS +(Dollars in millions, except per share data) +FISCAL 2019 +FISCAL 2018 (1) +% CHANGE +FISCAL 2017 +% CHANGE +Revenues +$ +39,117 +$ +36,397 +7 +% +$ +34,350 +6 +% +Cost of sales +21,643 +20,441 +6 +% +19,038 +7 +% +Gross profit +17,474 +15,956 +10 +% +15,312 +4 +% +Gross margin +44.7 +% +43.8 +% +44.6 +% +Demand creation expense +3,753 +3,577 +5 +% +3,341 +7 +% +Operating overhead expense +8,949 +7,934 +13 +% +7,222 +10 +% +Total selling and administrative expense +12,702 +11,511 +10 +% +10,563 +9 +% +% of revenues +32.5 +% +31.6 +% +30.8 +% +Interest expense (income), net +49 +54 +— +59 +— +Other (income) expense, net +(78 +) +66 +— +(196 +) +— +Income before income taxes +4,801 +4,325 +11 +% +4,886 +-11 +% +Income tax expense +772 +2,392 +-68 +% +646 +270 +% +Effective tax rate +16.1 +% +55.3 +% +13.2 +% +NET INCOME +$ +4,029 +$ +1,933 +108 +% +$ +4,240 +-54 +% +Diluted earnings per common share +$ +2.49 +$ +1.17 +113 +% +$ +2.51 +-53 +% +(1) +Fiscal 2018 reflects the impact from the enactment of the Tax Cuts and Jobs Act. Refer to Note 9 — Income Taxes in the accompanying Notes to the Consolidated Financial Statements for additional information. +26 NIKE, INC. +Table of Contents +CONSOLIDATED OPERATING RESULTS +REVENUES +(Dollars in millions) +FISCAL 2019 +FISCAL +2018 (1) +% CHANGE +% CHANGE EXCLUDING CURRENCY CHANGES (2) +FISCAL 2017 (1) +% CHANGE +% CHANGE EXCLUDING CURRENCY CHANGES (2) +NIKE, Inc. Revenues: +NIKE Brand Revenues by: +Footwear +$ +24,222 +$ +22,268 +9 +% +12 +% +$ +21,081 +6 +% +4 +% +Apparel +11,550 +10,733 +8 +% +11 +% +9,654 +11 +% +9 +% +Equipment +1,404 +1,396 +1 +% +4 +% +1,425 +-2 +% +-4 +% +Global Brand Divisions (3) +42 +88 +-52 +% +-53 +% +73 +21 +% +12 +% +Total NIKE Brand Revenues +37,218 +34,485 +8 +% +11 +% +32,233 +7 +% +5 +% +Converse +1,906 +1,886 +1 +% +3 +% +2,042 +-8 +% +-11 +% +Corporate (4) +(7 +) +26 +— +— +75 +— +— +TOTAL NIKE, INC. REVENUES +$ +39,117 +$ +36,397 +7 +% +11 +% +$ +34,350 +6 +% +4 +% +Supplemental NIKE Brand Revenues Details: +NIKE Brand Revenues by: +Sales to Wholesale Customers +$ +25,423 +$ +23,969 +6 +% +10 +% +$ +23,078 +4 +% +2 +% +Sales through NIKE Direct +11,753 +10,428 +13 +% +16 +% +9,082 +15 +% +12 +% +Global Brand Divisions (3) +42 +88 +-52 +% +-53 +% +73 +21 +% +12 +% +TOTAL NIKE BRAND REVENUES +$ +37,218 +$ +34,485 +8 +% +11 +% +$ +32,233 +7 +% +5 +% +NIKE Brand Revenues on a Wholesale Equivalent Basis: (2) +Sales to Wholesale Customers +$ +25,423 +$ +23,969 +6 +% +10 +% +$ +23,078 +4 +% +2 +% +Sales from our Wholesale Operations to NIKE Direct Operations +7,127 +6,332 +13 +% +16 +% +5,616 +13 +% +10 +% +TOTAL NIKE BRAND WHOLESALE EQUIVALENT REVENUES +$ +32,550 +$ +30,301 +7 +% +11 +% +$ +28,694 +6 +% +4 +% +NIKE Brand Wholesale Equivalent Revenues by: (2) +Men's +$ +17,737 +$ +16,698 +6 +% +10 +% +$ +15,819 +6 +% +4 +% +Women's +7,380 +6,913 +7 +% +11 +% +6,637 +4 +% +2 +% +NIKE Kids' +5,283 +4,906 +8 +% +11 +% +4,838 +1 +% +-1 +% +Others (5) +2,150 +1,784 +21 +% +25 +% +1,400 +27 +% +14 +% +TOTAL NIKE BRAND WHOLESALE EQUIVALENT REVENUES +$ +32,550 +$ +30,301 +7 +% +11 +% +$ +28,694 +6 +% +4 +% +NIKE Brand Wholesale Equivalent Revenues by: (2) +Running +$ +4,488 +$ +4,496 +0 +% +4 +% +$ +4,576 +-2 +% +-4 +% +NIKE Basketball +1,597 +1,494 +7 +% +9 +% +1,292 +16 +% +14 +% +Jordan Brand +3,138 +2,856 +10 +% +12 +% +3,098 +-8 +% +-9 +% +Football (Soccer) +1,894 +2,146 +-12 +% +-6 +% +1,984 +8 +% +5 +% +Training +3,137 +3,126 +0 +% +3 +% +3,080 +1 +% +0 +% +Sportswear +12,442 +10,720 +16 +% +21 +% +9,272 +16 +% +13 +% +Others (6) +5,854 +5,463 +7 +% +9 +% +5,392 +1 +% +0 +% +TOTAL NIKE BRAND WHOLESALE EQUIVALENT REVENUES +$ +32,550 +$ +30,301 +7 +% +11 +% +$ +28,694 +6 +% +4 +% +(1) +Certain prior year amounts have been reclassified to conform to fiscal 2019 presentation. These changes had no impact on previously reported consolidated results of operations or shareholders' equity. +(2) +The percent change excluding currency changes and the presentation of wholesale equivalent revenues represent non-GAAP financial measures. See "Use of Non-GAAP Financial Measures" for further information. +(3) +Global Brand Divisions revenues are primarily attributable to NIKE Brand licensing businesses that are not part of a geographic operating segment. +2019 FORM 10-K 27 +Table of Contents +(4) +Corporate revenues primarily consist of foreign currency hedge gains and losses related to revenues generated by entities within the NIKE Brand geographic operating segments and Converse, but managed through our central foreign exchange risk management program. +(5) +Others include all unisex products, equipment and other products not allocated to Men's, Women's and NIKE Kids', as well as certain adjustments that are not allocated to products designated by gender or age. +(6) +Others include all other categories and certain adjustments that are not allocated at the category level. +FISCAL 2019 NIKE BRAND REVENUE HIGHLIGHTS +The following tables present NIKE Brand revenues disaggregated by reportable operating segment, distribution channel and major product line: +FISCAL 2019 COMPARED TO FISCAL 2018 +On a currency-neutral basis, NIKE, Inc. Revenues grew 11% for fiscal 2019 , driven by growth in both the NIKE Brand and Converse. All NIKE Brand geographies delivered higher revenues for fiscal 2019 as our Consumer Direct Offense continued to deliver innovative products, deep brand connections and compelling retail experiences to consumers through NIKE.com and related mobile applications, digital partner platforms, NIKE-owned and partner stores, as well as through our wholesale customers. Revenue growth was broad-based as Greater China, North America and EMEA each contributed approximately 3 percentage points of growth to NIKE, Inc. Revenues , with APLA contributing approximately 2 percentage points of growth. +On a currency-neutral basis, NIKE Brand footwear and apparel revenues increased 12% and 11% , respectively, for fiscal 2019 , while NIKE Brand equipment revenues grew 4% . On a category basis, the increase in NIKE Brand footwear revenues was driven by growth in nearly all key categories, led by Sportswear and, to a lesser extent, the Jordan Brand and Running. Unit sales of footwear increased 8% and higher ASP per pair contributed approximately 4 percentage points of footwear revenue growth, primarily due to higher full-price and NIKE Direct ASPs. +The currency-neutral increase in NIKE Brand apparel revenues for fiscal 2019 was fueled by growth in nearly all key categories, most notably Sportswear. Unit sales of apparel increased 6% and higher ASP per unit contributed approximately 5 percentage points of apparel revenue growth, primarily due to higher full-price ASP, in part reflecting lower discounts, as well as higher NIKE Direct ASP. +On a reported basis, NIKE Direct revenues represented approximately 32% of our total NIKE Brand revenues for fiscal 2019 compared to 30% for fiscal 2018 . Digital commerce sales were $3.8 billion for fiscal 2019 compared to $2.8 billion for fiscal 2018 . On a currency-neutral basis, NIKE Direct revenues increased 16% for fiscal 2019 , driven by strong digital commerce sales growth of 35%, comparable store sales growth of 6% and the addition of new stores. Comparable store sales, which exclude digital commerce sales, comprises revenue from NIKE-owned in-line and factory stores for which all three of the following requirements have been met: (1) the store has been open at least one year, (2) square footage has not changed by more than 15% within the past year and (3) the store has not been permanently repositioned within the past year. +On a wholesale equivalent and currency-neutral basis, fiscal 2019 NIKE Brand Men's and Women's revenues increased 10% and 11% , respectively, both driven by growth in nearly all key categories, led by Sportswear. During fiscal 2019, the growth in Women's was fueled by our focus on compelling design, creating female-focused brand campaigns globally and a shift towards digital-led distribution. Revenues for our NIKE Kids' business increased 11% , as all key categories, except Football (Soccer), experienced growth. +28 NIKE, INC. +Table of Contents +GROSS MARGIN +FISCAL 2019 COMPARED TO FISCAL 2018 +For fiscal 2019 , our consolidated gross profit increased 10% to $17,474 million compared to $15,956 million for fiscal 2018 . Gross margin increased 90 basis points to 44.7% for fiscal 2019 compared to 43.8% for fiscal 2018 due to the following: +*Wholesale equivalent +Higher NIKE Brand product costs are primarily due to shifts in mix to higher-cost products and an increase in labor rates compared to fiscal 2018. Additionally, gross margin was favorably impacted by growth in our higher-margin NIKE Direct business. +TOTAL SELLING AND ADMINISTRATIVE EXPENSE +(Dollars in millions) +FISCAL 2019 +FISCAL 2018 +% CHANGE +FISCAL 2017 +% CHANGE +Demand creation expense (1) +$ +3,753 +$ +3,577 +5 +% +$ +3,341 +7 +% +Operating overhead expense +8,949 +7,934 +13 +% +7,222 +10 +% +Total selling and administrative expense +$ +12,702 +$ +11,511 +10 +% +$ +10,563 +9 +% +% of revenues +32.5 +% +31.6 +% +90 +bps +30.8 +% +80 +bps +(1) +Demand creation expense consists of advertising and promotion costs, including costs of endorsement contracts, complimentary product, television, digital and print advertising and media costs, brand events and retail brand presentation. +FISCAL 2019 COMPARED TO FISCAL 2018 +Demand creation expense increased 5% for fiscal 2019 compared to fiscal 2018 , due to sports marketing investments, as well as higher advertising and marketing expenses to support global brand campaigns, key sports moments and new product launches. Changes in foreign currency exchange rates decreased Demand creation expense by approximately 2 percentage points for fiscal 2019 . +Operating overhead expense increased 13% for fiscal 2019 compared to fiscal 2018 , driven primarily by higher wage-related and administrative expenses, which reflect critical investments in innovation, data and analytics capabilities, digital commerce platforms and an initial investment in a new enterprise resource planning tool to accelerate our end-to-end digital transformation. Changes in foreign currency exchange rates decreased Operating overhead expense by approximately 2 percentage points for fiscal 2019 . +OTHER (INCOME) EXPENSE, NET +(Dollars In millions) +FISCAL 2019 +FISCAL 2018 +FISCAL 2017 +Other (income) expense, net +$ +(78 +) +$ +66 +$ +(196 +) +Other (income) expense, net comprises foreign currency conversion gains and losses from the re-measurement of monetary assets and liabilities denominated in non-functional currencies and the impact of certain foreign currency derivative instruments, as well as unusual or non-operating transactions that are outside the normal course of business. +FISCAL 2019 COMPARED TO FISCAL 2018 +Other (income) expense, net changed from $66 million of other expense, net for fiscal 2018 to $78 million of other income, net for fiscal 2019 , primarily due to a $136 million net beneficial change in foreign currency conversion gains and losses, including hedges. +We estimate the combination of the translation of foreign currency-denominated profits from our international businesses and the year-over-year change in foreign currency-related gains and losses included in Other (income) expense, net had an unfavorable impact on our Income before income taxes of $97 million for fiscal 2019 . +2019 FORM 10-K 29 +Table of Contents +INCOME TAXES +FISCAL 2019 +FISCAL 2018 +% CHANGE +FISCAL 2017 +% CHANGE +Effective tax rate +16.1 +% +55.3 +% +(3,920) bps +13.2 +% +4,210 +bps +FISCAL 2019 COMPARED TO FISCAL 2018 +Our effective tax rate was 16.1% for fiscal 2019 , compared to 55.3% for fiscal 2018 due to significant changes related to the enactment of the U.S. Tax Cuts and Jobs Act (the “Tax Act”) in the prior year and a reduction in the U.S. federal statutory rate to 21% in the current year. These decreases were partially offset by an increase in U.S. tax on foreign earnings due to the impact of global intangible low-taxed income (GILTI). +Refer to Note 9 — Income Taxes in the accompanying Notes to the Consolidated Financial Statements for additional information on the impact of the Tax Act. +OPERATING SEGMENTS +Our operating segments are evidence of the structure of the Company's internal organization. The NIKE Brand segments are defined by geographic regions for operations participating in NIKE Brand sales activity. +Each NIKE Brand geographic segment operates predominantly in one industry: the design, development, marketing and selling of athletic footwear, apparel and equipment. The Company's reportable operating segments for the NIKE Brand are: North America; Europe, Middle East & Africa (EMEA); Greater China; and Asia Pacific & Latin America (APLA), and include results for the NIKE, Jordan and Hurley brands. The Company's NIKE Direct operations are managed within each geographic operating segment. Converse is also a reportable operating segment for the Company, and operates predominately in one industry: the design, marketing, licensing and selling of casual sneakers, apparel and accessories. +As part of our centrally managed foreign exchange risk management program, standard foreign currency exchange rates are assigned twice per year to each NIKE Brand entity in our geographic operating segments and Converse. These rates are set approximately nine and twelve months in advance of the future selling seasons to which they relate (specifically, for each currency, one standard rate applies to the fall and holiday selling seasons and one standard rate applies to the spring and summer selling seasons) based on average market spot rates in the calendar month preceding the date they are established. Inventories and Cost of sales for geographic operating segments and Converse reflect the use of these standard rates to record non-functional currency product purchases into the entity's functional currency. Differences between assigned standard foreign currency exchange rates and actual market rates are included in Corporate, together with foreign currency hedge gains and losses generated from our centrally managed foreign exchange risk management program and other conversion gains and losses. +The breakdown of revenues is as follows: +(Dollars in millions) +FISCAL 2019 +FISCAL 2018 +% CHANGE +% CHANGE EXCLUDING CURRENCY CHANGES (1) +FISCAL 2017 +% CHANGE +% CHANGE EXCLUDING CURRENCY CHANGES (1) +North America +$ +15,902 +$ +14,855 +7 +% +7 +% +$ +15,216 +-2 +% +-2 +% +Europe, Middle East & Africa +9,812 +9,242 +6 +% +11 +% +7,970 +16 +% +9 +% +Greater China +6,208 +5,134 +21 +% +24 +% +4,237 +21 +% +18 +% +Asia Pacific & Latin America +5,254 +5,166 +2 +% +13 +% +4,737 +9 +% +10 +% +Global Brand Divisions (2) +42 +88 +-52 +% +-53 +% +73 +21 +% +12 +% +TOTAL NIKE BRAND +37,218 +34,485 +8 +% +11 +% +32,233 +7 +% +5 +% +Converse +1,906 +1,886 +1 +% +3 +% +2,042 +-8 +% +-11 +% +Corporate (3) +(7 +) +26 +— +— +75 +— +— +TOTAL NIKE, INC. REVENUES +$ +39,117 +$ +36,397 +7 +% +11 +% +$ +34,350 +6 +% +4 +% +(1) +The percent change excluding currency changes represents a non-GAAP financial measure. See "Use of Non-GAAP Financial Measures" for further information. +(2) +Global Brand Divisions revenues are primarily attributable to NIKE Brand licensing businesses that are not part of a geographic operating segment. +(3) +Corporate revenues primarily consist of foreign currency hedge gains and losses related to revenues generated by entities within the NIKE Brand geographic operating segments and Converse, but managed through our central foreign exchange risk management program. +30 NIKE, INC. +Table of Contents +The primary financial measure used by the Company to evaluate performance of individual operating segments is earnings before interest and taxes (commonly referred to as “EBIT”), which represents Net income before Interest expense (income), net and Income tax expense in the Consolidated Statements of Income. As discussed in Note 17 — Operating Segments and Related Information in the accompanying Notes to the Consolidated Financial Statements, certain corporate costs are not included in EBIT of our operating segments. +The breakdown of earnings before interest and taxes is as follows: +(Dollars in millions) +FISCAL 2019 +FISCAL 2018 +% CHANGE +FISCAL 2017 +% CHANGE +North America +$ +3,925 +$ +3,600 +9 +% +$ +3,875 +-7 +% +Europe, Middle East & Africa +1,995 +1,587 +26 +% +1,507 +5 +% +Greater China +2,376 +1,807 +31 +% +1,507 +20 +% +Asia Pacific & Latin America +1,323 +1,189 +11 +% +980 +21 +% +Global Brand Divisions +(3,262 +) +(2,658 +) +-23 +% +(2,677 +) +1 +% +TOTAL NIKE BRAND +6,357 +5,525 +15 +% +5,192 +6 +% +Converse +303 +310 +-2 +% +477 +-35 +% +Corporate +(1,810 +) +(1,456 +) +-24 +% +(724 +) +-101 +% +TOTAL NIKE, INC. EARNINGS BEFORE INTEREST AND TAXES +4,850 +4,379 +11 +% +4,945 +-11 +% +Interest expense (income), net +49 +54 +— +59 +— +TOTAL NIKE, INC. INCOME BEFORE INCOME TAXES +$ +4,801 +$ +4,325 +11 +% +$ +4,886 +-11 +% +NORTH AMERICA +(Dollars in millions) +FISCAL 2019 +FISCAL 2018 +% CHANGE +% CHANGE EXCLUDING CURRENCY CHANGES +FISCAL 2017 +% CHANGE +% CHANGE EXCLUDING CURRENCY CHANGES +Revenues by: +Footwear +$ +10,045 +$ +9,322 +8 +% +8 +% +$ +9,684 +-4 +% +-4 +% +Apparel +5,260 +4,938 +7 +% +7 +% +4,886 +1 +% +1 +% +Equipment +597 +595 +0 +% +0 +% +646 +-8 +% +-8 +% +TOTAL REVENUES +$ +15,902 +$ +14,855 +7 +% +7 +% +$ +15,216 +-2 +% +-2 +% +Revenues by: +Sales to Wholesale Customers +$ +10,875 +$ +10,159 +7 +% +7 +% +$ +10,756 +-6 +% +-6 +% +Sales through NIKE Direct +5,027 +4,696 +7 +% +7 +% +4,460 +5 +% +5 +% +TOTAL REVENUES +$ +15,902 +$ +14,855 +7 +% +7 +% +$ +15,216 +-2 +% +-2 +% +EARNINGS BEFORE INTEREST +AND TAXES +$ +3,925 +$ +3,600 +9 +% +$ +3,875 +-7 +% +In the current marketplace environment, we believe there continues to be a meaningful shift in the way consumers shop for product and make purchasing decisions. Consumers are demanding a constant flow of fresh and innovative product, and have an expectation for superior service and rapid delivery, all fueled by the shift toward digital and mono-brand experiences in NIKE Direct. Specifically, in North America we anticipate continued evolution within the retail landscape, driven by shifting consumer traffic patterns across digital and physical channels. The evolution of the North America marketplace is resulting in third-party retail store closures; however, we are currently seeing stabilization and momentum building with our strategic wholesale customers, fueled by innovative product and NIKE Brand consumer experiences, leveraging digital. +FISCAL 2019 COMPARED TO FISCAL 2018 +On a currency-neutral basis, North America revenues increased 7% , driven by growth in nearly all key categories, led by Sportswear. NIKE Direct revenues increased 7% for fiscal 2019 as strong digital commerce sales growth of 29% and the addition of new stores more than offset a 3% decline in comparable store sales. The decline in comparable store sales was primarily due to higher sales in NIKE Brand in-line stores being more than offset by declines in NIKE Brand Factory Stores ("NFS"), as growth in our full-price channel has impacted the availability and composition of off-price inventory for sale within NFS. +2019 FORM 10-K 31 +Table of Contents +Footwear revenues increased 8% on a currency-neutral basis for fiscal 2019 , driven by growth in most key categories, led by Sportswear. Unit sales of footwear increased 4%, while higher ASP per pair contributed approximately 4 percentage points of footwear revenue growth. Higher ASP per pair was primarily due to higher full-price ASP, in part reflecting lower discounts, as well as higher ASP in our NIKE Direct business. +On a currency-neutral basis, apparel revenues increased 7% for fiscal 2019 , driven by higher revenues in all key categories, led by Sportswear, followed by NIKE Basketball. Unit sales of apparel increased 5%, while higher ASP per unit contributed approximately 2 percentage points of apparel revenue growth. The increase in ASP per unit was primarily a result of higher full-price ASP, in part reflecting lower discounts. +Reported EBIT increased 9% for fiscal 2019 , reflecting higher revenues, gross margin expansion and selling and administrative expense leverage. Gross margin increased 30 basis points as higher full-price ASP, in part reflecting lower discounts, as well as favorable full-price mix more than offset higher product costs. Selling and administrative expense grew due to higher demand creation and operating overhead expenses. The increase in demand creation expense was primarily due to higher advertising and marketing costs. Operating overhead expense increased as a result of higher wage-related costs, including investments in our NIKE Direct operations. +EUROPE, MIDDLE EAST & AFRICA +(Dollars in millions) +FISCAL 2019 +FISCAL 2018 +% CHANGE +% CHANGE EXCLUDING CURRENCY CHANGES +FISCAL 2017 +% CHANGE +% CHANGE EXCLUDING CURRENCY CHANGES +Revenues by: +Footwear +$ +6,293 +$ +5,875 +7 +% +12 +% +$ +5,192 +13 +% +6 +% +Apparel +3,087 +2,940 +5 +% +9 +% +2,395 +23 +% +16 +% +Equipment +432 +427 +1 +% +5 +% +383 +11 +% +6 +% +TOTAL REVENUES +$ +9,812 +$ +9,242 +6 +% +11 +% +$ +7,970 +16 +% +9 +% +Revenues by: +Sales to Wholesale Customers +$ +7,076 +$ +6,765 +5 +% +9 +% +$ +5,917 +14 +% +8 +% +Sales through NIKE Direct +2,736 +2,477 +10 +% +15 +% +2,053 +21 +% +13 +% +TOTAL REVENUES +$ +9,812 +$ +9,242 +6 +% +11 +% +$ +7,970 +16 +% +9 +% +EARNINGS BEFORE INTEREST AND TAXES +$ +1,995 +$ +1,587 +26 +% +$ +1,507 +5 +% +FISCAL 2019 COMPARED TO FISCAL 2018 +On a currency-neutral basis, EMEA revenues for fiscal 2019 grew 11% , reflecting balanced growth across all territories. Revenues increased in nearly all key categories, led by Sportswear. NIKE Direct revenues increased 15% , driven by strong digital commerce sales growth of 28%, comparable store sales growth of 10% and the addition of new stores. +Currency-neutral footwear revenues grew 12% for fiscal 2019 , driven by higher revenues in nearly all key categories, led by Sportswear. Unit sales of footwear increased 9% and higher ASP per pair contributed approximately 3 percentage points of footwear revenue growth. Higher ASP per pair primarily resulted from higher full-price and NIKE Direct ASPs. +For fiscal 2019 , currency-neutral apparel revenues increased 9% due to growth in most key categories, led by Sportswear. Unit sales of apparel increased 6% and higher ASP per unit contributed approximately 3 percentage points of apparel revenue growth. Higher ASP per unit was primarily due to higher NIKE Direct and full-price ASPs. +Reported EBIT increased 26% for fiscal 2019 , primarily due to strong revenue growth, gross margin expansion and selling and administrative expense leverage. Gross margin increased 280 basis points as favorable standard foreign currency exchange rates and higher full-price ASP more than offset higher product costs. Selling and administrative expense increased due to higher operating overhead and demand creation expense. Growth in operating overhead expense was primarily due to higher wage-related and administrative costs, including investments in our NIKE Direct operations. The increase in demand creation expense was primarily driven by higher advertising and marketing expenses, as well as higher sports marketing costs. The growth in demand creation and operating overhead expense was favorably impacted by changes in foreign currency exchange rates, specifically the Euro. +32 NIKE, INC. +Table of Contents +GREATER CHINA +(Dollars in millions) +FISCAL 2019 +FISCAL 2018 +% CHANGE +% CHANGE EXCLUDING CURRENCY CHANGES +FISCAL 2017 +% CHANGE +% CHANGE EXCLUDING CURRENCY CHANGES +Revenues by: +Footwear +$ +4,262 +$ +3,496 +22 +% +25 +% +$ +2,920 +20 +% +16 +% +Apparel +1,808 +1,508 +20 +% +23 +% +1,188 +27 +% +23 +% +Equipment +138 +130 +6 +% +8 +% +129 +1 +% +-1 +% +TOTAL REVENUES +$ +6,208 +$ +5,134 +21 +% +24 +% +$ +4,237 +21 +% +18 +% +Revenues by: +Sales to Wholesale Customers +$ +3,726 +$ +3,216 +16 +% +19 +% +$ +2,774 +16 +% +13 +% +Sales through NIKE Direct +2,482 +1,918 +29 +% +33 +% +1,463 +31 +% +27 +% +TOTAL REVENUES +$ +6,208 +$ +5,134 +21 +% +24 +% +$ +4,237 +21 +% +18 +% +EARNINGS BEFORE INTEREST AND TAXES +$ +2,376 +$ +1,807 +31 +% +$ +1,507 +20 +% +FISCAL 2019 COMPARED TO FISCAL 2018 +On a currency-neutral basis, Greater China revenues for fiscal 2019 increased 24% , driven by higher revenues in nearly all key categories, led by Sportswear, the Jordan Brand and NIKE Basketball. NIKE Direct revenues increased 33% , driven by strong digital commerce sales growth of 47%, comparable store sales growth of 23% and the addition of new stores. +Currency-neutral footwear revenues increased 25% for fiscal 2019 , driven by growth in most key categories, led by Sportswear and, to a lesser extent, the Jordan Brand and NIKE Basketball. Unit sales of footwear increased 20% and higher ASP per pair contributed approximately 5 percentage points to footwear revenue growth, driven by higher NIKE Direct and full-price ASPs. +The currency-neutral apparel revenue growth of 23% for fiscal 2019 was fueled by higher revenues in nearly all key categories, most notably Sportswear and the Jordan Brand. Unit sales of apparel increased 14% and higher ASP per unit increased apparel revenue growth by approximately 9 percentage points, primarily driven by higher full-price and NIKE Direct ASPs. +Reported EBIT increased 31% for fiscal 2019 , driven by higher revenues, gross margin expansion and selling and administrative expense leverage. Gross margin increased 210 basis points as higher full-price ASP, in part reflecting lower discounts, as well as favorable standard foreign currency exchange rates and higher NIKE Direct margins more than offset higher product costs. Selling and administrative expense increased due to higher demand creation and operating overhead expenses. Demand creation expense increased primarily due to higher retail brand presentation, advertising and marketing costs, as well as higher sports marketing expenses. Growth in operating overhead expense was driven by higher wage-related and administrative costs, including investments in our NIKE Direct operations. +ASIA PACIFIC & LATIN AMERICA +(Dollars in millions) +FISCAL 2019 +FISCAL 2018 +% CHANGE +% CHANGE EXCLUDING CURRENCY CHANGES +FISCAL 2017 +% CHANGE +% CHANGE EXCLUDING CURRENCY CHANGES +Revenues by: +Footwear +$ +3,622 +$ +3,575 +1 +% +12 +% +$ +3,285 +9 +% +9 +% +Apparel +1,395 +1,347 +4 +% +15 +% +1,185 +14 +% +15 +% +Equipment +237 +244 +-3 +% +8 +% +267 +-9 +% +-8 +% +TOTAL REVENUES +$ +5,254 +$ +5,166 +2 +% +13 +% +$ +4,737 +9 +% +10 +% +Revenues by: +Sales to Wholesale Customers +$ +3,746 +$ +3,829 +-2 +% +9 +% +$ +3,631 +5 +% +6 +% +Sales through NIKE Direct +1,508 +1,337 +13 +% +23 +% +1,106 +21 +% +21 +% +TOTAL REVENUES +$ +5,254 +$ +5,166 +2 +% +13 +% +$ +4,737 +9 +% +10 +% +EARNINGS BEFORE INTEREST +AND TAXES +$ +1,323 +$ +1,189 +11 +% +$ +980 +21 +% +2019 FORM 10-K 33 +Table of Contents +FISCAL 2019 COMPARED TO FISCAL 2018 +On a currency-neutral basis, APLA revenues increased 13% for fiscal 2019 , driven by higher revenues in every territory. Territory revenue growth was led by SOCO (which comprises Argentina, Uruguay and Chile), Korea and Japan, which increased 19%, 16% and 11%, respectively. Revenues increased in nearly all key categories, led by Sportswear and Running. NIKE Direct revenues increased 23% , fueled by strong digital commerce sales growth of 61%, comparable store sales growth of 14% and the addition of new stores. +The 12% increase in currency-neutral footwear revenues for fiscal 2019 was attributable to growth in most key categories, led by Sportswear, followed by Running. Unit sales of footwear increased 6% and higher ASP per pair contributed approximately 6 percentage points of footwear revenue growth, driven by higher full-price and NIKE Direct ASPs, in part reflecting inflationary conditions in our SOCO territory. +Currency-neutral apparel revenues grew 15% for fiscal 2019 , driven by higher revenues in nearly all key categories, most notably Sportswear, followed by Training. Unit sales of apparel increased 7% and higher ASP per unit contributed approximately 8 percentage points of apparel revenue growth, primarily driven by higher full-price and NIKE Direct ASPs, in part reflecting inflationary conditions in our SOCO territory. +Reported EBIT increased 11% for fiscal 2019 due to revenue growth, gross margin expansion and slightly lower selling and administrative expense. Gross margin increased 170 basis points as higher full-price ASP, as well as the favorable impact of growth and margin expansion in our NIKE Direct business, more than offset higher product costs. Demand creation expense decreased slightly as higher retail brand presentation and sports marketing costs were more than offset by the favorable impact of changes in foreign currency exchange rates, primarily the Argentine Peso (ARS) and Brazilian Real (BRL). Operating overhead expense decreased slightly as higher wage-related and administrative costs in our NIKE Direct operations were more than offset by the favorable impact of changes in foreign currency exchange rates, primarily the ARS and BRL. +GLOBAL BRAND DIVISIONS +(Dollars in millions) +FISCAL 2019 +FISCAL 2018 +% CHANGE +% CHANGE EXCLUDING CURRENCY CHANGES +FISCAL 2017 +% CHANGE +% CHANGE EXCLUDING CURRENCY CHANGES +Revenues +$ +42 +$ +88 +-52 +% +-53 +% +$ +73 +21 +% +12 +% +Earnings (Loss) Before Interest and Taxes +$ +(3,262 +) +$ +(2,658 +) +-23 +% +$ +(2,677 +) +1 +% +Global Brand Divisions primarily represent demand creation and operating overhead expense, including product creation and design expenses that are centrally managed for the NIKE Brand, as well as costs associated with NIKE Direct global digital operations and enterprise technology. Revenues for Global Brand Divisions are primarily attributable to NIKE Brand licensing businesses that are not part of a geographic operating segment. +FISCAL 2019 COMPARED TO FISCAL 2018 +Global Brand Divisions' loss before interest and taxes increased 23% for fiscal 2019 as total selling and administrative expense increased compared to fiscal 2018 . Operating overhead expense growth was primarily driven by higher wage-related and administrative costs resulting from investments in data and analytics capabilities, digital commerce platforms and our initial investment in a new enterprise resource planning tool, all of which are in an effort to accelerate our end-to-end digital transformation. Lower demand creation expense was primarily due to lower advertising and marketing costs. +CONVERSE +(Dollars in millions) +FISCAL 2019 +FISCAL 2018 +% CHANGE +% CHANGE EXCLUDING CURRENCY CHANGES +FISCAL 2017 +% CHANGE +% CHANGE EXCLUDING CURRENCY CHANGES +Revenues +$ +1,906 +$ +1,886 +1 +% +3 +% +$ +2,042 +-8 +% +-11 +% +Earnings Before Interest and Taxes +$ +303 +$ +310 +-2 +% +$ +477 +-35 +% +34 NIKE, INC. +Table of Contents +In territories we define as “direct distribution markets,” Converse designs, markets and sells products directly to distributors, wholesale customers and to consumers through direct to consumer operations. The largest direct distribution markets are the United States, the United Kingdom and China. We do not own the Converse trademarks in Japan and accordingly do not earn revenues in Japan. Territories other than direct distribution markets and Japan are serviced by third-party licensees who pay royalty revenues to Converse for the use of its registered trademarks and other intellectual property rights. +FISCAL 2019 COMPARED TO FISCAL 2018 +On a currency-neutral basis, Converse revenues increased 3% for fiscal 2019 . Comparable direct distribution markets (i.e., markets served under a direct distribution model for comparable periods in the current and prior fiscal years) increased 2%, which drove the majority of total Converse revenue growth. Comparable direct distribution market unit sales decreased 3% for fiscal 2019 , while higher ASP per unit contributed approximately 5 percentage points of direct distribution markets revenue growth. On a territory basis, the increase in comparable direct distribution markets revenues for the year was primarily attributable to revenue growth in Asia across all distribution channels, partially offset by lower revenues in the U.S. and Europe. Conversion of markets from licensed to direct distribution had minimal impact on total Converse revenues for fiscal 2019 . Revenues from comparable licensed markets grew 6% for fiscal 2019 , primarily due to revenue growth in Asia and Brazil, but had minimal impact on total Converse revenue growth. +Reported EBIT for Converse decreased 2% for fiscal 2019 as higher selling and administrative expense more than offset gross margin expansion and revenue growth. Gross margin increased 180 basis points, driven by higher margin in our direct to consumer business, favorable standard foreign currency exchange rates and higher full-price ASP due to changes in product mix. Selling and administrative expense increased due to higher operating overhead and higher demand creation expense. Higher operating overhead expense was due to an increase in wage-related and administrative costs, primarily to support investments in our digital business. Higher demand creation expense was primarily due to an increase in advertising and marketing costs associated with our digital platform. +CORPORATE +(Dollars in millions) +FISCAL 2019 +FISCAL 2018 +% CHANGE +FISCAL 2017 +% CHANGE +Revenues +$ +(7 +) +$ +26 +— +$ +75 +— +Earnings (Loss) Before Interest and Taxes +$ +(1,810 +) +$ +(1,456 +) +-24 +% +$ +(724 +) +-101 +% +Corporate revenues primarily consist of foreign currency hedge gains and losses related to revenues generated by entities within the NIKE Brand geographic operating segments and Converse, but managed through our central foreign exchange risk management program. +The Corporate loss before interest and taxes largely consists of unallocated general and administrative expenses, including expenses associated with centrally managed departments; depreciation and amortization related to our corporate headquarters; unallocated insurance, benefit and compensation programs, including stock-based compensation; and certain foreign currency gains and losses. +In addition to the foreign currency gains and losses recognized in Corporate revenues, foreign currency results in Corporate include gains and losses resulting from the difference between actual foreign currency exchange rates and standard rates used to record non-functional currency denominated product purchases within the NIKE Brand geographic operating segments and Converse; related foreign currency hedge results; conversion gains and losses arising from re-measurement of monetary assets and liabilities in non-functional currencies; and certain other foreign currency derivative instruments. +FISCAL 2019 COMPARED TO FISCAL 2018 +For fiscal 2019, Corporate's loss before interest and taxes increased $354 million primarily due to the following: +• +an unfavorable change of $276 million related to the difference between actual foreign currency exchange rates and standard foreign currency exchange rates assigned to the NIKE Brand geographic operating segments and Converse, net of hedge gains and losses; these results are reported as a component of consolidated gross margin; +• +an unfavorable change of $210 million, primarily due to higher operating overhead expense driven by higher wage-related and administrative costs; and +• +a favorable change in net foreign currency gains and losses of $132 million related to the re-measurement of monetary assets and liabilities denominated in non-functional currencies and the impact of certain foreign currency derivative instruments, reported as a component of consolidated Other (income) expense, net . +2019 FORM 10-K 35 +Table of Contents +FOREIGN CURRENCY EXPOSURES AND HEDGING PRACTICES +OVERVIEW +As a global company with significant operations outside the United States, in the normal course of business we are exposed to risk arising from changes in currency exchange rates. Our primary foreign currency exposures arise from the recording of transactions denominated in non-functional currencies and the translation of foreign currency denominated results of operations, financial position and cash flows into U.S. Dollars. +Our foreign exchange risk management program is intended to lessen both the positive and negative effects of currency fluctuations on our consolidated results of operations, financial position and cash flows. We manage global foreign exchange risk centrally on a portfolio basis to address those risks material to NIKE, Inc. We manage these exposures by taking advantage of natural offsets and currency correlations existing within the portfolio and, where practical and material, by hedging a portion of the remaining exposures using derivative instruments such as forward contracts and options. As described below, the implementation of the NIKE Trading Company (NTC) and our foreign currency adjustment program enhanced our ability to manage our foreign exchange risk by increasing the natural offsets and currency correlation benefits existing within our portfolio of foreign exchange exposures. Our hedging policy is designed to partially or entirely offset the impact of exchange rate changes on the underlying net exposures being hedged. Where exposures are hedged, our program has the effect of delaying the impact of exchange rate movements on our Consolidated Financial Statements; the length of the delay is dependent upon hedge horizons. We do not hold or issue derivative instruments for trading or speculative purposes. +Refer to Note 6 — Fair Value Measurements and Note 14 — Risk Management and Derivatives in the accompanying Notes to the Consolidated Financial Statements for additional description of how the above financial instruments are valued and recorded, as well as the fair value of outstanding derivatives at each reported period end. +TRANSACTIONAL EXPOSURES +We conduct business in various currencies and have transactions which subject us to foreign currency risk. Our most significant transactional foreign currency exposures are: +• +Product Costs — NIKE's product costs are exposed to fluctuations in foreign currencies in the following ways: +1. +Product purchases denominated in currencies other than the functional currency of the transacting entity: +a. +Certain NIKE entities purchase product from the NTC, a wholly-owned sourcing hub that buys NIKE branded products from third-party factories, predominantly in U.S. Dollars. The NTC, whose functional currency is the U.S. Dollar, then sells the products to NIKE entities in their respective functional currencies. NTC sales to a NIKE entity with a different functional currency results in a foreign currency exposure for the NTC. +b. +Other NIKE entities purchase product directly from third-party factories in U.S. Dollars. These purchases generate a foreign currency exposure for those NIKE entities with a functional currency other than the U.S. Dollar. +In both purchasing scenarios, a weaker U.S. Dollar reduces inventory costs incurred by NIKE whereas a stronger U.S. Dollar increases its cost. +2. +Factory input costs: NIKE operates a foreign currency adjustment program with certain factories. The program is designed to more effectively manage foreign currency risk by assuming certain of the factories' foreign currency exposures, some of which are natural offsets to our existing foreign currency exposures. Under this program, our payments to these factories are adjusted for rate fluctuations in the basket of currencies (“factory currency exposure index”) in which the labor, materials and overhead costs incurred by the factories in the production of NIKE branded products (“factory input costs”) are denominated. +For the currency within the factory currency exposure indices that is the local or functional currency of the factory, the currency rate fluctuation affecting the product cost is recorded within Inventories and is recognized in Cost of sales when the related product is sold to a third-party. All currencies within the indices, excluding the U.S. Dollar and the local or functional currency of the factory, are recognized as embedded derivative contracts and are recorded at fair value through Other (income) expense, net . Refer to Note 14 — Risk Management and Derivatives in the accompanying Notes to the Consolidated Financial Statements for additional detail. +As an offset to the impacts of the fluctuating U.S. Dollar on our non-functional currency denominated product purchases described above, a strengthening U.S. Dollar against the foreign currencies within the factory currency exposure indices reduces NIKE's U.S. Dollar inventory cost. Conversely, a weakening U.S. Dollar against the indexed foreign currencies increases our inventory cost. +36 NIKE, INC. +Table of Contents +• +Non-Functional Currency Denominated External Sales — A portion of our NIKE Brand and Converse revenues associated with European operations are earned in currencies other than the Euro (e.g., the British Pound) but are recognized at a subsidiary that uses the Euro as its functional currency. These sales generate a foreign currency exposure. +• +Other Costs — Non-functional currency denominated costs, such as endorsement contracts, also generate foreign currency risk, though to a lesser extent. In certain cases, the Company has entered into contractual agreements which have payments indexed to foreign currencies that create embedded derivative contracts recorded at fair value through Other (income) expense, net . Refer to Note 14 — Risk Management and Derivatives in the accompanying Notes to the Consolidated Financial Statements for additional detail. +• +Non-Functional Currency Denominated Monetary Assets and Liabilities — Our global subsidiaries have various assets and liabilities, primarily receivables and payables, including intercompany receivables and payables, denominated in currencies other than their functional currencies. These balance sheet items are subject to re-measurement which may create fluctuations in Other (income) expense, net within our consolidated results of operations. +MANAGING TRANSACTIONAL EXPOSURES +Transactional exposures are managed on a portfolio basis within our foreign currency risk management program. We manage these exposures by taking advantage of natural offsets and currency correlations that exist within the portfolio and may also elect to use currency forward and option contracts to hedge the remaining effect of exchange rate fluctuations on probable forecasted future cash flows, including certain product cost exposures, non-functional currency denominated external sales and other costs described above. Generally, these are accounted for as cash flow hedges, except for hedges of the embedded derivative components of the product cost exposures and other contractual agreements. +Certain currency forward contracts used to manage the foreign exchange exposure of non-functional currency denominated monetary assets and liabilities subject to re-measurement and embedded derivative contracts are not formally designated as hedging instruments. Accordingly, changes in fair value of these instruments are recognized in Other (income) expense, net and are intended to offset the foreign currency impact of the re-measurement of the related non-functional currency denominated asset or liability or the embedded derivative contract being hedged. +TRANSLATIONAL EXPOSURES +Many of our foreign subsidiaries operate in functional currencies other than the U.S. Dollar. Fluctuations in currency exchange rates create volatility in our reported results as we are required to translate the balance sheets, operational results and cash flows of these subsidiaries into U.S. Dollars for consolidated reporting. The translation of foreign subsidiaries' non-U.S. Dollar denominated balance sheets into U.S. Dollars for consolidated reporting results in a cumulative translation adjustment to Accumulated other comprehensive income (loss) within Shareholders' equity . In the translation of our Consolidated Statements of Income, a weaker U.S. Dollar in relation to foreign functional currencies benefits our consolidated earnings whereas a stronger U.S. Dollar reduces our consolidated earnings. The impact of foreign exchange rate fluctuations on the translation of our consolidated Revenues was a detriment of approximately $1,236 million, a benefit of approximately $832 million and a detriment of approximately $542 million for the years ended May 31, 2019, 2018 and 2017, respectively. The impact of foreign exchange rate fluctuations on the translation of our Income before income taxes was a detriment of approximately $233 million, a benefit of approximately $177 million and a detriment of approximately $115 million for the years ended May 31, 2019, 2018 and 2017, respectively. +Management generally identifies hyper-inflationary markets as those markets whose cumulative inflation rate over a three-year period exceeds 100%. Management has concluded our Argentina subsidiary within our APLA operating segment is operating in a hyper-inflationary market. As a result, beginning in the second quarter of fiscal 2019, the functional currency of our Argentina subsidiary changed from the local currency to the U.S. Dollar. As of and for the period ended May 31, 2019, this change did not have a material impact on our results of operations or financial condition and we do not anticipate it will have a material impact in future periods based on current rates. +MANAGING TRANSLATIONAL EXPOSURES +To minimize the impact of translating foreign currency denominated revenues and expenses into U.S. Dollars for consolidated reporting, certain foreign subsidiaries use excess cash to purchase U.S. Dollar denominated available-for-sale investments. The variable future cash flows associated with the purchase and subsequent sale of these U.S. Dollar denominated investments at non-U.S. Dollar functional currency subsidiaries creates a foreign currency exposure that qualifies for hedge accounting under U.S. GAAP. We utilize forward contracts and/or options to mitigate the variability of the forecasted future purchases and sales of these U.S. Dollar investments. The combination of the purchase and sale of the U.S. Dollar investment and the hedging instrument has the effect of partially offsetting the year-over-year foreign currency translation impact on net earnings in the period the investments are sold. Hedges of the purchase of U.S. Dollar denominated available-for-sale investments are accounted for as cash flow hedges. +2019 FORM 10-K 37 +Table of Contents +We estimate the combination of translation of foreign currency-denominated profits from our international businesses and the year-over-year change in foreign currency related gains and losses included in Other (income) expense, net had an unfavorable impact of approximately $97 million, $110 million and $59 million on our Income before income taxes for the years ended May 31, 2019, 2018 and 2017, respectively. +NET INVESTMENTS IN FOREIGN SUBSIDIARIES +We are also exposed to the impact of foreign exchange fluctuations on our investments in wholly-owned foreign subsidiaries denominated in a currency other than the U.S. Dollar, which could adversely impact the U.S. Dollar value of these investments and therefore the value of future repatriated earnings. We have, in the past, hedged and may, in the future, hedge net investment positions in certain foreign subsidiaries to mitigate the effects of foreign exchange fluctuations on these net investments. These hedges are accounted for as net investment hedges in accordance with U.S. GAAP. There were no outstanding net investment hedges as of May 31, 2019 and 2018. There were no cash flows from net investment hedge settlements for the years ended May 31, 2019, 2018 and 2017. +LIQUIDITY AND CAPITAL RESOURCES +CASH FLOW ACTIVITY +Cash provided by operations was $5,903 million for fiscal 2019 compared to $4,955 million for fiscal 2018 . Net income, adjusted for non-cash items, generated $5,341 million of operating cash flow for fiscal 2019 compared to $3,473 million for fiscal 2018 . The net change in working capital and other assets and liabilities resulted in an increase to Cash provided by operations of $562 million for fiscal 2019 , compared to an increase to Cash provided by operations of $1,482 million for fiscal 2018 . The primary driver of the change in working capital relates to the accrual of $1,172 million for the transition tax under the Tax Act during fiscal 2018. Refer to Note 9 — Income Taxes for additional information on the Tax Act. Cash provided by operations in fiscal 2019 was further impacted by the net change in cash collateral with derivative counterparties as a result of hedging transactions. During fiscal 2019 , we received cash collateral of $266 million compared to $23 million in fiscal 2018 . In addition, the change in Accounts receivable, net , decreased Cash provided by operations by $457 million in fiscal 2019 , primarily driven by revenue growth. +Cash provided (used) by investing activities was an outflow of $264 million for fiscal 2019 , compared to an inflow of $276 million for fiscal 2018 , driven primarily by the net change in short-term investments. During fiscal 2019 , the net change in investments (including sales, maturities and purchases) resulted in a cash inflow of $850 million compared to an inflow of $1,326 million in fiscal 2018 . +In fiscal 2020, we plan to continue investing in our infrastructure to support future growth, including corporate facilities, expanding our digital capabilities and new NIKE Direct stores. We continue to expect such investments to approximate 3% to 4% of revenues, on average. +Cash used by financing activities was $5,293 million for fiscal 2019 compared to $4,835 million for fiscal 2018 with the increase primarily impacted by the repayment of Notes payable during fiscal 2019 . +In fiscal 2019 , we purchased 54.3 million shares of NIKE's Class B Common Stock for $4,283 million (an average price of $ 78.86 per share). During the third quarter of fiscal 2019 , we concluded the four-year, $12 billion program authorized by our Board of Directors in November 2015. Throughout this program we purchased a total of 192.1 million shares for $12 billion (an average price of $62.47 per share). Immediately following the completion of this program, we began repurchasing shares under the new four-year, $15 billion program authorized by our Board of Directors in June 2018. +As of May 31, 2019, we had repurchased 11.6 million shares at a cost of $986 million (an average price of $84.72 per share) under this new program. We continue to expect funding of share repurchases will come from operating cash flows, excess cash and/or proceeds from debt. The timing and the amount of share repurchases will be dictated by our capital needs and stock market conditions. +CAPITAL RESOURCES +On July 21, 2016, we filed a shelf registration statement (the “Shelf”) with the SEC which permits us to issue an unlimited amount of debt securities from time to time. The Shelf expired on July 21, 2019 and we plan to file a new shelf registration statement with the SEC in July 2019. For additional information regarding our long-term debt refer to Note 8 — Long-Term Debt in the accompanying Notes to the Consolidated Financial Statements. +38 NIKE, INC. +Table of Contents +On August 28, 2015, we entered into a committed credit facility agreement with a syndicate of banks, which provides for up to $2 billion of borrowings. The facility matures August 28, 2020, with a one-year extension option prior to any anniversary of the closing date, provided that in no event shall it extend beyond August 28, 2022. As of and for the periods ended May 31, 2019 and 2018 , we had no amounts outstanding under the committed credit facility. +We currently have long-term debt ratings of AA- and A1 from Standard and Poor's Corporation and Moody's Investor Services, respectively. If our long-term debt ratings were to decline, the facility fee and interest rate under our committed credit facility would increase. Conversely, if our long-term debt ratings were to improve, the facility fee and interest rate would decrease. Changes in our long-term debt ratings would not trigger acceleration of maturity of any then-outstanding borrowings or any future borrowings under the committed credit facility. Under this facility, we have agreed to various covenants. These covenants include limits on our disposal of fixed assets and the amount of debt secured by liens we may incur as well as limits on the indebtedness we can incur relative to our net worth. In the event we were to have any borrowings outstanding under this facility and failed to meet any covenant, and were unable to obtain a waiver from a majority of the banks in the syndicate, any borrowings would become immediately due and payable. As of May 31, 2019 , we were in full compliance with each of these covenants and believe it is unlikely we will fail to meet any of these covenants in the foreseeable future. +Liquidity is also provided by our $2 billion commercial paper program. On June 1, 2018, we repaid $325 million and had no additional borrowings under this program as of and for the year ended May 31, 2019. We may continue to issue commercial paper or other debt securities depending on general corporate needs. We currently have short-term debt ratings of A1+ and P1 from Standard and Poor's Corporation and Moody's Investor Services, respectively. +To date, in fiscal 2019, we have not experienced difficulty accessing the credit markets or incurred higher interest costs; however, future volatility in the capital markets may increase costs associated with issuing commercial paper or other debt instruments or affect our ability to access those markets. +As of May 31, 2019 , we had cash, cash equivalents and short-term investments totaling $4.7 billion , primarily consisting of deposits held at major banks, money market funds, commercial paper, corporate notes, U.S. Treasury obligations, U.S. government sponsored enterprise obligations and other investment grade fixed-income securities. Our fixed-income investments are exposed to both credit and interest rate risk. All of our investments are investment grade to minimize our credit risk. While individual securities have varying durations, as of May 31, 2019 , the weighted-average days to maturity of our cash equivalents and short-term investments portfolio was 32 days. +We believe that existing cash, cash equivalents, short-term investments and cash generated by operations, together with access to external sources of funds as described above, will be sufficient to meet our domestic and foreign capital needs in the foreseeable future. +OFF-BALANCE SHEET ARRANGEMENTS +In connection with various contracts and agreements, we routinely provide indemnification relating to the enforceability of intellectual property rights, coverage for legal issues that arise and other items where we are acting as the guarantor. Currently, we have several such agreements in place. Based on our historical experience and the estimated probability of future loss, we have determined that the fair value of such indemnification is not material to our financial position or results of operations. +CONTRACTUAL OBLIGATIONS +Our significant long-term contractual obligations as of May 31, 2019 , and significant endorsement contracts, including related marketing commitments, entered into through the date of this report are as follows: +DESCRIPTION OF COMMITMENT +CASH PAYMENTS DUE DURING THE YEAR ENDING MAY 31, +(Dollars in millions) +2020 +2021 +2022 +2023 +2024 +THEREAFTER +TOTAL +Operating Leases +$ +553 +$ +513 +$ +441 +$ +386 +$ +345 +$ +1,494 +$ +3,732 +Capital Leases and Other Financing Obligations (1) +32 +34 +40 +37 +34 +197 +374 +Long-Term Debt (2) +115 +112 +109 +609 +98 +4,617 +5,660 +Endorsement Contracts (3) +1,382 +1,274 +1,360 +1,077 +968 +4,148 +10,209 +Product Purchase Obligations (4) +5,203 +— +— +— +— +— +5,203 +Other Purchase Obligations (5) +1,331 +411 +225 +166 +135 +492 +2,760 +Transition Tax Related to the Tax Act (6) +86 +86 +86 +86 +161 +483 +988 +TOTAL +$ +8,702 +$ +2,430 +$ +2,261 +$ +2,361 +$ +1,741 +$ +11,431 +$ +28,926 +(1) +Capital leases and other financing obligations include payments related to build-to-suit lease arrangements. +2019 FORM 10-K 39 +Table of Contents +(2) +The cash payments due for long-term debt include estimated interest payments. Estimates of interest payments are based on outstanding principal amounts, applicable fixed interest rates or currently effective interest rates as of May 31, 2019 (if variable), timing of scheduled payments and the term of the debt obligations. +(3) +The amounts listed for endorsement contracts represent approximate amounts of base compensation and minimum guaranteed royalty fees we are obligated to pay athlete, public figure, sport team and league endorsers of our products. Actual payments under some contracts may be higher than the amounts listed as these contracts provide for bonuses to be paid to the endorsers based upon athletic achievements and/or royalties on product sales in future periods. Actual payments under some contracts may also be lower as these contracts include provisions for reduced payments if athletic performance declines in future periods. +In addition to the cash payments, we are obligated to furnish our endorsers with NIKE product for their use. It is not possible to determine how much we will spend on this product on an annual basis as the contracts generally do not stipulate a specific amount of cash to be spent on the product. The amount of product provided to the endorsers will depend on many factors, including general playing conditions, the number of sporting events in which they participate and our own decisions regarding product and marketing initiatives. In addition, the costs to design, develop, source and purchase the products furnished to the endorsers are incurred over a period of time and are not necessarily tracked separately from similar costs incurred for products sold to customers. +(4) +We generally order product at least four to five months in advance of sale based primarily on advanced orders received from external wholesale customers and internal orders from our NIKE Direct in-line stores and digital commerce operations. The amounts listed for product purchase obligations represent agreements (including open purchase orders) to purchase products in the ordinary course of business that are enforceable and legally binding and specify all significant terms. In some cases, prices are subject to change throughout the production process. +(5) +Other purchase obligations primarily include construction, service and marketing commitments, including marketing commitments associated with endorsement contracts, made in the ordinary course of business. The amounts represent the minimum payments required by legally binding contracts and agreements that specify all significant terms, including open purchase orders for non-product purchases. +(6) +Represents the future cash payments due as part of the transition tax on deemed repatriation of undistributed earnings of foreign subsidiaries, which is reflected net of foreign tax credits we utilized. Refer to Note 9 — Income Taxes in the accompanying Notes to the Consolidated Financial Statements for additional information. +In addition to the above, we have long-term obligations for uncertain tax positions and various post-retirement benefits for which we are not able to reasonably estimate when cash payments will occur. Refer to Note 9 — Income Taxes and Note 13 — Benefit Plans in the accompanying Notes to the Consolidated Financial Statements for further information related to uncertain tax positions and post-retirement benefits, respectively. +We also have the following outstanding short-term debt obligations as of May 31, 2019 . Refer to Note 7 — Short-Term Borrowings and Credit Lines in the accompanying Notes to the Consolidated Financial Statements for further description and interest rates related to the short-term debt obligations listed below. +(Dollars in millions) +AS OF MAY 31, 2019 +Notes payable, due at mutually agreed-upon dates within one year of issuance or on demand +$ +9 +Payable to Sojitz America for the purchase of inventories, generally due 60 days after shipment of goods from a foreign port +$ +75 +As of May 31, 2019 , the Company had bank guarantees and letters of credit outstanding totaling $215 million , issued primarily for real estate agreements, self-insurance programs and other general business obligations. +NEW ACCOUNTING PRONOUNCEMENTS +Refer to Note 1 — Summary of Significant Accounting Policies in the accompanying Notes to the Consolidated Financial Statements for recently adopted and recently issued accounting standards. +CRITICAL ACCOUNTING POLICIES +Our previous discussion and analysis of our financial condition and results of operations are based upon our Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. Note 1 — Summary of Significant Accounting Policies in the accompanying Notes to the Consolidated Financial Statements describes the significant accounting policies and methods used in the preparation of our Consolidated Financial Statements. +We believe the estimates, assumptions and judgments involved in the accounting policies described below have the greatest potential impact on our Consolidated Financial Statements, so we consider these to be our critical accounting policies and estimates. Management has reviewed and discussed these critical accounting policies with the Audit & Finance Committee of the Board of Directors. +40 NIKE, INC. +Table of Contents +These policies require that we make estimates in the preparation of our Consolidated Financial Statements as of a given date. Because of the uncertainty inherent in these matters, actual results could differ from the estimates we use in applying the critical accounting policies. Within the context of these critical accounting policies, we are not currently aware of any reasonably likely events or circumstances that would result in materially different amounts being reported. +REVENUE RECOGNITION +On June 1, 2018, we adopted Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606) , using the modified retrospective method of adoption. Prior period amounts have not been restated and continue to be reported in accordance with our historical accounting policies. Our revenue recognition polices under Topic 606 are described in the following paragraphs and references to prior period policies under Accounting Standard Codification Topic 605 — Revenue Recognition, are included below in the event they are substantially different. +Revenue transactions associated with the sale of NIKE Brand footwear, apparel and equipment, as well as Converse products, comprise a single performance obligation, which consists of the sale of products to customers either through wholesale or direct to consumer channels. We satisfy the performance obligation and record revenues when transfer of control has passed to the customer, based on the terms of sale. A customer is considered to have control once they are able to direct the use and receive substantially all of the benefits of the product. Transfer of control passes to wholesale customers upon shipment or upon receipt depending on the country of the sale and the agreement with the customer. Control passes to retail store customers at the time of sale and to substantially all digital commerce customers upon shipment. Prior to June 1, 2018, the requirements for recognizing revenue were met upon delivery to the customer. The transaction price is determined based upon the invoiced sales price, less anticipated sales returns, discounts and miscellaneous claims from customers. Payment terms for wholesale transactions depend on the country of sale or agreement with the customer and payment is generally required within 90 days or less of shipment to or receipt by the wholesale customer. Payment is due at the time of sale for retail store and digital commerce transactions. +As part of our revenue recognition policy, consideration promised in our contracts with customers is variable due to anticipated reductions such as sales returns, discounts and miscellaneous claims from customers. We estimate the most likely amount we will be entitled to receive and record an anticipated reduction against Revenues, with an offsetting increase to Accrued liabilities at the time revenues are recognized. The estimated cost of inventory for product returns is recorded in Prepaid expenses and other current assets on the Consolidated Balance Sheets. Prior to June 1, 2018, the Company's reserve balances were reported net of the estimated cost of inventory for product returns and recognized within Accounts receivable, ne t for wholesale transactions and Accrued liabilities for our direct to consumer business, on the Consolidated Balance Sheets. +The provision for anticipated sales returns consists of both contractual return rights and discretionary authorized returns. Provisions for post-invoice sales discounts consist of both contractual programs and discretionary discounts that are expected to be granted at a later date. +Estimates of discretionary authorized returns, discounts and claims are based on (1) historical rates, (2) specific identification of outstanding returns not yet received from customers and outstanding discounts and claims and (3) estimated returns, discounts and claims expected but not yet finalized with customers. Actual returns, discounts and claims in any future period are inherently uncertain and may differ from estimates recorded. If actual or expected future returns, discounts or claims were significantly different than reserves established, a reduction or increase to net revenues would be recorded in the period in which such determination was made. +Refer also to Note 1 — Summary of Significant Accounting Policies and Note 16 — Revenues for additional information in the accompanying Notes to the Consolidated Financial Statements. +INVENTORY RESERVES +We also make ongoing estimates relating to the net realizable value of inventories based upon our assumptions about future demand and market conditions. If we estimate the net realizable value of our inventory is less than the cost of the inventory recorded on our books, we record a reserve equal to the difference between the cost of the inventory and the estimated net realizable value. This reserve is recorded as a charge to Cost of sales . If changes in market conditions result in reductions to the estimated net realizable value of our inventory below our previous estimate, we would increase our reserve in the period in which we made such a determination. +2019 FORM 10-K 41 +Table of Contents +CONTINGENT PAYMENTS UNDER ENDORSEMENT CONTRACTS +A significant amount of our Demand creation expense relates to payments under endorsement contracts. In general, endorsement payments are expensed on a straight-line basis over the term of the contract. However, certain contract elements may be accounted for differently based upon the facts and circumstances of each individual contract. +Certain contracts provide for contingent payments to endorsers based upon specific achievements in their sports (e.g., winning a championship). We record demand creation expense for these amounts when the endorser achieves the specific goal. +Certain contracts provide for variable payments based upon endorsers maintaining a level of performance in their sport over an extended period of time (e.g., maintaining a specified ranking in a sport for a year). When we determine payments are probable, the amounts are reported in Demand creation expense ratably over the contract period based on our best estimate of the endorser's performance. In these instances, to the extent actual payments to the endorser differ from our estimate due to changes in the endorser's performance, adjustments to Demand creation expense may be recorded in a future period. +Certain contracts provide for royalty payments to endorsers based upon a predetermined percent of sales of particular products, which we record in Cost of sales as the related sales occur. For contracts containing minimum guaranteed royalty payments, we record the amount of any guaranteed payment in excess of that earned through sales of product within Demand creation expense . +PROPERTY, PLANT AND EQUIPMENT AND DEFINITE-LIVED ASSETS +We review the carrying value of long-lived assets or asset groups to be used in operations whenever events or changes in circumstances indicate the carrying amount of the assets might not be recoverable. Factors that would necessitate an impairment assessment include a significant adverse change in the extent or manner in which an asset is used, a significant adverse change in legal factors or the business climate that could affect the value of the asset or a significant decline in the observable market value of an asset, among others. If such facts indicate a potential impairment, we would assess the recoverability of an asset group by determining if the carrying value of the asset group exceeds the sum of the projected undiscounted cash flows expected to result from the use and eventual disposition of the assets over the remaining economic life of the primary asset in the asset group. If the recoverability test indicates the carrying value of the asset group is not recoverable, we will estimate the fair value of the asset group using appropriate valuation methodologies that would typically include an estimate of discounted cash flows. Any impairment would be measured as the difference between the asset group's carrying amount and its estimated fair value. +HEDGE ACCOUNTING FOR DERIVATIVES +We use derivative contracts to hedge certain anticipated foreign currency and interest rate transactions as well as certain non-functional currency monetary assets and liabilities. When the specific criteria to qualify for hedge accounting has been met, changes in the fair value of contracts hedging probable forecasted future cash flows are recorded in Accumulated other comprehensive income (loss) , rather than Net income , until the underlying hedged transaction affects Net income . In most cases, this results in gains and losses on hedge derivatives being released from Accumulated other comprehensive income (loss) into Net income sometime after the maturity of the derivative. One of the criteria for this accounting treatment is that the notional value of these derivative contracts should not be in excess of specifically identified anticipated transactions. By their very nature, our estimates of anticipated transactions may fluctuate over time and may ultimately vary from actual transactions. When anticipated transaction estimates or actual transaction amounts decline below hedged levels, or if it is no longer probable a forecasted transaction will occur by the end of the originally specified time period or within an additional two-month period of time thereafter, we are required to reclassify the cumulative change in fair value of the over-hedged portion of the related hedge contract from Accumulated other comprehensive income (loss) to Other (income) expense, net during the quarter in which the decrease occurs. +INCOME TAXES +We are subject to taxation in the United States, as well as various state and foreign jurisdictions. The determination of our provision for income taxes requires significant judgment, the use of estimates and the interpretation and application of complex tax laws. On an interim basis, we estimate our effective tax rate for the full fiscal year. This estimated annual effective tax rate is then applied to the year-to-date Income before income taxes excluding infrequently occurring or unusual items, to determine the year-to-date Income tax expense . The income tax effects of infrequent or unusual items are recognized in the interim period in which they occur. As the fiscal year progresses, we continually refine our estimate based upon actual events and earnings by jurisdiction during the year. This continual estimation process periodically results in a change to our expected effective tax rate for the fiscal year. When this occurs, we adjust the income tax provision during the quarter in which the change in estimate occurs. +42 NIKE, INC. +Table of Contents +We record valuation allowances against our deferred tax assets, when necessary. Realization of deferred tax assets (such as net operating loss carry-forwards) is dependent on future taxable earnings and is therefore uncertain. At least quarterly, we assess the likelihood that our deferred tax asset balance will be recovered from future taxable income. To the extent we believe that recovery is not likely, we establish a valuation allowance against our net deferred tax asset, which increases our Income tax expense in the period when such determination is made. +On a quarterly basis, we evaluate the probability a tax position will be effectively sustained and the appropriateness of the amount recognized for uncertain tax positions based on factors including changes in facts or circumstances, changes in tax law, settled audit issues and new audit activity. Changes in our assessment may result in the recognition of a tax benefit or an additional charge to the tax provision in the period our assessment changes. We recognize interest and penalties related to income tax matters in Income tax expense . +On December 22, 2017, the United States enacted the Tax Act, which significantly changed previous U.S. tax laws, including provisions for a one-time transition tax on deemed repatriation of undistributed foreign earnings, and a reduction in the corporate tax rate from 35% to 21% for tax years beginning after December 31, 2017, among other changes. The Tax Act also transitions U.S. international taxation from a worldwide system to a modified territorial system and includes base erosion prevention measures on non-U.S. earnings, which has the effect of subjecting certain earnings of our foreign subsidiaries to U.S. taxation. Certain provisions of the Tax Act, including a provision to tax global intangible low-taxed income (GILTI) of foreign subsidiaries, were not effective for the Company until fiscal 2019. In accordance with U.S. GAAP, the Company has made an accounting policy election to treat taxes due under the GILTI provision as a current period expense. +Implementation of the Tax Act required us to record incremental provisional tax expense in fiscal 2018, which increased our effective tax rate in fiscal 2018. We completed our analysis of the Tax Act in the second quarter of fiscal 2019 and no adjustments were made to the provisional amounts recorded. +Refer to Note 9 — Income Taxes in the accompanying Notes to the Consolidated Financial Statements for additional information. +OTHER CONTINGENCIES +In the ordinary course of business, we are involved in legal proceedings regarding contractual and employment relationships, product liability claims, trademark rights and a variety of other matters. We record contingent liabilities resulting from claims against us when a loss is assessed to be probable and the amount of the loss is reasonably estimable. Assessing probability of loss and estimating probable losses requires analysis of multiple factors, including in some cases judgments about the potential actions of third-party claimants and courts. Recorded contingent liabilities are based on the best information available and actual losses in any future period are inherently uncertain. If future adjustments to estimated probable future losses or actual losses exceed our recorded liability for such claims, we would record additional charges during the period in which the actual loss or change in estimate occurred. In addition to contingent liabilities recorded for probable losses, we disclose contingent liabilities when there is a reasonable possibility the ultimate loss will materially exceed the recorded liability. While we cannot predict the outcome of pending legal matters with certainty, we do not believe any currently identified claim, proceeding or litigation, either individually or in aggregate, will have a material impact on our results of operations, financial position or cash flows. +2019 FORM 10-K 43 +Table of Contents +ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK +In the normal course of business and consistent with established policies and procedures, we employ a variety of financial instruments to manage exposure to fluctuations in the value of foreign currencies and interest rates. It is our policy to utilize these financial instruments only where necessary to finance our business and manage such exposures; we do not enter into these transactions for trading or speculative purposes. +We are exposed to foreign currency fluctuations, primarily as a result of our international sales, product sourcing and funding activities. Our foreign exchange risk management program is intended to lessen both the positive and negative effects of currency fluctuations on our consolidated results of operations, financial position and cash flows. We use forward and option contracts to hedge certain anticipated, but not yet firmly committed, transactions as well as certain firm commitments and the related receivables and payables, including third-party and intercompany transactions. We have, in the past, and may in the future, also use forward or options contracts to hedge our investment in the net assets of certain international subsidiaries to offset foreign currency translation adjustments related to our net investment in those subsidiaries. Where exposures are hedged, our program has the effect of delaying the impact of exchange rate movements on our Consolidated Financial Statements. +The timing for hedging exposures, as well as the type and duration of the hedge instruments employed, are guided by our hedging policies and determined based upon the nature of the exposure and prevailing market conditions. Typically, the Company may enter into hedge contracts starting up to 12 to 24 months in advance of the forecasted transaction and may place incremental hedges up to 100% of the exposure by the time the forecasted transaction occurs. The majority of derivatives outstanding as of May 31, 2019 are designated as foreign currency cash flow hedges, primarily for Euro/U.S. Dollar, British Pound/Euro, Chinese Yuan/U.S. Dollar and Japanese Yen/U.S. Dollar currency pairs. Refer to Note 14 — Risk Management and Derivatives in the accompanying Notes to the Consolidated Financial Statements for additional information. +Our earnings are also exposed to movements in short- and long-term market interest rates. Our objective in managing this interest rate exposure is to limit the impact of interest rate changes on earnings and cash flows and to reduce overall borrowing costs. To achieve these objectives, we maintain a mix of commercial paper, bank loans, and fixed-rate debt of varying maturities. +MARKET RISK MEASUREMENT +We monitor foreign exchange risk, interest rate risk and related derivatives using a variety of techniques including a review of market value, sensitivity analysis and Value-at-Risk (“VaR”). Our market-sensitive derivative and other financial instruments are foreign currency forward contracts, foreign currency option contracts, interest rate swaps, intercompany loans denominated in non-functional currencies, fixed interest rate U.S. Dollar denominated debt and fixed interest rate Japanese Yen denominated debt. +We use VaR to monitor the foreign exchange risk of our foreign currency forward and foreign currency option derivative instruments only. The VaR determines the maximum potential one-day loss in the fair value of these foreign exchange rate-sensitive financial instruments. The VaR model estimates assume normal market conditions and a 95% confidence level. There are various modeling techniques that can be used in the VaR computation. Our computations are based on interrelationships between currencies and interest rates (a “variance/co-variance” technique). These interrelationships are a function of foreign exchange currency market changes and interest rate changes over the preceding one-year period. The value of foreign currency options does not change on a one-to-one basis with changes in the underlying currency rate. We adjust the potential loss in option value for the estimated sensitivity (the “delta” and “gamma”) to changes in the underlying currency rate. This calculation reflects the impact of foreign currency rate fluctuations on the derivative instruments only and does not include the impact of such rate fluctuations on non-functional currency transactions (such as anticipated transactions, firm commitments, cash balances and accounts and loans receivable and payable), including those which are hedged by these instruments. +The VaR model is a risk analysis tool and does not purport to represent actual losses in fair value we will incur nor does it consider the potential effect of favorable changes in market rates. It also does not represent the full extent of the possible loss that may occur. Actual future gains and losses will differ from those estimated because of changes or differences in market rates and interrelationships, hedging instruments and hedge percentages, timing and other factors. +The estimated maximum one-day loss in fair value on our foreign currency sensitive derivative financial instruments, derived using the VaR model, was $34 million and $93 million at May 31, 2019 and 2018, respectively. The VAR decreased year-over-year as a result of a decrease in foreign currency volatilities at May 31, 2019. Such a hypothetical loss in the fair value of our derivatives would be offset by increases in the value of the underlying transactions being hedged. The average monthly change in the fair values of foreign currency forward and foreign currency option derivative instruments was $83 million and $260 million during fiscal 2019 and fiscal 2018, respectively. +44 NIKE, INC. +Table of Contents +The instruments not included in the VaR are intercompany loans denominated in non-functional currencies, fixed interest rate Japanese Yen denominated debt, fixed interest rate U.S. Dollar denominated debt and interest rate swaps. Intercompany loans and related interest amounts are eliminated in consolidation. Furthermore, our non-functional currency intercompany loans are substantially hedged against foreign exchange risk through the use of forward contracts, which are included in the VaR calculation above. Therefore, we consider the interest rate and foreign currency market risks associated with our non-functional currency intercompany loans to be immaterial to our consolidated financial position, results from operations and cash flows. +Details of third-party debt are provided in the table below. The table presents principal cash flows and related weighted average interest rates by expected maturity dates. +EXPECTED MATURITY DATE YEAR ENDING MAY 31, +(Dollars in millions) +2020 +2021 +2022 +2023 +2024 +THEREAFTER +TOTAL +FAIR VALUE +Foreign Exchange Risk +Japanese Yen Functional Currency +Long-term Japanese Yen debt — Fixed rate +Principal payments +$ +6 +$ +3 +$ +— +$ +— +$ +— +$ +— +$ +9 +$ +9 +Average interest rate +2.4 +% +2.4 +% +0.0 +% +0.0 +% +0.0 +% +0.0 +% +2.4 +% +Interest Rate Risk +Japanese Yen Functional Currency +Long-term Japanese Yen debt — Fixed rate +Principal payments +$ +6 +$ +3 +$ +— +$ +— +$ +— +$ +— +$ +9 +$ +9 +Average interest rate +2.4 +% +2.4 +% +0.0 +% +0.0 +% +0.0 +% +0.0 +% +2.4 +% +U.S. Dollar Functional Currency +Long-term U.S. Dollar debt — Fixed rate +Principal payments +$ +— +$ +— +$ +— +$ +500 +$ +— +$ +3,000 +$ +3,500 +$ +3,515 +Average interest rate +0.0 +% +0.0 +% +0.0 +% +2.3 +% +0.0 +% +3.3 +% +3.1 +% +The fixed interest rate Japanese Yen denominated debt instruments were issued by and are accounted for by one of our Japanese subsidiaries. Accordingly, the monthly translation of these instruments, which varies due to changes in foreign exchange rates, is recognized in Accumulated other comprehensive income (loss) upon consolidation of this subsidiary. +2019 FORM 10-K 45 +Table of Contents +ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA +Management of NIKE, Inc. is responsible for the information and representations contained in this report. The financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and include certain amounts based on our best estimates and judgments. Other financial information in this report is consistent with these financial statements. +Our accounting systems include controls designed to reasonably assure assets are safeguarded from unauthorized use or disposition and provide for the preparation of financial statements in conformity with U.S. GAAP. These systems are supplemented by the selection and training of qualified financial personnel and an organizational structure providing for appropriate segregation of duties. +An internal corporate audit department reviews the results of its work with the Audit & Finance Committee of the Board of Directors, presently comprised of three outside, independent directors. The Audit & Finance Committee is responsible for the appointment of the independent registered public accounting firm and reviews, with the independent registered public accounting firm, management and the internal corporate audit staff, the scope and the results of the annual audit, the effectiveness of the accounting control system and other matters relating to the financial affairs of NIKE as the Audit & Finance Committee deems appropriate. The independent registered public accounting firm and the internal corporate auditors have full access to the Audit & Finance Committee, with and without the presence of management, to discuss any appropriate matters. +46 NIKE, INC. +Table of Contents +MANAGEMENT'S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING +Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13(a) - 15(f) and Rule 15(d) - 15(f) of the Securities Exchange Act of 1934, as amended. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the financial statements for external purposes in accordance with generally accepted accounting principles in the United States of America. Internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of assets of the Company that could have a material effect on the financial statements. +Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +Under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, our management conducted an evaluation of the effectiveness of our internal control over financial reporting based upon the framework in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on the results of our evaluation, our management concluded that our internal control over financial reporting was effective as of May 31, 2019 . +PricewaterhouseCoopers LLP, an independent registered public accounting firm, has audited (1) the Consolidated Financial Statements and (2) the effectiveness of our internal control over financial reporting as of May 31, 2019 , as stated in their report herein. +Mark G. Parker +Andrew Campion +Chairman, President and Chief Executive Officer +Executive Vice President and Chief Financial Officer +2019 FORM 10-K 47 +Table of Contents +Report of Independent Registered Public Accounting Firm +To the Board of Directors and Shareholders of NIKE, Inc. +Opinions on the Financial Statements and Internal Control over Financial Reporting +We have audited the accompanying consolidated balance sheets of NIKE, Inc. and its subsidiaries (the “Company”) as of May 31, 2019 and 2018, and the related consolidated statements of income, comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended May 31, 2019, including the related notes and financial statement schedule listed in the index appearing under Item 15(a)(2) (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of May 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). +In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of May 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended May 31, 2019 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of May 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO. +Change in Accounting Principles +As discussed in Note 1 to the consolidated financial statements, the Company changed the manner in which it accounts for revenue from contracts with customers and the manner in which it accounts for income taxes related to intra-entity transfers other than inventory as of June 1, 2018 and the manner in which it accounts for share-based payment awards to employees as of June 1, 2017. +Basis for Opinions +The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. +Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. +48 NIKE, INC. +Table of Contents +Definition and Limitations of Internal Control over Financial Reporting +A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. +Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +/s/ PricewaterhouseCoopers LLP +Portland, Oregon +July 23, 2019 +We have served as the Company’s auditor since 1974. +2019 FORM 10-K 49 +Table of Contents +NIKE, INC. +CONSOLIDATED STATEMENTS OF INCOME +YEAR ENDED MAY 31, +(In millions, except per share data) +2019 +2018 +2017 +Revenues +$ +39,117 +$ +36,397 +$ +34,350 +Cost of sales +21,643 +20,441 +19,038 +Gross profit +17,474 +15,956 +15,312 +Demand creation expense +3,753 +3,577 +3,341 +Operating overhead expense +8,949 +7,934 +7,222 +Total selling and administrative expense +12,702 +11,511 +10,563 +Interest expense (income), net +49 +54 +59 +Other (income) expense, net +(78 +) +66 +(196 +) +Income before income taxes +4,801 +4,325 +4,886 +Income tax expense +772 +2,392 +646 +NET INCOME +$ +4,029 +$ +1,933 +$ +4,240 +Earnings per common share: +Basic +$ +2.55 +$ +1.19 +$ +2.56 +Diluted +$ +2.49 +$ +1.17 +$ +2.51 +Weighted average common shares outstanding: +Basic +1,579.7 +1,623.8 +1,657.8 +Diluted +1,618.4 +1,659.1 +1,692.0 +The accompanying Notes to the Consolidated Financial Statements are an integral part of this statement. +50 NIKE, INC. +Table of Contents +NIKE, INC. +CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME +YEAR ENDED MAY 31, +(Dollars in millions) +2019 +2018 +2017 +Net income +$ +4,029 +$ +1,933 +$ +4,240 +Other comprehensive income (loss), net of tax: +Change in net foreign currency translation adjustment +(173 +) +(6 +) +16 +Change in net gains (losses) on cash flow hedges +503 +76 +(515 +) +Change in net gains (losses) on other +(7 +) +34 +(32 +) +Total other comprehensive income (loss), net of tax +323 +104 +(531 +) +TOTAL COMPREHENSIVE INCOME +$ +4,352 +$ +2,037 +$ +3,709 +The accompanying Notes to the Consolidated Financial Statements are an integral part of this statement. +2019 FORM 10-K 51 +Table of Contents +NIKE, INC. +CONSOLIDATED BALANCE SHEETS +MAY 31, +(Dollars in millions) +2019 +2018 +ASSETS +Current assets: +Cash and equivalents +$ +4,466 +$ +4,249 +Short-term investments +197 +996 +Accounts receivable, net +4,272 +3,498 +Inventories +5,622 +5,261 +Prepaid expenses and other current assets +1,968 +1,130 +Total current assets +16,525 +15,134 +Property, plant and equipment, net +4,744 +4,454 +Identifiable intangible assets, net +283 +285 +Goodwill +154 +154 +Deferred income taxes and other assets +2,011 +2,509 +TOTAL ASSETS +$ +23,717 +$ +22,536 +LIABILITIES AND SHAREHOLDERS' EQUITY +Current liabilities: +Current portion of long-term debt +$ +6 +$ +6 +Notes payable +9 +336 +Accounts payable +2,612 +2,279 +Accrued liabilities +5,010 +3,269 +Income taxes payable +229 +150 +Total current liabilities +7,866 +6,040 +Long-term debt +3,464 +3,468 +Deferred income taxes and other liabilities +3,347 +3,216 +Commitments and contingencies (Note 18) +Redeemable preferred stock +— +— +Shareholders' equity: +Common stock at stated value: +Class A convertible — 315 and 329 shares outstanding +— +— +Class B — 1,253 and 1,272 shares outstanding +3 +3 +Capital in excess of stated value +7,163 +6,384 +Accumulated other comprehensive income (loss) +231 +(92 +) +Retained earnings +1,643 +3,517 +Total shareholders' equity +9,040 +9,812 +TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY +$ +23,717 +$ +22,536 +The accompanying Notes to the Consolidated Financial Statements are an integral part of this statement. +52 NIKE, INC. +Table of Contents +NIKE, INC. +CONSOLIDATED STATEMENTS OF CASH FLOWS +YEAR ENDED MAY 31, +(Dollars in millions) +2019 +2018 +2017 +Cash provided by operations: +Net income +$ +4,029 +$ +1,933 +$ +4,240 +Adjustments to reconcile net income to net cash provided by operations: +Depreciation +705 +747 +706 +Deferred income taxes +34 +647 +(273 +) +Stock-based compensation +325 +218 +215 +Amortization and other +15 +27 +10 +Net foreign currency adjustments +233 +(99 +) +(117 +) +Changes in certain working capital components and other assets and liabilities: +(Increase) decrease in accounts receivable +(270 +) +187 +(426 +) +(Increase) decrease in inventories +(490 +) +(255 +) +(231 +) +(Increase) decrease in prepaid expenses and other current and non-current assets +(203 +) +35 +(120 +) +Increase (decrease) in accounts payable, accrued liabilities and other current and non-current liabilities +1,525 +1,515 +(158 +) +Cash provided by operations +5,903 +4,955 +3,846 +Cash provided (used) by investing activities: +Purchases of short-term investments +(2,937 +) +(4,783 +) +(5,928 +) +Maturities of short-term investments +1,715 +3,613 +3,623 +Sales of short-term investments +2,072 +2,496 +2,423 +Additions to property, plant and equipment +(1,119 +) +(1,028 +) +(1,105 +) +Disposals of property, plant and equipment +5 +3 +13 +Other investing activities +— +(25 +) +(34 +) +Cash provided (used) by investing activities +(264 +) +276 +(1,008 +) +Cash used by financing activities: +Net proceeds from long-term debt issuance +— +— +1,482 +Long-term debt payments, including current portion +(6 +) +(6 +) +(44 +) +Increase (decrease) in notes payable +(325 +) +13 +327 +Payments on capital lease and other financing obligations +(27 +) +(23 +) +(17 +) +Proceeds from exercise of stock options and other stock issuances +700 +733 +489 +Repurchase of common stock +(4,286 +) +(4,254 +) +(3,223 +) +Dividends — common and preferred +(1,332 +) +(1,243 +) +(1,133 +) +Tax payments for net share settlement of equity awards +(17 +) +(55 +) +(29 +) +Cash used by financing activities +(5,293 +) +(4,835 +) +(2,148 +) +Effect of exchange rate changes on cash and equivalents +(129 +) +45 +(20 +) +Net increase (decrease) in cash and equivalents +217 +441 +670 +Cash and equivalents, beginning of year +4,249 +3,808 +3,138 +CASH AND EQUIVALENTS, END OF YEAR +$ +4,466 +$ +4,249 +$ +3,808 +Supplemental disclosure of cash flow information: +Cash paid during the year for: +Interest, net of capitalized interest +$ +153 +$ +125 +$ +98 +Income taxes +757 +529 +703 +Non-cash additions to property, plant and equipment +160 +294 +266 +Dividends declared and not paid +347 +320 +300 +The accompanying Notes to the Consolidated Financial Statements are an integral part of this statement. +2019 FORM 10-K 53 +Table of Contents +NIKE, INC. +CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY +COMMON STOCK +CAPITAL IN EXCESS OF STATED VALUE +ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) +RETAINED EARNINGS +TOTAL +CLASS A +CLASS B +(In millions, except per share data) +SHARES +AMOUNT +SHARES +AMOUNT +Balance at May 31, 2016 +353 +$ +— +1,329 +$ +3 +$ +5,038 +$ +318 +$ +6,899 +$ +12,258 +Stock options exercised +17 +525 +525 +Conversion to Class B Common Stock +(24 +) +24 +— +Repurchase of Class B Common Stock +(60 +) +(189 +) +(3,060 +) +(3,249 +) +Dividends on common stock ($0.70 per share) and preferred stock ($0.10 per share) +(1,159 +) +(1,159 +) +Issuance of shares to employees, net of shares withheld for employee taxes +4 +121 +(13 +) +108 +Stock-based compensation +215 +215 +Net income +4,240 +4,240 +Other comprehensive income (loss) +(531 +) +(531 +) +Balance at May 31, 2017 +329 +$ +— +1,314 +$ +3 +$ +5,710 +$ +(213 +) +$ +6,907 +$ +12,407 +Stock options exercised +24 +600 +600 +Repurchase of Class B Common Stock +(70 +) +(254 +) +(4,013 +) +(4,267 +) +Dividends on common stock ($0.78 per share) and preferred stock ($0.10 per share) +(1,265 +) +(1,265 +) +Issuance of shares to employees, net of shares withheld for employee taxes +4 +110 +(28 +) +82 +Stock-based compensation +218 +218 +Net income +1,933 +1,933 +Other comprehensive income (loss) +104 +104 +Reclassifications to retained earnings in accordance with ASU 2018-02 (Note 1) +17 +(17 +) +— +Balance at May 31, 2018 +329 +$ +— +1,272 +$ +3 +$ +6,384 +$ +(92 +) +$ +3,517 +$ +9,812 +Stock options exercised +18 +539 +539 +Conversion to Class B Common Stock +(14 +) +14 +— +Repurchase of Class B Common Stock +(54 +) +(227 +) +(4,056 +) +(4,283 +) +Dividends on common stock ($0.86 per share) and preferred stock ($0.10 per share) +(1,360 +) +(1,360 +) +Issuance of shares to employees, net of shares withheld for employee taxes +3 +142 +(3 +) +139 +Stock-based compensation +325 +325 +Net income +4,029 +4,029 +Other comprehensive income (loss) +323 +323 +Adoption of ASU 2016-16 (Note 1) +(507 +) +(507 +) +Adoption of ASC Topic 606 (Note 1) +23 +23 +Balance at May 31, 2019 +315 +$ +— +1,253 +$ +3 +$ +7,163 +$ +231 +$ +1,643 +$ +9,040 +The accompanying Notes to the Consolidated Financial Statements are an integral part of this statement. +54 NIKE, INC. +Table of Contents +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +Note 1 +Summary of Significant Accounting Policies +56 +Note 2 +Inventories +64 +Note 3 +Property, Plant and Equipment +64 +Note 4 +Identifiable Intangible Assets and Goodwill +64 +Note 5 +Accrued Liabilities +65 +Note 6 +Fair Value Measurements +65 +Note 7 +Short-Term Borrowings and Credit Lines +67 +Note 8 +Long-Term Debt +68 +Note 9 +Income Taxes +69 +Note 10 +Redeemable Preferred Stock +71 +Note 11 +Common Stock and Stock-Based Compensation +72 +Note 12 +Earnings Per Share +74 +Note 13 +Benefit Plans +74 +Note 14 +Risk Management and Derivatives +75 +Note 15 +Accumulated Other Comprehensive Income (Loss) +78 +Note 16 +Revenues +80 +Note 17 +Operating Segments and Related Information +81 +Note 18 +Commitments and Contingencies +84 +2019 FORM 10-K 55 +Table of Contents +NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES +DESCRIPTION OF BUSINESS +NIKE, Inc. is a worldwide leader in the design, development and worldwide marketing and selling of athletic footwear, apparel, equipment, accessories and services. NIKE, Inc. portfolio brands include the NIKE Brand, Jordan Brand, Hurley and Converse. The NIKE Brand is focused on performance athletic footwear, apparel, equipment, accessories and services across a wide range of sport categories, amplified with sport-inspired sportswear products carrying the Swoosh trademark, as well as other NIKE Brand trademarks. The Jordan Brand is focused on athletic and casual footwear, apparel and accessories using the Jumpman trademark. Sales and operating results of Jordan Brand products are reported within the respective NIKE Brand geographic operating segments. The Hurley brand is focused on action sports and youth lifestyle apparel and accessories under the Hurley trademark. Sales and operating results of Hurley brand products are reported within the NIKE Brand's North America geographic operating segment. Converse designs, distributes, licenses and sells casual sneakers, apparel and accessories under the Converse, Chuck Taylor, All Star, One Star, Star Chevron and Jack Purcell trademarks. In some markets outside the U.S., these trademarks are licensed to third parties who design, distribute, market and sell similar products. Operating results of the Converse brand are reported on a stand-alone basis. +BASIS OF CONSOLIDATION +The Consolidated Financial Statements include the accounts of NIKE, Inc. and its subsidiaries (the "Company" or "NIKE"). All significant intercompany transactions and balances have been eliminated. +REVENUE RECOGNITION +Beginning in fiscal 2019, the Company adopted Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606) . Prior period amounts have not been restated and continue to be reported in accordance with the Company's historical accounting policies. The Company's revenue recognition polices under Topic 606 are described in the following paragraphs and references to prior period policies under Accounting Standard Codification Topic 605 — Revenue Recognition (Topic 605) , are included below in the event they are substantially different. +Revenue transactions associated with the sale of NIKE Brand footwear, apparel and equipment, as well as Converse products, comprise a single performance obligation, which consists of the sale of products to customers either through wholesale or direct to consumer channels. The Company satisfies the performance obligation and records revenues when transfer of control has passed to the customer, based on the terms of sale. A customer is considered to have control once they are able to direct the use and receive substantially all of the benefits of the product. +Transfer of control passes to wholesale customers upon shipment or upon receipt depending on the country of the sale and the agreement with the customer. Control passes to retail store customers at the time of sale and to substantially all digital commerce customers upon shipment. Prior to June 1, 2018, the requirements for recognizing revenue were met upon delivery to the customer. The transaction price is determined based upon the invoiced sales price, less anticipated sales returns, discounts and miscellaneous claims from customers. Payment terms for wholesale transactions depend on the country of sale or agreement with the customer and payment is generally required within 90 days or less of shipment to or receipt by the wholesale customer. Payment is due at the time of sale for retail store and digital commerce transactions. +Consideration for trademark licensing contracts is earned through sales-based or usage-based royalty arrangements and the associated revenues are recognized over the license period. +Taxes assessed by governmental authorities that are both imposed on and concurrent with a specific revenue-producing transaction, and are collected by the Company from a customer, are excluded from Revenues and Cost of sales in the Consolidated Statements of Income. Shipping and handling costs associated with outbound freight after control over a product has transferred to a customer are accounted for as a fulfillment cost and are included in Cost of sales when the related revenue is recognized. +56 NIKE, INC. +Table of Contents +SALES-RELATED RESERVES +Consideration promised in the Company's contracts with customers is variable due to anticipated reductions such as sales returns, discounts and miscellaneous claims from customers. The Company estimates the most likely amount it will be entitled to receive and records an anticipated reduction against Revenues , with an offsetting increase to Accrued liabilities at the time revenues are recognized. The estimated cost of inventory for product returns is recorded in Prepaid expenses and other current assets on the Consolidated Balance Sheets. Prior to June 1, 2018, the Company's reserve balances were reported net of the estimated cost of inventory for product returns and recognized within Accounts receivable, net for wholesale transactions and Accrued liabilities for the Company's direct to consumer business, on the Consolidated Balance Sheets. +The provision for anticipated sales returns consists of both contractual return rights and discretionary authorized returns. Provisions for post-invoice sales discounts consist of both contractual programs and discretionary discounts that are expected to be granted at a later date. +Estimates of discretionary authorized returns, discounts and claims are based on (1) historical rates, (2) specific identification of outstanding returns not yet received from customers and outstanding discounts and claims and (3) estimated returns, discounts and claims expected, but not yet finalized with customers. Actual returns, discounts and claims in any future period are inherently uncertain and thus may differ from estimates recorded. If actual or expected future returns, discounts or claims were significantly greater or lower than the reserves established, a reduction or increase to net revenues would be recorded in the period in which such determination was made. +COST OF SALES +Cost of sales consists primarily of inventory costs, as well as warehousing costs (including the cost of warehouse labor), third-party royalties, certain foreign currency hedge gains and losses and product design costs. Shipping and handling costs are expensed as incurred and included in Cost of sales . +DEMAND CREATION EXPENSE +Demand creation expense consists of advertising and promotion costs, including costs of endorsement contracts, complimentary product, television, digital and print advertising and media costs, brand events and retail brand presentation. Advertising production costs are expensed the first time an advertisement is run. Advertising media costs are expensed when the advertisement appears. Costs related to brand events are expensed when the event occurs. Costs related to retail brand presentation are expensed when the presentation is complete and delivered. +A significant amount of the Company's promotional expenses result from payments under endorsement contracts. In general, endorsement payments are expensed on a straight-line basis over the term of the contract. However, certain contract elements may be accounted for differently based upon the facts and circumstances of each individual contract. Prepayments made under contracts are included in Prepaid expenses and other current assets or Deferred income taxes and other assets depending on the period to which the prepayment applies. +Certain contracts provide for contingent payments to endorsers based upon specific achievements in their sport (e.g., winning a championship). The Company records Demand creation expense for these amounts when the endorser achieves the specific goal. +Certain contracts provide for variable payments based upon endorsers maintaining a level of performance in their sport over an extended period of time (e.g., maintaining a specified ranking in a sport for a year). When the Company determines payments are probable, the amounts are reported in Demand creation expense ratably over the contract period based on the Company's best estimate of the endorser's performance. In these instances, to the extent actual payments to the endorser differ from the Company's estimate due to changes in the endorser's performance, adjustments to Demand creation expense may be recorded in a future period. +Certain contracts provide for royalty payments to endorsers based upon a predetermined percent of sales of particular products, which the Company records in Cost of sales as the related sales occur. For contracts containing minimum guaranteed royalty payments, the Company records the amount of any guaranteed payment in excess of that earned through sales of product within Demand creation expense . +Through cooperative advertising programs, the Company reimburses its wholesale customers for certain costs of advertising the Company's products. The Company records these costs in Demand creation expense at the point in time when it is obligated to its customers for the costs. This obligation may arise prior to the related advertisement being run. +2019 FORM 10-K 57 +Table of Contents +Total advertising and promotion expenses, which the Company refers to as Demand creation expense , were $3,753 million , $3,577 million and $3,341 million for the years ended May 31, 2019 , 2018 and 2017 , respectively. Prepaid advertising and promotion expenses totaled $773 million and $730 million at May 31, 2019 and 2018 , respectively, of which $333 million and $359 million , respectively, was recorded in Prepaid expenses and other current assets , and $440 million and $371 million , respectively, was recorded in Deferred income taxes and other assets , depending on the period to which the prepayment applied. +OPERATING OVERHEAD EXPENSE +Operating overhead expense consists primarily of wage and benefit-related expenses, research and development costs, as well as other administrative expenses, such as rent, depreciation and amortization, professional services, meetings and travel. +CASH AND EQUIVALENTS +Cash and equivalents represent cash and short-term, highly liquid investments, that are both readily convertible to known amounts of cash, and so near their maturity they present insignificant risk of changes in value because of changes in interest rates, including commercial paper, U.S. Treasury, U.S. Agency, money market funds, time deposits and corporate debt securities with maturities of 90 days or less at the date of purchase. +SHORT-TERM INVESTMENTS +Short-term investments consist of highly liquid investments, including commercial paper, U.S. Treasury, U.S. Agency, time deposits and corporate debt securities, with maturities over 90 days at the date of purchase. Debt securities the Company has the ability and positive intent to hold to maturity are carried at amortized cost. At May 31, 2019 and 2018 , the Company did not hold any short-term investments classified as trading or held-to-maturity. +At May 31, 2019 and 2018 , Short-term investments consisted of available-for-sale debt securities, which are recorded at fair value with unrealized gains and losses reported, net of tax, in Accumulated other comprehensive income (loss) , unless unrealized losses are determined to be other than temporary. Realized gains and losses on the sale of securities are determined by specific identification. The Company considers all available-for-sale debt securities, including those with maturity dates beyond 12 months, as available to support current operational liquidity needs and, therefore, classifies all securities with maturity dates beyond 90 days at the date of purchase as current assets within Short-term investments on the Consolidated Balance Sheets. +Refer to Note 6 — Fair Value Measurements for more information on the Company's short-term investments. +ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS RECEIVABLE +Accounts receivable, net consist primarily of amounts receivable from customers. The Company makes ongoing estimates relating to the collectability of its accounts receivable and maintains an allowance for estimated losses resulting from the inability of its customers to make required payments. In determining the amount of the allowance, the Company considers historical levels of credit losses and makes judgments about the creditworthiness of significant customers based on ongoing credit evaluations. Accounts receivable with anticipated collection dates greater than 12 months from the balance sheet date and related allowances are considered non-current and recorded in Deferred income taxes and other assets . The allowance for uncollectible accounts receivable was $30 million at both May 31, 2019 and 2018 . +INVENTORY VALUATION +Inventories are stated at lower of cost and net realizable value, and valued on either an average or a specific identification cost basis. In some instances, we ship product directly from our supplier to the customer, with the related inventory and cost of sales recognized on a specific identification basis. Inventory costs primarily consist of product cost from the Company's suppliers, as well as inbound freight, import duties, taxes, insurance and logistics and other handling fees. +PROPERTY, PLANT AND EQUIPMENT AND DEPRECIATION +Property, plant and equipment are recorded at cost. Depreciation is determined on a straight-line basis for land improvements, buildings and leasehold improvements over 2 to 40 years and for machinery and equipment over 2 to 15 years. +Depreciation and amortization of assets used in manufacturing, warehousing and product distribution are recorded in Cost of sales . Depreciation and amortization of all other assets are recorded in Operating overhead expense . +58 NIKE, INC. +Table of Contents +SOFTWARE DEVELOPMENT COSTS +Internal Use Software : Expenditures for major software purchases and software developed for internal use are capitalized and amortized over a 2 to 12 -year period on a straight-line basis. The Company's policy provides for the capitalization of external direct costs associated with developing or obtaining internal use computer software. In addition, the Company also capitalizes certain payroll and payroll-related costs for employees who are directly associated with internal use computer software projects. The amount of capitalizable payroll costs with respect to these employees is limited to the time directly spent on such projects. Costs associated with preliminary project stage activities, training, maintenance and all other post-implementation stage activities are expensed as incurred. +Computer Software to be Sold, Leased or Otherwise Marketed : Development costs of computer software to be sold, leased or otherwise marketed as an integral part of a product are subject to capitalization beginning when a product's technological feasibility has been established and ending when a product is available for general release to customers. In most instances, the Company's products are released soon after technological feasibility has been established. Therefore, software development costs incurred subsequent to achievement of technological feasibility are usually not significant, and generally most software development costs have been expensed as incurred. +IMPAIRMENT OF LONG-LIVED ASSETS +The Company reviews the carrying value of long-lived assets or asset groups to be used in operations whenever events or changes in circumstances indicate the carrying amount of the assets might not be recoverable. Factors that would necessitate an impairment assessment include a significant adverse change in the extent or manner in which an asset is used, a significant adverse change in legal factors or the business climate that could affect the value of the asset or a significant decline in the observable market value of an asset, among others. If such facts indicate a potential impairment, the Company would assess the recoverability of an asset group by determining if the carrying value of the asset group exceeds the sum of the projected undiscounted cash flows expected to result from the use and eventual disposition of the assets over the remaining economic life of the primary asset in the asset group. If the recoverability test indicates that the carrying value of the asset group is not recoverable, the Company will estimate the fair value of the asset group using appropriate valuation methodologies, which would typically include an estimate of discounted cash flows. Any impairment would be measured as the difference between the asset group's carrying amount and its estimated fair value. +GOODWILL AND INDEFINITE-LIVED INTANGIBLE ASSETS +The Company performs annual impairment tests on goodwill and intangible assets with indefinite lives in the fourth quarter of each fiscal year or when events occur or circumstances change that would, more likely than not, reduce the fair value of a reporting unit or an intangible asset with an indefinite life below its carrying value. Events or changes in circumstances that may trigger interim impairment reviews include significant changes in business climate, operating results, planned investments in the reporting unit, planned divestitures or an expectation that the carrying amount may not be recoverable, among other factors. The Company may first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events and circumstances, the Company determines it is more likely than not that the fair value of the reporting unit is greater than its carrying amount, an impairment test is unnecessary. If an impairment test is necessary, the Company will estimate the fair value of its related reporting units. If the carrying value of a reporting unit exceeds its fair value, the goodwill of that reporting unit is determined to be impaired and the Company will proceed with recording an impairment charge equal to the excess of the carrying value over the related fair value. +Indefinite-lived intangible assets primarily consist of acquired trade names and trademarks. The Company may first perform a qualitative assessment to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired. If, after assessing the totality of events and circumstances, the Company determines it is more likely than not that the indefinite-lived intangible asset is not impaired, no quantitative fair value measurement is necessary. If a quantitative fair value measurement calculation is required for these intangible assets, the Company primarily utilizes the relief-from-royalty method. This method assumes trade names and trademarks have value to the extent their owner is relieved of the obligation to pay royalties for the benefits received from them. This method requires the Company to estimate the future revenue for the related brands, the appropriate royalty rate and the weighted average cost of capital. If the carrying value of the indefinite-lived intangible exceeds its fair value, the asset is determined to be impaired and the Company will proceed with recording an impairment charge equal to the excess of the carrying value over the related fair value. +2019 FORM 10-K 59 +Table of Contents +OPERATING LEASES +The Company leases retail store space, certain distribution and warehouse facilities, office space, equipment and other non-real estate assets under operating leases. Operating lease agreements may contain rent escalation clauses, renewal options, rent holidays or certain landlord incentives, including tenant improvement allowances. Rent expense for non-cancelable operating leases with scheduled rent increases or landlord incentives are recognized on a straight-line basis over the lease term, beginning with the effective lease commencement date, which is generally the date in which the Company takes possession of or controls the physical use of the property. Certain leases also provide for contingent rent, which is generally determined as a percent of sales in excess of specified levels. A contingent rent liability is recognized together with the corresponding rent expense when specified levels have been achieved or when the Company determines that achieving the specified levels during the period is probable. +FAIR VALUE MEASUREMENTS +The Company measures certain financial assets and liabilities at fair value on a recurring basis, including derivatives, equity securities and available-for-sale debt securities. Fair value is the price the Company would receive to sell an asset or pay to transfer a liability in an orderly transaction with a market participant at the measurement date. The Company uses a three-level hierarchy established by the Financial Accounting Standards Board (FASB) that prioritizes fair value measurements based on the types of inputs used for the various valuation techniques (market approach, income approach and cost approach). +The levels of the fair value hierarchy are described below: +• +Level 1: Quoted prices in active markets for identical assets or liabilities. +• +Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly; these include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active. +• +Level 3: Unobservable inputs with little or no market data available, which require the reporting entity to develop its own assumptions. +The Company's assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. Financial assets and liabilities are classified in their entirety based on the most conservative level of input that is significant to the fair value measurement. +Pricing vendors are utilized for a majority of Level 1 and Level 2 investments. These vendors either provide a quoted market price in an active market or use observable inputs without applying significant adjustments in their pricing. Observable inputs include broker quotes, interest rates and yield curves observable at commonly quoted intervals, volatilities and credit risks. The fair value of derivative contracts is determined using observable market inputs such as the daily market foreign currency rates, forward pricing curves, currency volatilities, currency correlations and interest rates and considers nonperformance risk of the Company and its counterparties. +The Company's fair value measurement process includes comparing fair values to another independent pricing vendor to ensure appropriate fair values are recorded. +Refer to Note 6 — Fair Value Measurements for additional information. +FOREIGN CURRENCY TRANSLATION AND FOREIGN CURRENCY TRANSACTIONS +Adjustments resulting from translating foreign functional currency financial statements into U.S. Dollars are included in the foreign currency translation adjustment, a component of Accumulated other comprehensive income (loss) in Total shareholders' equity . +The Company's global subsidiaries have various assets and liabilities, primarily receivables and payables, which are denominated in currencies other than their functional currency. These balance sheet items are subject to re-measurement, the impact of which is recorded in Other (income) expense, net , within the Consolidated Statements of Income. +ACCOUNTING FOR DERIVATIVES AND HEDGING ACTIVITIES +The Company uses derivative financial instruments to reduce its exposure to changes in foreign currency exchange rates and interest rates. All derivatives are recorded at fair value on the Consolidated Balance Sheets and changes in the fair value of derivative financial instruments are either recognized in Accumulated other comprehensive income (loss) (a component of Total shareholders' equity ), Long-term debt or Net income depending on the nature of the underlying exposure, whether the derivative is formally designated as a hedge and, if designated, the extent to which the hedge is effective. The Company classifies the cash flows at settlement from derivatives in the same category as the cash flows from the related hedged items. For undesignated hedges and designated cash flow hedges, this is primarily within the Cash provided by operations component of the +60 NIKE, INC. +Table of Contents +Consolidated Statements of Cash Flows. For designated net investment hedges, this is within the Cash used by investing activities component of the Consolidated Statements of Cash Flows. For the Company's fair value hedges, which are interest rate swaps used to mitigate the change in fair value of its fixed-rate debt attributable to changes in interest rates, the related cash flows from periodic interest payments are reflected within the Cash provided by operations component of the Consolidated Statements of Cash Flows. Refer to Note 14 — Risk Management and Derivatives for additional information on the Company's risk management program and derivatives. +STOCK-BASED COMPENSATION +The Company accounts for stock-based compensation by estimating the fair value, net of estimated forfeitures, of equity awards and recognizing the related expense as Cost of sales or Operating overhead expense , as applicable, in the Consolidated Statements of Income on a straight-line basis over the vesting period. Substantially all awards vest ratably over four years of continued employment, with stock options expiring ten years from the date of grant. The fair value of options, stock appreciation rights, and employees' purchase rights under the employee stock purchase plans (ESPPs) is determined using the Black-Scholes option pricing model. The fair value of restricted stock and restricted stock units is established by the market price on the date of grant. +Refer to Note 11 — Common Stock and Stock-Based Compensation for additional information on the Company's stock-based compensation programs. +INCOME TAXES +The Company accounts for income taxes using the asset and liability method. This approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of assets and liabilities. The Company records a valuation allowance to reduce deferred tax assets to the amount management believes is more likely than not to be realized. +The Company recognizes a tax benefit from uncertain tax positions in the financial statements only when it is more likely than not the position will be sustained upon examination by relevant tax authorities. The Company recognizes interest and penalties related to income tax matters in Income tax expense . +Refer to Note 9 — Income Taxes for further discussion. +EARNINGS PER SHARE +Basic earnings per common share is calculated by dividing Net income by the weighted average number of common shares outstanding during the year. Diluted earnings per common share is calculated by adjusting weighted average outstanding shares, assuming conversion of all potentially dilutive stock options and awards. +Refer to Note 12 — Earnings Per Share for further discussion. +MANAGEMENT ESTIMATES +The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates, including estimates relating to assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. +RECENTLY ADOPTED ACCOUNTING STANDARDS +In May 2014, the Financial Accounting Standards Board (FASB) issued Topic 606, which replaces existing revenue recognition guidance. The new standard requires companies to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, Topic 606 requires disclosures of the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The Company adopted this standard using a modified retrospective approach in the first quarter of fiscal 2019 with the cumulative effect of initially applying the standard recognized in Retained earnings at June 1, 2018. Comparative prior period information has not been adjusted and continues to be reported in accordance with previous revenue recognition guidance in Topic 605. The Company has applied the new standard to all contracts at adoption. +2019 FORM 10-K 61 +Table of Contents +The Company's adoption of Topic 606 resulted in a change to the timing of revenue recognition. The satisfaction of the Company's performance obligation is based upon transfer of control over a product to a customer, which results in sales being recognized upon shipment rather than upon delivery for certain wholesale transactions and substantially all digital commerce sales. A customer is considered to have control once they are able to direct the use and receive substantially all of the benefits of the product. This resulted in a cumulative effect adjustment, which increased Retained earnings by $23 million at June 1, 2018. The adoption of Topic 606 did not have a material effect on the Consolidated Statements of Income for fiscal 2019. +Additionally, the Company's reserve balances for returns, post-invoice sales discounts and miscellaneous claims for wholesale transactions were previously reported net of the estimated cost of inventory for product returns, and as a reduction to Accounts receivable, net on the Consolidated Balance Sheets. Under Topic 606, an asset for the estimated cost of inventory for expected products returns is now recognized separately from the liability for sales-related reserves. This resulted in an increase to Accounts receivable, net , an increase in Prepaid expenses and other current assets and an increase in Accrued liabilities on the Consolidated Balance Sheets at May 31, 2019 . Sales-related reserves for the Company's direct to consumer operations continue to be recognized in Accrued liabilities , but are now recorded separately from an asset for the estimated cost of inventory for expected product returns, which is recognized in Prepaid expenses and other current assets . The following table presents the related effect of the adoption of Topic 606 on the Consolidated Balance Sheets at May 31, 2019 : +AS OF MAY 31, 2019 +(Dollars in millions) +AS REPORTED +EFFECT OF ADOPTION +BALANCES WITHOUT ADOPTION OF +TOPIC 606 +Accounts receivable, net +$ +4,272 +$ +782 +$ +3,490 +Prepaid expenses and other current assets +1,968 +410 +1,558 +Total current assets +16,525 +1,192 +15,333 +TOTAL ASSETS +23,717 +1,192 +22,525 +Accrued liabilities +5,010 +1,192 +3,818 +Total current liabilities +7,866 +1,192 +6,674 +TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY +$ +23,717 +$ +1,192 +$ +22,525 +Other impacts from the adoption of Topic 606 on the Consolidated Financial Statements were immaterial. Refer to Note 16 — Revenues for further discussion. +In February 2018, the FASB issued ASU No. 2018-02, Income Statement — Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (Loss) . The standard allows for reclassification of stranded tax effects on items resulting from the Tax Cuts and Jobs Act (the “Tax Act”) from Accumulated other comprehensive income (loss) to Retained earnings . Tax effects unrelated to the Tax Act are released from Accumulated other comprehensive income (loss) using either the specific identification approach or the portfolio approach based on the nature of the underlying item. The Company early adopted the ASU in the third quarter of fiscal 2018. As a result of the adoption, Retained earnings decreased by $17 million , with a corresponding increase to Accumulated other comprehensive income (loss) due to the reduction in the corporate tax rate from 35% to 21%. Refer to Note 9 — Income Taxes for additional information on the impact of the Tax Act. +In March 2016, the FASB issued ASU No. 2016-09, Compensation — Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting , which changes how companies account for certain aspects of share-based payment awards to employees. The Company adopted the ASU in the first quarter of fiscal 2018. The updated guidance requires excess tax benefits and deficiencies from share-based payment awards to be recorded in income tax expense in the income statement. Previously, excess tax benefits and deficiencies were recognized in shareholders' equity on the balance sheet. This change is required to be applied prospectively. During fiscal 2019 and fiscal 2018, the Company recognized $175 million and $230 million , respectively, of excess tax benefits related to share-based payment awards in Income tax expense in the Consolidated Statements of Income. +In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory . The updated guidance requires companies to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. Income tax effects of intra-entity transfers of inventory will continue to be deferred until the inventory has been sold to a third party. The Company adopted the standard on June 1, 2018, using a modified retrospective approach, with the cumulative effect of applying the new standard recognized in Retained earnings at the date of adoption. The adoption resulted in reductions to Retained earnings, Deferred income taxes and other assets , and Prepaid expenses and other current assets of $507 million , $422 million and $45 million , respectively, and an increase in Deferred income taxes and other liabilities of $40 million on the Consolidated Balance Sheets. +62 NIKE, INC. +Table of Contents +In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities , which expands and refines hedge accounting for both financial and non-financial risk components, aligns the recognition and presentation of the effects of hedging instruments and hedge items in the financial statements, and includes certain targeted improvements to ease the application of current guidance related to the assessment of hedge effectiveness. The Company elected to early adopt the ASU in the first quarter of fiscal 2019 and the adoption of the new guidance did not have a material impact on the Consolidated Financial Statements. +In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment, which simplified the accounting for goodwill impairment by eliminating the requirement to calculate the implied fair value of goodwill in measuring an impairment charge, previously Step 2 of the goodwill impairment test. Under the new standard, an impairment charge is recorded based on the excess of a reporting unit's carrying amount over its fair value, previously Step 1 of the goodwill impairment test. The guidance still allows companies to perform the optional qualitative assessment before determining whether to proceed to Step 1. The Company adopted the ASU in the first quarter of fiscal 2019 and the adoption of this standard did not have a material impact on the Consolidated Financial Statements. +In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments — Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities . The updated guidance enhances the reporting model for financial instruments, which includes amendments to address aspects of recognition, measurement, presentation and disclosure. The Company adopted the ASU in the first quarter of fiscal 2019 and the adoption of the new guidance did not have a material impact on the Consolidated Financial Statements. +RECENTLY ISSUED ACCOUNTING STANDARDS +In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) , which replaces existing lease accounting guidance. The new standard is intended to provide enhanced transparency and comparability by requiring lessees to record right-of-use (ROU) assets and corresponding lease liabilities on the balance sheet. ROU assets represent the Company's right to use an underlying asset for the lease term and lease liabilities represent the Company's obligation to make lease payments arising from the lease. The new guidance will require the Company to continue to classify leases as either an operating or finance lease, with classification affecting the pattern of expense recognition in the income statement. In addition, the new standard requires enhanced disclosure surrounding the amount, timing and uncertainty of cash flows arising from leasing agreements. In July 2018, the FASB issued ASU No. 2018-11, which provides entities with an additional transition method to adopt Topic 842. Under the new transition method, an entity initially applies the new standard at the adoption date, versus at the beginning of the earliest period presented, and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The Company will elect this transition method at the adoption date of June 1, 2019. +Upon adoption, the Company will elect the package of transition practical expedients which would allow the Company to carry forward prior conclusions related to: (i) whether any expired or existing contracts are or contain leases, (ii) the lease classification for any expired or existing leases and (iii) initial direct costs for existing leases. Additionally, the Company will elect the practical expedient to not separate lease components from nonlease components for all real estate leases within the portfolio. The Company will make an accounting policy election to keep leases with an initial term of 12 months or less off the Consolidated Balance Sheets and will recognize related lease payments in the Consolidated Statements of Income on a straight-line basis over the lease term. +In preparation for implementation, the Company has been executing changes to business processes, including implementing a software solution to assist with the new reporting requirements. Upon adoption, the Company's total assets and total liabilities will increase by approximately $2.8 billion . The Company does not believe the standard will have a material impact on the Consolidated Statements of Income or Consolidated Statements of Cash Flows. +2019 FORM 10-K 63 +Table of Contents +NOTE 2 — INVENTORIES +Inventory balances of $5,622 million and $5,261 million at May 31, 2019 and 2018 , respectively, were substantially all finished goods. +NOTE 3 — PROPERTY, PLANT AND EQUIPMENT +Property, plant and equipment, net included the following: +AS OF MAY 31, +(Dollars in millions) +2019 +2018 +Land and improvements +$ +329 +$ +331 +Buildings +2,445 +2,195 +Machinery, equipment and internal-use software +4,335 +4,230 +Leasehold improvements +1,563 +1,494 +Construction in process +797 +641 +Total property, plant and equipment, gross +9,469 +8,891 +Less accumulated depreciation +4,725 +4,437 +TOTAL PROPERTY, PLANT AND EQUIPMENT, NET +$ +4,744 +$ +4,454 +Capitalized interest was not material for the years ended May 31, 2019 , 2018 and 2017 . +NOTE 4 — IDENTIFIABLE INTANGIBLE ASSETS AND GOODWILL +Identifiable intangible assets, net consist of indefinite-lived trademarks, acquired trademarks and other intangible assets. The following table summarizes the Company's Identifiable intangible assets, net balances as of May 31, 2019 and 2018 : +AS OF MAY 31, +2019 +2018 +(Dollars in millions) +GROSS CARRYING AMOUNT +ACCUMULATED AMORTIZATION +NET CARRYING AMOUNT +GROSS CARRYING AMOUNT +ACCUMULATED AMORTIZATION +NET CARRYING AMOUNT +Indefinite-lived trademarks +$ +281 +$ +— +$ +281 +$ +281 +$ +— +$ +281 +Acquired trademarks and other +22 +20 +2 +22 +18 +4 +IDENTIFIABLE INTANGIBLE ASSETS, NET +$ +303 +$ +20 +$ +283 +$ +303 +$ +18 +$ +285 +Goodwill was $154 million at May 31, 2019 and 2018 , of which $65 million was included in the Converse segment for both periods. The remaining amounts were included in Global Brand Divisions for segment reporting purposes. There were no accumulated impairment losses for goodwill as of either period end. +64 NIKE, INC. +Table of Contents +NOTE 5 — ACCRUED LIABILITIES +Accrued liabilities included the following: +AS OF MAY 31, +(Dollars in millions) +2019 +2018 +Compensation and benefits, excluding taxes +$ +1,232 +$ +897 +Sales-related reserves (1) +1,218 +20 +Endorsement compensation +424 +425 +Dividends payable +346 +320 +Import and logistics costs +296 +268 +Collateral received from counterparties to hedging instruments +289 +23 +Taxes other than income taxes payable +234 +224 +Advertising and marketing +114 +140 +Fair value of derivatives +52 +184 +Other (2) +805 +768 +TOTAL ACCRUED LIABILITIES +$ +5,010 +$ +3,269 +(1) +Sales-related reserves as of May 31, 2019 reflect the Company's fiscal 2019 adoption of Topic 606. As of May 31, 2018, Sales-related reserves reflect the Company's prior accounting under Topic 605. Refer to Note 1 — Summary of Significant Accounting Policies for additional information on the adoption of the new standard. +(2) +Other consists of various accrued expenses with no individual item accounting for more than 5% of the total Accrued liabilities balance at May 31, 2019 and 2018 . +NOTE 6 — FAIR VALUE MEASUREMENTS +The following tables present information about the Company's financial assets measured at fair value on a recurring basis as of May 31, 2019 and 2018 , and indicate the level in the fair value hierarchy in which the Company classifies the fair value measurement. Refer to Note 1 — Summary of Significant Accounting Policies for additional detail regarding the Company's fair value measurement methodology. +AS OF MAY 31, 2019 +(Dollars in millions) +ASSETS AT FAIR VALUE +CASH AND EQUIVALENTS +SHORT-TERM INVESTMENTS +Cash +$ +853 +$ +853 +$ +— +Level 1: +U.S. Treasury securities +347 +200 +147 +Level 2: +Commercial paper and bonds +34 +1 +33 +Money market funds +1,637 +1,637 +— +Time deposits +1,791 +1,775 +16 +U.S. Agency securities +1 +— +1 +Total Level 2 +3,463 +3,413 +50 +TOTAL +$ +4,663 +$ +4,466 +$ +197 +2019 FORM 10-K 65 +Table of Contents +AS OF MAY 31, 2018 +(Dollars in millions) +ASSETS AT FAIR VALUE +CASH AND EQUIVALENTS +SHORT-TERM INVESTMENTS +Cash +$ +415 +$ +415 +$ +— +Level 1: +U.S. Treasury securities +1,178 +500 +678 +Level 2: +Commercial paper and bonds +451 +153 +298 +Money market funds +2,174 +2,174 +— +Time deposits +925 +907 +18 +U.S. Agency securities +102 +100 +2 +Total Level 2 +3,652 +3,334 +318 +TOTAL +$ +5,245 +$ +4,249 +$ +996 +The Company elects to record the gross assets and liabilities of its derivative financial instruments on the Consolidated Balance Sheets. The Company's derivative financial instruments are subject to master netting arrangements that allow for the offset of assets and liabilities in the event of default or early termination of the contract. Any amounts of cash collateral received related to these instruments associated with the Company's credit-related contingent features are recorded in Cash and equivalents and Accrued liabilities , the latter of which would further offset against the Company's derivative asset balance (refer to Note 14 — Risk Management and Derivatives ). Any amounts of cash collateral posted related to these instruments associated with the Company's credit-related contingent features are recorded in Prepaid expenses and other current assets , which would further offset against the Company's derivative liability balance (refer to Note 14 — Risk Management and Derivatives ). Cash collateral received or posted related to the Company's credit related contingent features is presented in the Cash provided by operations component of the Consolidated Statements of Cash Flows. Any amounts of non-cash collateral received, such as securities, are not recorded on the Consolidated Balance Sheets pursuant to U.S. GAAP. For further information related to credit risk, refer to Note 14 — Risk Management and Derivatives . +The following tables present information about the Company's derivative assets and liabilities measured at fair value on a recurring basis as of May 31, 2019 and 2018 , and indicate the level in the fair value hierarchy in which the Company classifies the fair value measurement. +AS OF MAY 31, 2019 +DERIVATIVE ASSETS +DERIVATIVE LIABILITIES +(Dollars in millions) +ASSETS AT FAIR VALUE +OTHER CURRENT ASSETS +OTHER LONG-TERM ASSETS +LIABILITIES AT FAIR VALUE +ACCRUED LIABILITIES +OTHER LONG-TERM LIABILITIES +Level 2: +Foreign exchange forwards and options (1) +$ +611 +$ +611 +$ +— +$ +51 +$ +51 +$ +— +Embedded derivatives +11 +5 +6 +3 +1 +2 +TOTAL +$ +622 +$ +616 +$ +6 +$ +54 +$ +52 +$ +2 +(1) +If the foreign exchange derivative instruments had been netted on the Consolidated Balance Sheets, the asset and liability positions each would have been reduced by $50 million as of May 31, 2019 . As of that date, the Company had received $289 million of cash collateral from various counterparties related to foreign exchange derivative instruments. No amount of collateral was posted on the Company's derivative liability balance as of May 31, 2019 . +66 NIKE, INC. +Table of Contents +AS OF MAY 31, 2018 +DERIVATIVE ASSETS +DERIVATIVE LIABILITIES +(Dollars in millions) +ASSETS AT FAIR VALUE +OTHER CURRENT ASSETS +OTHER LONG-TERM ASSETS +LIABILITIES AT FAIR VALUE +ACCRUED LIABILITIES +OTHER LONG-TERM LIABILITIES +Level 2: +Foreign exchange forwards and options (1) +$ +389 +$ +237 +$ +152 +$ +182 +$ +182 +$ +— +Embedded derivatives +11 +3 +8 +8 +2 +6 +TOTAL +$ +400 +$ +240 +$ +160 +$ +190 +$ +184 +$ +6 +(1) +If the foreign exchange derivative instruments had been netted on the Consolidated Balance Sheets, the asset and liability positions each would have been reduced by $182 million as of May 31, 2018 . As of that date, the Company had received $23 million of cash collateral from various counterparties related to foreign exchange derivative instruments. No amount of collateral was posted on the Company's derivative liability balance as of May 31, 2018 . +The Company's investment portfolio consists of investments in U.S. Treasury and Agency securities, time deposits, money market funds, corporate commercial paper and bonds. These securities are valued using market prices in both active markets (Level 1) and less active markets (Level 2). As of May 31, 2019 , the Company held $158 million of available-for-sale debt securities with maturity dates within one year and $39 million with maturity dates over one year and less than five years in Short-term investments on the Consolidated Balance Sheets. The gross realized gains and losses on sales of securities were immaterial for the fiscal years ended May 31, 2019 and 2018 . Unrealized gains and losses on available-for-sale debt securities included in Accumulated other comprehensive income (loss) were immaterial as of May 31, 2019 and 2018 . The Company regularly reviews its available-for-sale debt securities for other-than-temporary impairment. For the years ended May 31, 2019 and 2018 , the Company did not consider any of its securities to be other-than-temporarily impaired and, accordingly, did not recognize any impairment losses. +Included in Interest expense (income), net was interest income related to the Company's investment portfolio of $82 million , $70 million and $27 million for the years ended May 31, 2019 , 2018 and 2017 , respectively. +The Company's Level 3 assets comprise investments in certain non-marketable preferred stock. These Level 3 investments are an immaterial portion of the Company's portfolio and changes in these investments were immaterial during the years ended May 31, 2019 and 2018 . +No transfers among the levels within the fair value hierarchy occurred during the years ended May 31, 2019 or 2018 . +For additional information related to the Company's derivative financial instruments, refer to Note 14 — Risk Management and Derivatives . For fair value information regarding Notes payable and Long-term debt , refer to Note 7 — Short-Term Borrowings and Credit Lines and Note 8 — Long-Term Debt , respectively. The carrying amounts of other current financial assets and other current financial liabilities approximate fair value. +As of May 31, 2019 and 2018 , assets or liabilities required to be measured at fair value on a non-recurring basis were immaterial. +NOTE 7 — SHORT-TERM BORROWINGS AND CREDIT LINES +Notes payable and interest-bearing accounts payable to Sojitz Corporation of America (“Sojitz America”) as of May 31, 2019 and 2018 are summarized below: +AS OF MAY 31, +2019 +2018 +(Dollars in millions) +BORROWINGS +INTEREST RATE +BORROWINGS +INTEREST RATE +Notes payable: +Commercial paper +$ +— +0.00 +% +$ +325 +1.77 +% +U.S. operations +2 +0.00 +% +(1) +1 +0.00 +% +(1) +Non-U.S. operations +7 +26.00 +% +(1) +10 +18.11 +% +(1) +TOTAL NOTES PAYABLE +$ +9 +$ +336 +Interest-bearing accounts payable: +Sojitz America +$ +75 +3.27 +% +$ +61 +2.82 +% +(1) +Weighted average interest rate includes non-interest bearing overdrafts. +2019 FORM 10-K 67 +Table of Contents +The carrying amounts reflected in the Consolidated Balance Sheets for Notes payable approximate fair value. +The Company purchases through Sojitz America certain NIKE Brand products it acquires from non-U.S. suppliers. These purchases are for products sold in certain countries in the Company's Asia Pacific & Latin America geographic operating segment and Canada, excluding products produced and sold in the same country. Accounts payable to Sojitz America are generally due up to 60 days after shipment of goods from the foreign port. The interest rate on such accounts payable is the 60 -day London Interbank Offered Rate (“LIBOR”) as of the beginning of the month of the invoice date, plus 0.75% . +As of May 31, 2019 , no borrowings were outstanding under the Company's $2 billion commercial paper program. As of May 31, 2018, the Company had $325 million outstanding at a weighted average interest rate of 1.77% . +On August 28, 2015, the Company entered into a committed credit facility agreement with a syndicate of banks which provides for up to $2 billion of borrowings. The facility matures August 28, 2020, with a one -year extension option prior to any anniversary of the closing date, provided that in no event shall it extend beyond August 28, 2022. Based on the Company's current long-term senior unsecured debt ratings of AA- and A1 from Standard and Poor's Corporation and Moody's Investor Services, respectively, the interest rate charged on any outstanding borrowings would be the prevailing LIBOR plus 0.455% . The facility fee is 0.045% of the total commitment. Under the committed credit facility, the Company must maintain certain financial ratios, among other things, with which the Company was in compliance at May 31, 2019 . No amounts were outstanding under the committed credit facility as of May 31, 2019 or 2018 . +NOTE 8 — LONG-TERM DEBT +Long-term debt , net of unamortized premiums, discounts and debt issuance costs, comprises the following: +BOOK VALUE OUTSTANDING +AS OF MAY 31, +Scheduled Maturity (Dollars and Yen in millions) +ORIGINAL PRINCIPAL +INTEREST RATE +INTEREST PAYMENTS +2019 +2018 +Corporate Bond Payables: (1)(2) +May 1, 2023 +$ +500 +2.25 +% +Semi-Annually +$ +498 +$ +498 +November 1, 2026 +1,000 +2.38 +% +Semi-Annually +994 +994 +May 1, 2043 +500 +3.63 +% +Semi-Annually +495 +495 +November 1, 2045 +1,000 +3.88 +% +Semi-Annually +983 +982 +November 1, 2046 +500 +3.38 +% +Semi-Annually +491 +490 +Japanese Yen Notes: (3) +August 20, 2001 through November 20, 2020 +¥ +9,000 +2.60 +% +Quarterly +$ +6 +$ +10 +August 20, 2001 through November 20, 2020 +4,000 +2.00 +% +Quarterly +3 +5 +Total +3,470 +3,474 +Less current maturities +6 +6 +TOTAL LONG-TERM DEBT +$ +3,464 +$ +3,468 +(1) +These senior unsecured obligations rank equally with the Company's other unsecured and unsubordinated indebtedness. +(2) +The bonds are redeemable at the Company's option up to three months prior to the scheduled maturity date for the bonds maturing in 2023 and 2026, and up to six months prior to the scheduled maturity date for the bonds maturing in 2043, 2045 and 2046, at a price equal to the greater of (i) 100% of the aggregate principal amount of the notes to be redeemed or (ii) the sum of the present values of the remaining scheduled payments, plus in each case, accrued and unpaid interest. Within three and six months to scheduled maturity, respectively, the bonds also feature a par call provision, which allows for the bonds to be redeemed at a price equal to 100% of the aggregate principal amount of the notes being redeemed, plus accrued and unpaid interest. +(3) +NIKE Logistics YK assumed a total of ¥13.0 billion in loans as part of its agreement to purchase a distribution center in Japan, which serves as collateral for the loans. These loans mature in equal quarterly installments during the period August 20, 2001 through November 20, 2020. +The scheduled maturity of Long-term debt in each of the years ending May 31, 2020 through 2024 are $6 million , $3 million , $0 million , $500 million and $0 million , respectively, at face value. +The Company's long-term debt is recorded at adjusted cost, net of unamortized premiums, discounts and debt issuance costs. The fair value of long-term debt is estimated based upon quoted prices for similar instruments or quoted prices for identical instruments in inactive markets (Level 2). The fair value of the Company's long-term debt, including the current portion, was approximately $3,524 million at May 31, 2019 and $3,294 million at May 31, 2018 . +68 NIKE, INC. +Table of Contents +NOTE 9 — INCOME TAXES +Income before income taxes is as follows: +YEAR ENDED MAY 31, +(Dollars in millions) +2019 +2018 +2017 +Income before income taxes: +United States +$ +593 +$ +744 +$ +1,240 +Foreign +4,208 +3,581 +3,646 +TOTAL INCOME BEFORE INCOME TAXES +$ +4,801 +$ +4,325 +$ +4,886 +The provision for income taxes is as follows: +YEAR ENDED MAY 31, +(Dollars in millions) +2019 +2018 +2017 +Current: +United States +Federal +$ +74 +$ +1,167 +$ +398 +State +56 +45 +82 +Foreign +608 +533 +439 +Total Current +738 +1,745 +919 +Deferred: +United States +Federal +(33 +) +595 +(279 +) +State +(9 +) +25 +(9 +) +Foreign +76 +27 +15 +Total Deferred +34 +647 +(273 +) +TOTAL INCOME TAX EXPENSE +$ +772 +$ +2,392 +$ +646 +The Tax Act was signed into law on December 22, 2017 and significantly changed previous U.S. tax laws, including a reduction in the corporate tax rate from 35% to 21% and a one-time transition tax on deemed repatriation of undistributed foreign earnings. For fiscal 2018, the change in the corporate tax rate resulted in a blended U.S. federal statutory rate for the Company of approximately 29% . Certain provisions of the Tax Act, including a provision to tax global intangible low-taxed income (GILTI) of foreign subsidiaries, were not effective for the Company until fiscal 2019. In accordance with U.S. GAAP, the Company has made an accounting policy election to treat taxes due under the GILTI provision as a current period expense. Implementation of the Tax Act required the Company to record incremental provisional tax expense in fiscal 2018, which increased its effective tax rate in fiscal 2018. The Company completed its analysis of the Tax Act in the second quarter of fiscal 2019 and no adjustments were made to the provisional amounts recorded. As of May 31, 2019 and 2018 , long-term income taxes payable were $902 million and $993 million , respectively, and were included within Deferred income taxes and other liabilities on the Consolidated Balance Sheets. +A reconciliation from the U.S. statutory federal income tax rate to the effective income tax rate is as follows: +YEAR ENDED MAY 31, +2019 +2018 +2017 +Federal income tax rate +21.0 +% +29.2 +% +35.0 +% +State taxes, net of federal benefit +1.2 +% +1.2 +% +1.1 +% +Foreign earnings +-2.1 +% +-17.5 +% +-20.7 +% +Transition tax related to the Tax Act +— +% +43.3 +% +— +% +Remeasurement of deferred tax assets and liabilities related to the Tax Act +— +% +3.7 +% +— +% +Excess tax benefits from share-based compensation +-3.6 +% +-5.3 +% +— +% +Resolution of a U.S. tax matter +— +% +— +% +-3.2 +% +U.S. Research and Development tax credit +-1.1 +% +-0.6 +% +-0.6 +% +Other, net +0.7 +% +1.3 +% +1.6 +% +EFFECTIVE INCOME TAX RATE +16.1 +% +55.3 +% +13.2 +% +2019 FORM 10-K 69 +Table of Contents +The effective tax rate for the year ended May 31, 2019 was lower than the effective tax rate for the year ended May 31, 2018 due to significant changes related to the enactment of the Tax Act in the prior year and reduction in the U.S. federal statutory rate to 21% in the current year. The foreign earnings rate impact shown above for the year ended May 31, 2019 includes 1.5% of U.S. tax on foreign earnings driven by the impact of the Tax Act. +The effective tax rate for the year ended May 31, 2018 was higher than the effective tax rate for the year ended May 31, 2017 primarily due to the enactment of the Tax Act, which included provisional expense of $1,875 million for the one-time transition tax on the deemed repatriation of undistributed foreign earnings, and $158 million due to the remeasurement of deferred tax assets and liabilities. The remaining provisions of the Tax Act, which were a net benefit to the effective tax rate, did not have a material impact on the Company's Consolidated Financial Statements during fiscal 2018. Additionally, the increase in the effective tax rate was partially offset by the tax benefit from share-based compensation in the current period as a result of the adoption of ASU 2016-09 in the first quarter of fiscal 2018. During the year ended May 31, 2017, income tax benefit of $177 million attributable to employee share-based compensation were allocated to Total shareholders' equity . As a result of the adoption of ASU 2016-09, beginning in fiscal 2018, income tax benefits from share-based compensation are reported in the Consolidated Statements of Income. +Deferred tax assets and liabilities comprise the following: +AS OF MAY 31, +(Dollars in millions) +2019 +2018 +Deferred tax assets: +Inventories +$ +66 +$ +73 +Sales return reserves +128 +104 +Deferred compensation +271 +250 +Stock-based compensation +156 +135 +Reserves and accrued liabilities +101 +102 +Net operating loss carry-forwards +81 +88 +Other +125 +106 +Total deferred tax assets +928 +858 +Valuation allowance +(88 +) +(95 +) +Total deferred tax assets after valuation allowance +840 +763 +Deferred tax liabilities: +Foreign withholding tax on undistributed earnings of foreign subsidiaries +(235 +) +(155 +) +Property, plant and equipment +(188 +) +(167 +) +Intangibles +(23 +) +(77 +) +Other +(18 +) +(26 +) +Total deferred tax liabilities +(464 +) +(425 +) +NET DEFERRED TAX ASSET +$ +376 +$ +338 +The following is a reconciliation of the changes in the gross balance of unrecognized tax benefits: +AS OF MAY 31, +(Dollars in millions) +2019 +2018 +2017 +Unrecognized tax benefits, beginning of the period +$ +698 +$ +461 +$ +506 +Gross increases related to prior period tax positions +85 +19 +31 +Gross decreases related to prior period tax positions +(32 +) +(12 +) +(163 +) +Gross increases related to current period tax positions +81 +249 +115 +Settlements +— +— +(12 +) +Lapse of statute of limitations +(35 +) +(20 +) +(21 +) +Changes due to currency translation +11 +1 +5 +UNRECOGNIZED TAX BENEFITS, END OF THE PERIOD +$ +808 +$ +698 +$ +461 +As of May 31, 2019 , total gross unrecognized tax benefits, excluding related interest and penalties, were $808 million , $582 million of which would affect the Company's effective tax rate if recognized in future periods. The majority of the total gross unrecognized tax benefits are long-term in nature and included within Deferred income taxes and other liabilities on the Consolidated Balance Sheets. +70 NIKE, INC. +Table of Contents +The Company recognizes interest and penalties related to income tax matters in income tax expense. The liability for payment of interest and penalties increased by $17 million during the year ended May 31, 2019 , decreased by $14 million during the year ended May 31, 2018 and decreased by $38 million during the year ended May 31, 2017 . As of May 31, 2019 and 2018 , accrued interest and penalties related to uncertain tax positions were $174 million and $157 million , respectively (excluding federal benefit). +The Company is subject to taxation in the United States, as well as various state and foreign jurisdictions. The Company has closed all U.S. federal income tax matters through fiscal 2016 , with the exception of certain transfer pricing adjustments. The Company's major foreign jurisdictions, China and the Netherlands, have concluded substantially all income tax matters through calendar 2008 and fiscal 2012, respectively. Although the timing of resolution of audits is not certain, the Company evaluates all domestic and foreign audit issues in the aggregate, along with the expiration of applicable statutes of limitations, and estimates that it is reasonably possible the total gross unrecognized tax benefits could decrease by up to $210 million within the next 12 months. In January 2019, the European Commission opened a formal investigation to examine whether the Netherlands has breached State Aid rules when granting certain tax rulings to the Company. The Company believes the investigation is without merit. If this matter is adversely resolved, the Netherlands may be required to assess additional amounts with respect to current and prior periods, and the company's Netherlands income taxes in the future could increase. +The Company historically provided for U.S. income taxes on the undistributed earnings of foreign subsidiaries unless they were considered indefinitely reinvested outside the United States. As a result of the enactment of the Tax Act, in fiscal 2018 the Company reevaluated its historic indefinite reinvestment assertion and determined that any historical or future undistributed earnings of foreign subsidiaries are no longer considered to be indefinitely reinvested. +A portion of the Company's foreign operations benefit from a tax holiday, which is set to expire in 2021 . This tax holiday may be extended when certain conditions are met or may be terminated early if certain conditions are not met. The tax benefit attributable to this tax holiday was $167 million , $126 million and $187 million for the fiscal years ended May 31, 2019 , 2018 and 2017 , respectively. The benefit of the tax holiday on diluted earnings per common share was $0.10 , $0.08 and $0.11 for the fiscal years ended May 31, 2019 , 2018 and 2017 , respectively. +Deferred tax assets at May 31, 2019 and 2018 were reduced by a valuation allowance primarily relating to tax benefits of certain entities with operating losses. There was a $7 million net decrease in the valuation allowance for the year ended May 31, 2019 , compared to a $13 million net increase for the year ended May 31, 2018 , and $30 million net increase for the year ended May 31, 2017 . +The Company has available domestic and foreign loss carry-forwards of $257 million at May 31, 2019 . If not utilized, such losses will expire as follows: +YEAR ENDING MAY 31, +(Dollars in millions) +2020 +2021 +2022 +2023 +2024-2039 +INDEFINITE +TOTAL +Net operating losses +$ +5 +$ +2 +$ +1 +$ +26 +$ +34 +$ +189 +$ +257 +NOTE 10 — REDEEMABLE PREFERRED STOCK +Sojitz America is the sole owner of the Company's authorized redeemable preferred stock, $1 par value, which is redeemable at the option of Sojitz America or the Company at par value aggregating $0.3 million . A cumulative dividend of $0.10 per share is payable annually on May 31 and no dividends may be declared or paid on the common stock of the Company unless dividends on the redeemable preferred stock have been declared and paid in full. There have been no changes in the redeemable preferred stock in the fiscal years ended May 31, 2019 , 2018 and 2017 . As the holder of the redeemable preferred stock, Sojitz America does not have general voting rights, but does have the right to vote as a separate class on the sale of all or substantially all of the assets of the Company and its subsidiaries, on merger, consolidation, liquidation or dissolution of the Company, or on the sale or assignment of the NIKE trademark for athletic footwear sold in the United States. The redeemable preferred stock has been fully issued to Sojitz America and is not blank check preferred stock. The Company's articles of incorporation do not permit the issuance of additional preferred stock. +2019 FORM 10-K 71 +Table of Contents +NOTE 11 — COMMON STOCK AND STOCK-BASED COMPENSATION +COMMON STOCK +The authorized number of shares of Class A Common Stock, no par value, and Class B Common Stock, no par value, are 400 million and 2,400 million , respectively. Each share of Class A Common Stock is convertible into one share of Class B Common Stock. Voting rights of Class B Common Stock are limited in certain circumstances with respect to the election of directors. There are no differences in the dividend and liquidation preferences or participation rights of the holders of Class A and Class B Common Stock. From time to time, the Company's Board of Directors authorizes share repurchase programs for the repurchase of Class B Common Stock. The value of repurchased shares is deducted from Total shareholders' equity through allocation to Capital in excess of stated value and Retained earnings . +STOCK-BASED COMPENSATION +The NIKE, Inc. Stock Incentive Plan (the “Stock Incentive Plan”) provides for the issuance of up to 718 million previously unissued shares of Class B Common Stock in connection with equity awards granted under the Stock Incentive Plan. The Stock Incentive Plan authorizes the grant of non-statutory stock options, incentive stock options, stock appreciation rights, restricted stock, restricted stock units and performance-based awards. The exercise price for stock options and stock appreciation rights may not be less than the fair market value of the underlying shares on the date of grant. A committee of the Board of Directors administers the Stock Incentive Plan. The committee has the authority to determine the employees to whom awards will be made, the amount of the awards and the other terms and conditions of the awards. The Company generally grants stock options and restricted stock on an annual basis. Substantially all awards under the Stock Incentive Plan vest ratably over 4 years of continued employment, with stock options expiring 10 years from the date of grant. +The following table summarizes the Company's total stock-based compensation expense recognized in Cost of sales or Operating overhead expense , as applicable: +YEAR ENDED MAY 31, +(Dollars in millions) +2019 +2018 +2017 +Stock options (1) +$ +207 +$ +149 +$ +145 +ESPPs +40 +34 +36 +Restricted stock +78 +35 +34 +TOTAL STOCK-BASED COMPENSATION EXPENSE +$ +325 +$ +218 +$ +215 +(1) +Expense for stock options includes the expense associated with stock appreciation rights. Accelerated stock option expense is recorded for employees meeting certain retirement eligibility requirements. Accelerated stock option expense was $41 million , $18 million and $14 million for the years ended May 31, 2019 , 2018 and 2017 , respectively. +The income tax benefit related to stock-based compensation expense was $175 million and $230 million for the fiscal years ended May 31, 2019 and 2018 , respectively, and reported within Income tax expense in accordance with ASU 2016-09. For the fiscal year ended May 31, 2017, prior to the adoption of ASU 2016-09, income tax benefits related to stock-based compensation expense were $177 million and allocated to Total shareholders' equity . +STOCK OPTIONS +The weighted average fair value per share of the options granted during the years ended May 31, 2019 , 2018 and 2017 , computed as of the grant date using the Black-Scholes pricing model, was $22.78 , $9.82 and $9.38 , respectively. The weighted average assumptions used to estimate these fair values were as follows: +YEAR ENDED MAY 31, +2019 +2018 +2017 +Dividend yield +1.0 +% +1.2 +% +1.1 +% +Expected volatility +26.6 +% +16.4 +% +17.4 +% +Weighted average expected life (in years) +6.0 +6.0 +6.0 +Risk-free interest rate +2.8 +% +2.0 +% +1.3 +% +72 NIKE, INC. +Table of Contents +The Company estimates the expected volatility based on the implied volatility in market traded options on the Company's common stock with a term greater than one year, along with other factors. The weighted average expected life of options is based on an analysis of historical and expected future exercise patterns. The interest rate is based on the U.S. Treasury (constant maturity) risk-free rate in effect at the date of grant for periods corresponding with the expected term of the options. +The following summarizes the stock option transactions under the plan discussed above: +SHARES (1) +WEIGHTED AVERAGE OPTION PRICE +(In millions) +Options outstanding as of May 31, 2018 +93.2 +$ +40.73 +Exercised +(18.2 +) +29.70 +Forfeited +(1.8 +) +66.66 +Granted +18.1 +81.79 +Options outstanding as of May 31, 2019 +91.3 +$ +50.59 +(1) +Includes stock appreciation rights transactions. +Options exercisable as of May 31, 2019 were 54.4 million and had a weighted average option price of $37.82 per share. The aggregate intrinsic value for options outstanding and exercisable at May 31, 2019 was $2,507 million and $2,138 million , respectively. The total intrinsic value of the options exercised during the years ended May 31, 2019 , 2018 and 2017 was $938 million , $889 million and $594 million , respectively. The intrinsic value is the amount by which the market value of the underlying stock exceeds the exercise price of the options. The weighted average contractual life remaining for options outstanding and options exercisable at May 31, 2019 was 5.9 years and 4.3 years, respectively. As of May 31, 2019 , the Company had $352 million of unrecognized compensation costs from stock options, net of estimated forfeitures, to be recognized in Cost of sales or Operating overhead expense , as applicable, over a weighted average remaining period of 2.1 years. +EMPLOYEE STOCK PURCHASE PLANS +In addition to the Stock Incentive Plan, the Company gives employees the right to purchase shares at a discount from the market price under employee stock purchase plans (ESPPs). Subject to the annual statutory limit, employees are eligible to participate through payroll deductions of up to 10% of their compensation. At the end of each six -month offering period, shares are purchased by the participants at 85% of the lower of the fair market value at the beginning or the end of the offering period. Employees purchased 2.5 million , 3.1 million and 3.1 million shares during each of the fiscal years ended May 31, 2019 , 2018 and 2017 , respectively. +RESTRICTED STOCK AND RESTRICTED STOCK UNITS +Recipients of restricted stock are entitled to cash dividends and to vote their respective shares throughout the period of restriction. Recipients of restricted stock units are entitled to dividend equivalent cash payments upon vesting. The number of restricted stock and restricted stock units vested includes shares of common stock withheld by the Company on behalf of employees to satisfy the minimum statutory tax withholding requirements. +The following summarizes the restricted stock and restricted stock unit activity under the plan discussed above: +SHARES +WEIGHTED AVERAGE GRANT DATE +FAIR VALUE +(In millions) +Nonvested as of May 31, 2018 +2.8 +$ +59.14 +Vested +(0.6 +) +59.01 +Forfeited +(0.3 +) +66.24 +Granted +2.5 +80.95 +Nonvested as of May 31, 2019 +4.4 +$ +70.93 +2019 FORM 10-K 73 +Table of Contents +The weighted average grant date fair values per share of restricted stock and restricted stock units granted for the years ended May 31, 2019 , 2018 and 2017 was $80.95 , $62.51 , and $57.59 , respectively. During the years ended May 31, 2019 , 2018 and 2017 , the aggregate fair value of restricted stock and restricted stock units vested was $44 million , $113 million and $60 million , respectively, determined as of the date of vesting. As of May 31, 2019 , the Company had $195 million of unrecognized compensation costs from restricted stock and restricted stock units, net of estimated forfeitures, to be recognized in Cost of sales or Operating overhead expense , as applicable, over a weighted average period of 2.3 years. +NOTE 12 — EARNINGS PER SHARE +The following is a reconciliation from basic earnings per common share to diluted earnings per common share. The computations of diluted earnings per common share excluded options, including shares under ESPPs, to purchase an additional 17.5 million , 42.9 million and 30.5 million shares of common stock outstanding for the years ended May 31, 2019 , 2018 and 2017 , respectively, because the options were anti-dilutive. +YEAR ENDED MAY 31, +(Dollars in millions, except per share data) +2019 +2018 +2017 +Net income available to common stockholders +$ +4,029 +$ +1,933 +$ +4,240 +Determination of shares: +Weighted average common shares outstanding +1,579.7 +1,623.8 +1,657.8 +Assumed conversion of dilutive stock options and awards +38.7 +35.3 +34.2 +DILUTED WEIGHTED AVERAGE COMMON SHARES OUTSTANDING +1,618.4 +1,659.1 +1,692.0 +Earnings per common share: +Basic +$ +2.55 +$ +1.19 +$ +2.56 +Diluted +$ +2.49 +$ +1.17 +$ +2.51 +NOTE 13 — BENEFIT PLANS +The Company has a qualified 401(k) Savings and Profit Sharing Plan, in which all U.S. employees are able to participate. The Company matches a portion of employee contributions to the savings plan. Company contributions to the savings plan were $90 million , $80 million and $75 million and included in Cost of sales or Operating overhead expense , as applicable, for the years ended May 31, 2019 , 2018 and 2017 , respectively. The terms of the plan also allow for annual discretionary profit sharing contributions, as recommended by senior management and approved by the Board of Directors, to the accounts of eligible U.S. employees who work at least 1,000 hours in a year. Profit sharing contributions of $37 million , $59 million and $68 million were made to the plan and included in Cost of sales or Operating overhead expense , as applicable, for the years ended May 31, 2019 , 2018 and 2017 , respectively. +The Company also has a Long-Term Incentive Plan (LTIP) adopted by the Board of Directors and approved by shareholders in September 1997 and later amended and approved in fiscal 2007 and fiscal 2012. The Company recognized $83 million , $33 million and $21 million of Operating overhead expense related to cash awards under the LTIP during the years ended May 31, 2019 , 2018 and 2017 , respectively. +The Company allows certain highly compensated employees and non-employee directors of the Company to defer compensation under a nonqualified deferred compensation plan. Deferred compensation plan liabilities were $647 million and $641 million at May 31, 2019 and 2018 , respectively, and primarily classified as non-current in Deferred income taxes and other liabilities on the Consolidated Balance Sheets. +The Company has pension plans in various countries worldwide. The pension plans are only available to local employees and are generally government mandated. The liability related to the unfunded pension liabilities of the plans was $73 million and $70 million at May 31, 2019 and 2018 , respectively, and primarily classified as non-current in Deferred income taxes and other liabilities on the Consolidated Balance Sheets. +74 NIKE, INC. +Table of Contents +NOTE 14 — RISK MANAGEMENT AND DERIVATIVES +The Company is exposed to global market risks, including the effect of changes in foreign currency exchange rates and interest rates, and uses derivatives to manage financial exposures that occur in the normal course of business. The Company does not hold or issue derivatives for trading or speculative purposes. +The Company may elect to designate certain derivatives as hedging instruments under U.S. GAAP. The Company formally documents all relationships between designated hedging instruments and hedged items as well as its risk management objectives and strategies for undertaking hedge transactions. This process includes linking all derivatives designated as hedges to either recognized assets or liabilities or forecasted transactions and assessing, both at inception and on an ongoing basis, the effectiveness of the hedging relationships. +The majority of derivatives outstanding as of May 31, 2019 are designated as foreign currency cash flow hedges, primarily for Euro/U.S. Dollar, British Pound/Euro, Chinese Yuan/U.S. Dollar and Japanese Yen/U.S. Dollar currency pairs. All derivatives are recognized on the Consolidated Balance Sheets at fair value and classified based on the instrument's maturity date. +The following table presents the fair values of derivative instruments included within the Consolidated Balance Sheets as of May 31, 2019 and 2018 . Refer to Note 6 — Fair Value Measurements for a description of how the financial instruments in the table below are valued. +DERIVATIVE ASSETS +DERIVATIVE LIABILITIES +BALANCE SHEET LOCATION +AS OF MAY 31, +BALANCE SHEET LOCATION +AS OF MAY 31, +(Dollars in millions) +2019 +2018 +2019 +2018 +Derivatives formally designated as hedging instruments: +Foreign exchange forwards and options +Prepaid expenses and other current assets +$ +509 +$ +118 +Accrued liabilities +$ +5 +$ +156 +Foreign exchange forwards and options +Deferred income taxes and other assets +— +152 +Deferred income taxes and other liabilities +— +— +Total derivatives formally designated as hedging instruments +509 +270 +5 +156 +Derivatives not designated as hedging instruments: +Foreign exchange forwards and options +Prepaid expenses and other current assets +102 +119 +Accrued liabilities +46 +26 +Embedded derivatives +Prepaid expenses and other current assets +5 +3 +Accrued liabilities +1 +2 +Embedded derivatives +Deferred income taxes and other assets +6 +8 +Deferred income taxes and other liabilities +2 +6 +Total derivatives not designated as hedging instruments +113 +130 +49 +34 +TOTAL DERIVATIVES +$ +622 +$ +400 +$ +54 +$ +190 +The following tables present the amounts in the Consolidated Statements of Income in which the effects of cash flow hedges are recorded and the effects of cash flow hedge activity on these line items for the years ended May 31, 2019 , 2018 and 2017 : +YEAR ENDED MAY 31, +2019 +2018 +2017 +(Dollars in millions) +TOTAL +AMOUNT OF +GAIN (LOSS) +ON CASH FLOW +HEDGE ACTIVITY +TOTAL +AMOUNT OF +GAIN (LOSS) +ON CASH FLOW +HEDGE ACTIVITY +TOTAL +AMOUNT OF +GAIN (LOSS) +ON CASH FLOW +HEDGE ACTIVITY +Revenues +$ +39,117 +$ +(5 +) +$ +36,397 +$ +34 +$ +34,350 +$ +96 +Cost of sales +21,643 +53 +20,441 +(90 +) +19,038 +339 +Demand creation expense +3,753 +— +3,577 +1 +3,341 +— +Other (income) expense, net +(78 +) +35 +66 +(69 +) +(196 +) +199 +Interest expense (income), net +49 +(7 +) +54 +(7 +) +59 +(4 +) +2019 FORM 10-K 75 +Table of Contents +The following tables present the amounts affecting the Consolidated Statements of Income for the years ended May 31, 2019 , 2018 and 2017 : +(Dollars in millions) +AMOUNT OF GAIN (LOSS) +RECOGNIZED IN OTHER +COMPREHENSIVE INCOME (LOSS) ON DERIVATIVES (1) +AMOUNT OF GAIN (LOSS) +RECLASSIFIED FROM ACCUMULATED +OTHER COMPREHENSIVE +INCOME (LOSS) INTO INCOME (1) +YEAR ENDED MAY 31, +LOCATION OF GAIN (LOSS) +RECLASSIFIED FROM ACCUMULATED +OTHER COMPREHENSIVE INCOME +(LOSS) INTO INCOME +YEAR ENDED MAY 31, +2019 +2018 +2017 +2019 +2018 +2017 +Derivatives designated as +cash flow hedges: +Foreign exchange forwards +and options +$ +14 +$ +19 +$ +72 +Revenues +$ +(5 +) +$ +34 +$ +96 +Foreign exchange forwards +and options +405 +(50 +) +43 +Cost of sales +53 +(90 +) +339 +Foreign exchange forwards +and options +2 +1 +(4 +) +Demand creation expense +— +1 +— +Foreign exchange forwards +and options +156 +(19 +) +37 +Other (income) expense, net +35 +(69 +) +199 +Interest rate swaps (2) +— +— +(54 +) +Interest expense (income), net +(7 +) +(7 +) +(4 +) +Total designated cash +flow hedges +$ +577 +$ +(49 +) +$ +94 +$ +76 +$ +(131 +) +$ +630 +(1) +For the years ended May 31, 2019 , 2018 and 2017 , the amounts recorded in Other (income) expense, net as a result of the discontinuance of cash flow hedges because the forecasted transactions were no longer probable of occurring were immaterial. +(2) +Gains and losses associated with terminated interest rate swaps, which were previously designated as cash flow hedges and recorded in Accumulated other comprehensive income (loss), will be released through Interest expense (income), net over the term of the issued debt. +AMOUNT OF GAIN (LOSS) RECOGNIZED +IN INCOME ON DERIVATIVES +LOCATION OF GAIN (LOSS) +RECOGNIZED IN INCOME +ON DERIVATIVES +YEAR ENDED MAY 31, +(Dollars in millions) +2019 +2018 +2017 +Derivatives not designated as hedging instruments: +Foreign exchange forwards and options +$ +166 +$ +(57 +) +$ +(44 +) +Other (income) expense, net +Embedded derivatives +7 +(4 +) +(2 +) +Other (income) expense, net +CASH FLOW HEDGES +All changes in fair value of derivatives designated as cash flow hedges are recorded in Accumulated other comprehensive income (loss) until Net income is affected by the variability of cash flows of the hedged transaction. Effective hedge results are classified in the Consolidated Statements of Income in the same manner as the underlying exposure. Derivative instruments designated as cash flow hedges must be discontinued when it is no longer probable the forecasted hedged transaction will occur in the initially identified time period. The gains and losses associated with discontinued derivative instruments in Accumulated other comprehensive income (loss) will be recognized immediately in Other (income) expense, net , if it is probable the forecasted hedged transaction will not occur by the end of the initially identified time period or within an additional two -month period thereafter. In all situations in which hedge accounting is discontinued and the derivative remains outstanding, the Company will account for the derivative as an undesignated instrument as discussed below. +The purpose of the Company's foreign exchange risk management program is to lessen both the positive and negative effects of currency fluctuations on the Company's consolidated results of operations, financial position and cash flows. Foreign currency exposures the Company may elect to hedge in this manner include product cost exposures, non-functional currency denominated external and intercompany revenues, demand creation expenses, investments in U.S. Dollar denominated available-for-sale debt securities and certain other intercompany transactions. +76 NIKE, INC. +Table of Contents +Product cost exposures are primarily generated through non-functional currency denominated product purchases and the foreign currency adjustment program described below. NIKE entities primarily purchase product in two ways: (1) Certain NIKE entities purchase product from the NIKE Trading Company (NTC), a wholly owned sourcing hub that buys NIKE branded products from third party factories, predominantly in U.S. Dollars. The NTC, whose functional currency is the U.S. Dollar, then sells the product to NIKE entities in their respective functional currencies. NTC sales to a NIKE entity with a different functional currency result in a foreign currency exposure for the NTC. (2) Other NIKE entities purchase product directly from third party factories in U.S. Dollars. These purchases generate a foreign currency exposure for those NIKE entities with a functional currency other than the U.S. Dollar. +The Company operates a foreign currency adjustment program with certain factories. The program is designed to more effectively manage foreign currency risk by assuming certain of the factories' foreign currency exposures, some of which are natural offsets to the Company's existing foreign currency exposures. Under this program, the Company's payments to these factories are adjusted for rate fluctuations in the basket of currencies (“factory currency exposure index”) in which the labor, materials and overhead costs incurred by the factories in the production of NIKE branded products (“factory input costs”) are denominated. For the portion of the indices denominated in the local or functional currency of the factory, the Company may elect to place formally designated cash flow hedges. For all currencies within the indices, excluding the U.S. Dollar and the local or functional currency of the factory, an embedded derivative contract is created upon the factory's acceptance of NIKE's purchase order. Embedded derivative contracts are separated from the related purchase order, as further described within the Embedded Derivatives section below. +The Company's policy permits the utilization of derivatives to reduce its foreign currency exposures where internal netting or other strategies cannot be effectively employed. Typically, the Company may enter into hedge contracts starting up to 12 to 24 months in advance of the forecasted transaction and may place incremental hedges up to 100% of the exposure by the time the forecasted transaction occurs. The total notional amount of outstanding foreign currency derivatives designated as cash flow hedges was $8.1 billion as of May 31, 2019 . +As of May 31, 2019 , approximately $518 million of deferred net gains (net of tax) on both outstanding and matured derivatives in Accumulated other comprehensive income (loss) are expected to be reclassified to Net income during the next 12 months concurrent with the underlying hedged transactions also being recorded in Net income . Actual amounts ultimately reclassified to Net income are dependent on the exchange rates in effect when derivative contracts currently outstanding mature. As of May 31, 2019 , the maximum term over which the Company is hedging exposures to the variability of cash flows for its forecasted transactions was 15 months. +FAIR VALUE HEDGES +The Company has, in the past, been exposed to the risk of changes in the fair value of certain fixed-rate debt attributable to changes in interest rates. Derivatives used by the Company to hedge this risk are receive-fixed, pay-variable interest rate swaps. All interest rate swaps designated as fair value hedges of the related long-term debt meet the shortcut method requirements under U.S. GAAP. Accordingly, changes in the fair values of the interest rate swaps are considered to exactly offset changes in the fair value of the underlying long-term debt. The Company had no interest rate swaps designated as fair value hedges as of May 31, 2019 . +NET INVESTMENT HEDGES +The Company has, in the past, hedged and may, in the future, hedge the risk of variability in foreign currency-denominated net investments in wholly-owned international operations. All changes in fair value of the derivatives designated as net investment hedges are reported in Accumulated other comprehensive income (loss) along with the foreign currency translation adjustments on those investments. The Company had no outstanding net investment hedges as of May 31, 2019 . +UNDESIGNATED DERIVATIVE INSTRUMENTS +The Company may elect to enter into foreign exchange forwards to mitigate the change in fair value of specific assets and liabilities on the Consolidated Balance Sheets and/or the embedded derivative contracts. These undesignated instruments are recorded at fair value as a derivative asset or liability on the Consolidated Balance Sheets with their corresponding change in fair value recognized in Other (income) expense, net , together with the re-measurement gain or loss from the hedged balance sheet position and/or embedded derivative contract. The total notional amount of outstanding undesignated derivative instruments was $6.5 billion as of May 31, 2019 . +2019 FORM 10-K 77 +Table of Contents +EMBEDDED DERIVATIVES +As part of the foreign currency adjustment program described above, an embedded derivative contract is created upon the factory's acceptance of NIKE's purchase order for currencies within the factory currency exposure indices that are neither the U.S. Dollar nor the local or functional currency of the factory. In addition, embedded derivative contracts are created when the Company enters into certain other contractual agreements which have payments that are indexed to currencies that are not the functional currency of either substantial party to the contracts. Embedded derivative contracts are treated as foreign currency forward contracts that are bifurcated from the related contract and recorded at fair value as a derivative asset or liability on the Consolidated Balance Sheets with their corresponding change in fair value recognized in Other (income) expense, net , through the date the foreign currency fluctuations cease to exist. +At May 31, 2019 , the total notional amount of embedded derivatives outstanding was approximately $452 million . +CREDIT RISK +The Company is exposed to credit-related losses in the event of nonperformance by counterparties to hedging instruments. The counterparties to all derivative transactions are major financial institutions with investment grade credit ratings; however, this does not eliminate the Company's exposure to credit risk with these institutions. This credit risk is limited to the unrealized gains in such contracts should any of these counterparties fail to perform as contracted. To manage this risk, the Company has established strict counterparty credit guidelines that are continually monitored. +The Company's derivative contracts contain credit risk-related contingent features designed to protect against significant deterioration in counterparties' creditworthiness and their ultimate ability to settle outstanding derivative contracts in the normal course of business. The Company's bilateral credit-related contingent features generally require the owing entity, either the Company or the derivative counterparty, to post collateral for the portion of the fair value in excess of $50 million should the fair value of outstanding derivatives per counterparty be greater than $50 million . Additionally, a certain level of decline in credit rating of either the Company or the counterparty could also trigger collateral requirements. As of May 31, 2019 , the Company was in compliance with all credit risk-related contingent features and derivative instruments with credit risk-related contingent features in a net liability position were immaterial. Accordingly, the Company was not required to post any collateral as a result of these contingent features. Further, as of May 31, 2019 , the Company had $289 million of cash collateral received from various counterparties to its derivative contracts (refer to Note 6 — Fair Value Measurements ). The Company considers the impact of the risk of counterparty default to be immaterial . +NOTE 15 — ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) +The changes in Accumulated other comprehensive income (loss) , net of tax, were as follows: +(Dollars in millions) +FOREIGN CURRENCY TRANSLATION ADJUSTMENT (1) +CASH FLOW HEDGES +NET INVESTMENT HEDGES (1) +OTHER +TOTAL +Balance at May 31, 2018 +$ +(173 +) +$ +17 +$ +115 +$ +(51 +) +$ +(92 +) +Other comprehensive income (loss): +Other comprehensive gains (losses) before reclassifications (2) +(173 +) +573 +— +10 +410 +Reclassifications to net income of previously deferred (gains) losses (3) +— +(70 +) +— +(17 +) +(87 +) +Total other comprehensive income (loss) +(173 +) +503 +— +(7 +) +323 +Balance at May 31, 2019 +$ +(346 +) +$ +520 +$ +115 +$ +(58 +) +$ +231 +(1) +The accumulated foreign currency translation adjustment and net investment hedge gains/losses related to an investment in a foreign subsidiary are reclassified to Net income upon sale or upon complete or substantially complete liquidation of the respective entity. +(2) +Net of tax benefit (expense) of $ 0 million , $ (4) million , $ 0 million , $ 1 million and $ (3) million , respectively. +(3) +Net of tax (benefit) expense of $ 0 million , $ 6 million , $ 0 million , $ 0 million and $ 6 million , respectively. +78 NIKE, INC. +Table of Contents +(Dollars in millions) +FOREIGN CURRENCY TRANSLATION ADJUSTMENT (1) +CASH FLOW HEDGES +NET INVESTMENT HEDGES (1) +OTHER +TOTAL +Balance at May 31, 2017 +$ +(191 +) +$ +(52 +) +$ +115 +$ +(85 +) +$ +(213 +) +Other comprehensive income (loss): +Other comprehensive gains (losses) before reclassifications (2) +(6 +) +(52 +) +— +2 +(56 +) +Reclassifications to net income of previously deferred (gains) losses (3) +— +128 +— +32 +160 +Total other comprehensive income (loss) +(6 +) +76 +— +34 +104 +Reclassifications to retained earnings in accordance with ASU 2018-02 (4) +24 +(7 +) +— +— +17 +Balance at May 31, 2018 +$ +(173 +) +$ +17 +$ +115 +$ +(51 +) +$ +(92 +) +(1) +The accumulated foreign currency translation adjustment and net investment hedge gains/losses related to an investment in a foreign subsidiary are reclassified to Net income upon sale or upon complete or substantially complete liquidation of the respective entity. +(2) +Net of tax benefit (expense) of $ (24) million , $ (3) million , $ 0 million , $ (4) million and $ (31) million , respectively. +(3) +Net of tax (benefit) expense of $ 0 million , $ (3) million , $ 0 million , $ 0 million and $ (3) million , respectively. +(4) +Refer to Note 1 — Summary of Significant Accounting Policies for additional information on the adoption of ASU 2018-02 during the third quarter of fiscal 2018. +The following table summarizes the reclassifications from Accumulated other comprehensive income (loss) to the Consolidated Statements of Income: +AMOUNT OF GAIN (LOSS) +RECLASSIFIED FROM ACCUMULATED +OTHER COMPREHENSIVE INCOME +(LOSS) INTO INCOME +LOCATION OF GAIN (LOSS) +RECLASSIFIED FROM ACCUMULATED +OTHER COMPREHENSIVE INCOME +(LOSS) INTO INCOME +YEAR ENDED MAY 31, +(Dollars in millions) +2019 +2018 +Gains (losses) on cash flow hedges: +Foreign exchange forwards and options +$ +(5 +) +$ +34 +Revenues +Foreign exchange forwards and options +53 +(90 +) +Cost of sales +Foreign exchange forwards and options +— +1 +Demand creation expense +Foreign exchange forwards and options +35 +(69 +) +Other (income) expense, net +Interest rate swaps +(7 +) +(7 +) +Interest expense (income), net +Total before tax +76 +(131 +) +Tax (expense) benefit +(6 +) +3 +Gain (loss) net of tax +70 +(128 +) +Gains (losses) on other +17 +(32 +) +Other (income) expense, net +Total before tax +17 +(32 +) +Tax (expense) benefit +— +— +Gain (loss) net of tax +17 +(32 +) +Total net gain (loss) reclassified for the period +$ +87 +$ +(160 +) +2019 FORM 10-K 79 +Table of Contents +NOTE 16 — REVENUES +DISAGGREGATION OF REVENUES +The following tables present the Company's revenues disaggregated by reportable operating segment, major product line and by distribution channel: +YEAR ENDED MAY 31, 2019 +(Dollars in millions) +NORTH AMERICA +EUROPE, MIDDLE EAST & AFRICA +GREATER CHINA +ASIA PACIFIC & LATIN AMERICA +GLOBAL BRAND DIVISIONS +TOTAL NIKE BRAND +CONVERSE +CORPORATE +TOTAL NIKE, INC. +Revenues by: +Footwear +$ +10,045 +$ +6,293 +$ +4,262 +$ +3,622 +$ +— +$ +24,222 +$ +1,658 +$ +— +$ +25,880 +Apparel +5,260 +3,087 +1,808 +1,395 +— +11,550 +118 +— +11,668 +Equipment +597 +432 +138 +237 +— +1,404 +24 +— +1,428 +Other (1) +— +— +— +— +42 +42 +106 +(7 +) +141 +TOTAL REVENUES +$ +15,902 +$ +9,812 +$ +6,208 +$ +5,254 +$ +42 +$ +37,218 +$ +1,906 +$ +(7 +) +$ +39,117 +Revenues by: +Sales to Wholesale Customers +$ +10,875 +$ +7,076 +$ +3,726 +$ +3,746 +$ +— +$ +25,423 +$ +1,247 +$ +— +$ +26,670 +Sales through Direct to Consumer +5,027 +2,736 +2,482 +1,508 +— +11,753 +553 +— +12,306 +Other (1) +— +— +— +— +42 +42 +106 +(7 +) +141 +TOTAL REVENUES +$ +15,902 +$ +9,812 +$ +6,208 +$ +5,254 +$ +42 +$ +37,218 +$ +1,906 +$ +(7 +) +$ +39,117 +(1) +Other revenues for Global Brand Divisions and Converse are primarily attributable to licensing businesses. Other revenues for Corporate primarily consist of foreign currency hedge gains and losses related to revenues generated by entities within the NIKE Brand geographic operating segments and Converse but managed through the Company's central foreign exchange risk management program. +As of May 31, 2019, the Company did not have any contract assets and had an immaterial amount of contract liabilities recorded in Accrued Liabilities on the Consolidated Balance Sheets. +SALES-RELATED RESERVES +At May 31, 2019 , the Company's sales-related reserve balance, which includes returns, post-invoice sales discounts and miscellaneous claims, was $1,218 million and recorded in Accrued liabilities on the Consolidated Balance Sheets. The estimated cost of inventory for expected product returns was $410 million as of May 31, 2019 and was recorded in Prepaid expenses and other current assets on the Consolidated Balance Sheets. At May 31, 2018 , the Company's sales-related reserve balance, which includes returns, post-invoice sales discounts and miscellaneous claims, was $675 million , net of the estimated cost of expected product returns, and recognized as a reduction in Accounts receivable, net on the Consolidated Balance Sheets. +MAJOR CUSTOMERS +No customer accounted for 10% or more of the Company's net revenues during the fiscal years ended May 31, 2019 , 2018 and 2017 . +2019 FORM 10-K 80 +Table of Contents +NOTE 17 — OPERATING SEGMENTS AND RELATED INFORMATION +The Company's operating segments are evidence of the structure of the Company's internal organization. The NIKE Brand segments are defined by geographic regions for operations participating in NIKE Brand sales activity. +Each NIKE Brand geographic segment operates predominantly in one industry: the design, development, marketing and selling of athletic footwear, apparel and equipment. The Company's reportable operating segments for the NIKE Brand are: North America; Europe, Middle East & Africa; Greater China; and Asia Pacific & Latin America, and include results for the NIKE, Jordan and Hurley brands. +The Company's NIKE Direct operations are managed within each NIKE Brand geographic operating segment. Converse is also a reportable segment for the Company, and operates in one industry: the design, marketing, licensing and selling of casual sneakers, apparel and accessories. +Global Brand Divisions is included within the NIKE Brand for presentation purposes to align with the way management views the Company. Global Brand Divisions primarily represent NIKE Brand licensing businesses that are not part of a geographic operating segment, and demand creation and operating overhead expense, including product creation and design expenses that are centrally managed for the NIKE Brand, as well as costs associated with NIKE Direct global digital operations and enterprise technology. +Corporate consists primarily of unallocated general and administrative expenses, including expenses associated with centrally managed departments; depreciation and amortization related to the Company's headquarters; unallocated insurance, benefit and compensation programs, including stock-based compensation; and certain foreign currency gains and losses, including certain hedge gains and losses. +The primary financial measure used by the Company to evaluate performance of individual operating segments is earnings before interest and taxes (commonly referred to as “EBIT”), which represents Net income before Interest expense (income), net and Income tax expense in the Consolidated Statements of Income. +As part of the Company's centrally managed foreign exchange risk management program, standard foreign currency rates are assigned twice per year to each NIKE Brand entity in the Company's geographic operating segments and to Converse. These rates are set approximately nine and twelve months in advance of the future selling seasons to which they relate (specifically, for each currency, one standard rate applies to the fall and holiday selling seasons and one standard rate applies to the spring and summer selling seasons) based on average market spot rates in the calendar month preceding the date they are established. Inventories and Cost of sales for geographic operating segments and Converse reflect the use of these standard rates to record non-functional currency product purchases in the entity's functional currency. Differences between assigned standard foreign currency rates and actual market rates are included in Corporate, together with foreign currency hedge gains and losses generated from the Company's centrally managed foreign exchange risk management program and other conversion gains and losses. +Accounts receivable, net, Inventories and Property, plant and equipment, net for operating segments are regularly reviewed by management and are therefore provided below. Additions to long-lived assets as presented in the following table represent capital expenditures. +2019 FORM 10-K 81 +Table of Contents +YEAR ENDED MAY 31, +(Dollars in millions) +2019 +2018 +2017 +REVENUES +North America +$ +15,902 +$ +14,855 +$ +15,216 +Europe, Middle East & Africa +9,812 +9,242 +7,970 +Greater China +6,208 +5,134 +4,237 +Asia Pacific & Latin America +5,254 +5,166 +4,737 +Global Brand Divisions +42 +88 +73 +Total NIKE Brand +37,218 +34,485 +32,233 +Converse +1,906 +1,886 +2,042 +Corporate +(7 +) +26 +75 +TOTAL NIKE, INC. REVENUES +$ +39,117 +$ +36,397 +$ +34,350 +EARNINGS BEFORE INTEREST AND TAXES +North America +$ +3,925 +$ +3,600 +$ +3,875 +Europe, Middle East & Africa +1,995 +1,587 +1,507 +Greater China +2,376 +1,807 +1,507 +Asia Pacific & Latin America +1,323 +1,189 +980 +Global Brand Divisions +(3,262 +) +(2,658 +) +(2,677 +) +Total NIKE Brand +6,357 +5,525 +5,192 +Converse +303 +310 +477 +Corporate +(1,810 +) +(1,456 +) +(724 +) +Total NIKE, Inc. Earnings Before Interest and Taxes +4,850 +4,379 +4,945 +Interest expense (income), net +49 +54 +59 +TOTAL NIKE, INC. INCOME BEFORE INCOME TAXES +$ +4,801 +$ +4,325 +$ +4,886 +ADDITIONS TO LONG-LIVED ASSETS +North America +$ +117 +$ +196 +$ +223 +Europe, Middle East & Africa +233 +240 +173 +Greater China +49 +76 +51 +Asia Pacific & Latin America +47 +49 +59 +Global Brand Divisions +278 +286 +278 +Total NIKE Brand +724 +847 +784 +Converse +18 +22 +30 +Corporate +333 +325 +387 +TOTAL ADDITIONS TO LONG-LIVED ASSETS +$ +1,075 +$ +1,194 +$ +1,201 +DEPRECIATION +North America +$ +149 +$ +160 +$ +140 +Europe, Middle East & Africa +111 +116 +106 +Greater China +50 +56 +54 +Asia Pacific & Latin America +53 +55 +54 +Global Brand Divisions +195 +217 +233 +Total NIKE Brand +558 +604 +587 +Converse +31 +33 +28 +Corporate +116 +110 +91 +TOTAL DEPRECIATION +$ +705 +$ +747 +$ +706 +82 NIKE, INC. +Table of Contents +AS OF MAY 31, +(Dollars in millions) +2019 +2018 +ACCOUNTS RECEIVABLE, NET +North America +$ +1,718 +$ +1,443 +Europe, Middle East & Africa +1,164 +870 +Greater China +245 +101 +Asia Pacific & Latin America +771 +720 +Global Brand Divisions +105 +102 +Total NIKE Brand +4,003 +3,236 +Converse +243 +240 +Corporate +26 +22 +TOTAL ACCOUNTS RECEIVABLE, NET +$ +4,272 +$ +3,498 +INVENTORIES +North America +$ +2,328 +$ +2,270 +Europe, Middle East & Africa +1,390 +1,433 +Greater China +693 +580 +Asia Pacific & Latin America +694 +687 +Global Brand Divisions +126 +91 +Total NIKE Brand +5,231 +5,061 +Converse +269 +268 +Corporate +122 +(68 +) +TOTAL INVENTORIES +$ +5,622 +$ +5,261 +PROPERTY, PLANT AND EQUIPMENT, NET +North America +$ +814 +$ +848 +Europe, Middle East & Africa +929 +849 +Greater China +237 +256 +Asia Pacific & Latin America +326 +339 +Global Brand Divisions +665 +597 +Total NIKE Brand +2,971 +2,889 +Converse +100 +115 +Corporate +1,673 +1,450 +TOTAL PROPERTY, PLANT AND EQUIPMENT, NET +$ +4,744 +$ +4,454 +REVENUES AND LONG-LIVED ASSETS BY GEOGRAPHIC AREA +After allocation of revenues for Global Brand Divisions, Converse and Corporate to geographical areas based on the location where the sales originated, revenues by geographical area are essentially the same as reported above for the NIKE Brand operating segments with the exception of the United States. Revenues derived in the United States were $16,091 million , $15,314 million and $15,778 million for the years ended May 31, 2019 , 2018 and 2017 , respectively. +2019 FORM 10-K 83 +Table of Contents +The Company's largest concentrations of long-lived assets primarily consist of the Company's world headquarters and distribution facilities in the United States, as well as distribution facilities in Belgium and China. Long-lived assets attributable to operations in these countries, which are primarily composed of property, plant and equipment, net, were as follows: +AS OF MAY 31, +(Dollars in millions) +2019 +2018 +United States +$ +3,174 +$ +2,930 +Belgium +618 +534 +China +242 +262 +NOTE 18 — COMMITMENTS AND CONTINGENCIES +The Company leases retail store space, certain distribution and warehouse facilities, office space, equipment and other non-real estate assets under operating leases expiring from 1 to 24 years after May 31, 2019 . Rent expense, excluding executory costs, was $829 million , $820 million and $731 million for the years ended May 31, 2019 , 2018 and 2017 , respectively. Amounts of minimum future annual commitments under non-cancelable operating and capital leases are as follows: +YEAR ENDING MAY 31, +(Dollars in millions) +2020 +2021 +2022 +2023 +2024 +THEREAFTER +TOTAL +Operating leases +$ +553 +$ +513 +$ +441 +$ +386 +$ +345 +$ +1,494 +$ +3,732 +Capital leases and other financing obligations (1) +32 +34 +40 +37 +34 +197 +374 +(1) +Capital leases and other financing obligations include payments related to build-to-suit lease arrangements. +As of May 31, 2019 and 2018 , the Company had bank guarantees and letters of credit outstanding totaling $215 million and $165 million , respectively, issued primarily for real estate agreements, self-insurance programs and other general business obligations. +In connection with various contracts and agreements, the Company provides routine indemnification relating to the enforceability of intellectual property rights, coverage for legal issues that arise and other items where the Company is acting as the guarantor. Currently, the Company has several such agreements in place. However, based on the Company's historical experience and the estimated probability of future loss, the Company has determined the fair value of such indemnification is not material to the Company's financial position or results of operations. +In the ordinary course of its business, the Company is involved in various legal proceedings involving contractual and employment relationships, product liability claims, trademark rights and a variety of other matters. While the Company cannot predict the outcome of its pending legal matters with certainty, the Company does not believe any currently identified claim, proceeding or litigation, either individually or in aggregate, will have a material impact on the Company's results of operations, financial position or cash flows. +84 NIKE, INC. +Table of Contents +ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE +There has been no change of accountants nor any disagreements with accountants on any matter of accounting principles or practices or financial statement disclosure required to be reported under this Item. +ITEM 9A. CONTROLS AND PROCEDURES +We maintain disclosure controls and procedures that are designed to provide reasonable assurance that ensure information required to be disclosed in our Securities Exchange Act of 1934, as amended ("the Exchange Act") reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. +We carry out a variety of ongoing procedures, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, to evaluate the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of May 31, 2019 . +“Management's Annual Report on Internal Control Over Financial Reporting” is included in Item 8 of this Report. +We are continuing several transformation initiatives to centralize and simplify our business processes and systems. These are long-term initiatives, which we believe will enhance our internal control over financial reporting due to increased automation and further integration of related processes. We will continue to monitor our internal control over financial reporting for effectiveness throughout these transformation initiatives. +There have not been any changes in our internal control over financial reporting during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. +ITEM 9B. OTHER INFORMATION +No disclosure is required under this item. +2019 FORM 10-K 85 +Table of Contents +PART III +ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE +The information required by Item 401 of Regulation S-K regarding directors is included under “Election of Directors” in the definitive Proxy Statement for our 2019 Annual Meeting of Shareholders and is incorporated herein by reference. The information required by Item 401 of Regulation S-K regarding executive officers is included under “Information about our Executive Officers” in Item 1 of this Report. The information required by Item 406 of Regulation S-K is included under “Corporate Governance — Code of Business Conduct and Ethics” in the definitive Proxy Statement for our 2019 Annual Meeting of Shareholders and is incorporated herein by reference. The information required by Items 407(d)(4) and (d)(5) of Regulation S-K regarding the Audit & Finance Committee of the Board of Directors is included under “Corporate Governance — Board Committees” in the definitive Proxy Statement for our 2019 Annual Meeting of Shareholders and is incorporated herein by reference. +ITEM 11. EXECUTIVE COMPENSATION +The information required by Items 402, 407(e)(4) and 407(e)(5) of Regulation S-K regarding executive compensation is included under “Election of Directors — Director Compensation for Fiscal 2019 ,” “Compensation Discussion and Analysis,” “Executive Compensation,” “Election of Directors — Compensation Committee Interlocks and Insider Participation,” and “Compensation Committee Report” in the definitive Proxy Statement for our 2019 Annual Meeting of Shareholders and is incorporated herein by reference. +ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS +The information required by Item 201(d) of Regulation S-K is included under “Executive Compensation — Equity Compensation Plans” in the definitive Proxy Statement for our 2019 Annual Meeting of Shareholders and is incorporated herein by reference. The information required by Item 403 of Regulation S-K is included under “Election of Directors — Stock Holdings of Certain Owners and Management” in the definitive Proxy Statement for our 2019 Annual Meeting of Shareholders and is incorporated herein by reference. +ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE +The information required by Items 404 and 407(a) of Regulation S-K is included under “Election of Directors — Transactions with Related Persons” and “Corporate Governance — Director Independence” in the definitive Proxy Statement for our 2019 Annual Meeting of Shareholders and is incorporated herein by reference. +ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES +The information required by Item 9(e) of Schedule 14A is included under “Ratification of Independent Registered Public Accounting Firm” in the definitive Proxy Statement for our 2019 Annual Meeting of Shareholders and is incorporated herein by reference. +86 NIKE, INC. +Table of Contents +PART IV +ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES +(a) +The following documents are filed as part of this report: +FORM 10-K PAGE NO. +1. +Financial Statements: +Report of Independent Registered Public Accounting Firm +48 +Consolidated Statements of Income for each of the three years ended May 31, 2019, May 31, 2018 and May 31, 2017 +50 +Consolidated Statements of Comprehensive Income for each of the three years ended May 31, 2019, May 31, 2018 and May 31 2017 +51 +Consolidated Balance Sheets at May 31, 2019 and May 31, 2018 +52 +Consolidated Statements of Cash Flows for each of the three years ended May 31, 2019, May 31, 2018 and May 31, 2017 +53 +Consolidated Statements of Shareholders' Equity for each of the three years ended May 31, 2019, May 31, 2018 and May 31, 2017 +54 +Notes to Consolidated Financial Statements +55 +2. +Financial Statement Schedule: +II — Valuation and Qualifying Accounts for the years ended May 31, 2019, 2018 and 2017 +89 +All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. +3. +Exhibits: +3.1 +Restated Articles of Incorporation, as amended (incorporated by reference to Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended November 30, 2015). +3.2 +Fifth Restated Bylaws, as amended (incorporated by reference to Exhibit 3.2 to the Company's Current Report on Form 8-K filed November 17, 2017). +4.1 +Restated Articles of Incorporation, as amended (see Exhibit 3.1). +4.2 +Fifth Restated Bylaws, as amended (see Exhibit 3.2). +4.3 +Indenture dated as of April 26, 2013, by and between NIKE, Inc. and Deutsche Bank Trust Company Americas, as trustee (incorporated by reference to Exhibit 4.1 to the Company's Form 8-K filed April 26, 2013). +4.4 +Second Supplemental Indenture, dated as of October 29, 2015, by and between NIKE, Inc. and Deutsche Bank Trust Company Americas, as trustee, including the form of 3.875% Notes due 2045 (incorporated by reference to Exhibit 4.2 to the Company's Form 8-K filed October 29, 2015). +4.5 +Third Supplemental Indenture, dated as of October 21, 2016, by and between NIKE, Inc. and Deutsche Bank Trust Company Americas, as trustee, including the form of 2.375% Notes due 2026 and form of 3.375% Notes due 2046 (incorporated by reference to Exhibit 4.2 to the Company's Form 8-K filed October 21, 2016). +4.6 +Description of Registrant's Securities. +10.1 +Form of Non-Statutory Stock Option Agreement for options granted to non-employee directors prior to May 31, 2010 under the 1990 Stock Incentive Plan (incorporated by reference to Exhibit 10.3 to the Company's Current Report on Form 8-K filed June 21, 2005).* +10.2 +Form of Non-Statutory Stock Option Agreement for options granted to non-employee directors after May 31, 2010 under the 1990 Stock Incentive Plan (incorporated by reference to Exhibit 10.2 to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 2010).* +10.3 +Form of Non-Statutory Stock Option Agreement for options granted to executives prior to May 31, 2010 under the 1990 Stock Incentive Plan (incorporated by reference to Exhibit 10.1 to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 2009).* +10.4 +Form of Restricted Stock Agreement for non-employee directors under the 1990 Stock Incentive Plan (incorporated by reference to Exhibit 10.4 to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 2014).* +10.5 +Form of Non-Statutory Stock Option Agreement for options granted to executives under the Stock Incentive Plan (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended February 28, 2018).* +2019 FORM 10-K 87 +Table of Contents +10.6 +Form of Indemnity Agreement entered into between the Company and each of its officers and directors (incorporated by reference to Exhibit 10.2 to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 2008).* +10.7 +NIKE, Inc. 1990 Stock Incentive Plan (incorporated by reference to Exhibit 10.7 to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 2014).* +10.8 +NIKE, Inc. Long-Term Incentive Plan (incorporated by reference to Exhibit 10.9 to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 2015).* +10.9 +NIKE, Inc. Deferred Compensation Plan (Amended and Restated effective April 1, 2013) (incorporated by reference to Exhibit 10.9 to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 2013).* +10.10 +NIKE, Inc. Deferred Compensation Plan (Amended and Restated effective June 1, 2004) (applicable to amounts deferred before January 1, 2005) (incorporated by reference to Exhibit 10.6 to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 2004).* +10.11 +Amendment No. 1 effective January 1, 2008 to the NIKE, Inc. Deferred Compensation Plan (June 1, 2004 Restatement) (incorporated by reference to Exhibit 10.9 to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 2009).* +10.12 +NIKE, Inc. Foreign Subsidiary Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended November 30, 2008).* +10.13 +Amended and Restated Covenant Not to Compete and Non-Disclosure Agreement between NIKE, Inc. and Mark G. Parker dated July 24, 2008 (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed July 24, 2008).* +10.14 +Form of Restricted Stock Agreement under the Stock Incentive Plan for awards after May 31, 2010 (incorporated by reference to Exhibit 10.15 to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 2015).* +10.15 +Form of Restricted Stock Unit Agreement under the Stock Incentive Plan (incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended February 28, 2018).* +10.16 +Form of Covenant Not to Compete and Non-Disclosure Agreement between NIKE, Inc. and its executive officers (other than Mark G. Parker) (incorporated by reference to Exhibit 10.17 to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 2018).* +10.17 +Policy for Recoupment of Incentive Compensation (incorporated by reference to Exhibit 10.3 to the Company's Current Report on Form 8-K filed July 20, 2010).* +10.18 +Credit Agreement dated as of August 28, 2015 among NIKE, Inc., Bank of America, N.A., as Administrative Agent, Citibank N.A., as Syndication Agent, Deutsche Bank A.G. New York Branch and HSBC Bank USA, National Association, as Co-Documentation Agents, and the other Banks named therein (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed September 2, 2015). +10.19 +Executive Performance Sharing Plan (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed September 23, 2015).* +10.20 +Stock Incentive Plan, as amended (incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K filed September 23, 2015).* +10.21 +Form of Discretionary Performance Award Agreement (incorporated by reference to Exhibit 10.22 to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 2018).* +10.22 +NIKE, Inc. Amended and Restated Long-Term Incentive Plan (incorporated by reference to Exhibit A to the Company's definitive Proxy Statement filed July 25, 2017).* +21 +Subsidiaries of the Registrant. +23 +Consent of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm (included within this Annual Report on Form 10-K). +31.1 +Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer. +31.2 +Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer. +32 +Section 1350 Certifications. +101.INS +XBRL Instance Document +101.SCH +XBRL Taxonomy Extension Schema +101.CAL +XBRL Taxonomy Extension Calculation Linkbase +101.DEF +XBRL Taxonomy Extension Definition Document +101.LAB +XBRL Taxonomy Extension Label Linkbase +101.PRE +XBRL Taxonomy Extension Presentation Linkbase +* Management contract or compensatory plan or arrangement. +The Exhibits filed herewith do not include certain instruments with respect to long-term debt of NIKE and its subsidiaries, inasmuch as the total amount of debt authorized under any such instrument does not exceed 10 percent of the total assets of NIKE and its subsidiaries on a consolidated basis. NIKE agrees, pursuant to Item 601(b)(4)(iii) of Regulation S-K, that it will furnish a copy of any such instrument to the SEC upon request. +Upon written request to Investor Relations, NIKE, Inc., One Bowerman Drive, Beaverton, Oregon 97005-6453, NIKE will furnish shareholders with a copy of any Exhibit upon payment of $0.10 per page, which represents our reasonable expenses in furnishing Exhibits. +88 NIKE, INC. +Table of Contents +SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS +(Dollars in millions) +BALANCE AT BEGINNING OF +PERIOD +CHARGED TO COSTS AND EXPENSES +CHARGED +TO OTHER +ACCOUNTS (1) +WRITE-OFFS, +NET +BALANCE +AT END +OF PERIOD +Sales returns reserve +For the year ended May 31, 2017 +$ +444 +$ +696 +$ +3 +$ +(800 +) +$ +343 +For the year ended May 31, 2018 +343 +640 +5 +(658 +) +330 +For the year ended May 31, 2019 (2) +734 +1,959 +(30 +) +(1,820 +) +843 +(1) +Amounts included in this column primarily relate to foreign currency translation. +(2) +As a result of the adoption of ASC Topic 606 during the first quarter of fiscal 2019, an asset for the estimated cost of inventory for expected products returns is now recognized separately from the liability for sales returns reserves, which is presented above. +2019 FORM 10-K 89 +Table of Contents +ITEM 16. FORM 10-K SUMMARY +None. +90 NIKE, INC. +Table of Contents +Consent of Independent Registered Public Accounting Firm +We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (Nos. 033-63995, 333-63581, 333-63583, 333-68864, 333-68886, 333-71660, 333-104822, 333-117059, 333-133360, 333-164248, 333-171647, 333-173727, 333-208900 and 333-215439) of NIKE, Inc. of our report dated July 23, 2019 relating to the financial statements and financial statement schedule and the effectiveness of internal control over financial reporting, which appears in this Form 10-K. +/s/ PricewaterhouseCoopers LLP +Portland, Oregon +July 23, 2019 +2019 FORM 10-K 91 +Table of Contents +SIGNATURES +Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. +NIKE, INC. +By: +/s/ MARK G. PARKER +Mark G. Parker +Chairman, President and Chief Executive Officer +Date: +July 23, 2019 +Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. +SIGNATURE +TITLE +DATE +PRINCIPAL EXECUTIVE OFFICER AND DIRECTOR: +/s/ MARK G. PARKER +Mark G. Parker +Chairman, President and Chief Executive Officer +July 23, 2019 +PRINCIPAL FINANCIAL OFFICER: +/s/ ANDREW CAMPION +Andrew Campion +Executive Vice President and Chief Financial Officer +July 23, 2019 +PRINCIPAL ACCOUNTING OFFICER: +/s/ CHRIS L. ABSTON +Chris L. Abston +Corporate Controller +July 23, 2019 +DIRECTORS: +/s/ CATHLEEN A. BENKO +Cathleen A. Benko +Director +July 23, 2019 +/s/ ELIZABETH J. COMSTOCK +Elizabeth J. Comstock +Director +July 23, 2019 +/s/ JOHN G. CONNORS +John G. Connors +Director +July 23, 2019 +/s/ TIMOTHY D. COOK +Timothy D. Cook +Director +July 23, 2019 +/s/ JOHN J. DONAHOE II +John J. Donahoe II +Director +July 23, 2019 +/s/ ALAN B. GRAF, JR. +Alan B. Graf, Jr. +Director +July 23, 2019 +/s/ PETER B. HENRY +Peter B. Henry +Director +July 23, 2019 +/s/ TRAVIS A. KNIGHT +Travis A. Knight +Director +July 23, 2019 +/s/ JOHN C. LECHLEITER +John C. Lechleiter +Director +July 23, 2019 +/s/ MICHELLE A. PELUSO +Michelle A. Peluso +Director +July 23, 2019 +/s/ JOHN W. ROGERS, JR. +John W. Rogers, Jr. +Director +July 23, 2019 +/s/ JOHN R. THOMPSON, JR. +John R. Thompson, Jr. +Director +July 23, 2019 +92 NIKE, INC. \ No newline at end of file diff --git a/raw/filings/0000320187/2018/0000320187-19-000051/filing_metadata.csv b/raw/filings/0000320187/2018/0000320187-19-000051/filing_metadata.csv new file mode 100644 index 0000000000000000000000000000000000000000..e57f049a82c433fcf55ac4aa92f75b54e3897b69 --- /dev/null +++ b/raw/filings/0000320187/2018/0000320187-19-000051/filing_metadata.csv @@ -0,0 +1,2 @@ +cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing +0000320187,NKE,"NIKE, Inc.",10-K,2019-07-23,2019-05-31,2019-07-24T00:13:55.000Z,0000320187-19-000051,nke-531201910k.htm,10-K,14926311,1,0,https://www.sec.gov/Archives/edgar/data/320187/000032018719000051/nke-531201910k.htm,https://www.sec.gov/Archives/edgar/data/320187/000032018719000051/,2018,2018,1 diff --git a/raw/filings/0000320187/2018/0000320187-19-000051/item1.txt b/raw/filings/0000320187/2018/0000320187-19-000051/item1.txt new file mode 100644 index 0000000000000000000000000000000000000000..039a194f910fbc224c79060b2a051832eab715dc --- /dev/null +++ b/raw/filings/0000320187/2018/0000320187-19-000051/item1.txt @@ -0,0 +1,107 @@ +ITEM 1. BUSINESS +GENERAL +NIKE, Inc. was incorporated in 1967 under the laws of the State of Oregon. As used in this report, the terms “we,” “us,” “NIKE” and the “Company” refer to NIKE, Inc. and its predecessors, subsidiaries and affiliates, collectively, unless the context indicates otherwise. Our NIKE digital commerce website is located at www.nike.com . On our NIKE corporate website, located at investors.nike.com , we post the following filings as soon as reasonably practicable after they are electronically filed with, or furnished to, the United States Securities and Exchange Commission (the “SEC”): our annual report on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities and Exchange Act of 1934, as amended. Our definitive Proxy Statements are also posted on our corporate website. All such filings on our corporate website are available free of charge. Copies of these filings are also available on the SEC's website ( www.sec.gov ). Also available on our corporate website are the charters of the committees of our Board of Directors, as well as our corporate governance guidelines and code of ethics; copies of any of these documents will be provided in print to any shareholder who submits a request in writing to NIKE Investor Relations, One Bowerman Drive, Beaverton, Oregon 97005-6453. +Our principal business activity is the design, development and worldwide marketing and selling of athletic footwear, apparel, equipment, accessories and services. NIKE is the largest seller of athletic footwear and apparel in the world. We sell our products through NIKE-owned retail stores and through digital platforms (which we refer to collectively as our “NIKE Direct” operations), to retail accounts and a mix of independent distributors, licensees and sales representatives in virtually all countries around the world. Virtually all of our products are manufactured by independent contractors. Nearly all footwear and apparel products are produced outside the United States, while equipment products are produced both in the United States and abroad. +PRODUCTS +We focus our NIKE Brand product offerings in six key categories: Running, NIKE Basketball, the Jordan Brand, Football (Soccer), Training and Sportswear (our sports-inspired lifestyle products). We also market products designed for kids, as well as for other athletic and recreational uses such as American football, baseball, cricket, golf, lacrosse, skateboarding, tennis, volleyball, walking, wrestling and other outdoor activities. +NIKE's athletic footwear products are designed primarily for specific athletic use, although a large percentage of the products are worn for casual or leisure purposes. We place considerable emphasis on innovation and high-quality construction in the development and manufacturing of our products. Sportswear, Running and the Jordan Brand are currently our top-selling footwear categories and we expect them to continue to lead in footwear sales. +We also sell sports apparel covering the above-mentioned categories, which feature the same trademarks and are sold predominantly through the same marketing and distribution channels as athletic footwear. Our sports apparel, similar to our athletic footwear products, is designed primarily for athletic use and exemplifies our commitment to innovation and high-quality construction. Sportswear, Training and Running are currently our top-selling apparel categories and we expect them to continue to lead in apparel sales. We often market footwear, apparel and accessories in “collections” of similar use or by category. We also market apparel with licensed college and professional team and league logos. +We sell a line of performance equipment and accessories under the NIKE Brand name, including bags, socks, sport balls, eyewear, timepieces, digital devices, bats, gloves, protective equipment and other equipment designed for sports activities. We also sell small amounts of various plastic products to other manufacturers through our wholly-owned subsidiary, NIKE IHM, Inc., doing business as Air Manufacturing Innovation. +2019 FORM 10-K 1 +Table of Contents +Our Jordan Brand designs, distributes and licenses athletic and casual footwear, apparel and accessories predominantly focused on basketball using the Jumpman trademark. Sales and operating results for Jordan Brand products are reported within the respective NIKE Brand geographic operating segments. +One of our wholly-owned subsidiary brands, Converse, headquartered in Boston, Massachusetts, designs, distributes and licenses casual sneakers, apparel and accessories under the Converse, Chuck Taylor, All Star, One Star, Star Chevron and Jack Purcell trademarks. Operating results of the Converse brand are reported on a stand-alone basis. +Another of our wholly-owned subsidiary brands, Hurley, headquartered in Costa Mesa, California, designs and distributes a line of action sports and youth lifestyle apparel and accessories under the Hurley trademark. Sales and operating results for Hurley products are included within the NIKE Brand's North America geographic operating segment. +In addition to the products we sell to our wholesale customers and directly to consumers through our NIKE Direct operations, we have also entered into license agreements that permit unaffiliated parties to manufacture and sell, using NIKE-owned trademarks, certain apparel, digital devices and applications and other equipment designed for sports activities. +SALES AND MARKETING +We experience moderate fluctuations in aggregate sales volume during the year. Historically, revenues in the first and fourth fiscal quarters have slightly exceeded those in the second and third quarters. However, the mix of product sales may vary considerably as a result of changes in seasonal and geographic demand for particular types of footwear, apparel and equipment, as well as other macroeconomic, operating and logistics-related factors. +Because NIKE is a consumer products company, the relative popularity of various sports and fitness activities and changing design trends affect the demand for our products. We must, therefore, respond to trends and shifts in consumer preferences by adjusting the mix of existing product offerings, developing new products, styles and categories and influencing sports and fitness preferences through extensive marketing. Failure to respond in a timely and adequate manner could have a material adverse effect on our sales and profitability. This is a continuing risk. Refer to Item 1A. Risk Factors. +We report our NIKE Brand operations based on our internal geographic organization. Each NIKE Brand geographic segment operates predominantly in one industry: the design, development, marketing and selling of athletic footwear, apparel and equipment. The Company's reportable operating segments for the NIKE Brand are: North America; Europe, Middle East & Africa (EMEA); Greater China; and Asia Pacific & Latin America (APLA), and include results for the NIKE, Jordan and Hurley brands. Sales through our NIKE Direct operations are managed within each geographic operating segment. +Converse is also a reportable operating segment and operates predominately in one industry: the design, marketing, licensing and selling of casual sneakers, apparel and accessories. Converse direct to consumer operations, including digital commerce, are reported within the Converse operating segment results. +UNITED STATES MARKET +For fiscal 2019 , NIKE Brand and Converse sales in the United States accounted for approximately 41% of total revenues, compared to 42% and 46% for fiscal 2018 and fiscal 2017 , respectively. We sell our NIKE Brand, Jordan Brand, Hurley and Converse products to thousands of retail accounts in the United States, including a mix of footwear stores, sporting goods stores, athletic specialty stores, department stores, skate, tennis and golf shops and other retail accounts. In the United States, we utilize NIKE sales offices to solicit such sales. During fiscal 2019 , our three largest United States customers accounted for approximately 24% of sales in the United States. +2 NIKE, INC. +Table of Contents +Our NIKE Direct and Converse direct to consumer operations sell NIKE Brand, Jordan Brand, Hurley and Converse products to consumers through various digital platforms. In addition, our NIKE Direct and Converse direct to consumer operations sell through the following number of retail stores in the United States: +U.S. RETAIL STORES +NUMBER +NIKE Brand factory stores +217 +NIKE Brand in-line stores (including employee-only stores) +29 +Converse stores (including factory stores) +109 +Hurley stores (including factory and employee-only stores) +29 +TOTAL +384 +In the United States, NIKE has six significant distribution centers. Four are located in Memphis, Tennessee, two of which are owned and two of which are leased. Two other distribution centers, one located in Indianapolis, Indiana and one located in Dayton, Tennessee, are leased and operated by third-party logistics providers. NIKE Brand apparel and equipment are also shipped from our Foothill Ranch, California distribution center, which we lease. Smaller leased and third-party leased and operated distribution facilities are located in various parts of the United States. +INTERNATIONAL MARKETS +For fiscal 2019 , non-U.S. NIKE Brand and Converse sales accounted for approximately 59% of total revenues, compared to 58% and 54% for fiscal 2018 and fiscal 2017 , respectively. We sell our products to retail accounts, through our own NIKE Direct operations and through a mix of independent distributors, licensees and sales representatives around the world. We sell to thousands of retail accounts and ship products from 67 distribution centers outside of the United States. During fiscal 2019 , NIKE's three largest customers outside of the United States accounted for approximately 14% of total non-U.S. sales. +In addition to NIKE and Converse owned digital commerce platforms in over 45 countries, our NIKE Direct and Converse direct to consumer businesses operate the following number of retail stores outside the United States: +NON-U.S. RETAIL STORES +NUMBER +NIKE Brand factory stores +648 +NIKE Brand in-line stores (including employee-only stores) +57 +Converse stores (including factory stores) +63 +TOTAL +768 +International branch offices and subsidiaries of NIKE are located in Argentina, Australia, Austria, Belgium, Bermuda, Brazil, Canada, Chile, China, Croatia, the Czech Republic, Denmark, Finland, France, Germany, Greece, Hong Kong, Hungary, India, Indonesia, Ireland, Israel, Italy, Japan, Korea, Macau, Malaysia, Mexico, the Netherlands, New Zealand, Norway, Panama, the Philippines, Poland, Portugal, Russia, Singapore, Slovakia, Slovenia, South Africa, Spain, Sri Lanka, Sweden, Switzerland, Taiwan, Thailand, Turkey, the United Arab Emirates, the United Kingdom, Uruguay and Vietnam. +SIGNIFICANT CUSTOMER +No customer accounted for 10% or more of our worldwide net revenues during fiscal 2019 . +2019 FORM 10-K 3 +Table of Contents +PRODUCT RESEARCH, DESIGN AND DEVELOPMENT +We believe our research, design and development efforts are key factors in our success. Technical innovation in the design and manufacturing process of footwear, apparel and athletic equipment receives continued emphasis as we strive to produce products that help to enhance athletic performance, reduce injury and maximize comfort, while reducing waste. +In addition to our own staff of specialists in the areas of biomechanics, chemistry, exercise physiology, engineering, industrial design, sustainability and related fields, we also utilize research committees and advisory boards made up of athletes, coaches, trainers, equipment managers, orthopedists, podiatrists and other experts who consult with us and review designs, materials, concepts for product and manufacturing process improvements and compliance with product safety regulations around the world. Employee athletes, athletes engaged under sports marketing contracts and other athletes wear-test and evaluate products during the design and development process. +As we continue to develop new technologies, we are simultaneously focused on the design of innovative products incorporating such technologies throughout our product categories. Using market intelligence and research, our various design teams identify opportunities to leverage new technologies in existing categories responding to consumer preferences. The proliferation of NIKE Air, Lunar, Zoom, Free, Flywire, Dri-Fit, Flyknit, Flyweave, ZoomX, React, Adaptive and NIKE+ technologies, among others, throughout our Running, NIKE Basketball, Jordan Brand, Football (Soccer), Training and Sportswear categories typifies our dedication to designing innovative products. +MANUFACTURING +We are supplied by 112 footwear factories located in 12 countries. The largest single footwear factory accounted for approximately 9% of total fiscal 2019 NIKE Brand footwear production. Virtually all of our footwear is manufactured outside of the United States by independent contract manufacturers which often operate multiple factories. For fiscal 2019 , contract factories in Vietnam, China and Indonesia manufactured approximately 49%, 23% and 21% of total NIKE Brand footwear, respectively. We also have manufacturing agreements with independent contract manufacturers in Argentina and India to manufacture footwear for sale primarily within those countries. For fiscal 2019 , four footwear contract manufacturers each accounted for greater than 10% of footwear production and in the aggregate accounted for approximately 61% of NIKE Brand footwear production. +We are supplied by 334 apparel factories located in 36 countries. The largest single apparel factory accounted for approximately 14% of total fiscal 2019 NIKE Brand apparel production. Virtually all of our apparel is manufactured outside of the United States by independent contract manufacturers which often operate multiple factories. For fiscal 2019 , contract factories in China, Vietnam and Thailand produced approximately 27%, 22% and 10% of total NIKE Brand apparel, respectively. For fiscal 2019 , one apparel contract manufacturer accounted for more than 10% of apparel production, and the top five contract manufacturers in the aggregate accounted for approximately 49% of NIKE Brand apparel production. +The principal materials used in our footwear products are natural and synthetic rubber, plastic compounds, foam cushioning materials, natural and synthetic leather, nylon, polyester and canvas, as well as polyurethane films used to make NIKE Air-Sole cushioning components. During fiscal 2019 , Air Manufacturing Innovation, a wholly-owned subsidiary, with facilities near Beaverton, Oregon and in St. Charles, Missouri, as well as independent contractors in China and Vietnam, were our suppliers of the Air-Sole cushioning components used in footwear. The principal materials used in our apparel products are natural and synthetic fabrics and threads (both virgin and recycled); specialized performance fabrics designed to efficiently wick moisture away from the body, retain heat and repel rain and/or snow; and plastic and metal hardware. NIKE's independent contractors and suppliers buy raw materials for the manufacturing of our footwear, apparel and equipment products. Most raw materials are available and purchased by those independent contractors and suppliers in the countries where manufacturing takes place. NIKE's independent contract manufacturers and suppliers have thus far experienced little difficulty in satisfying raw material requirements for the production of our products. +Since 1972, Sojitz Corporation of America (“Sojitz America”), a large Japanese trading company and the sole owner of our redeemable preferred stock, has performed import-export financing services for us. During fiscal 2019 , Sojitz America provided financing and purchasing services for NIKE Brand products sold in certain NIKE markets including Argentina, Brazil, Canada, India, South Africa and Uruguay, excluding products produced and sold in the same country. Approximately 5% of NIKE Brand sales occurred in those countries. Any failure of Sojitz America to provide these services or any failure of Sojitz America's banks could disrupt our ability to acquire products from our suppliers and to deliver products to our customers in those markets. Such a disruption could result in canceled orders that would adversely affect sales and profitability. However, we believe that any such disruption would be short-term in duration due to the ready availability of alternative sources of financing at competitive rates. +4 NIKE, INC. +Table of Contents +INTERNATIONAL OPERATIONS AND TRADE +Our international operations and sources of supply are subject to the usual risks of doing business abroad, such as the implementation of, or potential changes in, foreign and domestic trade policies, increases in import duties, anti-dumping measures, quotas, safeguard measures, trade restrictions, restrictions on the transfer of funds and, in certain parts of the world, political instability and terrorism. We have not, to date, been materially affected by any such risk, but cannot predict the likelihood of such material effects occurring in the future. +In recent years, uncertain global and regional economic and political conditions have affected international trade and increased protectionist actions around the world. These trends are affecting many global manufacturing and service sectors, and the footwear and apparel industries, as a whole, are not immune. Companies in our industry are facing trade protectionism in many different regions, and in nearly all cases we are working together with industry groups to address trade issues and reduce the impact to the industry, while observing applicable competition laws. Notwithstanding our efforts, protectionist measures have resulted in increases in the cost of our products, and additional measures, if implemented, could adversely affect sales and/or profitability for NIKE, as well as the imported footwear and apparel industry as a whole. +We monitor protectionist trends and developments throughout the world that may materially impact our industry, and we engage in administrative and judicial processes to mitigate trade restrictions. We are actively monitoring actions that may result in additional anti-dumping measures and could affect our industry. We are also monitoring for and advocating against other impediments that may limit or delay customs clearance for imports of footwear, apparel and equipment. NIKE also advocates for trade liberalization for footwear and apparel in a number of regional and bilateral free trade agreements. Changes in U.S. trade policies, including new and potential tariffs or penalties on imported goods, may negatively affect U.S. corporations with production activities outside the U.S., including NIKE. There have also been discussions and commentary regarding retaliatory actions by countries affected by the new tariffs and other changes in U.S. trade policy, and certain foreign governments have instituted or are considering imposing retaliatory measures on certain U.S. goods, which could negatively affect U.S. corporations with business operations and/or consumer markets in those countries. Depending on the extent that certain new or proposed reforms are implemented by the U.S. government and the manner in which foreign governments respond to such reforms, it may become necessary for us to change the way we conduct business, which may adversely affect our results of operations. In addition, with respect to proposed trade restrictions targeting China, which represents an important sourcing country and consumer market for us, we are working with a broad coalition of global businesses and trade associations representing a wide variety of sectors to help ensure that any legislation enacted and implemented (i) addresses legitimate and core concerns, (ii) is consistent with international trade rules and (iii) reflects and considers China's domestic economy and the important role it has in the global economic community. +Where trade protection measures are implemented, we believe that we have the ability to develop, over a period of time, adequate alternative sources of supply for the products obtained from our present suppliers. If events prevented us from acquiring products from our suppliers in a particular country, our operations could be temporarily disrupted and we could experience an adverse financial impact. However, we believe we could abate any such disruption, and that much of the adverse impact on supply would, therefore, be of a short-term nature, although alternate sources of supply might not be as cost-effective and could have an ongoing adverse impact on profitability. +Our international operations are also subject to compliance with the U.S. Foreign Corrupt Practices Act, or "FCPA", and other anti-bribery laws applicable to our operations. We source a significant portion of our products from, and have important consumer markets, outside of the United States, and we have an ethics and compliance program to address compliance with the FCPA and similar laws by us, our employees, agents, suppliers and other partners. +COMPETITION +The athletic footwear, apparel and equipment industry is highly competitive on a worldwide basis. We compete internationally with a significant number of athletic and leisure footwear companies, athletic and leisure apparel companies, sports equipment companies and large companies having diversified lines of athletic and leisure footwear, apparel and equipment, including adidas, Anta, ASICS, Li Ning, lululemon athletica, Puma, Under Armour and V.F. Corporation, among others. The intense competition and the rapid changes in technology and consumer preferences in the markets for athletic and leisure footwear and apparel and athletic equipment, constitute significant risk factors in our operations. +2019 FORM 10-K 5 +Table of Contents +NIKE is the largest seller of athletic footwear and apparel in the world. Important aspects of competition in this industry are: +• +Product attributes such as quality; performance and reliability; new product innovation and development and consumer price/value. +• +Consumer connection and affinity for brands and products, developed through marketing and promotion; social media interaction; customer support and service; identification with prominent and influential athletes, public figures, coaches, teams, colleges and sports leagues who endorse our brands and use our products and active engagement through sponsored sporting events and clinics. +• +Effective sourcing and distribution of products, with attractive merchandising and presentation at retail, both in-store and digital platforms. +We believe that we are competitive in all of these areas. +TRADEMARKS AND PATENTS +We believe that our intellectual property rights are important to our brand, our success and our competitive position. We pursue available protections of these rights and vigorously protect them against third-party theft and infringement. +We use trademarks on nearly all of our products and believe having distinctive marks that are readily identifiable is an important factor in creating a market for our goods, in identifying our brands and the Company, and in distinguishing our goods from the goods of others. We consider our NIKE and Swoosh Design trademarks to be among our most valuable assets and we have registered these trademarks in almost 170 jurisdictions worldwide. In addition, we own many other trademarks that we use in marketing our products. We own common law rights in the trade dress of several significant shoe designs and elements. For certain trade dress, we have sought and obtained trademark registrations. +We have copyright protection in our design, graphics and other original works. In some instances, we also obtain registered copyrights. +We file for, own and maintain many U.S. and foreign utility and design patents protecting components, technologies, materials, manufacturing techniques, features, functionality, and industrial and aesthetic designs used in and for the manufacture of various athletic and leisure footwear and apparel, athletic equipment and digital devices and related software applications. These patents expire at various times. +We believe our success depends upon our capabilities in areas such as design, research and development, production and marketing and is supported by our intellectual property rights, such as trademarks, patents and trade secrets, among others. +We have followed a policy of applying for and registering intellectual property rights in the United States and select foreign countries on trademarks, inventions, innovations and designs that we deem valuable. We also continue to vigorously protect our intellectual property, including trademarks, patents and trade secrets against third-party infringement. +EMPLOYEES +As of May 31, 2019 , we had approximately 76,700 employees worldwide, including retail and part-time employees. Management is committed to maintaining an environment where all NIKE employees have the opportunity to reach their full potential. None of our employees are represented by a union, except for certain employees in the APLA geography, where local law requires those employees to be represented by a trade union. Also, in some countries outside of the United States, local laws require employee representation by works councils (which may be entitled to information and consultation on certain Company decisions) or by organizations similar to a union. In certain European countries, we are required by local law to enter into and/or comply with industry-wide or national collective bargaining agreements. NIKE has never experienced a material interruption of operations due to labor disagreements. +6 NIKE, INC. +Table of Contents +INFORMATION ABOUT OUR EXECUTIVE OFFICERS +The executive officers of NIKE, Inc. as of July 23, 2019 are as follows: +Mark G. Parker , Chairman, President and Chief Executive Officer — Mr. Parker, 63, was appointed President and Chief Executive Officer in January 2006 and named Chairman of the Board in 2016. He has been employed by NIKE since 1979 with primary responsibilities in product research, design and development, marketing and brand management. Mr. Parker was appointed divisional Vice President in charge of product development in 1987, corporate Vice President in 1989, General Manager in 1993, Vice President of Global Footwear in 1998 and President of the NIKE Brand in 2001. +Andrew Campion , Executive Vice President and Chief Financial Officer — Mr. Campion, 47, joined NIKE in 2007 as Vice President of Global Planning and Development, leading strategic and financial planning. He was appointed Chief Financial Officer of the NIKE Brand in 2010, responsible for leading all aspects of financial management for the Company's flagship brand. In 2014, he was appointed Senior Vice President, Strategy, Finance and Investor Relations in addition to his role as Chief Financial Officer of NIKE Brand. Mr. Campion assumed the role of Executive Vice President and Chief Financial Officer in August 2015. Prior to joining NIKE, he held leadership roles in strategic planning, mergers and acquisitions, financial planning and analysis, operations and planning, investor relations and tax at The Walt Disney Company from 1996 to 2007. +Elliott Hill , President, Consumer and Marketplace — Mr. Hill, 55, joined NIKE in 1988, with primary responsibilities in sales and retail. He has served as Apparel Sales Director in Europe, Retail Development Director in Europe, Vice President of Sales and Retail in EMEA, General Manager of US Retail, Vice President of US Sales, Retail and NIKE.com, and Vice President of Global Retail. Most recently, Mr. Hill served as President of Geographies and Sales and Vice President and General Manager of North America. Mr. Hill was appointed President, Consumer and Marketplace in 2018. +Hilary K. Krane , Executive Vice President, Chief Administrative Officer and General Counsel — Ms. Krane, 55, joined NIKE as Vice President and General Counsel in 2010. In 2011, her responsibilities expanded, and she became Vice President, General Counsel and Corporate Affairs. Ms. Krane was appointed Executive Vice President, Chief Administrative Officer and General Counsel in 2013. Prior to joining NIKE, Ms. Krane was General Counsel and Senior Vice President for Corporate Affairs at Levi Strauss & Co. from 2006 to 2010. From 1996 to 2006, she was a Partner and Assistant General Counsel at PricewaterhouseCoopers LLP. +Monique S. Matheson , Executive Vice President, Global Human Resources — Ms. Matheson, 52, joined NIKE in 1998, with primary responsibilities in the human resources function. She was appointed as Vice President and Senior Business Partner in 2011 and Vice President, Chief Talent and Diversity Officer in 2012. Ms. Matheson was appointed Executive Vice President, Global Human Resources in 2017. +John F. Slusher , Executive Vice President, Global Sports Marketing — Mr. Slusher, 50, joined NIKE in 1998, with primary responsibilities in global sports marketing. Mr. Slusher was appointed Director of Sports Marketing for Asia Pacific and Americas in 2006, divisional Vice President of Asia Pacific & Americas Sports Marketing in September 2007 and Vice President, Global Sports Marketing in November 2007. Prior to joining NIKE, Mr. Slusher was an attorney at the law firm of O'Melveny & Myers from 1995 to 1998. +Eric D. Sprunk , Chief Operating Officer — Mr. Sprunk, 55, joined NIKE in 1993. He was appointed Finance Director and General Manager of the Americas in 1994, Finance Director for NIKE Europe in 1995, Regional General Manager of NIKE Europe Footwear in 1998 and Vice President & General Manager of the Americas in 2000. Mr. Sprunk was appointed Vice President of Global Footwear in 2001, Vice President of Merchandising and Product in 2009 and Chief Operating Officer in 2013. Prior to joining NIKE, Mr. Sprunk was a certified public accountant with Price Waterhouse from 1987 to 1993. +2019 FORM 10-K 7 +Table of Contents \ No newline at end of file diff --git a/raw/filings/0000320187/2018/0000320187-19-000051/item13.txt b/raw/filings/0000320187/2018/0000320187-19-000051/item13.txt new file mode 100644 index 0000000000000000000000000000000000000000..29ae16546e25b038a88a88cefb08e2ef8f678cca --- /dev/null +++ b/raw/filings/0000320187/2018/0000320187-19-000051/item13.txt @@ -0,0 +1,2 @@ +ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE +The information required by Items 404 and 407(a) of Regulation S-K is included under “Election of Directors — Transactions with Related Persons” and “Corporate Governance — Director Independence” in the definitive Proxy Statement for our 2019 Annual Meeting of Shareholders and is incorporated herein by reference. \ No newline at end of file diff --git a/raw/filings/0000320187/2018/0000320187-19-000051/item9a.txt b/raw/filings/0000320187/2018/0000320187-19-000051/item9a.txt new file mode 100644 index 0000000000000000000000000000000000000000..5e5c99ebc8b63ad0385a11075e9adb4bb55a1473 --- /dev/null +++ b/raw/filings/0000320187/2018/0000320187-19-000051/item9a.txt @@ -0,0 +1,6 @@ +ITEM 9A. CONTROLS AND PROCEDURES +We maintain disclosure controls and procedures that are designed to provide reasonable assurance that ensure information required to be disclosed in our Securities Exchange Act of 1934, as amended ("the Exchange Act") reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. +We carry out a variety of ongoing procedures, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, to evaluate the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of May 31, 2019 . +“Management's Annual Report on Internal Control Over Financial Reporting” is included in Item 8 of this Report. +We are continuing several transformation initiatives to centralize and simplify our business processes and systems. These are long-term initiatives, which we believe will enhance our internal control over financial reporting due to increased automation and further integration of related processes. We will continue to monitor our internal control over financial reporting for effectiveness throughout these transformation initiatives. +There have not been any changes in our internal control over financial reporting during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. \ No newline at end of file diff --git a/raw/filings/0000320187/2018/0000320187-19-000051/rp_note.txt b/raw/filings/0000320187/2018/0000320187-19-000051/rp_note.txt new file mode 100644 index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391 diff --git a/raw/filings/0000320187/2018/0000320187-19-000051/rpt_disclosure.txt b/raw/filings/0000320187/2018/0000320187-19-000051/rpt_disclosure.txt new file mode 100644 index 0000000000000000000000000000000000000000..8812ea20fc8439a77e7b18aba61504918008d679 --- /dev/null +++ b/raw/filings/0000320187/2018/0000320187-19-000051/rpt_disclosure.txt @@ -0,0 +1,5 @@ +TRANSACTIONS WITH RELATED PERSONS +Philip H. Knight, the father of NIKE director Travis A. Knight, serves as Chairman Emeritus, which provides a standing invitation for Philip H. Knight to attend meetings of the Board and its committees as a non-voting observer. In fiscal 2020, as Chairman Emeritus, Mr. Knight received an annual salary of $500,000, and medical and dental insurance coverage generally available to employees. +In connection with his retirement and in recognition of his substantial service and unique insights and experience, the Company entered into a consulting agreement with John R. Thompson, Jr., a member of the Company's Board in fiscal 2020. Pursuant to the terms of the agreement, effective June 1, 2020, Mr. Thompson serves as Director Emeritus of the Company and, when and as required by the Board, provides consulting services and advice to the Board and other officers of the Company as the Board may specify until such time as either party terminates the agreement by providing 30 days' written notice. As Director Emeritus, Mr. Thompson is eligible to attend meetings of the Board and certain committees as a non-voting observer. For his services and commitment, the Company will pay Mr. Thompson the same compensation and benefits he would have been eligible to receive for his service as a non-employee director as of June 1, 2020, which equals approximately $267,000, and reimburse him for reasonable expenses incurred in connection with his services. +Eric Sprunk’s daughter, Nicole Sprunk, was employed by the Company in a non-executive role in fiscal 2020 as a Brand Director. During fiscal 2020, the Company paid aggregate compensation to Nicole Sprunk of $330,113, comprised of salary, bonus, the value of stock granted, certain maternity leave benefits and matching contributions to the Company-sponsored retirement plan. The compensation and benefits received by Nicole Sprunk were consistent with compensation paid to other employees holding similar positions. +The Company’s written policy requires the Corporate Responsibility, Sustainability & Governance Committee to review any transaction or proposed transaction with a related person that would be required to be reported under Item 404(a) of Regulation S-K, and to determine whether to ratify or approve the transaction, with ratification or approval to occur only if the committee determines that the transaction is fair to the Company or that approval or ratification of the transaction is in the interest of the Company. \ No newline at end of file diff --git a/raw/filings/0000320187/2019/0000320187-20-000047/filing.txt b/raw/filings/0000320187/2019/0000320187-20-000047/filing.txt new file mode 100644 index 0000000000000000000000000000000000000000..2464f8b4b0c0a5085104e0ee18b7d69c46a3de91 --- /dev/null +++ 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ACT: +Class B Common Stock +NKE +New York Stock Exchange +(Title of each class) +(Trading symbol) +(Name of each exchange on which registered) +SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: +NONE +Indicate by check mark: +YES +NO +• +if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. +þ +¨ +• +if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. +¨ +þ +• +whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. +þ +¨ +• +whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). +þ +¨ +• +whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. +Large accelerated filer +þ +Accelerated filer +☐ +Non-accelerated filer +☐ +Smaller reporting company +☐ +Emerging growth company +☐ +• +if an emerging growth company, if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. +¨ +• +whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. +þ +• +whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). +☐ +þ +As of November 30, 2019, the aggregate market values of the Registrant's Common Stock held by non-affiliates were: +Class A +$ +7,387,322,889 +Class B +116,456,809,401 +$ +123,844,132,290 +As of July 17, 2020, the number of shares of the Registrant's Common Stock outstanding were: +Class A +315,017,252 +Class B +1,244,871,297 +1,559,888,549 +DOCUMENTS INCORPORATED BY REFERENCE: +Parts of Registrant's Proxy Statement for the Annual Meeting of Shareholders to be held on September 17, 2020 are incorporated by reference into Part III of this Report. +Table of Contents +NIKE, INC. +ANNUAL REPORT ON FORM 10-K +TABLE OF CONTE NTS +PAGE +PART I +1 +ITEM 1. +Business +1 +General +1 +Products +1 +Sales and Marketing +2 +United States Market +2 +International Markets +2 +Significant Customer +3 +Product Research, Design and Development +3 +Manufacturing +3 +International Operations and Trade +5 +Competition +5 +Trademarks and Patents +6 +Employees +6 +Information about our Executive Officers +7 +ITEM 1A. +Risk Factors +8 +ITEM 1B. +Unresolved Staff Comments +22 +ITEM 2. +Properties +22 +ITEM 3. +Legal Proceedings +22 +ITEM 4. +Mine Safety Disclosures +22 +PART II +23 +ITEM 5. +Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities +23 +ITEM 6. +Selected Financial Data +25 +ITEM 7. +Management's Discussion and Analysis of Financial Condition and Results of Operations +27 +ITEM 7A. +Quantitative and Qualitative Disclosures about Market Risk +50 +ITEM 8. +Financial Statements and Supplementary Data +52 +ITEM 9. +Changes in and Disagreements with Accountants on Accounting and Financial Disclosure +95 +ITEM 9A. +Controls and Procedures +95 +ITEM 9B. +Other Information +95 +PART III +96 +(Except for the information set forth under “Information about our Executive Officers” in Item 1 above, Part III is incorporated by reference from the Proxy Statement for the NIKE, Inc. 2020 Annual Meeting of Shareholders.) +ITEM 10. +Directors, Executive Officers and Corporate Governance +96 +ITEM 11. +Executive Compensation +96 +ITEM 12. +Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters +96 +ITEM 13. +Certain Relationships and Related Transactions and Director Independence +96 +ITEM 14. +Principal Accountant Fees and Services +96 +PART IV +97 +ITEM 15. +Exhibits and Financial Statement Schedules +97 +ITEM 16. +Form 10-K Summary +101 +Signatures +103 +Table of Contents +PART I +ITEM 1. BUSINESS +GENERAL +NIKE, Inc. was incorporated in 1967 under the laws of the State of Oregon. As used in this report, the terms “we,” “us,” “NIKE” and the “Company” refer to NIKE, Inc. and its predecessors, subsidiaries and affiliates, collectively, unless the context indicates otherwise. Our NIKE digital commerce website is located at www.nike.com . On our NIKE corporate website, located at investors.nike.com , we post the following filings as soon as reasonably practicable after they are electronically filed with, or furnished to, the United States Securities and Exchange Commission (the “SEC”): our annual report on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities and Exchange Act of 1934, as amended. Our definitive Proxy Statements are also posted on our corporate website. All such filings on our corporate website are available free of charge. Copies of these filings are also available on the SEC's website ( www.sec.gov ). Also available on our corporate website are the charters of the committees of our Board of Directors, as well as our corporate governance guidelines and code of ethics; copies of any of these documents will be provided in print to any shareholder who submits a request in writing to NIKE Investor Relations, One Bowerman Drive, Beaverton, Oregon 97005-6453. +Our principal business activity is the design, development and worldwide marketing and selling of athletic footwear, apparel, equipment, accessories and services. NIKE is the largest seller of athletic footwear and apparel in the world. We sell our products directly to consumers through NIKE-owned retail stores and digital platforms (which we refer to collectively as our “NIKE Direct” operations) and to retail accounts and a mix of independent distributors, licensees and sales representatives in virtually all countries around the world. We also offer interactive consumer experiences through our digital platforms. Virtually all of our products are manufactured by independent contractors. Nearly all footwear and apparel products are produced outside the United States, while equipment products are produced both in the United States and abroad. +PRODUCTS +We focus our NIKE Brand product offerings in six key categories: Running, NIKE Basketball, the Jordan Brand, Football (Soccer), Training and Sportswear (our sports-inspired lifestyle products). We also market products designed for kids, as well as for other athletic and recreational uses such as American football, baseball, cricket, golf, lacrosse, skateboarding, tennis, volleyball, walking, wrestling and other outdoor activities. +NIKE's athletic footwear products are designed primarily for specific athletic use, although a large percentage of the products are worn for casual or leisure purposes. We place considerable emphasis on innovation and high-quality construction in the development and manufacturing of our products. Sportswear, the Jordan Brand and Running are currently our top-selling footwear categories and we expect them to continue to lead in footwear sales. +We also sell sports apparel covering the above-mentioned categories, which feature the same trademarks and are sold predominantly through the same marketing and distribution channels as athletic footwear. Our sports apparel, similar to our athletic footwear products, is designed primarily for athletic use and also demonstrates our commitment to innovation and high-quality construction. Sportswear, Training and Running are currently our top-selling apparel categories and we expect them to continue to lead in apparel sales. We often market footwear, apparel and accessories in “collections” of similar use or by category. We also market apparel with licensed college and professional team and league logos. +We sell a line of performance equipment and accessories under the NIKE Brand name, including bags, socks, sport balls, eyewear, timepieces, digital devices, bats, gloves, protective equipment and other equipment designed for sports activities. We also sell small amounts of various plastic products to other manufacturers through our wholly-owned subsidiary, NIKE IHM, Inc., doing business as Air Manufacturing Innovation. +Our Jordan Brand designs, distributes and licenses athletic and casual footwear, apparel and accessories predominantly focused on basketball using the Jumpman trademark. Sales and operating results for Jordan Brand products are reported within the respective NIKE Brand geographic operating segments. +Our wholly-owned subsidiary brand, Converse, headquartered in Boston, Massachusetts, designs, distributes and licenses casual sneakers, apparel and accessories under the Converse, Chuck Taylor, All Star, One Star, Star Chevron and Jack Purcell trademarks. Operating results of the Converse brand are reported on a stand-alone basis. +2020 FORM 10-K 1 +Table of Contents +In addition to the products we sell to our wholesale customers and directly to consumers through our NIKE Direct operations, we have also entered into license agreements that permit unaffiliated parties to manufacture and sell, using NIKE-owned trademarks, certain apparel, digital devices and applications and other equipment designed for sports activities. +SALES AND MARKETING +We experience moderate fluctuations in aggregate sales volume during the year. Historically, revenues in the first and fourth fiscal quarters have slightly exceeded those in the second and third quarters. However, the mix of product sales may vary considerably as a result of changes in seasonal and geographic demand for particular types of footwear, apparel and equipment, as well as other macroeconomic, operating and logistics-related factors, as evidenced by the impact of the COVID-19 pandemic. +Because NIKE is a consumer products company, the relative popularity and availability of various sports and fitness activities, as well as changing design trends, affect the demand for our products. We must, therefore, respond to trends and shifts in consumer preferences by adjusting the mix of existing product offerings, developing new products, styles and categories and influencing sports and fitness preferences through extensive marketing. Failure to respond in a timely and adequate manner could have a material adverse effect on our sales and profitability. This is a continuing risk. Refer to Item 1A. Risk Factors. +We report our NIKE Brand operations based on our internal geographic organization. Each NIKE Brand geographic segment operates predominantly in one industry: the design, development, marketing and selling of athletic footwear, apparel and equipment. The Company's reportable operating segments for the NIKE Brand are: North America; Europe, Middle East & Africa (EMEA); Greater China; and Asia Pacific & Latin America (APLA), and include results for the NIKE and Jordan brands. The Hurley brand results, prior to its divestiture in the beginning of the third quarter of fiscal 2020, are included in North America. Sales through our NIKE Direct operations are managed within each geographic operating segment. +Converse is also a reportable operating segment and operates predominately in one industry: the design, marketing, licensing and selling of casual sneakers, apparel and accessories. Converse direct to consumer operations, including digital commerce, are reported within the Converse operating segment results. +UNITED STATES MARKET +For fiscal 2020 , NIKE Brand and Converse sales in the United States accounted for approximately 39% of total revenues, compared to 41% and 42% for fiscal 2019 and fiscal 2018 , respectively. We sell our NIKE Brand, Jordan Brand and Converse products to thousands of retail accounts in the United States, including a mix of footwear stores, sporting goods stores, athletic specialty stores, department stores, skate, tennis and golf shops and other retail accounts. In the United States, we utilize NIKE sales offices to solicit such sales. During fiscal 2020 , our three largest United States customers accounted for approximately 24% of sales in the United States. +Our NIKE Direct and Converse direct to consumer operations sell NIKE Brand, Jordan Brand and Converse products to consumers through various digital platforms. In addition, our NIKE Direct and Converse direct to consumer operations sell products through the following number of retail stores in the United States: +U.S. RETAIL STORES +NUMBER +NIKE Brand factory stores +212 +NIKE Brand in-line stores (including employee-only stores) +28 +Converse stores (including factory stores) +98 +TOTAL +338 +In the United States, NIKE has seven significant distribution centers. Four are located in Memphis, Tennessee, two of which are owned and two of which are leased. Two other distribution centers, one located in Indianapolis, Indiana and one located in Dayton, Tennessee, are leased and operated by third-party logistics providers. One distribution center for Converse is located in Ontario, California, which is leased. There are other smaller distribution facilities located in various parts of the United States, some of which are leased or operated by third-parties. +INTERNATIONAL MARKETS +For fiscal 2020 , non-U.S. NIKE Brand and Converse sales accounted for approximately 61% of total revenues, compared to 59% and 58% for fiscal 2019 and fiscal 2018 , respectively. We sell our products to retail accounts, through our own NIKE Direct operations and through a mix of independent distributors, licensees and sales representatives around the world. We sell to thousands of retail accounts and ship products from 74 distribution centers outside of the United States. During fiscal 2020 , NIKE's three largest customers outside of the United States accounted for approximately 15% of total non-U.S. sales. +2020 FORM 10-K 2 +Table of Contents +In addition to NIKE and Converse owned digital commerce platforms in over 45 countries, our NIKE Direct and Converse direct to consumer businesses operate the following number of retail stores outside the United States: +NON-U.S. RETAIL STORES +NUMBER +NIKE Brand factory stores +643 +NIKE Brand in-line stores (including employee-only stores) +52 +Converse stores (including factory stores) +63 +TOTAL +758 +International branch offices and subsidiaries of NIKE are located in Argentina, Australia, Austria, Belgium, Bermuda, Brazil, Canada, Chile, China, Croatia, the Czech Republic, Denmark, Finland, France, Germany, Greece, Hong Kong, Hungary, India, Indonesia, Ireland, Israel, Italy, Japan, Korea, Macau, Malaysia, Mexico, the Netherlands, New Zealand, Norway, Panama, the Philippines, Poland, Portugal, Russia, Singapore, Slovakia, Slovenia, South Africa, Spain, Sri Lanka, Sweden, Switzerland, Taiwan, Thailand, Turkey, the United Arab Emirates, the United Kingdom, Uruguay and Vietnam. +SIGNIFICANT CUSTOMER +No customer accounted for 10% or more of our consolidated net Revenues during fiscal 2020 . +PRODUCT RESEARCH, DESIGN AND DEVELOPMENT +We believe our research, design and development efforts are key factors in our success. Technical innovation in the design and manufacturing process of footwear, apparel and athletic equipment receives continued emphasis as we strive to produce products that help to enhance athletic performance, reduce injury and maximize comfort, while reducing waste. +In addition to our own staff of specialists in the areas of biomechanics, chemistry, exercise physiology, engineering, digital technologies, industrial design, sustainability and related fields, we also utilize research committees and advisory boards made up of athletes, coaches, trainers, equipment managers, orthopedists, podiatrists, physicians and other experts who consult with us and review designs, materials, concepts for product and manufacturing process improvements and compliance with product safety regulations around the world. Employee athletes, athletes engaged under sports marketing contracts and other athletes wear-test and evaluate products during the design and development process. +As we continue to develop new technologies, we are simultaneously focused on the design of innovative products and experiences incorporating such technologies throughout our product categories and consumer applications. Using market intelligence and research, our various design teams identify opportunities to leverage new technologies in existing categories to respond to consumer preferences. The proliferation of NIKE Air, Zoom, Free, Flywire, Dri-Fit, Flyknit, Flyweave, FlyEase, ZoomX, React and Adaptive technologies, among others, throughout our Running, NIKE Basketball, Jordan Brand, Football (Soccer), Training and Sportswear categories, as well as Converse, typifies our dedication to designing innovative products. +MANUFACTURING +We are supplied by 122 footwear factories located in 12 countries. Virtually all of our footwear is manufactured outside of the United States by over 15 independent contract manufacturers, which often operate multiple factories. The largest single footwear factory accounted for approximately 9% of total fiscal 2020 NIKE Brand footwear production. For fiscal 2020 , contract factories in Vietnam, Indonesia and China manufactured approximately 50% , 24% and 22% of total NIKE Brand footwear, respectively. We also have manufacturing agreements with independent contract manufacturers in Argentina and India to manufacture footwear for sale primarily within those countries. For fiscal 2020 , four footwear contract manufacturers each accounted for greater than 10% of footwear production and in the aggregate accounted for approximately 61% of NIKE Brand footwear production. +We are supplied by 329 apparel factories located in 38 countries. The largest single apparel factory accounted for approximately 11% of total fiscal 2020 NIKE Brand apparel production. Virtually all of our apparel is manufactured outside of the United States by independent contract manufacturers which often operate multiple factories. For fiscal 2020 , contract factories in Vietnam, China and Cambodia produced approximately 28% , 23% and 12% of total NIKE Brand apparel, respectively. For fiscal 2020 , two apparel contract manufacturers accounted for more than 10% of apparel production, and the top five contract manufacturers in the aggregate accounted for approximately 48% of NIKE Brand apparel production. +The principal materials used in our footwear products are natural and synthetic rubber, plastic compounds, foam cushioning materials, natural and synthetic leather, nylon, polyester and canvas, as well as polyurethane films used to make NIKE Air-Sole cushioning components. During fiscal 2020 , Air Manufacturing Innovation, a wholly-owned subsidiary, with facilities near Beaverton, Oregon, in Dong Nai Province, Vietnam and St. Charles, Missouri, as well as independent contractors in China and +2020 FORM 10-K 3 +Table of Contents +Vietnam, were our suppliers of materials and cushioning components used in footwear. Air Manufacturing Innovation also manufactures and sells small amounts of various other plastic products to other manufacturers. The principal materials used in our apparel products are natural and synthetic fabrics and threads (both virgin and recycled); specialized performance fabrics designed to efficiently wick moisture away from the body, retain heat and repel rain and/or snow; and plastic and metal hardware. NIKE's independent contractors and suppliers buy raw materials for the manufacturing of our footwear, apparel and equipment products. Most raw materials are available and purchased by those independent contractors and suppliers in the countries where manufacturing takes place. NIKE's independent contract manufacturers and suppliers have thus far experienced little difficulty in satisfying raw material requirements for the production of our products. +Since 1972, Sojitz Corporation of America (“Sojitz America”), a large Japanese trading company and the sole owner of our redeemable preferred stock, has performed import-export financing services for us. During fiscal 2020 , Sojitz America provided financing and purchasing services for NIKE Brand products sold in certain NIKE markets including Argentina, Brazil, Canada, India, South Africa and Uruguay, excluding products produced and sold in the same country. Approximately 4% of NIKE Brand sales occurred in those countries. Any failure of Sojitz America to provide these services or any failure of Sojitz America's banks could disrupt our ability to acquire products from our suppliers and to deliver products to our customers in those markets. Such a disruption could result in canceled orders that would adversely affect sales and profitability. However, we believe that any such disruption would be short-term in duration due to the ready availability of alternative sources of financing at competitive rates. +2020 FORM 10-K 4 +Table of Contents +INTERNATIONAL OPERATIONS AND TRADE +Our international operations and sources of supply are subject to the usual risks of doing business abroad, such as the implementation of, or potential changes in, foreign and domestic trade policies, increases in import duties, anti-dumping measures, quotas, safeguard measures, trade restrictions, restrictions on the transfer of funds and, in certain parts of the world, political instability and terrorism. We have not, to date, been materially affected by any such risk, but cannot predict the likelihood of such material effects occurring in the future. +In recent years, uncertain global and regional economic and political conditions have affected international trade and increased protectionist actions around the world. These trends are affecting many global manufacturing and service sectors, and the footwear and apparel industries, as a whole, are not immune. Companies in our industry are facing trade protectionism in many different regions, and in nearly all cases we are working together with industry groups to address trade issues and reduce the impact to the industry, while observing applicable competition laws. Notwithstanding our efforts, protectionist measures have resulted in increases in the cost of our products, and additional measures, if implemented, could adversely affect sales and/or profitability for NIKE, as well as the imported footwear and apparel industry as a whole. +We monitor protectionist trends and developments throughout the world that may materially impact our industry, and we engage in administrative and judicial processes to mitigate trade restrictions. We are actively monitoring actions that may result in additional anti-dumping measures and could affect our industry. We are also monitoring for and advocating against other impediments that may limit or delay customs clearance for imports of footwear, apparel and equipment. NIKE also advocates for trade liberalization for footwear and apparel in a number of regional and bilateral free trade agreements. Changes in U.S. trade policies, including new and potential tariffs or penalties on imported goods, may negatively affect U.S. corporations with production activities outside the U.S., including NIKE. There have also been discussions and commentary regarding retaliatory actions by countries affected by the new tariffs and other changes in U.S. trade policy, and certain foreign governments have instituted or are considering imposing retaliatory measures on certain U.S. goods, which could negatively affect U.S. corporations with business operations and/or consumer markets in those countries. Depending on the extent that certain new or proposed reforms are implemented by the U.S. government and the manner in which foreign governments respond to such reforms, it may become necessary for us to change the way we conduct business, which may adversely affect our results of operations. In addition, with respect to proposed trade restrictions targeting China, which represents an important sourcing country and consumer market for us, we are working with a broad coalition of global businesses and trade associations representing a wide variety of sectors to help ensure that any legislation enacted and implemented (i) addresses legitimate and core concerns, (ii) is consistent with international trade rules and (iii) reflects and considers China's domestic economy and the important role it has in the global economic community. +Where trade protection measures are implemented, we believe that we have the ability to develop, over a period of time, adequate alternative sources of supply for the products obtained from our present suppliers. If events prevented us from acquiring products from our suppliers in a particular country, our operations could be temporarily disrupted and we could experience an adverse financial impact. However, we believe we could abate any such disruption, and that much of the adverse impact on supply would, therefore, be of a short-term nature, although alternate sources of supply might not be as cost-effective and could have an ongoing adverse impact on profitability. +Our international operations are also subject to compliance with the U.S. Foreign Corrupt Practices Act, or "FCPA", and other anti-bribery laws applicable to our operations. We source a significant portion of our products from, and have important consumer markets, outside of the United States, and we have an ethics and compliance program to address compliance with the FCPA and similar laws by us, our employees, agents, suppliers and other partners. +COMPETITION +The athletic footwear, apparel and equipment industry is highly competitive on a worldwide basis. We compete internationally with a significant number of athletic and leisure footwear companies, athletic and leisure apparel companies, sports equipment companies and large companies having diversified lines of athletic and leisure footwear, apparel and equipment, including adidas, Anta, ASICS, Li Ning, lululemon athletica, Puma, Under Armour and V.F. Corporation, among others. The intense competition and the rapid changes in technology and consumer preferences in the markets for athletic and leisure footwear and apparel and athletic equipment, constitute significant risk factors in our operations. +2020 FORM 10-K 5 +Table of Contents +NIKE is the largest seller of athletic footwear and apparel in the world. Important aspects of competition in this industry are: +• +Product attributes such as quality; performance and reliability; new product style, design, innovation and development, as well as consumer price/value. +• +Consumer connection, engagement and affinity for brands and products, developed through marketing, promotion and digital experiences; social media interaction; customer support and service; identification with prominent and influential athletes, influencers, public figures, coaches, teams, colleges and sports leagues who endorse our brands and use our products and active engagement through sponsored sporting events and clinics. +• +Effective sourcing and distribution of products, with attractive merchandising and presentation at retail, both in-store and on digital platforms. +We believe that we are competitive in all of these areas. +TRADEMARKS AND PATENTS +We believe that our intellectual property rights are important to our brand, our success and our competitive position. We strategically pursue available protections of these rights and vigorously protect them against third-party theft and infringement. +We use trademarks on nearly all of our products and believe having distinctive marks that are readily identifiable is an important factor in creating a market for our goods, in identifying our brands and the Company, and in distinguishing our goods from the goods of others. We consider our NIKE and Swoosh Design trademarks to be among our most valuable assets and we have registered these trademarks in almost 170 jurisdictions worldwide. In addition, we own many other trademarks that we use in marketing our products. We own common law rights in the trade dress of several significant shoe designs and elements. For certain trade dress, we have sought and obtained trademark registrations. +We have copyright protection in our design, graphics and other original works. When appropriate, we also obtain registered copyrights. +We file for, own and maintain many U.S. and foreign utility and design patents protecting components, technologies, materials, manufacturing techniques, features, functionality, and industrial and aesthetic designs used in and for the manufacture of various athletic and leisure footwear and apparel, athletic equipment and digital devices and related software applications. These patents expire at various times. +We believe our success depends upon our capabilities in areas such as design, research and development, production and marketing and is supported by our intellectual property rights, such as trademarks, patents and trade secrets, among others. +We have followed a policy of applying for and registering intellectual property rights in the United States and select foreign countries on trademarks, inventions, innovations and designs that we deem valuable. We also continue to vigorously protect our intellectual property, including trademarks, patents and trade secrets against third-party infringement. +EMPLOYEES +As of May 31, 2020 , we had approximately 75,400 employees worldwide, including retail and part-time employees. Management is committed to maintaining an environment where all NIKE employees have the opportunity to reach their full potential. None of our employees are represented by a union, except for certain employees in the APLA geography, where local law requires those employees to be represented by a trade union. Also, in some countries outside of the United States, local laws require employee representation by works councils (which may be entitled to information and consultation on certain Company decisions) or by organizations similar to a union. In certain European countries, we are required by local law to enter into and/or comply with industry-wide or national collective bargaining agreements. NIKE has never experienced a material interruption of operations due to labor disagreements. +2020 FORM 10-K 6 +Table of Contents +INFORMATION ABOUT OUR EXECUTIVE OFFICERS +The executive officers of NIKE, Inc. as of July 24, 2020 are as follows: +Mark G. Parker , Executive Chairman — Mr. Parker, 64, is Executive Chairman of the Board of Directors and served as President and Chief Executive Officer from 2006 - January 2020. He has been employed by NIKE since 1979 with primary responsibilities in product research, design and development, marketing and brand management. Mr. Parker was appointed divisional Vice President in charge of product development in 1987, corporate Vice President in 1989, General Manager in 1993, Vice President of Global Footwear in 1998 and President of the NIKE Brand in 2001. +John J. Donahoe II , President and Chief Executive Officer — Mr. Donahoe, 60, was appointed President and Chief Executive Officer in January 2020 and has been a director since 2014. He brings expertise in digital commerce, technology and global strategy. He previously served as President and Chief Executive Officer at ServiceNow, Inc. Prior to joining ServiceNow, Inc., he served as President and Chief Executive Officer of eBay, Inc. He also held leadership roles at Bain & Company for two decades. +Andrew Campion , Chief Operating Officer — Mr. Campion, 48, joined NIKE in 2007 as Vice President of Global Planning and Development, leading strategic and financial planning. He was appointed Chief Financial Officer of the NIKE Brand in 2010, responsible for leading all aspects of financial management for the Company's flagship brand. In 2014, he was appointed Senior Vice President, Strategy, Finance and Investor Relations. Mr. Campion assumed the role of Executive Vice President and Chief Financial Officer in August 2015. In April 2020, he was appointed Chief Operating Officer and leads NIKE's global technology and digital transformation, demand and supply management, manufacturing, distribution and logistics, sustainability, workplace design and connectivity, and procurement. Prior to joining NIKE, he held leadership roles in strategic planning, mergers and acquisitions, financial planning and analysis, operations and planning, investor relations and tax at The Walt Disney Company. +Matthew Friend , Executive Vice President and Chief Financial Officer — Mr. Friend, 42, joined NIKE in 2009 as Senior Director of Corporate Strategy and Development, and was appointed Chief Financial Officer of Emerging Markets in 2011. In 2014, Mr. Friend was appointed Chief Financial Officer of Global Categories, Product and Functions, and was subsequently appointed Chief Financial Officer of the NIKE Brand in 2016. He was also appointed Vice President of Investor Relations in 2019. Mr. Friend was appointed as Executive Vice President and Chief Financial Officer of NIKE, Inc. in April 2020. Prior to joining NIKE, he worked in the financial industry including roles as VP of investment banking and mergers and acquisitions at Goldman Sachs and Morgan Stanley. +Hilary K. Krane , Executive Vice President, Chief Administrative Officer and General Counsel — Ms. Krane, 56, joined NIKE as Vice President and General Counsel in 2010. In 2011, her responsibilities expanded, and she became Vice President, General Counsel and Corporate Affairs. Ms. Krane was appointed Executive Vice President, Chief Administrative Officer and General Counsel in 2013. Prior to joining NIKE, Ms. Krane was General Counsel and Senior Vice President for Corporate Affairs at Levi Strauss & Co. from 2006 to 2010. From 1996 to 2006, she was a Partner and Assistant General Counsel at PricewaterhouseCoopers LLP. +Monique S. Matheson , Executive Vice President, Global Human Resources — Ms. Matheson, 53, joined NIKE in 1998, with primary responsibilities in the human resources function. She was appointed as Vice President and Senior Business Partner in 2011 and Vice President, Chief Talent and Diversity Officer in 2012. Ms. Matheson was appointed Executive Vice President, Global Human Resources in 2017. +Heidi O'Neill , President of Consumer and Marketplace — Ms. O'Neill, 55, joined NIKE in 1998, and held a variety of leadership roles, including President of NIKE Direct, where she was responsible for NIKE's connection to its consumer globally through the Company's retail and digital-commerce business. She also led NIKE's women's business for seven years, growing it into a multi-billion dollar business, and leading the Company's North America apparel business as VP/GM. Ms. O'Neill was appointed as President of Consumer and Marketplace in April 2020 and is responsible for NIKE's Direct business, including all stores, e-commerce and apps globally. +2020 FORM 10-K 7 +Table of Contents +ITEM 1A. RISK FACTORS +Special Note Regarding Forward-Looking Statements and Analyst Reports +Certain written and oral statements, other than purely historic information, including estimates, projections, statements relating to NIKE's business plans, objectives and expected operating results and the assumptions upon which those statements are based, made or incorporated by reference from time to time by NIKE or its representatives in this report, other reports, filings with the SEC, press releases, conferences or otherwise, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements include, without limitation, any statement that may predict, forecast, indicate or imply future results, performance or achievements, and may contain the words “believe,” “anticipate,” “expect,” “estimate,” “project,” “will be,” “will continue,” “will likely result” or words or phrases of similar meaning. Forward-looking statements involve risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. The risks and uncertainties are detailed from time to time in reports filed by NIKE with the SEC, including reports filed on Forms 8-K, 10-Q and 10-K, and include, among others, the following: health epidemics, pandemics and similar outbreaks, including the COVID-19 pandemic; international, national and local political, civil, economic and market conditions; the size and growth of the overall athletic footwear, apparel and equipment markets; intense competition among designers, marketers, distributors and sellers of athletic footwear, apparel and equipment for consumers and endorsers; demographic changes; changes in consumer preferences; popularity of particular designs, categories of products and sports; seasonal and geographic demand for NIKE products; difficulties in anticipating or forecasting changes in consumer preferences, consumer demand for NIKE products and the various market factors described above; difficulties in implementing, operating and maintaining NIKE's increasingly complex information technology systems and controls, including, without limitation, the systems related to demand and supply planning and inventory control; interruptions in data and information technology systems; consumer data security; fluctuations and difficulty in forecasting operating results, including, without limitation, the fact that advance orders may not be indicative of future revenues due to changes in shipment timing, the changing mix of orders with shorter lead times, and discounts, order cancellations and returns; the ability of NIKE to sustain, manage or forecast its growth and inventories; the size, timing and mix of purchases of NIKE's products; increases in the cost of materials, labor and energy used to manufacture products; new product development and introduction; the ability to secure and protect trademarks, patents and other intellectual property; product performance and quality; customer service; adverse publicity, including without limitation, through social media or in connection with brand damaging events; the loss of significant customers or suppliers; dependence on distributors and licensees; business disruptions; increased costs of freight and transportation to meet delivery deadlines; increases in borrowing costs due to any decline in NIKE's debt ratings; changes in business strategy or development plans; general risks associated with doing business outside of the United States, including, without limitation, exchange rate fluctuations, inflation, import duties, tariffs, quotas, political and economic instability and terrorism; the potential impact of new laws, regulations or policy, including, without limitation, tariffs, import/export, trade and immigration regulations or policies; changes in government regulations; the impact of, including business and legal developments relating to, climate change and natural disasters; litigation, regulatory proceedings, sanctions or any other claims asserted against NIKE; the ability to attract and retain qualified employees, and any negative public perception with respect to key personnel or our corporate culture, values or purpose; the effects of NIKE's decision to invest in or divest of businesses and other factors referenced or incorporated by reference in this report and other reports. +Risk Factors +The risks included here are not exhaustive. Other sections of this report may include additional factors which could adversely affect NIKE's business and financial performance. Moreover, NIKE operates in a very competitive and rapidly changing environment. New risks emerge from time to time and it is not possible for management to predict all such risks, nor can it assess the impact of all such risks on NIKE's business or the extent to which any risk, or combination of risks, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results. +Investors should also be aware that while NIKE does, from time to time, communicate with securities analysts, it is against NIKE's policy to disclose to them any material non-public information or other confidential commercial information. Accordingly, shareholders should not assume that NIKE agrees with any statement or report issued by any analyst irrespective of the content of the statement or report. Furthermore, NIKE has a policy against confirming financial forecasts or projections issued by others. Thus, to the extent that reports issued by securities analysts contain any projections, forecasts or opinions, such reports are not the responsibility of NIKE. +Our financial condition and results of operations have been and are expected to continue to be adversely affected by the coronavirus pandemic. +A n ovel strain of coronavirus (COVID-19) was first identified in Wuhan, China in December 2019, and subsequently declared a pandemic by the World Health Organization. To date, this pandemic and preventative measures taken to contain or mitigate the pandemic have caused, and are expected to continue to cause, business slowdown or shutdown in affected areas and significant disruption in the +2020 FORM 10-K 8 +Table of Contents +financial markets, both globally and in the United States. These events have led to and could continue to lead to a decline in discretionary spending by consumers, and in turn materially impact, our business, sales, financial condition and results of operations. We have experienced a negative i mpact on our sales, operations and financial results, and we cannot predict the degree to, or the time period over, which our sales, operations and financial results will continue to be affected by the pandemic and preventative measures. Risks presented by the COVID-19 pandemic include, but are not limited to: +• +Deterioration in economic conditions in the United States and globally; +• +Reduced consumer demand for our products as consumers seek to reduce or delay discretionary spending in response to the impacts of COVID-19, including as a result of a rise in unemployment rates and diminished consumer confidence; +• +Cancellation or postponement of sports seasons and sporting events in multiple countries, including in the United States, and bans on large public gatherings, which have reduced consumer spending on our products and could impact the effectiveness of our arrangements with key endorsers; +• +Decreased retail traffic as a result of store closures, reduced operating hours, social distancing restrictions and/or changes in consumer behavior; +• +The risk that any safety protocols in NIKE-owned or affiliated facilities will not be effective or not be perceived as effective, or that any virus-related illnesses will be linked or alleged to be linked to such facilities, whether accurate or not; +• +Incremental costs resulting from the adoption of preventative measures, including providing facial coverings and hand sanitizer, rearranging operations to follow social distancing protocols, conducting temperature checks and undertaking regular and thorough disinfecting of surfaces; +• +Disruption to our distribution centers and our third-party manufacturing partners and other vendors, including through the effects of facility closures, reductions in operating hours, labor shortages, and real time changes in operating procedures, including for additional cleaning and disinfection procedures; +• +Bankruptcies or other financial difficulties facing our wholesale customers, which could cause them to be unable to make or delay making payments to us, or result in cancellation or reduction of their orders; +• +Operational risk, including but not limited to cybersecurity risks, as a result of extended workforce remote work arrangements, and restrictions on employee travel; +• +Impacts to our distribution and logistics providers' ability to operate or increases in their operating costs. These supply chain effects may have an adverse effect on our ability to meet consumer demand, including digital demand, and could result in an increase in our costs of production and distribution, including increased freight and logistics costs and other expenses; and +• +Significant disruption of and volatility in global financial markets, which could have a negative impact on our ability to access capital in the future. +We continue to monitor the latest developments regarding the pandemic and have made certain assumptions regarding the pandemic for purposes of our operating, financial and tax planning projections, including assumptions regarding the duration and severity of the pandemic and the global macroeconomic impacts of the pandemic. However, we are unable to accurately predict the extent of the impact of the pandemic on our business, operations and financial condition due to the uncertainty of future developments. In particular, we believe the ultimate impacts on our business, results of operations, cash flows and financial condition will depend on, among other things, the further spread and duration of COVID-19, the requirements to take action to help limit the spread of the illness, the availability, safety and efficacy of a vaccine and treatments for COVID-19 and the economic impacts of the pandemic. Even in those regions where we are beginning to experience business recovery should those regions fail to fully contain COVID-19 or suffer a COVID-19 relapse, those markets may not recover as quickly or at all, which could have a material adverse effect on our business and results of operations. The pandemic may also affect our business, operations or financial condition in a manner that is not presently known to us or that we currently do not consider to present significant risks. +In addition, the impact of COVID-19 may also exacerbate other risks discussed in this Item 1A. Risk Factors, any of which could have a material effect on us. +Global economic conditions could have a material adverse effect on our business, operating results and financial condition. +The uncertain state of the global economy continues to impact businesses around the world. If global economic and financial market conditions further deteriorate or do not improve, the following factors could have a material adverse effect on our business, operating results and financial condition: +• +Our sales are impacted by discretionary spending by consumers. Declines in consumer spending may result in reduced demand for our products, increased inventories, reduced orders from retailers for our products, order cancellations, lower revenues, higher discounts and lower gross margins. +• +In the future, we may be unable to access financing in the credit and capital markets at reasonable rates in the event we find it desirable to do so. +2020 FORM 10-K 9 +Table of Contents +• +We conduct transactions in various currencies, which creates exposure to fluctuations in foreign currency exchange rates relative to the U.S. Dollar. Continued volatility in the markets and exchange rates for foreign currencies and contracts in foreign currencies could have a significant impact on our reported operating results and financial condition. +• +Continued volatility in the availability and prices for commodities and raw materials we use in our products and in our supply chain (such as cotton or petroleum derivatives) could have a material adverse effect on our costs, gross margins and profitability. +• +If retailers of our products experience declining revenues or experience difficulty obtaining financing in the capital and credit markets to purchase our products, this could result in reduced orders for our products, order cancellations, late retailer payments, extended payment terms, higher accounts receivable, reduced cash flows, greater expense associated with collection efforts and increased bad debt expense. +• +If retailers of our products experience severe financial difficulty, some may become insolvent and cease business operations, which could negatively impact the sale of our products to consumers. +If contract manufacturers of our products or other participants in our supply chain experience difficulty obtaining financing in the capital and credit markets to purchase raw materials or to finance capital equipment and other general working capital needs, it may result in delays or non-delivery of shipments of our products. +Our products, services and experiences face intense competition. +NIKE is a consumer products company and the relative popularity of various sports and fitness activities and changing design trends affect the demand for our products. The athletic footwear, apparel and equipment industry is highly competitive both in the United States and worldwide. We compete internationally with a significant number of athletic and leisure footwear companies, athletic and leisure apparel companies, sports equipment companies, private labels and large companies that have diversified lines of athletic and leisure footwear, apparel and equipment. We also compete with other companies for the production capacity of independent manufacturers that produce our products. Our NIKE Direct operations, both through our digital commerce operations and retail stores, also compete with multi-brand retailers, which sell our products through their digital platforms and physical stores, and with digital commerce platforms. In addition, we compete with respect to the digital experiences we are able to offer our consumers. +Product offerings, technologies, marketing expenditures (including expenditures for advertising and endorsements), pricing, costs of production, customer service, digital commerce platforms, digital services and experiences and social media presence are areas of intense competition. This, in addition to ongoing rapid changes in technology, a reduction in barriers to the creation of new footwear and apparel companies and consumer preferences in the markets for athletic and leisure footwear and apparel, athletic equipment, services and experiences, constitute significant risk factors in our operations. In addition, the competitive nature of retail, including shifts in the ways in which consumers shop, and the continued proliferation of digital commerce, constitutes a risk factor implicating our NIKE Direct and wholesale operations. If we do not adequately and timely anticipate and respond to our competitors, our costs may increase, demand for our products may decline, possibly significantly, or we may need to reduce wholesale or suggested retail prices for our products. +Failure to maintain our reputation, brand image and culture could negatively impact our business. +Our iconic brands have worldwide recognition, and our success depends on our ability to maintain and enhance our brand image and reputation. Maintaining, promoting and growing our brands will depend on our design and marketing efforts, including advertising and consumer campaigns, product innovation and product quality. Our commitment to product innovation and quality and our continuing investment in design (including materials) and marketing may not have the desired impact on our brand image and reputation. In addition, our success in maintaining, extending and expanding our brand image depends on our ability to adapt to a rapidly changing media environment, including our increasing reliance on social media and digital dissemination of advertising campaigns on our digital platforms and through our digital experiences. We could be adversely impacted if we fail to achieve any of these objectives. +Our brand value also depends on our ability to maintain a positive consumer perception of our corporate integrity, purpose and brand culture. Negative claims or publicity involving us, our culture and values, our products, services and experiences, consumer data, or any of our key employees, endorsers, sponsors or suppliers could seriously damage our reputation and brand image, regardless of whether such claims are accurate. For example, while we require our suppliers of our products to operate their business in compliance with applicable laws and regulations, we do not control their practices. Negative publicity relating to a violation or an alleged violation of policies or laws by such suppliers could damage our brand image and diminish consumer trust in our brand. Social media, which accelerates and potentially amplifies the scope of negative publicity, can increase the challenges of responding to negative claims. Adverse publicity about regulatory or legal action against us, or by us, could also damage our reputation and brand image, undermine consumer confidence in us and reduce long-term demand for our products, even if the regulatory or legal action is unfounded or not material to our operations. If the reputation, culture or image of any of our brands is tarnished or if we receive negative publicity, then our sales, financial condition and results of operations could be materially and adversely affected. +2020 FORM 10-K 10 +Table of Contents +Our business is affected by seasonality, which could result in fluctuations in our operating results. +We experience moderate fluctuations in aggregate sales volume during the year. Historically, revenues in the first and fourth fiscal quarters have slightly exceeded those in the second and third fiscal quarters. However, the mix of product sales may vary considerably from time to time as a result of changes in seasonal or COVID-19 related cancellations or postponements and geographic demand for particular types of footwear, apparel and equipment and in connection with the timing of significant sporting events, such as the NBA Finals, Olympics or the World Cup, among others. In addition, our customers may cancel orders, change delivery schedules or change the mix of products ordered with minimal notice. As a result, we may not be able to accurately predict our quarterly sales. Accordingly, our results of operations are likely to fluctuate significantly from period to period. This seasonality, along with other factors that are beyond our control, including economic conditions, changes in consumer preferences, weather conditions, outbreaks of disease, social or political unrest, availability of import quotas, transportation disruptions and currency exchange rate fluctuations, could adversely affect our business and cause our results of operations to fluctuate. Our operating margins are also sensitive to a number of additional factors that are beyond our control, including manufacturing and transportation costs, shifts in product sales mix and geographic sales trends, all of which we expect to continue. Results of operations in any period should not be considered indicative of the results to be expected for any future period. +If we are unable to anticipate consumer preferences and develop new products, we may not be able to maintain or increase our revenues and profits. +Our success depends on our ability to identify, originate and define product trends as well as to anticipate, gauge and react to changing consumer demands in a timely manner. However, lead times for many of our products may make it more difficult for us to respond rapidly to new or changing product trends or consumer preferences. All of our products are subject to changing consumer preferences that cannot be predicted with certainty. Our new products may not receive consumer acceptance as consumer preferences could shift rapidly to different types of performance products or away from these types of products altogether, and our future success depends in part on our ability to anticipate and respond to these changes. If we fail to anticipate accurately and respond to trends and shifts in consumer preferences by adjusting the mix of existing product offerings, developing new products, designs, styles and categories, and influencing sports and fitness preferences through extensive marketing, we could experience lower sales, excess inventories or lower profit margins, any of which could have an adverse effect on our results of operations and financial condition. In addition, we market our products globally through a diverse spectrum of advertising and promotional programs and campaigns, including social media, mobile applications and online advertising. If we do not successfully market our products or if advertising and promotional costs increase, these factors could have an adverse effect on our business, financial condition and results of operations. +We rely on technical innovation and high-quality products to compete in the market for our products. +Technical innovation and quality control in the design and manufacturing process of footwear, apparel and athletic equipment is essential to the commercial success of our products. Research and development play a key role in technical innovation. We rely upon specialists in the fields of biomechanics, chemistry, exercise physiology, engineering, digital technologies, industrial design, sustainability and related fields, as well as research committees and advisory boards made up of athletes, coaches, trainers, equipment managers, orthopedists, podiatrists and other experts to develop and test cutting-edge performance products. While we strive to produce products that help to enhance athletic performance, reduce injury and maximize comfort, if we fail to introduce technical innovation in our products, consumer demand for our products could decline, and if we experience problems with the quality of our products, we may incur substantial expense to remedy the problems and loss of consumer confidence. +Failure to continue to obtain or maintain high-quality endorsers of our products could harm our business. +We establish relationships with professional athletes, sports teams and leagues, as well as other public figures, including artists, designers and influencers, to develop, evaluate and promote our products, as well as establish product authenticity with consumers. However, as competition in our industry has increased, the costs associated with establishing and retaining such sponsorships and other relationships have increased. If we are unable to maintain our current associations with professional athletes, sports teams and leagues, or other public figures, or to do so at a reasonable cost, we could lose the high visibility or on-field authenticity associated with our products, and we may be required to modify and substantially increase our marketing investments. As a result, our brands, net revenues, expenses and profitability could be harmed. +Furthermore, if certain endorsers were to stop using our products contrary to their endorsement agreements, our business could be adversely affected. In addition, actions taken or statements made by athletes, teams or leagues, or other endorsers, associated with our products that harm the reputations of those athletes, teams or leagues, or endorsers, could also seriously harm our brand image with consumers and, as a result, could have an adverse effect on our sales and financial condition. In addition, poor performance by our endorsers, a failure to continue to correctly identify promising athletes, public figures or sports organizations, to use and endorse our products or a failure to enter into cost-effective endorsement arrangements with prominent athletes, public figures and sports organizations could adversely affect our brand, sales and profitability. +2020 FORM 10-K 11 +Table of Contents +Economic factors beyond our control, and changes in the global economic environment, including fluctuations in inflation and currency exchange rates, could result in lower revenues, higher costs and decreased margins and earnings. +A majority of our products are manufactured and sold outside of the United States, and we conduct purchase and sale transactions in various currencies, which creates exposure to the volatility of global economic conditions, including fluctuations in inflation and foreign currency exchange rates. Additionally, there has been, and may continue to be, volatility in currency exchange rates as a result of the United Kingdom's exit from the European Union, commonly referred to as “Brexit” or new or proposed U.S. policy changes that impact the U.S. Dollar value relative to other international currencies. Our international revenues and expenses generally are derived from sales and operations in foreign currencies, and these revenues and expenses could be affected by currency fluctuations, specifically amounts recorded in foreign currencies and translated into U.S. Dollars for consolidated financial reporting, as weakening of foreign currencies relative to the U.S. Dollar adversely affects the U.S. Dollar value of the Company's foreign currency-denominated sales and earnings. Currency exchange rate fluctuations could also disrupt the business of the independent manufacturers that produce our products by making their purchases of raw materials more expensive and more difficult to finance. Foreign currency fluctuations have adversely affected and could continue to have an adverse effect on our results of operations and financial condition. +We may hedge certain foreign currency exposures to lessen and delay, but not to completely eliminate, the effects of foreign currency fluctuations on our financial results. Since the hedging activities are designed to lessen volatility, they not only reduce the negative impact of a stronger U.S. Dollar or other trading currency, but they also reduce the positive impact of a weaker U.S. Dollar or other trading currency. Our future financial results could be significantly affected by the value of the U.S. Dollar in relation to the foreign currencies in which we conduct business. The degree to which our financial results are affected for any given time period will depend in part upon our hedging activities. +We may be adversely affected by the financial health of our customers. +We extend credit to our customers based on an assessment of a customer's financial condition, generally without requiring collateral. To assist in the scheduling of production and the shipping of our products, we offer certain customers the opportunity to place orders five to six months ahead of delivery under our futures ordering program. These advance orders may be canceled under certain conditions, and the risk of cancellation may increase when dealing with financially unstable retailers or retailers struggling with economic uncertainty. In the past, some customers have experienced financial difficulties up to and including bankruptcies, which have had an adverse effect on our sales, our ability to collect on receivables and our financial condition. When the retail economy weakens or as consumer behavior shifts, retailers may be more cautious with orders. A slowing or changing economy in our key markets could adversely affect the financial health of our customers, which in turn could have an adverse effect on our results of operations and financial condition. In addition, product sales are dependent in part on high quality merchandising and an appealing retail environment to attract consumers, which requires continuing investments by retailers. Retailers that experience financial difficulties may fail to make such investments or delay them, resulting in lower sales and orders for our products. +Failure to accurately forecast consumer demand could lead to excess inventories or inventory shortages, which could result in decreased operating margins, reduced cash flows and harm to our business. +To meet anticipated demand for our products, we purchase products from manufacturers outside of our futures ordering program and in advance of customer orders, which we hold in inventory and resell to customers. There is a risk we may be unable to sell excess products ordered from manufacturers. Inventory levels in excess of customer demand may result in inventory write-downs, and the sale of excess inventory at discounted prices could significantly impair our brand image and have an adverse effect on our operating results, financial condition and cash flows. Conversely, if we underestimate consumer demand for our products or if our manufacturers fail to supply products we require at the time we need them, we may experience inventory shortages. Inventory shortages might delay shipments to customers, negatively impact retailer, distributor and consumer relationships and diminish brand loyalty. The difficulty in forecasting demand also makes it difficult to estimate our future results of operations, financial condition and cash flows from period to period. A failure to accurately predict the level of demand for our products could adversely affect our net revenues and net income, and we are unlikely to forecast such effects with any certainty in advance. +Our NIKE Direct operations have required and will continue to require a substantial investment and commitment of resources and are subject to numerous risks and uncertainties. +Our NIKE Direct operations, including our retail stores and digital platforms, have required and will continue to require significant investment. Our NIKE Direct stores have required and will continue to require substantial fixed investment in equipment and leasehold improvements and personnel. We have entered into substantial operating lease commitments for retail space. Certain stores have been designed and built to serve as high-profile venues to promote brand awareness and marketing activities and to integrate with our digital platforms. Because of their unique design and technological elements, locations and size, these stores require substantially more investment than other stores. Due to the high fixed-cost structure associated with our NIKE Direct retail stores, a decline in sales, a shift in consumer behavior away from brick-and-mortar retail, or the closure, temporary or +2020 FORM 10-K 12 +Table of Contents +otherwise, or poor performance of individual or multiple stores could result in significant lease termination costs, write-offs of equipment and leasehold improvements and employee-related costs. +Many factors unique to retail operations, some of which are beyond our control, pose risks and uncertainties. Risks include, but are not limited to: credit card fraud; mismanagement of existing retail channel partners; and inability to manage costs associated with store construction and operation. +In addition, we have made significant investments in digital technologies and information systems for the digital aspect of our NIKE Direct operations, and our digital offerings will require co ntinued investment in the development and upgrading of our technology platforms. In order to deliver high-quality digital experiences, our digital platforms must be designed effectively and work well with a range of other technologies, systems, networks, and standards that we do not control. We may not be successful in developing platforms that operate effectively with these technologies, systems, networks or standards. A growing portion of consumers access our NIKE Direct digital platforms, but in the event that it is more difficult for consumers to access and use our digital platforms, consumers find that our digital platforms do not effectively meet their needs or expectations or consumers choose not to access or use our digital platforms or use devices that do not offer access to our platforms, the success of our NIKE Direct operations could be adversely impacted. Our competitors may develop, or have already developed, digital experiences, features, content, services or technologies that are similar to ours or that achieve greater acceptance. +We may not realize a satisfactory return on our investment in our NIKE Direct operations and management's attention from our other business opportunities could be diverted, which could have an adverse effect on our business, financial condition or results of operations. +If the technology-based systems that give our consumers the ability to shop or interact with us online do not function effectively, our operating results, as well as our ability to grow our digital commerce business globally or to retain our customer base, could be materially adversely affected. +Many of our consumers shop with us through our digital platforms. Increasingly, consumers are using mobile-based devices and applications to shop online with us and with our competitors, and to do comparison shopping, as well as to engage with us and our competitors through digital experiences that are offered on mobile platforms. We are increasingly using social media and proprietary mobile applications to interact with our consumers and as a means to enhance their shopping experience. Any failure on our part to provide attractive, effective, reliable, user-friendly digital commerce platforms that offer a wide assortment of merchandise with rapid delivery options and that continually meet the changing expectations of online shoppers or any failure to provide attractive digital experiences to our customers could place us at a competitive disadvantage, result in the loss of digital commerce and other sales, harm our reputation with consumers, have a material adverse impact on the growth of our digital commerce business globally and could have a material adverse impact on our business and results of operations. In addition, as use of our digital platforms continues to grow, we will need an increasing amount of technical infrastructure to continue to satisfy our consumers' needs. If we fail to continue to effectively scale and adapt our digital platforms to accommodate increased consumer demand, our business may be subject to interruptions, delays or failures and consumer demand for our products and digital experiences could decline. +Risks specific to our digital commerce business also include diversion of sales from our and our retailers' brick and mortar stores, difficulty in recreating the in-store experience through direct channels and liability for online content. Our failure to successfully respond to these risks might adversely affect sales in our digital commerce business, as well as damage our reputation and brands. +We rely significantly on information technology to operate our business, including our supply chain and retail operations, and any failure, inadequacy or interruption of that technology could harm our ability to effectively operate our business. +We are heavily dependent on information technology systems and networks, including the Internet and third-party services (“Information Technology Systems”), across our supply chain, including product design, production, forecasting, ordering, manufacturing, transportation, sales and distribution, as well as for processing financial information for external and internal reporting purposes, retail operations and other business activities. Information Technology Systems are critical to many of our operating activities and our business processes and may be negatively impacted by any service interruption or shutdown. For example, our ability to effectively manage and maintain our inventory and to ship products to customers on a timely basis depends significantly on the reliability of these Information Technology Systems. Over a number of years, we have implemented Information Technology Systems in all of the geographical regions in which we operate. Our work to integrate, secure and enhance these systems and related processes in our global operations is ongoing and NIKE will continue to invest in these efforts. We cannot provide assurance, however, that the measures we take to secure and enhance these systems will be sufficient to protect our Information Technology Systems and prevent cyber-attacks, system failures or data or information loss. The failure of these systems to operate effectively, including as a result of security breaches, viruses, hackers, malware, natural disasters, vendor business interruptions or other causes, or failure to properly maintain, protect, repair or upgrade systems, or problems with transitioning to upgraded or replacement systems could cause delays in product fulfillment and reduced efficiency of our operations, could require significant capital investments to remediate the problem which may not be sufficient to cover all +2020 FORM 10-K 13 +Table of Contents +eventualities, and may have an adverse effect on our reputation, results of operations and financial condition. Further, like other companies in the retail industry, we have in the past experienced, and we expect to continue to experience, cyber-attacks, including phishing, and other attempts to breach, or gain unauthorized access to, our systems. To date, these attacks have not had a material impact on our operations, but we cannot provide assurance that they will not have an impact in the future. +We also use Information Technology Systems to process financial information and results of operations for internal reporting purposes and to comply with regulatory financial reporting, legal and tax requirements. If Information Technology Systems suffer severe damage, disruption or shutdown and our business continuity plans, or those of our vendors, do not effectively resolve the issues in a timely manner, we could experience delays in reporting our financial results, which could result in lost revenues and profits, as well as reputational damage. Furthermore, we depend on Information Technology Systems and personal data collection for digital marketing, digital commerce, consumer engagement and the marketing and use of our digital products and services. We also rely on our ability to engage in electronic communications throughout the world between and among our employees as well as with other third parties, including customers, suppliers, vendors and consumers. Any interruption in Information Technology Systems may impede our ability to engage in the digital space and result in lost revenues, damage to our reputation, and loss of users. +We are subject to a complex array of laws and regulations and litigation and other legal and regulatory proceedings, which could have an adverse effect on our business, financial condition and results of operations. +As a multinational corporation with operations and distribution channels throughout the world, we are subject to and must comply with extensive laws and regulations in the United States and other jurisdictions in which we have operations and distribution channels. If we or our employees, agents, suppliers, and other partners fail to comply with any of these laws or regulations, such failure could subject us to fines, sanctions or other penalties that could negatively affect our reputation, business, financial condition and results of operations. We are involved in various types of claims, lawsuits, regulatory proceedings and government investigations relating to our business, our products and the actions of our employees and representatives, including contractual and employment relationships, product liability, antitrust, trademark rights and a variety of other matters. It is not possible to predict with certainty the outcome of any such legal or regulatory proceedings or investigations, and we could in the future incur judgments, fines or penalties, or enter into settlements of lawsuits and claims that could have a material adverse effect on our business, financial condition and results of operations and negatively impact our reputation. The global nature of our business means legal and compliance risks, such as anti-bribery, anti-corruption, fraud, trade, environmental, competition, privacy and other regulatory matters, will continue to exist and additional legal proceedings and other contingencies will arise from time to time, which could adversely affect us. In addition, the adoption of new laws or regulations, or changes in the interpretation of existing laws or regulations, may result in significant unanticipated legal and reputational risks. Any current or future legal or regulatory proceedings could divert management's attention from our operations and result in substantial legal fees. +Changes to U.S. or other countries' trade policies and tariff and import/export regulations or our failure to comply with such regulations may have a material adverse effect on our reputation, business, financial condition and results of operations. +Changes in U.S. or international social, political, regulatory and economic conditions could impact our business, financial condition and results of operations. In particular, political and economic instability, geopolitical conflicts, political unrest, civil strife, terrorist activity, acts of war, public corruption, expropriation and other economic or political uncertainties in the United States or internationally could interrupt and negatively affect the sale of our products or other business operations. Any negative sentiment toward the United States as a result of any such changes could also adversely affect our business. +In addition, changes in laws and policies governing foreign trade, manufacturing, development and investment in the territories or countries where we currently sell our products or conduct our business could adversely affect our business. The U.S. presidential administration has instituted or proposed changes in trade policies that include the negotiation or termination of trade agreements, the imposition of higher tariffs on imports into the U.S., economic sanctions on individuals, corporations or countries, and other government regulations affecting trade between the U.S. and other countries where we conduct our business. It may be time-consuming and expensive for us to alter our business operations in order to adapt to or comply with any such changes. +Changes or proposed changes in U.S. or other countries' trade policies may result in restrictions and economic disincentives on international trade. Tariffs and other changes in U.S. trade policy have in the past and could in the future trigger retaliatory actions by affected countries, and certain foreign governments have instituted or are considering imposing retaliatory measures on certain U.S. goods. Further, any emerging protectionist or nationalist trends either in the United States or in other countries could affect the trade environment. The Company, similar to many other multinational corporations, does a significant amount of business that would be impacted by changes to the trade policies of the United States and foreign countries (including governmental action related to tariffs, international trade agreements, or economic sanctions). Such changes have the potential to adversely impact the U.S. economy or certain sectors thereof or the economy of another country in which we conduct operations, our industry and the global demand for our products, and as a result, could have a material adverse effect on our business, financial condition and results of operations. +2020 FORM 10-K 14 +Table of Contents +Failure to adequately protect or enforce our intellectual property rights could adversely affect our business. +We periodically discover counterfeit reproductions of our products or products that otherwise infringe our intellectual property rights. If we are unsuccessful in enforcing our intellectual property rights, continued sales of these products could adversely affect our sales and our brand and could result in a shift of consumer preference away from our products. +The actions we take to establish and protect our intellectual property rights may not be adequate to prevent imitation of our products by others. We also may be unable to prevent others from seeking to block sales of our products as violations of proprietary rights. +We may be subject to liability if third parties successfully claim we infringe on their intellectual property rights. Defending infringement claims could be expensive and time-consuming and might result in our entering into costly license agreements. We also may be subject to significant damages or injunctions against development, use, importation and/or sale of certain products. +We take various actions to prevent the unauthorized use and/or disclosure of our confidential information and intellectual property rights. These actions include contractual measures such as entering into non-disclosure and non-compete agreements and agreements relating to our collaborations with third parties and providing confidential information awareness training. Our controls and efforts to prevent unauthorized use and/or disclosure of confidential information and intellectual property rights might not always be effective. For example, confidential information related to business strategy, innovations, new technologies, mergers and acquisitions, unpublished financial results or personal data could be prematurely, inadvertently, or improperly used and/or disclosed, resulting in a loss of reputation, loss of intellectual property rights, a decline in our stock price and/or a negative impact on our market position, and could lead to damages, fines, penalties or injunctions. +In addition, the laws of certain countries may not protect or allow enforcement of intellectual property rights to the same extent as the laws of the United States. We may face significant expenses and liability in connection with the protection of our intellectual property rights, including outside the United States, and if we are unable to successfully protect our rights or resolve intellectual property conflicts with others, our business or financial condition may be adversely affected. +We are subject to data security and privacy risks that could negatively affect our results, operations or reputation. +In addition to our own sensitive and proprietary business information, we handle transactional and personal information about our wholesale customers and consumers and users of our digital experiences, which include online distribution channels and product engagement, adaptive products and personal fitness applications. Hackers and data thieves are increasingly sophisticated and operate social engineering, such as phishing, and large-scale, complex automated attacks that can evade detection for long periods of time. Any breach of our or our service providers' network, or other vendor systems, may result in the loss of confidential business and financial data, misappropriation of our consumers', users' or employees' personal information or a disruption of our business. Any of these outcomes could have a material adverse effect on our business, including unwanted media attention, impairment of our consumer and customer relationships, damage to our reputation; resulting in lost sales and consumers, fines, lawsuits, or significant legal and remediation expenses. We also may need to expend significant resources to protect against, respond to and/or redress problems caused by any breach. +In addition, we must comply with increasingly complex and rigorous, and sometimes conflicting, regulatory standards enacted to protect business and personal data in the United States, Europe and elsewhere. For example, the European Union adopted the General Data Protection Regulation (the “GDPR”), which became effective on May 25, 2018; and California passed the California Consumer Privacy Act (the "CCPA") which became effective on January 1, 2020. These laws impose additional obligations on companies regarding the handling of personal data and provide certain individual privacy rights to persons whose data is stored. Compliance with existing, proposed and recently enacted laws (including implementation of the privacy and process enhancements called for under GDPR and CCPA) and regulations can be costly and time consuming, and any failure to comply with these regulatory standards could subject us to legal and reputational risks. Misuse of or failure to secure personal information could also result in violation of data privacy laws and regulations, proceedings against the Company by governmental entities or others, imposition of fines by governmental authorities and damage to our reputation and credibility and could have a negative impact on revenues and profits. +Our international operations involve inherent risks which could result in harm to our business. +Virtually all of our athletic footwear and apparel is manufactured outside of the United States, and the majority of our products are sold outside of the United States. Accordingly, we are subject to the risks generally associated with global trade and doing business abroad, which include foreign laws and regulations, varying consumer preferences across geographic regions, political unrest, disruptions or delays in cross-border shipments and changes in economic conditions in countries in which our products are manufactured or where we sell products. This includes, for example, the uncertainty surrounding the effect of Brexit, including changes to the legal and regulatory framework that apply to the United Kingdom and its relationship with the European Union, as well as new and proposed changes affecting tax laws and trade policy in the United States and elsewhere as further described below under “We could be subject to changes in tax rates, adoption of new tax laws, additional tax liabilities or increased volatility in our effective tax rate” and “Changes to U.S. or other countries' trade policies and tariff and import/export regulations or our failure to comply with such regulations may have a material adverse effect on our reputation, business, financial condition and +2020 FORM 10-K 15 +Table of Contents +results of operations.” The U.S. presidential administration has indicated a focus on policy reforms that discourage U.S. corporations from outsourcing manufacturing and production activities to foreign jurisdictions, including through tariffs or penalties on goods manufactured outside the United States, which may require us to change the way we conduct business and adversely affect our results of operations. The administration has also targeted the specific practices of certain U.S. multinational corporations in public statements which, if directed at us, could harm our reputation or otherwise negatively impact our business. +In addition, disease outbreaks, including the current COVID-19 pandemic, terrorist acts and military conflict have increased the risks of doing business abroad. These factors, among others, could affect our ability to manufacture products or procure materials, our ability to import products, our ability to sell products in international markets and our cost of doing business. If any of these or other factors make the conduct of business in a particular country undesirable or impractical, our business could be adversely affected. In addition, many of our imported products are subject to duties, tariffs or quotas that affect the cost and quantity of various types of goods imported into the United States and other countries. Any country in which our products are produced or sold may eliminate, adjust or impose new quotas, duties, tariffs, safeguard measures, anti-dumping duties, cargo restrictions to prevent terrorism, restrictions on the transfer of currency, climate change legislation, product safety regulations or other charges or restrictions, any of which could have an adverse effect on our results of operations and financial condition. +Furthermore, we are subject to the U.S. Foreign Corrupt Practices Act as well as the anti-corruption laws of other countries in which we operate. Although we implement policies and procedures designed to promote compliance with these laws, our employees, contractors and agents, as well as those companies to which we outsource certain of our business operations, may take actions in violation of our policies. Any such violation could result in sanctions or other penalties and have an adverse effect on our business, reputation and operating results. +Our products are subject to risks associated with overseas sourcing, manufacturing and financing. +The principal materials used in our apparel products — natural and synthetic fabrics and threads, specialized performance fabrics designed to efficiently wick moisture away from the body, retain heat or repel rain and/or snow as well as plastic and metal hardware — are available in countries where our manufacturing takes place. The principal materials used in our footwear products — natural and synthetic rubber, plastic compounds, foam cushioning materials, natural and synthetic leather, natural and synthetic fabrics and threads, nylon, canvas and polyurethane films — are also locally available to manufacturers. Both our apparel and footwear products are dependent upon the ability of our unaffiliated contract manufacturers to locate, train, employ and retain adequate personnel. NIKE contractors and suppliers buy raw materials and are subject to wage rates that are oftentimes regulated by the governments of the countries in which our products are manufactured. +There could be a significant disruption in the supply of fabrics or raw materials from current sources or, in the event of a disruption, our contract manufacturers might not be able to locate alternative suppliers of materials of comparable quality at an acceptable price or at all. Further, our unaffiliated contract manufacturers have experienced and may continue to experience in the future, unexpected increases in work wages, whether government mandated or otherwise and increases in compliance costs due to governmental regulation concerning certain metals used in the manufacturing of our products. In addition, we cannot be certain that our unaffiliated manufacturers will be able to fill our orders in a timely manner. If we experience significant increases in demand, or reductions in the availability of materials, or need to replace an existing manufacturer, there can be no assurance additional supplies of fabrics or raw materials or additional manufacturing capacity will be available when required on terms acceptable to us, or at all, or that any supplier or manufacturer would allocate sufficient capacity to us in order to meet our requirements. In addition, even if we are able to expand existing or find new manufacturing or sources of materials, we may encounter delays in production and added costs as a result of the time it takes to train suppliers and manufacturers in our methods, products, quality control standards and labor, health and safety standards. Any delays, interruption or increased costs in labor or wages, or the supply of materials or manufacture of our products could have an adverse effect on our ability to meet retail customer and consumer demand for our products and result in lower revenues and net income both in the short- and long-term. +Because independent manufacturers make a majority of our products outside of our principal sales markets, our products must be transported by third parties over large geographic distances. Delays in the shipment or delivery of our products due to the availability of transportation, work stoppages, port strikes, infrastructure congestion or other factors, and costs and delays associated with consolidating or transitioning between manufacturers, could adversely impact our financial performance. In addition, manufacturing delays or unexpected demand for our products may require us to use faster, but more expensive, transportation methods such as air freight, which could adversely affect our profit margins. The cost of oil is a significant component in manufacturing and transportation costs, so increases in the price of petroleum products can adversely affect our profit margins. Changes in U.S. trade policies, including new and potential changes to import tariffs and existing trade policies and agreements, could also have a significant impact on our activities in foreign jurisdictions, and could adversely affect our results of operations. +In addition, Sojitz America performs import-export financing services and purchasing services for NIKE Brand products sold in certain countries and any failure of Sojitz America to provide these services or any failure of Sojitz America's banks could have an +2020 FORM 10-K 16 +Table of Contents +adverse effect on our ability to acquire products from our suppliers and to deliver products to our customers in the countries in which Sojitz provides services, which could in turn adversely affect our sales and profitability. +We could be subject to changes in tax rates, adoption of new tax laws, additional tax liabilities or increased volatility in our effective tax rate. +We are subject to the tax laws in the United States and numerous foreign jurisdictions. Current economic and political conditions make tax laws and regulations, or their interpretation and application, in any jurisdiction subject to significant change. +We earn a substantial portion of our income in foreign countries and are subject to the tax laws of those jurisdictions. For example, effective January 1, 2020, the tax law in the Netherlands, one of the Company's major jurisdictions, changed. +Other proposals to reform foreign tax laws could significantly impact how U.S. multinational corporations are taxed on foreign earnings. Although we cannot predict whether or in what form these proposals will pass, several of the proposals considered, if enacted into law, could have an adverse impact on our income tax expense and cash flows. +Portions of our operations are subject to a reduced tax rate or are free of tax under various tax holidays and rulings. We also utilize tax rulings and other agreements to obtain certainty in treatment of certain tax matters. These holidays and rulings expire in whole or in part from time to time and may be extended when certain conditions are met, or terminated if certain conditions are not met. The impact of any changes in conditions would be the loss of certainty in treatment thus potentially impacting our effective income tax rate. For example, in January 2019, the European Commission opened a formal investigation to examine whether the Netherlands has breached State Aid rules when granting certain tax rulings to the Company. If this matter is adversely resolved, the Netherlands may be required to assess additional amounts with respect to current and prior periods and the Company's Netherlands income taxes in the future could increase. +We are also subject to the examination of our tax returns by the United States Internal Revenue Service (“IRS”) and other tax authorities. We regularly assess the likelihood of an adverse outcome resulting from these examinations to determine the adequacy of its provision for income taxes. Although we believe our tax provisions are adequate, the final determination of tax audits and any related disputes could be materially different from our historical income tax provisions and accruals. The results of audits or related disputes could have an adverse effect on our financial statements for the period or periods for which the applicable final determinations are made. For example, we and our subsidiaries are also engaged in a number of intercompany transactions across multiple tax jurisdictions. Although we believe we have clearly reflected the economics of these transactions and the proper local transfer pricing documentation is in place, tax authorities may propose and sustain adjustments that could result in changes that may impact our mix of earnings in countries with differing statutory tax rates. +Consolidation of retailers or concentration of retail market share among a few retailers may increase and concentrate our credit risk and impair our ability to sell products. +The athletic footwear, apparel and equipment retail markets in some countries are dominated by a few large athletic footwear, apparel and equipment retailers with many stores and accelerating digital commerce capabilities. The market shares of these retailers may increase through acquisitions and construction of additional stores and investments in digital capacity, and as a result of attrition as struggling retailers exit the market. Consolidation of our retailers will concentrate our credit risk with a smaller set of retailers, any of whom may experience declining sales or a shortage of liquidity, including as a result of the COVID-19 pandemic. In addition, increasing market share concentration among a few retailers in a particular country or region increases the risk that if any one of them substantially reduces their purchases of our products, we may be unable to find sufficient retail outlets for our products to sustain the same level of sales and revenues. +We are subject to the risk our licensees may not generate expected sales or maintain the value of our brands. +We currently license, and expect to continue licensing, certain of our proprietary rights, such as trademarks or copyrighted material, to third parties. If our licensees fail to successfully market and sell licensed products, or fail to obtain sufficient capital or effectively manage their business operations, customer relationships, labor relationships, supplier relationships or credit risks, it could adversely affect our revenues, both directly from reduced royalties received and indirectly from reduced sales of our other products. +We also rely on our licensees to help preserve the value of our brands. Although we attempt to protect our brands through approval rights over the design, production processes, quality, packaging, merchandising, distribution, advertising and promotion of our licensed products, we cannot completely control the use of our licensed brands by our licensees. The misuse of a brand by or negative publicity involving a licensee could have a material adverse effect on that brand and on us. +Failure of our contractors or our licensees' contractors to comply with our code of conduct, local laws and other standards could harm our business. +We work with hundreds of contractors outside of the United States to manufacture our products, and we also have license agreements that permit unaffiliated parties to manufacture or contract for the manufacture of products using our intellectual property. We require the contractors that directly manufacture our products and our licensees that make products using our intellectual property (including, indirectly, their contract manufacturers) to comply with a code of conduct and other environmental, +2020 FORM 10-K 17 +Table of Contents +health and safety standards for the benefit of workers. We also require our direct contractors and the contractors of our licensees to comply with applicable standards for product safety. Notwithstanding their contractual obligations, from time to time contractors may not comply with such standards or applicable local law or our licensees may fail to enforce such standards or applicable local law on their contractors. If one or more of our direct or indirect contractors violates or fails to comply with or is accused of violating or failing to comply with such standards and laws, this could harm our reputation or result in a product recall and, as a result, could have an adverse effect on our sales and financial condition. Negative publicity regarding production methods, alleged unethical or illegal practices or workplace or related conditions of any of our suppliers, manufacturers or licensees could adversely affect our brand image and sales, force us to locate alternative suppliers, manufacturers or licenses or result in the imposition of additional regulations, including new or additional quotas, tariffs, product safety regulations or other regulatory measures, by governmental authorities. +If one or more of our counterparty financial institutions default on their obligations to us or fail, we may incur significant losses. +As part of our hedging activities, we enter into transactions involving derivative financial instruments, which may include forward contracts, commodity futures contracts, option contracts, collars and swaps with various financial institutions. In addition, we have significant amounts of cash, cash equivalents and other investments on deposit or in accounts with banks or other financial institutions in the United States and abroad. As a result, we are exposed to the risk of default by or failure of counterparty financial institutions. The risk of counterparty default or failure may be heightened during economic downturns and periods of uncertainty in the financial markets. If one of our counterparties were to become insolvent or file for bankruptcy, our ability to recover losses incurred as a result of default, or our assets deposited or held in accounts with such counterparty, may be limited by the counterparty's liquidity or the applicable laws governing the insolvency or bankruptcy proceedings. In the event of default or failure of one or more of our counterparties, we could incur significant losses, which could negatively impact our results of operations and financial condition. +We rely on a concentrated source base of contract manufacturers to supply a significant portion of our footwear products. +NIKE is supplied by 122 footwear factories located in 12 countries. We do not own or operate any of the footwear manufacturing facilities and depend upon independent contract manufacturers to manufacture all of the footwear products we sell. In fiscal 2020 , four footwear contract manufacturers each accounted for greater than 10% of fiscal 2020 footwear production and in aggregate accounted for approximately 61% of NIKE Brand footwear production in fiscal 2020 . Our ability to meet our customers' needs depends on our ability to maintain a steady supply of products from our independent contract manufacturers. If one or more of our significant suppliers were to sever their relationship with us or significantly alter the terms of our relationship, including due to changes in applicable trade policies, or be unable to perform, including as a result of the COVID-19 pandemic, we may not be able to obtain replacement products in a timely manner, which could have a material adverse effect on our sales, financial condition or results of operations. Additionally, if any of our primary contract manufacturers fail to make timely shipments, do not meet our quality standards or otherwise fail to deliver us product in accordance with our plans, there could be a material adverse effect on our results of operations. +Certain of our manufacturers are highly specialized and only produce a specific type of product. Such manufacturing partners may go out of business if consumer preferences or market conditions change such that there is no longer sufficient demand for the types of products they produce. If, in the future, the relevant products are again in demand and the specialized manufacturers no longer exist, we may not be able to locate replacement facilities to manufacture certain products in a timely manner or at all, which could have a material adverse effect on our sales, financial condition or results of operations. +Our success depends on our global distribution facilities. +We distribute our products to customers directly from the factory and through distribution centers located throughout the world. Our ability to meet customer expectations, manage inventory, complete sales and achieve objectives for operating efficiencies and growth, particularly in emerging markets, depends on the proper operation of our distribution facilities, the development or expansion of additional distribution capabilities and the timely performance of services by third parties (including those involved in shipping product to and from our distribution facilities). Our distribution facilities have in the past and could be interrupted by information technology problems, disasters such as earthquakes or fires or outbreaks of disease or government actions taken to mitigate their spread. Any significant failure in our distribution facilities could result in an adverse effect on our business. We maintain business interruption insurance, but it may not adequately protect us from adverse effects caused by significant disruptions in our distribution facilities. +The market for prime real estate is competitive. +Our ability to effectively obtain real estate to open new retail stores and otherwise conduct our operations, both domestically and internationally, depends on the availability of real estate that meets our criteria for traffic, square footage, co-tenancies, lease economics, demographics and other factors. We also must be able to effectively renew our existing real estate leases. In addition, from time to time, we seek to downsize, consolidate, reposition or close some of our real estate locations, which may require modification of an existing lease. Failure to secure adequate new locations or successfully modify leases for existing +2020 FORM 10-K 18 +Table of Contents +locations, or failure to effectively manage the profitability of our existing fleet of retail stores, could have an adverse effect on our operating results and financial condition. +Additionally, the economic environment may make it difficult to determine the fair market rent of real estate properties domestically and internationally. This could impact the quality of our decisions to exercise lease options at previously negotiated rents and to renew expiring leases at negotiated rents. Any adverse effect on the quality of these decisions could impact our ability to retain real estate locations adequate to meet our targets or efficiently manage the profitability of our existing fleet of stores, which could have an adverse effect on our operating results and financial condition. +Extreme weather conditions and natural disasters could negatively impact our operating results and financial condition. +Extreme weather conditions in the areas in which our retail stores, suppliers, manufacturers, customers, distribution centers, headquarters and vendors are located could adversely affect our operating results and financial condition. Moreover, natural disasters such as earthquakes, hurricanes and tsunamis, whether occurring in the United States or abroad, and their related consequences and effects, including energy shortages and public health issues, have in the past temporarily disrupted, and could in the future disrupt, our operations, the operations of our vendors, manufacturers and other suppliers or have in the past and could result in economic instability that may negatively impact our operating results and financial condition. In particular, if a natural disaster were to occur in an area in which we or our suppliers, manufacturers, customers, distribution centers and vendors are located, our continued success would depend, in part, on the safety and availability of the relevant personnel and facilities and proper functioning of our or third parties' computer, telecommunication and other systems and operations. In addition, a severe weather event could negatively impact retail traffic to our stores or stores that carry our products and could have an adverse impact on consumer spending, any of which could in turn result in negative point-of-sale trends for our merchandise. Further, climate change may increase both the frequency and severity of extreme weather conditions and natural disasters, which may affect our business operations, either in a particular region or globally, as well as the activities of our third-party vendors and other suppliers, manufacturers and customers. In addition, the physical changes prompted by climate change could result in changes in regulations or consumer preferences, which could in turn affect our business, operating results and financial condition. We believe the diversity of locations in which we operate, our operational size and our Information Technology Systems position us well, but if we were to experience a local or regional disaster or other business continuity event, we could still experience operational challenges, in particular depending upon how a local or regional event may affect our human capital across our operations or with regard to particular aspects of our operations, such as key executive officers or personnel. Further, if we are unable to find alternative suppliers, replace capacity at key manufacturing or distribution locations or quickly repair damage to our Information Technology Systems or supply systems, we could be late in delivering, or be unable to deliver, products to our customers. These events could result in reputational damage, lost sales, cancellation charges or markdowns, all of which could have an adverse effect on our business, results of operations and financial condition. +Our financial results may be adversely affected if substantial investments in businesses and operations fail to produce expected returns. +From time to time, we may invest in technology, business infrastructure, new businesses, product offering and manufacturing innovation and expansion of existing businesses, such as our NIKE Direct operations, which require substantial cash investments and management attention. We believe cost-effective investments are essential to business growth and profitability; however, significant investments are subject to typical risks and uncertainties inherent in developing a new business or expanding an existing business. The failure of any significant investment to provide expected returns or profitability could have a material adverse effect on our financial results and divert management attention from more profitable business operations. See also “ Our NIKE Direct operations have required and will continue to require a substantial investment and commitment of resources and are subject to numerous risks and uncertainties .” +The success of our business depends, in part, on high-quality employees, including key personnel as well as our ability to maintain our workplace culture and values. +Our success depends in part on the continued service of high-quality employees, including key executive officers and personnel. The loss of the services of key individuals, or any negative perception with respect to these individuals, or our workplace culture or values, could harm our business. Our success also depends on our ability to recruit, retain and engage our personnel sufficiently, both to maintain our current business and to execute our strategic initiatives. Competition for employees in our industry is intense and we may not be successful in attracting and retaining such personnel. In addition, shifts in U.S. immigration policy could negatively impact our ability to attract, hire and retain highly skilled employees who are from outside the United States. W e also believe that our corporate culture has been a key driver of our success, and we have invested substantial time and resources in building, maintaining and evolving our culture. Any failure to preserve and evolve our culture could negatively affect our future success, including our ability to retain and recruit employees. +2020 FORM 10-K 19 +Table of Contents +Our business operations and financial performance could be adversely affected by changes in our relationship with our workforce or changes to United States or foreign employment regulations. +We have significant exposure to changes in domestic and foreign laws governing our relationships with our workforce, including wage and hour laws and regulations, fair labor standards, minimum wage requirements, overtime pay, unemployment tax rates, workers' compensation rates, citizenship requirements and payroll taxes, which could have a direct impact on our operating costs. A significant increase in minimum wage or overtime rates in countries where we have workforces could have a significant impact on our operating costs and may require that we relocate those operations or take other steps to mitigate such increases, all of which may cause us to incur additional costs. There is also a risk of potential claims that we have violated laws related to discrimination and harassment, health and safety, wage and hour laws, criminal activity, personal injury and other claims. In addition, if there were a significant increase in the number of members of our workforce who are members of labor organizations or become parties to collective bargaining agreements, we could be vulnerable to a strike, work stoppage or other labor action, which could have an adverse effect on our business. +The sale of a large number of shares of common stock by our principal stockholder could depress the market price of our common stock. +As of June 30, 2020, Swoosh, LLC beneficially owned approximately 75% of our Class A Common Stock. If, on June 30, 2020, all of these shares were converted into Class B Common Stock, the commensurate ownership percentage of our Class B Common Stock would be approximately 16%. The shares are available for resale, subject to the requirements of the U.S. securities laws and the terms of the limited liability company agreement governing Swoosh, LLC. The sale or prospect of a sale of a substantial number of these shares could have an adverse effect on the market price of our common stock. Swoosh, LLC was formed by Philip H. Knight, our Chairman Emeritus, to hold the majority of his shares of Class A Common Stock. Swoosh, LLC is controlled by Mr. Knight's son and NIKE director, Travis Knight. +Changes in our credit ratings or macroeconomic conditions may affect our liquidity, increasing borrowing costs and limiting our financing options. +Our long-term debt is currently rated Investment Grade by Standard & Poor's and Moody's Investors Service. If our credit ratings are lowered, borrowing costs for our existing facilities or for future long-term debt or short-term credit facilities may increase and our financing options, including our access to the unsecured credit market or the capital markets, could be adversely affected. We may also be subject to restrictive covenants that would reduce our flexibility to, among other things, incur additional indebtedness, make restricted payments, pledge assets as security, make investments, loans, advances, guarantees and acquisitions, undergo fundamental changes and enter into transactions with affiliates. Failure to comply with such covenants could result in a default, and as a result, the commitments of our lenders under our credit agreements may be terminated and the maturity of amounts owed may be accelerated. In addition, macroeconomic conditions, such as increased volatility or disruption in the credit markets, could adversely affect our ability to refinance existing debt. +If our internal controls are ineffective, our operating results could be adversely affected. +Our internal control over financial reporting may not prevent or detect misstatements because of its inherent limitations, including the possibility of human error, the circumvention or overriding of controls or fraud. Even effective internal controls can provide only reasonable assurance with respect to the preparation and fair presentation of financial statements. If we fail to maintain the adequacy of our internal controls, including any failure to implement required new or improved controls, or if we experience difficulties in their implementation, our business and operating results could be harmed and we could fail to meet our financial reporting obligations. +If our estimates or judgments relating to our critical accounting policies prove to be incorrect, our operating results could be adversely affected. +The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. We base our estimates on historical experience and on various other assumptions we believe to be reasonable under the circumstances, as provided in “Management's Discussion and Analysis of Financial Condition and Results of Operations.” The results of these estimates form the basis for making judgments about the carrying values of assets, liabilities and equity, and the amount of revenues and expenses that are not readily apparent from other sources. Significant assumptions and estimates used in preparing our consolidated financial statements include those related to revenue recognition, inventory reserves, contingent payments under endorsement contracts, accounting for property, plant and equipment and definite-lived assets, hedge accounting for derivatives, stock-based compensation, income taxes and other contingencies. Our operating results may be adversely affected if our assumptions change or if actual circumstances differ from those in our assumptions, which could cause our operating results to fall below the expectations of securities analysts and investors, resulting in a decline in the price of our Class B Common Stock. +2020 FORM 10-K 20 +Table of Contents +Anti-takeover provisions may impair an acquisition of the Company or reduce the price of our common stock. +There are provisions within our articles of incorporation and Oregon law intended to protect shareholder interests by providing the Board of Directors a means to attempt to deny coercive takeover attempts or to negotiate with a potential acquirer in order to obtain more favorable terms. Such provisions include a control share acquisition statute, a freeze-out statute, two classes of stock that vote separately on certain issues, and the fact that holders of Class A Common Stock elect three-quarters of the Board of Directors rounded down to the next whole number. However, such provisions could discourage, delay or prevent an unsolicited merger, acquisition or other change in control of our company that some shareholders might believe to be in their best interests or in which shareholders might receive a premium for their common stock over the prevailing market price. These provisions could also discourage proxy contests for control of the Company. +We may fail to meet market expectations, which could cause the price of our stock to decline. +Our Class B Common Stock is traded publicly, and at any given time various securities analysts follow our financial results and issue reports on us. These reports include information about our historical financial results as well as analysts' opinions of our future performance, which may, in part, be based upon any guidance we have provided. Analysts' estimates are often different from our estimates or expectations. If our operating results are below the estimates or expectations of public market analysts and investors, our stock price could decline. In the past, securities class action litigation has been brought against NIKE and other companies following a decline in the market price of their securities. If our stock price is volatile for any reason, we may become involved in this type of litigation in the future. Any litigation could result in reputational damage, substantial costs and a diversion of management's attention and resources needed to successfully run our business. +2020 FORM 10-K 21 +Table of Contents +ITEM 1B. UNRESOLVED STAFF COMMENTS +None. +ITEM 2. PROPERTIES +The following is a summary of principal properties owned or leased by NIKE: +The NIKE World Campus, owned by NIKE and located near Beaverton, Oregon, USA, is an approximately 400-acre site consisting of over 40 buildings which, together with adjacent leased properties, functions as our world headquarters and is occupied by approximately 12,800 employees engaged in management, research, design, development, marketing, finance and other administrative functions serving nearly all of our segments. We lease a similar, but smaller, administrative facility in Hilversum, the Netherlands, which serves as the headquarters for our Europe, Middle East & Africa geography and management of certain brand functions for our non-U.S. operations. We also lease an office complex in Shanghai, China, our headquarters for our Greater China geography, occupied by employees focused on implementing our wholesale, NIKE Direct and merchandising strategies in the region, among other functions. +In the United States, NIKE has seven significant distribution centers. Four are located in Memphis, Tennessee, two of which are owned and two of which are leased. Two other distribution centers, one located in Indianapolis, Indiana and one located in Dayton, Tennessee, are leased and operated by third-party logistics providers. One distribution center for Converse is located in Ontario, California, which is leased. NIKE has a number of distribution facilities outside the United States, some of which are leased and operated by third-party logistics providers. The most significant distribution facilities outside the United States are located in Laakdal, Belgium; Taicang, China; Tomisato, Japan and Incheon, Korea, all of which we own, as well as in Suzhou, China, which is leased and operated by a third-party logistics provider. +Air Manufacturing Innovation manufactures cushioning components used in footwear at NIKE-owned and leased facilities located near Beaverton, Oregon, and in Dong Nai Province, Vietnam, as well as at NIKE-owned facilities in St. Charles, Missouri. +Aside from the principal properties described above, we lease many offices worldwide for sales and administrative purposes. We lease 1,091 retail stores worldwide, which primarily consist of factory stores. See “United States Market” and “International Markets” for additional information regarding our retail stores. Our leases expire at various dates through the year 2043 . +ITEM 3. LEGAL PROCEEDINGS +There are no material pending legal proceedings, other than ordinary routine litigation incidental to our business, to which we are a party or of which any of our property is the subject. +ITEM 4. MINE SAFETY DISCLOSURES +Not applicable. +2020 FORM 10-K 22 +Table of Contents +PART II +ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES +NIKE's Class B Common Stock is listed on the New York Stock Exchange and trades under the symbol NKE. At July 17, 2020, there were 23,114 holders of record of NIKE's Class B Common Stock and 14 holders of record of NIKE's Class A Common Stock. These figures do not include beneficial owners who hold shares in nominee name. The Class A Common Stock is not publicly traded, but each share is convertible upon request of the holder into one share of Class B Common Stock. Refer to Selected Quarterly Financial Data in Part II, Item 6 of this Report for dividends declared on the Class A and Class B Common Stock. +In June 2018, the Board of Directors approved a four-year, $15 billion share repurchase program. As of May 31, 2020 , the Company had repurchased 45.2 million shares at an average price of $89.00 per share for a total approximate cost of $4.0 billion under this program. +All share repurchases were made under NIKE's publicly announced program and there are no other programs under which the Company repurchases shares. The following table presents a summary of share repurchases made during the quarter ended May 31, 2020 : +PERIOD +TOTAL NUMBER OF SHARES PURCHASED +AVERAGE PRICE +PAID PER SHARE +APPROXIMATE DOLLAR +VALUE OF SHARES THAT +MAY YET BE PURCHASED +UNDER THE PLANS +OR PROGRAMS +(IN MILLIONS) +March 1 — March 31, 2020 +1,872,265 +$ +85.08 +$ +10,981 +April 1 — April 30, 2020 +— +$ +— +$ +10,981 +May 1 — May 31, 2020 +— +$ +— +$ +10,981 +1,872,265 +$ +85.08 +2020 FORM 10-K 23 +Table of Contents +PERFORMANCE GRAPH +The following graph demonstrates a five-year comparison of cumulative total returns for NIKE's Class B Common Stock; the Standard & Poor's 500 Stock Index; the Standard & Poor's Apparel, Accessories & Luxury Goods Index; and the Dow Jones U.S. Footwear Index. The graph assumes an investment of $100 on May 31, 2015 in each of the indices and our Class B Common Stock. Each of the indices assumes that all dividends were reinvested on the day of issuance. +COMPARISON OF 5-YEAR CUMULATIVE TOTAL RETURN AMONG NIKE, INC.; S&P 500 INDEX; THE DOW JONES U.S. FOOTWEAR INDEX; AND S&P APPAREL, ACCESSORIES & LUXURY GOODS INDEX +The Dow Jones U.S. Footwear Index consists of NIKE, Deckers Outdoor Corporation, Skechers U.S.A., Inc., Steven Madden, Ltd. and Wolverine World Wide, Inc. Because NIKE is part of the Dow Jones U.S. Footwear Index, the price and returns of NIKE stock have a substantial effect on this index. The Standard & Poor's Apparel, Accessories & Luxury Goods Index consists of Hanesbrands Inc., PVH Corporation, Ralph Lauren Corporation, Tapestry, Inc., Under Armour, Inc. and V.F. Corporation. The Dow Jones U.S. Footwear Index and the Standard & Poor's Apparel, Accessories & Luxury Goods Index include companies in two major lines of business in which the Company competes. The indices do not encompass all of the Company's competitors, nor all product categories and lines of business in which the Company is engaged. +The stock performance shown on the performance graph above is not necessarily indicative of future performance. The Company will not make or endorse any predictions as to future stock performance. +The performance graph above is being furnished solely to accompany this Report pursuant to Item 201(e) of Regulation S-K, is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing. +2020 FORM 10-K 24 +Table of Contents +ITEM 6. SELECTED FINANCIAL DATA +All share and per share amounts are reflective of the two-for-one stock split that began trading at the split-adjusted price on December 24, 2015. +(In millions, except per share data and financial ratios) +FINANCIAL HISTORY +2020 +2019 +2018 +2017 +2016 +Year Ended May 31, +Revenues (1) +$ +37,403 +$ +39,117 +$ +36,397 +$ +34,350 +$ +32,376 +Gross profit +16,241 +17,474 +15,956 +15,312 +14,971 +Gross margin (1) +43.4 +% +44.7 +% +43.8 +% +44.6 +% +46.2 +% +Net income (1)(2) +2,539 +4,029 +1,933 +4,240 +3,760 +Earnings per common share: (2) +Basic +1.63 +2.55 +1.19 +2.56 +2.21 +Diluted +1.60 +2.49 +1.17 +2.51 +2.16 +Weighted average common shares outstanding +1,558.8 +1,579.7 +1,623.8 +1,657.8 +1,697.9 +Diluted weighted average common shares outstanding +1,591.6 +1,618.4 +1,659.1 +1,692.0 +1,742.5 +Cash dividends declared per common share +0.955 +0.86 +0.78 +0.70 +0.62 +Cash provided (used) by operations (1) +2,485 +5,903 +4,955 +3,846 +3,399 +At May 31, +Cash and equivalents (3) +$ +8,348 +$ +4,466 +$ +4,249 +$ +3,808 +$ +3,138 +Short-term investments +439 +197 +996 +2,371 +2,319 +Inventories (1) +7,367 +5,622 +5,261 +5,055 +4,838 +Working capital +12,272 +8,659 +9,094 +10,587 +9,667 +Operating lease right-of-use assets, net (4) +3,097 +— +— +— +— +Total assets (4)(5)(6) +31,342 +23,717 +22,536 +23,259 +21,379 +Long-term debt (3) +9,406 +3,464 +3,468 +3,471 +1,993 +Total operating lease liabilities (4) +3,358 +— +— +— +— +Redeemable preferred stock +0.3 +0.3 +0.3 +0.3 +0.3 +Shareholders' equity (6) +8,055 +9,040 +9,812 +12,407 +12,258 +Market capitalization +153,553 +120,951 +114,983 +87,084 +92,867 +Financial Ratios: +Return on equity (2)(6) +29.7 +% +42.7 +% +17.4 +% +34.4 +% +30.1 +% +Return on assets (2)(3)(4)(5)(6) +9.2 +% +17.4 +% +8.4 +% +19.0 +% +17.5 +% +Inventory turns +3.3 +4.0 +4.0 +3.8 +3.8 +Current ratio at May 31 (3)(4) +2.5 +2.1 +2.5 +2.9 +2.8 +Price/Earnings ratio at May 31 (2) +61.6 +31.0 +61.4 +21.1 +25.6 +(1) +Fiscal 2020 reflects the impacts of COVID-19 on our results of operations and financial condition. Refer to Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations for additional information. +(2) +Fiscal 2018 reflects the impact from the enactment of the U.S. Tax Cuts and Jobs Act. Refer to Note 9 — Income Taxes in the accompanying Notes to the Consolidated Financial Statements for additional information. +(3) +During the fourth quarter of fiscal 2020, the Company issued $6 billion of senior unsecured notes. Refer to Note 8 — Long-Term Debt in the accompanying Notes to the Consolidated Financial Statements for additional information. +(4) +Fiscal 2020 reflects the impact from the adoption of Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842). Refer to Note 1 — Summary of Significant Accounting Policies in the accompanying Notes to the Consolidated Financial Statements f or additional information. +(5) +Fiscal 2019 reflects the impact from the a doption of ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). Refer to Note 1 — Summary of Significant Accounting Policies in the accompanying Notes to the Consolidated Financial Statements f or additional information. +(6) +Fiscal 2019 reflects the impact from the adoption of ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. Refer to Note 1 — Summary of Significant Accounting Policies in the accompanying Notes to the Consolidated Financial Statements for additional information. +2020 FORM 10-K 25 +Table of Contents +SELECTED QUARTERLY FINANCIAL DATA +(UNAUDITED) +1ST QUARTER +2ND QUARTER +3RD QUARTER +4TH QUARTER +(In millions, except per share data) +2020 +2019 +2020 +2019 +2020 +2019 +2020 +2019 +Revenues (1) +$ +10,660 +$ +9,948 +$ +10,326 +$ +9,374 +$ +10,104 +$ +9,611 +$ +6,313 +$ +10,184 +Gross profit +4,871 +4,397 +4,544 +4,105 +4,473 +4,339 +2,353 +4,633 +Gross margin (1) +45.7 +% +44.2 +% +44.0 +% +43.8 +% +44.3 +% +45.1 % +37.3 +% +45.5 +% +Net income (loss) (1) +1,367 +1,092 +1,115 +847 +847 +1,101 +(790 +) +989 +Earnings (loss) per common share: +Basic +0.87 +0.69 +0.71 +0.54 +0.54 +0.70 +(0.51 +) +0.63 +Diluted +0.86 +0.67 +0.70 +0.52 +0.53 +0.68 +(0.51 +) +0.62 +Weighted average common +shares outstanding +1,562.4 +1,594.0 +1,560.6 +1,581.4 +1,556.3 +1,572.8 +1,555.7 +1,570.2 +Diluted weighted average common +shares outstanding +1,597.5 +1,634.4 +1,594.4 +1,620.7 +1,591.6 +1,609.6 +1,555.7 +1,607.5 +Cash dividends declared per +common share +0.22 +0.20 +0.245 +0.22 +0.245 +0.22 +0.245 +0.22 +(1) +The third and fourth quarters of fiscal 2020 reflect the impacts of COVID-19 on our results of operations and financial condition. Refer to Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations for additional information. +2020 FORM 10-K 26 +Table of Contents +ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS +NIKE designs, develops, markets and sells athletic footwear, apparel, equipment, accessories and services worldwide. We are the largest seller of athletic footwear and apparel in the world. We sell our products through NIKE-owned retail stores and through digital platforms (which we refer to collectively as our “NIKE Direct” operations), to retail accounts and to a mix of independent distributors, licensees and sales representatives in virtually all countries around the world. Our goal is to deliver value to our shareholders by building a profitable global portfolio of branded footwear, apparel, equipment and accessories businesses. Our strategy is to achieve long-term revenue growth by creating innovative, “must-have” products, building deep personal consumer connections with our brands and delivering compelling consumer experiences through digital platforms and at retail. +Since fiscal 2018, through the Consumer Direct Offense and our Triple Double strategy, we have focused on doubling the impact of innovation, increasing our speed and agility to market and growing our direct connections with consumers. In June 2020, we announced a new digitally empowered phase of the Consumer Direct Offense strategy: Consumer Direct Acceleration. This strategic acceleration will focus on three specific areas. First, creating the marketplace of the future through more premium, consistent and seamless consumer experiences that more closely align with what consumers want and need. This strategy will lead with NIKE Digital and our own stores, as well as through select strategic partners who share our marketplace vision. Second, we will align our product creation and category organizations around a new consumer construct focused on Men’s, Women’s and Kids'. This approach allows us to create product that better meets individual consumer needs, including more specialization of our category approach, while re-aligning and simplifying our offense to accelerate our largest growth opportunities. In particular, we’ll be reinvesting in our Women’s and Kids’ businesses and will also simplify our operating model across the remainder of the company to optimize effectiveness. Third, we will unify investments in data and analytics, demand sensing, insight gathering, inventory management and other areas against an end-to-end technology foundation to accelerate our digital transformation. We believe this unified approach will accelerate growth and unlock more efficiency for our business, while driving speed and responsiveness as we serve consumers globally. +On July 22, 2020, management announced a series of leadership and operating model changes to streamline and speed up strategic execution. These changes are expected to lead to a net loss of jobs, resulting in pre-tax, one-time employee termination costs of approximately $200 million to $250 million, which is expected to be incurred primarily during the first half of fiscal 2021, in the form of cash expenditures. These amounts are subject to change until such time as all details are finalized. +This next phase of our Consumer Direct Offense is expected to drive sustainable growth and profitability as we accelerate NIKE to a digital-first company. We are committed to the execution of this strategy, despite the short-term adverse impacts to our business from a novel strain of coronavirus (COVID-19). As such, our long-term financial goals on average, per year, remain the same and are outlined below: +• +High single-digit revenue growth; +• +Gross margin expansion of as much as 50 basis points; +• +Slight selling and administrative expense leverage; +• +Mid-teens earnings per share growth; and +• +Low-thirties percentage rate of return on invested capital. +COVID-19 UPDATE +COVID-19 was first identified in Wuhan, China in December 2019, and subsequently declared a pandemic by the World Health Organization. To date, COVID-19 has surfaced in nearly all regions around the world and resulted in travel restrictions and business slowdowns or shutdowns in affected areas. As a result, COVID-19 has impacted our business globally, including through store closures, reduced operating hours and decreased retail traffic. In particular, the outbreak and preventive measures taken to help curb the spread had material adverse impacts on our operations and business results in Greater China during the third quarter of fiscal 2020, following the temporary closure of, or reduced operating hours in, approximately 75% of NIKE-owned and partner stores within the region. During the fourth quarter of fiscal 2020, our results of operations were further impacted as approximately 90% of our NIKE Brand stores across North America, EMEA and APLA, excluding Korea, were closed for approximately 8 weeks. The majority of Converse direct to consumer stores were also closed for a significant portion of the fourth quarter. Additionally, certain of our wholesale partners closed stores or reduced operating hours during the fourth quarter, resulting in lower than expected sales and a slowing of receipt of shipments of our products. The combined effect of store closures and reduced wholesale shipments caused higher than normal inventory levels at May 31, 2020, as Inventories grew 31% compared to the prior year. In order to manage future inventory growth and ensure a return to normalized levels we are modifying our buying plans and canceling certain pre-COVID-19 factory purchases, shifting product offer dates to meet near-term demand, as well as shifting available inventory into our digital channel and increasing digital fulfillment capacity specifically in +2020 FORM 10-K 27 +Table of Contents +North America and EMEA. Additionally, we are investing in targeted promotions and markdowns to accelerate liquidation of excess inventory while continuing to protect the long-term health of our product franchises. +COVID-19 also impacted our distribution centers, our third-party manufacturing partners and other vendors, including through the effects of facility closures, reductions in operating hours, labor shortages and real time changes in operating procedures to accommodate social distancing guidelines and additional cleaning and disinfection procedures. +In response to the uncertainty of the pandemic described above, we enhanced our liquidity position during the fourth quarter through the issuance of $6 billion in senior unsecured notes, the temporary suspension of our share repurchase program and by entering into a new committed credit facility agreement, which provides for an additional $2 billion of borrowings. Refer to Liquidity and Capital Resources for additional discussion . +Throughout the third and fourth quarter of fiscal 2020, our digital commerce remained open, supported by the employees in the distribution centers. During the fourth quarter, NIKE Brand digital remained our fastest growing channel, growing 79% on a currency-neutral basis with each of our geographies growing over 50%. Beginning in mid-May, stores within our NIKE Direct operations gradually began reopening. As of July 17, 2020, over 90% of our NIKE Direct stores have reopened across the globe, with 100% open in Greater China, over 90% open in both EMEA and North America, and APLA open over 70%. As of July 17, 2020, substantially all Converse direct to consumer stores have reopened to serve consumers. +We continue to monitor the rapidly evolving situation and guidance from international and domestic authorities, including federal, state and local public health authorities and may take additional actions based on their recommendations. In these circumstances, there may be developments outside our control requiring us to adjust our operating plan. As such, given the dynamic nature of this situation, the Company cannot reasonably estimate the impacts of COVID-19 on our future financial condition, results of operations or cash flows. However, we do expect they will have a material adverse impact on our future revenue growth as well as our overall profitability and may continue to lead to higher than normal inventory levels in various markets, revised payment terms with certain of our wholesale customers, higher sales-related reserves, factory cancellation costs and a volatile effective tax rate driven by changes in the mix of earnings across the Company's jurisdictions. +On March 27, 2020, in response to COVID-19, the United States government enacted the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"). The CARES Act is a relief package consisting of various stimulus measures, such as tax payment deferrals, various business incentives and makes certain technical corrections to the U.S. Tax Cuts and Jobs Act of 2017. The enactment of such legislation, while favorable, did not have a material impact on our fiscal 2020 Consolidated Financial Statements. +FISCAL 2020 OVERVIEW +Fiscal 2020 NIKE, Inc. Revenues declined 4% to $37.4 billion, as revenue growth of 7% for the first nine months of fiscal 2020 was more than offset by a 38% decline in the fourth quarter due to the impacts of COVID-19. The NIKE Brand, which represents over 90% of NIKE, Inc. Revenues , experienced a 4% decline, down 2% on a currency-neutral basis, driven by declines across nearly all geographies, partially offset by 11% currency-neutral growth in Greater China. NIKE Direct grew 8% on a currency-neutral basis driven by 49% growth in digital, with all geographies growing strong double digits, while wholesale revenues declined 7% . Revenues for Converse declined 3% and 1% , on a reported and currency-neutral basis, respecti vely, as revenue growth in Asia was more than offset by declines in North America, Europe and licensee markets. +Income before income taxes decreased 40% for fiscal 2020 , primarily due to lower revenues and gross margin resulting from the impacts of COVID-19, as well as higher selling and administrative expense. For the first nine months of fiscal 2020, gross margin expanded 30 basis points compared to the first nine months of fiscal 2019. However, this was more than offset by a decline of 820 basis points in the fourth quarter of fiscal 2020, primarily due the impacts of COVID-19. For fiscal 2020, NIKE, Inc. gross margin decreased 130 basis points as higher full-price average selling price (ASP), on a wholesale equivalent basis, was more than offset by higher product costs due to incremental tariffs in the U.S., as well as factory cancellation charges, higher inventory obsolescence reserves and the negative rate impacts of supply chain costs on a lower volume of wholesale shipments in the fourth quarter of fiscal 2020. Selling and administrative expense increased, due to higher operating overhead expense partially offset by lower demand creation expense. Operating overhead expense increased due to higher wage-related expenses, as a result of our continued investment in end-to-end digital capabilities, and higher bad debt expense, partially offset by lower travel and related spend. Demand creation expense decreased primarily due to lower retail brand presentation costs and sports marketing expenses as sporting events were postponed or canceled and a majority of stores were closed globally during the fourth quarter of fiscal 2020. These decreases were partially offset by higher digital brand marketing costs. +Diluted earnings per common share reflects a 2% decline in the weighted average diluted common shares outstanding, driven by our share repurchase program. +As we continue to execute against the Consumer Direct Offense, we are focused on optimizing country operating models across our global portfolio and we remain committed to investing in our most significant growth opportunities. During the third quarter of fiscal 2020, we announced our intention to sell our NIKE Brand businesses in Brazil, Argentina, Chile and Uruguay to strategic third-party distributors in an effort to more personally serve consumers in these respective marketplaces while driving +2020 FORM 10-K 28 +Table of Contents +sustainable, profitable growth. These transactions are expected to close in the first half of fiscal 2021. As a result of this decision, the related assets and liabilities of these entities were classified as held-for-sale on the Consolidated Balance Sheets as of May 31, 2020. Additionally, we recognized a non-recurring impairment charge of $405 million, within Other (income) expense, net on the Consolidated Statements of Income, classified within Corporate. This charge was primarily due to the anticipated release of non-cash cumulative foreign currency translation losses, and could fluctuate due to changes in exchange rates up to the date of close. In future quarters, as we shift from a wholesale and direct to consumer operating model to a distributor operating model within these countries, we expect consolidated NIKE, Inc. and APLA revenue growth will be reduced due to differences in commercial terms. However, we expect the future operating model to have a favorable impact on our overall profitability as we reduce selling and administrative expenses, as well as lessen exposure to foreign exchange rate volatility. +On October 29, 2019, we signed a definitive agreement to sell the assets and liabilities of our wholly-owned subsidiary brand, Hurley. The transaction closed on December 6, 2019, and the impacts of the divestiture are not considered material to the Company. +While foreign currency markets remain volatile, in part due to geopolitical dynamics leading to a stronger U.S. Dollar, we continue to see opportunities to drive future growth and profitability. We remain committed to effectively managing our business to achieve our financial goals over the long-term by executing against the operational strategies outlined above. +For discussion related to the results of operations and changes in financial condition for fiscal 2019 compared to fiscal 2018 refer to Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in our fiscal 2019 Form 10-K, which was filed with the United States Securities and Exchange Commission on July 23, 2019. +USE OF NON-GAAP FINANCIAL MEASURES +Throughout this Annual Report on Form 10-K, we discuss non-GAAP financial measures, including references to wholesale equivalent revenues, currency-neutral revenues, as well as Total NIKE Brand earnings before interest and taxes (EBIT) and Total NIKE, Inc. EBIT, which should be considered in addition to, and not in lieu of, the financial measures calculated and presented in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). References to wholesale equivalent revenues are intended to provide context as to the total size of our NIKE Brand market footprint if we had no NIKE Direct operations. NIKE Brand wholesale equivalent revenues consist of (1) sales to external wholesale customers and (2) internal sales from our wholesale operations to our NIKE Direct operations, which are charged at prices comparable to those charged to external wholesale customers. Additionally, currency-neutral revenues are calculated using actual exchange rates in use during the comparative prior year period to enhance the visibility of the underlying business trends excluding the impact of translation arising from foreign currency exchange rate fluctuations. EBIT is calculated as Net Income before Interest expense (income), net and Income tax expense in the Consolidated Statements of Income. +Management uses these non-GAAP financial measures when evaluating the Company's performance, including when making financial and operating decisions. Additionally, management believes these non-GAAP financial measures provide investors with additional financial information that should be considered when assessing our underlying business performance and trends. However, references to wholesale equivalent revenues, currency-neutral revenues and EBIT should not be considered in isolation or as a substitute for other financial measures calculated and presented in accordance with U.S. GAAP and may not be comparable to similarly titled non-GAAP measures used by other companies. +2020 FORM 10-K 29 +Table of Contents +RESULTS OF OPERATIONS +(Dollars in millions, except per share data) +FISCAL 2020 +FISCAL 2019 +% CHANGE +FISCAL 2018 +% CHANGE +Revenues (1) +$ +37,403 +$ +39,117 +-4 +% +$ +36,397 +7 +% +Cost of sales +21,162 +21,643 +-2 +% +20,441 +6 +% +Gross profit +16,241 +17,474 +-7 +% +15,956 +10 +% +Gross margin (1) +43.4 +% +44.7 +% +43.8 +% +Demand creation expense +3,592 +3,753 +-4 +% +3,577 +5 +% +Operating overhead expense +9,534 +8,949 +7 +% +7,934 +13 +% +Total selling and administrative expense +13,126 +12,702 +3 +% +11,511 +10 +% +% of revenues +35.1 +% +32.5 +% +31.6 +% +Interest expense (income), net +89 +49 +— +54 +— +Other (income) expense, net +139 +(78 +) +— +66 +— +Income before income taxes +2,887 +4,801 +-40 +% +4,325 +11 +% +Income tax expense (2) +348 +772 +-55 +% +2,392 +-68 +% +Effective tax rate +12.1 +% +16.1 +% +55.3 +% +NET INCOME (1) +$ +2,539 +$ +4,029 +-37 +% +$ +1,933 +108 +% +Diluted earnings per common share +$ +1.60 +$ +2.49 +-36 +% +$ +1.17 +113 +% +(1) +Fiscal 2020 reflects the impacts of COVID-19 on our results of operations. Refer to discussion of our results below for additional information. +(2) +Fiscal 2018 reflects the impact from the enactment of the U.S. Tax Cuts and Jobs Act. Refer to Note 9 — Income Taxes in the accompanying Notes to the Consolidated Financial Statements for additional information. +2020 FORM 10-K 30 +Table of Contents +CONSOLIDATED OPERATING RESULTS +REVENUES +(Dollars in millions) +FISCAL 2020 +FISCAL 2019 +% CHANGE +% CHANGE EXCLUDING CURRENCY CHANGES (1) +FISCAL 2018 +% CHANGE +% CHANGE EXCLUDING CURRENCY CHANGES (1) +NIKE, Inc. Revenues: +NIKE Brand Revenues by: +Footwear +$ +23,305 +$ +24,222 +-4 +% +-2 +% +$ +22,268 +9 +% +12 +% +Apparel +10,953 +11,550 +-5 +% +-3 +% +10,733 +8 +% +11 +% +Equipment +1,280 +1,404 +-9 +% +-6 +% +1,396 +1 +% +4 +% +Global Brand Divisions (2) +30 +42 +-29 +% +-26 +% +88 +-52 +% +-53 +% +Total NIKE Brand Revenues +35,568 +37,218 +-4 +% +-2 +% +34,485 +8 +% +11 +% +Converse +1,846 +1,906 +-3 +% +-1 +% +1,886 +1 +% +3 +% +Corporate (3) +(11 +) +(7 +) +— +— +26 +— +— +TOTAL NIKE, INC. REVENUES +$ +37,403 +$ +39,117 +-4 +% +-2 +% +$ +36,397 +7 +% +11 +% +Supplemental NIKE Brand Revenues Details: +NIKE Brand Revenues by: +Sales to Wholesale Customers +$ +23,156 +$ +25,423 +-9 +% +-7 +% +$ +23,969 +6 +% +10 +% +Sales through NIKE Direct +12,382 +11,753 +5 +% +8 +% +10,428 +13 +% +16 +% +Global Brand Divisions (2) +30 +42 +-29 +% +-26 +% +88 +-52 +% +-53 +% +TOTAL NIKE BRAND REVENUES +$ +35,568 +$ +37,218 +-4 +% +-2 +% +$ +34,485 +8 +% +11 +% +NIKE Brand Revenues on a Wholesale Equivalent Basis: (1) +Sales to Wholesale Customers +$ +23,156 +$ +25,423 +-9 +% +-7 +% +$ +23,969 +6 +% +10 +% +Sales from our Wholesale Operations to NIKE Direct Operations +7,452 +7,127 +5 +% +7 +% +6,332 +13 +% +16 +% +TOTAL NIKE BRAND WHOLESALE EQUIVALENT REVENUES +$ +30,608 +$ +32,550 +-6 +% +-4 +% +$ +30,301 +7 +% +11 +% +NIKE Brand Wholesale Equivalent Revenues by: (1) +Men's +$ +16,694 +$ +17,737 +-6 +% +-4 +% +$ +16,698 +6 +% +10 +% +Women's +6,999 +7,380 +-5 +% +-3 +% +6,913 +7 +% +11 +% +NIKE Kids' +5,033 +5,283 +-5 +% +-3 +% +4,906 +8 +% +11 +% +Others (4) +1,882 +2,150 +-12 +% +-10 +% +1,784 +21 +% +25 +% +TOTAL NIKE BRAND WHOLESALE EQUIVALENT REVENUES +$ +30,608 +$ +32,550 +-6 +% +-4 +% +$ +30,301 +7 +% +11 +% +NIKE Brand Wholesale Equivalent Revenues by: (1) +Running +$ +3,830 +$ +4,488 +-15 +% +-12 +% +$ +4,496 +0 +% +4 +% +NIKE Basketball +1,508 +1,597 +-6 +% +-4 +% +1,494 +7 +% +9 +% +Jordan Brand +3,609 +3,138 +15 +% +16 +% +2,856 +10 +% +12 +% +Football (Soccer) +1,575 +1,894 +-17 +% +-14 +% +2,146 +-12 +% +-6 +% +Training +2,688 +3,137 +-14 +% +-13 +% +3,126 +0 +% +3 +% +Sportswear +12,285 +12,442 +-1 +% +1 +% +10,720 +16 +% +21 +% +Others (5) +5,113 +5,854 +-13 +% +-10 +% +5,463 +7 +% +9 +% +TOTAL NIKE BRAND WHOLESALE EQUIVALENT REVENUES +$ +30,608 +$ +32,550 +-6 +% +-4 +% +$ +30,301 +7 +% +11 +% +(1) +The percent change excluding currency changes and the presentation of wholesale equivalent revenues represent non-GAAP financial measures. See "Use of Non-GAAP Financial Measures" for further information. +(2) +Global Brand Divisions revenues are primarily attributable to NIKE Brand licensing businesses that are not part of a geographic operating segment. +(3) +Corporate revenues primarily consist of foreign currency hedge gains and losses related to revenues generated by entities within the NIKE Brand geographic operating segments and Converse, but managed through our central foreign exchange risk management program. +2020 FORM 10-K 31 +Table of Contents +(4) +Others include all unisex products, equipment and other products not allocated to Men's, Women's and NIKE Kids', as well as certain adjustments that are not allocated to products designated by gender or age. +(5) +Others include all other categories and certain adjustments that are not allocated at the category level. +FISCAL 2020 NIKE BRAND REVENUE HIGHLIGHTS +The following tables present NIKE Brand revenues disaggregated by reportable operating segment, distribution channel and major product line: +FISCAL 2020 COMPARED TO FISCAL 2019 +On a currency-neutral basis, NIKE, Inc. Revenues declined 2% for fiscal 2020 , driven by lower revenues in both the NIKE Brand and Converse as the first nine months of revenue growth was offset by the impacts of lower shipments to wholesale customers and store closures within our NIKE Direct and Converse direct to consumer operations due to COVID-19 in the fourth quarter. Revenues for North America declined in fiscal 2020 , reducing NIKE, Inc. Revenues by approximately 4 percentage points, partially offset by revenue growth in Greater China contributing approximately 2 percentage points. +On a currency-neutral basis, NIKE Brand footwear revenues decreased 2% for fiscal 2020 , driven by declines in nearly all key categories, primarily Running, Sportswear and Training, partially offset by growth in the Jordan Brand. Unit sales of footwear decreased 8%, partially offset by higher ASP per pair contributing approximately 6 percentage points. The increase in ASP was primarily due to higher full-price and NIKE Direct ASPs, as well as the favorable impact of growth in our NIKE Direct business. +Currency-neutral NIKE Brand apparel revenues decreased 3% for fiscal 2020 , due to declines in most key categories, primarily Running, Training and Football (Soccer), partially offset by growth in Sportswear and the Jordan Brand. Unit sales of apparel decreased 8%, partially offset by higher ASP per unit contributing approximately 5 percentage points. The increase in ASP was primarily due to higher full-price ASP and the favorable impact of growth in our NIKE Direct business. +On a reported basis, NIKE Direct revenues represented approximately 35% of our total NIKE Brand revenues for fiscal 2020 , compared to 32% for fiscal 2019 . Digital commerce sales were $5.5 billion for fiscal 2020 compared to $3.8 billion for fiscal 2019 . On a currency-neutral basis, NIKE Direct revenues increased 8% for fiscal 2020 , driven by strong digital commerce sales growth of 49%, which more than offset comparable store sales contraction of 12% due to temporary store closures and stores operating on reduced hours as a result of COVID-19. Comparable store sales, which exclude digital commerce sales, comprises revenues from NIKE-owned in-line and factory stores for which all three of the following requirements have been met: (1) the store has been open at least one year, (2) square footage has not changed by more than 15% within the past year and (3) the store has not been permanently repositioned within the past year. Comparable store sales includes revenues from stores that were temporarily closed during the period as a result of COVID-19. Comparable store sales represents a performance measure that we believe is useful information for management and investors in understanding the performance of our established NIKE-owned in-line and factory stores. Management considers this metric when making financial and operating decisions. The method of calculating comparable store sales varies across the retail industry. As a result, our calculation of this metric may not be comparable to similarly titled measures used by other companies. +On a currency-neutral basis, fiscal 2020 NIKE Brand Men's and Women's revenues decreased 4% and 3% , respectively. Lower NIKE Brand Men's revenues were driven by declines in nearly all key categories, primarily Running and Training, partially offset by growth in the Jordan Brand. Lower NIKE Brand Women's revenues were driven by declines in most key categories, primarily Running and Training, partially offset by growth in Sportswear and the Jordan Brand. Revenues for our NIKE Kids' business decreased 3% , as declines primarily in Football (Soccer) more than offset growth in the Jordan Brand. +2020 FORM 10-K 32 +Table of Contents +GROSS MARGIN +FISCAL 2020 COMPARED TO FISCAL 2019 +For fiscal 2020 , our consolidated gross profit decreased 7% to $16,241 million compared to $17,474 million for fiscal 2019 , which was significantly impacted by lower shipments to our wholesale customers and store closures within our NIKE Direct operations due to COVID-19. Gross margin decreased 130 basis points to 43.4% for fiscal 2020 compared to 44.7% for fiscal 2019 due to the following: +*Wholesale equivalent +Higher product costs were in part due to incremental tariffs in North America. Higher other costs, primarily in the fourth quarter of fiscal 2020 due to the impacts of COVID-19, were specifically related to increased factory cancellations costs, higher inventory obsolescence and the adverse rate impact of supply chain costs on a lower volume of wholesale shipments. +TOTAL SELLING AND ADMINISTRATIVE EXPENSE +(Dollars in millions) +FISCAL 2020 +FISCAL 2019 +% CHANGE +FISCAL 2018 +% CHANGE +Demand creation expense (1) +$ +3,592 +$ +3,753 +-4 +% +$ +3,577 +5 +% +Operating overhead expense +9,534 +8,949 +7 +% +7,934 +13 +% +Total selling and administrative expense +$ +13,126 +$ +12,702 +3 +% +$ +11,511 +10 +% +% of revenues +35.1 +% +32.5 +% +260 +bps +31.6 +% +90 +bps +(1) +Demand creation expense consists of advertising and promotion costs, including costs of endorsement contracts, complimentary product, television, digital and print advertising and media costs, brand events and retail brand presentation. +FISCAL 2020 COMPARED TO FISCAL 2019 +Demand creation expense decreased 4% for fiscal 2020 compared to fiscal 2019 , due to lower retail brand presentation costs and lower sports marketing investments, as well as decreased advertising and marketing expenses as sporting events were postponed or canceled and a majority of stores were closed globally during the fourth quarter of fiscal 2020. These decreases were partially offset by higher digital brand marketing costs. Changes in foreign currency exchange rates decreased Demand creation expense by approximately 2 percentage points for fiscal 2020 . +Operating overhead expense increased 7% for fiscal 2020 compared to fiscal 2019 , driven by higher wage-related and administrative expenses to support our continued investments in end-to-end digital capabilities, including support for a new enterprise resource planning tool. Operating overhead expense was further impacted by higher bad debt expense recognized during the fourth quarter of fiscal 2020 due to the impacts of COVID-19. These increases were partially offset by lower travel and related spend. Changes in foreign currency exchange rates decreased Operating overhead expense by approximately 1 percentage points for fiscal 2020 . +OTHER (INCOME) EXPENSE, NET +(Dollars in millions) +FISCAL 2020 +FISCAL 2019 +FISCAL 2018 +Other (income) expense, net +$ +139 +$ +(78 +) +$ +66 +Other (income) expense, net comprises foreign currency conversion gains and losses from the re-measurement of monetary assets and liabilities denominated in non-functional currencies and the impact of certain foreign currency derivative instruments, as well as unusual or non-operating transactions that are outside the normal course of business. +2020 FORM 10-K 33 +Table of Contents +FISCAL 2020 COMPARED TO FISCAL 2019 +Other (income) expense, net changed from $78 million of other income, net for fiscal 2019 to $139 million of other expense, net for fiscal 2020 , primarily due to the non-recurring impairment charge of $405 million related to our planned, strategic distributor partnership transition within APLA. For more information see Note 20 — Acquisitions and Divestitures within the accompanying Notes to the Consolidated Financial Statements. This was offset by a $121 million net beneficial change in foreign currency conversion gains and losses, including hedges. +We estimate the combination of the translation of foreign currency-denominated profits from our international businesses and the year-over-year change in foreign currency-related gains and losses included in Other (income) expense, net had an unfavorable impact on our Income before income taxes of $91 million for fiscal 2020 . +INCOME TAXES +FISCAL 2020 +FISCAL 2019 +% CHANGE +FISCAL 2018 +% CHANGE +Effective tax rate +12.1 +% +16.1 +% +(400) bps +55.3 +% +(3,920) bps +FISCAL 2020 COMPARED TO FISCAL 2019 +Our effective tax rate was 12.1% for fiscal 2020 , compared to 16.1% for fiscal 2019 due to increased benefits from discrete items such as stock-based compensation. +Our effective tax rate for fiscal 2018 reflected significant changes related to the enactment of the U.S. Tax Cuts and Jobs Act (the "Tax Act"). Refer to Note 9 — Income Taxes in the accompanying Notes to the Consolidated Financial Statements for additional information on the impact of the Tax Act. +OPERATING SEGMENTS +Our operating segments are evidence of the structure of the Company's internal organization. The NIKE Brand segments are defined by geographic regions for operations participating in NIKE Brand sales activity. +Each NIKE Brand geographic segment operates predominantly in one industry: the design, development, marketing and selling of athletic footwear, apparel and equipment. The Company's reportable operating segments for the NIKE Brand are: North America; Europe, Middle East & Africa (EMEA); Greater China; and Asia Pacific & Latin America (APLA), and include results for the NIKE and Jordan brands, with results for the Hurley Brand, prior to its divestiture, included in North America. Refer to Note 20 — Acquisitions and Divestitures within the accompanying Notes to the Consolidated Financial Statements for additional information. The Company's NIKE Direct operations are managed within each geographic operating segment. Converse is also a reportable operating segment for the Company, and operates predominately in one industry: the design, marketing, licensing and selling of casual sneakers, apparel and accessories. +As part of our centrally managed foreign exchange risk management program, standard foreign currency exchange rates are assigned twice per year to each NIKE Brand entity in our geographic operating segments and Converse. These rates are set approximately nine and twelve months in advance of the future selling seasons to which they relate (specifically, for each currency, one standard rate applies to the fall and holiday selling seasons and one standard rate applies to the spring and summer selling seasons) based on average market spot rates in the calendar month preceding the date they are established. Inventories and Cost of sales for geographic operating segments and Converse reflect the use of these standard rates to record non-functional currency product purchases into the entity's functional currency. Differences between assigned standard foreign currency exchange rates and actual market rates are included in Corporate, together with foreign currency hedge gains and losses generated from our centrally managed foreign exchange risk management program and other conversion gains and losses. +2020 FORM 10-K 34 +Table of Contents +The breakdown of revenues is as follows: +(Dollars in millions) +FISCAL 2020 +FISCAL 2019 +% CHANGE +% CHANGE EXCLUDING CURRENCY CHANGES (1) +FISCAL 2018 +% CHANGE +% CHANGE EXCLUDING CURRENCY CHANGES (1) +North America +$ +14,484 +$ +15,902 +-9 +% +-9 +% +$ +14,855 +7 +% +7 +% +Europe, Middle East & Africa +9,347 +9,812 +-5 +% +-1 +% +9,242 +6 +% +11 +% +Greater China +6,679 +6,208 +8 +% +11 +% +5,134 +21 +% +24 +% +Asia Pacific & Latin America +5,028 +5,254 +-4 +% +1 +% +5,166 +2 +% +13 +% +Global Brand Divisions (2) +30 +42 +-29 +% +-26 +% +88 +-52 +% +-53 +% +TOTAL NIKE BRAND +35,568 +37,218 +-4 +% +-2 +% +34,485 +8 +% +11 +% +Converse +1,846 +1,906 +-3 +% +-1 +% +1,886 +1 +% +3 +% +Corporate (3) +(11 +) +(7 +) +— +— +26 +— +— +TOTAL NIKE, INC. REVENUES +$ +37,403 +$ +39,117 +-4 +% +-2 +% +$ +36,397 +7 +% +11 +% +(1) +The percent change excluding currency changes represents a non-GAAP financial measure. See "Use of Non-GAAP Financial Measures" for further information. +(2) +Global Brand Divisions revenues are primarily attributable to NIKE Brand licensing businesses that are not part of a geographic operating segment. +(3) +Corporate revenues primarily consist of foreign currency hedge gains and losses related to revenues generated by entities within the NIKE Brand geographic operating segments and Converse, but managed through our central foreign exchange risk management program. +The primary financial measure used by the Company to evaluate performance of individual operating segments is EBIT, which represents Net income before Interest expense (income), net and Income tax expense in the Consolidated Statements of Income. As discussed in Note 17 — Operating Segments and Related Information in the accompanying Notes to the Consolidated Financial Statements, certain corporate costs are not included in EBIT of our operating segments. +The breakdown of earnings before interest and taxes is as follows: +(Dollars in millions) +FISCAL 2020 +FISCAL 2019 +% CHANGE +FISCAL 2018 +% CHANGE +North America +$ +2,899 +$ +3,925 +-26 +% +$ +3,600 +9 +% +Europe, Middle East & Africa +1,541 +1,995 +-23 +% +1,587 +26 +% +Greater China +2,490 +2,376 +5 +% +1,807 +31 +% +Asia Pacific & Latin America +1,184 +1,323 +-11 +% +1,189 +11 +% +Global Brand Divisions +(3,468 +) +(3,262 +) +-6 +% +(2,658 +) +-23 +% +TOTAL NIKE BRAND (1) +4,646 +6,357 +-27 +% +5,525 +15 +% +Converse +297 +303 +-2 +% +310 +-2 +% +Corporate +(1,967 +) +(1,810 +) +-9 +% +(1,456 +) +-24 +% +TOTAL NIKE, INC. EARNINGS BEFORE INTEREST AND TAXES (1) +2,976 +4,850 +-39 +% +4,379 +11 +% +Interest expense (income), net +89 +49 +— +54 +— +TOTAL NIKE, INC. INCOME BEFORE INCOME TAXES +$ +2,887 +$ +4,801 +-40 +% +$ +4,325 +11 +% +(1) +Total NIKE Brand EBIT and Total NIKE, Inc. EBIT represent non-GAAP financial measures. See "Use of Non-GAAP Financial Measures" for further information. +2020 FORM 10-K 35 +Table of Contents +NORTH AMERICA +(Dollars in millions) +FISCAL 2020 +FISCAL 2019 +% CHANGE +% CHANGE EXCLUDING CURRENCY CHANGES +FISCAL 2018 +% CHANGE +% CHANGE EXCLUDING CURRENCY CHANGES +Revenues by: +Footwear +$ +9,329 +$ +10,045 +-7 +% +-7 +% +$ +9,322 +8 +% +8 +% +Apparel +4,639 +5,260 +-12 +% +-12 +% +4,938 +7 +% +7 +% +Equipment +516 +597 +-14 +% +-14 +% +595 +0 +% +0 +% +TOTAL REVENUES +$ +14,484 +$ +15,902 +-9 +% +-9 +% +$ +14,855 +7 +% +7 +% +Revenues by: +Sales to Wholesale Customers +$ +9,371 +$ +10,875 +-14 +% +-14 +% +$ +10,159 +7 +% +7 +% +Sales through NIKE Direct +5,113 +5,027 +2 +% +2 +% +4,696 +7 +% +7 +% +TOTAL REVENUES +$ +14,484 +$ +15,902 +-9 +% +-9 +% +$ +14,855 +7 +% +7 +% +EARNINGS BEFORE INTEREST AND TAXES +$ +2,899 +$ +3,925 +-26 +% +$ +3,600 +9 +% +We believe there continues to be a meaningful shift in the way consumers shop for product and make purchasing decisions. Consumers are demanding a constant flow of fresh and innovative product, and have an expectation for superior service and rapid delivery, all fueled by the shift toward digital and mono-brand experiences in NIKE Direct. Specifically, in North America we anticipate continued evolution within the retail landscape, driven by shifting consumer traffic patterns across digital and physical channels. The evolution of the North America marketplace is resulting in third-party retail store closures, which is expected to be further accelerated as a result of the effects of COVID-19; however, we remain focused on building long-term momentum with our strategic wholesale customers, fueled by innovative product and NIKE Brand consumer experiences, leveraging digital. +FISCAL 2020 COMPARED TO FISCAL 2019 +On a currency-neutral basis, North America revenues decreased 9% , as revenue growth for the first nine months of fiscal 2020 was offset by declines in the fourth quarter, primarily resulting from lower shipments to our wholesale customers and store closures within our NIKE Direct operations due to COVID-19. Revenues declined in nearly all key categories, primarily Running and Training. NIKE Direct revenues increased 2% for fiscal 2020 as strong digital commerce sales growth of 45% more than offset a 20% decline in comparable store sales due to temporary store closures and stores operating on reduced hours as a result of COVID-19 during the fourth quarter. +Footwear revenues contracted 7% on a currency-neutral basis for fiscal 2020 , driven by declines in nearly all key categories, primarily Running, Training and Sportswear. Unit sales of footwear decreased 13%, partially offset by higher ASP per pair contributing approximately 6 percentage points. Higher ASP per pair was primarily due to higher NIKE Direct ASP and the favorable impact of growth in our NIKE Direct business, as well as higher full-price ASP. +On a currency-neutral basis, apparel revenues decreased 12% for fiscal 2020 as lower revenues in nearly all key categories, primarily Training, were partially offset by growth in Sportswear. Unit sales of apparel decreased 16%, partially offset by higher ASP per unit contributing approximately 4 percentage points. The increase in ASP per unit was primarily a result of higher full-price and NIKE Direct ASPs, as well as the favorable impact of growth in our NIKE Direct business. +Reported EBIT decreased 26% for fiscal 2020 , reflecting lower revenues, gross margin contraction and higher selling and administrative expense. Gross margin declined 230 basis points as higher-full price ASP was more than offset by higher product costs, primarily due to incremental tariffs, as well as increased costs specifically in the fourth quarter due to COVID-19 for warehousing and freight, the adverse rate impact of supply chain costs on a lower volume of wholesale shipments, factory cancellations and inventory obsolescence. Selling and administrative expense grew due to higher operating overhead expense, partially offset by lower demand creation expense. Operating overhead expense increased primarily due to higher bad debt expense and higher administrative costs. The decrease in demand creation expense reflected higher digital brand marketing costs, which were more than offset by lower retail brand presentation costs and sports marketing expenses as leagues and sporting events were suspended and a majority of stores within our NIKE Direct operations were closed during the fourth quarter due to COVID-19. +2020 FORM 10-K 36 +Table of Contents +EUROPE, MIDDLE EAST & AFRICA +(Dollars in millions) +FISCAL 2020 +FISCAL 2019 +% CHANGE +% CHANGE EXCLUDING CURRENCY CHANGES +FISCAL 2018 +% CHANGE +% CHANGE EXCLUDING CURRENCY CHANGES +Revenues by: +Footwear +$ +5,892 +$ +6,293 +-6 +% +-3 +% +$ +5,875 +7 +% +12 +% +Apparel +3,053 +3,087 +-1 +% +2 +% +2,940 +5 +% +9 +% +Equipment +402 +432 +-7 +% +-3 +% +427 +1 +% +5 +% +TOTAL REVENUES +$ +9,347 +$ +9,812 +-5 +% +-1 +% +$ +9,242 +6 +% +11 +% +Revenues by: +Sales to Wholesale Customers +$ +6,574 +$ +7,076 +-7 +% +-4 +% +$ +6,765 +5 +% +9 +% +Sales through NIKE Direct +2,773 +2,736 +1 +% +5 +% +2,477 +10 +% +15 +% +TOTAL REVENUES +$ +9,347 +$ +9,812 +-5 +% +-1 +% +$ +9,242 +6 +% +11 +% +EARNINGS BEFORE INTEREST AND TAXES +$ +1,541 +$ +1,995 +-23 +% +$ +1,587 +26 +% +FISCAL 2020 COMPARED TO FISCAL 2019 +On a currency-neutral basis, EMEA revenues for fiscal 2020 declined 1% , as revenue growth for the first nine months of fiscal 2020 was offset by declines in the fourth quarter, primarily resulting from lower shipments to our wholesale customers and store closures within our NIKE Direct operations due to COVID-19. The decline reflects lower revenues in the Northern Europe and Southern Europe territories, which each declined 8%, partially offset by growth in UK & Ireland of 5%. Revenues decreased in most key categories, primarily Football (Soccer) and Running, partially offset by growth in the Jordan Brand. NIKE Direct revenues increased 5% due to strong digital commerce sales growth of 50%, partially offset by a 15% decline in comparable store sales due to temporary store closures and stores operating on reduced hours as a result of COVID-19, as well as declines from certain store closures as we continually optimize our fleet to meet consumer demand across physical and digital channels. +Currency-neutral footwear revenues contracted 3% for fiscal 2020 , driven by lower revenues in nearly all key categories, primarily Sportswear. Unit sales of footwear decreased 10%, partially offset by higher ASP per pair contributing approximately 7 percentage points. Higher ASP per pair primarily resulted from higher full-price and NIKE Direct ASPs. +For fiscal 2020 , currency-neutral apparel revenues increased 2% as growth in several key categories, most notably Sportswear and the Jordan Brand, was partially offset by declines in Football (Soccer). Unit sales of apparel decreased 2%, partially offset by higher ASP per unit contributing approximately 4 percentage points. Higher ASP per unit was primarily due to higher full-price ASP. +Reported EBIT decreased 23% for fiscal 2020 due to lower revenues, gross margin contraction and higher selling and administrative expense. Gross margin declined 240 basis points as higher full-price ASP was more than offset by unfavorable changes in standard foreign currency exchange rates and higher other costs, which primarily occurred in the fourth quarter due to COVID-19 and reflected increased warehousing and freight costs, the adverse rate impact of supply chain costs on a lower volume of wholesale shipments and higher inventory obsolescence. Selling and administrative expense increased due to higher operating overhead expense, partially offset by lower demand creation expense. Growth in operating overhead expense was primarily due to higher bad debt expense. The decrease in demand creation expense was primarily driven by lower retail brand presentation costs resulting from store closures during the fourth quarter due to COVID-19. +2020 FORM 10-K 37 +Table of Contents +GREATER CHINA +(Dollars in millions) +FISCAL 2020 +FISCAL 2019 +% CHANGE +% CHANGE EXCLUDING CURRENCY CHANGES +FISCAL 2018 +% CHANGE +% CHANGE EXCLUDING CURRENCY CHANGES +Revenues by: +Footwear +$ +4,635 +$ +4,262 +9 +% +12 +% +$ +3,496 +22 +% +25 +% +Apparel +1,896 +1,808 +5 +% +8 +% +1,508 +20 +% +23 +% +Equipment +148 +138 +7 +% +11 +% +130 +6 +% +8 +% +TOTAL REVENUES +$ +6,679 +$ +6,208 +8 +% +11 +% +$ +5,134 +21 +% +24 +% +Revenues by: +Sales to Wholesale Customers +$ +3,803 +$ +3,726 +2 +% +6 +% +$ +3,216 +16 +% +19 +% +Sales through NIKE Direct +2,876 +2,482 +16 +% +20 +% +1,918 +29 +% +33 +% +TOTAL REVENUES +$ +6,679 +$ +6,208 +8 +% +11 +% +$ +5,134 +21 +% +24 +% +EARNINGS BEFORE INTEREST AND TAXES +$ +2,490 +$ +2,376 +5 +% +$ +1,807 +31 +% +FISCAL 2020 COMPARED TO FISCAL 2019 +On a currency-neutral basis, Greater China revenues for fiscal 2020 increased 11% , despite temporary store closures and stores operating on reduced hours as a result of COVID-19 during the third quarter and for part of the fourth quarter. Higher revenues were driven by growth in most key categories, led by the Jordan Brand and Sportswear. NIKE Direct revenues increased 20% , driven by strong digital commerce sales growth of 49%, the addition of new stores and comparable store sales growth of 1%. +Currency-neutral footwear revenues increased 12% for fiscal 2020 , driven by growth in nearly all key categories, led by the Jordan Brand and, to a lesser extent, Sportswear. Unit sales of footwear increased 10% and higher ASP per pair contributed approximately 2 percentage points of footwear revenue growth, driven by higher full-price ASP. +The currency-neutral apparel revenue growth of 8% for fiscal 2020 was fueled by higher revenues in most key categories, led by Sportswear and the Jordan Brand. Unit sales of apparel increased 8%, while ASP per unit was flat as higher off-price and full-price ASPs were offset by unfavorable full-price mix and lower NIKE Direct ASP. +Reported EBIT increased 5% for fiscal 2020 , driven by higher revenues and selling and administrative expense leverage, partially offset by gross margin contraction. Gross margin decreased 170 basis points as unfavorable changes in standard foreign currency exchange rates and higher product costs more than offset higher full-price ASP. Selling and administrative expense increased due to higher operating overhead and demand creation expense. Growth in operating overhead expense was driven by higher investments within our NIKE Direct operations. Demand creation expense increased primarily due to higher retail brand presentation costs, including digital brand marketing. +2020 FORM 10-K 38 +Table of Contents +ASIA PACIFIC & LATIN AMERICA +(Dollars in millions) +FISCAL 2020 +FISCAL 2019 +% CHANGE +% CHANGE EXCLUDING CURRENCY CHANGES +FISCAL 2018 +% CHANGE +% CHANGE EXCLUDING CURRENCY CHANGES +Revenues by: +Footwear +$ +3,449 +$ +3,622 +-5 +% +0 +% +$ +3,575 +1 +% +12 +% +Apparel +1,365 +1,395 +-2 +% +3 +% +1,347 +4 +% +15 +% +Equipment +214 +237 +-10 +% +-4 +% +244 +-3 +% +8 +% +TOTAL REVENUES +$ +5,028 +$ +5,254 +-4 +% +1 +% +$ +5,166 +2 +% +13 +% +Revenues by: +Sales to Wholesale Customers +$ +3,408 +$ +3,746 +-9 +% +-4 +% +$ +3,829 +-2 +% +9 +% +Sales through NIKE Direct +1,620 +1,508 +7 +% +12 +% +1,337 +13 +% +23 +% +TOTAL REVENUES +$ +5,028 +$ +5,254 +-4 +% +1 +% +$ +5,166 +2 +% +13 +% +EARNINGS BEFORE INTEREST AND TAXES +$ +1,184 +$ +1,323 +-11 +% +$ +1,189 +11 +% +As discussed previously, we entered into definitive agreements to sell our NIKE Brand businesses in Brazil, Argentina, Chile and Uruguay and shift to a distributor operating model. The impacts of entering into these agreements are included within Corporate and are not reflected in the APLA operating segment results for fiscal 2020 . +FISCAL 2020 COMPARED TO FISCAL 2019 +On a currency-neutral basis, APLA revenues increased 1% for fiscal 2020 . The increase in revenues reflected growth in the Korea and SOCO (which comprises Argentina, Uruguay and Chile) territories of 14% and 6%, respectively, partially offset by declines in Mexico of 9%. Revenues increased in several key categories, led by the Jordan Brand. NIKE Direct revenues increased 12% , fueled by strong digital commerce sales growth of 62% and the addition of new stores, partially offset by a decline in comparable store sales of 4% due to temporary store closures and stores operating on reduced hours as a result of COVID-19 during the fourth quarter. +Currency-neutral footwear revenues for fiscal 2020 were flat as growth in the Jordan Brand and NIKE Basketball was offset by declines in all other key categories, primarily Training. Unit sales of footwear decreased 12%, offset by higher ASP per pair contributing approximately 12 percentage points, driven by higher full-price and NIKE Direct ASPs, both of which in part reflect inflationary conditions in our SOCO territory. +Currency-neutral apparel revenues grew 3% for fiscal 2020 , driven by higher revenues in several key categories, most notably Sportswear. Unit sales of apparel decreased 5%, which were more than offset by higher ASP per unit contributing approximately 8 percentage points, primarily driven by higher full-price and NIKE Direct ASPs, both of which in part reflect inflationary conditions in our SOCO territory. +Reported EBIT decreased 11% for fiscal 2020 reflecting lower revenues and gross margin contraction, partially offset by lower selling and administrative expense. Gross margin decreased 140 basis points as higher full-price ASP was more than offset by higher product costs, unfavorable changes in standard foreign currency exchange rates, as well as higher other costs. The increase in other costs primarily occurred in the fourth quarter due to COVID-19 and reflected increased warehousing and freight, as well as higher inventory obsolescence. Selling and administrative expense decreased as lower demand creation expense was partially offset by higher operating overhead expense. The decrease in demand creation expense was primarily due to lower sports marketing costs, advertising and marketing expenses, as well as lower retail brand presentation costs as sporting events were postponed or canceled and a majority of stores were closed during the fourth quarter due to COVID-19. The increase in operating overhead expense was primarily due to higher bad debt expense and higher wage-related costs. +2020 FORM 10-K 39 +Table of Contents +GLOBAL BRAND DIVISIONS +(Dollars in millions) +FISCAL 2020 +FISCAL 2019 +% CHANGE +% CHANGE EXCLUDING CURRENCY CHANGES +FISCAL 2018 +% CHANGE +% CHANGE EXCLUDING CURRENCY CHANGES +Revenues +$ +30 +$ +42 +-29 +% +-26 +% +$ +88 +-52 +% +-53 +% +Earnings (Loss) Before Interest and Taxes +$ +(3,468 +) +$ +(3,262 +) +-6 +% +$ +(2,658 +) +-23 +% +Global Brand Divisions primarily represent demand creation and operating overhead expense, including product creation and design expenses that are centrally managed for the NIKE Brand, as well as costs associated with NIKE Direct global digital operations and enterprise technology. Revenues for Global Brand Divisions are primarily attributable to NIKE Brand licensing businesses that are not part of a geographic operating segment. +FISCAL 2020 COMPARED TO FISCAL 2019 +Global Brand Divisions' loss before interest and taxes increased 6% for fiscal 2020 as total selling and administrative expense increased compared to fiscal 2019 , primarily due to higher operating overhead expense. The increase in operating overhead expense was primarily driven by higher wage-related and administrative costs resulting from investments in data and analytics capabilities, digital commerce platforms and our continued investment in a new enterprise resource planning tool, all of which are in an effort to accelerate our end-to-end digital transformation. +CONVERSE +(Dollars in millions) +FISCAL 2020 +FISCAL 2019 +% CHANGE +% CHANGE EXCLUDING CURRENCY CHANGES +FISCAL 2018 +% CHANGE +% CHANGE EXCLUDING CURRENCY CHANGES +Revenues by: +Footwear +$ +1,642 +$ +1,658 +-1 +% +1 +% +$ +1,611 +3 +% +5 +% +Apparel +89 +$ +118 +-25 +% +-22 +% +$ +144 +-18 +% +-17 +% +Equipment +25 +24 +4 +% +8 +% +28 +-14 +% +-13 +% +Other (1) +90 +106 +-15 +% +-14 +% +103 +3 +% +4 +% +TOTAL REVENUES +$ +1,846 +$ +1,906 +-3 +% +-1 +% +$ +1,886 +1 +% +3 +% +Revenues by: +Sales to Wholesale Customers +$ +1,154 +$ +1,247 +-7 +% +-5 +% +$ +1,310 +-5 +% +2 +% +Sales through Direct to Consumer +602 +553 +9 +% +11 +% +473 +17 +% +5 +% +Other (1) +90 +106 +-15 +% +-14 +% +103 +3 +% +4 +% +TOTAL REVENUES +$ +1,846 +$ +1,906 +-3 +% +-1 +% +$ +1,886 +1 +% +3 +% +EARNINGS BEFORE INTEREST AND TAXES +$ +297 +$ +303 +-2 +% +$ +310 +-2 +% +(1) +Other revenues consist of territories serviced by third-party licensees who pay royalties to Converse for the use of its registered trademarks and other intellectual property rights. We do not own the Converse trademarks in Japan and accordingly do not earn revenues in Japan. +FISCAL 2020 COMPARED TO FISCAL 2019 +On a currency-neutral basis, Converse revenues decreased 1% for fiscal 2020 , as revenue growth for the first nine months of fiscal 2020 was offset by declines in the fourth quarter, primarily resulting from lower shipments to our wholesale customers and store closures in our direct to consumer operations due to COVID-19. Revenue declines in North America and Europe, as well as in licensee markets were partially offset by increases in Asia. Wholesale revenues decreased 5% while direct to consumer revenues increased 11%, as strong digital sales growth across all geographies more than offset declines from Converse owned store closures due to COVID-19. Combined unit sales within the wholesale and direct to consumer channels decreased 6%, while ASP grew 6% primarily due to the favorable impact on ASP of growth in the direct to consumer channel and growth within the Asia geography. +Reported EBIT decreased 2% , primarily driven by declines in revenues, partially offset by gross margin expansion and lower selling and administrative expenses. Gross margin increased 60 basis points driven by higher full-price ASP, in part due to growth in our higher margin Asia geography, as well as higher ASP in our direct to consumer channel, primarily through digital, both of which were only partially offset by unfavorable changes in standard foreign currency exchange rates. Selling and administrative expense decreased primarily due to decreases in demand creation expense, as operating overhead expense was flat. Demand creation expense decreased as a result of lower advertising and marketing in response to COVID-19. Operating overhead +2020 FORM 10-K 40 +Table of Contents +expense was flat for fiscal 2020 , as decreases in wage-related costs, travel and other discretionary expenses were offset by increased bad debt expense recognized in the fourth quarter. +CORPORATE +(Dollars in millions) +FISCAL 2020 +FISCAL 2019 +% CHANGE +FISCAL 2018 +% CHANGE +Revenues +$ +(11 +) +$ +(7 +) +— +$ +26 +— +Earnings (Loss) Before Interest and Taxes +$ +(1,967 +) +$ +(1,810 +) +-9 +% +$ +(1,456 +) +-24 +% +Corporate revenues primarily consist of foreign currency hedge gains and losses related to revenues generated by entities within the NIKE Brand geographic operating segments and Converse, but managed through our central foreign exchange risk management program. +The Corporate loss before interest and taxes primarily consists of unallocated general and administrative expenses, including expenses associated with centrally managed departments; depreciation and amortization related to our corporate headquarters; unallocated insurance, benefit and compensation programs, including stock-based compensation; and certain foreign currency gains and losses. +In addition to the foreign currency gains and losses recognized in Corporate revenues, foreign currency results in Corporate include gains and losses resulting from the difference between actual foreign currency exchange rates and standard rates used to record non-functional currency denominated product purchases within the NIKE Brand geographic operating segments and Converse; related foreign currency hedge results; conversion gains and losses arising from re-measurement of monetary assets and liabilities in non-functional currencies; and certain other foreign currency derivative instruments. +For fiscal 2020 , Corporate includes the non-recurring impairment charge recognized as a result of our decision to transition our NIKE Brand business operations in Brazil, Argentina, Chile and Uruguay to third-party distributors. This charge primarily reflects the anticipated release of associated non-cash cumulative foreign currency translation losses. +FISCAL 2020 COMPARED TO FISCAL 2019 +The Corporate loss before interest and taxes increased $157 million primarily due to the following: +• +an unfavorable change of $494 million, primarily due to the $405 million non-recurring impairment charge discussed above. For more information see Note 20 — Acquisitions and Divestitures within the accompanying Notes to the Consolidated Financial Statements; +• +a favorable change of $213 million related to the difference between actual foreign currency exchange rates and standard foreign currency exchange rates assigned to the NIKE Brand geographic operating segments and Converse, net of hedge gains and losses; these results are reported as a component of consolidated gross margin; and +• +a favorable change in net foreign currency gains and losses of $124 million related to the re-measurement of monetary assets and liabilities denominated in non-functional currencies and the impact of certain foreign currency derivative instruments, reported as a component of consolidated Other (income) expense, net . +FOREIGN CURRENCY EXPOSURES AND HEDGING PRACTICES +OVERVIEW +As a global company with significant operations outside the United States, in the normal course of business we are exposed to risk arising from changes in currency exchange rates. Our primary foreign currency exposures arise from the recording of transactions denominated in non-functional currencies and the translation of foreign currency denominated results of operations, financial position and cash flows into U.S. Dollars. +Our foreign exchange risk management program is intended to lessen both the positive and negative effects of currency fluctuations on our consolidated results of operations, financial position and cash flows. We manage global foreign exchange risk centrally on a portfolio basis to address those risks material to NIKE, Inc. We manage these exposures by taking advantage of natural offsets and currency correlations existing within the portfolio and, where practical and material, by hedging a portion of the remaining exposures using derivative instruments such as forward contracts and options. As described below, the implementation of the NIKE Trading Company (NTC) and our foreign currency adjustment program enhanced our ability to manage our foreign exchange risk by increasing the natural offsets and currency correlation benefits existing within our portfolio of foreign exchange exposures. Our hedging policy is designed to partially or entirely offset the impact of exchange rate changes on the underlying net exposures being hedged. Where exposures are hedged, our program has the effect of delaying the impact +2020 FORM 10-K 41 +Table of Contents +of exchange rate movements on our Consolidated Financial Statements; the length of the delay is dependent upon hedge horizons. We do not hold or issue derivative instruments for trading or speculative purposes. +Refer to Note 6 — Fair Value Measurements and Note 14 — Risk Management and Derivatives in the accompanying Notes to the Consolidated Financial Statements for additional description of outstanding derivatives at each reported period end. +TRANSACTIONAL EXPOSURES +We conduct business in various currencies and have transactions which subject us to foreign currency risk. Our most significant transactional foreign currency exposures are: +• +Product Costs — NIKE's product costs are exposed to fluctuations in foreign currencies in the following ways: +1. +Product purchases denominated in currencies other than the functional currency of the transacting entity: +a. +Certain NIKE entities purchase product from the NTC, a wholly-owned sourcing hub that buys NIKE branded products from third-party factories, predominantly in U.S. Dollars. The NTC, whose functional currency is the U.S. Dollar, then sells the products to NIKE entities in their respective functional currencies. NTC sales to a NIKE entity with a different functional currency results in a foreign currency exposure for the NTC. +b. +Other NIKE entities purchase product directly from third-party factories in U.S. Dollars. These purchases generate a foreign currency exposure for those NIKE entities with a functional currency other than the U.S. Dollar. +In both purchasing scenarios, a weaker U.S. Dollar reduces inventory costs incurred by NIKE whereas a stronger U.S. Dollar increases its cost. +2. +Factory input costs: NIKE operates a foreign currency adjustment program with certain factories. The program is designed to more effectively manage foreign currency risk by assuming certain of the factories' foreign currency exposures, some of which are natural offsets to our existing foreign currency exposures. Under this program, our payments to these factories are adjusted for rate fluctuations in the basket of currencies (“factory currency exposure index”) in which the labor, materials and overhead costs incurred by the factories in the production of NIKE branded products (“factory input costs”) are denominated. +For the currency within the factory currency exposure indices that is the local or functional currency of the factory, the currency rate fluctuation affecting the product cost is recorded within Inventories and is recognized in Cost of sales when the related product is sold to a third-party. All currencies within the indices, excluding the U.S. Dollar and the local or functional currency of the factory, are recognized as embedded derivative contracts and are recorded at fair value through Other (income) expense, net . Refer to Note 14 — Risk Management and Derivatives in the accompanying Notes to the Consolidated Financial Statements for additional detail. +As an offset to the impacts of the fluctuating U.S. Dollar on our non-functional currency denominated product purchases described above, a strengthening U.S. Dollar against the foreign currencies within the factory currency exposure indices reduces NIKE's U.S. Dollar inventory cost. Conversely, a weakening U.S. Dollar against the indexed foreign currencies increases our inventory cost. +• +Non-Functional Currency Denominated External Sales — A portion of our NIKE Brand and Converse revenues associated with European operations are earned in currencies other than the Euro (e.g., the British Pound) but are recognized at a subsidiary that uses the Euro as its functional currency. These sales generate a foreign currency exposure. +• +Other Costs — Non-functional currency denominated costs, such as endorsement contracts, also generate foreign currency risk, though to a lesser extent. In certain cases, the Company has entered into contractual agreements which have payments indexed to foreign currencies that create embedded derivative contracts recorded at fair value through Other (income) expense, net . Refer to Note 14 — Risk Management and Derivatives in the accompanying Notes to the Consolidated Financial Statements for additional detail. +• +Non-Functional Currency Denominated Monetary Assets and Liabilities — Our global subsidiaries have various assets and liabilities, primarily receivables and payables, including intercompany receivables and payables, denominated in currencies other than their functional currencies. These balance sheet items are subject to re-measurement which may create fluctuations in Other (income) expense, net within our consolidated results of operations. +MANAGING TRANSACTIONAL EXPOSURES +Transactional exposures are managed on a portfolio basis within our foreign currency risk management program. We manage these exposures by taking advantage of natural offsets and currency correlations that exist within the portfolio and may also elect to use currency forward and option contracts to hedge the remaining effect of exchange rate fluctuations on probable forecasted future cash flows, including certain product cost exposures, non-functional currency denominated external sales and other costs described above. Generally, these are accounted for as cash flow hedges, except for hedges of the embedded derivative components of the product cost exposures and other contractual agreements. +2020 FORM 10-K 42 +Table of Contents +Certain currency forward contracts used to manage the foreign exchange exposure of non-functional currency denominated monetary assets and liabilities subject to re-measurement and embedded derivative contracts are not formally designated as hedging instruments. Accordingly, changes in fair value of these instruments are recognized in Other (income) expense, net and are intended to offset the foreign currency impact of the re-measurement of the related non-functional currency denominated asset or liability or the embedded derivative contract being hedged. +TRANSLATIONAL EXPOSURES +Many of our foreign subsidiaries operate in functional currencies other than the U.S. Dollar. Fluctuations in currency exchange rates create volatility in our reported results as we are required to translate the balance sheets, operational results and cash flows of these subsidiaries into U.S. Dollars for consolidated reporting. The translation of foreign subsidiaries' non-U.S. Dollar denominated balance sheets into U.S. Dollars for consolidated reporting results in a cumulative translation adjustment to Accumulated other comprehensive income (loss) within Shareholders' equity . In the translation of our Consolidated Statements of Income, a weaker U.S. Dollar in relation to foreign functional currencies benefits our consolidated earnings whereas a stronger U.S. Dollar reduces our consolidated earnings. The impact of foreign exchange rate fluctuations on the translation of our consolidated Revenues was a detriment of approximately $867 million, a detriment of approximately $1,236 million, and a benefit of approximately $832 million for the years ended May 31, 2020 , 2019 and 2018 , respectively. The impact of foreign exchange rate fluctuations on the translation of our Income before income taxes was a detriment of approximately $212 million, a detriment of approximately $233 million, and a benefit of approximately $177 million for the years ended May 31, 2020 , 2019 and 2018 , respectively. +Management generally identifies hyper-inflationary markets as those markets whose cumulative inflation rate over a three-year period exceeds 100%. Management has concluded our Argentina subsidiary within our APLA operating segment is operating in a hyper-inflationary market. As a result, beginning in the second quarter of fiscal 2019, the functional currency of our Argentina subsidiary changed from the local currency to the U.S. Dollar. As of and for the period ended May 31, 2020 , this change did not have a material impact on our results of operations or financial condition and we do not anticipate it will have a material impact in future periods based on current rates. +MANAGING TRANSLATIONAL EXPOSURES +To minimize the impact of translating foreign currency denominated revenues and expenses into U.S. Dollars for consolidated reporting, certain foreign subsidiaries use excess cash to purchase U.S. Dollar denominated available-for-sale investments. The variable future cash flows associated with the purchase and subsequent sale of these U.S. Dollar denominated investments at non-U.S. Dollar functional currency subsidiaries creates a foreign currency exposure that qualifies for hedge accounting under U.S. GAAP. We utilize forward contracts and/or options to mitigate the variability of the forecasted future purchases and sales of these U.S. Dollar investments. The combination of the purchase and sale of the U.S. Dollar investment and the hedging instrument has the effect of partially offsetting the year-over-year foreign currency translation impact on net earnings in the period the investments are sold. Hedges of the purchase of U.S. Dollar denominated available-for-sale investments are accounted for as cash flow hedges. +We estimate the combination of translation of foreign currency-denominated profits from our international businesses and the year-over-year change in foreign currency related gains and losses included in Other (income) expense, net had an unfavorable impact of approximately $91 million, $97 million, and $110 million on our Income before income taxes for the years ended May 31, 2020, 2019 and 2018, respectively. +NET INVESTMENTS IN FOREIGN SUBSIDIARIES +We are also exposed to the impact of foreign exchange fluctuations on our investments in wholly-owned foreign subsidiaries denominated in a currency other than the U.S. Dollar, which could adversely impact the U.S. Dollar value of these investments and therefore the value of future repatriated earnings. We have, in the past, hedged and may, in the future, hedge net investment positions in certain foreign subsidiaries to mitigate the effects of foreign exchange fluctuations on these net investments. These hedges are accounted for as net investment hedges in accordance with U.S. GAAP. There were no outstanding net investment hedges as of May 31, 2020 and 2019 . There were no cash flows from net investment hedge settlements for the years ended May 31, 2020 , 2019 and 2018 . +2020 FORM 10-K 43 +Table of Contents +LIQUIDITY AND CAPITAL RESOURCES +CASH FLOW ACTIVITY +Cash provided (used) by operations was an inflow of $2,485 million for fiscal 2020 compared to $5,903 million for fiscal 2019 . Net income , adjusted for non-cash items, generated $3,730 million of operating cash inflow for fiscal 2020 compared to $5,341 million for fiscal 2019 . The decrease primarily reflects lower Net Income , resulting from the unfavorable impacts of COVID-19. The net change in working capital and other assets and liabilities resulted in a decrease to Cash provided (used) by operations of $1,245 million for fiscal 2020 , compared to an increase of $562 million for fiscal 2019 . The net change in working capital was impacted by a $1,364 million increase in Inventories , in part reflecting lower shipments to our wholesale customers and store closures within our NIKE Direct operations, as well as a decrease in Accounts Payabl e resulting from lower spending, both of which are due to COVID-19. The net change in working capital was also unfavorably impacted by the net change in cash collateral with derivative counterparties as a result of hedging transactions. During fiscal 2020 , cash collateral received from counterparties decreased $289 million compared to an increase of $266 million in fiscal 2019 . Refer to the Credit Risk section of Note 14 — Risk Management and Derivatives in the accompanying Notes to the Consolidated Financial Statements for additional details. In addition, the net change in working capital was impacted by a $1,509 million reduction in Accounts receivable, net , in fiscal 2020 , primarily driven by lower revenues in the fourth quarter of fiscal 2020 due to the impacts of COVID-19. +Cash provided (used) by investing activities was an outflow of $1,028 million for fiscal 2020 , compared to an outflow of $264 million for fiscal 2019 , driven primarily by lower proceeds from the net change in short-term investments. During fiscal 2020 , the net change in investments (including sales, maturities and purchases) resulted in a cash inflow of $27 million compared to $850 million in fiscal 2019 . Additionally, during fiscal 2020, we continued investing in our infrastructure to support future growth, specifically focused around digital capabilities, our end-to-end technology foundation, our corporate facilities and improvements across our supply chain. We expect this trend to continue in future periods. +Cash provided (used) by financing activities was an inflow of $2,491 million for fiscal 2020 compared to an outflow of $5,293 million for fiscal 2019 , primarily due to the net proceeds from a $5,942 million corporate bond issuance in the fourth quarter of fiscal 2020, as well as lower share repurchases during fiscal 2020 . +In fiscal 2020 , we purchased 33.5 million shares of NIKE's Class B Common Stock for $3,033 million (an average price of $ 90.49 per share) under the four-year, $15 billion share repurchase program approved by the Board of Directors in June 2018. As of May 31, 2020 , we had repurchased 45.2 million shares at a cost of $4,019 million (an average price of $89.00 per share) under this new program. We continue to expect funding of share repurchases will come from operating cash flows, excess cash and/or proceeds from debt. To enhance our liquidity position in response to COVID-19, during the fourth quarter of fiscal 2020, we elected to temporarily suspend share repurchases under our existing share repurchase program. The existing program remains authorized by the Board of Directors and we may resume share repurchases in the future at any time, depending upon market conditions, our capital needs and other factors. +CAPITAL RESOURCES +On July 23, 2019, we filed a shelf registration statement (the “Shelf”) with the U.S. Securities and Exchange Commission (SEC) which permits us to issue an unlimited amount of debt securities from time to time. The Shelf expires on July 23, 2022. On March 27, 2020 we issued $6 billion of senior unsecured notes with tranches maturing March 27, 2025, March 27, 2027, March 27, 2030, March 27, 2040 and March 27, 2050. For additional information regarding our long-term debt refer to Note 8 — Long-Term Debt in the accompanying Notes to the Consolidated Financial Statements. +On August 16, 2019, we entered into a committed credit facility agreement with a syndicate of banks which provides for up to $2 billion of borrowings, with the option to increase borrowings up to $3 billion in total upon lender approval. The facility matures on August 16, 2024, with a one-year extension option prior to any anniversary of the closing date, provided that in no event shall it extend beyond August 16, 2026. This facility replaces the prior $2 billion credit facility agreement entered into on August 28, 2015, which would have matured August 28, 2020. On April 6, 2020, we entered into a committed credit facility agreement with a syndicate of banks which provides for up to $2 billion of borrowings, in addition to the existing credit facility discussed above. The new facility matures on April 5, 2021. As of May 31, 2020 and 2019 , no amounts were outstanding under our committed credit facilities. +We currently have long-term debt ratings of AA- and A1 from Standard and Poor's Corporation and Moody's Investor Services, respectively. As it relates to our committed credit facility entered into on August 16, 2019, if our long-term debt ratings were to decline, the facility fee and interest rate would increase. Conversely, if our long-term debt ratings were to improve, the facility fee and interest rate would decrease. Under the committed credit facility entered into on April 6, 2020, if our long-term debt ratings were to decline, only the interest rate would increase, but would remain unchanged in the event our long-term debt rating were to improve. Changes in our long-term debt ratings would not trigger acceleration of maturity of any then-outstanding borrowings or any future borrowings under the committed credit facilities. Under these facilities, we have agreed to various covenants. These +2020 FORM 10-K 44 +Table of Contents +covenants include limits on our disposal of assets and the amount of debt secured by liens we may incur. In the event we were to have any borrowings outstanding under these facilities, failed to meet any covenant and were unable to obtain a waiver from a majority of the banks in the syndicate, any borrowings would become immediately due and payable. As of May 31, 2020 , we were in full compliance with each of these covenants and believe it is unlikely we will fail to meet any of these covenants in the foreseeable future. +Liquidity is also provided by our $4 billion commercial paper program, which we increased by $2 billion during the fourth quarter of fiscal 2020. During the fiscal year ended May 31, 2020 , the maximum amount of commercial paper borrowings outstanding at any point was $ 1,456 million. As of May 31, 2020 , we had $248 million of commercial paper outstanding at a weighted average interest rate of 1.65% . No commercial paper was outstanding as of May 31, 2019. +We may continue to issue commercial paper or other debt securities depending on general corporate needs. We currently have short-term debt ratings of A1+ and P1 from Standard and Poor's Corporation and Moody's Investor Services, respectively. +To date, in fiscal 2020, we have not experienced difficulty accessing the credit markets; however, future volatility in the capital markets may increase costs associated with issuing commercial paper or other debt instruments or affect our ability to access those markets. +As of May 31, 2020 , we had cash, cash equivalents and short-term investments totaling $8.8 billion , primarily consisting of commercial paper, corporate notes, deposits held at major banks, money market funds, U.S. government sponsored enterprise obligations, U.S. Treasury obligations and other investment grade fixed-income securities. Our fixed-income investments are exposed to both credit and interest rate risk. All of our investments are investment grade to minimize our credit risk. While individual securities have varying durations, as of May 31, 2020 , the weighted-average days to maturity of our cash equivalents and short-term investments portfolio was 14 days. +We believe that existing cash, cash equivalents, short-term investments and cash generated by operations, together with access to external sources of funds as described above, will be sufficient to meet our domestic and foreign capital needs in the foreseeable future. +We utilize a variety of tax planning and financing strategies to manage our worldwide cash and deploy funds to locations where they are needed. We indefinitely reinvest a significant portion of our foreign earnings, and our current plans do not demonstrate a need to repatriate these earnings. Should we require additional capital in the United States, we may determine to repatriate indefinitely reinvested foreign funds or raise capital in the United States through debt. Given our existing structure, if we were to repatriate indefinitely reinvested foreign earnings, we would be required to accrue and pay withholding taxes in certain foreign jurisdictions. +OFF-BALANCE SHEET ARRANGEMENTS +In connection with various contracts and agreements, we routinely provide indemnification relating to the enforceability of intellectual property rights, coverage for legal issues that arise and other items where we are acting as the guarantor. Currently, we have several such agreements in place. Based on our historical experience and the estimated probability of future loss, we have determined that the fair value of such indemnification is not material to our financial position or results of operations. +CONTRACTUAL OBLIGATIONS +Our significant long-term contractual obligations as of May 31, 2020 , and significant endorsement contracts, including related marketing commitments, entered into through the date of this report are as follows: +DESCRIPTION OF COMMITMENT +CASH PAYMENTS DUE DURING THE YEAR ENDING MAY 31, +(Dollars in millions) +2021 +2022 +2023 +2024 +2025 +THEREAFTER +TOTAL +Operating Leases +$ +550 +$ +514 +$ +456 +$ +416 +$ +374 +$ +1,474 +$ +3,784 +Long-Term Debt (1) +289 +286 +786 +275 +1,275 +11,541 +14,452 +Endorsement Contracts (2) +1,330 +1,471 +1,178 +1,064 +1,135 +3,164 +9,342 +Product Purchase Obligations (3) +4,234 +— +— +— +— +— +4,234 +Other Purchase Obligations (4) +1,085 +345 +189 +136 +127 +345 +2,227 +Transition Tax Related to the Tax Act (5) +86 +86 +86 +161 +215 +268 +902 +TOTAL +$ +7,574 +$ +2,702 +$ +2,695 +$ +2,052 +$ +3,126 +$ +16,792 +$ +34,941 +(1) +The cash payments due for long-term debt include estimated interest payments. Estimates of interest payments are based on outstanding principal amounts, applicable fixed interest rates or currently effective interest rates as of May 31, 2020 (if variable), timing of scheduled payments and the term of the debt obligations. +(2) +The amounts listed for endorsement contracts represent approximate amounts of base compensation and minimum guaranteed royalty fees we are obligated to pay athlete, public figure, sport team and league endorsers of our products. Actual payments under some contracts may be higher than the +2020 FORM 10-K 45 +Table of Contents +amounts listed as these contracts provide for bonuses to be paid to the endorsers based upon athletic achievements and/or royalties on product sales in future periods. Actual payments under some contracts may also be lower as these contracts include provisions for reduced payments if athletic performance declines in future periods. +In addition to the cash payments, we are obligated to furnish our endorsers with NIKE product for their use. It is not possible to determine how much we will spend on this product on an annual basis as the contracts generally do not stipulate a specific amount of cash to be spent on the product. The amount of product provided to the endorsers will depend on many factors, including general playing conditions, the number of sporting events in which they participate and our own decisions regarding product and marketing initiatives. In addition, the costs to design, develop, source and purchase the products furnished to the endorsers are incurred over a period of time and are not necessarily tracked separately from similar costs incurred for products sold to customers. +(3) +We generally order product at least four to five months in advance of sale based primarily on advanced orders received from external wholesale customers and internal orders from our direct to consumer operations. The amounts listed for product purchase obligations represent agreements (including open purchase orders) to purchase products in the ordinary course of business that are enforceable and legally binding and specify all significant terms. In some cases, prices are subject to change throughout the production process. +(4) +Other purchase obligations primarily include construction, service and marketing commitments, including marketing commitments associated with endorsement contracts, made in the ordinary course of business. The amounts represent the minimum payments required by legally binding contracts and agreements that specify all significant terms, and may include open purchase orders for non-product purchases. +(5) +Represents the future cash payments due as part of the transition tax on deemed repatriation of undistributed earnings of foreign subsidiaries, which is reflected net of foreign tax credits we utilized. Refer to Note 9 — Income Taxes in the accompanying Notes to the Consolidated Financial Statements for additional information. +In addition to the above, we have long-term obligations for uncertain tax positions and various post-retirement benefits for which we are not able to reasonably estimate when cash payments will occur. Refer to Note 9 — Income Taxes and Note 13 — Benefit Plans in the accompanying Notes to the Consolidated Financial Statements for further information related to uncertain tax positions and post-retirement benefits, respectively. +We also have the following outstanding short-term debt obligations as of May 31, 2020 . Refer to Note 7 — Short-Term Borrowings and Credit Lines in the accompanying Notes to the Consolidated Financial Statements for further description and interest rates related to the short-term debt obligations listed below. +(Dollars in millions) +AS OF MAY 31, 2020 +Notes payable, due at mutually agreed-upon dates within one year of issuance or on demand +$ +248 +As of May 31, 2020 , we had bank guarantees and letters of credit outstanding totaling $239 million , issued primarily for real estate agreements, self-insurance programs and other general business obligations. +NEW ACCOUNTING PRONOUNCEMENTS +Refer to Note 1 — Summary of Significant Accounting Policies in the accompanying Notes to the Consolidated Financial Statements for recently adopted accounting standards. +CRITICAL ACCOUNTING POLICIES +Our previous discussion and analysis of our financial condition and results of operations are based upon our Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. Note 1 — Summary of Significant Accounting Policies in the accompanying Notes to the Consolidated Financial Statements describes the significant accounting policies and methods used in the preparation of our Consolidated Financial Statements. +We believe the estimates, assumptions and judgments involved in the accounting policies described below have the greatest potential impact on our Consolidated Financial Statements, so we consider these to be our critical accounting policies and estimates. Management has reviewed and discussed these critical accounting policies with the Audit & Finance Committee of the Board of Directors. +These policies require that we make estimates in the preparation of our Consolidated Financial Statements as of a given date. Because of the uncertainty inherent in these matters, actual results could differ from the estimates we use in applying the critical accounting policies. Within the context of these critical accounting policies, we are not currently aware of any reasonably likely events or circumstances that would result in materially different amounts being reported. +REVENUE RECOGNITION +On June 1, 2018, we adopted Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606) , using the modified retrospective method of adoption. Prior to fiscal 2019, amounts have not been restated and continue to be reported in accordance with our historical accounting policies. Our revenue recognition policies under Topic 606 are described +2020 FORM 10-K 46 +Table of Contents +in the following paragraphs and references to prior period policies under Accounting Standard Codification Topic 605 — Revenue Recognition, are included below in the event they are substantially different. +Revenue transactions associated with the sale of NIKE Brand footwear, apparel and equipment, as well as Converse products, comprise a single performance obligation, which consists of the sale of products to customers either through wholesale or direct to consumer channels. We satisfy the performance obligation and record revenues when transfer of control has passed to the customer, based on the terms of sale. A customer is considered to have control once they are able to direct the use and receive substantially all of the benefits of the product. Transfer of control passes to wholesale customers upon shipment or upon receipt depending on the country of the sale and the agreement with the customer. Control passes to retail store customers at the time of sale and to substantially all digital commerce customers upon shipment. Prior to fiscal 2019, the requirements for recognizing revenue were met upon delivery to the customer. The transaction price is determined based upon the invoiced sales price, less anticipated sales returns, discounts and miscellaneous claims from customers. Payment terms for wholesale transactions depend on the country of sale or agreement with the customer and payment is generally required within 90 days or less of shipment to or receipt by the wholesale customer. Payment is due at the time of sale for retail store and digital commerce transactions. +As part of our revenue recognition policy, consideration promised in our contracts with customers is variable due to anticipated reductions such as sales returns, discounts and miscellaneous claims from customers. We estimate the most likely amount we will be entitled to receive and record an anticipated reduction against Revenues, with an offsetting increase to Accrued liabilities at the time revenues are recognized. The estimated cost of inventory for product returns is recorded in Prepaid expenses and other current assets on the Consolidated Balance Sheets. Prior to fiscal 2019, reserve balances were reported net of the estimated cost of inventory for product returns and recognized within Accounts receivable, ne t for wholesale transactions and Accrued liabilities for our direct to consumer business, on the Consolidated Balance Sheets. +The provision for anticipated sales returns consists of both contractual return rights and discretionary authorized returns. Provisions for post-invoice sales discounts consist of both contractual programs and discretionary discounts that are expected to be granted at a later date. +Estimates of discretionary authorized returns, discounts and claims are based on (1) historical rates, (2) specific identification of outstanding returns not yet received from customers and outstanding discounts and claims and (3) estimated returns, discounts and claims expected but not yet finalized with customers. Actual returns, discounts and claims in any future period are inherently uncertain and may differ from estimates recorded. If actual or expected future returns, discounts or claims were significantly different than reserves established, a reduction or increase to net revenues would be recorded in the period in which such determination was made. +Refer also to Note 1 — Summary of Significant Accounting Policies and Note 16 — Revenues for additional information in the accompanying Notes to the Consolidated Financial Statements. +INVENTORY RESERVES +We make ongoing estimates relating to the net realizable value of inventories based upon our assumptions about future demand and market conditions. If we estimate the net realizable value of our inventory is less than the cost of the inventory recorded on our books, we record a reserve equal to the difference between the cost of the inventory and the estimated net realizable value. This reserve is recorded as a charge to Cost of sales . If changes in market conditions result in reductions to the estimated net realizable value of our inventory below our previous estimate, we would increase our reserve in the period in which we made such a determination. +CONTINGENT PAYMENTS UNDER ENDORSEMENT CONTRACTS +A significant amount of our Demand creation expense relates to payments under endorsement contracts. In general, endorsement payments are expensed on a straight-line basis over the term of the contract. However, certain contract elements may be accounted for differently based upon the facts and circumstances of each individual contract. +Certain contracts provide for contingent payments to endorsers based upon specific achievements in their sports (e.g., winning a championship). We record demand creation expense for these amounts when the endorser achieves the specific goal. +Certain contracts provide for variable payments based upon endorsers maintaining a level of performance in their sport over an extended period of time (e.g., maintaining a specified ranking in a sport for a year). When we determine payments are probable, the amounts are reported in Demand creation expense ratably over the contract period based on our best estimate of the endorser's performance. In these instances, to the extent actual payments to the endorser differ from our estimate due to changes in the endorser's performance, adjustments to Demand creation expense may be recorded in a future period. +Certain contracts provide for royalty payments to endorsers based upon a predetermined percent of sales of particular products, which we record in Cost of sales as the related sales occur. For contracts containing minimum guaranteed royalty payments, we +2020 FORM 10-K 47 +Table of Contents +record the amount of any guaranteed payment in excess of that earned through sales of product within Demand creation expense . +PROPERTY, PLANT AND EQUIPMENT AND DEFINITE-LIVED ASSETS +We review the carrying value of long-lived assets or asset groups to be used in operations whenever events or changes in circumstances indicate the carrying amount of the assets might not be recoverable. Factors that would necessitate an impairment assessment include a significant adverse change in the extent or manner in which an asset is used, a significant adverse change in legal factors or the business climate that could affect the value of the asset or a significant decline in the observable market value of an asset, among others. If such facts indicate a potential impairment, we would assess the recoverability of an asset group by determining if the carrying value of the asset group exceeds the sum of the projected undiscounted cash flows expected to result from the use and eventual disposition of the assets over the remaining economic life of the primary asset in the asset group. If the recoverability test indicates the carrying value of the asset group is not recoverable, we will estimate the fair value of the asset group using appropriate valuation methodologies that would typically include an estimate of discounted cash flows. Any impairment would be measured as the difference between the asset group's carrying amount and its estimated fair value. +HEDGE ACCOUNTING FOR DERIVATIVES +We use derivative contracts to hedge certain anticipated foreign currency and interest rate transactions as well as certain non-functional currency monetary assets and liabilities. When the specific criteria to qualify for hedge accounting has been met, changes in the fair value of contracts hedging probable forecasted future cash flows are recorded in Accumulated other comprehensive income (loss) , rather than Net income , until the underlying hedged transaction affects Net income . In most cases, this results in gains and losses on hedge derivatives being released from Accumulated other comprehensive income (loss) into Net income sometime after the maturity of the derivative. One of the criteria for this accounting treatment is that the notional value of these derivative contracts should not be in excess of the designated amount of anticipated transactions. By their very nature, our estimates of anticipated transactions may fluctuate over time and may ultimately vary from actual transactions. When the designated amount of anticipated or actual transactions decline below hedged levels, or if it is no longer probable a forecasted transaction will occur by the end of the originally specified time period or within an additional two-month period of time thereafter, we are required to reclassify the cumulative change in fair value of the over-hedged portion of the related hedge contract from Accumulated other comprehensive income (loss) to Other (income) expense, net during the quarter in which the decrease occurs. In rare circumstances, the additional period of time may exceed two months due to extenuating circumstances related to the nature of the forecasted transaction that are outside our control or influence. +INCOME TAXES +We are subject to taxation in the United States, as well as various state and foreign jurisdictions. The determination of our provision for income taxes requires significant judgment, the use of estimates and the interpretation and application of complex tax laws. On an interim basis, we estimate our effective tax rate for the full fiscal year. This estimated annual effective tax rate is then applied to the year-to-date Income before income taxes excluding infrequently occurring or unusual items, to determine the year-to-date Income tax expense . The income tax effects of infrequent or unusual items are recognized in the interim period in which they occur. As the fiscal year progresses, we continually refine our estimate based upon actual events and earnings by jurisdiction during the year. This continual estimation process periodically results in a change to our expected effective tax rate for the fiscal year. When this occurs, we adjust the income tax provision during the quarter in which the change in estimate occurs. +We record valuation allowances against our deferred tax assets, when necessary. Realization of deferred tax assets (such as net operating loss carry-forwards) is dependent on future taxable earnings and is therefore uncertain. At least quarterly, we assess the likelihood that our deferred tax asset balance will be recovered from future taxable income. To the extent we believe that recovery is not likely, we establish a valuation allowance against our net deferred tax asset, which increases our Income tax expense in the period when such determination is made. +We have not recorded withholding tax expense for foreign earnings we have determined to be indefinitely reinvested within certain of our foreign jurisdictions. The amount of earnings indefinitely reinvested offshore is due to the actual deployment of such earnings in our offshore operations and our expectations of the future cash needs of our U.S. and foreign entities. Withholding tax consequences are also a factor in determining the amount of foreign earnings to be indefinitely reinvested offshore. +We carefully review all factors that drive the ultimate disposition of foreign earnings determined to be reinvested offshore and apply stringent standards to overcome the presumption of repatriation. Despite this approach, because the determination is based on expected working capital and other capital needs in jurisdictions where the earnings are generated, the possibility exists that foreign earnings declared as indefinitely reinvested may be repatriated. For instance, the actual cash needs of our U.S. operations may exceed our current expectations, or the actual cash needs of our foreign entities may be less than our current expectations. This would result in additional withholding tax expense in the year we determined amounts were no longer indefinitely reinvested offshore. +2020 FORM 10-K 48 +Table of Contents +On a quarterly basis, we evaluate the probability a tax position will be effectively sustained and the appropriateness of the amount recognized for uncertain tax positions based on factors including changes in facts or circumstances, changes in tax law, settled audit issues and new audit activity. Changes in our assessment may result in the recognition of a tax benefit or an additional charge to the tax provision in the period our assessment changes. We recognize interest and penalties related to income tax matters in Income tax expense . +On December 22, 2017, the United States enacted the Tax Act, which significantly changed previous U.S. tax laws, including provisions for a one-time transition tax on deemed repatriation of undistributed foreign earnings, and a reduction in the corporate tax rate from 35% to 21% for tax years beginning after December 31, 2017, among other changes. The Tax Act also transitions U.S. international taxation from a worldwide system to a modified territorial system and includes base erosion prevention measures on non-U.S. earnings, which has the effect of subjecting certain earnings of our foreign subsidiaries to U.S. taxation. Certain provisions of the Tax Act, including a provision to tax global intangible low-taxed income (GILTI) of foreign subsidiaries, were not effective for the Company until fiscal 2019. In accordance with U.S. GAAP, the Company has made an accounting policy election to treat taxes due under the GILTI provision as a current period expense. +Implementation of the Tax Act required us to record incremental provisional tax expense in fiscal 2018, which increased our effective tax rate in fiscal 2018. We completed our analysis of the Tax Act in the second quarter of fiscal 2019 and no adjustments were made to the provisional amounts recorded. +Refer to Note 9 — Income Taxes in the accompanying Notes to the Consolidated Financial Statements for additional information. +OTHER CONTINGENCIES +In the ordinary course of business, we are involved in legal proceedings regarding contractual and employment relationships, product liability claims, trademark rights and a variety of other matters. We record contingent liabilities resulting from claims against us when a loss is assessed to be probable and the amount of the loss is reasonably estimable. Assessing probability of loss and estimating probable losses requires analysis of multiple factors, including in some cases judgments about the potential actions of third-party claimants and courts. Recorded contingent liabilities are based on the best information available and actual losses in any future period are inherently uncertain. If future adjustments to estimated probable future losses or actual losses exceed our recorded liability for such claims, we would record additional charges during the period in which the actual loss or change in estimate occurred. In addition to contingent liabilities recorded for probable losses, we disclose contingent liabilities when there is a reasonable possibility the ultimate loss will materially exceed the recorded liability. While we cannot predict the outcome of pending legal matters with certainty, we do not believe any currently identified claim, proceeding or litigation, either individually or in aggregate, will have a material impact on our results of operations, financial position or cash flows. +2020 FORM 10-K 49 +Table of Contents +ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK +In the normal course of business and consistent with established policies and procedures, we employ a variety of financial instruments to manage exposure to fluctuations in the value of foreign currencies and interest rates. It is our policy to utilize these financial instruments only where necessary to finance our business and manage such exposures; we do not enter into these transactions for trading or speculative purposes. +We are exposed to foreign currency fluctuations, primarily as a result of our international sales, product sourcing and funding activities. Our foreign exchange risk management program is intended to lessen both the positive and negative effects of currency fluctuations on our consolidated results of operations, financial position and cash flows. We use forward and option contracts to hedge certain anticipated, but not yet firmly committed, transactions as well as certain firm commitments and the related receivables and payables, including third-party and intercompany transactions. We have, in the past, and may in the future, also use forward or options contracts to hedge our investment in the net assets of certain international subsidiaries to offset foreign currency translation adjustments related to our net investment in those subsidiaries. Where exposures are hedged, our program has the effect of delaying the impact of exchange rate movements on our Consolidated Financial Statements. +The timing for hedging exposures, as well as the type and duration of the hedge instruments employed, are guided by our hedging policies and determined based upon the nature of the exposure and prevailing market conditions. Typically, the Company may enter into hedge contracts starting up to 12 to 24 months in advance of the forecasted transaction and may place incremental hedges up to 100% of the exposure by the time the forecasted transaction occurs. The majority of derivatives outstanding as of May 31, 2020 are designated as foreign currency cash flow hedges, primarily for Euro/U.S. Dollar, British Pound/Euro, Japanese Yen/U.S. Dollar and Chinese Yuan/U.S. Dollar currency pairs. Refer to Note 14 — Risk Management and Derivatives in the accompanying Notes to the Consolidated Financial Statements for additional information. +Our earnings are also exposed to movements in short- and long-term market interest rates. Our objective in managing this interest rate exposure is to limit the impact of interest rate changes on earnings and cash flows and to reduce overall borrowing costs. To achieve these objectives, we maintain a mix of commercial paper, bank loans, and fixed-rate debt of varying maturities. +MARKET RISK MEASUREMENT +We monitor foreign exchange risk, interest rate risk and related derivatives using a variety of techniques including a review of market value, sensitivity analysis and Value-at-Risk (“VaR”). Our market-sensitive derivative and other financial instruments are foreign currency forward contracts, foreign currency option contracts, intercompany loans denominated in non-functional currencies, fixed interest rate U.S. Dollar denominated debt and fixed interest rate Japanese Yen denominated debt. +We use VaR to monitor the foreign exchange risk of our foreign currency forward and foreign currency option derivative instruments only. The VaR determines the maximum potential one-day loss in the fair value of these foreign exchange rate-sensitive financial instruments. The VaR model estimates assume normal market conditions and a 95% confidence level. There are various modeling techniques that can be used in the VaR computation. Our computations are based on interrelationships between currencies and interest rates (a “variance/co-variance” technique). These interrelationships are a function of foreign exchange currency market changes and interest rate changes over the preceding one-year period. The value of foreign currency options does not change on a one-to-one basis with changes in the underlying currency rate. We adjust the potential loss in option value for the estimated sensitivity (the “delta” and “gamma”) to changes in the underlying currency rate. This calculation reflects the impact of foreign currency rate fluctuations on the derivative instruments only and does not include the impact of such rate fluctuations on non-functional currency transactions (such as anticipated transactions, firm commitments, cash balances and accounts and loans receivable and payable), including those which are hedged by these instruments. +The VaR model is a risk analysis tool and does not purport to represent actual losses in fair value we will incur nor does it consider the potential effect of favorable changes in market rates. It also does not represent the full extent of the possible loss that may occur. Actual future gains and losses will differ from those estimated because of changes or differences in market rates and interrelationships, hedging instruments and hedge percentages, timing and other factors. +The estimated maximum one-day loss in fair value on our foreign currency sensitive derivative financial instruments, derived using the VaR model, was $48 million and $34 million at May 31, 2020 and 2019 , respectively. The VaR increased year-over-year as a result of an increase in foreign currency volatilities at May 31, 2020 . Such a hypothetical loss in the fair value of our derivatives would be offset by increases in the value of the underlying transactions being hedged. The average monthly change in the fair values of foreign currency forward and foreign currency option derivative instruments was $126 million and $83 million during fiscal 2020 and fiscal 2019 , respectively. +2020 FORM 10-K 50 +Table of Contents +The instruments not included in the VaR are intercompany loans denominated in non-functional currencies, fixed interest rate Japanese Yen denominated debt, and fixed interest rate U.S. Dollar denominated debt. Intercompany loans and related interest amounts are eliminated in consolidation. Furthermore, our non-functional currency intercompany loans are substantially hedged against foreign exchange risk through the use of forward contracts, which are included in the VaR calculation above. Therefore, we consider the interest rate and foreign currency market risks associated with our non-functional currency intercompany loans to be immaterial to our consolidated financial position, results of operations and cash flows. +Details of third-party debt are provided in the table below. The table presents principal cash flows and related weighted average interest rates by expected maturity dates. +EXPECTED MATURITY DATE YEAR ENDING MAY 31, +(Dollars in millions) +2021 +2022 +2023 +2024 +2025 +THEREAFTER +TOTAL +FAIR VALUE +Foreign Exchange Risk +Japanese Yen Functional Currency +Long-term Japanese Yen debt — Fixed rate +Principal payments +$ +3 +$ +— +$ +— +$ +— +$ +— +$ +— +$ +3 +$ +3 +Average interest rate +2.4 +% +0.0 +% +0.0 +% +0.0 +% +0.0 +% +0.0 +% +2.4 +% +Interest Rate Risk +Japanese Yen Functional Currency +Long-term Japanese Yen debt — Fixed rate +Principal payments +$ +3 +$ +— +$ +— +$ +— +$ +— +$ +— +$ +3 +$ +3 +Average interest rate +2.4 +% +0.0 +% +0.0 +% +0.0 +% +0.0 +% +0.0 +% +2.4 +% +U.S. Dollar Functional Currency +Long-term U.S. Dollar debt — Fixed rate +Principal payments +$ +— +$ +— +$ +500 +$ +— +$ +1,000 +$ +8,000 +$ +9,500 +$ +10,642 +Average interest rate +0.0 +% +0.0 +% +2.3 +% +0.0 +% +2.4 +% +3.1 +% +3.0 +% +The fixed interest rate Japanese Yen denominated debt instruments were issued by and are accounted for by one of our Japanese subsidiaries. Accordingly, the monthly translation of these instruments, which varies due to changes in foreign exchange rates, is recognized in Accumulated other comprehensive income (loss) upon consolidation of this subsidiary. +2020 FORM 10-K 51 +Table of Contents +ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA +Management of NIKE, Inc. is responsible for the information and representations contained in this report. The financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and include certain amounts based on our best estimates and judgments. Other financial information in this report is consistent with these financial statements. +Our accounting systems include controls designed to reasonably assure assets are safeguarded from unauthorized use or disposition and provide for the preparation of financial statements in conformity with U.S. GAAP. These systems are supplemented by the selection and training of qualified financial personnel and an organizational structure providing for appropriate segregation of duties. +An internal corporate audit department reviews the results of its work with the Audit & Finance Committee of the Board of Directors, presently comprised of three outside, independent directors. The Audit & Finance Committee is responsible for the appointment of the independent registered public accounting firm and reviews, with the independent registered public accounting firm, management and the internal corporate audit staff, the scope and the results of the annual audit, the effectiveness of the accounting control system and other matters relating to the financial affairs of NIKE as the Audit & Finance Committee deems appropriate. The independent registered public accounting firm and the internal corporate auditors have full access to the Audit & Finance Committee, with and without the presence of management, to discuss any appropriate matters. +2020 FORM 10-K 52 +Table of Contents +MANAGEMENT'S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING +Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13(a) - 15(f) and Rule 15(d) - 15(f) of the Securities Exchange Act of 1934, as amended. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the financial statements for external purposes in accordance with generally accepted accounting principles in the United States of America. Internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of assets of the Company that could have a material effect on the financial statements. +Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +Under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, our management conducted an evaluation of the effectiveness of our internal control over financial reporting based upon the framework in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on the results of our evaluation, our management concluded that our internal control over financial reporting was effective as of May 31, 2020 . +PricewaterhouseCoopers LLP, an independent registered public accounting firm, has audited (1) the Consolidated Financial Statements and (2) the effectiveness of our internal control over financial reporting as of May 31, 2020 , as stated in their report herein. +John J. Donahoe II +Matthew Friend +President and Chief Executive Officer +Executive Vice President and Chief Financial Officer +2020 FORM 10-K 53 +Table of Contents +Report of Independent Registered Public Accounting Firm +To the Board of Directors and Shareholders of NIKE, Inc. +Opinions on the Financial Statements and Internal Control over Financial Reporting +We have audited the accompanying consolidated balance sheets of NIKE, Inc. and its subsidiaries (the “Company”) as of May 31, 2020 and 2019, and the related consolidated statements of income, of comprehensive income, of shareholders' equity and of cash flows for each of the three years in the period ended May 31, 2020, including the related notes and financial statement schedule listed in the index appearing under Item 15(a)(2) (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of May 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). +In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of May 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended May 31, 2020 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of May 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO. +Changes in Accounting Principles +As discussed in Note 1 to the consolidated financial statements, the Company changed the manner in which it accounts for leases as of June 1, 2019 and the manner in which it accounts for revenue from contracts with customers and the manner in which it accounts for income taxes related to intra-entity transfers other than inventory as of June 1, 2018 . +Basis for Opinions +The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on the Company's consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. +Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions . +Definition and Limitations of Internal Control over Financial Reporting +A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. +2020 FORM 10-K 54 +Table of Contents +Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +Critical Audit Matters +The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. +Accounting for Income Taxes +As described in Note 9 to the consolidated financial statements, the Company recorded income tax expense of $348 million for the year ended May 31, 2020, and has net deferred tax assets of $732 million, including a valuation allowance of $26 million, and total gross unrecognized tax benefits, excluding related interest and penalties, of $771 million as of May 31, 2020, $536 million of which would affect the Company's effective tax rate if recognized in future periods. The Company is subject to taxation in the United States, as well as various state and foreign jurisdictions. As disclosed by management, the use of significant judgment and estimates, as well as the interpretation and application of complex tax laws is required by management to determine its provision for income taxes. +The principal considerations for our determination that performing procedures relating to the accounting for income taxes is a critical audit matter are the significant judgment by management when assessing complex tax laws and regulations, including new temporary regulations and recent court rulings, as it relates to determining the provision for income taxes and other tax positions. This in turn led to a high degree of auditor judgment, subjectivity and effort in performing procedures and evaluating audit evidence relating to the provision for income taxes and other tax positions. In addition, the audit effort involved the use of professionals with specialized skill and knowledge to assist in performing procedures and evaluating the audit evidence obtained. +Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the provision for income taxes and other tax positions. These procedures also included, among others, evaluating the effect on the Company's tax provision of changes in its legal entity structure and tax laws, testing management's tax calculations and considering the Company's compliance with tax laws. We also used professionals with specialized skill and knowledge to assist in evaluating the application of relevant tax laws, the provision for income taxes and the reasonableness of management's assessments of whether certain tax positions are more-likely-than-not of being sustained. +/s/ PricewaterhouseCoopers LLP +Portland, Oregon +July 24, 2020 +We have served as the Company's auditor since 1974. +2020 FORM 10-K 55 +Table of Contents +NIKE, INC. +CONSOLIDATED STATEMENTS OF INCOME +YEAR ENDED MAY 31, +(In millions, except per share data) +2020 +2019 +2018 +Revenues +$ +37,403 +$ +39,117 +$ +36,397 +Cost of sales +21,162 +21,643 +20,441 +Gross profit +16,241 +17,474 +15,956 +Demand creation expense +3,592 +3,753 +3,577 +Operating overhead expense +9,534 +8,949 +7,934 +Total selling and administrative expense +13,126 +12,702 +11,511 +Interest expense (income), net +89 +49 +54 +Other (income) expense, net +139 +( 78 +) +66 +Income before income taxes +2,887 +4,801 +4,325 +Income tax expense +348 +772 +2,392 +NET INCOME +$ +2,539 +$ +4,029 +$ +1,933 +Earnings per common share: +Basic +$ +1.63 +$ +2.55 +$ +1.19 +Diluted +$ +1.60 +$ +2.49 +$ +1.17 +Weighted average common shares outstanding: +Basic +1,558.8 +1,579.7 +1,623.8 +Diluted +1,591.6 +1,618.4 +1,659.1 +The accompanying Notes to the Consolidated Financial Statements are an integral part of this statement. +2020 FORM 10-K 56 +Table of Contents +NIKE, INC. +CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME +YEAR ENDED MAY 31, +(Dollars in millions) +2020 +2019 +2018 +Net income +$ +2,539 +$ +4,029 +$ +1,933 +Other comprehensive income (loss), net of tax: +Change in net foreign currency translation adjustment +( 148 +) +( 173 +) +( 6 +) +Change in net gains (losses) on cash flow hedges +( 130 +) +503 +76 +Change in net gains (losses) on other +( 9 +) +( 7 +) +34 +Total other comprehensive income (loss), net of tax +( 287 +) +323 +104 +TOTAL COMPREHENSIVE INCOME +$ +2,252 +$ +4,352 +$ +2,037 +The accompanying Notes to the Consolidated Financial Statements are an integral part of this statement. +2020 FORM 10-K 57 +Table of Contents +NIKE, INC. +CONSOLIDATED BALANCE SHEETS +MAY 31, +(In millions) +2020 +2019 +ASSETS +Current assets: +Cash and equivalents +$ +8,348 +$ +4,466 +Short-term investments +439 +197 +Accounts receivable, net +2,749 +4,272 +Inventories +7,367 +5,622 +Prepaid expenses and other current assets +1,653 +1,968 +Total current assets +20,556 +16,525 +Property, plant and equipment, net +4,866 +4,744 +Operating lease right-of-use assets, net +3,097 +— +Identifiable intangible assets, net +274 +283 +Goodwill +223 +154 +Deferred income taxes and other assets +2,326 +2,011 +TOTAL ASSETS +$ +31,342 +$ +23,717 +LIABILITIES AND SHAREHOLDERS' EQUITY +Current liabilities: +Current portion of long-term debt +$ +3 +$ +6 +Notes payable +248 +9 +Accounts payable +2,248 +2,612 +Current portion of operating lease liabilities +445 +— +Accrued liabilities +5,184 +5,010 +Income taxes payable +156 +229 +Total current liabilities +8,284 +7,866 +Long-term debt +9,406 +3,464 +Operating lease liabilities +2,913 +— +Deferred income taxes and other liabilities +2,684 +3,347 +Commitments and contingencies (Note 18) +Redeemable preferred stock +— +— +Shareholders' equity: +Common stock at stated value: +Class A convertible — 315 and 315 shares outstanding +— +— +Class B — 1,243 and 1,253 shares outstanding +3 +3 +Capital in excess of stated value +8,299 +7,163 +Accumulated other comprehensive income (loss) +( 56 +) +231 +Retained earnings (deficit) +( 191 +) +1,643 +Total shareholders' equity +8,055 +9,040 +TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY +$ +31,342 +$ +23,717 +The accompanying Notes to the Consolidated Financial Statements are an integral part of this statement. +2020 FORM 10-K 58 +Table of Contents +NIKE, INC. +CONSOLIDATED STATEMENTS OF CASH FLOWS +YEAR ENDED MAY 31, +(Dollars in millions) +2020 +2019 +2018 +Cash provided (used) by operations: +Net income +$ +2,539 +$ +4,029 +$ +1,933 +Adjustments to reconcile net income to net cash provided (used) by operations: +Depreciation +721 +705 +747 +Deferred income taxes +( 380 +) +34 +647 +Stock-based compensation +429 +325 +218 +Amortization, impairment and other +398 +15 +27 +Net foreign currency adjustments +23 +233 +( 99 +) +Changes in certain working capital components and other assets and liabilities: +(Increase) decrease in accounts receivable +1,239 +( 270 +) +187 +(Increase) decrease in inventories +( 1,854 +) +( 490 +) +( 255 +) +(Increase) decrease in prepaid expenses, operating lease right-of-use assets and other current and non-current assets +( 654 +) +( 203 +) +35 +Increase (decrease) in accounts payable, accrued liabilities, operating lease liabilities and other current and non-current liabilities +24 +1,525 +1,515 +Cash provided (used) by operations +2,485 +5,903 +4,955 +Cash provided (used) by investing activities: +Purchases of short-term investments +( 2,426 +) +( 2,937 +) +( 4,783 +) +Maturities of short-term investments +74 +1,715 +3,613 +Sales of short-term investments +2,379 +2,072 +2,496 +Additions to property, plant and equipment +( 1,086 +) +( 1,119 +) +( 1,028 +) +Other investing activities +31 +5 +( 22 +) +Cash provided (used) by investing activities +( 1,028 +) +( 264 +) +276 +Cash provided (used) by financing activities: +Proceeds from borrowings, net of debt issuance costs +6,134 +— +— +Increase (decrease) in notes payable, net +49 +( 325 +) +13 +Proceeds from exercise of stock options and other stock issuances +885 +700 +733 +Repurchase of common stock +( 3,067 +) +( 4,286 +) +( 4,254 +) +Dividends — common and preferred +( 1,452 +) +( 1,332 +) +( 1,243 +) +Other financing activities +( 58 +) +( 50 +) +( 84 +) +Cash provided (used) by financing activities +2,491 +( 5,293 +) +( 4,835 +) +Effect of exchange rate changes on cash and equivalents +( 66 +) +( 129 +) +45 +Net increase (decrease) in cash and equivalents +3,882 +217 +441 +Cash and equivalents, beginning of year +4,466 +4,249 +3,808 +CASH AND EQUIVALENTS, END OF YEAR +$ +8,348 +$ +4,466 +$ +4,249 +Supplemental disclosure of cash flow information: +Cash paid during the year for: +Interest, net of capitalized interest +$ +140 +$ +153 +$ +125 +Income taxes +1,028 +757 +529 +Non-cash additions to property, plant and equipment +121 +160 +294 +Dividends declared and not paid +385 +347 +320 +The accompanying Notes to the Consolidated Financial Statements are an integral part of this statement. +2020 FORM 10-K 59 +Table of Contents +NIKE, INC. +CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY +COMMON STOCK +CAPITAL IN EXCESS OF STATED VALUE +ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) +RETAINED EARNINGS (DEFICIT) +TOTAL +CLASS A +CLASS B +(In millions, except per share data) +SHARES +AMOUNT +SHARES +AMOUNT +Balance at May 31, 2017 +329 +$ +— +1,314 +$ +3 +$ +5,710 +$ +( 213 +) +$ +6,907 +$ +12,407 +Stock options exercised +24 +600 +600 +Repurchase of Class B Common Stock +( 70 +) +( 254 +) +( 4,013 +) +( 4,267 +) +Dividends on common stock ($0.78 per share) and preferred stock ($0.10 per share) +( 1,265 +) +( 1,265 +) +Issuance of shares to employees, net of shares withheld for employee taxes +4 +110 +( 28 +) +82 +Stock-based compensation +218 +218 +Net income +1,933 +1,933 +Other comprehensive income (loss) +104 +104 +Reclassifications to retained earnings in accordance with ASU 2018-02 +17 +( 17 +) +— +Balance at May 31, 2018 +329 +$ +— +1,272 +$ +3 +$ +6,384 +$ +( 92 +) +$ +3,517 +$ +9,812 +Stock options exercised +18 +539 +539 +Conversion to Class B Common Stock +( 14 +) +14 +— +Repurchase of Class B Common Stock +( 54 +) +( 227 +) +( 4,056 +) +( 4,283 +) +Dividends on common stock ($0.86 per share) and preferred stock ($0.10 per share) +( 1,360 +) +( 1,360 +) +Issuance of shares to employees, net of shares withheld for employee taxes +3 +142 +( 3 +) +139 +Stock-based compensation +325 +325 +Net income +4,029 +4,029 +Other comprehensive income (loss) +323 +323 +Adoption of ASU 2016-16 (Note 1) +( 507 +) +( 507 +) +Adoption of ASC Topic 606 (Note 1) +23 +23 +Balance at May 31, 2019 +315 +$ +— +1,253 +$ +3 +$ +7,163 +$ +231 +$ +1,643 +$ +9,040 +Stock options exercised +20 +703 +703 +Repurchase of Class B Common Stock +( 34 +) +( 161 +) +( 2,872 +) +( 3,033 +) +Dividends on common stock ($0.955 per share) and preferred stock ($0.10 per share) +( 1,491 +) +( 1,491 +) +Issuance of shares to employees, net of shares withheld for employee taxes +4 +165 +( 9 +) +156 +Stock-based compensation +429 +429 +Net income +2,539 +2,539 +Other comprehensive income (loss) +( 287 +) +( 287 +) +Adoption of ASC Topic 842 (Note 1) +( 1 +) +( 1 +) +Balance at May 31, 2020 +315 +$ +— +1,243 +$ +3 +$ +8,299 +$ +( 56 +) +$ +( 191 +) +$ +8,055 +The accompanying Notes to the Consolidated Financial Statements are an integral part of this statement. +2020 FORM 10-K 60 +Table of Contents +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +Note 1 +Summary of Significant Accounting Policies +62 +Note 2 +Inventories +69 +Note 3 +Property, Plant and Equipment +69 +Note 4 +Identifiable Intangible Assets and Goodwill +69 +Note 5 +Accrued Liabilities +70 +Note 6 +Fair Value Measurements +70 +Note 7 +Short-Term Borrowings and Credit Lines +73 +Note 8 +Long-Term Debt +74 +Note 9 +Income Taxes +75 +Note 10 +Redeemable Preferred Stock +78 +Note 11 +Common Stock and Stock-Based Compensation +78 +Note 12 +Earnings Per Share +80 +Note 13 +Benefit Plans +80 +Note 14 +Risk Management and Derivatives +81 +Note 15 +Accumulated Other Comprehensive Income (Loss) +86 +Note 16 +Revenues +88 +Note 17 +Operating Segments and Related Information +89 +Note 18 +Commitments and Contingencies +92 +Note 19 +Leases +92 +Note 20 +Acquisitions and Divestitures +93 +Note 21 +Subsequent Events +94 +2020 FORM 10-K 61 +Table of Contents +NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES +DESCRIPTION OF BUSINESS +NIKE, Inc. is a worldwide leader in the design, development and worldwide marketing and selling of athletic footwear, apparel, equipment, accessories and services. NIKE, Inc. portfolio brands include the NIKE Brand, Jordan Brand, Hurley and Converse. The NIKE Brand is focused on performance athletic footwear, apparel, equipment, accessories and services across a wide range of sport categories, amplified with sport-inspired lifestyle products carrying the Swoosh trademark, as well as other NIKE Brand trademarks. The Jordan Brand is focused on athletic and casual footwear, apparel and accessories using the Jumpman trademark. Sales and operating results of Jordan Brand products are reported within the respective NIKE Brand geographic operating segments. The Hurley brand is focused on action sports and youth lifestyle apparel and accessories under the Hurley trademark. Sales and operating results of Hurley brand products, prior to its divestiture, are reported within the NIKE Brand's North America geographic operating segment. Refer to Note 20 — Acquisitions and Divestitures for information regarding the divestiture of the Company's wholly-owned subsidiary, Hurley. Converse designs, distributes, licenses and sells casual sneakers, apparel and accessories under the Converse, Chuck Taylor, All Star, One Star, Star Chevron and Jack Purcell trademarks. In some markets outside the U.S., these trademarks are licensed to third parties who design, distribute, market and sell similar products. Operating results of the Converse brand are reported on a stand-alone basis. +BASIS OF CONSOLIDATION +The Consolidated Financial Statements include the accounts of NIKE, Inc. and its subsidiaries (the "Company" or "NIKE"). All significant intercompany transactions and balances have been eliminated. +REVENUE RECOGNITION +Beginning in fiscal 2019, the Company adopted Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606) . Prior to fiscal 2019, amounts have not been restated and continue to be reported in accordance with the Company's historical accounting policies. The Company's revenue recognition policies under Topic 606 are described in the following paragraphs and references to prior period policies under Accounting Standard Codification Topic 605 — Revenue Recognition (Topic 605) , are included below in the event they are substantially different. +Revenue transactions associated with the sale of NIKE Brand footwear, apparel and equipment, as well as Converse products, comprise a single performance obligation, which consists of the sale of products to customers either through wholesale or direct to consumer channels. The Company satisfies the performance obligation and records revenues when transfer of control has passed to the customer, based on the terms of sale. A customer is considered to have control once they are able to direct the use and receive substantially all of the benefits of the product. +Transfer of control passes to wholesale customers upon shipment or upon receipt depending on the country of the sale and the agreement with the customer. Control passes to retail store customers at the time of sale and to substantially all digital commerce customers upon shipment. Prior to fiscal 2019, the requirements for recognizing revenue were met upon delivery to the customer. The transaction price is determined based upon the invoiced sales price, less anticipated sales returns, discounts and miscellaneous claims from customers. Payment terms for wholesale transactions depend on the country of sale or agreement with the customer and payment is generally required within 90 days or less of shipment to or receipt by the wholesale customer. Payment is due at the time of sale for retail store and digital commerce transactions. +Consideration for trademark licensing contracts is earned through sales-based or usage-based royalty arrangements and the associated revenues are recognized over the license period. +Taxes assessed by governmental authorities that are both imposed on and concurrent with a specific revenue-producing transaction, and are collected by the Company from a customer, are excluded from Revenues and Cost of sales in the Consolidated Statements of Income. Shipping and handling costs associated with outbound freight after control over a product has transferred to a customer are accounted for as a fulfillment cost and are included in Cost of sales when the related revenues are recognized. +SALES-RELATED RESERVES +Consideration promised in the Company's contracts with customers is variable due to anticipated reductions such as sales returns, discounts and miscellaneous claims from customers. The Company estimates the most likely amount it will be entitled to receive and records an anticipated reduction against Revenues , with an offsetting increase to Accrued liabilities at the time revenues are recognized. The estimated cost of inventory for product returns is recorded in Prepaid expenses and other current assets on the Consolidated Balance Sheets. Prior to fiscal 2019, the Company's reserve balances were reported net of the +2020 FORM 10-K 62 +Table of Contents +estimated cost of inventory for product returns and recognized within Accounts receivable, net for wholesale transactions and Accrued liabilities for the Company's direct to consumer business, on the Consolidated Balance Sheets. +The provision for anticipated sales returns consists of both contractual return rights and discretionary authorized returns. Provisions for post-invoice sales discounts consist of both contractual programs and discretionary discounts that are expected to be granted at a later date. +Estimates of discretionary authorized returns, discounts and claims are based on (1) historical rates, (2) specific identification of outstanding returns not yet received from customers and outstanding discounts and claims and (3) estimated returns, discounts and claims expected, but not yet finalized with customers. Actual returns, discounts and claims in any future period are inherently uncertain and thus may differ from estimates recorded. If actual or expected future returns, discounts or claims were significantly greater or lower than the reserves established, a reduction or increase to net revenues would be recorded in the period in which such determination was made. +COST OF SALES +Cost of sales consists primarily of inventory costs, as well as warehousing costs (including the cost of warehouse labor), third-party royalties, certain foreign currency hedge gains and losses and product design costs. Shipping and handling costs are expensed as incurred and included in Cost of sales . +DEMAND CREATION EXPENSE +Demand creation expense consists of advertising and promotion costs, including costs of endorsement contracts, complimentary product, television, digital and print advertising and media costs, brand events and retail brand presentation. Advertising production costs are expensed the first time an advertisement is run. Advertising media costs are expensed when the advertisement appears. Costs related to brand events are expensed when the event occurs. Costs related to retail brand presentation are expensed when the presentation is complete and delivered. +A significant amount of the Company's promotional expenses result from payments under endorsement contracts. In general, endorsement payments are expensed on a straight-line basis over the term of the contract. However, certain contract elements may be accounted for differently based upon the facts and circumstances of each individual contract. Prepayments made under contracts are included in Prepaid expenses and other current assets or Deferred income taxes and other assets depending on the period to which the prepayment applies. +Certain contracts provide for contingent payments to endorsers based upon specific achievements in their sport (e.g., winning a championship). The Company records Demand creation expense for these amounts when the endorser achieves the specific goal. +Certain contracts provide for variable payments based upon endorsers maintaining a level of performance in their sport over an extended period of time (e.g., maintaining a specified ranking in a sport for a year). When the Company determines payments are probable, the amounts are reported in Demand creation expense ratably over the contract period based on the Company's best estimate of the endorser's performance. In these instances, to the extent actual payments to the endorser differ from the Company's estimate due to changes in the endorser's performance, adjustments to Demand creation expense may be recorded in a future period. +Certain contracts provide for royalty payments to endorsers based upon a predetermined percent of sales of particular products, which the Company records in Cost of sales as the related sales occur. For contracts containing minimum guaranteed royalty payments, the Company records the amount of any guaranteed payment in excess of that earned through sales of product within Demand creation expense . +Through cooperative advertising programs, the Company reimburses its wholesale customers for certain costs of advertising the Company's products. The Company records these costs in Demand creation expense at the point in time it is obligated to its customers for the costs. This obligation may arise prior to the related advertisement being run. +Total advertising and promotion expenses, which the Company refers to as Demand creation expense , were $ 3,592 million , $ 3,753 million and $ 3,577 million for the years ended May 31, 2020 , 2019 and 2018 , respectively. Prepaid advertising and promotion expenses totaled $ 686 million and $ 773 million at May 31, 2020 and 2019 , respectively, of which $ 326 million and $ 333 million , respectively, was recorded in Prepaid expenses and other current assets , and $ 360 million and $ 440 million , respectively, was recorded in Deferred income taxes and other assets , depending on the period to which the prepayment applied. +2020 FORM 10-K 63 +Table of Contents +OPERATING OVERHEAD EXPENSE +Operating overhead expense consists primarily of wage and benefit-related expenses, research and development costs, bad debt expense, as well as other administrative expenses, such as rent, depreciation and amortization, professional services, meetings and travel. +CASH AND EQUIVALENTS +Cash and equivalents represent cash and short-term, highly liquid investments, that are both readily convertible to known amounts of cash, and so near their maturity they present insignificant risk of changes in value because of changes in interest rates, including commercial paper, U.S. Treasury, U.S. Agency, money market funds, time deposits and corporate debt securities with maturities of 90 days or less at the date of purchase. +SHORT-TERM INVESTMENTS +Short-term investments consist of highly liquid investments, including commercial paper, U.S. Treasury, U.S. Agency, time deposits and corporate debt securities, with maturities over 90 days at the date of purchase. Debt securities the Company has the ability and positive intent to hold to maturity are carried at amortized cost. At May 31, 2020 and 2019 , the Company did not hold any short-term investments classified as trading or held-to-maturity. +At May 31, 2020 and 2019 , Short-term investments consisted of available-for-sale debt securities, which are recorded at fair value with unrealized gains and losses reported, net of tax, in Accumulated other comprehensive income (loss) , unless unrealized losses are determined to be other than temporary. Realized gains and losses on the sale of securities are determined by specific identification. The Company considers all available-for-sale debt securities, including those with maturity dates beyond 12 months, as available to support current operational liquidity needs and, therefore, classifies all securities with maturity dates beyond 90 days at the date of purchase as current assets within Short-term investments on the Consolidated Balance Sheets. +Refer to Note 6 — Fair Value Measurements for more information on the Company's short-term investments. +ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS RECEIVABLE +Accounts receivable, net consist primarily of amounts receivable from customers. The Company makes ongoing estimates relating to the collectability of its accounts receivable and maintains an allowance for estimated losses resulting from the inability of its customers to make required payments. In addition to judgments about the creditworthiness of significant customers based on ongoing credit evaluations, the Company considers historical levels of credit losses, as well as macroeconomic and industry trends, such as the impacts of COVID–19, to determine the amount of the allowance. Accounts receivable with anticipated collection dates greater than 12 months from the balance sheet date and related allowances are considered non-current and recorded in Deferred income taxes and other assets . The allowance for uncollectible accounts receivable was $ 214 million and $ 30 million as of May 31, 2020 and 2019 , respectively. +INVENTORY VALUATION +Inventories are stated at lower of cost and net realizable value, and valued on either an average or a specific identification cost basis. In some instances, the Company ships product directly from its suppliers to the customer, with the related inventory and cost of sales recognized on a specific identification basis. Inventory costs primarily consist of product cost from the Company's suppliers, as well as inbound freight, import duties, taxes, insurance and logistics and other handling fees. +PROPERTY, PLANT AND EQUIPMENT AND DEPRECIATION +Property, plant and equipment are recorded at cost. Depreciation is determined on a straight-line basis for land improvements, buildings and leasehold improvements over 2 to 40 years and for machinery and equipment over 2 to 15 years. +Depreciation and amortization of assets used in manufacturing, warehousing and product distribution are recorded in Cost of sales . Depreciation and amortization of all other assets are recorded in Operating overhead expense . +SOFTWARE DEVELOPMENT COSTS +Internal Use Software : Expenditures for major software purchases and software developed for internal use are capitalized and amortized over a 2 to 12 -year period on a straight-line basis. The Company's policy provides for the capitalization of external direct costs associated with developing or obtaining internal use computer software. In addition, the Company also capitalizes certain payroll and payroll-related costs for employees who are directly associated with internal use computer software projects. +2020 FORM 10-K 64 +Table of Contents +The amount of capitalizable payroll costs with respect to these employees is limited to the time directly spent on such projects. Costs associated with preliminary project stage activities, training, maintenance and all other post-implementation stage activities are expensed as incurred. +Computer Software to be Sold, Leased or Otherwise Marketed : Development costs of computer software to be sold, leased or otherwise marketed as an integral part of a product are subject to capitalization beginning when a product's technological feasibility has been established and ending when a product is available for general release to customers. In most instances, the Company's products are released soon after technological feasibility has been established. Therefore, software development costs incurred subsequent to achievement of technological feasibility are usually not significant, and generally most software development costs have been expensed as incurred. +IMPAIRMENT OF LONG-LIVED ASSETS +The Company reviews the carrying value of long-lived assets or asset groups to be used in operations whenever events or changes in circumstances indicate the carrying amount of the assets might not be recoverable. Factors that would necessitate an impairment assessment include a significant adverse change in the extent or manner in which an asset is used, a significant adverse change in legal factors or the business climate that could affect the value of the asset or a significant decline in the observable market value of an asset, among others. If such facts indicate a potential impairment, the Company would assess the recoverability of an asset group by determining if the carrying value of the asset group exceeds the sum of the projected undiscounted cash flows expected to result from the use and eventual disposition of the assets over the remaining economic life of the primary asset in the asset group. If the recoverability test indicates that the carrying value of the asset group is not recoverable, the Company will estimate the fair value of the asset group using appropriate valuation methodologies, which would typically include an estimate of discounted cash flows. Any impairment would be measured as the difference between the asset group's carrying amount and its estimated fair value. +GOODWILL AND INDEFINITE-LIVED INTANGIBLE ASSETS +The Company performs annual impairment tests on goodwill and intangible assets with indefinite lives in the fourth quarter of each fiscal year or when events occur or circumstances change that would, more likely than not, reduce the fair value of a reporting unit or an intangible asset with an indefinite life below its carrying value. Events or changes in circumstances that may trigger interim impairment reviews include significant changes in business climate, operating results, planned investments in the reporting unit, planned divestitures or an expectation that the carrying amount may not be recoverable, among other factors. +For purposes of testing goodwill for impairment, the Company allocates goodwill across its reporting units, which are considered the Company's operating segments. The Company may first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events and circumstances, the Company determines it is more likely than not that the fair value of the reporting unit is greater than its carrying amount, an impairment test is unnecessary. If an impairment test is necessary, the Company will estimate the fair value of its related reporting units. If the carrying value of a reporting unit exceeds its fair value, the goodwill of that reporting unit is determined to be impaired and the Company will proceed with recording an impairment charge equal to the excess of the carrying value over the related fair value. +Indefinite-lived intangible assets primarily consist of acquired trade names and trademarks. The Company may first perform a qualitative assessment to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired. If, after assessing the totality of events and circumstances, the Company determines it is more likely than not that the indefinite-lived intangible asset is not impaired, no quantitative fair value measurement is necessary. If a quantitative fair value measurement calculation is required for these intangible assets, the Company primarily utilizes the relief-from-royalty method. This method assumes trade names and trademarks have value to the extent their owner is relieved of the obligation to pay royalties for the benefits received from them. This method requires the Company to estimate the future revenues for the related brands, the appropriate royalty rate and the weighted average cost of capital. If the carrying value of the indefinite-lived intangible exceeds its fair value, the asset is determined to be impaired and the Company will proceed with recording an impairment charge equal to the excess of the carrying value over the related fair value. +OPERATING LEASES +Beginning in fiscal 2020, the Company adopted Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842) . Prior period amounts have not been restated and continue to be reported in accordance with the Company's historical accounting policies. The Company's lease recognition policies under Topic 842 are described in the following paragraphs. +2020 FORM 10-K 65 +Table of Contents +The Company primarily leases retail store space, certain distribution and warehouse facilities, office space, equipment and other non-real estate assets. The Company determines if an arrangement is a lease at inception and begins recording lease activity at the commencement date, which is generally the date in which the Company takes possession of or controls the physical use of the asset. Right-of-use (ROU) assets and lease liabilities are recognized based on the present value of lease payments over the lease term with lease expense recognized on a straight-line basis. The Company's incremental borrowing rate is used to determine the present value of future lease payments unless the implicit rate is readily determinable. +Lease agreements may contain rent escalation clauses, renewal or termination options, rent holidays or certain landlord incentives, including tenant improvement allowances. ROU assets include amounts for scheduled rent increases and are reduced by the amount of lease incentives. The lease term includes the non-cancelable period of the lease and options to extend or terminate the lease when it is reasonably certain the Company will exercise those options. Certain lease agreements include variable lease payments, which are based on a percent of retail sales over specified levels or adjust periodically for inflation as a result of changes in a published index, primarily the Consumer Price Index. +FAIR VALUE MEASUREMENTS +The Company measures certain financial assets and liabilities at fair value on a recurring basis, including derivatives, equity securities and available-for-sale debt securities. Fair value is the price the Company would receive to sell an asset or pay to transfer a liability in an orderly transaction with a market participant at the measurement date. The Company uses a three-level hierarchy established by the Financial Accounting Standards Board (FASB) that prioritizes fair value measurements based on the types of inputs used for the various valuation techniques (market approach, income approach and cost approach). +The levels of the fair value hierarchy are described below: +• +Level 1: Quoted prices in active markets for identical assets or liabilities. +• +Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly; these include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active. +• +Level 3: Unobservable inputs with little or no market data available, which require the reporting entity to develop its own assumptions. +The Company's assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. Financial assets and liabilities are classified in their entirety based on the most conservative level of input that is significant to the fair value measurement. +Pricing vendors are utilized for a majority of Level 1 and Level 2 investments. These vendors either provide a quoted market price in an active market or use observable inputs without applying significant adjustments in their pricing. Observable inputs include broker quotes, interest rates and yield curves observable at commonly quoted intervals, volatilities and credit risks. The fair value of derivative contracts is determined using observable market inputs such as the daily market foreign currency rates, forward pricing curves, currency volatilities, currency correlations and interest rates and considers nonperformance risk of the Company and its counterparties. +The Company's fair value measurement process includes comparing fair values to another independent pricing vendor to ensure appropriate fair values are recorded. +Refer to Note 6 — Fair Value Measurements for additional information. +FOREIGN CURRENCY TRANSLATION AND FOREIGN CURRENCY TRANSACTIONS +Adjustments resulting from translating foreign functional currency financial statements into U.S. Dollars are included in the foreign currency translation adjustment, a component of Accumulated other comprehensive income (loss) in Total shareholders' equity . +The Company's global subsidiaries have various assets and liabilities, primarily receivables and payables, which are denominated in currencies other than their functional currency. These balance sheet items are subject to re-measurement, the impact of which is recorded in Other (income) expense, net , within the Consolidated Statements of Income. +ACCOUNTING FOR DERIVATIVES AND HEDGING ACTIVITIES +The Company uses derivative financial instruments to reduce its exposure to changes in foreign currency exchange rates and interest rates. All derivatives are recorded at fair value on the Consolidated Balance Sheets and changes in the fair value of derivative financial instruments are either recognized in Accumulated other comprehensive income (loss) (a component of Total shareholders' equity ), Long-term debt or Net income depending on the nature of the underlying exposure, whether the derivative is formally designated as a hedge and, if designated, the extent to which the hedge is effective. The Company classifies the cash flows at settlement from derivatives in the same category as the cash flows from the related hedged items. For undesignated +2020 FORM 10-K 66 +Table of Contents +hedges and designated cash flow hedges, this is primarily within the Cash provided by operations component of the Consolidated Statements of Cash Flows. For designated net investment hedges, this is within the Cash used by investing activities component of the Consolidated Statements of Cash Flows. For the Company's fair value hedges, which are interest rate swaps used to mitigate the change in fair value of its fixed-rate debt attributable to changes in interest rates, the related cash flows from periodic interest payments are reflected within the Cash provided by operations component of the Consolidated Statements of Cash Flows. Refer to Note 14 — Risk Management and Derivatives for additional information on the Company's risk management program and derivatives. +STOCK-BASED COMPENSATION +The Company accounts for stock-based compensation by estimating the fair value, net of estimated forfeitures, of equity awards and recognizing the related expense as Cost of sales or Operating overhead expense , as applicable, in the Consolidated Statements of Income on a straight-line basis over the vesting period. Substantially all awards vest ratably over four years of continued employment, with stock options expiring ten years from the date of grant. The fair value of options, stock appreciation rights, and employees' purchase rights under the employee stock purchase plans (ESPPs) is determined using the Black-Scholes option pricing model. The fair value of restricted stock and restricted stock units is established by the market price on the date of grant. +Refer to Note 11 — Common Stock and Stock-Based Compensation for additional information on the Company's stock-based compensation programs. +INCOME TAXES +The Company accounts for income taxes using the asset and liability method. This approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of assets and liabilities. The Company records a valuation allowance to reduce deferred tax assets to the amount management believes is more likely than not to be realized. +The Company recognizes a tax benefit from uncertain tax positions in the financial statements only when it is more likely than not the position will be sustained upon examination by relevant tax authorities. The Company recognizes interest and penalties related to income tax matters in Income tax expense . +Refer to Note 9 — Income Taxes for further discussion. +EARNINGS PER SHARE +Basic earnings per common share is calculated by dividing Net income by the weighted average number of common shares outstanding during the year. Diluted earnings per common share is calculated by adjusting weighted average outstanding shares, assuming conversion of all potentially dilutive stock options and awards. +Refer to Note 12 — Earnings Per Share for further discussion. +MANAGEMENT ESTIMATES +The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates, including estimates relating to assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Additionally, the extent to which the evolving COVID-19 pandemic impacts the Company's financial statements will depend on a number of factors, including the magnitude and duration of the pandemic. The Company expects it may have a material, adverse impact on future revenue growth as well as overall profitability and may continue to lead to higher than normal inventory levels, revised payment terms with certain wholesale customers, higher sales-related reserves, factory cancellation costs and a volatile effective tax rate driven by changes in the mix of earnings across the Company's jurisdictions. +2020 FORM 10-K 67 +Table of Contents +RECENTLY ADOPTED ACCOUNTING STANDARDS +In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842) , which replaced existing lease accounting guidance. The new standard is intended to provide enhanced transparency and comparability by requiring lessees to record ROU assets and corresponding lease liabilities on the balance sheet. ROU assets represent the Company's right to use an underlying asset for the lease term and lease liabilities represent the Company's obligation to make lease payments arising from the lease. The new guidance requires the Company to continue to classify leases as either an operating or finance lease, with classification affecting the pattern of expense recognition in the income statement. In addition, the new standard requires enhanced disclosure surrounding the amount, timing and uncertainty of cash flows arising from leasing agreements. +In July 2018, the FASB issued ASU No. 2018-11, which provided entities with an additional transition method. Under the new transition method, an entity initially applies the new standard at the adoption date, versus at the beginning of the earliest period presented, and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The Company elected this transition method and adopted Topic 842 using a modified retrospective approach in the first quarter of fiscal 2020 with the cumulative effect of initially applying the new standard recognized in Retained earnings at June 1, 2019. Comparative prior period information has not been adjusted and continues to be reported in accordance with previous lease accounting guidance in Accounting Standards Codification (ASC) Topic 840 - Leases . +Upon adoption, the Company elected the package of transition practical expedients which allowed the Company to carry forward prior conclusions related to: (i) whether any expired or existing contracts are or contain leases, (ii) the lease classification for any expired or existing leases and (iii) initial direct costs for existing leases. Additionally, the Company elected the practical expedient to not separate lease components from nonlease components for all real estate leases within the portfolio. The Company made an accounting policy election to not record leases with an initial term of 12 months or less on the Consolidated Balance Sheets and will recognize related lease payments in the Consolidated Statements of Income on a straight-line basis over the lease term. +In preparation for implementation, the Company executed changes to business processes, including implementing a software solution to assist with the new reporting requirements. The adoption of Topic 842 resulted in a $ 2.7 billion increase to total assets and total liabilities as of June 1, 2019. Upon adoption, the Company recognized $ 3.2 billion of total operating lease liabilities and $ 2.9 billion of operating lease ROU assets, as well as removed $ 348 million of existing deferred rent liabilities, which was recorded as an offset against the ROU assets. In addition, the Company removed $ 184 million of existing assets and liabilities related to build-to-suit lease arrangements. Several other asset and liability line items in the Company's Consolidated Balance Sheets were also impacted by immaterial amounts. The adoption of the standard did not have a material impact on the Consolidated Statements of Income or Consolidated Statements of Cash Flows. For more information on the Company's lease arrangements refer to Note 19 — Leases . +In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory . The updated guidance requires companies to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. Income tax effects of intra-entity transfers of inventory will continue to be deferred until the inventory has been sold to a third party. The Company adopted the standard on June 1, 2018, using a modified retrospective approach, with the cumulative effect of applying the new standard recognized in Retained earnings at the date of adoption. The adoption resulted in reductions to Retained earnings, Deferred income taxes and other assets , and Prepaid expenses and other current assets of $ 507 million , $ 422 million and $ 45 million , respectively, and an increase in Deferred income taxes and other liabilities of $ 40 million on the Consolidated Balance Sheets. +2020 FORM 10-K 68 +Table of Contents +NOTE 2 — INVENTORIES +Inventory balances of $ 7,367 million and $ 5,622 million at May 31, 2020 and 2019 , respectively, were substantially all finished goods. +NOTE 3 — PROPERTY, PLANT AND EQUIPMENT +Property, plant and equipment, net included the following: +MAY 31, +(Dollars in millions) +2020 +2019 +Land and improvements +$ +345 +$ +329 +Buildings +2,442 +2,445 +Machinery and equipment +2,751 +2,726 +Internal-use software +1,483 +1,609 +Leasehold improvements +1,554 +1,563 +Construction in process +1,086 +797 +Total property, plant and equipment, gross +9,661 +9,469 +Less accumulated depreciation +4,795 +4,725 +TOTAL PROPERTY, PLANT AND EQUIPMENT, NET +$ +4,866 +$ +4,744 +Capitalized interest was not material for the years ended May 31, 2020 , 2019 and 2018 . +NOTE 4 — IDENTIFIABLE INTANGIBLE ASSETS AND GOODWILL +Identifiable intangible assets, net consist of indefinite-lived trademarks, acquired trademarks and other intangible assets. T he following table summarizes the Company's Identifiable intangible assets, net balances as of May 31, 2020 and 2019 : +MAY 31, +2020 +2019 +(Dollars in millions) +GROSS CARRYING AMOUNT +ACCUMULATED AMORTIZATION +NET CARRYING AMOUNT +GROSS CARRYING AMOUNT +ACCUMULATED AMORTIZATION +NET CARRYING AMOUNT +Indefinite-lived trademarks +$ +246 +$ +— +$ +246 +$ +281 +$ +— +$ +281 +Acquired trademarks and other +47 +19 +28 +22 +20 +2 +IDENTIFIABLE INTANGIBLE ASSETS, NET +$ +293 +$ +19 +$ +274 +$ +303 +$ +20 +$ +283 +Goodwill was $ 223 million and $ 154 million at May 31, 2020 and 2019 , respectively and there were no accumulated impairment losses as of May 31, 2020 and 2019 . Additionally, the impact to Goodwill during fiscal 2020 and 2019 as a result of acquisitions and divestitures was not material. +2020 FORM 10-K 69 +Table of Contents +NOTE 5 — ACCRUED LIABILITIES +Accrued liabilities included the following: +MAY 31, +(Dollars in millions) +2020 +2019 +Compensation and benefits, excluding taxes +$ +1,248 +$ +1,232 +Sales-related reserves +1,178 +1,218 +Allowance for cumulative foreign currency translation losses (1) +405 +— +Endorsement compensation +393 +424 +Dividends payable +384 +346 +Import and logistics costs +273 +296 +Taxes other than income taxes payable +202 +234 +Fair value of derivatives +190 +52 +Liabilities held-for-sale (1) +146 +— +Advertising and marketing +97 +114 +Collateral received from counterparties to hedging instruments +— +289 +Other (2) +668 +805 +TOTAL ACCRUED LIABILITIES +$ +5,184 +$ +5,010 +(1) +Refer to Note 20 — Acquisitions and Divestitures for additional information. +(2) +Other consists of various accrued expenses with no individual item accounting for more than 5% of the total Accrued liabilities balance at May 31, 2020 and 2019 . +NOTE 6 — FAIR VALUE MEASUREMENTS +The following tables present information about the Company's financial assets measured at fair value on a recurring basis as of May 31, 2020 and 2019 and indicate the level in the fair value hierarchy in which the Company classifies the fair value measurement. Refer to Note 1 — Summary of Significant Accounting Policies for additional detail regarding the Company's fair value measurement methodology. +MAY 31, 2020 +(Dollars in millions) +ASSETS AT FAIR VALUE +CASH AND EQUIVALENTS +SHORT-TERM INVESTMENTS +Cash +$ +596 +$ +596 +$ +— +Level 1: +U.S. Treasury securities +1,204 +800 +404 +Level 2: +Commercial paper and bonds +32 +— +32 +Money market funds +5,973 +5,973 +— +Time deposits +981 +979 +2 +U.S. Agency securities +1 +— +1 +Total Level 2 +6,987 +6,952 +35 +TOTAL +$ +8,787 +$ +8,348 +$ +439 +2020 FORM 10-K 70 +Table of Contents +MAY 31, 2019 +(Dollars in millions) +ASSETS AT FAIR VALUE +CASH AND EQUIVALENTS +SHORT-TERM INVESTMENTS +Cash +$ +853 +$ +853 +$ +— +Level 1: +U.S. Treasury securities +347 +200 +147 +Level 2: +Commercial paper and bonds +34 +1 +33 +Money market funds +1,637 +1,637 +— +Time deposits +1,791 +1,775 +16 +U.S. Agency securities +1 +— +1 +Total Level 2 +3,463 +3,413 +50 +TOTAL +$ +4,663 +$ +4,466 +$ +197 +As of May 31, 2020 , the Company held $ 396 million of available-for-sale debt securities with maturity dates within one year and $ 43 million with maturity dates over one year and less than five years in Short-term investments on the Consolidated Balance Sheets. The fair value of the Company's available-for-sale debt securities approximates their amortized cost. +Included in Interest expense (income), net was interest income related to the Company's investment portfolio of $ 62 million , $ 82 million and $ 70 million for the years ended May 31, 2020 , 2019 and 2018 , respectively. +The Company elects to record the gross assets and liabilities of its derivative financial instruments on the Consolidated Balance Sheets. The Company's derivative financial instruments are subject to master netting arrangements that allow for the offset of assets and liabilities in the event of default or early termination of the contract. Any amounts of cash collateral received related to these instruments associated with the Company's credit-related contingent features are recorded in Cash and equivalents and Accrued liabilities , the latter of which would further offset against the Company's derivative asset balance. Any amounts of cash collateral posted related to these instruments associated with the Company's credit-related contingent features are recorded in Prepaid expenses and other current assets , which would further offset against the Company's derivative liability balance. Cash collateral received or posted related to the Company's credit related contingent features is presented in the Cash provided by operations component of the Consolidated Statements of Cash Flows. Any amounts of non-cash collateral received, such as securities, are not recorded on the Consolidated Balance Sheets pursuant to U.S. GAAP. For further information related to credit risk, refer to Note 14 — Risk Management and Derivatives . +The following tables present information about the Company's derivative assets and liabilities measured at fair value on a recurring basis as of May 31, 2020 and 2019 and indicate the level in the fair value hierarchy in which the Company classifies the fair value measurement. +MAY 31, 2020 +DERIVATIVE ASSETS +DERIVATIVE LIABILITIES +(Dollars in millions) +ASSETS AT FAIR VALUE +OTHER CURRENT ASSETS +OTHER LONG-TERM ASSETS +LIABILITIES AT FAIR VALUE +ACCRUED LIABILITIES +OTHER LONG-TERM LIABILITIES +Level 2: +Foreign exchange forwards and options (1) +$ +94 +$ +91 +$ +3 +$ +205 +$ +188 +$ +17 +Embedded derivatives +1 +1 +— +2 +2 +— +TOTAL +$ +95 +$ +92 +$ +3 +$ +207 +$ +190 +$ +17 +(1) +If the foreign exchange derivative instruments had been netted on the Consolidated Balance Sheets, the asset and liability positions would have been reduced by $ 76 million as of May 31, 2020 . As of that date, no amount of cash collateral had been received or posted on the derivative asset and liability balances related to these foreign exchange derivative instruments. +2020 FORM 10-K 71 +Table of Contents +MAY 31, 2019 +DERIVATIVE ASSETS +DERIVATIVE LIABILITIES +(Dollars in millions) +ASSETS AT FAIR VALUE +OTHER CURRENT ASSETS +OTHER LONG-TERM ASSETS +LIABILITIES AT FAIR VALUE +ACCRUED LIABILITIES +OTHER LONG-TERM LIABILITIES +Level 2: +Foreign exchange forwards and options (1) +$ +611 +$ +611 +$ +— +$ +51 +$ +51 +$ +— +Embedded derivatives +11 +5 +6 +3 +1 +2 +TOTAL +$ +622 +$ +616 +$ +6 +$ +54 +$ +52 +$ +2 +(1) +If the foreign exchange derivative instruments had been netted on the Consolidated Balance Sheets, the asset and liability positions each would have been reduced by $ 50 million as of May 31, 2019 . As of that date, the Company had received $ 289 million of cash collateral from various counterparties related to foreign exchange derivative instruments. No amount of collateral was posted on the Company's derivative liability balance as of May 31, 2019 . +No transfers among the levels within the fair value hierarchy occurred during the years ended May 31, 2020 or 2019. +For additional information related to the Company's derivative financial instruments, refer to Note 14 — Risk Management and Derivatives . For fair value information regarding Notes payable and Long-term debt , refer to Note 7 — Short-Term Borrowings and Credit Lines and Note 8 — Long-Term Debt , respectively. The carrying amounts of other current financial assets and other current financial liabilities approximate fair value. +NON-RECURRING FAIR VALUE MEASUREMENTS +As further discussed in Note 20 — Acquisitions and Divestitures , the Company met the criteria to recognize the related assets and liabilities of its Brazil, Argentina, Chile and Uruguay entities as held-for-sale in the third quarter of fiscal 2020 and the classification of these balances remain as such, as of May 31, 2020. This required the Company to remeasure the disposal groups at fair value, less costs to sell, which is considered a Level 3 fair value measurement and was based on each transaction's estimated consideration at the date of close. The carrying value of the Argentina, Chile and Uruguay disposal groups exceeded their fair value, less costs to sell and as a result, the Company recognized a non-recurring impairment charge of $ 405 million . This charge was primarily due to the anticipated release of non-cash cumulative foreign currency translation losses which were included as part of the carrying value of the Argentina, Chile and Uruguay disposal groups when measuring for impairment. For the fiscal year ended May 31, 2020 , the charge was recognized in Other (income) expense, net on the Consolidated Statements of Income, classified within Corporate, and a corresponding allowance within Accrued Liabilities on the Consolidated Balance Sheets. +All other assets or liabilities required to be measured at fair value on a non-recurring basis as of May 31, 2020 were immaterial. As of May 31, 2019 , all assets or liabilities required to be measured at fair value on a non-recurring basis were immaterial. +2020 FORM 10-K 72 +Table of Contents +NOTE 7 — SHORT-TERM BORROWINGS AND CREDIT LINES +Notes payable as of May 31, 2020 and 2019 are summarized below: +MAY 31, +2020 +2019 +(Dollars in millions) +BORROWINGS +INTEREST RATE +BORROWINGS +INTEREST RATE +Notes payable: +Commercial paper (1) +$ +248 +1.65 +% +$ +— +0.00 +% +U.S. operations +— +0.00 +% +2 +0.00 +% +(2) +Non-U.S. operations +— +0.00 +% +7 +26.00 +% +(2) +TOTAL NOTES PAYABLE +$ +248 +$ +9 +(1) +Commercial paper borrowings with original maturities greater than three months are included in Proceeds from borrowings, net of debt issuance costs on the Consolidated Statements of Cash Flows. +(2) +Weighted average interest rate includes non-interest bearing overdrafts. +The carrying amounts reflected in the Consolidated Balance Sheets for Notes payable approximate fair value. +On August 16, 2019, the Company entered into a committed credit facility agreement with a syndicate of banks which provides for up to $ 2 billion of borrowings, with the option to increase borrowings up to $ 3 billion in total upon lender approval. The facility matures on August 16, 2024, with a one year extension option prior to any anniversary of the closing date, provided that in no event shall it extend beyond August 16, 2026. Based on the Company's current long-term senior unsecured debt ratings of AA- and A1 from Standard and Poor's Corporation and Moody's Investor Services, respectively, the interest rate charged on any outstanding borrowings would be the prevailing LIBOR plus 0.46 % . The facility fee is 0.04 % of the total commitment. This facility replaces the prior $ 2 billion credit facility agreement entered into on August 28, 2015, which would have matured August 28, 2020. As of and for the periods ended May 31, 2020 and 2019, no amounts were outstanding under either committed credit facility. +On April 6, 2020, the Company entered into a committed credit facility agreement with a syndicate of banks which provides for up to $ 2 billion of borrowings, in addition to the existing credit facility discussed above. The new facility matures on April 5, 2021. Based on the Company's current long-term senior unsecured debt ratings of AA- and A1 from Standard and Poor's Corporation and Moody's Investor Services, respectively, the interest rate charged on any outstanding borrowings would be the prevailing LIBOR plus 1.05 % . The facility fee is 0.20 % of the total commitment. As of May 31, 2020, no amounts were outstanding under this committed credit facility. +2020 FORM 10-K 73 +Table of Contents +NOTE 8 — LONG-TERM DEBT +Long-term debt , net of unamortized premiums, discounts and debt issuance costs, comprises the following: +BOOK VALUE OUTSTANDING +AS OF MAY 31, +Scheduled Maturity (Dollars and Yen in millions) +ORIGINAL PRINCIPAL +INTEREST RATE +INTEREST PAYMENTS +2020 +2019 +Corporate Term Debt: (1)(2) +May 1, 2023 +$ +500 +2.25 +% +Semi-Annually +$ +499 +$ +498 +March 27, 2025 +1,000 +2.40 +% +Semi-Annually +994 +— +November 1, 2026 +1,000 +2.38 +% +Semi-Annually +995 +994 +March 27, 2027 +1,000 +2.75 +% +Semi-Annually +994 +— +March 27, 2030 +1,500 +2.85 +% +Semi-Annually +1,489 +— +March 27, 2040 +1,000 +3.25 +% +Semi-Annually +985 +— +May 1, 2043 +500 +3.63 +% +Semi-Annually +495 +495 +November 1, 2045 +1,000 +3.88 +% +Semi-Annually +984 +983 +November 1, 2046 +500 +3.38 +% +Semi-Annually +491 +491 +March 27, 2050 +1,500 +3.38 +% +Semi-Annually +1,480 +— +Japanese Yen Notes: (3) +August 20, 2001 through November 20, 2020 +¥ +9,000 +2.60 +% +Quarterly +$ +2 +$ +6 +August 20, 2001 through November 20, 2020 +4,000 +2.00 +% +Quarterly +1 +3 +Total +9,409 +3,470 +Less current maturities +3 +6 +TOTAL LONG-TERM DEBT +$ +9,406 +$ +3,464 +(1) +These senior unsecured obligations rank equally with the Company's other unsecured and unsubordinated indebtedness. +(2) +The bonds are redeemable at the Company's option at a price equal to the greater of (i) 100 % of the aggregate principal amount of the notes to be redeemed or (ii) the sum of the present values of the remaining scheduled payments, plus in each case, accrued and unpaid interest. However, the bonds also feature a par call provision, which allows for the bonds to be redeemed at a price equal to 100 % of the aggregate principal amount of the notes being redeemed, plus accrued and unpaid interest on or after the Par Call Date, as defined in the respective notes. +(3) +NIKE Logistics YK assumed a total of ¥ 13.0 billion in loans as part of its agreement to purchase a distribution center in Japan, which serves as collateral for the loans. These loans mature in equal quarterly installments during the period August 20, 2001 through November 20, 2020. +The scheduled maturity of Long-term debt in each of the years ending May 31, 2021 through 2025 are $ 3 million , $ 0 million , $ 500 million , $ 0 million and $ 1,000 million , respectively, at face value. +The Company's long-term debt is recorded at adjusted cost, net of unamortized premiums, discounts and debt issuance costs. The fair value of long-term debt is estimated based upon quoted prices for similar instruments or quoted prices for identical instruments in inactive markets (Level 2). The fair value of the Company's long-term debt, including the current portion, was approximately $ 10,645 million at May 31, 2020 and $ 3,524 million at May 31, 2019 . +2020 FORM 10-K 74 +Table of Contents +NOTE 9 — INCOME TAXES +Income before income taxes is as follows: +YEAR ENDED MAY 31, +(Dollars in millions) +2020 +2019 +2018 +Income before income taxes: +United States +$ +2,954 +$ +593 +$ +744 +Foreign +( 67 +) +4,208 +3,581 +TOTAL INCOME BEFORE INCOME TAXES +$ +2,887 +$ +4,801 +$ +4,325 +The provision for income taxes is as follows: +YEAR ENDED MAY 31, +(Dollars in millions) +2020 +2019 +2018 +Current: +United States +Federal +$ +( 109 +) +$ +74 +$ +1,167 +State +81 +56 +45 +Foreign +756 +608 +533 +Total Current +728 +738 +1,745 +Deferred: +United States +Federal +( 231 +) +( 33 +) +595 +State +( 47 +) +( 9 +) +25 +Foreign +( 102 +) +76 +27 +Total Deferred +( 380 +) +34 +647 +TOTAL INCOME TAX EXPENSE +$ +348 +$ +772 +$ +2,392 +On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (the “Tax Act”) which significantly changed previous U.S. tax laws, including a reduction in the corporate tax rate from 35% to 21% and a one-time transition tax on deemed repatriation of undistributed foreign earnings. For fiscal 2018, the change in the corporate tax rate resulted in a blended U.S. federal statutory rate for the Company of approximately 29 % . +As of May 31, 2020 and 2019 , long-term income taxes payable were $ 757 million and $ 902 million , respectively, and were included within Deferred income taxes and other assets on the Consolidated Balance Sheets. +A reconciliation from the U.S. statutory federal income tax rate to the effective income tax rate is as follows: +YEAR ENDED MAY 31, +2020 +2019 +2018 +Federal income tax rate +21.0 +% +21.0 +% +29.2 +% +State taxes, net of federal benefit +0.8 +% +1.0 +% +0.8 +% +Foreign earnings +5.9 +% +- 1.1 +% +- 19.2 +% +Foreign-derived intangible income benefit related to the Tax Act +- 8.1 +% +— +% +— +% +Transition tax related to the Tax Act +— +% +— +% +43.3 +% +Remeasurement of deferred tax assets and liabilities related to the Tax Act +— +% +— +% +3.7 +% +Excess tax benefits from share-based compensation +- 7.2 +% +- 3.6 +% +- 5.3 +% +Income tax audits and contingency reserves +- 1.4 +% +1.3 +% +2.9 +% +U.S. research and development tax credit +- 1.8 +% +- 1.0 +% +- 0.6 +% +Other, net +2.9 +% +- 1.5 +% +0.5 +% +EFFECTIVE INCOME TAX RATE +12.1 +% +16.1 +% +55.3 +% +The effective tax rate for the fiscal year ended May 31, 2020 was lower than the effective tax rate for the fiscal year ended May 31, 2019 due to increased benefits from discrete items such as stock-based compensation. The foreign earnings rate impact shown above for the fiscal year ended May 31, 2020 includes withholding taxes of 6.5 % and held for sale accounting items of +2020 FORM 10-K 75 +Table of Contents +2.9 % , offset by a benefit for statutory rate differences and other items of 3.5 % . The foreign derived intangible income benefit reflects U.S. tax benefits introduced by the Tax Act for companies serving foreign markets. This benefit became available to the Company as a result of a restructuring of its intellectual property interests. Income tax audit and contingency reserves reflect benefits associated with the modification of the treatment of certain research and development expenditures of 2.9 % offset by an increase related to the resolution of an audit by the U.S. Internal Revenue Service ("IRS") and other matters of 1.5 % . Included in other is the deferral of income tax effects related to intra-entity transfers of inventory of 2.3 % and other items of 0.6 % . +The effective tax rate for the year fiscal ended May 31, 2019 was lower than the effective tax rate for the fiscal year ended May 31, 2018 due to significant changes related to the enactment of the Tax Act in fiscal year 2018 and reduction in the U.S. federal statutory rate to 21% in fiscal year 2019. +Deferred tax assets and liabilities comprise the following as of: +MAY 31, +(Dollars in millions) +2020 +2019 +Deferred tax assets: +Inventories +$ +84 +$ +66 +Sales return reserves +115 +128 +Deferred compensation +295 +271 +Stock-based compensation +168 +156 +Reserves and accrued liabilities +120 +101 +Operating lease liabilities +491 +— +Capitalized research and development expenditures +189 +— +Net operating loss carry-forwards +21 +81 +Other +127 +125 +Total deferred tax assets +1,610 +928 +Valuation allowance +( 26 +) +( 88 +) +Total deferred tax assets after valuation allowance +1,584 +840 +Deferred tax liabilities: +Foreign withholding tax on undistributed earnings of foreign subsidiaries +( 165 +) +( 235 +) +Property, plant and equipment +( 232 +) +( 188 +) +Right-of-use assets +( 423 +) +— +Other +( 32 +) +( 41 +) +Total deferred tax liabilities +( 852 +) +( 464 +) +NET DEFERRED TAX ASSET +$ +732 +$ +376 +The above amounts exclude deferred taxes of the Company's Brazil, Argentina, Chile and Uruguay operations which are classified as held-for-sale on the Consolidated Balance Sheets as of May 31, 2020. See Note 20 — Acquisitions and Divestitures for additional information. +The following is a reconciliation of the changes in the gross balance of unrecognized tax benefits as of: +MAY 31, +(Dollars in millions) +2020 +2019 +2018 +Unrecognized tax benefits, beginning of the period +$ +808 +$ +698 +$ +461 +Gross increases related to prior period tax positions +181 +85 +19 +Gross decreases related to prior period tax positions +( 171 +) +( 32 +) +( 12 +) +Gross increases related to current period tax positions +50 +81 +249 +Settlements +( 58 +) +— +— +Lapse of statute of limitations +( 28 +) +( 35 +) +( 20 +) +Changes due to currency translation +( 11 +) +11 +1 +UNRECOGNIZED TAX BENEFITS, END OF THE PERIOD +$ +771 +$ +808 +$ +698 +As of May 31, 2020 , total gross unrecognized tax benefits, excluding related interest and penalties, were $ 771 million , $ 536 million of which would affect the Company's effective tax rate if recognized in future periods. The majority of the total gross +2020 FORM 10-K 76 +Table of Contents +unrecognized tax benefits are long-term in nature and included within Deferred income taxes and other assets on the Consolidated Balance Sheets. +The Company recognizes interest and penalties related to income tax matters in income tax expense. The liability for payment of interest and penalties decreased by $ 16 million during the year ended May 31, 2020 , increased by $ 17 million during the fiscal year ended May 31, 2019 and decreased by $ 14 million during the fiscal year ended May 31, 2018 . As of May 31, 2020 and 2019 , accrued interest and penalties related to uncertain tax positions were $ 158 million and $ 174 million , respectively (excluding federal benefit). +The Company is subject to taxation in the United States, as well as various state and foreign jurisdictions. The Company is currently under audit by the IRS for fiscal years 2017 through 2019 . The Company has closed all U.S. federal income tax matters through fiscal 2016 , with the exception of certain transfer pricing adjustments. Tax years after 2009 remain open in certain major foreign jurisdictions. Although the timing of resolution of audits is not certain, the Company evaluates all domestic and foreign audit issues in the aggregate, along with the expiration of applicable statutes of limitations, and estimates that it is reasonably possible the total gross unrecognized tax benefits could decrease by up to $ 50 million within the next 12 months. In January 2019, the European Commission opened a formal investigation to examine whether the Netherlands has breached State Aid rules when granting certain tax rulings to the Company. The Company believes the investigation is without merit. If this matter is adversely resolved, the Netherlands may be required to assess additional amounts with respect to current and prior periods, and the Company's Netherlands income taxes in the future could increase. +The Company historically provided for U.S. income taxes on the undistributed earnings of foreign subsidiaries unless they were considered indefinitely reinvested outside the United States. As a result of the enactment of the Tax Act, in fiscal 2018 the Company reevaluated its historic indefinite reinvestment assertion and determined that any historical or future undistributed earnings of foreign subsidiaries are no longer considered to be indefinitely reinvested. Effective January 1, 2020, however, the tax law in the Netherlands, one of the Company's major jurisdictions, changed. As a result of the change in law, the Company's undistributed earnings in the Netherlands are subject to withholding tax upon distribution. It is the Company's intention to indefinitely reinvest the historical earnings of its foreign subsidiaries outside North America prior to May 31, 2020 to ensure there is sufficient working capital to expand operations outside the United States. Accordingly, the Company has not recorded a deferred tax liability related to foreign withholding taxes on approximately $ 8.1 billion of undistributed earnings of these foreign subsidiaries as of May 31, 2020. Withholding taxes of approximately $ 1.2 billion would be payable upon the remittance of these undistributed earnings as of May 31, 2020. +A portion of the Company's foreign operations benefit from a tax holiday, which is set to expire in 2021 . This tax holiday may be extended when certain conditions are met or may be terminated early if certain conditions are not met. The tax benefit attributable to this tax holiday was $ 238 million , $ 167 million and $ 126 million for the fiscal years ended May 31, 2020 , 2019 and 2018 , respectively. The benefit of the tax holiday on diluted earnings per common share was $ 0.15 , $ 0.10 and $ 0.08 for the fiscal years ended May 31, 2020 , 2019 and 2018 , respectively. +Deferred tax assets at May 31, 2020 and 2019 were reduced by a valuation allowance. For the fiscal year ended May 31, 2020, a valuation allowance was provided for U.S. foreign tax credit carry-forwards and on tax benefits generated by entities with operating losses. For the fiscal year ended May 31, 2019, the valuation allowance provided primarily related to tax benefits generated by certain entities with operating losses. There was a $ 62 million net decrease in the valuation allowance for the fiscal year ended May 31, 2020 , compared to a $ 7 million net decrease for the fiscal year ended May 31, 2019 , and $ 13 million net increase for the year ended May 31, 2018 . The decrease in the Company's net valuation allowance for the fiscal year ended May 31, 2020 is primarily related to the classification of the Company's Brazil and Argentina operations as held-for-sale on the Consolidated Balance Sheets as of May 31, 2020 . See Note 20 — Acquisitions and Divestitures for additional information. +The Company has recorded deferred tax assets of $ 15 million at May 31, 2020 for U.S. foreign tax credit carry-forwards which will begin to expire in 2030. +The Company has available domestic and foreign loss carry-forwards of $ 83 million at May 31, 2020 . If not utilized, such losses will expire as follows: +YEAR ENDING MAY 31, +(Dollars in millions) +2021 +2022 +2023 +2024 +2025-2040 +INDEFINITE +TOTAL +Net operating losses +$ +— +$ +3 +$ +2 +$ +2 +$ +59 +$ +17 +$ +83 +The above amounts at May 31, 2020 exclude net operating loss carry-forwards of the Company's Brazil, Argentina and Chile operations which are included in assets held-for-sale on the Consolidated Balance Sheets at May 31, 2020. See Note 20 — Acquisitions and Divestitures for additional information. +2020 FORM 10-K 77 +Table of Contents +NOTE 10 — REDEEMABLE PREFERRED STOCK +Sojitz America is the sole owner of the Company's authorized redeemable preferred stock, $ 1 par value, which is redeemable at the option of Sojitz America or the Company at par value aggregating $ 0.3 million . A cumulative dividend of $ 0.10 per share is payable annually on May 31 and no dividends may be declared or paid on the common stock of the Company unless dividends on the redeemable preferred stock have been declared and paid in full. There have been no changes in the redeemable preferred stock in the fiscal years ended May 31, 2020 , 2019 and 2018 . As the holder of the redeemable preferred stock, Sojitz America does not have general voting rights, but does have the right to vote as a separate class on the sale of all or substantially all of the assets of the Company and its subsidiaries, on merger, consolidation, liquidation or dissolution of the Company, or on the sale or assignment of the NIKE trademark for athletic footwear sold in the United States. The redeemable preferred stock has been fully issued to Sojitz America and is not blank check preferred stock. The Company's articles of incorporation do not permit the issuance of additional preferred stock. +NOTE 11 — COMMON STOCK AND STOCK-BASED COMPENSATION +COMMON STOCK +The authorized number of shares of Class A Common Stock, no par value, and Class B Common Stock, no par value, are 400 million and 2,400 million , respectively. Each share of Class A Common Stock is convertible into one share of Class B Common Stock. Voting rights of Class B Common Stock are limited in certain circumstances with respect to the election of directors. There are no differences in the dividend and liquidation preferences or participation rights of the holders of Class A and Class B Common Stock. From time to time, the Company's Board of Directors authorizes share repurchase programs for the repurchase of Class B Common Stock. The value of repurchased shares is deducted from Total shareholders' equity through allocation to Capital in excess of stated value and Retained earnings . +STOCK-BASED COMPENSATION +The NIKE, Inc. Stock Incentive Plan (the “Stock Incentive Plan”) provides for the issuance of up to 718 million previously unissued shares of Class B Common Stock in connection with equity awards granted under the Stock Incentive Plan. The Stock Incentive Plan authorizes the grant of non-statutory stock options, incentive stock options, stock appreciation rights, restricted stock, restricted stock units and performance-based awards. The exercise price for stock options and stock appreciation rights may not be less than the fair market value of the underlying shares on the date of grant. A committee of the Board of Directors administers the Stock Incentive Plan. The committee has the authority to determine the employees to whom awards will be made, the amount of the awards and the other terms and conditions of the awards. The Company generally grants stock options and restricted stock on an annual basis. Substantially all awards under the Stock Incentive Plan vest ratably over 4 years of continued employment, with stock options expiring 10 years from the date of grant. +The following table summarizes the Company's total stock-based compensation expense recognized in Cost of sales or Operating overhead expense , as applicable: +YEAR ENDED MAY 31, +(Dollars in millions) +2020 +2019 +2018 +Stock options (1) +$ +237 +$ +207 +$ +149 +ESPPs +53 +40 +34 +Restricted stock +139 +78 +35 +TOTAL STOCK-BASED COMPENSATION EXPENSE +$ +429 +$ +325 +$ +218 +(1) +Expense for stock options includes the expense associated with stock appreciation rights. Accelerated stock option expense is recorded for employees meeting certain retirement eligibility requirements. Accelerated stock option expense was $ 53 million , $ 41 million and $ 18 million for the fiscal years ended May 31, 2020 , 2019 and 2018 , respectively. +The income tax benefit related to stock-based compensation expense was $ 207 million , $ 175 million and $ 230 million for the fiscal years ended May 31, 2020 , 2019 and 2018 , respectively, and reported within Income tax expense . +2020 FORM 10-K 78 +Table of Contents +STOCK OPTIONS +The weighted average fair value per share of the options granted during the years ended May 31, 2020 , 2019 and 2018 , computed as of the grant date using the Black-Scholes pricing model, was $ 18.71 , $ 22.78 and $ 9.82 , respectively. The weighted average assumptions used to estimate these fair values were as follows: +YEAR ENDED MAY 31, +2020 +2019 +2018 +Dividend yield +1.0 +% +1.0 +% +1.2 +% +Expected volatility +23.0 +% +26.6 +% +16.4 +% +Weighted average expected life (in years) +6.0 +6.0 +6.0 +Risk-free interest rate +1.5 +% +2.8 +% +2.0 +% +Expected volatilities are based on the historical volatility of the Company's common stock, the implied volatility in market traded options on the Company's common stock with a term greater than one year , as well as other factors. The weighted average expected life of options is based on an analysis of historical and expected future exercise patterns. The interest rate is based on the U.S. Treasury (constant maturity) risk-free rate in effect at the date of grant for periods corresponding with the expected term of the options. +The following summarizes the stock option transactions under the plan discussed above: +SHARES (1) +WEIGHTED AVERAGE OPTION PRICE +(In millions) +Options outstanding as of May 31, 2019 +91.3 +$ +50.59 +Exercised +( 20.1 +) +35.26 +Forfeited +( 2.2 +) +75.74 +Granted +19.1 +85.29 +Options outstanding as of May 31, 2020 +88.1 +$ +60.98 +(1) +Includes stock appreciation rights transactions. +Options exercisable as of May 31, 2020 were 48.5 million and had a weighted average option price of $ 46.91 per share. The aggregate intrinsic value for options outstanding and exercisable at May 31, 2020 was $ 3,316 million and $ 2,506 million , respectively. The total intrinsic value of the options exercised during the years ended May 31, 2020 , 2019 and 2018 was $ 1,161 million , $ 938 million and $ 889 million , respectively. The intrinsic value is the amount by which the market value of the underlying stock exceeds the exercise price of the options. The weighted average contractual life remaining for options outstanding and options exercisable at May 31, 2020 was 6.2 years and 4.5 years, respectively. As of May 31, 2020 , the Company had $ 411 million of unrecognized compensation costs from stock options, net of estimated forfeitures, to be recognized in Cost of sales or Operating overhead expense , as applicable, over a weighted average remaining period of 2.6 years. +EMPLOYEE STOCK PURCHASE PLANS +In addition to the Stock Incentive Plan, the Company gives employees the right to purchase shares at a discount from the market price under employee stock purchase plans (ESPPs). Subject to the annual statutory limit, employees are eligible to participate through payroll deductions of up to 10 % of their compensation. At the end of each six -month offering period, shares are purchased by the participants at 85 % of the lower of the fair market value at the beginning or the end of the offering period. Employees purchased 2.7 million , 2.5 million and 3.1 million shares during each of the fiscal years ended May 31, 2020 , 2019 and 2018 , respectively. +RESTRICTED STOCK AND RESTRICTED STOCK UNITS +Recipients of restricted stock are entitled to cash dividends and to vote their respective shares throughout the period of restriction. Recipients of restricted stock units are entitled to dividend equivalent cash payments upon vesting. The number of restricted stock and restricted stock units vested includes shares of common stock withheld by the Company on behalf of employees to satisfy the minimum statutory tax withholding requirements. +2020 FORM 10-K 79 +Table of Contents +The following summarizes the restricted stock and restricted stock unit activity under the plan discussed above: +SHARES +WEIGHTED AVERAGE GRANT DATE +FAIR VALUE +(In millions) +Nonvested as of May 31, 2019 +4.4 +$ +70.93 +Vested +( 1.1 +) +72.64 +Forfeited +( 0.3 +) +79.62 +Granted +3.8 +88.26 +Nonvested as of May 31, 2020 +6.8 +$ +79.84 +The weighted average fair value per share of restricted stock and restricted stock units granted for the years ended May 31, 2020 , 2019 and 2018 , computed as of the grant date, was $ 88.26 , $ 80.95 , and $ 62.51 , respectively. During the years ended May 31, 2020 , 2019 and 2018 , the aggregate fair value of restricted stock and restricted stock units vested was $ 98 million , $ 44 million and $ 113 million , respectively, computed as of the date of vesting. As of May 31, 2020 , the Company had $ 342 million of unrecognized compensation costs from restricted stock and restricted stock units, net of estimated forfeitures, to be recognized in Cost of sales or Operating overhead expense , as applicable, over a weighted average remaining period of 2.7 years. +NOTE 12 — EARNINGS PER SHARE +The following is a reconciliation from basic earnings per common share to diluted earnings per common share. The computations of diluted earnings per common share excluded options, including shares under ESPPs, and restricted stock to purchase an additional 30.6 million , 17.5 million and 42.9 million shares of common stock outstanding for the fiscal years ended May 31, 2020 , 2019 and 2018 , respectively, because the options and restricted stock were anti-dilutive. +YEAR ENDED MAY 31, +(In millions, except per share data) +2020 +2019 +2018 +Net income available to common stockholders +$ +2,539 +$ +4,029 +$ +1,933 +Determination of shares: +Weighted average common shares outstanding +1,558.8 +1,579.7 +1,623.8 +Assumed conversion of dilutive stock options and awards +32.8 +38.7 +35.3 +DILUTED WEIGHTED AVERAGE COMMON SHARES OUTSTANDING +1,591.6 +1,618.4 +1,659.1 +Earnings per common share: +Basic +$ +1.63 +$ +2.55 +$ +1.19 +Diluted +$ +1.60 +$ +2.49 +$ +1.17 +NOTE 13 — BENEFIT PLANS +The Company has a qualified 401(k) Savings and Profit Sharing Plan, in which all U.S. employees are able to participate. The Company matches a portion of employee contributions to the savings plan. Company contributions to the savings plan were $ 107 million , $ 90 million and $ 80 million and included in Cost of sales or Operating overhead expense , as applicable, for the years ended May 31, 2020 , 2019 and 2018 , respectively. The terms of the plan also allow for annual discretionary profit sharing contributions, as recommended by senior management and approved by the Board of Directors, to the accounts of eligible U.S. employees who work at least 1,000 hours in a year. For the fiscal year ended May 31, 2020, there were no profit sharing contributions made to the plan. Profit sharing contributions of $ 37 million and $ 59 million were made to the plan and included in Cost of sales or Operating overhead expense , as applicable, for the years ended May 31, 2019 and 2018 , respectively. +The Company also has a Long-Term Incentive Plan (LTIP) adopted by the Board of Directors and approved by shareholders in September 1997 and later amended and approved in fiscal 2007 and fiscal 2012. The Company recognized $ 66 million , $ 83 million and $ 33 million of Operating overhead expense related to cash awards under the LTIP during the years ended May 31, 2020 , 2019 and 2018 , respectively. +The Company allows certain highly compensated employees and non-employee directors of the Company to defer compensation under a nonqualified deferred compensation plan. Deferred compensation plan liabilities were $ 725 million and $ 647 million at +2020 FORM 10-K 80 +Table of Contents +May 31, 2020 and 2019 , respectively, and primarily classified as non-current in Deferred income taxes and other liabilities on the Consolidated Balance Sheets. +The Company has pension plans in various countries worldwide. The pension plans are only available to local employees and are generally government mandated. The liability related to the unfunded pension liabilities of the plans was $ 79 million and $ 73 million at May 31, 2020 and 2019 , respectively, and primarily classified as non-current in Deferred income taxes and other liabilities on the Consolidated Balance Sheets. +NOTE 14 — RISK MANAGEMENT AND DERIVATIVES +The Company is exposed to global market risks, including the effect of changes in foreign currency exchange rates and interest rates, and uses derivatives to manage financial exposures that occur in the normal course of business. The Company does not hold or issue derivatives for trading or speculative purposes. +The Company may elect to designate certain derivatives as hedging instruments under U.S. GAAP. The Company formally documents all relationships between designated hedging instruments and hedged items as well as its risk management objectives and strategies for undertaking hedge transactions. This process includes linking all derivatives designated as hedges to either recognized assets or liabilities or forecasted transactions and assessing, both at inception and on an ongoing basis, the effectiveness of the hedging relationships. +The majority of derivatives outstanding as of May 31, 2020 are designated as foreign currency cash flow hedges, primarily for Euro/U.S. Dollar, British Pound/Euro, Japanese Yen/U.S. Dollar and Chinese Yuan/U.S. Dollar currency pairs. All derivatives are recognized on the Consolidated Balance Sheets at fair value and classified based on the instrument's maturity date. +The following tables present the fair values of derivative instruments included within the Consolidated Balance Sheets as of May 31, 2020 and 2019 : +DERIVATIVE ASSETS +BALANCE SHEET LOCATION +MAY 31, +(Dollars in millions) +2020 +2019 +Derivatives formally designated as hedging instruments: +Foreign exchange forwards and options +Prepaid expenses and other current assets +$ +43 +$ +509 +Foreign exchange forwards and options +Deferred income taxes and other assets +1 +— +Total derivatives formally designated as hedging instruments +44 +509 +Derivatives not designated as hedging instruments: +Foreign exchange forwards and options +Prepaid expenses and other current assets +48 +102 +Embedded derivatives +Prepaid expenses and other current assets +1 +5 +Foreign exchange forwards and options +Deferred income taxes and other assets +2 +— +Embedded derivatives +Deferred income taxes and other assets +— +6 +Total derivatives not designated as hedging instruments +51 +113 +TOTAL DERIVATIVE ASSETS +$ +95 +$ +622 +2020 FORM 10-K 81 +Table of Contents +DERIVATIVE LIABILITIES +BALANCE SHEET LOCATION +MAY 31, +(Dollars in millions) +2020 +2019 +Derivatives formally designated as hedging instruments: +Foreign exchange forwards and options +Accrued liabilities +$ +173 +$ +5 +Foreign exchange forwards and options +Deferred income taxes and other liabilities +17 +— +Total derivatives formally designated as hedging instruments +190 +5 +Derivatives not designated as hedging instruments: +Foreign exchange forwards and options +Accrued liabilities +15 +46 +Embedded derivatives +Accrued liabilities +2 +1 +Embedded derivatives +Deferred income taxes and other liabilities +— +2 +Total derivatives not designated as hedging instruments +17 +49 +TOTAL DERIVATIVE LIABILITIES +$ +207 +$ +54 +The following table presents the amounts in the Consolidated Statements of Income in which the effects of cash flow hedges are recorded and the effects of cash flow hedge activity on these line items for the fiscal years ended May 31, 2020 , 2019 and 2018 : +YEAR ENDED MAY 31, +2020 +2019 +2018 +(Dollars in millions) +TOTAL +AMOUNT OF +GAIN (LOSS) +ON CASH FLOW +HEDGE ACTIVITY +TOTAL +AMOUNT OF +GAIN (LOSS) +ON CASH FLOW +HEDGE ACTIVITY +TOTAL +AMOUNT OF +GAIN (LOSS) +ON CASH FLOW +HEDGE ACTIVITY +Revenues +$ +37,403 +$ +( 17 +) +$ +39,117 +$ +( 5 +) +$ +36,397 +$ +34 +Cost of sales +21,162 +364 +21,643 +53 +20,441 +( 90 +) +Demand creation expense +3,592 +( 2 +) +3,753 +— +3,577 +1 +Other (income) expense, net +139 +181 +( 78 +) +35 +66 +( 69 +) +Interest expense (income), net +89 +( 7 +) +49 +( 7 +) +54 +( 7 +) +The following tables present the amounts affecting the Consolidated Statements of Income for the years ended May 31, 2020 , 2019 and 2018 : +2020 FORM 10-K 82 +Table of Contents +(Dollars in millions) +AMOUNT OF GAIN (LOSS) +RECOGNIZED IN OTHER +COMPREHENSIVE INCOME (LOSS) ON DERIVATIVES (1) +AMOUNT OF GAIN (LOSS) +RECLASSIFIED FROM ACCUMULATED +OTHER COMPREHENSIVE +INCOME (LOSS) INTO INCOME (1) +YEAR ENDED MAY 31, +LOCATION OF GAIN (LOSS) +RECLASSIFIED FROM ACCUMULATED +OTHER COMPREHENSIVE INCOME +(LOSS) INTO INCOME +YEAR ENDED MAY 31, +2020 +2019 +2018 +2020 +2019 +2018 +Derivatives designated as +cash flow hedges: +Foreign exchange forwards +and options +$ +28 +$ +14 +$ +19 +Revenues +$ +( 17 +) +$ +( 5 +) +$ +34 +Foreign exchange forwards +and options +283 +405 +( 50 +) +Cost of sales +364 +53 +( 90 +) +Foreign exchange forwards +and options +1 +2 +1 +Demand creation expense +( 2 +) +— +1 +Foreign exchange forwards +and options +90 +156 +( 19 +) +Other (income) expense, net +181 +35 +( 69 +) +Interest rate swaps (2) +— +— +— +Interest expense (income), net +( 7 +) +( 7 +) +( 7 +) +Total designated cash +flow hedges +$ +402 +$ +577 +$ +( 49 +) +$ +519 +$ +76 +$ +( 131 +) +(1) +For the fiscal years ended May 31, 2020 , 2019 and 2018 , the amounts recorded in Other (income) expense, net as a result of the discontinuance of cash flow hedges because the forecasted transactions were no longer probable of occurring were immaterial. +(2) +Gains and losses associated with terminated interest rate swaps, which were previously designated as cash flow hedges and recorded in Accumulated other comprehensive income (loss), will be released through Interest expense (income), net over the term of the issued debt. +AMOUNT OF GAIN (LOSS) RECOGNIZED +IN INCOME ON DERIVATIVES +LOCATION OF GAIN (LOSS) +RECOGNIZED IN INCOME +ON DERIVATIVES +YEAR ENDED MAY 31, +(Dollars in millions) +2020 +2019 +2018 +Derivatives not designated as hedging instruments: +Foreign exchange forwards and options +$ +76 +$ +166 +$ +( 57 +) +Other (income) expense, net +Embedded derivatives +( 1 +) +7 +( 4 +) +Other (income) expense, net +CASH FLOW HEDGES +All changes in fair value of derivatives designated as cash flow hedges are recorded in Accumulated other comprehensive income (loss) until Net income is affected by the variability of cash flows of the hedged transaction. Effective hedge results are classified in the Consolidated Statements of Income in the same manner as the underlying exposure. Derivative instruments designated as cash flow hedges must be discontinued when it is no longer probable the forecasted hedged transaction will occur in the initially identified time period. The gains and losses associated with discontinued derivative instruments in Accumulated other comprehensive income (loss) will be recognized immediately in Other (income) expense, net , if it is probable the forecasted hedged transaction will not occur by the end of the initially identified time period or within an additional two -month period thereafter. In rare circumstances, the additional period of time may exceed two months due to extenuating circumstances related to the nature of the forecasted transaction that are outside the control or influence of the Company. In all situations in which hedge accounting is discontinued and the derivative remains outstanding, the Company accounts for the derivative as an undesignated instrument as discussed below. +The purpose of the Company's foreign exchange risk management program is to lessen both the positive and negative effects of currency fluctuations on the Company's consolidated results of operations, financial position and cash flows. Foreign currency exposures the Company may elect to hedge in this manner include product cost exposures, non-functional currency denominated external and intercompany revenues, demand creation expenses, investments in U.S. Dollar denominated available-for-sale debt securities and certain other intercompany transactions. +Product cost exposures are primarily generated through non-functional currency denominated product purchases and the foreign currency adjustment program described below. NIKE entities primarily purchase product in two ways: (1) Certain NIKE entities purchase product from the NIKE Trading Company (NTC), a wholly-owned sourcing hub that buys NIKE branded products from third party factories, predominantly in U.S. Dollars. The NTC, whose functional currency is the U.S. Dollar, then sells the product to NIKE entities in their respective functional currencies. NTC sales to a NIKE entity with a different functional currency result in a foreign currency exposure for the NTC. (2) Other NIKE entities purchase product directly from third party factories in U.S. Dollars. +2020 FORM 10-K 83 +Table of Contents +These purchases generate a foreign currency exposure for those NIKE entities with a functional currency other than the U.S. Dollar. +The Company operates a foreign currency adjustment program with certain factories. The program is designed to more effectively manage foreign currency risk by assuming certain of the factories' foreign currency exposures, some of which are natural offsets to the Company's existing foreign currency exposures. Under this program, the Company's payments to these factories are adjusted for rate fluctuations in the basket of currencies (“factory currency exposure index”) in which the labor, materials and overhead costs incurred by the factories in the production of NIKE branded products (“factory input costs”) are denominated. For the portion of the indices denominated in the local or functional currency of the factory, the Company may elect to place formally designated cash flow hedges. For all currencies within the indices, excluding the U.S. Dollar and the local or functional currency of the factory, an embedded derivative contract is created upon the factory's acceptance of NIKE's purchase order. Embedded derivative contracts are separated from the related purchase order, as further described within the Embedded Derivatives section below. +The Company's policy permits the utilization of derivatives to reduce its foreign currency exposures where internal netting or other strategies cannot be effectively employed. Typically, the Company may enter into hedge contracts starting up to 12 to 24 months in advance of the forecasted transaction and may place incremental hedges up to 100 % of the exposure by the time the forecasted transaction occurs. The total notional amount of outstanding foreign currency derivatives designated as cash flow hedges was $ 8.1 billion as of May 31, 2020 . +As of May 31, 2020 , approximately $ 374 million of deferred net gains (net of tax) on both outstanding and matured derivatives in Accumulated other comprehensive income (loss) are expected to be reclassified to Net income during the next 12 months concurrent with the underlying hedged transactions also being recorded in Net income . Actual amounts ultimately reclassified to Net income are dependent on the exchange rates in effect when derivative contracts currently outstanding mature. As of May 31, 2020 , the maximum term over which the Company hedges exposures to the variability of cash flows for its forecasted transactions was 24 months. +FAIR VALUE HEDGES +The Company has, in the past, been exposed to the risk of changes in the fair value of certain fixed-rate debt attributable to changes in interest rates. Derivatives used by the Company to hedge this risk are receive-fixed, pay-variable interest rate swaps. All interest rate swaps designated as fair value hedges of the related long-term debt meet the shortcut method requirements under U.S. GAAP. Accordingly, changes in the fair values of the interest rate swaps are considered to exactly offset changes in the fair value of the underlying long-term debt. The Company had no interest rate swaps designated as fair value hedges as of May 31, 2020 . +NET INVESTMENT HEDGES +The Company has, in the past, hedged and may, in the future, hedge the risk of variability in foreign currency-denominated net investments in wholly-owned international operations. All changes in fair value of the derivatives designated as net investment hedges are reported in Accumulated other comprehensive income (loss) along with the foreign currency translation adjustments on those investments. The Company had no outstanding net investment hedges as of May 31, 2020 . +UNDESIGNATED DERIVATIVE INSTRUMENTS +The Company may elect to enter into foreign exchange forwards to mitigate the change in fair value of specific assets and liabilities on the Consolidated Balance Sheets and/or the embedded derivative contracts. These undesignated instruments are recorded at fair value as a derivative asset or liability on the Consolidated Balance Sheets with their corresponding change in fair value recognized in Other (income) expense, net , together with the re-measurement gain or loss from the hedged balance sheet position and/or embedded derivative contract. The total notional amount of outstanding undesignated derivative instruments was $ 4.1 billion as of May 31, 2020 . +EMBEDDED DERIVATIVES +As part of the foreign currency adjustment program described above, an embedded derivative contract is created upon the factory's acceptance of NIKE's purchase order for currencies within the factory currency exposure indices that are neither the U.S. Dollar nor the local or functional currency of the factory. In addition, embedded derivative contracts are created when the Company enters into certain other contractual agreements which have payments that are indexed to currencies that are not the functional currency of either substantial party to the contracts. Embedded derivative contracts are treated as foreign currency forward contracts that are bifurcated from the related contract and recorded at fair value as a derivative asset or liability on the Consolidated Balance Sheets with their corresponding change in fair value recognized in Other (income) expense, net , through the date the foreign currency fluctuations cease to exist. +2020 FORM 10-K 84 +Table of Contents +At May 31, 2020 , the total notional amount of embedded derivatives outstanding was approximately $ 281 million . +CREDIT RISK +The Company is exposed to credit-related losses in the event of nonperformance by counterparties to hedging instruments. The counterparties to all derivative transactions are major financial institutions with investment grade credit ratings; however, this does not eliminate the Company's exposure to credit risk with these institutions. This credit risk is limited to the unrealized gains in such contracts should any of these counterparties fail to perform as contracted. To manage this risk, the Company has established strict counterparty credit guidelines that are continually monitored. +The Company's derivative contracts contain credit risk-related contingent features designed to protect against significant deterioration in counterparties' creditworthiness and their ultimate ability to settle outstanding derivative contracts in the normal course of business. The Company's bilateral credit-related contingent features generally require the owing entity, either the Company or the derivative counterparty, to post collateral for the portion of the fair value in excess of $ 50 million should the fair value of outstanding derivatives per counterparty be greater than $ 50 million . Additionally, a certain level of decline in credit rating of either the Company or the counterparty could also trigger collateral requirements. As of May 31, 2020 , the Company was in compliance with all credit risk-related contingent features, and had derivative instruments with such features in a net liability position of $ 137 million . However, no derivative instruments with credit risk-related contingent features in a net liability position were greater than $ 50 million by counterparty. Accordingly, the Company was not required to post any collateral as a result of these contingent features. Further, as of May 31, 2020 , the Company had received no cash collateral from various counterparties to its derivative contracts. The Company considers the impact of the risk of counterparty default to be immaterial . +For additional information related to the Company's derivative financial instruments and collateral, refer to Note 6 — Fair Value Measurements . +2020 FORM 10-K 85 +Table of Contents +NOTE 15 — ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) +The changes in Accumulated other comprehensive income (loss) , net of tax, were as follows: +(Dollars in millions) +FOREIGN CURRENCY TRANSLATION ADJUSTMENT (1) +CASH FLOW HEDGES +NET INVESTMENT HEDGES (1) +OTHER +TOTAL +Balance at May 31, 2019 +$ +( 346 +) +$ +520 +$ +115 +$ +( 58 +) +$ +231 +Other comprehensive income (loss): +Other comprehensive gains (losses) before reclassifications (2) +( 149 +) +387 +— +( 8 +) +230 +Reclassifications to net income of previously deferred (gains) losses (3) +1 +( 517 +) +— +( 1 +) +( 517 +) +Total other comprehensive income (loss) +( 148 +) +( 130 +) +— +( 9 +) +( 287 +) +Balance at May 31, 2020 +$ +( 494 +) +$ +390 +$ +115 +$ +( 67 +) +$ +( 56 +) +(1) +The accumulated foreign currency translation adjustment and net investment hedge gains/losses related to an investment in a foreign subsidiary are reclassified to Net income upon sale or upon complete or substantially complete liquidation of the respective entity. +(2) +Net of tax benefit (expense) of $ 0 million , $ ( 15 ) million , $ 0 million , $ 1 million and $ ( 14 ) million , respectively. +(3) +Net of tax (benefit) expense of $ 0 million , $ 2 million , $ 0 million , $ 0 million and $ 2 million , respectively. +(Dollars in millions) +FOREIGN CURRENCY TRANSLATION ADJUSTMENT (1) +CASH FLOW HEDGES +NET INVESTMENT HEDGES (1) +OTHER +TOTAL +Balance at May 31, 2018 +$ +( 173 +) +$ +17 +$ +115 +$ +( 51 +) +$ +( 92 +) +Other comprehensive income (loss): +Other comprehensive gains (losses) before reclassifications (2) +( 173 +) +573 +— +10 +410 +Reclassifications to net income of previously deferred (gains) losses (3) +— +( 70 +) +— +( 17 +) +( 87 +) +Total other comprehensive income (loss) +( 173 +) +503 +— +( 7 +) +323 +Balance at May 31, 2019 +$ +( 346 +) +$ +520 +$ +115 +$ +( 58 +) +$ +231 +(1) +The accumulated foreign currency translation adjustment and net investment hedge gains/losses related to an investment in a foreign subsidiary are reclassified to Net income upon sale or upon complete or substantially complete liquidation of the respective entity. +(2) +Net of tax benefit (expense) of $ 0 million , $ ( 4 ) million , $ 0 million , $ 1 million and $ ( 3 ) million , respectively. +(3) +Net of tax (benefit) expense of $ 0 million , $ 6 million , $ 0 million , $ 0 million and $ 6 million , respectively. +2020 FORM 10-K 86 +Table of Contents +The following table summarizes the reclassifications from Accumulated other comprehensive income (loss) to the Consolidated Statements of Income: +AMOUNT OF GAIN (LOSS) +RECLASSIFIED FROM ACCUMULATED +OTHER COMPREHENSIVE INCOME +(LOSS) INTO INCOME +LOCATION OF GAIN (LOSS) +RECLASSIFIED FROM ACCUMULATED +OTHER COMPREHENSIVE INCOME +(LOSS) INTO INCOME +YEAR ENDED MAY 31, +(Dollars in millions) +2020 +2019 +Gains (losses) on foreign currency translation adjustment +$ +( 1 +) +$ +— +Other (income) expense, net +Total before tax +( 1 +) +— +Tax (expense) benefit +— +— +Gain (loss) net of tax +( 1 +) +— +Gains (losses) on cash flow hedges: +Foreign exchange forwards and options +$ +( 17 +) +( 5 +) +Revenues +Foreign exchange forwards and options +364 +53 +Cost of sales +Foreign exchange forwards and options +( 2 +) +— +Demand creation expense +Foreign exchange forwards and options +181 +35 +Other (income) expense, net +Interest rate swaps +( 7 +) +( 7 +) +Interest expense (income), net +Total before tax +519 +76 +Tax (expense) benefit +( 2 +) +( 6 +) +Gain (loss) net of tax +517 +70 +Gains (losses) on other +1 +17 +Other (income) expense, net +Total before tax +1 +17 +Tax (expense) benefit +— +— +Gain (loss) net of tax +1 +17 +Total net gain (loss) reclassified for the period +$ +517 +$ +87 +2020 FORM 10-K 87 +Table of Contents +NOTE 16 — REVENUES +DISAGGREGATION OF REVENUES +The following tables present the Company's revenues disaggregated by reportable operating segment, major product line and by distribution channel: +YEAR ENDED MAY 31, 2020 +(Dollars in millions) +NORTH AMERICA +EUROPE, MIDDLE EAST & AFRICA +GREATER CHINA +ASIA PACIFIC & LATIN AMERICA +GLOBAL BRAND DIVISIONS +TOTAL NIKE BRAND +CONVERSE +CORPORATE +TOTAL NIKE, INC. +Revenues by: +Footwear +$ +9,329 +$ +5,892 +$ +4,635 +$ +3,449 +$ +— +$ +23,305 +$ +1,642 +$ +— +$ +24,947 +Apparel +4,639 +3,053 +1,896 +1,365 +— +10,953 +89 +— +11,042 +Equipment +516 +402 +148 +214 +— +1,280 +25 +— +1,305 +Other +— +— +— +— +30 +30 +90 +( 11 +) +109 +TOTAL REVENUES +$ +14,484 +$ +9,347 +$ +6,679 +$ +5,028 +$ +30 +$ +35,568 +$ +1,846 +$ +( 11 +) +$ +37,403 +Revenues by: +Sales to Wholesale Customers +$ +9,371 +$ +6,574 +$ +3,803 +$ +3,408 +$ +— +$ +23,156 +$ +1,154 +$ +— +$ +24,310 +Sales through Direct to Consumer +5,113 +2,773 +2,876 +1,620 +— +12,382 +602 +— +12,984 +Other +— +— +— +— +30 +30 +90 +( 11 +) +109 +TOTAL REVENUES +$ +14,484 +$ +9,347 +$ +6,679 +$ +5,028 +$ +30 +$ +35,568 +$ +1,846 +$ +( 11 +) +$ +37,403 +YEAR ENDED MAY 31, 2019 +(Dollars in millions) +NORTH AMERICA +EUROPE, MIDDLE EAST & AFRICA +GREATER CHINA +ASIA PACIFIC & LATIN AMERICA +GLOBAL BRAND DIVISIONS +TOTAL NIKE BRAND +CONVERSE +CORPORATE +TOTAL NIKE, INC. +Revenues by: +Footwear +$ +10,045 +$ +6,293 +$ +4,262 +$ +3,622 +$ +— +$ +24,222 +$ +1,658 +$ +— +$ +25,880 +Apparel +5,260 +3,087 +1,808 +1,395 +— +11,550 +118 +— +11,668 +Equipment +597 +432 +138 +237 +— +1,404 +24 +— +1,428 +Other +— +— +— +— +42 +42 +106 +( 7 +) +141 +TOTAL REVENUES +$ +15,902 +$ +9,812 +$ +6,208 +$ +5,254 +$ +42 +$ +37,218 +$ +1,906 +$ +( 7 +) +$ +39,117 +Revenues by: +Sales to Wholesale Customers +$ +10,875 +$ +7,076 +$ +3,726 +$ +3,746 +$ +— +$ +25,423 +$ +1,247 +$ +— +$ +26,670 +Sales through Direct to Consumer +5,027 +2,736 +2,482 +1,508 +— +11,753 +553 +— +12,306 +Other +— +— +— +— +42 +42 +106 +( 7 +) +141 +TOTAL REVENUES +$ +15,902 +$ +9,812 +$ +6,208 +$ +5,254 +$ +42 +$ +37,218 +$ +1,906 +$ +( 7 +) +$ +39,117 +For the fiscal years ended May 31, 2020 and 2019 , Other revenues for Global Brand Divisions and Converse were primarily attributable to licensing businesses. For the fiscal years ended May 31, 2020 and 2019 , Other revenues for Corporate primarily consisted of foreign currency hedge gains and losses related to revenues generated by entities within the NIKE Brand geographic operating segments and Converse but managed through the Company's central foreign exchange risk management program. +As of May 31, 2020 and 2019 , the Company did not have any contract assets and had an immaterial amount of contract liabilities recorded in Accrued Liabilities on the Consolidated Balance Sheets. +2020 FORM 10-K 88 +Table of Contents +SALES-RELATED RESERVES +At May 31, 2020 and May 31, 2019 , the Company's sales-related reserve balance, which includes returns, post-invoice sales discounts and miscellaneous claims, was $ 1,178 million and $ 1,218 million , respectively, recorded in Accrued liabilities on the Consolidated Balance Sheets. The estimated cost of inventory for expected product returns was $ 313 million and $ 410 million as of May 31, 2020 and May 31, 2019 , respectively, and was recorded in Prepaid expenses and other current assets on the Consolidated Balance Sheets. +MAJOR CUSTOMERS +No customer accounted for 10% or more of the Company's consolidated net Revenues during the fiscal years ended May 31, 2020 , 2019 and 2018 . +NOTE 17 — OPERATING SEGMENTS AND RELATED INFORMATION +The Company's operating segments are evidence of the structure of the Company's internal organization. The NIKE Brand segments are defined by geographic regions for operations participating in NIKE Brand sales activity. +Each NIKE Brand geographic segment operates predominantly in one industry: the design, development, marketing and selling of athletic footwear, apparel and equipment. The Company's reportable operating segments for the NIKE Brand are: North America; Europe, Middle East & Africa (EMEA); Greater China; and Asia Pacific & Latin America (APLA), and include results for the NIKE and Jordan brands, with the results for the Hurley brand, prior to its divestiture, included in North America. Refer to Note 20 — Acquisitions and Divestitures for information regarding the divestiture of the Company's wholly-owned subsidiary, Hurley, and the planned transition of NIKE Brand businesses in certain countries within APLA to third-party distributors. +The Company's NIKE Direct operations are managed within each NIKE Brand geographic operating segment. Converse is also a reportable segment for the Company, and operates in one industry: the design, marketing, licensing and selling of athletic lifestyle sneakers, apparel and accessories. +Global Brand Divisions is included within the NIKE Brand for presentation purposes to align with the way management views the Company. Global Brand Divisions primarily represent NIKE Brand licensing businesses that are not part of a geographic operating segment, and demand creation and operating overhead expense, including product creation and design expenses that are centrally managed for the NIKE Brand, as well as costs associated with NIKE Direct global digital operations and enterprise technology. +Corporate consists primarily of unallocated general and administrative expenses, including expenses associated with centrally managed departments; depreciation and amortization related to the Company's headquarters; unallocated insurance, benefit and compensation programs, including stock-based compensation; and certain foreign currency gains and losses, including certain hedge gains and losses. For the fiscal year ended May 31, 2020 , Corporate includes the non-recurring impairment charge, recognized as a result of the Company's decision to transition its operations in Brazil, Argentina, Chile and Uruguay to third-party distributors. This charge primarily reflects the anticipated release of associated non-cash cumulative foreign currency translation losses. For more information regarding this charge, refer to Note 20 — Acquisitions and Divestitures . +The primary financial measure used by the Company to evaluate performance of individual operating segments is earnings before interest and taxes (EBIT), which represents Net income before Interest expense (income), net and Income tax expense in the Consolidated Statements of Income. +As part of the Company's centrally managed foreign exchange risk management program, standard foreign currency rates are assigned twice per year to each NIKE Brand entity in the Company's geographic operating segments and to Converse. These rates are set approximately nine and twelve months in advance of the future selling seasons to which they relate (specifically, for each currency, one standard rate applies to the fall and holiday selling seasons and one standard rate applies to the spring and summer selling seasons) based on average market spot rates in the calendar month preceding the date they are established. Inventories and cost of sales for geographic operating segments and Converse reflect the use of these standard rates to record non-functional currency product purchases in the entity's functional currency. Differences between assigned standard foreign currency rates and actual market rates are included in Corporate, together with foreign currency hedge gains and losses generated from the Company's centrally managed foreign exchange risk management program and other conversion gains and losses. +Accounts receivable, net, Inventories and Property, plant and equipment, net for operating segments are regularly reviewed by management and are therefore provided below. +2020 FORM 10-K 89 +Table of Contents +YEAR ENDED MAY 31, +(Dollars in millions) +2020 +2019 +2018 +REVENUES +North America +$ +14,484 +$ +15,902 +$ +14,855 +Europe, Middle East & Africa +9,347 +9,812 +9,242 +Greater China +6,679 +6,208 +5,134 +Asia Pacific & Latin America +5,028 +5,254 +5,166 +Global Brand Divisions +30 +42 +88 +Total NIKE Brand +35,568 +37,218 +34,485 +Converse +1,846 +1,906 +1,886 +Corporate +( 11 +) +( 7 +) +26 +TOTAL NIKE, INC. REVENUES +$ +37,403 +$ +39,117 +$ +36,397 +EARNINGS BEFORE INTEREST AND TAXES +North America +$ +2,899 +$ +3,925 +$ +3,600 +Europe, Middle East & Africa +1,541 +1,995 +1,587 +Greater China +2,490 +2,376 +1,807 +Asia Pacific & Latin America +1,184 +1,323 +1,189 +Global Brand Divisions +( 3,468 +) +( 3,262 +) +( 2,658 +) +Converse +297 +303 +310 +Corporate +( 1,967 +) +( 1,810 +) +( 1,456 +) +Interest expense (income), net +89 +49 +54 +TOTAL NIKE, INC. INCOME BEFORE INCOME TAXES +$ +2,887 +$ +4,801 +$ +4,325 +ADDITIONS TO PROPERTY, PLANT AND EQUIPMENT +North America +$ +110 +$ +117 +$ +196 +Europe, Middle East & Africa +139 +233 +240 +Greater China +28 +49 +76 +Asia Pacific & Latin America +41 +47 +49 +Global Brand Divisions +438 +278 +286 +Total NIKE Brand +756 +724 +847 +Converse +12 +18 +22 +Corporate +356 +333 +325 +TOTAL ADDITIONS TO PROPERTY, PLANT AND EQUIPMENT +$ +1,124 +$ +1,075 +$ +1,194 +DEPRECIATION +North America +$ +148 +$ +149 +$ +160 +Europe, Middle East & Africa +132 +111 +116 +Greater China +44 +50 +56 +Asia Pacific & Latin America +46 +53 +55 +Global Brand Divisions +214 +195 +217 +Total NIKE Brand +584 +558 +604 +Converse +25 +31 +33 +Corporate +112 +116 +110 +TOTAL DEPRECIATION +$ +721 +$ +705 +$ +747 +2020 FORM 10-K 90 +Table of Contents +AS OF MAY 31, +(Dollars in millions) +2020 +2019 +ACCOUNTS RECEIVABLE, NET +North America +$ +1,020 +$ +1,718 +Europe, Middle East & Africa +712 +1,164 +Greater China +321 +245 +Asia Pacific & Latin America (1) +425 +771 +Global Brand Divisions +65 +105 +Total NIKE Brand +2,543 +4,003 +Converse +149 +243 +Corporate +57 +26 +TOTAL ACCOUNTS RECEIVABLE, NET +$ +2,749 +$ +4,272 +INVENTORIES +North America +$ +3,077 +$ +2,328 +Europe, Middle East & Africa +2,070 +1,390 +Greater China +882 +693 +Asia Pacific & Latin America (1) +770 +694 +Global Brand Divisions +137 +126 +Total NIKE Brand +6,936 +5,231 +Converse +341 +269 +Corporate +90 +122 +TOTAL INVENTORIES +$ +7,367 +$ +5,622 +PROPERTY, PLANT AND EQUIPMENT, NET +North America +$ +645 +$ +814 +Europe, Middle East & Africa +885 +929 +Greater China +214 +237 +Asia Pacific & Latin America (1) +296 +326 +Global Brand Divisions +830 +665 +Total NIKE Brand +2,870 +2,971 +Converse +80 +100 +Corporate +1,916 +1,673 +TOTAL PROPERTY, PLANT AND EQUIPMENT, NET +$ +4,866 +$ +4,744 +(1) +Excludes assets held-for-sale as of May 31, 2020 . See Note 20 — Acquisitions and Divestitures for additional information. +REVENUES AND LONG-LIVED ASSETS BY GEOGRAPHIC AREA +After allocation of revenues for Global Brand Divisions, Converse and Corporate to geographical areas based on the location where the sales originated, revenues by geographical area are essentially the same as reported above for the NIKE Brand operating segments with the exception of the United States. Revenues derived in the United States were $ 14,625 million , $ 16,091 million and $ 15,314 million for the fiscal years ended May 31, 2020 , 2019 and 2018 , respectively. +The Company's largest concentrations of long-lived assets primarily consist of the Company's corporate headquarters, retail locations and distribution facilities in the United States and China, as well as distribution facilities in Belgium. Long-lived assets attributable to operations in these countries, which primarily consists of property, plant and equipment, net, as well as operating lease right-of-use assets, net in conjunction with the adoption of Topic 842 in fiscal 2020, were as follows: +MAY 31, +(Dollars in millions) +2020 (1) +2019 +United States +$ +5,114 +$ +3,174 +Belgium +606 +618 +China +457 +242 +(1) +Includes operating lease right-of-use assets, net in conjunction with the adoption of Topic 842. Comparative prior period information has not been adjusted and continues to be reported in accordance with previous accounting guidance in effect for those periods. +2020 FORM 10-K 91 +Table of Contents +NOTE 18 — COMMITMENTS AND CONTINGENCIES +As of May 31, 2020 and 2019 , the Company had bank guarantees and letters of credit outstanding totaling $ 239 million and $ 215 million , respectively, issued primarily for real estate agreements, self-insurance programs and other general business obligations. +In connection with various contracts and agreements, the Company provides routine indemnification relating to the enforceability of intellectual property rights, coverage for legal issues that arise and other items where the Company is acting as the guarantor. Currently, the Company has several such agreements in place. However, based on the Company's historical experience and the estimated probability of future loss, the Company has determined the fair value of such indemnification is not material to the Company's financial position or results of operations. +In the ordinary course of its business, the Company is involved in various legal proceedings involving contractual and employment relationships, product liability claims, trademark rights and a variety of other matters. While the Company cannot predict the outcome of its pending legal matters with certainty, the Company does not believe any currently identified claim, proceeding or litigation, either individually or in aggregate, will have a material impact on the Company's results of operations, financial position or cash flows. +NOTE 19 — LEASES +Lease expense is recognized in Cost of sales or Operating overhead expense within the Consolidated Statements of Income, based on the underlying nature of the leased asset. For the fiscal year ended May 31, 2020 , lease expense primarily consisted of operating lease costs of $ 569 million , along with $ 337 million primarily related to variable lease costs which includes an immaterial amount of short-term lease costs. As of and for the fiscal year ended May 31, 2020 , finance leases were not a material component of the Company's lease portfolio. +Amounts of future undiscounted cash flows related to operating lease payments over the lease term are as follows and are reconciled to the present value of the operating lease liabilities as recorded on the Consolidated Balance Sheets: +(Dollars in millions) +AS OF MAY 31, 2020 (1) +Fiscal 2021 +$ +550 +Fiscal 2022 +514 +Fiscal 2023 +456 +Fiscal 2024 +416 +Fiscal 2025 +374 +Thereafter +1,474 +Total undiscounted future cash flows related to lease payments +$ +3,784 +Less: Interest +426 +Present value of lease liabilities +$ +3,358 +(1) +Excludes $ 67 million of future operating lease payments for lease agreements signed but not yet commenced. +In accordance with Topic 840, rent expense, excluding executory costs, was $ 829 million and $ 820 million for the fiscal years ended May 31, 2019 and 2018, respectively. Amounts of minimum future annual commitments under non-cancelable operating and capital leases in accordance with Topic 840 were as follows: +AS OF MAY 31, 2019 +(Dollars in millions) +OPERATING LEASES +CAPITAL LEASES AND OTHER FINANCING OBLIGATIONS (1) +TOTAL +Fiscal 2020 +$ +553 +$ +32 +$ +585 +Fiscal 2021 +513 +34 +547 +Fiscal 2022 +441 +40 +481 +Fiscal 2023 +386 +37 +423 +Fiscal 2024 +345 +34 +379 +Thereafter +1,494 +197 +1,691 +TOTAL +$ +3,732 +$ +374 +$ +4,106 +(1) +Capital leases and other financing obligations include payments related to build-to-suit lease arrangements. +2020 FORM 10-K 92 +Table of Contents +The following table includes the weighted average remaining lease terms, in years, and the weighted average discount rate used to calculate the present value of operating lease liabilities: +AS OF MAY 31, +2020 +Weighted-average remaining lease term (years) +8.7 +Weighted-average discount rate +2.4 +% +The following table includes supplemental cash and non-cash information related to operating leases: +FISCAL YEAR ENDED +(Dollars in millions) +MAY 31, 2020 +Cash paid for amounts included in the measurement of lease liabilities: +Operating cash flows from operating leases +$ +532 +Operating lease right-of-use assets obtained in exchange for new operating lease liabilities (1) +$ +705 +(1) +Excludes the amount initially capitalized in conjunction with the adoption of Topic 842. +NOTE 20 — ACQUISITIONS AND DIVESTITURES +ACQUISITIONS +During fiscal 2020 , 2019 and 2018 , the Company made multiple acquisitions focused on gaining new capabilities to fuel its Consumer Direct Offense strategy, serving consumers personally at a global scale. The impact of acquisitions, individually and in the aggregate, was not considered material to the Company's Consolidated Financial Statements. +DIVESTITURES +During the third quarter of fiscal 2020 , as a result of the Company's decision to transition its wholesale and direct to consumer operating model in certain countries within its APLA operating segment, the Company signed definitive agreements to sell its NIKE Brand businesses in Brazil, Argentina, Chile and Uruguay to third-party distributors. Specifically, NIKE entered into agreements to sell its operations in Argentina, Chile and Uruguay to Grupo Axo and to sell substantially all of its operations in Brazil to Grupo SBF S.A., through its wholly-owned subsidiary. The Company will retain a small operation in Brazil focused on certain sports marketing assets, local manufacturing and Converse. These transactions are expected to close in the first half of fiscal 2021, with Grupo SBF S.A.'s transaction subject to Brazil Antitrust Authority approvals. +As a result of this decision, beginning in the third quarter of fiscal 2020, the related assets and liabilities of these entities were classified as held-for-sale and remain as such on the Consolidated Balance Sheets as of May 31, 2020 , which consisted of the following: +• +Assets of $ 506 million , primarily consisting of $ 264 million of Inventories and $ 138 million of Accounts receivable, net which were reclassified to Prepaid expenses and other current assets on the Company's Consolidated Balance Sheets; and +• +Liabilities of $ 146 million , primarily consisting of $ 85 million of Accrued liabilities, as well as $ 49 million of Accounts Payable, which was reclassified to Accrued liabilities on the Company's Consolidated Balance Sheets. +As a result of meeting the criteria for held-for-sale classification, the Company recognized a non-recurring impairment charge of $ 405 million within Other (income) expense, net on the Consolidated Statements of Income, classified within Corporate, and a corresponding allowance within Accrued Liabilities on the Consolidated Balance Sheets. This charge was primarily due to the anticipated release of non-cash cumulative foreign currency translation losses, which were included as part of the carrying value of the Argentina, Chile and Uruguay disposal groups when measuring for impairment. These losses will be reclassified from Accumulated other comprehensive income (loss) to Net income upon closure of the transaction. For more information see Note 6 — Fair Value Measurements . +On October 29, 2019, the Company signed a definitive agreement to sell the assets and liabilities of its wholly-owned subsidiary brand, Hurley. The transaction closed on December 6, 2019, and the impacts of the divestiture are not considered material to the Company. +2020 FORM 10-K 93 +Table of Contents +NOTE 21 — SUBSEQUENT EVENTS +In June 2020, the Company announced a new digitally empowered phase of its Consumer Direct Offense, the Consumer Direct Acceleration. As a result, on July 22, 2020, management announced a series of leadership and operating model changes to streamline and speed up strategic execution for the Company. The changes are expected to lead to a net loss of jobs, resulting in pre-tax, one-time employee termination costs of approximately $ 200 million to $ 250 million , which is expected to be incurred primarily during the first half of fiscal 2021, in the form of cash expenditures. +2020 FORM 10-K 94 +Table of Contents +ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE +There has been no change of accountants nor any disagreements with accountants on any matter of accounting principles or practices or financial statement disclosure required to be reported under this Item. +ITEM 9A. CONTROLS AND PROCEDURES +We maintain disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in our Securities Exchange Act of 1934, as amended ("the Exchange Act") reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. +We carry out a variety of ongoing procedures, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, to evaluate the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of May 31, 2020 . +“Management's Annual Report on Internal Control Over Financial Reporting” is included in Item 8 of this Report. +We are continuing several transformation initiatives to centralize and simplify our business processes and systems. These are long-term initiatives, which we believe will enhance our internal control over financial reporting due to increased automation and further integration of related processes. We will continue to monitor our internal control over financial reporting for effectiveness throughout these transformation initiatives. +There have not been any changes in our internal control over financial reporting during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. +ITEM 9B. OTHER INFORMATION +No disclosure is required under this item. +2020 FORM 10-K 95 +Table of Contents +PART III +ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE +The information required by Item 401 of Regulation S-K regarding directors is included under “NIKE, Inc. Board of Directors” in the definitive Proxy Statement for our 2020 Annual Meeting of Shareholders and is incorporated herein by reference. The information required by Item 401 of Regulation S-K regarding executive officers is included under “Information about our Executive Officers” in Item 1 of this Report. The information required by Item 406 of Regulation S-K is included under “Corporate Governance — Board Structure and Responsibilities — Code of Conduct” in the definitive Proxy Statement for our 2020 Annual Meeting of Shareholders and is incorporated herein by reference. The information required by Items 407(d)(4) and (d)(5) of Regulation S-K regarding the Audit & Finance Committee of the Board of Directors is included under “Corporate Governance — Board Structure and Responsibilities — Board Committees” in the definitive Proxy Statement for our 2020 Annual Meeting of Shareholders and is incorporated herein by reference. +ITEM 11. EXECUTIVE COMPENSATION +The information required by Items 402, 407(e)(4) and 407(e)(5) of Regulation S-K regarding executive compensation is included under “Corporate Governance — Director Compensation for Fiscal 2020 ,” “Compensation Discussion and Analysis,” and “Stock Ownership Information — Transactions with Related Persons — Compensation Committee Interlocks and Insider Participation,” in the definitive Proxy Statement for our 2020 Annual Meeting of Shareholders and is incorporated herein by reference. +ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS +The information required by Item 201(d) of Regulation S-K is included under “Compensation Discussion and Analysis — Executive Compensation Tables — Equity Compensation Plan Information” in the definitive Proxy Statement for our 2020 Annual Meeting of Shareholders and is incorporated herein by reference. The information required by Item 403 of Regulation S-K is included under “Stock Ownership Information — Stock Holdings of Certain Owners and Management” in the definitive Proxy Statement for our 2020 Annual Meeting of Shareholders and is incorporated herein by reference. +ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE +The information required by Items 404 and 407(a) of Regulation S-K is included under “Stock Ownership Information — Transactions with Related Persons” and “Corporate Governance — Individual Board Skills Matrix — Director Independence” in the definitive Proxy Statement for our 2020 Annual Meeting of Shareholders and is incorporated herein by reference. +ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES +The information required by Item 9(e) of Schedule 14A is included under “Audit Matters — Ratification of Appointment of Independent Registered Public Accounting Firm” in the definitive Proxy Statement for our 2020 Annual Meeting of Shareholders and is incorporated herein by reference. +2020 FORM 10-K 96 +Table of Contents +PART IV +ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES +(a) +The following documents are filed as part of this report: +FORM 10-K PAGE NO. +1. +Financial Statements: +Report of Independent Registered Public Accounting Firm +54 +Consolidated Statements of Income for each of the three years ended May 31, 2020, May 31, 2019 and May 31, 2018 +56 +Consolidated Statements of Comprehensive Income for each of the three years ended May 31, 2020, May 31, 2019 and May 31, 2018 +57 +Consolidated Balance Sheets at May 31, 2020 and May 31, 2019 +58 +Consolidated Statements of Cash Flows for each of the three years ended May 31, 2020, May 31, 2019 and May 31, 2018 +59 +Consolidated Statements of Shareholders' Equity for each of the three years ended May 31, 2020, May 31, 2019 and May 31, 2018 +60 +Notes to Consolidated Financial Statements +61 +2. +Financial Statement Schedule: +II — Valuation and Qualifying Accounts for the years ended May 31, 2020, 2019 and 2018 +100 +All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. +3. +Exhibits: +3.1 +Restated Articles of Incorporation, as amended (incorporated by reference to Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended November 30, 2015). +3.2 +Fifth Restated Bylaws, as amended (incorporated by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K filed June 19, 2020). +4.1 +Restated Articles of Incorporation, as amended (see Exhibit 3.1). +4.2 +Fifth Restated Bylaws, as amended (see Exhibit 3.2). +4.3 +Indenture dated as of April 26, 2013, by and between NIKE, Inc. and Deutsche Bank Trust Company Americas, as trustee (incorporated by reference to Exhibit 4.1 to the Company's Form 8-K filed April 26, 2013). +4.4 +Second Supplemental Indenture, dated as of October 29, 2015, by and between NIKE, Inc. and Deutsche Bank Trust Company Americas, as trustee, including the form of 3.875% Notes due 2045 (incorporated by reference to Exhibit 4.2 to the Company's Form 8-K filed October 29, 2015). +4.5 +Third Supplemental Indenture, dated as of October 21, 2016, by and between NIKE, Inc. and Deutsche Bank Trust Company Americas, as trustee, including the form of 2.375% Notes due 2026 and form of 3.375% Notes due 2046 (incorporated by reference to Exhibit 4.2 to the Company's Form 8-K filed October 21, 2016). +4.6 +Fourth Supplemental Indenture, dated as of March 27, 2020, by and between NIKE, Inc. and Deutsche Bank Trust Company Americas, as trustee, including the form of 2.400% Notes due 2025, form of 2.750% Notes due 2027, form of 2.850% Notes due 2030, form of 3.250% Notes due 2040 and form of 3.375% Notes due 2050 (incorporated by reference to Exhibit 4.2 to the Company's Form 8-K filed March 27, 2020). +4.7 +Description of Registrants Securities (incorporated by reference to Exhibit 4.6 to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 2019). +10.1 +Form of Non-Statutory Stock Option Agreement for options granted to non-employee directors prior to May 31, 2010 under the 1990 Stock Incentive Plan (incorporated by reference to Exhibit 10.3 to the Company's Current Report on Form 8-K filed June 21, 2005).* +10.2 +Form of Non-Statutory Stock Option Agreement for options granted to non-employee directors after May 31, 2010 under the 1990 Stock Incentive Plan (incorporated by reference to Exhibit 10.2 to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 2010).* +10.3 +Form of Non-Statutory Stock Option Agreement for options granted to executives prior to May 31, 2010 under the 1990 Stock Incentive Plan (incorporated by reference to Exhibit 10.1 to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 2009).* +10.4 +Form of Restricted Stock Agreement for non-employee directors under the 1990 Stock Incentive Plan (incorporated by reference to Exhibit 10.4 to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 2014).* +2020 FORM 10-K 97 +Table of Contents +10.5 +Form of Non-Statutory Stock Option Agreement for options granted to executives under the Stock Incentive Plan (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended February 28, 2018).* +10.6 +Form of Indemnity Agreement entered into between the Company and each of its officers and directors (incorporated by reference to Exhibit 10.2 to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 2008).* +10.7 +NIKE, Inc. 1990 Stock Incentive Plan (incorporated by reference to Exhibit 10.7 to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 2014).* +10.8 +NIKE, Inc. Long-Term Incentive Plan (incorporated by reference to Exhibit 10.9 to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 2015).* +10.9 +NIKE, Inc. Deferred Compensation Plan (Amended and Restated effective April 1, 2013) (incorporated by reference to Exhibit 10.9 to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 2013).* +10.10 +NIKE, Inc. Deferred Compensation Plan (Amended and Restated effective June 1, 2004) (applicable to amounts deferred before January 1, 2005) (incorporated by reference to Exhibit 10.6 to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 2004).* +10.11 +Amendment No. 1 effective January 1, 2008 to the NIKE, Inc. Deferred Compensation Plan (June 1, 2004 Restatement) (incorporated by reference to Exhibit 10.9 to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 2009).* +10.12 +NIKE, Inc. Foreign Subsidiary Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended November 30, 2008).* +10.13 +Amended and Restated Covenant Not to Compete and Non-Disclosure Agreement between NIKE, Inc. and Mark G. Parker dated July 24, 2008 (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed July 24, 2008).* +10.14 +Form of Restricted Stock Agreement under the Stock Incentive Plan for awards after May 31, 2010 (incorporated by reference to Exhibit 10.15 to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 2015).* +10.15 +Form of Restricted Stock Unit Agreement under the Stock Incentive Plan (incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended February 28, 2018).* +10.16 +Form of Covenant Not to Compete and Non-Disclosure Agreement between NIKE, Inc. and its executive officers (other than Mark G. Parker and John J. Donahoe II) (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed February 18, 2020).* +10.17 +Policy for Recoupment of Incentive Compensation (incorporated by reference to Exhibit 10.3 to the Company's Current Report on Form 8-K filed July 20, 2010).* +10.18 +Credit Agreement dated as of August 28, 2015 among NIKE, Inc., Bank of America, N.A., as Administrative Agent, Citibank N.A., as Syndication Agent, Deutsche Bank A.G. New York Branch and HSBC Bank USA, National Association, as Co-Documentation Agents, and the other Banks named therein (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed September 2, 2015). +10.19 +Executive Performance Sharing Plan (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed September 23, 2015).* +10.20 +Stock Incentive Plan, as amended (incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K filed September 23, 2015).* +10.21 +Form of Discretionary Performance Award Agreement (incorporated by reference to Exhibit 10.22 to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 2018).* +10.22 +NIKE, Inc. Amended and Restated Long-Term Incentive Plan (incorporated by reference to Exhibit A to the Company's definitive Proxy Statement filed July 25, 2017).* +10.23 +Offer Letter between NIKE, Inc. and John J. Donahoe II (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed October 22, 2019).* +10.24 +Form of Covenant Not to Compete and Non-Disclosure Agreement between NIKE, Inc. and John J. Donahoe II (incorporated by reference to Exhibit 10.3 to the Company's Current Report on Form 8-K filed October 22, 2019).* +10.25 +Form of Performance-Based Stock Option Agreement (incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K filed October 22, 2019). +10.26 +Letter Agreement between NIKE, Inc. and Mark G. Parker (incorporated by reference to Exhibit 10.6 to the Company's Current Report on Form 8-K filed October 22, 2019).* +10.27 +Credit Agreement, dated as of April 6, 2020, among NIKE, Inc., Bank of America, N.A., as Administrative Agent, and the other Banks named therein (incorporated by reference to Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended February 29, 2020). +10.28 +NIKE, Inc. Executive Performance Sharing Plan (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed June 19, 2020).* +10.29 +NIKE, Inc. Amended and Restated Long-Term Incentive Plan (incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K filed June 19, 2020).* +10.30 +Form of Non-Statutory Stock Option Agreement under the NIKE, Inc. Stock Incentive Plan (incorporated by reference to Exhibit 10.3 to the Company's Current Report on Form 8-K filed June 19, 2020).* +10.31 +Form of Restricted Stock Unit Agreement under the NIKE, Inc. Stock Incentive Plan (incorporated by reference to Exhibit 10.4 to the Company's Current Report on Form 8-K filed June 19, 2020).* +2020 FORM 10-K 98 +Table of Contents +10.32 +Credit Agreement dated as of August 16, 2019, among NIKE, Inc., Bank of America, N.A., as Administrative Agent, Citibank N.A., as Syndication Agent, Deutsche Bank Securities, Inc., HSBC Bank USA, National Association and JPMorgan Chase, N.A., as Co-Documentation Agents, and the other Banks named therein (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed August 20, 2019). +21 +Subsidiaries of the Registrant. +23 +Consent of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm (included within this Annual Report on Form 10-K). +31.1 +Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer. +31.2 +Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer. +32 +Section 1350 Certifications. +101.INS +XBRL Instance Document +101.SCH +XBRL Taxonomy Extension Schema +101.CAL +XBRL Taxonomy Extension Calculation Linkbase +101.DEF +XBRL Taxonomy Extension Definition Document +101.LAB +XBRL Taxonomy Extension Label Linkbase +101.PRE +XBRL Taxonomy Extension Presentation Linkbase +* Management contract or compensatory plan or arrangement. +The Exhibits filed herewith do not include certain instruments with respect to long-term debt of NIKE and its subsidiaries, inasmuch as the total amount of debt authorized under any such instrument does not exceed 10 percent of the total assets of NIKE and its subsidiaries on a consolidated basis. NIKE agrees, pursuant to Item 601(b)(4)(iii) of Regulation S-K, that it will furnish a copy of any such instrument to the SEC upon request. +Upon written request to Investor Relations, NIKE, Inc., One Bowerman Drive, Beaverton, Oregon 97005-6453, NIKE will furnish shareholders with a copy of any Exhibit upon payment of $0.10 per page, which represents our reasonable expenses in furnishing Exhibits. +2020 FORM 10-K 99 +Table of Contents +SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS +(Dollars in millions) +BALANCE AT BEGINNING OF +PERIOD +CHARGED TO COSTS AND EXPENSES +CHARGED +TO OTHER +ACCOUNTS (1) +WRITE-OFFS, +NET +BALANCE +AT END +OF PERIOD +Sales returns reserve +For the fiscal year ended May 31, 2018 +$ +343 +$ +640 +$ +5 +$ +( 658 +) +$ +330 +For the fiscal year ended May 31, 2019 (2) +734 +1,959 +( 30 +) +( 1,820 +) +843 +For the fiscal year ended May 31, 2020 +843 +1,941 +( 31 +) +( 2,071 +) +682 +(1) +Amounts included in this column primarily relate to foreign currency translation. +(2) +As a result of the adoption of ASC Topic 606 during the first quarter of fiscal 2019, an asset for the estimated cost of inventory for expected products returns is now recognized separately from the liability for sales returns reserves, which is presented above. +2020 FORM 10-K 100 +Table of Contents +ITEM 16. FORM 10-K SUMMARY +None. +2020 FORM 10-K 101 +Table of Contents +Consent of Independent Registered Public Accounting Firm +We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (Nos. 033-63995, 333-63581, 333-63583, 333-68864, 333-68886, 333-71660, 333-104822, 333-117059, 333-133360, 333-164248, 333-171647, 333-173727, 333-208900 and 333-215439) and the Registration Statement on Form S-3 (No. 333-232770) of NIKE, Inc. of our report dated July 24, 2020 relating to the financial statements and financial statement schedule and the effectiveness of internal control over financial reporting, which appears in this Form 10-K. +/s/ PricewaterhouseCoopers LLP +Portland, Oregon +July 24, 2020 +2020 FORM 10-K 102 +Table of Contents +SIGNATURES +Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. +NIKE, INC. +By: +/s/ JOHN J. DONAHOE II +John J. Donahoe II +President and Chief Executive Officer +Date: +July 24, 2020 +Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. +SIGNATURE +TITLE +DATE +PRINCIPAL EXECUTIVE OFFICER AND DIRECTOR: +/s/ JOHN J. DONAHOE II +John J. Donahoe II +President and Chief Executive Officer +July 24, 2020 +PRINCIPAL FINANCIAL OFFICER: +/s/ MATTHEW FRIEND +Matthew Friend +Executive Vice President and Chief Financial Officer +July 24, 2020 +PRINCIPAL ACCOUNTING OFFICER: +/s/ CHRIS L. ABSTON +Chris L. Abston +Vice President and Corporate Controller +July 24, 2020 +DIRECTORS: +/s/ MARK G. PARKER +Mark G. Parker +Director, Chairman of the Board +July 24, 2020 +/s/ CATHLEEN A. BENKO +Cathleen A. Benko +Director +July 24, 2020 +/s/ ELIZABETH J. COMSTOCK +Elizabeth J. Comstock +Director +July 24, 2020 +/s/ JOHN G. CONNORS +John G. Connors +Director +July 24, 2020 +/s/ TIMOTHY D. COOK +Timothy D. Cook +Director +July 24, 2020 +/s/ THASUNDA B. DUCKETT +Thasunda B. Duckett +Director +July 24, 2020 +/s/ ALAN B. GRAF, JR. +Alan B. Graf, Jr. +Director +July 24, 2020 +/s/ PETER B. HENRY +Peter B. Henry +Director +July 24, 2020 +/s/ TRAVIS A. KNIGHT +Travis A. Knight +Director +July 24, 2020 +/s/ MICHELLE A. PELUSO +Michelle A. Peluso +Director +July 24, 2020 +/s/ JOHN W. ROGERS, JR. +John W. Rogers, Jr. +Director +July 24, 2020 +2020 FORM 10-K 103 \ No newline at end of file diff --git a/raw/filings/0000320187/2019/0000320187-20-000047/filing_metadata.csv b/raw/filings/0000320187/2019/0000320187-20-000047/filing_metadata.csv new file mode 100644 index 0000000000000000000000000000000000000000..63a460c1c552119f2aa089220cfc4ea62976b35b --- /dev/null +++ b/raw/filings/0000320187/2019/0000320187-20-000047/filing_metadata.csv @@ -0,0 +1,2 @@ +cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing +0000320187,NKE,"NIKE, Inc.",10-K,2020-07-24,2020-05-31,2020-07-25T00:07:45.000Z,0000320187-20-000047,nke-531202010k.htm,10-K,19747611,1,1,https://www.sec.gov/Archives/edgar/data/320187/000032018720000047/nke-531202010k.htm,https://www.sec.gov/Archives/edgar/data/320187/000032018720000047/,2019,2019,1 diff --git a/raw/filings/0000320187/2019/0000320187-20-000047/item1.txt b/raw/filings/0000320187/2019/0000320187-20-000047/item1.txt new file mode 100644 index 0000000000000000000000000000000000000000..2c7e66fb3225655f0dd28824f97b3522076c36b7 --- /dev/null +++ b/raw/filings/0000320187/2019/0000320187-20-000047/item1.txt @@ -0,0 +1,105 @@ +ITEM 1. BUSINESS +GENERAL +NIKE, Inc. was incorporated in 1967 under the laws of the State of Oregon. As used in this report, the terms “we,” “us,” “NIKE” and the “Company” refer to NIKE, Inc. and its predecessors, subsidiaries and affiliates, collectively, unless the context indicates otherwise. Our NIKE digital commerce website is located at www.nike.com . On our NIKE corporate website, located at investors.nike.com , we post the following filings as soon as reasonably practicable after they are electronically filed with, or furnished to, the United States Securities and Exchange Commission (the “SEC”): our annual report on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities and Exchange Act of 1934, as amended. Our definitive Proxy Statements are also posted on our corporate website. All such filings on our corporate website are available free of charge. Copies of these filings are also available on the SEC's website ( www.sec.gov ). Also available on our corporate website are the charters of the committees of our Board of Directors, as well as our corporate governance guidelines and code of ethics; copies of any of these documents will be provided in print to any shareholder who submits a request in writing to NIKE Investor Relations, One Bowerman Drive, Beaverton, Oregon 97005-6453. +Our principal business activity is the design, development and worldwide marketing and selling of athletic footwear, apparel, equipment, accessories and services. NIKE is the largest seller of athletic footwear and apparel in the world. We sell our products directly to consumers through NIKE-owned retail stores and digital platforms (which we refer to collectively as our “NIKE Direct” operations) and to retail accounts and a mix of independent distributors, licensees and sales representatives in virtually all countries around the world. We also offer interactive consumer experiences through our digital platforms. Virtually all of our products are manufactured by independent contractors. Nearly all footwear and apparel products are produced outside the United States, while equipment products are produced both in the United States and abroad. +PRODUCTS +We focus our NIKE Brand product offerings in six key categories: Running, NIKE Basketball, the Jordan Brand, Football (Soccer), Training and Sportswear (our sports-inspired lifestyle products). We also market products designed for kids, as well as for other athletic and recreational uses such as American football, baseball, cricket, golf, lacrosse, skateboarding, tennis, volleyball, walking, wrestling and other outdoor activities. +NIKE's athletic footwear products are designed primarily for specific athletic use, although a large percentage of the products are worn for casual or leisure purposes. We place considerable emphasis on innovation and high-quality construction in the development and manufacturing of our products. Sportswear, the Jordan Brand and Running are currently our top-selling footwear categories and we expect them to continue to lead in footwear sales. +We also sell sports apparel covering the above-mentioned categories, which feature the same trademarks and are sold predominantly through the same marketing and distribution channels as athletic footwear. Our sports apparel, similar to our athletic footwear products, is designed primarily for athletic use and also demonstrates our commitment to innovation and high-quality construction. Sportswear, Training and Running are currently our top-selling apparel categories and we expect them to continue to lead in apparel sales. We often market footwear, apparel and accessories in “collections” of similar use or by category. We also market apparel with licensed college and professional team and league logos. +We sell a line of performance equipment and accessories under the NIKE Brand name, including bags, socks, sport balls, eyewear, timepieces, digital devices, bats, gloves, protective equipment and other equipment designed for sports activities. We also sell small amounts of various plastic products to other manufacturers through our wholly-owned subsidiary, NIKE IHM, Inc., doing business as Air Manufacturing Innovation. +Our Jordan Brand designs, distributes and licenses athletic and casual footwear, apparel and accessories predominantly focused on basketball using the Jumpman trademark. Sales and operating results for Jordan Brand products are reported within the respective NIKE Brand geographic operating segments. +Our wholly-owned subsidiary brand, Converse, headquartered in Boston, Massachusetts, designs, distributes and licenses casual sneakers, apparel and accessories under the Converse, Chuck Taylor, All Star, One Star, Star Chevron and Jack Purcell trademarks. Operating results of the Converse brand are reported on a stand-alone basis. +2020 FORM 10-K 1 +Table of Contents +In addition to the products we sell to our wholesale customers and directly to consumers through our NIKE Direct operations, we have also entered into license agreements that permit unaffiliated parties to manufacture and sell, using NIKE-owned trademarks, certain apparel, digital devices and applications and other equipment designed for sports activities. +SALES AND MARKETING +We experience moderate fluctuations in aggregate sales volume during the year. Historically, revenues in the first and fourth fiscal quarters have slightly exceeded those in the second and third quarters. However, the mix of product sales may vary considerably as a result of changes in seasonal and geographic demand for particular types of footwear, apparel and equipment, as well as other macroeconomic, operating and logistics-related factors, as evidenced by the impact of the COVID-19 pandemic. +Because NIKE is a consumer products company, the relative popularity and availability of various sports and fitness activities, as well as changing design trends, affect the demand for our products. We must, therefore, respond to trends and shifts in consumer preferences by adjusting the mix of existing product offerings, developing new products, styles and categories and influencing sports and fitness preferences through extensive marketing. Failure to respond in a timely and adequate manner could have a material adverse effect on our sales and profitability. This is a continuing risk. Refer to Item 1A. Risk Factors. +We report our NIKE Brand operations based on our internal geographic organization. Each NIKE Brand geographic segment operates predominantly in one industry: the design, development, marketing and selling of athletic footwear, apparel and equipment. The Company's reportable operating segments for the NIKE Brand are: North America; Europe, Middle East & Africa (EMEA); Greater China; and Asia Pacific & Latin America (APLA), and include results for the NIKE and Jordan brands. The Hurley brand results, prior to its divestiture in the beginning of the third quarter of fiscal 2020, are included in North America. Sales through our NIKE Direct operations are managed within each geographic operating segment. +Converse is also a reportable operating segment and operates predominately in one industry: the design, marketing, licensing and selling of casual sneakers, apparel and accessories. Converse direct to consumer operations, including digital commerce, are reported within the Converse operating segment results. +UNITED STATES MARKET +For fiscal 2020 , NIKE Brand and Converse sales in the United States accounted for approximately 39% of total revenues, compared to 41% and 42% for fiscal 2019 and fiscal 2018 , respectively. We sell our NIKE Brand, Jordan Brand and Converse products to thousands of retail accounts in the United States, including a mix of footwear stores, sporting goods stores, athletic specialty stores, department stores, skate, tennis and golf shops and other retail accounts. In the United States, we utilize NIKE sales offices to solicit such sales. During fiscal 2020 , our three largest United States customers accounted for approximately 24% of sales in the United States. +Our NIKE Direct and Converse direct to consumer operations sell NIKE Brand, Jordan Brand and Converse products to consumers through various digital platforms. In addition, our NIKE Direct and Converse direct to consumer operations sell products through the following number of retail stores in the United States: +U.S. RETAIL STORES +NUMBER +NIKE Brand factory stores +212 +NIKE Brand in-line stores (including employee-only stores) +28 +Converse stores (including factory stores) +98 +TOTAL +338 +In the United States, NIKE has seven significant distribution centers. Four are located in Memphis, Tennessee, two of which are owned and two of which are leased. Two other distribution centers, one located in Indianapolis, Indiana and one located in Dayton, Tennessee, are leased and operated by third-party logistics providers. One distribution center for Converse is located in Ontario, California, which is leased. There are other smaller distribution facilities located in various parts of the United States, some of which are leased or operated by third-parties. +INTERNATIONAL MARKETS +For fiscal 2020 , non-U.S. NIKE Brand and Converse sales accounted for approximately 61% of total revenues, compared to 59% and 58% for fiscal 2019 and fiscal 2018 , respectively. We sell our products to retail accounts, through our own NIKE Direct operations and through a mix of independent distributors, licensees and sales representatives around the world. We sell to thousands of retail accounts and ship products from 74 distribution centers outside of the United States. During fiscal 2020 , NIKE's three largest customers outside of the United States accounted for approximately 15% of total non-U.S. sales. +2020 FORM 10-K 2 +Table of Contents +In addition to NIKE and Converse owned digital commerce platforms in over 45 countries, our NIKE Direct and Converse direct to consumer businesses operate the following number of retail stores outside the United States: +NON-U.S. RETAIL STORES +NUMBER +NIKE Brand factory stores +643 +NIKE Brand in-line stores (including employee-only stores) +52 +Converse stores (including factory stores) +63 +TOTAL +758 +International branch offices and subsidiaries of NIKE are located in Argentina, Australia, Austria, Belgium, Bermuda, Brazil, Canada, Chile, China, Croatia, the Czech Republic, Denmark, Finland, France, Germany, Greece, Hong Kong, Hungary, India, Indonesia, Ireland, Israel, Italy, Japan, Korea, Macau, Malaysia, Mexico, the Netherlands, New Zealand, Norway, Panama, the Philippines, Poland, Portugal, Russia, Singapore, Slovakia, Slovenia, South Africa, Spain, Sri Lanka, Sweden, Switzerland, Taiwan, Thailand, Turkey, the United Arab Emirates, the United Kingdom, Uruguay and Vietnam. +SIGNIFICANT CUSTOMER +No customer accounted for 10% or more of our consolidated net Revenues during fiscal 2020 . +PRODUCT RESEARCH, DESIGN AND DEVELOPMENT +We believe our research, design and development efforts are key factors in our success. Technical innovation in the design and manufacturing process of footwear, apparel and athletic equipment receives continued emphasis as we strive to produce products that help to enhance athletic performance, reduce injury and maximize comfort, while reducing waste. +In addition to our own staff of specialists in the areas of biomechanics, chemistry, exercise physiology, engineering, digital technologies, industrial design, sustainability and related fields, we also utilize research committees and advisory boards made up of athletes, coaches, trainers, equipment managers, orthopedists, podiatrists, physicians and other experts who consult with us and review designs, materials, concepts for product and manufacturing process improvements and compliance with product safety regulations around the world. Employee athletes, athletes engaged under sports marketing contracts and other athletes wear-test and evaluate products during the design and development process. +As we continue to develop new technologies, we are simultaneously focused on the design of innovative products and experiences incorporating such technologies throughout our product categories and consumer applications. Using market intelligence and research, our various design teams identify opportunities to leverage new technologies in existing categories to respond to consumer preferences. The proliferation of NIKE Air, Zoom, Free, Flywire, Dri-Fit, Flyknit, Flyweave, FlyEase, ZoomX, React and Adaptive technologies, among others, throughout our Running, NIKE Basketball, Jordan Brand, Football (Soccer), Training and Sportswear categories, as well as Converse, typifies our dedication to designing innovative products. +MANUFACTURING +We are supplied by 122 footwear factories located in 12 countries. Virtually all of our footwear is manufactured outside of the United States by over 15 independent contract manufacturers, which often operate multiple factories. The largest single footwear factory accounted for approximately 9% of total fiscal 2020 NIKE Brand footwear production. For fiscal 2020 , contract factories in Vietnam, Indonesia and China manufactured approximately 50% , 24% and 22% of total NIKE Brand footwear, respectively. We also have manufacturing agreements with independent contract manufacturers in Argentina and India to manufacture footwear for sale primarily within those countries. For fiscal 2020 , four footwear contract manufacturers each accounted for greater than 10% of footwear production and in the aggregate accounted for approximately 61% of NIKE Brand footwear production. +We are supplied by 329 apparel factories located in 38 countries. The largest single apparel factory accounted for approximately 11% of total fiscal 2020 NIKE Brand apparel production. Virtually all of our apparel is manufactured outside of the United States by independent contract manufacturers which often operate multiple factories. For fiscal 2020 , contract factories in Vietnam, China and Cambodia produced approximately 28% , 23% and 12% of total NIKE Brand apparel, respectively. For fiscal 2020 , two apparel contract manufacturers accounted for more than 10% of apparel production, and the top five contract manufacturers in the aggregate accounted for approximately 48% of NIKE Brand apparel production. +The principal materials used in our footwear products are natural and synthetic rubber, plastic compounds, foam cushioning materials, natural and synthetic leather, nylon, polyester and canvas, as well as polyurethane films used to make NIKE Air-Sole cushioning components. During fiscal 2020 , Air Manufacturing Innovation, a wholly-owned subsidiary, with facilities near Beaverton, Oregon, in Dong Nai Province, Vietnam and St. Charles, Missouri, as well as independent contractors in China and +2020 FORM 10-K 3 +Table of Contents +Vietnam, were our suppliers of materials and cushioning components used in footwear. Air Manufacturing Innovation also manufactures and sells small amounts of various other plastic products to other manufacturers. The principal materials used in our apparel products are natural and synthetic fabrics and threads (both virgin and recycled); specialized performance fabrics designed to efficiently wick moisture away from the body, retain heat and repel rain and/or snow; and plastic and metal hardware. NIKE's independent contractors and suppliers buy raw materials for the manufacturing of our footwear, apparel and equipment products. Most raw materials are available and purchased by those independent contractors and suppliers in the countries where manufacturing takes place. NIKE's independent contract manufacturers and suppliers have thus far experienced little difficulty in satisfying raw material requirements for the production of our products. +Since 1972, Sojitz Corporation of America (“Sojitz America”), a large Japanese trading company and the sole owner of our redeemable preferred stock, has performed import-export financing services for us. During fiscal 2020 , Sojitz America provided financing and purchasing services for NIKE Brand products sold in certain NIKE markets including Argentina, Brazil, Canada, India, South Africa and Uruguay, excluding products produced and sold in the same country. Approximately 4% of NIKE Brand sales occurred in those countries. Any failure of Sojitz America to provide these services or any failure of Sojitz America's banks could disrupt our ability to acquire products from our suppliers and to deliver products to our customers in those markets. Such a disruption could result in canceled orders that would adversely affect sales and profitability. However, we believe that any such disruption would be short-term in duration due to the ready availability of alternative sources of financing at competitive rates. +2020 FORM 10-K 4 +Table of Contents +INTERNATIONAL OPERATIONS AND TRADE +Our international operations and sources of supply are subject to the usual risks of doing business abroad, such as the implementation of, or potential changes in, foreign and domestic trade policies, increases in import duties, anti-dumping measures, quotas, safeguard measures, trade restrictions, restrictions on the transfer of funds and, in certain parts of the world, political instability and terrorism. We have not, to date, been materially affected by any such risk, but cannot predict the likelihood of such material effects occurring in the future. +In recent years, uncertain global and regional economic and political conditions have affected international trade and increased protectionist actions around the world. These trends are affecting many global manufacturing and service sectors, and the footwear and apparel industries, as a whole, are not immune. Companies in our industry are facing trade protectionism in many different regions, and in nearly all cases we are working together with industry groups to address trade issues and reduce the impact to the industry, while observing applicable competition laws. Notwithstanding our efforts, protectionist measures have resulted in increases in the cost of our products, and additional measures, if implemented, could adversely affect sales and/or profitability for NIKE, as well as the imported footwear and apparel industry as a whole. +We monitor protectionist trends and developments throughout the world that may materially impact our industry, and we engage in administrative and judicial processes to mitigate trade restrictions. We are actively monitoring actions that may result in additional anti-dumping measures and could affect our industry. We are also monitoring for and advocating against other impediments that may limit or delay customs clearance for imports of footwear, apparel and equipment. NIKE also advocates for trade liberalization for footwear and apparel in a number of regional and bilateral free trade agreements. Changes in U.S. trade policies, including new and potential tariffs or penalties on imported goods, may negatively affect U.S. corporations with production activities outside the U.S., including NIKE. There have also been discussions and commentary regarding retaliatory actions by countries affected by the new tariffs and other changes in U.S. trade policy, and certain foreign governments have instituted or are considering imposing retaliatory measures on certain U.S. goods, which could negatively affect U.S. corporations with business operations and/or consumer markets in those countries. Depending on the extent that certain new or proposed reforms are implemented by the U.S. government and the manner in which foreign governments respond to such reforms, it may become necessary for us to change the way we conduct business, which may adversely affect our results of operations. In addition, with respect to proposed trade restrictions targeting China, which represents an important sourcing country and consumer market for us, we are working with a broad coalition of global businesses and trade associations representing a wide variety of sectors to help ensure that any legislation enacted and implemented (i) addresses legitimate and core concerns, (ii) is consistent with international trade rules and (iii) reflects and considers China's domestic economy and the important role it has in the global economic community. +Where trade protection measures are implemented, we believe that we have the ability to develop, over a period of time, adequate alternative sources of supply for the products obtained from our present suppliers. If events prevented us from acquiring products from our suppliers in a particular country, our operations could be temporarily disrupted and we could experience an adverse financial impact. However, we believe we could abate any such disruption, and that much of the adverse impact on supply would, therefore, be of a short-term nature, although alternate sources of supply might not be as cost-effective and could have an ongoing adverse impact on profitability. +Our international operations are also subject to compliance with the U.S. Foreign Corrupt Practices Act, or "FCPA", and other anti-bribery laws applicable to our operations. We source a significant portion of our products from, and have important consumer markets, outside of the United States, and we have an ethics and compliance program to address compliance with the FCPA and similar laws by us, our employees, agents, suppliers and other partners. +COMPETITION +The athletic footwear, apparel and equipment industry is highly competitive on a worldwide basis. We compete internationally with a significant number of athletic and leisure footwear companies, athletic and leisure apparel companies, sports equipment companies and large companies having diversified lines of athletic and leisure footwear, apparel and equipment, including adidas, Anta, ASICS, Li Ning, lululemon athletica, Puma, Under Armour and V.F. Corporation, among others. The intense competition and the rapid changes in technology and consumer preferences in the markets for athletic and leisure footwear and apparel and athletic equipment, constitute significant risk factors in our operations. +2020 FORM 10-K 5 +Table of Contents +NIKE is the largest seller of athletic footwear and apparel in the world. Important aspects of competition in this industry are: +• +Product attributes such as quality; performance and reliability; new product style, design, innovation and development, as well as consumer price/value. +• +Consumer connection, engagement and affinity for brands and products, developed through marketing, promotion and digital experiences; social media interaction; customer support and service; identification with prominent and influential athletes, influencers, public figures, coaches, teams, colleges and sports leagues who endorse our brands and use our products and active engagement through sponsored sporting events and clinics. +• +Effective sourcing and distribution of products, with attractive merchandising and presentation at retail, both in-store and on digital platforms. +We believe that we are competitive in all of these areas. +TRADEMARKS AND PATENTS +We believe that our intellectual property rights are important to our brand, our success and our competitive position. We strategically pursue available protections of these rights and vigorously protect them against third-party theft and infringement. +We use trademarks on nearly all of our products and believe having distinctive marks that are readily identifiable is an important factor in creating a market for our goods, in identifying our brands and the Company, and in distinguishing our goods from the goods of others. We consider our NIKE and Swoosh Design trademarks to be among our most valuable assets and we have registered these trademarks in almost 170 jurisdictions worldwide. In addition, we own many other trademarks that we use in marketing our products. We own common law rights in the trade dress of several significant shoe designs and elements. For certain trade dress, we have sought and obtained trademark registrations. +We have copyright protection in our design, graphics and other original works. When appropriate, we also obtain registered copyrights. +We file for, own and maintain many U.S. and foreign utility and design patents protecting components, technologies, materials, manufacturing techniques, features, functionality, and industrial and aesthetic designs used in and for the manufacture of various athletic and leisure footwear and apparel, athletic equipment and digital devices and related software applications. These patents expire at various times. +We believe our success depends upon our capabilities in areas such as design, research and development, production and marketing and is supported by our intellectual property rights, such as trademarks, patents and trade secrets, among others. +We have followed a policy of applying for and registering intellectual property rights in the United States and select foreign countries on trademarks, inventions, innovations and designs that we deem valuable. We also continue to vigorously protect our intellectual property, including trademarks, patents and trade secrets against third-party infringement. +EMPLOYEES +As of May 31, 2020 , we had approximately 75,400 employees worldwide, including retail and part-time employees. Management is committed to maintaining an environment where all NIKE employees have the opportunity to reach their full potential. None of our employees are represented by a union, except for certain employees in the APLA geography, where local law requires those employees to be represented by a trade union. Also, in some countries outside of the United States, local laws require employee representation by works councils (which may be entitled to information and consultation on certain Company decisions) or by organizations similar to a union. In certain European countries, we are required by local law to enter into and/or comply with industry-wide or national collective bargaining agreements. NIKE has never experienced a material interruption of operations due to labor disagreements. +2020 FORM 10-K 6 +Table of Contents +INFORMATION ABOUT OUR EXECUTIVE OFFICERS +The executive officers of NIKE, Inc. as of July 24, 2020 are as follows: +Mark G. Parker , Executive Chairman — Mr. Parker, 64, is Executive Chairman of the Board of Directors and served as President and Chief Executive Officer from 2006 - January 2020. He has been employed by NIKE since 1979 with primary responsibilities in product research, design and development, marketing and brand management. Mr. Parker was appointed divisional Vice President in charge of product development in 1987, corporate Vice President in 1989, General Manager in 1993, Vice President of Global Footwear in 1998 and President of the NIKE Brand in 2001. +John J. Donahoe II , President and Chief Executive Officer — Mr. Donahoe, 60, was appointed President and Chief Executive Officer in January 2020 and has been a director since 2014. He brings expertise in digital commerce, technology and global strategy. He previously served as President and Chief Executive Officer at ServiceNow, Inc. Prior to joining ServiceNow, Inc., he served as President and Chief Executive Officer of eBay, Inc. He also held leadership roles at Bain & Company for two decades. +Andrew Campion , Chief Operating Officer — Mr. Campion, 48, joined NIKE in 2007 as Vice President of Global Planning and Development, leading strategic and financial planning. He was appointed Chief Financial Officer of the NIKE Brand in 2010, responsible for leading all aspects of financial management for the Company's flagship brand. In 2014, he was appointed Senior Vice President, Strategy, Finance and Investor Relations. Mr. Campion assumed the role of Executive Vice President and Chief Financial Officer in August 2015. In April 2020, he was appointed Chief Operating Officer and leads NIKE's global technology and digital transformation, demand and supply management, manufacturing, distribution and logistics, sustainability, workplace design and connectivity, and procurement. Prior to joining NIKE, he held leadership roles in strategic planning, mergers and acquisitions, financial planning and analysis, operations and planning, investor relations and tax at The Walt Disney Company. +Matthew Friend , Executive Vice President and Chief Financial Officer — Mr. Friend, 42, joined NIKE in 2009 as Senior Director of Corporate Strategy and Development, and was appointed Chief Financial Officer of Emerging Markets in 2011. In 2014, Mr. Friend was appointed Chief Financial Officer of Global Categories, Product and Functions, and was subsequently appointed Chief Financial Officer of the NIKE Brand in 2016. He was also appointed Vice President of Investor Relations in 2019. Mr. Friend was appointed as Executive Vice President and Chief Financial Officer of NIKE, Inc. in April 2020. Prior to joining NIKE, he worked in the financial industry including roles as VP of investment banking and mergers and acquisitions at Goldman Sachs and Morgan Stanley. +Hilary K. Krane , Executive Vice President, Chief Administrative Officer and General Counsel — Ms. Krane, 56, joined NIKE as Vice President and General Counsel in 2010. In 2011, her responsibilities expanded, and she became Vice President, General Counsel and Corporate Affairs. Ms. Krane was appointed Executive Vice President, Chief Administrative Officer and General Counsel in 2013. Prior to joining NIKE, Ms. Krane was General Counsel and Senior Vice President for Corporate Affairs at Levi Strauss & Co. from 2006 to 2010. From 1996 to 2006, she was a Partner and Assistant General Counsel at PricewaterhouseCoopers LLP. +Monique S. Matheson , Executive Vice President, Global Human Resources — Ms. Matheson, 53, joined NIKE in 1998, with primary responsibilities in the human resources function. She was appointed as Vice President and Senior Business Partner in 2011 and Vice President, Chief Talent and Diversity Officer in 2012. Ms. Matheson was appointed Executive Vice President, Global Human Resources in 2017. +Heidi O'Neill , President of Consumer and Marketplace — Ms. O'Neill, 55, joined NIKE in 1998, and held a variety of leadership roles, including President of NIKE Direct, where she was responsible for NIKE's connection to its consumer globally through the Company's retail and digital-commerce business. She also led NIKE's women's business for seven years, growing it into a multi-billion dollar business, and leading the Company's North America apparel business as VP/GM. Ms. O'Neill was appointed as President of Consumer and Marketplace in April 2020 and is responsible for NIKE's Direct business, including all stores, e-commerce and apps globally. +2020 FORM 10-K 7 +Table of Contents \ No newline at end of file diff --git a/raw/filings/0000320187/2019/0000320187-20-000047/item13.txt b/raw/filings/0000320187/2019/0000320187-20-000047/item13.txt new file mode 100644 index 0000000000000000000000000000000000000000..1b34571ba9c654509861fe3d11bf90137555f7ce --- /dev/null +++ b/raw/filings/0000320187/2019/0000320187-20-000047/item13.txt @@ -0,0 +1,2 @@ +ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE +The information required by Items 404 and 407(a) of Regulation S-K is included under “Stock Ownership Information — Transactions with Related Persons” and “Corporate Governance — Individual Board Skills Matrix — Director Independence” in the definitive Proxy Statement for our 2020 Annual Meeting of Shareholders and is incorporated herein by reference. \ No newline at end of file diff --git a/raw/filings/0000320187/2019/0000320187-20-000047/item9a.txt b/raw/filings/0000320187/2019/0000320187-20-000047/item9a.txt new file mode 100644 index 0000000000000000000000000000000000000000..1e19cf9e088885478528880e75c2c5f02dbabebf --- /dev/null +++ b/raw/filings/0000320187/2019/0000320187-20-000047/item9a.txt @@ -0,0 +1,6 @@ +ITEM 9A. CONTROLS AND PROCEDURES +We maintain disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in our Securities Exchange Act of 1934, as amended ("the Exchange Act") reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. +We carry out a variety of ongoing procedures, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, to evaluate the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of May 31, 2020 . +“Management's Annual Report on Internal Control Over Financial Reporting” is included in Item 8 of this Report. +We are continuing several transformation initiatives to centralize and simplify our business processes and systems. These are long-term initiatives, which we believe will enhance our internal control over financial reporting due to increased automation and further integration of related processes. We will continue to monitor our internal control over financial reporting for effectiveness throughout these transformation initiatives. +There have not been any changes in our internal control over financial reporting during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. \ No newline at end of file diff --git a/raw/filings/0000320187/2019/0000320187-20-000047/rp_note.txt b/raw/filings/0000320187/2019/0000320187-20-000047/rp_note.txt new file mode 100644 index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391 diff --git a/raw/filings/0000320187/2019/0000320187-20-000047/rpt_disclosure.txt b/raw/filings/0000320187/2019/0000320187-20-000047/rpt_disclosure.txt new file mode 100644 index 0000000000000000000000000000000000000000..8812ea20fc8439a77e7b18aba61504918008d679 --- /dev/null +++ b/raw/filings/0000320187/2019/0000320187-20-000047/rpt_disclosure.txt @@ -0,0 +1,5 @@ +TRANSACTIONS WITH RELATED PERSONS +Philip H. Knight, the father of NIKE director Travis A. Knight, serves as Chairman Emeritus, which provides a standing invitation for Philip H. Knight to attend meetings of the Board and its committees as a non-voting observer. In fiscal 2020, as Chairman Emeritus, Mr. Knight received an annual salary of $500,000, and medical and dental insurance coverage generally available to employees. +In connection with his retirement and in recognition of his substantial service and unique insights and experience, the Company entered into a consulting agreement with John R. Thompson, Jr., a member of the Company's Board in fiscal 2020. Pursuant to the terms of the agreement, effective June 1, 2020, Mr. Thompson serves as Director Emeritus of the Company and, when and as required by the Board, provides consulting services and advice to the Board and other officers of the Company as the Board may specify until such time as either party terminates the agreement by providing 30 days' written notice. As Director Emeritus, Mr. Thompson is eligible to attend meetings of the Board and certain committees as a non-voting observer. For his services and commitment, the Company will pay Mr. Thompson the same compensation and benefits he would have been eligible to receive for his service as a non-employee director as of June 1, 2020, which equals approximately $267,000, and reimburse him for reasonable expenses incurred in connection with his services. +Eric Sprunk’s daughter, Nicole Sprunk, was employed by the Company in a non-executive role in fiscal 2020 as a Brand Director. During fiscal 2020, the Company paid aggregate compensation to Nicole Sprunk of $330,113, comprised of salary, bonus, the value of stock granted, certain maternity leave benefits and matching contributions to the Company-sponsored retirement plan. The compensation and benefits received by Nicole Sprunk were consistent with compensation paid to other employees holding similar positions. +The Company’s written policy requires the Corporate Responsibility, Sustainability & Governance Committee to review any transaction or proposed transaction with a related person that would be required to be reported under Item 404(a) of Regulation S-K, and to determine whether to ratify or approve the transaction, with ratification or approval to occur only if the committee determines that the transaction is fair to the Company or that approval or ratification of the transaction is in the interest of the Company. \ No newline at end of file diff --git a/raw/filings/0000320187/2020/0000320187-21-000028/filing.txt b/raw/filings/0000320187/2020/0000320187-21-000028/filing.txt new file mode 100644 index 0000000000000000000000000000000000000000..e1e8cbc62a149c830a862538d165f09cf105bd13 --- /dev/null +++ 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us-gaap:AccountingStandardsUpdate201409Member nke:SECSchedule1209AllowanceSalesReturnsMember 2019-06-01 2020-05-31 0000320187 us-gaap:AccountingStandardsUpdate201409Member nke:SECSchedule1209AllowanceSalesReturnsMember 2020-05-31 0000320187 us-gaap:AccountingStandardsUpdate201409Member nke:SECSchedule1209AllowanceSalesReturnsMember 2020-06-01 2021-05-31 0000320187 us-gaap:AccountingStandardsUpdate201409Member nke:SECSchedule1209AllowanceSalesReturnsMember 2021-05-31 0000320187 nke:SECSchedule1209AllowanceSalesReturnsMember srt:RestatementAdjustmentMember 2019-06-01 2020-05-31 0000320187 nke:SECSchedule1209AllowanceSalesReturnsMember srt:RestatementAdjustmentMember 2018-06-01 2019-05-31 +Table of Contents +UNITED STATES +SECURITIES AND EXCHANGE COMMISSION +Washington, D.C. 20549 +FORM 10-K +(Mark One) +☑ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 +FOR THE FISCAL YEAR ENDED May 31, 2021 +OR +☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 +FOR THE TRANSITION PERIOD FROM TO . +Commission File No. 1-10635 +NIKE, Inc. +(Exact name of Registrant as specified in its charter) +Oregon +93-0584541 +(State or other jurisdiction of incorporation) +(IRS Employer Identification No.) +One Bowerman Drive , Beaverton , Oregon 97005-6453 +(Address of principal executive offices and zip code) +( 503 ) 671-6453 +(Registrant's telephone number, including area code) +SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: +Class B Common Stock +NKE +New York Stock Exchange +(Title of each class) +(Trading symbol) +(Name of each exchange on which registered) +SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: +NONE +Indicate by check mark: +YES +NO +• +if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. +þ +¨ +• +if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. +¨ +þ +• +whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. +þ +¨ +• +whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). +þ +¨ +• +whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. +Large accelerated filer +þ +Accelerated filer +☐ +Non-accelerated filer +☐ +Smaller reporting company +☐ +Emerging growth company +☐ +• +if an emerging growth company, if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. +¨ +• +whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. +þ +• +whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). +☐ +þ +As of November 30, 2020, the aggregate market values of the Registrant's Common Stock held by non-affiliates were: +Class A +$ 9,632,565,644 +Class B +170,815,547,402 +$ 180,448,113,046 +As of July 9, 2021, the number of shares of the Registrant's Common Stock outstanding were: +Class A +305,011,252 +Class B +1,276,789,972 +1,581,801,224 +DOCUMENTS INCORPORATED BY REFERENCE: +Parts of Registrant's Proxy Statement for the Annual Meeting of Shareholders to be held on October 6, 2021, are incorporated by reference into Part III of this Report. +Table of Contents +NIKE, INC. +ANNUAL REPORT ON FORM 10-K +TABLE OF CONTENTS +PAGE +PART I +1 +ITEM 1. +Business +1 +General +1 +Products +1 +Sales and Marketing +2 +United States Market +2 +International Markets +3 +Significant Customer +3 +Product Research, Design and Development +3 +Manufacturing +3 +International Operations and Trade +4 +Competition +5 +Trademarks and Patents +5 +Human Capital Resources +5 +Information about our Executive Officers +9 +ITEM 1A. +Risk Factors +10 +ITEM 1B. +Unresolved Staff Comments +24 +ITEM 2. +Properties +24 +ITEM 3. +Legal Proceedings +24 +ITEM 4. +Mine Safety Disclosures +24 +PART II +25 +ITEM 5. +Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities +25 +ITEM 6. +Selected Financial Data +27 +ITEM 7. +Management's Discussion and Analysis of Financial Condition and Results of Operations +28 +ITEM 7A. +Quantitative and Qualitative Disclosures about Market Risk +51 +ITEM 8. +Financial Statements and Supplementary Data +53 +ITEM 9. +Changes in and Disagreements with Accountants on Accounting and Financial Disclosure +94 +ITEM 9A. +Controls and Procedures +94 +ITEM 9B. +Other Information +94 +PART III +95 +(Except for the information set forth under “Information about our Executive Officers” in Item 1 above, Part III is incorporated by reference from the Proxy Statement for the NIKE, Inc. 202 1 Annual Meeting of Shareholders.) +ITEM 10. +Directors, Executive Officers and Corporate Governance +95 +ITEM 11. +Executive Compensation +95 +ITEM 12. +Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters +95 +ITEM 13. +Certain Relationships and Related Transactions and Director Independence +95 +ITEM 14. +Principal Accountant Fees and Services +95 +PART IV +96 +ITEM 15. +Exhibits and Financial Statement Schedules +96 +ITEM 16. +Form 10-K Summary +100 +Signatures +102 +Table of Contents +PART I +ITEM 1. BUSINESS +GENERAL +NIKE, Inc. was incorporated in 1967 under the laws of the State of Oregon. As used in this report, the terms “we,” “us,” “NIKE” and the “Company” refer to NIKE, Inc. and its predecessors, subsidiaries and affiliates, collectively, unless the context indicates otherwise. Our NIKE digital commerce website is located at www.nike.com . On our NIKE corporate website, located at investors.nike.com , we post the following filings as soon as reasonably practicable after they are electronically filed with, or furnished to, the United States Securities and Exchange Commission (the “SEC”): our annual report on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities and Exchange Act of 1934, as amended. Our definitive Proxy Statements are also posted on our corporate website. All such filings on our corporate website are available free of charge. Copies of these filings are also available on the SEC's website ( www.sec.gov ). Also available on our corporate website are the charters of the committees of our Board of Directors, as well as our corporate governance guidelines and code of ethics; copies of any of these documents will be provided in print to any shareholder who submits a request in writing to NIKE Investor Relations, One Bowerman Drive, Beaverton, Oregon 97005-6453. +Our principal business activity is the design, development and worldwide marketing and selling of athletic footwear, apparel, equipment, accessories and services. NIKE is the largest seller of athletic footwear and apparel in the world. We sell our products directly to consumers through NIKE-owned retail stores and digital platforms (which we refer to collectively as our “NIKE Direct” operations) and to retail accounts and a mix of independent distributors, licensees and sales representatives in virtually all countries around the world. We also offer interactive consumer services and experiences through our digital platforms. Virtually all of our products are manufactured by independent contractors. Nearly all footwear and apparel products are produced outside the United States, while equipment products are produced both in the United States and abroad. +PRODUCTS +We focus our NIKE Brand product offerings in six key categories: Running, NIKE Basketball, the Jordan Brand, Football (Soccer), Training and Sportswear (our sports-inspired lifestyle products). We also market products designed for kids, as well as for other athletic and recreational uses, such as American football, baseball, cricket, golf, lacrosse, skateboarding, tennis, volleyball, walking, wrestling and other outdoor activities. In June 2020, we announced that we will align our product creation and category organizations around a new consumer construct focused on Men’s, Women’s and Kids'. This approach is intended to allow us to create product that better meets individual consumer needs, including more specialization of our category approach, while re-aligning and simplifying our business to accelerate our largest growth opportunities. +NIKE's athletic footwear products are designed primarily for specific athletic use, although a large percentage of the products are worn for casual or leisure purposes. We place considerable emphasis on innovation and high-quality construction in the development and manufacturing of our products. Sportswear, the Jordan Brand and Running are currently our top-selling footwear categories, and we expect them to continue to lead in footwear sales. +We also sell sports apparel covering the above-mentioned categories, which feature the same trademarks and are sold predominantly through the same marketing and distribution channels as athletic footwear. Our sports apparel, similar to our athletic footwear products, is designed primarily for athletic use, although many of the products are worn for casual or leisure purposes, and demonstrates our commitment to innovation and high-quality construction. Sportswear, Training, Football (Soccer) and Running are currently our top-selling apparel categories, and we expect them to continue to lead in apparel sales. We often market footwear, apparel and accessories in “collections” of similar use or by category. We also market apparel with licensed college and professional team and league logos. +We sell a line of performance equipment and accessories under the NIKE Brand name, including bags, socks, sport balls, eyewear, timepieces, digital devices, bats, gloves, protective equipment and other equipment designed for sports activities. We also sell small amounts of various plastic products to other manufacturers through our wholly-owned subsidiary, NIKE IHM, Inc., doing business as Air Manufacturing Innovation. +2021 FORM 10-K 1 +Table of Contents +Our Jordan Brand designs, distributes and licenses athletic and casual footwear, apparel and accessories predominantly focused on basketball using the Jumpman trademark. Sales and operating results for Jordan Brand products are reported within the respective NIKE Brand geographic operating segments. +Our wholly-owned subsidiary brand, Converse, headquartered in Boston, Massachusetts, designs, distributes and licenses casual sneakers, apparel and accessories under the Converse, Chuck Taylor, All Star, One Star, Star Chevron and Jack Purcell trademarks. Operating results of the Converse brand are reported on a stand-alone basis. +In addition to the products we sell to our wholesale customers and directly to consumers through our NIKE Direct operations, we have also entered into license agreements that permit unaffiliated parties to manufacture and sell, using NIKE-owned trademarks, certain apparel, digital devices and applications and other equipment designed for sports activities. +We also offer interactive consumer services and experiences through our digital platforms, including fitness and activity apps; sport, fitness and wellness content; and digital services and features in retail stores that enhance the consumer experience. +SALES AND MARKETING +We experience moderate fluctuations in aggregate sales volume during the year. Historically, revenues in the first and fourth fiscal quarters have slightly exceeded those in the second and third quarters. However, the mix of product sales may vary considerably as a result of changes in seasonal and geographic demand for particular types of footwear, apparel and equipment, as well as other macroeconomic, strategic, operating and logistics-related factors, as evidenced by the impact of the COVID-19 pandemic. +Because NIKE is a consumer products company, the relative popularity and availability of various sports and fitness activities, as well as changing design trends, affect the demand for our products. We must, therefore, respond to trends and shifts in consumer preferences by adjusting the mix of existing product offerings, developing new products, styles and categories and influencing sports and fitness preferences through extensive marketing. Failure to respond in a timely and adequate manner could have a material adverse effect on our sales and profitability. This is a continuing risk. Refer to Item 1A. Risk Factors. +We report our NIKE Brand operations based on our internal geographic organization. Each NIKE Brand geographic segment operates predominantly in one industry: the design, development, marketing and selling of athletic footwear, apparel and equipment. The Company's reportable operating segments for the NIKE Brand are: North America; Europe, Middle East & Africa (EMEA); Greater China; and Asia Pacific & Latin America (APLA), and include results for the NIKE and Jordan brands. The Hurley brand results, prior to its divestiture in fiscal 2020, were included in North America. Sales through our NIKE Direct operations are managed within each geographic operating segment. +Converse is also a reportable operating segment and operates predominately in one industry: the design, marketing, licensing and selling of casual sneakers, apparel and accessories. Converse direct to consumer operations, including digital commerce, are reported within the Converse operating segment results. +UNITED STATES MARKET +For fiscal 2021, NIKE Brand and Converse sales in the United States accounted for approximately 39% of total revenues, compared to 39% and 41% for fiscal 2020 and fiscal 2019, respectively. We sell our NIKE Brand, Jordan Brand and Converse products to thousands of retail accounts in the United States, including a mix of footwear stores, sporting goods stores, athletic specialty stores, department stores, skate, tennis and golf shops and other retail accounts. In the United States, we utilize NIKE sales offices to solicit such sales. During fiscal 2021, our three largest United States customers accounted for approximately 24% of sales in the United States. +Our NIKE Direct and Converse direct to consumer operations sell NIKE Brand, Jordan Brand and Converse products to consumers through various digital platforms. In addition, our NIKE Direct and Converse direct to consumer operations sell products through the following number of retail stores in the United States: +U.S. RETAIL STORES NUMBER +NIKE Brand factory stores 204 +NIKE Brand in-line stores (including employee-only stores) 30 +Converse stores (including factory stores) 91 +TOTAL 325 +In the United States, NIKE has seven significant distribution centers. Four are located in Memphis, Tennessee, two of which are owned and two of which are leased. Two other distribution centers, one located in Indianapolis, Indiana and one located in Dayton, Tennessee, are leased and operated by third-party logistics providers. One distribution center for Converse is located in +2021 FORM 10-K 2 +Table of Contents +Ontario, California, which is leased. There are other smaller distribution facilities located in various parts of the United States, some of which are leased or operated by third-parties. +INTERNATIONAL MARKETS +For fiscal 2021, non-U.S. NIKE Brand and Converse sales accounted for approximately 61% of total revenues, compared to 61% and 59% for fiscal 2020 and fiscal 2019, respectively. We sell our products to retail accounts through our own NIKE Direct operations and through a mix of independent distributors, licensees and sales representatives around the world. We sell to thousands of retail accounts and ship products from 70 distribution centers outside of the United States. During fiscal 2021, NIKE's three largest customers outside of the United States accounted for approximately 15% of total non-U.S. sales. +In addition to NIKE-owned and Converse-owned digital commerce platforms in over 45 countries, our NIKE Direct and Converse direct to consumer businesses operate the following number of retail stores outside the United States: +NON-U.S. RETAIL STORES NUMBER +NIKE Brand factory stores 618 +NIKE Brand in-line stores (including employee-only stores) 46 +Converse stores (including factory stores) 59 +TOTAL 723 +International branch offices and subsidiaries of NIKE are located in Argentina, Australia, Austria, Belgium, Bermuda, Brazil, Canada, Chile, China, Croatia, the Czech Republic, Denmark, Finland, France, Germany, Greece, Hong Kong, Hungary, India, Indonesia, Ireland, Israel, Italy, Japan, Korea, Macau, Malaysia, Mexico, the Netherlands, New Zealand, Norway, the Philippines, Poland, Portugal, Russia, Singapore, Slovenia, South Africa, Spain, Sri Lanka, Sweden, Switzerland, Taiwan, Thailand, Turkey, the United Arab Emirates, the United Kingdom, Uruguay and Vietnam. +SIGNIFICANT CUSTOMER +No customer accounted for 10% or more of our consolidated net Revenues during fiscal 2021. +PRODUCT RESEARCH, DESIGN AND DEVELOPMENT +We believe our research, design and development efforts are key factors in our success. Technical innovation in the design and manufacturing process of footwear, apparel and athletic equipment receives continued emphasis as we strive to produce products that help to enhance athletic performance, reduce injury and maximize comfort, while reducing waste. +In addition to our own staff of specialists in the areas of biomechanics, chemistry, exercise physiology, engineering, digital technologies, industrial design, sustainability and related fields, we also utilize research committees and advisory boards made up of athletes, coaches, trainers, equipment managers, orthopedists, podiatrists, physicians and other experts who consult with us and review certain designs, materials and concepts for product and manufacturing process improvements and compliance with product safety regulations around the world. Employee athletes, athletes engaged under sports marketing contracts and other athletes wear-test and evaluate products during the design and development process. +As we continue to develop new technologies, we are simultaneously focused on the design of innovative products and experiences incorporating such technologies throughout our product categories and consumer applications. Using market intelligence and research, our various design teams identify opportunities to leverage new technologies in existing categories to respond to consumer preferences. The proliferation of NIKE Air, Zoom, Free, Flywire, Dri-Fit, Flyknit, Flyweave, FlyEase, ZoomX, Air Max, React and Adapt technologies, among others, typifies our dedication to designing innovative products. +MANUFACTURING +We are supplied by 191 footwear factories located in 14 countries. Virtually all of our footwear is manufactured outside of the United States by over 15 independent contract manufacturers, which often operate multiple factories. The largest single footwear factory accounted for approximately 9% of total fiscal 2021 NIKE Brand footwear production. For fiscal 2021, contract factories in Vietnam, Indonesia and China manufactured approximately 51%, 24% and 21% of total NIKE Brand footwear, respectively. We also have manufacturing agreements with independent contract manufacturers in Argentina and India to manufacture footwear for sale primarily within those countries. For fiscal 2021, four footwear contract manufacturers each accounted for greater than 10% of footwear production and in the aggregate accounted for approximately 61% of NIKE Brand footwear production. +2021 FORM 10-K 3 +Table of Contents +We are supplied by 344 apparel factories located in 33 countries. The largest single apparel factory accounted for approximately 8% of total fiscal 2021 NIKE Brand apparel production. Virtually all of our apparel is manufactured outside of the United States by independent contract manufacturers, which often operate multiple factories. For fiscal 2021, contract factories in Vietnam, China and Cambodia produced approximately 30%, 19% and 12% of total NIKE Brand apparel, respectively. For fiscal 2021, two apparel contract manufacturers each accounted for more than 10% of apparel production, and the top five contract manufacturers in the aggregate accounted for approximately 51% of NIKE Brand apparel production. +The principal materials used in our footwear products are natural and synthetic rubber, plastic compounds, foam cushioning materials, natural and synthetic leather, nylon, polyester and canvas, as well as polyurethane films used to make NIKE Air-Sole cushioning components. During fiscal 2021, Air Manufacturing Innovation, a wholly-owned subsidiary, with facilities near Beaverton, Oregon, in Dong Nai Province, Vietnam, and St. Charles, Missouri, as well as independent contractors in China and Vietnam, were our suppliers of materials and cushioning components used in footwear. Air Manufacturing Innovation also manufactures and sells small amounts of various other plastic products to other manufacturers. The principal materials used in our apparel products are natural and synthetic fabrics, yarns and threads (both virgin and recycled); specialized performance fabrics designed to efficiently wick moisture away from the body, retain heat and repel rain and/or snow; and plastic and metal hardware. NIKE's independent contractors and suppliers buy raw materials for the manufacturing of our footwear, apparel and equipment products. Most raw materials are available and purchased by those independent contractors and suppliers in the countries where manufacturing takes place. NIKE's independent contractors and suppliers have thus far experienced little difficulty in satisfying raw material requirements for the production of our products. +Since 1972, Sojitz Corporation of America (“Sojitz America”), a large Japanese trading company and the sole owner of our redeemable preferred stock, has performed import-export financing services for us. +INTERNATIONAL OPERATIONS AND TRADE +Our international operations and sources of supply are subject to the usual risks of doing business abroad, such as the implementation of, or potential changes in, foreign and domestic trade policies, increases in import duties, anti-dumping measures, quotas, safeguard measures, trade restrictions, restrictions on the transfer of funds and, in certain parts of the world, political tensions, instability, conflicts, nationalism and terrorism. We have not, to date, been materially affected by any such risk but cannot predict the likelihood of such material effects occurring in the future. +In recent years, uncertain global and regional economic and political conditions have affected international trade and increased protectionist actions around the world. These trends are affecting many global manufacturing and service sectors, and the footwear and apparel industries, as a whole, are not immune. Companies in our industry are facing trade protectionism in many different regions, and, in nearly all cases, we are working together with industry groups to address trade issues and reduce the impact to the industry, while observing applicable competition laws. Notwithstanding our efforts, protectionist measures have resulted in increases in the cost of our products, and additional measures, if implemented, could adversely affect sales and/or profitability for NIKE, as well as the imported footwear and apparel industry as a whole. +We monitor protectionist trends and developments throughout the world that may materially impact our industry, and we engage in administrative and judicial processes to mitigate trade restrictions. We are actively monitoring actions that may result in additional anti-dumping measures and could affect our industry. We are also monitoring for and advocating against other impediments that may limit or delay customs clearance for imports of footwear, apparel and equipment. NIKE also advocates for trade liberalization for footwear and apparel in a number of regional and bilateral free trade agreements. Changes in, and responses to, U.S. trade policies, including the imposition of tariffs or penalties on imported goods or retaliatory measures by other countries, could negatively affect U.S. corporations, including NIKE, with business operations and/or consumer markets in those countries, which could also make it necessary for us to change the way we conduct business, either of which may have an adverse effect on our business, financial condition or our results of operations. In addition, with respect to proposed trade restrictions, we work with a broad coalition of global businesses and trade associations representing a wide variety of sectors to help ensure that any legislation enacted and implemented (i) addresses legitimate and core concerns, (ii) is consistent with international trade rules and (iii) reflects and considers domestic economies and the important role they may play in the global economic community. +Where trade protection measures are implemented, we believe we have the ability to develop, over a period of time, adequate alternative sources of supply for the products obtained from our present suppliers. If events prevented us from acquiring products from our suppliers in a particular country, our operations could be temporarily disrupted and we could experience an adverse financial impact. However, we believe we could abate any such disruption, and that much of the adverse impact on supply would, therefore, be of a short-term nature, although alternate sources of supply might not be as cost-effective and could have an ongoing adverse impact on profitability. +Our international operations are also subject to compliance with the U.S. Foreign Corrupt Practices Act, or "FCPA", and other anti-bribery laws applicable to our operations. We source a significant portion of our products from, and have important consumer +2021 FORM 10-K 4 +Table of Contents +markets, outside of the United States, and we have an ethics and compliance program to address compliance with the FCPA and similar laws by us, our employees, agents, suppliers and other partners. +COMPETITION +The athletic footwear, apparel and equipment industry is highly competitive on a worldwide basis. We compete internationally with a significant number of athletic and leisure footwear companies, athletic and leisure apparel companies, sports equipment companies and large companies having diversified lines of athletic and leisure footwear, apparel and equipment, including adidas, Anta, ASICS, Li Ning, lululemon athletica, Puma, Under Armour and V.F. Corporation, among others. The intense competition and the rapid changes in technology and consumer preferences in the markets for athletic and leisure footwear and apparel and athletic equipment constitute significant risk factors in our operations. Refer to Item 1A. Risk Factors for additional information. +NIKE is the largest seller of athletic footwear and apparel in the world. Important aspects of competition in this industry are: +• Product attributes such as quality; performance and reliability; new product style, design, innovation and development; as well as consumer price/value. +• Consumer connection, engagement and affinity for brands and products, developed through marketing, promotion and digital experiences; social media interaction; customer support and service; identification with prominent and influential athletes, influencers, public figures, coaches, teams, colleges and sports leagues who endorse our brands and use our products and active engagement through sponsored sporting events and clinics. +• Effective sourcing and distribution of products, with attractive merchandising and presentation at retail, both in-store and on digital platforms. +We believe that we are competitive in all of these areas. +TRADEMARKS AND PATENTS +We believe that our intellectual property rights are important to our brand, our success and our competitive position. We strategically pursue available protections of these rights and vigorously protect them against third-party theft and infringement. +We use trademarks on nearly all of our products and believe having distinctive marks that are readily identifiable is an important factor in creating a market for our goods, in identifying our brands and the Company, and in distinguishing our goods from the goods of others. We consider our NIKE and Swoosh Design trademarks to be among our most valuable assets and we have registered these trademarks in almost 170 jurisdictions worldwide. In addition, we own many other trademarks that we use in marketing our products. We own common law rights in the trade dress of several significant shoe designs and elements. For certain trade dress, we have sought and obtained trademark registrations. +We have copyright protection in our design, graphics and other original works. When appropriate, we also obtain registered copyrights. +We file for, own and maintain many U.S. and foreign utility and design patents protecting components, technologies, materials, manufacturing techniques, features, functionality, and industrial designs used in and for the manufacture of various athletic and leisure footwear and apparel, athletic equipment and digital devices and related software applications. These patents expire at various times. +We believe our success depends upon our capabilities in areas such as design, research and development, production and marketing and is supported by our intellectual property rights, such as trademarks, patents and trade secrets, among others. +We have followed a policy of applying for and registering intellectual property rights in the United States and select foreign countries on trademarks, inventions, innovations and designs that we deem valuable. We also continue to vigorously protect our intellectual property, including trademarks, patents and trade secrets against third-party infringement. +HUMAN CAPITAL RESOURCES +At NIKE, we consider the strength and effective management of our workforce to be essential to the ongoing success of our business. We believe that it is important to attract, develop and retain a diverse and engaged workforce at all levels of our business and that such a workforce fosters creativity and accelerates innovation. We are focused on building an increasingly diverse talent pipeline that reflects our consumers, athletes and the communities we serve. +2021 FORM 10-K 5 +Table of Contents +CULTURE +Each employee shapes NIKE’s culture through behaviors and practices. This starts with our Maxims, which represent our core values and, along with our Code of Conduct, feature the fundamental behaviors that help anchor, inform and guide us and apply to all employees. Our mission is to bring inspiration and innovation to every athlete in the world, which includes the belief that if you have a body, you are an athlete. We aim to do this by creating groundbreaking sport innovations, making our products more sustainably, building a creative and diverse global team and making a positive impact in communities where we live and work. Our mission is aligned with our deep commitment to maintaining an environment where all NIKE employees have the opportunity to reach their full potential, to connect to our brands and to shape the culture in which they work. We believe providing for growth and retention of our employees is essential in fostering such a culture and are dedicated to giving access to training programs and career development opportunities, including trainings on NIKE’s values, history and business, trainings on developing leadership skills at all levels, tools and resources for managers and qualified tuition reimbursement opportunities. +As part of our commitment to empowering our employees to help shape our culture, we source employee feedback through our Engagement Survey program. The program provides every employee throughout the globe an opportunity to provide confidential feedback on key areas known to drive employee engagement, including their satisfaction with their managers, their work and the Company generally. The program also measures our employees’ emotional commitment to NIKE as well as NIKE’s culture of diversity, equity and inclusion. NIKE also provides multiple points of contact for employees to speak up if they experience something that does not align with our values or otherwise violates our workplace policies, even if they are uncertain what they observed or heard is a violation of company policy. +As part of our commitment to make a positive impact on our communities, we have maintained a goal of investing 1.5% of our prior fiscal year’s pre-tax income into global communities, with an emphasis on inspiring kids to be active through play and sport. We increased that annual goal to 2% for fiscal 2022 forward. Our community investments are an important part of our culture in that we also support employees in giving back to community organizations through donations and volunteering, which are matched by the NIKE Foundation where eligible. +EMPLOYEE BASE +As of May 31, 2021, we had approximately 73,300 employees worldwide, including retail and part-time employees. We also utilize independent contractors and temporary personnel to supplement our workforce. +None of our employees are represented by a union, except for certain employees in the APLA geography, where local law requires those employees to be represented by a trade union. Also, in some countries outside of the United States, local laws require employee representation by works councils (which may be entitled to information and consultation on certain Company decisions) or by organizations similar to a union. In certain European countries, we are required by local law to enter into, and/or comply with, industry-wide or national collective bargaining agreements. NIKE has never experienced a material interruption of operations due to labor disagreements. +DIVERSITY, EQUITY AND INCLUSION (DE&I) +DE&I is a strategic priority for NIKE and we are committed to having an increasingly diverse team and culture. We aim to foster an inclusive workplace through recruitment, development and retention of diverse talent with the goal of expanding representation across all dimensions of diversity over the long term. In fiscal 2021, we elevated our DE&I team to sit at the heart of NIKE’s People and Culture Strategy and combined our Talent and Diversity & Inclusion teams under a single leader. We also announced certain targets for the Company to work toward by fiscal 2025, including increasing representation of women in our global corporate workforce and leadership positions, as well as increasing representation of U.S. racial and ethnic minorities in our U.S. corporate workforce and at the Director level and above. +We have enhanced our efforts to recruit diverse talent through our traditional channels and launched new initiatives, such as partnerships with athletes and sports-related organizations to create apprenticeship programs and new partnerships with organizations, colleges and universities that serve diverse populations. Additionally, we are prioritizing DE&I education so that all NIKE employees and leaders have the cultural awareness and understanding to build diverse and inclusive teams. We also have Employee Networks, collectively known as NikeUNITED, representing various employee groups. +Our DE&I focus extends beyond our workforce and includes our communities, which we support in a number of ways. We have committed to investments through both the NIKE and Jordan Brands that aim to address racial inequality and improve diversity and representation in our communities. We also are leveraging our global scale to accelerate business diversity, including investing in business training programs for women and increasing the proportion of services supplied by minority-owned businesses. +2021 FORM 10-K 6 +Table of Contents +COMPENSATION AND BENEFITS +NIKE’s total rewards are intended to be competitive and equitable, meet the diverse needs of our global teammates and reinforce our values. We are committed to providing comprehensive, competitive and equitable pay and benefits to our employees, and we have invested, and aim to continue to invest, in our employees through growth and development and well-being initiatives. Our initiatives in this area include: +• We are committed to competitive pay and to reviewing our pay and promotion practices annually. +• We have an annual company bonus plan and a retail-focused bonus plan applicable to all eligible employees. Both programs are focused on rewarding employees for company performance, which we believe reinforces our culture and rewards behaviors that support collaboration and teamwork. +• We provide comprehensive family care benefits in the U.S. and globally where practicable. +• Our Military Leave benefit provides up to 12 weeks of paid time off every 12 months, and we enhanced our Military Leave benefit for employees called up to serve as part of the U.S. COVID-19 response. +• We offer free access to our Sport Centers at our World Headquarters (WHQ) for our full-time employees and North America store employees. +• We provide employees free access to mindfulness and meditation resources, including membership to Headspace as well as live classes through our Sport Centers. +• Our global Employee Assistance Program (EAP) provides free and confidential counseling to all global employees and their families. +• As part of our continued commitment to support our teammates through pay and benefits, we introduced the following new and enhanced employee programs in fiscal 2021: +◦ We enhanced our family care program through additional leaves, backup care and child/elder care assistance, and we introduced an income-based childcare subsidy, expanding childcare support to employees beyond those at WHQ. +◦ We enhanced U.S. mental health care coverage. +◦ We updated our transgender healthcare coverage to provide employees covered on the U.S. Health Plan access to both restorative services and personalized care. +COVID-19 RESPONSE +Since the start of the COVID-19 pandemic, NIKE has been, and continues to be, committed to supporting our employees and communities. Some of the ways NIKE responded during the pandemic to support employees include: +• Throughout the pandemic NIKE has provided pay continuity for our retail, Air Manufacturing Innovation and distribution center employees—employees who were particularly affected by closures and reduced hours in fiscal 2020 and fiscal 2021. We have also taken precautions to provide a safe working environment, encouraging and supporting work-from-home whenever possible and instituting protective policies and procedures for when remote work is not possible. +• We provided a two-to-one match for all employee donations to community organizations providing COVID relief and support anywhere in the world. +• We offer two weeks of paid COVID-19 sick leave for all employees, in addition to existing paid time off benefits and legally mandated sick leave programs, which covers physical health as well as mental and emotional well-being and care for a family member. We also provide the option for employees to utilize up to two weeks of paid time off in advance of accrued balances, if needed. +• As part of our holistic approach to support our employees in their wellness journey during quarantine mandates, we offered NTC Premium, the NIKE Training Club’s subscription-based service, for free to our employees globally. +• In addition to our existing EAP, we enhanced mental healthcare to include virtual care, access to insomnia and anxiety apps and increased EAP support. +• We also supported certain eligible employees who work from home due to COVID-19 health and safety measures by providing them with select technology and ergonomic products through a NIKE-exclusive portal. +Additional information related to our human capital strategy can be found in our FY20 NIKE, Inc. Impact Report, which is available on the Purpose section of our website. Information contained on or accessible through our websites is not incorporated +2021 FORM 10-K 7 +Table of Contents +into, and does not form a part of, this Annual Report or any other report or document we file with the SEC, and any references to our websites are intended to be inactive textual references only. +2021 FORM 10-K 8 +Table of Contents +INFORMATION ABOUT OUR EXECUTIVE OFFICERS +The executive officers of NIKE, Inc. as of July 20, 2021, are as follows: +Mark G. Parker , Executive Chairman — Mr. Parker, 65, is Executive Chairman of the Board of Directors and served as President and Chief Executive Officer from 2006 - January 2020. He has been employed by NIKE since 1979 with primary responsibilities in product research, design and development, marketing and brand management. Mr. Parker was appointed divisional Vice President in charge of product development in 1987, corporate Vice President in 1989, General Manager in 1993, Vice President of Global Footwear in 1998 and President of the NIKE Brand in 2001. +John J. Donahoe II , President and Chief Executive Officer — Mr. Donahoe, 61, was appointed President and Chief Executive Officer in January 2020 and has been a director since 2014. He brings expertise in digital commerce, technology and global strategy. He previously served as President and Chief Executive Officer at ServiceNow, Inc. Prior to joining ServiceNow, Inc., he served as President and Chief Executive Officer of eBay, Inc. He also held leadership roles at Bain & Company for two decades. +Andrew Campion , Chief Operating Officer — Mr. Campion, 49, joined NIKE in 2007 as Vice President of Global Planning and Development, leading strategic and financial planning. He was appointed Chief Financial Officer of the NIKE Brand in 2010, responsible for leading all aspects of financial management for the Company's flagship brand. In 2014, he was appointed Senior Vice President, Strategy, Finance and Investor Relations. Mr. Campion assumed the role of Executive Vice President and Chief Financial Officer in August 2015. In April 2020, he was appointed Chief Operating Officer and leads NIKE's global technology and digital transformation, demand and supply management, manufacturing, distribution and logistics, sustainability, workplace design and connectivity, and procurement. Prior to joining NIKE, he held leadership roles in strategic planning, mergers and acquisitions, financial planning and analysis, operations and planning, investor relations and tax at The Walt Disney Company. +Matthew Friend , Executive Vice President and Chief Financial Officer — Mr. Friend, 43, joined NIKE in 2009 as Senior Director of Corporate Strategy and Development, and was appointed Chief Financial Officer of Emerging Markets in 2011. In 2014, Mr. Friend was appointed Chief Financial Officer of Global Categories, Product and Functions, and was subsequently appointed Chief Financial Officer of the NIKE Brand in 2016. He was also appointed Vice President of Investor Relations in 2019. Mr. Friend was appointed as Executive Vice President and Chief Financial Officer of NIKE, Inc. in April 2020. Prior to joining NIKE, he worked in the financial industry including roles as VP of investment banking and mergers and acquisitions at Goldman Sachs and Morgan Stanley. +Hilary K. Krane , Executive Vice President, Chief Administrative Officer and General Counsel — Ms. Krane, 57, joined NIKE as Vice President and General Counsel in 2010. In 2011, her responsibilities expanded, and she became Vice President, General Counsel and Corporate Affairs. Ms. Krane was appointed Executive Vice President, Chief Administrative Officer and General Counsel in 2013. Prior to joining NIKE, Ms. Krane was General Counsel and Senior Vice President for Corporate Affairs at Levi Strauss & Co. from 2006 to 2010. From 1996 to 2006, she was a Partner and Assistant General Counsel at PricewaterhouseCoopers LLP. +Monique S. Matheson , Executive Vice President, Global Human Resources — Ms. Matheson, 54, joined NIKE in 1998, with primary responsibilities in the human resources function. She was appointed as Vice President and Senior Business Partner in 2011 and Vice President, Chief Talent and Diversity Officer in 2012. Ms. Matheson was appointed Executive Vice President, Global Human Resources in 2017. +Heidi O'Neill , President of Consumer and Marketplace — Ms. O'Neill, 56, joined NIKE in 1998, and held a variety of leadership roles, including President of NIKE Direct, where she was responsible for NIKE's connection to its consumer globally through the Company's retail and digital-commerce business. She also led NIKE's women's business for seven years, growing it into a multi-billion dollar business, and leading the Company's North America apparel business as VP/GM. Ms. O'Neill was appointed as President of Consumer and Marketplace in April 2020 and is responsible for NIKE's Direct business, including all stores, e-commerce and apps globally. +2021 FORM 10-K 9 +Table of Contents +ITEM 1A. RISK FACTORS +Special Note Regarding Forward-Looking Statements and Analyst Reports +Certain written and oral statements, other than purely historic information, including estimates, projections, statements relating to NIKE's business plans, objectives and expected operating results and the assumptions upon which those statements are based, made or incorporated by reference from time to time by NIKE or its representatives in this report, other reports, filings with the SEC, press releases, conferences or otherwise, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements include, without limitation, any statement that may predict, forecast, indicate or imply future results, performance or achievements, and may contain the words “believe,” “anticipate,” “expect,” “estimate,” “project,” “will be,” “will continue,” “will likely result” or words or phrases of similar meaning. Forward-looking statements involve risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. The risks and uncertainties are detailed from time to time in reports filed by NIKE with the SEC, including reports filed on Forms 8-K, 10-Q and 10-K, and include, among others, the following: health epidemics, pandemics and similar outbreaks, including the COVID-19 pandemic; international, national and local political, civil, economic and market conditions; the size and growth of the overall athletic or leisure footwear, apparel and equipment markets; intense competition among designers, marketers, distributors and sellers of athletic or leisure footwear, apparel and equipment for consumers and endorsers; demographic changes; changes in consumer preferences; popularity of particular designs, categories of products and sports; seasonal and geographic demand for NIKE products; difficulties in anticipating or forecasting changes in consumer preferences, consumer demand for NIKE products and the various market factors described above; difficulties in implementing, operating and maintaining NIKE's increasingly complex information technology systems and controls, including, without limitation, the systems related to demand and supply planning and inventory control; interruptions in data and information technology systems; consumer data security; fluctuations and difficulty in forecasting operating results, including, without limitation, the fact that advance orders may not be indicative of future revenues due to changes in shipment timing, the changing mix of orders with shorter lead times, and discounts, order cancellations and returns; the ability of NIKE to sustain, manage or forecast its growth and inventories; the size, timing and mix of purchases of NIKE's products; increases in the cost of materials, labor and energy used to manufacture products; new product development and introduction; the ability to secure and protect trademarks, patents and other intellectual property; product performance and quality; customer service; adverse publicity, including without limitation, through social media or in connection with brand damaging events; the loss of significant customers or suppliers; dependence on distributors and licensees; business disruptions; increased costs of freight and transportation to meet delivery deadlines; increases in borrowing costs due to any decline in NIKE's debt ratings; changes in business strategy or development plans; general risks associated with doing business outside of the United States, including, without limitation, exchange rate fluctuations, inflation, import duties, tariffs, quotas, political and economic instability and terrorism; the potential impact of new laws, regulations or policy, including, without limitation, tariffs, import/export, trade, wage and hour or labor and immigration regulations or policies; changes in government regulations; the impact of, including business and legal developments relating to, climate change and natural disasters; litigation, regulatory proceedings, sanctions or any other claims asserted against NIKE; the ability to attract and retain qualified employees, and any negative public perception with respect to key personnel or our corporate culture, values or purpose; the effects of NIKE's decision to invest in or divest of businesses or capabilities and other factors referenced or incorporated by reference in this report and other reports. +Risk Factors +The risks included here are not exhaustive. Other sections of this report may include additional factors which could adversely affect NIKE's business and financial performance. Moreover, NIKE operates in a very competitive and rapidly changing environment. New risks emerge from time to time and it is not possible for management to predict all such risks, nor can it assess the impact of all such risks on NIKE's business or the extent to which any risk, or combination of risks, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results. +Investors should also be aware that while NIKE does, from time to time, communicate with securities analysts, it is against NIKE's policy to disclose to them any material non-public information or other confidential commercial information. Accordingly, shareholders should not assume that NIKE agrees with any statement or report issued by any analyst irrespective of the content of the statement or report. Furthermore, NIKE has a policy against confirming financial forecasts or projections issued by others. Thus, to the extent that reports issued by securities analysts contain any projections, forecasts or opinions, such reports are not the responsibility of NIKE. +Economic and Industry Risks +Our financial condition and results of operations have been, and could in the future be, adversely affected by the coronavirus pandemic. +A novel strain of coronavirus (COVID-19) was first identified in Wuhan, China in December 2019, and subsequently declared a +2021 FORM 10-K 10 +Table of Contents +pandemic by the World Health Organization. To date, this pandemic and preventative measures taken to contain or mitigate the pandemic have caused, and may in the future cause, business slowdown or shutdown in affected areas and significant disruption in the financial markets, both globally and in the United States. These events have led to and could again lead to a decline in discretionary spending by consumers, and in turn materially impact, our business, sales, financial condition and results of operations. We cannot predict whether, and to what degree, our sales, operations and financial results could in the future be affected by the pandemic and preventative measures. Risks presented by the COVID-19 pandemic include, but are not limited to: +• Deterioration in economic conditions in the United States and globally; +• Reduced consumer demand for our products if consumers seek to reduce or delay discretionary spending in response to the impacts of COVID-19, including as a result of a rise in unemployment rates and diminished consumer confidence; +• Cancellation or postponement of sports seasons and sporting events in multiple countries, including in the United States, and bans on large public gatherings, which have reduced consumer spending on our products and could impact the effectiveness of our arrangements with key endorsers; +• Decreased retail traffic as a result of store closures, reduced operating hours, social distancing restrictions and/or changes in consumer behavior; +• The risk that any safety protocols in NIKE-owned or affiliated facilities, including our offices, will not be effective or not be perceived as effective, or that any virus-related illnesses will be linked or alleged to be linked to such facilities, whether accurate or not; +• Incremental costs resulting from the adoption of preventative measures and compliance with regulatory requirements, including providing facial coverings and hand sanitizer, rearranging operations to follow social distancing protocols, conducting temperature checks, COVID-19 testing and undertaking regular and thorough disinfecting of surfaces; +• Disruption to our distribution centers and our third-party manufacturing partners and other vendors, including through the effects of facility closures, reductions in operating hours, labor shortages, and real time changes in operating procedures, including for additional cleaning and disinfection procedures; +• Bankruptcies or other financial difficulties facing our wholesale customers, which could cause them to be unable to make or delay making payments to us, or result in cancellation or reduction of their orders; +• Operational risk, including but not limited to cybersecurity risks, as a result of continued workforce remote work arrangements, and restrictions on employee travel; +• Impacts to our distribution and logistics providers' ability to operate or increases in their operating costs. These supply chain effects have had an adverse effect on our ability to meet consumer demand, including digital demand, and have in the past resulted in and could in the future result in an increase in our costs of production and distribution, including increased freight and logistics costs and other expenses; and +• Significant disruption of and volatility in global financial markets, which could have a negative impact on our ability to access capital in the future. +We continue to monitor the latest developments regarding the pandemic and have made certain assumptions regarding the pandemic for purposes of our operating, financial and tax planning projections, including assumptions regarding the duration and severity of the pandemic and the global macroeconomic impacts of the pandemic. However, we are unable to accurately predict the extent of the impact of the pandemic on our business, operations and financial condition due to the uncertainty of future developments. In particular, we believe the ultimate impacts on our business, results of operations, cash flows and financial condition will depend on, among other things, the further spread and duration of COVID-19, the requirements to take action to help limit the spread of the illness, the availability, widespread distribution and acceptance, as well as the safety and efficacy of vaccines for COVID-19 and the economic impacts of the pandemic. Even in those regions where we have experienced business recovery, should those regions fail to fully contain COVID-19 or suffer a COVID-19 relapse, those markets may not recover as quickly or at all, which could have a material adverse effect on our business and results of operations. The pandemic may also affect our business, operations or financial condition in a manner that is not presently known to us or that we currently do not consider to present significant risks. +In addition, the impact of COVID-19 may also exacerbate other risks discussed in this Item 1A. Risk Factors, any of which could have a material effect on us . +2021 FORM 10-K 11 +Table of Contents +Global economic conditions could have a material adverse effect on our business, operating results and financial condition. +The uncertain state of the global economy continues to impact businesses around the world. If global economic and financial market conditions deteriorate, the following factors could have a material adverse effect on our business, operating results and financial condition: +• Our sales are impacted by discretionary spending by consumers. Declines in consumer spending have in the past and in the future may result in reduced demand for our products, increased inventories, reduced orders from retailers for our products, order cancellations, lower revenues, higher discounts and lower gross margins. +• In the future, we may be unable to access financing in the credit and capital markets at reasonable rates in the event we find it desirable to do so. +• We conduct transactions in various currencies, which creates exposure to fluctuations in foreign currency exchange rates relative to the U.S. Dollar. Continued volatility in the markets and exchange rates for foreign currencies and contracts in foreign currencies could have a significant impact on our reported operating results and financial condition. +• Continued volatility in the availability and prices for commodities and raw materials we use in our products and in our supply chain (such as cotton or petroleum derivatives) could have a material adverse effect on our costs, gross margins and profitability. +• If retailers of our products experience declining revenues or experience difficulty obtaining financing in the capital and credit markets to purchase our products, this could result in reduced orders for our products, order cancellations, late retailer payments, extended payment terms, higher accounts receivable, reduced cash flows, greater expense associated with collection efforts and increased bad debt expense. +• If retailers of our products experience severe financial difficulty, some may become insolvent and cease business operations, which could negatively impact the sale of our products to consumers. If contract manufacturers of our products or other participants in our supply chain experience difficulty obtaining financing in the capital and credit markets to purchase raw materials or to finance capital equipment and other general working capital needs, it may result in delays or non-delivery of shipments of our products. +Our products, services and experiences face intense competition. +NIKE is a consumer products company and the relative popularity of various sports and fitness activities and changing design trends affect the demand for our products, services and experiences. The athletic footwear, apparel and equipment industry is highly competitive both in the United States and worldwide. We compete internationally with a significant number of athletic and leisure footwear companies, athletic and leisure apparel companies, sports equipment companies, private labels and large companies that have diversified lines of athletic and leisure footwear, apparel and equipment. We also compete with other companies for the production capacity of independent manufacturers that produce our products. Our NIKE Direct operations, both through our digital commerce operations and retail stores, also compete with multi-brand retailers, which sell our products through their digital platforms and physical stores, and with digital commerce platforms. In addition, we compete with respect to the digital services and experiences we are able to offer our consumers, including fitness and activity apps; sport, fitness and wellness content and services; and digital services and features in retail stores that enhance the consumer experience. +Product offerings, technologies, marketing expenditures (including expenditures for advertising and endorsements), pricing, costs of production, customer service, digital commerce platforms, digital services and experiences and social media presence are areas of intense competition. These, in addition to ongoing rapid changes in technology, a reduction in barriers to the creation of new footwear and apparel companies and consumer preferences in the markets for athletic and leisure footwear, apparel, and equipment, services and experiences, constitute significant risk factors in our operations. In addition, the competitive nature of retail, including shifts in the ways in which consumers shop, and the continued proliferation of digital commerce, constitutes a risk factor implicating our NIKE Direct and wholesale operations. If we do not adequately and timely anticipate and respond to our competitors, our costs may increase, demand for our products may decline, possibly significantly, or we may need to reduce wholesale or suggested retail prices for our products. +Economic factors beyond our control, and changes in the global economic environment, including fluctuations in inflation and currency exchange rates, could result in lower revenues, higher costs and decreased margins and earnings. +A majority of our products are manufactured and sold outside of the United States, and we conduct purchase and sale transactions in various currencies, which creates exposure to the volatility of global economic conditions, including fluctuations in inflation and foreign currency exchange rates. Additionally, there has been, and may continue to be, volatility in currency exchange rates as a result of the United Kingdom's exit from the European Union, commonly referred to as “Brexit” or new or proposed U.S. policy changes that impact the U.S. Dollar value relative to other international currencies. Our international revenues and expenses generally are derived from sales and operations in foreign currencies, and these revenues and expenses +2021 FORM 10-K 12 +Table of Contents +could be affected by currency fluctuations, specifically amounts recorded in foreign currencies and translated into U.S. Dollars for consolidated financial reporting, as weakening of foreign currencies relative to the U.S. Dollar adversely affects the U.S. Dollar value of the Company's foreign currency-denominated sales and earnings. Currency exchange rate fluctuations could also disrupt the business of the independent manufacturers that produce our products by making their purchases of raw materials more expensive and more difficult to finance. Foreign currency fluctuations have adversely affected and could continue to have an adverse effect on our results of operations and financial condition. +We may hedge certain foreign currency exposures to lessen and delay, but not to completely eliminate, the effects of foreign currency fluctuations on our financial results. Since the hedging activities are designed to lessen volatility, they not only reduce the negative impact of a stronger U.S. Dollar or other trading currency, but they also reduce the positive impact of a weaker U.S. Dollar or other trading currency. Our future financial results could be significantly affected by the value of the U.S. Dollar in relation to the foreign currencies in which we conduct business. The degree to which our financial results are affected for any given time period will depend in part upon our hedging activities. +We may be adversely affected by the financial health of our customers. +We extend credit to our customers based on an assessment of a customer's financial condition, generally without requiring collateral. To assist in the scheduling of production and the shipping of our products, we offer certain customers the opportunity to place orders five to six months ahead of delivery under our futures ordering program. These advance orders may be canceled under certain conditions, and the risk of cancellation may increase when dealing with financially unstable retailers or retailers struggling with economic uncertainty. In the past, some customers have experienced financial difficulties up to and including bankruptcies, which have had an adverse effect on our sales, our ability to collect on receivables and our financial condition. When the retail economy weakens or as consumer behavior shifts, retailers may be more cautious with orders. A slowing or changing economy in our key markets could adversely affect the financial health of our customers, which in turn could have an adverse effect on our results of operations and financial condition. In addition, product sales are dependent in part on high quality merchandising and an appealing retail environment to attract consumers, which requires continuing investments by retailers. Retailers that experience financial difficulties may fail to make such investments or delay them, resulting in lower sales and orders for our products. The ongoing financial uncertainty surrounding COVID-19, particularly for retailers, could also have an effect on our sales, our ability to collect on receivables and our financial condition. +Extreme weather conditions and natural disasters could negatively impact our operating results and financial condition. +Extreme weather conditions in the areas in which our retail stores, suppliers, manufacturers, customers, distribution centers, offices, headquarters and vendors are located could adversely affect our operating results and financial condition. Moreover, natural disasters such as earthquakes, hurricanes, wildfires and tsunamis, whether occurring in the United States or abroad, and their related consequences and effects, including energy shortages and public health issues, have in the past temporarily disrupted, and could in the future disrupt, our operations, the operations of our vendors, manufacturers and other suppliers or have in the past resulted in, and in the future could result in, economic instability that may negatively impact our operating results and financial condition. In particular, if a natural disaster or severe weather event were to occur in an area in which we or our suppliers, manufacturers, customers, distribution centers and vendors are located, our continued success would depend, in part, on the safety and availability of the relevant personnel and facilities and proper functioning of our or third parties' computer, network, telecommunication and other systems and operations. In addition, a natural disaster or severe weather event could negatively impact retail traffic to our stores or stores that carry our products and could have an adverse impact on consumer spending, any of which could in turn result in negative point-of-sale trends for our merchandise. Further, climate change may increase both the frequency and severity of extreme weather conditions and natural disasters, which may affect our business operations, either in a particular region or globally, as well as the activities of our third-party vendors and other suppliers, manufacturers and customers. In addition, the physical changes prompted by climate change could result in changes in regulations or consumer preferences, which could in turn affect our business, operating results and financial condition. We believe the diversity of locations in which we operate, our operational size, disaster recovery and business continuity planning and our information technology systems and networks, including the Internet and third-party services (“Information Technology Systems”) position us well, but may not be sufficient for all or for concurrent eventualities. If we were to experience a local or regional disaster or other business continuity event or concurrent events, we could still experience operational challenges, in particular depending upon how a local or regional event may affect our human capital across our operations or with regard to particular aspects of our operations, such as key executive officers or personnel. For example, our World Headquarters are located in an active seismic zone, which is at a higher risk for earthquakes and the related consequences or effects. Further, if we are unable to find alternative suppliers, replace capacity at key manufacturing or distribution locations or quickly repair damage to our Information Technology Systems or supply systems, we could be late in delivering, or be unable to deliver, products to our customers. These events could result in reputational damage, lost sales, cancellation charges or markdowns, all of which could have an adverse effect on our business, results of operations and financial condition. +2021 FORM 10-K 13 +Table of Contents +Business and Operational Risks +Failure to maintain our reputation, brand image and culture could negatively impact our business. +Our iconic brands have worldwide recognition, and our success depends on our ability to maintain and enhance our brand image and reputation. Maintaining, promoting and growing our brands will depend on our design and marketing efforts, including advertising and consumer campaigns, product innovation and product quality. Our commitment to product innovation and quality and our continuing investment in design (including materials) and marketing may not have the desired impact on our brand image and reputation. In addition, our success in maintaining, extending and expanding our brand image depends on our ability to adapt to a rapidly changing media environment, including our increasing reliance on social media and digital dissemination of advertising campaigns on our digital platforms and through our digital experiences. We could be adversely impacted if we fail to achieve any of these objectives. +Our brand value also depends on our ability to maintain a positive consumer perception of our corporate integrity, purpose and brand culture. Negative claims or publicity involving us, our culture and values, our products, services and experiences, consumer data, or any of our key employees, endorsers, sponsors or suppliers could seriously damage our reputation and brand image, regardless of whether such claims are accurate. For example, while we require our suppliers of our products to operate their business in compliance with applicable laws and regulations, we do not control their practices. Negative publicity relating to a violation or an alleged violation of policies or laws by such suppliers could damage our brand image and diminish consumer trust in our brand. Further, our reputation and brand image could be damaged as a result of our support of, association with or lack of support or disapproval of certain social causes, as well as any decisions we make to continue to conduct, or change, certain of our activities in response to such considerations. Social media, which accelerates and potentially amplifies the scope of negative publicity, can increase the challenges of responding to negative claims. Adverse publicity about regulatory or legal action against us, or by us, could also damage our reputation and brand image, undermine consumer confidence in us and reduce long-term demand for our products, even if the regulatory or legal action is unfounded or not material to our operations. If the reputation, culture or image of any of our brands is tarnished or if we receive negative publicity, then our sales, financial condition and results of operations could be materially and adversely affected. +Our business is affected by seasonality, which could result in fluctuations in our operating results. +We experience moderate fluctuations in aggregate sales volume during the year. Historically, revenues in the first and fourth fiscal quarters have slightly exceeded those in the second and third fiscal quarters. However, the mix of product sales may vary considerably from time to time or in the future as a result of strategic shifts in our business, changes in COVID-19 related cancellations or postponements and seasonal or geographic demand for particular types of footwear, apparel and equipment and in connection with the timing, cancellation or postponement of significant sporting events, such as the NBA Finals, Olympics or the World Cup, among others. In addition, our customers may cancel orders, change delivery schedules or change the mix of products ordered with minimal notice. As a result, we may not be able to accurately predict our quarterly sales. Accordingly, our results of operations are likely to fluctuate significantly from period to period. This seasonality, along with other factors that are beyond our control, including economic conditions, changes in consumer preferences, weather conditions, outbreaks of disease, social or political unrest, availability of import quotas, transportation disruptions and currency exchange rate fluctuations, could adversely affect our business and cause our results of operations to fluctuate. Our operating margins are also sensitive to a number of additional factors that are beyond our control, including manufacturing and transportation costs, shifts in product sales mix and geographic sales trends, all of which we expect to continue. Results of operations in any period should not be considered indicative of the results to be expected for any future period. +If we are unable to anticipate consumer preferences and develop new products, we may not be able to maintain or increase our revenues and profits. +Our success depends on our ability to identify, originate and define product trends as well as to anticipate, gauge and react to changing consumer demands in a timely manner. However, lead times for many of our products may make it more difficult for us to respond rapidly to new or changing product trends or consumer preferences. All of our products are subject to changing consumer preferences that cannot be predicted with certainty. Our new products may not receive consumer acceptance as consumer preferences could shift rapidly to different types of performance products or away from these types of products altogether, and our future success depends in part on our ability to anticipate and respond to these changes. If we fail to anticipate accurately and respond to trends and shifts in consumer preferences by adjusting the mix of existing product offerings, developing new products, designs, styles and categories, and influencing sports and fitness preferences through extensive marketing, we could experience lower sales, excess inventories or lower profit margins, any of which could have an adverse effect on our results of operations and financial condition. In addition, we market our products globally through a diverse spectrum of advertising and promotional programs and campaigns, including social media, mobile applications and online advertising. If we do not successfully market our products or if advertising and promotional costs increase, these factors could have an adverse effect on our business, financial condition and results of operations. +2021 FORM 10-K 14 +Table of Contents +We rely on technical innovation and high-quality products to compete in the market for our products. +Technical innovation and quality control in the design and manufacturing processes of footwear, apparel and equipment is essential to the commercial success of our products. Research and development play a key role in technical innovation. We rely upon specialists in the fields of biomechanics, chemistry, exercise physiology, engineering, digital technologies, industrial design, sustainability and related fields, as well as research committees and advisory boards made up of athletes, coaches, trainers, equipment managers, orthopedists, podiatrists and other experts to develop and test cutting-edge performance products. While we strive to produce products that help to enhance athletic performance and reduce injury and maximize comfort, if we fail to introduce technical innovation in our products, consumer demand for our products could decline, and if we experience problems with the quality of our products, we may incur substantial expense to remedy the problems and loss of consumer confidence. +Failure to continue to obtain or maintain high-quality endorsers of our products could harm our business. +We establish relationships with professional athletes, sports teams and leagues, as well as other public figures, including artists, designers and influencers, to develop, evaluate and promote our products, as well as establish product authenticity with consumers. However, as competition in our industry has increased, the costs associated with establishing and retaining such sponsorships and other relationships have increased. If we are unable to maintain our current associations with professional athletes, sports teams and leagues, or other public figures, or to do so at a reasonable cost, we could lose the high visibility or on-field authenticity associated with our products, and we may be required to modify and substantially increase our marketing investments. As a result, our brands, net revenues, expenses and profitability could be harmed. +Furthermore, if certain endorsers were to stop using our products contrary to their endorsement agreements, our business could be adversely affected. In addition, actions taken or statements made by athletes, teams or leagues, or other endorsers, associated with our products or brand that harm the reputations of those athletes, teams or leagues, or endorsers, could also seriously harm our brand image with consumers and, as a result, could have an adverse effect on our sales and financial condition. In addition, poor performance by our endorsers, a failure to continue to correctly identify promising athletes, public figures or sports organizations, to use and endorse our products and brand or a failure to enter into cost-effective endorsement arrangements with prominent athletes, public figures and sports organizations could adversely affect our brand, sales and profitability. +Failure to accurately forecast consumer demand could lead to excess inventories or inventory shortages, which could result in decreased operating margins, reduced cash flows and harm to our business. +To meet anticipated demand for our products, we purchase products from manufacturers outside of our futures ordering program and in advance of customer orders, which we hold in inventory and resell to customers. There is a risk we may be unable to sell excess products ordered from manufacturers. Inventory levels in excess of customer demand may result in inventory write-downs, and the sale of excess inventory at discounted prices could significantly impair our brand image and have an adverse effect on our operating results, financial condition and cash flows. Conversely, if we underestimate consumer demand for our products or if our manufacturers fail to supply products we require at the time we need them, we may experience inventory shortages. Inventory shortages could delay shipments to customers, negatively impact retailer, distributor and consumer relationships and diminish brand loyalty. The difficulty in forecasting demand also makes it difficult to estimate our future results of operations, financial condition and cash flows from period to period. A failure to accurately predict the level of demand for our products could adversely affect our net revenues and net income, and we are unlikely to forecast such effects with any certainty in advance. +Our NIKE Direct operations have required and will continue to require a substantial investment and commitment of resources and are subject to numerous risks and uncertainties. +Our NIKE Direct operations, including our retail stores and digital platforms, have required and will continue to require significant investment. Our NIKE Direct stores have required and will continue to require substantial fixed investment in equipment and leasehold improvements and personnel. We have entered into substantial operating lease commitments for retail space. Certain stores have been designed and built to serve as high-profile venues to promote brand awareness and marketing activities and to integrate with our digital platforms. Because of their unique design and technological elements, locations and size, these stores require substantially more investment than other stores. Due to the high fixed-cost structure associated with our NIKE Direct retail stores, a decline in sales, a shift in consumer behavior away from brick-and-mortar retail, or the closure, temporary or otherwise, or poor performance of individual or multiple stores could result in significant lease termination costs, write-offs of equipment and leasehold improvements and employee-related costs. +Many factors unique to retail operations, some of which are beyond our control, pose risks and uncertainties. Risks include, but are not limited to: credit card fraud; mismanagement of existing retail channel partners; and inability to manage costs associated with store construction and operation. +In addition, we have made significant investments in digital technologies and information systems for the digital aspect of our NIKE Direct operations, and our digital offerings will require co ntinued investment in the development and upgrading of our technology platforms. In order to deliver high-quality digital experiences, our digital platforms must be designed effectively and work well with a range of other technologies, systems, networks, and standards that we do not control. We may not be successful +2021 FORM 10-K 15 +Table of Contents +in developing platforms that operate effectively with these technologies, systems, networks or standards. A growing portion of consumers access our NIKE Direct digital platforms, but in the event that it is more difficult for consumers to access and use our digital platforms, consumers find that our digital platforms do not effectively meet their needs or expectations or consumers choose not to access or use our digital platforms or use devices that do not offer access to our platforms, the success of our NIKE Direct operations could be adversely impacted. Our competitors may develop, or have already developed, digital experiences, features, content, services or technologies that are similar to ours or that achieve greater acceptance. +We may not realize a satisfactory return on our investment in our NIKE Direct operations and management's attention from our other business opportunities could be diverted, which could have an adverse effect on our business, financial condition or results of operations. +If the technology-based systems that give our consumers the ability to shop or interact with us online do not function effectively, our operating results, as well as our ability to grow our digital commerce business globally or to retain our customer base, could be materially adversely affected. +Many of our consumers shop with us through our digital platforms. Increasingly, consumers are using mobile-based devices and applications to shop online with us and with our competitors, and to do comparison shopping, as well as to engage with us and our competitors through digital services and experiences that are offered on mobile platforms. We are increasingly using social media and proprietary mobile applications to interact with our consumers and as a means to enhance their shopping experience. Any failure on our part to provide attractive, effective, reliable, secure, user-friendly digital commerce platforms that offer a wide assortment of merchandise with rapid delivery options and that continually meet the changing expectations of online shoppers or any failure to provide attractive digital experiences to our customers could place us at a competitive disadvantage, result in the loss of digital commerce and other sales, harm our reputation with consumers, have a material adverse impact on the growth of our digital commerce business globally and have a material adverse impact on our business and results of operations. In addition, as use of our digital platforms continues to grow, we will need an increasing amount of technical infrastructure to continue to satisfy our consumers' needs. If we fail to continue to effectively scale and adapt our digital platforms to accommodate increased consumer demand, our business may be subject to interruptions, delays or failures and consumer demand for our products and digital experiences could decline. +Risks specific to our digital commerce business also include diversion of sales from our and our retailers' brick and mortar stores, difficulty in recreating the in-store experience through direct channels and liability for online content. Our failure to successfully respond to these risks might adversely affect sales in our digital commerce business, as well as damage our reputation and brands. +We rely significantly on information technology to operate our business, including our supply chain and retail operations, and any failure, inadequacy or interruption of that technology could harm our ability to effectively operate our business. +We are heavily dependent on Information Technology Systems, across our supply chain, including product design, production, forecasting, ordering, manufacturing, transportation, sales and distribution, as well as for processing financial information for external and internal reporting purposes, retail operations and other business activities. Information Technology Systems are critical to many of our operating activities and our business processes and may be negatively impacted by any service interruption or shutdown. For example, our ability to effectively manage and maintain our inventory and to ship products to customers on a timely basis depends significantly on the reliability of these Information Technology Systems. Over a number of years, we have implemented Information Technology Systems in all of the geographical regions in which we operate. Our work to integrate, secure and enhance these systems and related processes in our global operations is ongoing and NIKE will continue to invest in these efforts. We cannot provide assurance, however, that the measures we take to secure and enhance these systems will be sufficient to protect our Information Technology Systems and prevent cyber-attacks, system failures or data or information loss. The failure of these systems to operate effectively, including as a result of security breaches, viruses, hackers, malware, natural disasters, vendor business interruptions or other causes, failure to properly maintain, protect, repair or upgrade systems, or problems with transitioning to upgraded or replacement systems could cause delays in product fulfillment and reduced efficiency of our operations, could require significant capital investments to remediate the problem which may not be sufficient to cover all eventualities, and may have an adverse effect on our reputation, results of operations and financial condition. In addition, the increased use of employee-owned devices for communications as well as work-from-home arrangements, such as those implemented in response to the COVID-19 pandemic, present additional operational risks to our Information Technology Systems, including, but not limited to, increased risks of cyber-attacks. Further, like other companies in the retail industry, we have in the past experienced, and we expect to continue to experience, cyber-attacks, including phishing, and other attempts to breach, or gain unauthorized access to, our systems. To date, these attacks have not had a material impact on our operations, but we cannot provide assurance that they will not have an impact in the future. +We also use Information Technology Systems to process financial information and results of operations for internal reporting purposes and to comply with regulatory financial reporting, legal and tax requirements. If Information Technology Systems suffer severe damage, disruption or shutdown and our business continuity plans, or those of our vendors, do not effectively resolve the issues in a timely manner, we could experience delays in reporting our financial results, which could result in lost revenues and +2021 FORM 10-K 16 +Table of Contents +profits, as well as reputational damage. Furthermore, we depend on Information Technology Systems and personal data collection for digital marketing, digital commerce, consumer engagement and the marketing and use of our digital products and services. We also rely on our ability to engage in electronic communications throughout the world between and among our employees as well as with other third parties, including customers, suppliers, vendors and consumers. Any interruption in Information Technology Systems may impede our ability to engage in the digital space and result in lost revenues, damage to our reputation, and loss of users. +We are subject to the risk our licensees may not generate expected sales or maintain the value of our brands. +We currently license, and expect to continue licensing, certain of our proprietary rights, such as trademarks or copyrighted material, to third parties. If our licensees fail to successfully market and sell licensed products, or fail to obtain sufficient capital or effectively manage their business operations, customer relationships, labor relationships, supplier relationships or credit risks, it could adversely affect our revenues, both directly from reduced royalties received and indirectly from reduced sales of our other products. +We also rely on our licensees to help preserve the value of our brands. Although we attempt to protect our brands through approval rights over the design, production processes, quality, packaging, merchandising, distribution, advertising and promotion of our licensed products, we cannot completely control the use of our licensed brands by our licensees. The misuse of a brand by or negative publicity involving a licensee could have a material adverse effect on that brand and on us. +Consolidation of retailers or concentration of retail market share among a few retailers may increase and concentrate our credit risk and impair our ability to sell products. +The athletic footwear, apparel and equipment retail markets in some countries are dominated by a few large athletic footwear, apparel and equipment retailers with many stores and accelerating digital commerce capabilities. The market shares of these retailers may increase through acquisitions and construction of additional stores and investments in digital capacity, and as a result of attrition as struggling retailers exit the market. Consolidation of our retailers will concentrate our credit risk with a smaller set of retailers, any of whom may experience declining sales or a shortage of liquidity, including as a result of the COVID-19 pandemic. In addition, increasing market share concentration among a few retailers in a particular country or region increases the risk that if any one of them substantially reduces their purchases of our products, we may be unable to find sufficient retail outlets for our products to sustain the same level of sales and revenues. +If one or more of our counterparty financial institutions default on their obligations to us or fail, we may incur significant losses. +As part of our hedging activities, we enter into transactions involving derivative financial instruments, which may include forward contracts, commodity futures contracts, option contracts, collars and swaps with various financial institutions. In addition, we have significant amounts of cash, cash equivalents and other investments on deposit or in accounts with banks or other financial institutions in the United States and abroad. As a result, we are exposed to the risk of default by or failure of counterparty financial institutions. The risk of counterparty default or failure may be heightened during economic downturns and periods of uncertainty in the financial markets. If one of our counterparties were to become insolvent or file for bankruptcy, our ability to recover losses incurred as a result of default, or our assets deposited or held in accounts with such counterparty, may be limited by the counterparty's liquidity or the applicable laws governing the insolvency or bankruptcy proceedings. In the event of default or failure of one or more of our counterparties, we could incur significant losses, which could negatively impact our results of operations and financial condition. +We rely on a concentrated source base of contract manufacturers to supply a significant portion of our footwear products. +NIKE is supplied by 191 footwear factories located in 14 countries. We do not own or operate any of the footwear manufacturing facilities and depend upon independent contract manufacturers to manufacture all of the footwear products we sell. In fiscal 2021, four footwear contract manufacturers each accounted for greater than 10% of fiscal 2021 footwear production and in aggregate accounted for approximately 61% of NIKE Brand footwear production in fiscal 2021. Our ability to meet our customers' needs depends on our ability to maintain a steady supply of products from our independent contract manufacturers. If one or more of our significant suppliers were to sever their relationship with us or significantly alter the terms of our relationship, including due to changes in applicable trade policies, or be unable to perform, including as a result of the COVID-19 pandemic, we may not be able to obtain replacement products in a timely manner, which could have a material adverse effect on our sales, financial condition or results of operations. Additionally, if any of our primary contract manufacturers fail to make timely shipments, do not meet our quality standards or otherwise fail to deliver us product in accordance with our plans, there could be a material adverse effect on our results of operations. +Certain of our manufacturers are highly specialized and only produce a specific type of product. Such manufacturing partners may go out of business if consumer preferences or market conditions change such that there is no longer sufficient demand for the types of products they produce. If, in the future, the relevant products are again in demand and the specialized manufacturers no longer exist, we may not be able to locate replacement facilities to manufacture certain products in a timely manner or at all, which could have a material adverse effect on our sales, financial condition or results of operations. +2021 FORM 10-K 17 +Table of Contents +The market for prime real estate is competitive. +Our ability to effectively obtain real estate to open new retail stores and otherwise conduct our operations, both domestically and internationally, depends on the availability of real estate that meets our criteria for traffic, square footage, co-tenancies, lease economics, demographics and other factors. We also must be able to effectively renew our existing real estate leases. In addition, from time to time, we seek to downsize, consolidate, reposition or close some of our real estate locations, which may require modification of an existing lease. Failure to secure adequate new locations or successfully modify leases for existing locations, or failure to effectively manage the profitability of our existing fleet of retail stores, could have an adverse effect on our operating results and financial condition. +Additionally, the economic environment may make it difficult to determine the fair market rent of real estate properties domestically and internationally. This could impact the quality of our decisions to exercise lease options at previously negotiated rents and to renew expiring leases at negotiated rents. Any adverse effect on the quality of these decisions could impact our ability to retain real estate locations adequate to meet our targets or efficiently manage the profitability of our existing fleet of stores, which could have an adverse effect on our operating results and financial condition. +The success of our business depends, in part, on high-quality employees, including key personnel as well as our ability to maintain our workplace culture and values. +Our success depends in part on the continued service of high-quality employees, including key executive officers and personnel. The loss of the services of key individuals, or any negative perception with respect to these individuals, or our workplace culture or values, could harm our business. Our success also depends on our ability to recruit, retain and engage our personnel sufficiently, both to maintain our current business and to execute our strategic initiatives. Competition for employees in our industry is intense and we may not be successful in attracting and retaining such personnel. Changes to our current and future office environments or adoption of a new work model that expects employees to work on-site for a specified number of days with some flexibility to work remotely on other days, may not meet the needs or expectations of our employees or may not be perceived as favorable compared to other companies' policies, which could negatively impact our ability to attract, hire and retain our employees. In addition, shifts in U.S. immigration policy could negatively impact our ability to attract, hire and retain highly skilled employees who are from outside the United States. W e also believe that our corporate culture has been a key driver of our success, and we have invested substantial time and resources in building, maintaining and evolving our culture. Any failure to preserve and evolve our culture could negatively affect our future success, including our ability to retain and recruit employees. +Our business operations and financial performance could be adversely affected by changes in our relationship with our workforce or changes to United States or foreign employment regulations. +We have significant exposure to changes in domestic and foreign laws governing our relationships with our workforce, including wage and hour laws and regulations, fair labor standards, minimum wage requirements, overtime pay, unemployment tax rates, workers' compensation rates, citizenship requirements and payroll taxes, which could have a direct impact on our operating costs. A significant increase in minimum wage or overtime rates in countries where we have workforce could have a significant impact on our operating costs and may require that we relocate those operations or take other steps to mitigate such increases, all of which may cause us to incur additional costs. There is also a risk of potential claims that we have violated laws related to discrimination and harassment, health and safety, wage and hour laws, criminal activity, personal injury and other claims. In addition, if there were a significant increase in the number of members of our workforce who are members of labor organizations or become parties to collective bargaining agreements, we could be vulnerable to a strike, work stoppage or other labor action, which could have an adverse effect on our business. +Risks Related to Operating a Global Business +Our international operations involve inherent risks which could result in harm to our business. +Virtually all of our athletic footwear and apparel is manufactured outside of the United States, and the majority of our products are sold outside of the United States. Accordingly, we are subject to the risks generally associated with global trade and doing business abroad, which include foreign laws and regulations, varying consumer preferences across geographic regions, political tensions, unrest, disruptions or delays in cross-border shipments and changes in economic conditions in countries in which our products are manufactured or where we sell products. This includes, for example, the effect of Brexit, including implementation of the legal and regulatory framework that applies to the United Kingdom and its relationship with the European Union and other countries, as well as new and proposed changes affecting tax laws and trade policy in the United States and elsewhere as further described below under “We could be subject to changes in tax rates, adoption of new tax laws, additional tax liabilities or increased volatility in our effective tax rate” and “Changes to U.S. or other countries' trade policies and tariff and import/export regulations or our failure to comply with such regulations may have a material adverse effect on our reputation, business, financial condition and results of operations.” Changes in the U.S. presidential administration's import and export policies, including trade restrictions, increased tariffs or quotas, embargoes, safeguards or customs restrictions, could require us to change the way we conduct business and adversely affect our results of operations. +In addition, disease outbreaks, including the recent COVID-19 pandemic, terrorist acts and military conflict have increased the risks of doing business abroad. These factors, among others, could affect our ability to manufacture products or procure +2021 FORM 10-K 18 +Table of Contents +materials, our ability to import products, our ability to sell products in international markets and our cost of doing business. If any of these or other factors make the conduct of business in a particular country undesirable or impractical, our business could be adversely affected. In addition, many of our imported products are subject to duties, tariffs or quotas that affect the cost and quantity of various types of goods imported into the United States and other countries. Any country in which our products are produced or sold may eliminate, adjust or impose new quotas, duties, tariffs, safeguard measures, anti-dumping duties, cargo restrictions to prevent terrorism, restrictions on the transfer of currency, climate change legislation, product safety regulations or other charges or restrictions, any of which could have an adverse effect on our results of operations and financial condition. +Furthermore, we are subject to the U.S. Foreign Corrupt Practices Act as well as the anti-corruption laws of other countries in which we operate. Although we implement policies and procedures designed to promote compliance with these laws, our employees, contractors, suppliers and agents, as well as those companies to which we outsource certain of our business operations, may take actions in violation of our policies. Any such violation could result in sanctions or other penalties and have an adverse effect on our business, reputation and operating results. +Our products are subject to risks associated with overseas sourcing, manufacturing and financing. +The principal materials used in our apparel products — natural and synthetic fabrics and threads, specialized performance fabrics designed to efficiently wick moisture away from the body, retain heat or repel rain and/or snow as well as plastic and metal hardware — are available in countries where our manufacturing takes place. The principal materials used in our footwear products — natural and synthetic rubber, plastic compounds, foam cushioning materials, natural and synthetic leather, natural and synthetic fabrics and threads, nylon, canvas and polyurethane films — are also locally available to manufacturers. Both our apparel and footwear products are dependent upon the ability of our independent contract manufacturers to locate, train, employ and retain adequate personnel. NIKE contractors and suppliers buy raw materials and are subject to wage rates and other labor standards that are oftentimes regulated by the governments of the countries in which our products are manufactured. +There could be a significant disruption in the supply of fabrics or raw materials from current sources or, in the event of a disruption, our contract manufacturers might not be able to locate alternative suppliers of materials of comparable quality at an acceptable price or at all. Further, our independent contract manufacturers have experienced and may continue to experience in the future, unexpected increases in work wages or other changes in labor standards, whether government mandated or otherwise, and increases in compliance costs due to governmental regulation concerning certain metals, fabrics or raw materials used in the manufacturing of our products. In addition, we cannot be certain that our unaffiliated manufacturers will be able to fill our orders in a timely manner. If we experience significant increases in demand, or reductions in the availability of materials, or need to replace an existing manufacturer, there can be no assurance additional supplies of fabrics or raw materials or additional manufacturing capacity will be available when required on terms acceptable to us, or at all, or that any supplier or manufacturer would allocate sufficient capacity to us in order to meet our requirements. In addition, even if we are able to expand existing or find new manufacturing or sources of materials, we may encounter delays in production and added costs as a result of the time it takes to train suppliers and manufacturers in our methods, products, quality control standards and labor, health and safety standards. Any delays, interruption or increased costs in labor or wages, or the supply of materials or manufacture of our products could have an adverse effect on our ability to meet retail customer and consumer demand for our products and result in lower revenues and net income both in the short- and long-term. +Because independent manufacturers make a majority of our products outside of our principal sales markets, our products must be transported by third parties over large geographic distances. Delays in the shipment or delivery of our products due to the availability of transportation, work stoppages, port strikes, infrastructure congestion or other factors, and costs and delays associated with consolidating or transitioning between manufacturers, could adversely impact our financial performance. In addition, manufacturing delays or unexpected demand for our products may require us to use faster, but more expensive, transportation methods such as air freight, which could adversely affect our profit margins. The cost of oil is a significant component in manufacturing and transportation costs, so increases in the price of petroleum products can adversely affect our profit margins. Changes in U.S. trade policies, including to import tariffs and existing trade policies and agreements, could also have a significant impact on our activities in foreign jurisdictions, and could adversely affect our reputation or results of operations. +Our success depends on our global distribution facilities. +We distribute our products to customers directly from the factory and through distribution centers located throughout the world. Our ability to meet customer expectations, manage inventory, complete sales and achieve objectives for operating efficiencies and growth, particularly in emerging markets, depends on the proper operation of our distribution facilities, the development or expansion of additional distribution capabilities and the timely performance of services by third parties (including those involved in shipping product to and from our distribution facilities). Our distribution facilities have in the past and could be interrupted by information technology problems, disasters such as earthquakes or fires or outbreaks of disease or government actions taken to mitigate their spread. Any significant failure in our distribution facilities could result in an adverse effect on our business. We maintain business interruption insurance, but it may not adequately protect us from adverse effects caused by significant disruptions in our distribution facilities. +2021 FORM 10-K 19 +Table of Contents +Legal, Regulatory, and Compliance Risks +We are subject to a complex array of laws and regulations and litigation and other legal and regulatory proceedings, which could have an adverse effect on our business, financial condition and results of operations. +As a multinational corporation with operations and distribution channels throughout the world, we are subject to and must comply with extensive laws and regulations in the United States and other jurisdictions in which we have operations and distribution channels. If we or our employees, agents, suppliers, and other partners fail to comply with any of these laws or regulations, such failure could subject us to fines, sanctions or other penalties that could negatively affect our reputation, business, financial condition and results of operations. Furthermore, laws, regulations and policies and the interpretation of such, can conflict among jurisdictions and compliance in one jurisdiction may result in legal or reputational risks in another jurisdiction. We are involved in various types of claims, lawsuits, regulatory proceedings and government investigations relating to our business, our products and the actions of our employees and representatives, including contractual and employment relationships, product liability, antitrust, trademark rights and a variety of other matters. It is not possible to predict with certainty the outcome of any such legal or regulatory proceedings or investigations, and we could in the future incur judgments, fines or penalties, or enter into settlements of lawsuits and claims that could have a material adverse effect on our business, financial condition and results of operations and negatively impact our reputation. The global nature of our business means legal and compliance risks, such as anti-bribery, anti-corruption, fraud, trade, environmental, competition, privacy and other regulatory matters, will continue to exist and additional legal proceedings and other contingencies will arise from time to time, which could adversely affect us. In addition, the adoption of new laws or regulations, or changes in the interpretation of existing laws or regulations, may result in significant unanticipated legal and reputational risks. Any current or future legal or regulatory proceedings could divert management's attention from our operations and result in substantial legal fees. +Changes to U.S. or other countries' trade policies and tariff and import/export regulations or our failure to comply with such regulations may have a material adverse effect on our reputation, business, financial condition and results of operations. +Changes in U.S. or international social, political, regulatory and economic conditions could impact our business, reputation, financial condition and results of operations. In particular, political and economic instability, geopolitical conflicts, political unrest, civil strife, terrorist activity, acts of war, public corruption, expropriation, nationalism and other economic or political uncertainties in the United States or internationally could interrupt and negatively affect the sale of our products or other business operations. Any negative sentiment toward the United States as a result of any such changes could also adversely affect our business. +In addition, changes in laws and policies governing foreign trade, manufacturing, development and investment in the territories or countries where we currently sell our products or conduct our business could adversely affect our business. U.S. presidential administrations have instituted or proposed changes in trade policies that include the negotiation or termination of trade agreements, the imposition of higher tariffs on imports into the U.S., economic sanctions on individuals, corporations or countries, and other government regulations affecting trade between the U.S. and other countries where we conduct our business. It may be time-consuming and expensive for us to alter our business operations in order to adapt to or comply with any such changes. +Changes or proposed changes in U.S. or other countries' trade policies may result in restrictions and economic disincentives on international trade. Tariffs and other changes in U.S. trade policy have in the past and could in the future trigger retaliatory actions by affected countries, and certain foreign governments have instituted or are considering imposing retaliatory measures on certain U.S. goods. Further, any emerging protectionist or nationalist trends either in the United States or in other countries could affect the trade environment. The Company, similar to many other multinational corporations, does a significant amount of business that would be impacted by changes to the trade policies of the United States and foreign countries (including governmental action related to tariffs, international trade agreements, or economic sanctions). Such changes have the potential to adversely impact the U.S. economy or certain sectors thereof or the economy of another country in which we conduct operations, our industry and the global demand for our products, and as a result, could have a material adverse effect on our business, financial condition and results of operations. +Failure to adequately protect or enforce our intellectual property rights could adversely affect our business. +We periodically discover counterfeit reproductions of our products or products that otherwise infringe our intellectual property rights. If we are unsuccessful in enforcing our intellectual property rights, continued sales of these products could adversely affect our sales and our brand and could result in a shift of consumer preference away from our products. +The actions we take to establish and protect our intellectual property rights may not be adequate to prevent imitation of our products by others. We also may be unable to prevent others from seeking to block sales of our products as violations of proprietary rights. +We may be subject to liability if third parties successfully claim we infringe their intellectual property rights. Defending infringement claims could be expensive and time-consuming and might result in our entering into costly license agreements. We also may be subject to significant damages or injunctions against development, manufacturing, use, importation and/or sale of certain products. +2021 FORM 10-K 20 +Table of Contents +We take various actions to prevent the unauthorized use and/or disclosure of our confidential information and intellectual property rights. These actions include contractual measures such as entering into non-disclosure and non-compete agreements and agreements relating to our collaborations with third parties and providing confidential information awareness training. Our controls and efforts to prevent unauthorized use and/or disclosure of confidential information and intellectual property rights might not always be effective. For example, confidential information related to business strategy, innovations, new technologies, mergers and acquisitions, unpublished financial results or personal data could be prematurely, inadvertently, or improperly used and/or disclosed, resulting in a loss of reputation, loss of intellectual property rights, a decline in our stock price and/or a negative impact on our market position, and could lead to damages, fines, penalties or injunctions. +In addition, the laws of certain countries may not protect or allow enforcement of intellectual property rights to the same extent as the laws of the United States. We may face significant expenses and liability in connection with the protection of our intellectual property rights, including outside the United States, and if we are unable to successfully protect our rights or resolve intellectual property conflicts with others, our business or financial condition may be adversely affected. +We are subject to data security and privacy risks that could negatively affect our results, operations or reputation. +In addition to our own sensitive and proprietary business information, we handle transactional and personal information about our wholesale customers and consumers and users of our digital experiences, which include online distribution channels and product engagement, adaptive products and personal fitness applications. Hackers and data thieves are increasingly sophisticated and operate social engineering, such as phishing, and large-scale, complex automated attacks that can evade detection for long periods of time. Any breach of our or our service providers' networks, or other vendor systems, may result in the loss of confidential business and financial data, misappropriation of our consumers', users' or employees' personal information or a disruption of our business. Any of these outcomes could have a material adverse effect on our business, including unwanted media attention, impairment of our consumer and customer relationships, damage to our reputation; resulting in lost sales and consumers, fines, lawsuits, or significant legal and remediation expenses. We also may need to expend significant resources to protect against, respond to and/or redress problems caused by any breach. +In addition, we must comply with increasingly complex and rigorous, and sometimes conflicting, regulatory standards enacted to protect business and personal data in the United States, Europe and elsewhere. For example, the European Union adopted the General Data Protection Regulation (the “GDPR”), which became effective on May 25, 2018; and California passed the California Consumer Privacy Act (the "CCPA") which became effective on January 1, 2020, and additional jurisdictions are considering proposing or adopting similar regulations. These laws impose additional obligations on companies regarding the handling of personal data and provide certain individual privacy rights to persons whose data is stored. Compliance with existing, proposed and recently enacted laws (including implementation of the privacy and process enhancements called for under GDPR and CCPA) and regulations can be costly and time consuming, and any failure to comply with these regulatory standards could subject us to legal and reputational risks. Misuse of or failure to secure personal information could also result in violation of data privacy laws and regulations, proceedings against the Company by governmental entities or others, imposition of fines by governmental authorities and damage to our reputation and credibility and could have a negative impact on revenues and profits. +We could be subject to changes in tax rates, adoption of new tax laws, additional tax liabilities or increased volatility in our effective tax rate. +We earn a substantial portion of our income in foreign countries and, as such, we are subject to the tax laws in the United States and numerous foreign jurisdictions. Current economic and political conditions make tax laws and regulations, or their interpretation and application, in any jurisdiction subject to significant change. +Proposals to reform U.S. and foreign tax laws could significantly impact how U.S. multinational corporations are taxed on foreign earnings and could increase the U.S. corporate tax rate. Although we cannot predict whether or in what form these proposals will pass, several of the proposals considered, if enacted into law, could have an adverse impact on our effective tax rate, income tax expense and cash flows. +Portions of our operations are subject to a reduced tax rate or are under various tax holidays. We also utilize tax rulings and other agreements to obtain certainty in treatment of certain tax matters. These holidays expire from time to time and may be extended when certain conditions are met, or terminated if certain conditions are not met. The impact of any changes in conditions would be the loss of certainty in treatment thus potentially impacting our effective income tax rate. For example, in January 2019, the European Commission opened a formal investigation to examine whether the Netherlands has breached State Aid rules when granting certain tax rulings to the Company. If this matter is adversely resolved, the Netherlands may be required to assess additional amounts with respect to current and prior periods and the Company's Netherlands income taxes in the future could increase. +We are also subject to the examination of our tax returns by the United States Internal Revenue Service (“IRS”) and other tax authorities. We regularly assess the likelihood of an adverse outcome resulting from these examinations to determine the adequacy of its provision for income taxes. Although we believe our tax provisions are adequate, the final determination of tax audits and any related disputes could be materially different from our historical income tax provisions and accruals. The results of audits or related disputes could have an adverse effect on our financial statements for the period or periods for which the +2021 FORM 10-K 21 +Table of Contents +applicable final determinations are made. For example, we and our subsidiaries are also engaged in a number of intercompany transactions across multiple tax jurisdictions. Although we believe we have clearly reflected the economics of these transactions and the proper local transfer pricing documentation is in place, tax authorities may propose and sustain adjustments that could result in changes that may impact our mix of earnings in countries with differing statutory tax rates. +Failure of our contractors or our licensees' contractors to comply with our code of conduct, local laws and other standards could harm our business. +We work with hundreds of contractors outside of the United States to manufacture our products, and we also have license agreements that permit independent parties to manufacture or contract for the manufacture of products using our intellectual property. We require the contractors that directly manufacture our products and our licensees that make products using our intellectual property (including, indirectly, their contract manufacturers) to comply with a code of conduct and other environmental, human rights, health and safety standards for the benefit of workers. We also require our contract manufacturers and the contractors of our licensees to comply with applicable standards for product safety. Notwithstanding their contractual obligations, from time to time contractors may not comply with such standards or applicable local law or our licensees may fail to enforce such standards or applicable local law on their contractors. If one or more of our direct or indirect contractors violates or fails to comply with, or is accused of violating or failing to comply with, such standards and laws, this could harm our reputation or result in a product recall and, as a result, could have an adverse effect on our sales and financial condition. Negative publicity regarding production methods, alleged unethical or illegal practices or workplace or related conditions of any of our suppliers, manufacturers or licensees could adversely affect our brand image and sales, force us to locate alternative suppliers, manufacturers or licenses or result in the imposition of additional regulations, including new or additional quotas, tariffs, sanctions, product safety regulations or other regulatory measures, by governmental authorities. +Risks Related to Our Securities, Investments and Liquidity +Our financial results may be adversely affected if substantial investments in businesses and operations fail to produce expected returns. +From time to time, we may invest in technology, business infrastructure, new businesses or capabilities, product offering and manufacturing innovation and expansion of existing businesses, such as our NIKE Direct operations, which require substantial cash investments and management attention. We believe cost-effective investments are essential to business growth and profitability; however, significant investments are subject to typical risks and uncertainties inherent in developing a new business or expanding an existing business. The failure of any significant investment to provide expected returns or profitability could have a material adverse effect on our financial results and divert management attention from more profitable business operations. See also “ Our NIKE Direct operations have required and will continue to require a substantial investment and commitment of resources and are subject to numerous risks and uncertainties .” +The sale of a large number of shares of common stock by our principal stockholder could depress the market price of our common stock. +As of June 30, 2021, Swoosh, LLC beneficially owned approximately 77% of our Class A Common Stock. If, on June 30, 2021, all of these shares were converted into Class B Common Stock, the commensurate ownership percentage of our Class B Common Stock would be approximately 15%. The shares are available for resale, subject to the requirements of the U.S. securities laws and the terms of the limited liability company agreement governing Swoosh, LLC. The sale or prospect of a sale of a substantial number of these shares could have an adverse effect on the market price of our common stock. Swoosh, LLC was formed by Philip H. Knight, our Chairman Emeritus, to hold the majority of his shares of Class A Common Stock. Swoosh, LLC is controlled by Mr. Knight's son and NIKE director, Travis Knight. +Changes in our credit ratings or macroeconomic conditions may affect our liquidity, increasing borrowing costs and limiting our financing options. +Our long-term debt is currently rated Investment Grade by Standard & Poor's and Moody's Investors Service. If our credit ratings are lowered, borrowing costs for our existing facilities or for future long-term debt or short-term credit facilities may increase and our financing options, including our access to credit or capital markets, could be adversely affected. We may also be subject to restrictive covenants that would reduce our flexibility to, among other things, incur additional indebtedness, make restricted payments, pledge assets as security, make investments, loans, advances, guarantees and acquisitions, undergo fundamental changes and enter into transactions with affiliates. Failure to comply with such covenants could result in a default, and as a result, the commitments of our lenders under our credit agreements may be terminated and the maturity of amounts owed may be accelerated. In addition, macroeconomic conditions, such as increased volatility or disruption in the credit markets, could adversely affect our ability to refinance existing debt. +If our internal controls are ineffective, our operating results could be adversely affected. +Our internal control over financial reporting may not prevent or detect misstatements because of its inherent limitations, including the possibility of human error, the circumvention or overriding of controls or fraud. Even effective internal controls can provide only reasonable assurance with respect to the preparation and fair presentation of financial statements. If we fail to maintain the adequacy of our internal controls, including any failure to implement required new or improved controls, or if we experience +2021 FORM 10-K 22 +Table of Contents +difficulties in their implementation, our business and operating results could be harmed and we could fail to meet our financial reporting obligations. +If our estimates or judgments relating to our critical accounting policies prove to be incorrect, our operating results could be adversely affected. +The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. We base our estimates on historical experience and on various other assumptions we believe to be reasonable under the circumstances, as provided in “Management's Discussion and Analysis of Financial Condition and Results of Operations.” The results of these estimates form the basis for making judgments about the carrying values of assets, liabilities and equity, and the amount of revenues and expenses that are not readily apparent from other sources. Significant assumptions and estimates used in preparing our consolidated financial statements include those related to revenue recognition, inventory reserves, contingent payments under endorsement contracts, accounting for property, plant and equipment and definite-lived assets, hedge accounting for derivatives, income taxes and other contingencies. Our operating results may be adversely affected if our assumptions change or if actual circumstances differ from those in our assumptions, which could cause our operating results to fall below the expectations of securities analysts and investors, resulting in a decline in the price of our Class B Common Stock. +Anti-takeover provisions may impair an acquisition of the Company or reduce the price of our common stock. +There are provisions within our articles of incorporation and Oregon law intended to protect shareholder interests by providing the Board of Directors a means to attempt to deny coercive takeover attempts or to negotiate with a potential acquirer in order to obtain more favorable terms. Such provisions include a control share acquisition statute, a freeze-out statute, two classes of stock that vote separately on certain issues, and the fact that holders of Class A Common Stock elect three-quarters of the Board of Directors rounded down to the next whole number. However, such provisions could discourage, delay or prevent an unsolicited merger, acquisition or other change in control of our company that some shareholders might believe to be in their best interests or in which shareholders might receive a premium for their common stock over the prevailing market price. These provisions could also discourage proxy contests for control of the Company. +We may fail to meet market expectations, which could cause the price of our stock to decline. +Our Class B Common Stock is traded publicly, and at any given time various securities analysts follow our financial results and issue reports on us. These reports include information about our historical financial results as well as analysts' opinions of our future performance, which may, in part, be based upon any guidance we have provided. Analysts' estimates are often different from our estimates or expectations. If our operating results are below the estimates or expectations of public market analysts and investors, our stock price could decline. In the past, securities class action litigation has been brought against NIKE and other companies following a decline in the market price of their securities. If our stock price is volatile for any reason, we may become involved in this type of litigation in the future. Any litigation could result in reputational damage, substantial costs and a diversion of management's attention and resources needed to successfully run our business. +2021 FORM 10-K 23 +Table of Contents +ITEM 1B. UNRESOLVED STAFF COMMENTS +None. +ITEM 2. PROPERTIES +The following is a summary of principal properties owned or leased by NIKE: +The NIKE World Campus, owned by NIKE and located near Beaverton, Oregon, USA, is an approximately 400-acre site consisting of over 40 buildings which, together with adjacent leased properties, functions as our world headquarters and is occupied by approximately 11,700 employees engaged in management, research, design, development, marketing, finance and other administrative functions serving nearly all of our segments. We lease a similar, but smaller, administrative facility in Hilversum, the Netherlands, which serves as the headquarters for our Europe, Middle East & Africa geography and management of certain brand functions for our non-U.S. operations. We also lease an office complex in Shanghai, China, our headquarters for our Greater China geography, occupied by employees focused on implementing our wholesale, NIKE Direct and merchandising strategies in the region, among other functions. +In the United States, NIKE has seven significant distribution centers. Four are located in Memphis, Tennessee, two of which are owned and two of which are leased. Two other distribution centers, one located in Indianapolis, Indiana and one located in Dayton, Tennessee, are leased and operated by third-party logistics providers. One distribution center for Converse is located in Ontario, California, which is leased. NIKE has a number of distribution facilities outside the United States, some of which are leased and operated by third-party logistics providers. The most significant distribution facilities outside the United States are located in Laakdal, Belgium; Taicang, China; Tomisato, Japan and Incheon, Korea, all of which we own, as well as in Suzhou, China, which is leased and operated by a third-party logistics provider. +Air Manufacturing Innovation manufactures cushioning components used in footwear at NIKE-owned and leased facilities located near Beaverton, Oregon, and in Dong Nai Province, Vietnam, as well as at NIKE-owned facilities in St. Charles, Missouri. +Aside from the principal properties described above, we lease many offices worldwide for sales and administrative purposes. We lease approximately 1,043 retail stores worldwide, which primarily consist of factory stores. See “United States Market” and “International Markets” for additional information regarding our retail stores. Our leases expire at various dates through the fiscal year 2043. +ITEM 3. LEGAL PROCEEDINGS +There are no material pending legal proceedings, other than ordinary routine litigation incidental to our business, to which we are a party or of which any of our property is the subject. +ITEM 4. MINE SAFETY DISCLOSURES +Not applicable. +2021 FORM 10-K 24 +Table of Contents +PART II +ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES +NIKE's Class B Common Stock is listed on the New York Stock Exchange and trades under the symbol NKE. At July 9, 2021, there were 22,745 holders of record of NIKE's Class B Common Stock and 14 holders of record of NIKE's Class A Common Stock. These figures do not include beneficial owners who hold shares in nominee name. The Class A Common Stock is not publicly traded, but each share is convertible upon request of the holder into one share of Class B Common Stock. Refer to our Consolidated Statements of Shareholders' Equity for dividends declared on the Class A and Class B Common Stock. +In June 2018, the Board of Directors approved a four-year, $15 billion share repurchase program. During the fourth quarter of fiscal 2020, to enhance our liquidity position in response to COVID-19, we elected to temporarily suspend share repurchases under our existing share repurchase program. The existing program remained authorized by the Board of Directors and during the fourth quarter of fiscal 2021, we began repurchasing shares under the program. As of May 31, 2021, the Company had repurchased 50.0 million shares at an average price of $93.33 per share for a total approximate cost of $4.7 billion. +All share repurchases were made under NIKE's publicly announced program, and there are no other programs under which the Company repurchases shares. The following table presents a summary of share repurchases made during the quarter ended May 31, 2021: +PERIOD TOTAL NUMBER OF SHARES PURCHASED AVERAGE PRICE +PAID PER SHARE APPROXIMATE DOLLAR +VALUE OF SHARES THAT +MAY YET BE PURCHASED +UNDER THE PLANS +OR PROGRAMS +(IN MILLIONS) +March 1 — March 31, 2021 — $ — $ 10,981 +April 1 — April 30, 2021 1,658,744 $ 130.82 $ 10,764 +May 1 — May 31, 2021 3,208,713 $ 134.94 $ 10,331 +4,867,457 $ 133.54 +2021 FORM 10-K 25 +Table of Contents +PERFORMANCE GRAPH +The following graph demonstrates a five-year comparison of cumulative total returns for NIKE's Class B Common Stock; the Standard & Poor's 500 Stock Index; the Standard & Poor's Apparel, Accessories & Luxury Goods Index; and the Dow Jones U.S. Footwear Index. The graph assumes an investment of $100 on May 31, 2016, in each of the indices and our Class B Common Stock. Each of the indices assumes that all dividends were reinvested on the day of issuance. +COMPARISON OF 5-YEAR CUMULATIVE TOTAL RETURN AMONG NIKE, INC.; S&P 500 INDEX; THE DOW JONES U.S. FOOTWEAR INDEX; AND S&P APPAREL, ACCESSORIES & LUXURY GOODS INDEX +The Dow Jones U.S. Footwear Index consists of NIKE, Deckers Outdoor Corporation and Skechers U.S.A., Inc. Because NIKE is part of the Dow Jones U.S. Footwear Index, the price and returns of NIKE stock have a substantial effect on this index. The Standard & Poor's Apparel, Accessories & Luxury Goods Index consists of Hanesbrands Inc., PVH Corporation, Ralph Lauren Corporation, Tapestry, Inc., Under Armour, Inc. and V.F. Corporation. The Dow Jones U.S. Footwear Index and the Standard & Poor's Apparel, Accessories & Luxury Goods Index include companies in two major lines of business in which the Company competes. The indices do not encompass all of the Company's competitors, nor all product categories and lines of business in which the Company is engaged. +The stock performance shown on the performance graph above is not necessarily indicative of future performance. The Company will not make or endorse any predictions as to future stock performance. +The performance graph above is being furnished solely to accompany this Report pursuant to Item 201(e) of Regulation S-K, is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing. +2021 FORM 10-K 26 +Table of Contents +ITEM 6. SELECTED FINANCIAL DATA +Not applicable. +2021 FORM 10-K 27 +Table of Contents +ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS +NIKE designs, develops, markets and sells athletic footwear, apparel, equipment, accessories and services worldwide. We are the largest seller of athletic footwear and apparel in the world. We sell our products through NIKE-owned retail stores and through digital platforms (which we refer to collectively as our “NIKE Direct” operations), to retail accounts and to a mix of independent distributors, licensees and sales representatives in virtually all countries around the world. Our goal is to deliver value to our shareholders by building a profitable global portfolio of branded footwear, apparel, equipment and accessories businesses. Our strategy is to achieve long-term revenue growth by creating innovative, “must-have” products, building deep personal consumer connections with our brands and delivering compelling consumer experiences through digital platforms and at retail. +Since fiscal 2018, through the Consumer Direct Offense and our Triple Double strategy, we have focused on doubling the impact of innovation, increasing our speed and agility to market and growing our direct connections with consumers. In June 2020, we announced a new digitally empowered phase of the Consumer Direct Offense strategy: Consumer Direct Acceleration. This strategic acceleration will focus on three specific areas. First, creating the marketplace of the future through more premium, consistent and seamless consumer experiences that more closely align with what consumers want and need. This strategy will lead with NIKE Digital and our owned stores, as well as through select strategic partners who share our marketplace vision. Second, we will align our product creation and category organizations around a new consumer construct focused on Men’s, Women’s and Kids'. This approach is intended to allow us to create product that better meets individual consumer needs, including more specialization of our category approach, while re-aligning and simplifying our offense to accelerate our largest growth opportunities. In particular, we expect to reinvest in our Women’s and Kids’ businesses and also simplify our operating model across the remainder of the Company to optimize effectiveness. Third, we will unify investments in data and analytics, demand sensing, insight gathering, inventory management and other areas against an end-to-end technology foundation to accelerate our digital transformation. We believe this unified approach will accelerate growth and unlock more efficiency for our business, while driving speed and responsiveness as we serve consumers globally. As such, our new financial goals through fiscal 2025 are outlined below: +• High single-digit to low double-digit revenue growth; +• Gross margin rate in the high 40s by fiscal 2025; +• Earnings before interest and taxes as a percent of revenues ("EBIT Margin") in the high teens by fiscal 2025; +• Mid to high teens diluted earnings per share growth; +• Exceeding low 30% range rate of return on invested capital (ROIC); and +• Annual capital expenditures at roughly 3% of Revenues. +As a result of our strategic acceleration, management announced on July 22, 2020, a series of leadership and operating model changes to streamline and speed up our execution. These changes resulted in a net reduction of our global workforce and d uring fiscal 2021, we incurred pre-tax charges of $ 294 million, which relate to employee termination costs and, to a lesser extent, stock-based compensation expense. All related actions are now substantially complete, and w e expect future annual wage-related savings will be reinvested to execute against this next phase of our strategy. For more information related to our organizational realignment and related costs, see Note 21 — Restructuring within the accompanying Notes to the Consolidated Financial Statements. +COVID-19 UPDATE +Throughout fiscal 2021, the COVID-19 pandemic impacted our business results and operations globally. Our business and wholesale partners experienced temporary store closures and stores operating on reduced hours, as a result of mandatory lockdowns across our North America, EMEA and APLA geographies. Additionally, disruption in the global supply chain due to container shortages, transportation delays and U.S. port congestion interrupted the flow of our inventory. Despite the disruption caused by the pandemic, we achieved record Revenues for fiscal 2021, which increased 19% to $44.5 billion, compared to the prior fiscal year, with gross margin expansion of 140 basis points. We ended the fiscal year with Inventories down 7% compared to May 31, 2020, and our liquidity position remains strong with $13.5 billion of Cash and equivalents and Short-term investments, an increase of $4.7 billion compared to May 31, 2020. +Our NIKE Direct business fueled our growth throughout the year as we navigated the pandemic, leveraging our digital platforms with our store footprint to connect directly with the consumer. NIKE Brand digital revenues grew 60% on a currency-neutral basis, with strong double-digit growth across each of our geographies. Despite temporary store closures throughout the year, due to COVID-19 safety-related measures, we experienced a 4% increase in comparable store sales, driven by growth in Greater China and North America, partially offset by declines in EMEA and APLA. As of July 15, 2021, approximately 99% of our owned stores were open with some operating on reduced hours. +2021 FORM 10-K 28 +Table of Contents +We continue to monitor the rapidly evolving situation, as well as guidance from international and domestic authorities, including federal, state and local public health authorities and may take additional actions based on their recommendations. In these circumstances, there may be developments outside our control requiring us to adjust our operating plan. There remains risk that COVID-19 could have material adverse impacts on our future revenue growth as well as our overall profitability and may lead to higher than normal inventory levels in various markets, adverse impacts on the global supply chain, revised payment terms with certain of our wholesale customers, higher sales-related reserves, factory cancellation costs and a volatile effective tax rate driven by changes in the mix of earnings across our jurisdictions. +FISCAL 2021 OVERVIEW +In fiscal 2021, NIKE, Inc. achieved record Revenues which increased 19% to $44.5 billion. The NIKE Brand, which represents over 90% of NIKE, Inc. Revenues, experienced growth of 19%, up 17% on a currency-neutral basis, driven by increases across all geographies. NIKE Direct grew 30% on a currency-neutral basis, driven by 60% growth in digital, with all geographies growing strong double digits, while wholesale revenues grew 10%. Revenues for Converse increased 19% and 16%, on a reported and currency-neutral basis, respecti vely, led by strong double-digit growth in digital. +Income (loss) before income taxes increased 131% for fiscal 2021, primarily due to higher revenues, gross margin expansion and selling and administrative expense leverage. NIKE, Inc. gross margin increased 140 basis points primarily due to annualizing the impacts of COVID-19 including lower factory cancellation charges, lower inventory obsolescence reserves as well as the favorable rate impact of fixed supply chain costs on a higher volume of wholesale shipments. The increase in gross margin also reflects higher full-price product margins across wholesale and NIKE Direct. Selling and administrative expense decreased due to lower Demand creation expense, partially offset by higher Operating overhead expense. Demand creation expense decreased primarily due to lower marketing and advertising expenses for our brand events and retail operations, as well as lower sports marketing expenses as sporting events were postponed due to COVID-19. These decreases were partially offset by higher digital marketing investments. Operating overhead expense increased primarily due to an increase in strategic technology investments, higher NIKE Direct variable costs and $255 million in restructuring-related costs, partially offset by lower bad debt expense and travel and related expenses. ROIC as of May 31, 2021, was 48.8% compared to 21.5% as of May 31, 2020. ROIC is considered a non-GAAP financial measure, see "Use of Non-GAAP Financial Measures" for further information. +During fiscal 2020, we entered into definitive agreements to sell our NIKE Brand businesses in Brazil, Argentina, Chile and Uruguay and to shift to a distributor operating model. During fiscal 2021, the transaction with Grupo SBF S.A. to purchase substantially all of our NIKE Brand operations in Brazil closed. Additionally, during the third quarter of fiscal 2021, we mutually agreed with Grupo Axo to terminate the sale and purchase agreement for the transition of NIKE’s businesses in Argentina, Chile and Uruguay to a distributor partnership. However, as we remain committed to selling the legal entities in all three countries and granting distribution rights to third-party distributors, the assets and liabilities of the entities have remained classified as held-for-sale on our Consolidated Balance Sheets as of May 31, 2021. For more information related to our planned distributor partnership transition within APLA, see Note 20 — Acquisitions and Divestitures within the accompanying Notes to the Consolidated Financial Statements. In future quarters, as we shift from a wholesale and direct to consumer operating model to a distributor operating model within these countries, we expect consolidated NIKE, Inc. and APLA revenue growth will be reduced due to differences in commercial terms. However, we expect the future operating model to have a favorable impact on our overall profitability as we reduce selling and administrative expenses, as well as lessen exposure to foreign exchange rate volatility. +While foreign currency markets remain volatile, in part due to geopolitical dynamics which may lead to a stronger U.S. Dollar, we continue to see opportunities to drive future growth and profitability. We remain committed to effectively managing our business and mitigating financial market risks to achieve our financial goals over the long-term by executing against the operational strategies outlined above. +For discussion related to the results of operations and changes in financial condition for fiscal 2020 compared to fiscal 2019 refer to Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in our fiscal 2020 Form 10-K, which was filed with the United States Securities and Exchange Commission on July 24, 2020. +USE OF NON-GAAP FINANCIAL MEASURES +Throughout this Annual Report on Form 10-K, we discuss non-GAAP financial measures, including references to wholesale equivalent revenues, currency-neutral revenues, Total NIKE Brand earnings before interest and taxes (EBIT) and Total NIKE, Inc. EBIT, as well as EBIT Margin and ROIC, which should be considered in addition to, and not in lieu of, the financial measures calculated and presented in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). References to wholesale equivalent revenues are intended to provide context as to the total size of our NIKE Brand market footprint if we had no NIKE Direct operations. NIKE Brand wholesale equivalent revenues consist of (1) sales to external wholesale customers and (2) internal sales from our wholesale operations to our NIKE Direct operations, which are charged at prices comparable to those charged to external wholesale customers. Additionally, currency-neutral revenues are calculated using actual exchange rates in use during the comparative prior year period to enhance the visibility of the underlying business trends, excluding the impact of translation arising from foreign currency exchange rate fluctuations. EBIT is calculated as Net Income before Interest expense (income), net and Income tax expense in the Consolidated Statements of Income. EBIT Margin +2021 FORM 10-K 29 +Table of Contents +is calculated as EBIT divided by total NIKE Inc. Revenues. ROIC represents a performance measure that management believes is useful information in understanding the Company's ability to effectively manage invested capital, see the table below for how the Company calculates this measure. +Management uses these non-GAAP financial measures when evaluating the Company's performance, including when making financial and operating decisions. Additionally, management believes these non-GAAP financial measures provide investors with additional financial information that should be considered when assessing our underlying business performance and trends. However, references to wholesale equivalent revenues, currency-neutral revenues, ROIC and EBIT should not be considered in isolation or as a substitute for other financial measures calculated and presented in accordance with U.S. GAAP and may not be comparable to similarly titled non-GAAP measures used by other companies. +Our ROIC calculation as of May 31, 2021 and 2020 is as follows: +FOR THE TRAILING FOUR QUARTERS ENDED +(Dollars in millions) MAY 31, 2021 MAY 31, 2020 +Numerator +Net income $ 5,727 $ 2,539 +Add: Interest expense (income), net 262 89 +Add: Income tax expense 934 348 +Earnings before interest and taxes 6,923 2,976 +Income tax adjustment (1) +(970) (352) +Earnings before interest and after taxes $ 5,953 $ 2,624 +AVERAGE FOR THE TRAILING FIVE QUARTERS ENDED +MAY 31, 2021 MAY 31, 2020 +Denominator +Total debt (2),(3) +$ 12,890 $ 8,022 +Add: Shareholders' equity 10,523 8,938 +Less: Cash and equivalents and Short-term investments 11,217 4,756 +Total invested capital $ 12,196 $ 12,204 +RETURN ON INVESTED CAPITAL 48.8 % 21.5 % +(1) Equals Earnings before interest and taxes multiplied by the effective tax rate as of the respective quarter end. +(2) Total debt includes the following: 1) Current portion of long-term debt, 2) Notes Payable, 3) Current portion of operating lease liabilities, 4) Long-term debt and 5) Operating lease liabilities. +(3) The Company adopted Accounting Standards Codification No. 842, Leases, on June 1, 2019. For comparability, total debt for each quarter prior to adoption includes approximately $3.2 billion, which represents the current and long-term portion of the Company's operating lease liabilities as of June 1, 2019. +2021 FORM 10-K 30 +Table of Contents +RESULTS OF OPERATIONS +(Dollars in millions, except per share data) +FISCAL 2021 FISCAL 2020 % CHANGE FISCAL 2019 % CHANGE +Revenues $ 44,538 $ 37,403 19 % $ 39,117 -4 % +Cost of sales 24,576 21,162 16 % 21,643 -2 % +Gross profit 19,962 16,241 23 % 17,474 -7 % +Gross margin 44.8 % 43.4 % 44.7 % +Demand creation expense 3,114 3,592 -13 % 3,753 -4 % +Operating overhead expense 9,911 9,534 4 % 8,949 7 % +Total selling and administrative expense 13,025 13,126 -1 % 12,702 3 % +% of revenues 29.2 % 35.1 % 32.5 % +Interest expense (income), net 262 89 — 49 — +Other (income) expense, net 14 139 — (78) — +Income before income taxes 6,661 2,887 131 % 4,801 -40 % +Income tax expense 934 348 168 % 772 -55 % +Effective tax rate 14.0 % 12.1 % 16.1 % +NET INCOME $ 5,727 $ 2,539 126 % $ 4,029 -37 % +Diluted earnings per common share $ 3.56 $ 1.60 123 % $ 2.49 -36 % +2021 FORM 10-K 31 +Table of Contents +CONSOLIDATED OPERATING RESULTS +REVENUES +(Dollars in millions) +FISCAL 2021 FISCAL 2020 % CHANGE +% CHANGE EXCLUDING CURRENCY CHANGES (1) +FISCAL 2019 % CHANGE +% CHANGE EXCLUDING CURRENCY CHANGES (1) +NIKE, Inc. Revenues: +NIKE Brand Revenues by: +Footwear $ 28,021 $ 23,305 20 % 18 % $ 24,222 -4 % -2 % +Apparel 12,865 10,953 17 % 15 % 11,550 -5 % -3 % +Equipment 1,382 1,280 8 % 7 % 1,404 -9 % -6 % +Global Brand Divisions (2) +25 30 -17 % -17 % 42 -29 % -26 % +Total NIKE Brand Revenues 42,293 35,568 19 % 17 % 37,218 -4 % -2 % +Converse 2,205 1,846 19 % 16 % 1,906 -3 % -1 % +Corporate (3) +40 (11) — — (7) — — +TOTAL NIKE, INC. REVENUES $ 44,538 $ 37,403 19 % 17 % $ 39,117 -4 % -2 % +Supplemental NIKE Brand Revenues Details: +NIKE Brand Revenues by: +Sales to Wholesale Customers $ 25,898 $ 23,156 12 % 10 % $ 25,423 -9 % -7 % +Sales through NIKE Direct 16,370 12,382 32 % 30 % 11,753 5 % 8 % +Global Brand Divisions (2) +25 30 -17 % -17 % 42 -29 % -26 % +TOTAL NIKE BRAND REVENUES $ 42,293 $ 35,568 19 % 17 % $ 37,218 -4 % -2 % +NIKE Brand Revenues on a Wholesale Equivalent Basis: (1) +Sales to Wholesale Customers $ 25,898 $ 23,156 12 % 10 % $ 25,423 -9 % -7 % +Sales from our Wholesale Operations to NIKE Direct Operations 9,872 7,452 32 % 30 % 7,127 5 % 7 % +TOTAL NIKE BRAND WHOLESALE EQUIVALENT REVENUES $ 35,770 $ 30,608 17 % 15 % $ 32,550 -6 % -4 % +NIKE Brand Wholesale Equivalent Revenues by: (1) +Men's $ 18,883 $ 16,694 13 % 11 % $ 17,737 -6 % -4 % +Women's 8,555 6,999 22 % 20 % 7,380 -5 % -3 % +NIKE Kids' 5,884 5,033 17 % 15 % 5,283 -5 % -3 % +Others (4) +2,448 1,882 30 % 26 % 2,150 -12 % -10 % +TOTAL NIKE BRAND WHOLESALE EQUIVALENT REVENUES $ 35,770 $ 30,608 17 % 15 % $ 32,550 -6 % -4 % +NIKE Brand Wholesale Equivalent Revenues by: (1) +Running $ 3,987 $ 3,830 4 % 3 % $ 4,488 -15 % -12 % +NIKE Basketball 1,692 1,508 12 % 10 % 1,597 -6 % -4 % +Jordan Brand 4,711 3,609 31 % 28 % 3,138 15 % 16 % +Football (Soccer) 1,682 1,575 7 % 4 % 1,894 -17 % -14 % +Training 2,907 2,688 8 % 7 % 3,137 -14 % -13 % +Sportswear 15,053 12,285 23 % 20 % 12,442 -1 % 1 % +Others (5) +5,738 5,113 12 % 11 % 5,854 -13 % -10 % +TOTAL NIKE BRAND WHOLESALE EQUIVALENT REVENUES $ 35,770 $ 30,608 17 % 15 % $ 32,550 -6 % -4 % +(1) The percent change excluding currency changes and the presentation of wholesale equivalent revenues represent non-GAAP financial measures. See "Use of Non-GAAP Financial Measures" for further information. +(2) Global Brand Divisions revenues include NIKE Brand licensing and other miscellaneous revenues that are not part of a geographic operating segment. +(3) Corporate revenues primarily consist of foreign currency hedge gains and losses related to revenues generated by entities within the NIKE Brand geographic operating segments and Converse, but managed through our central foreign exchange risk management program. +(4) Others include all unisex products, equipment and other products not allocated to Men's, Women's and NIKE Kids', as well as certain adjustments that are not allocated to products designated by gender or age. +(5) Others include all other categories and certain adjustments that are not allocated at the category level. +2021 FORM 10-K 32 +Table of Contents +FISCAL 2021 NIKE BRAND REVENUE HIGHLIGHTS +The following tables present NIKE Brand revenues disaggregated by reportable operating segment, distribution channel and major product line: +FISCAL 2021 COMPARED TO FISCAL 2020 +On a currency-neutral basis, NIKE, Inc. Revenues increased 17% for fiscal 2021, driven by growth in both the NIKE Brand and Converse. Higher revenues in North America contributed approximately 7 percentage points to NIKE, Inc. Revenues, with EMEA and Greater China each contributing approximately 4 percentage points of growth and APLA and Converse each contributing approximately 1 percentage point of growth. +On a currency-neutral basis, NIKE Brand footwear revenues increased 18% for fiscal 2021, driven by growth in nearly all key categories, primarily Sportswear and the Jordan Brand. Unit sales of footwear increased 11%, while higher average selling price (ASP), on a wholesale equivalent basis, per pair contributed approximately 7 percentage points of footwear revenue growth. The increase in ASP was primarily due to higher full-price ASP, in part reflecting lower discounts, as well as higher NIKE Direct ASP and the favorable impact of growth in our NIKE Direct business. +Currency-neutral NIKE Brand apparel revenues increased 15% for fiscal 2021, due to growth in all key categories, primarily Sportswear, Football (Soccer) and the Jordan Brand. Unit sales of apparel increased 14%, while higher ASP per unit contributed approximately 1 percentage point of apparel revenue growth. The increase in ASP was primarily due to the favorable impact of growth in our NIKE Direct business, as well as higher NIKE Direct ASP, partially offset by lower full-price ASP. +On a reported basis, NIKE Direct revenues represented approximately 39% of our total NIKE Brand revenues for fiscal 2021 compared to 35% for fiscal 2020. Digital commerce sales were $9.1 billion for fiscal 2021 compared to $5.5 billion for fiscal 2020. On a currency-neutral basis, NIKE Direct revenues increased 30% for fiscal 2021, driven by strong digital commerce sales growth of 60%, comparable store sales growth of 4% and the addition of new stores. Comparable store sales, which exclude digital commerce sales, comprises revenues from NIKE-owned in-line and factory stores for which all three of the following requirements have been met: (1) the store has been open at least one year, (2) square footage has not changed by more than 15% within the past year and (3) the store has not been permanently repositioned within the past year. Comparable store sales includes revenues from stores that were temporarily closed during the period as a result of COVID-19. Comparable store sales represents a performance measure that we believe is useful information for management and investors in understanding the performance of our established NIKE-owned in-line and factory stores. Management considers this metric when making financial and operating decisions. The method of calculating comparable store sales varies across the retail industry. As a result, our calculation of this metric may not be comparable to similarly titled measures used by other companies. +On a currency-neutral basis, fiscal 2021 NIKE Brand Men's and Women's revenues increased 11% and 20%, respectively. Higher NIKE Brand Men's revenues were driven by growth in nearly all key categories, primarily Sportswear, the Jordan Brand and Football (Soccer). Higher NIKE Brand Women's revenues were driven by growth in all key categories, primarily Sportswear, the Jordan Brand, Training and Running. Revenues for our NIKE Kids' business increased 15%, due to growth primarily in the Jordan Brand and Football (Soccer). +2021 FORM 10-K 33 +Table of Contents +GROSS MARGIN +FISCAL 2021 COMPARED TO FISCAL 2020 +For fiscal 2021, our consolidated gross profit increased 23% to $19,962 million compared to $16,241 million for fiscal 2020, as the prior fiscal year was significantly impacted by lower shipments to our wholesale customers and store closures within our NIKE Direct operations due to COVID-19. Gross margin increased 140 basis points to 44.8% for fiscal 2021 compared to 43.4% for fiscal 2020 due to the following: +*Wholesale equivalent +Favorable NIKE Brand full-price product margins across both our wholesale and NIKE Direct businesses primarily reflect higher full-price ASP, net of discounts. Additionally, the favorable impact of growth in our higher margin NIKE Direct business, led by NIKE owned Digital, was more than offset by higher promotions in our factory stores during the first half of fiscal 2021 to reduce excess inventory as a result of COVID-19. Lower other costs are due to annualizing certain impacts of COVID-19 from fiscal 2020, including lower factory cancellation charges, lower inventory obsolescence reserves as well as the favorable rate impact of fixed supply chain costs on a higher volume of wholesale shipments. +TOTAL SELLING AND ADMINISTRATIVE EXPENSE +(Dollars in millions) +FISCAL 2021 FISCAL 2020 % CHANGE FISCAL 2019 % CHANGE +Demand creation expense (1) +$ 3,114 $ 3,592 -13 % $ 3,753 -4 % +Operating overhead expense 9,911 9,534 4 % 8,949 7 % +Total selling and administrative expense $ 13,025 $ 13,126 -1 % $ 12,702 3 % +% of revenues 29.2 % 35.1 % (590) bps 32.5 % 260 bps +(1) Demand creation expense consists of advertising and promotion costs, including costs of endorsement contracts, complimentary product, television, digital and print advertising and media costs, brand events and retail brand presentation. +FISCAL 2021 COMPARED TO FISCAL 2020 +Demand creation expense decreased 13% for fiscal 2021, due to lower marketing and advertising expenses for our brand events and retail operations, as well as lower sports marketing expense as sporting events were postponed due to COVID-19. This activity was partially offset by higher digital marketing investments. Changes in foreign currency exchange rates increased Demand creation expense by approximately 2 percentage points for fiscal 2021. +Operating overhead expense increased 4% for fiscal 2021, due to an increase in strategic technology investments, higher NIKE Direct variable costs, and approximately $255 million in restructuring-related costs, partially offset by lower bad debt expense and lower travel and related expenses. Changes in foreign currency exchange rates increased Operating overhead expense by approximately 1 percentage point for fiscal 2021. +OTHER (INCOME) EXPENSE, NET +(Dollars in millions) +FISCAL 2021 FISCAL 2020 FISCAL 2019 +Other (income) expense, net $ 14 $ 139 $ (78) +Other (income) expense, net comprises foreign currency conversion gains and losses from the remeasurement of monetary assets and liabilities denominated in non-functional currencies and the impact of certain foreign currency derivative instruments, as well as unusual or non-operating transactions that are outside the normal course of business. +2021 FORM 10-K 34 +Table of Contents +FISCAL 2021 COMPARED TO FISCAL 2020 +Other (income) expense, net decreased from $139 million of other expense, net in fiscal 2020 to $14 million of other expense, net in the current year, primarily due to the non-recurring impairment charge of $405 million incurred in the prior year associated with our planned, strategic distributor partnership transition within APLA, partially offset by a $241 million net detrimental change in foreign currency conversion gains and losses, including hedges. +For more information related to our distributor partnership transition within APLA, see Note 20 — Acquisitions and Divestitures within the accompanying Notes to the Consolidated Financial Statements. +We estimate the combination of the translation of foreign currency-denominated profits from our international businesses, and the year-over-year change in foreign currency-related gains and losses included in Other (income) expense, net had a favorable impact on our Income before income taxes of $19 million for fiscal 2021. +INCOME TAXES +FISCAL 2021 FISCAL 2020 % CHANGE FISCAL 2019 % CHANGE +Effective tax rate 14.0 % 12.1 % 190 bps 16.1 % (400) bps +FISCAL 2021 COMPARED TO FISCAL 2020 +Our effective tax rate was 14.0% for fiscal 2021, compared to 12.1% for fiscal 2020 due to a change in the proportion of earnings taxed in the U.S. related to the recovery from the impact of the COVID-19 pandemic and less favorable impacts from discrete items such as stock-based compensation. +OPERATING SEGMENTS +Our operating segments are evidence of the structure of the Company's internal organization. The NIKE Brand segments are defined by geographic regions for operations participating in NIKE Brand sales activity. +Each NIKE Brand geographic segment operates predominantly in one industry: the design, development, marketing and selling of athletic footwear, apparel and equipment. The Company's reportable operating segments for the NIKE Brand are: North America; Europe, Middle East & Africa (EMEA); Greater China; and Asia Pacific & Latin America (APLA), and include results for the NIKE and Jordan brands, with results for the Hurley brand, prior to its divestiture in fiscal 2020, included in North America. Refer to Note 20 — Acquisitions and Divestitures within the accompanying Notes to the Consolidated Financial Statements for additional information. The Company's NIKE Direct operations are managed within each geographic operating segment. Converse is also a reportable operating segment for the Company and operates predominately in one industry: the design, marketing, licensing and selling of athletic lifestyle sneakers, apparel and accessories. +As part of our centrally managed foreign exchange risk management program, standard foreign currency exchange rates are assigned twice per year to each NIKE Brand entity in our geographic operating segments and Converse. These rates are set approximately nine and twelve months in advance of the future selling seasons to which they relate (specifically, for each currency, one standard rate applies to the fall and holiday selling seasons and one standard rate applies to the spring and summer selling seasons) based on average market spot rates in the calendar month preceding the date they are established. Inventories and Cost of sales for geographic operating segments and Converse reflect the use of these standard rates to record non-functional currency product purchases into the entity's functional currency. Differences between assigned standard foreign currency exchange rates and actual market rates are included in Corporate, together with foreign currency hedge gains and losses generated from our centrally managed foreign exchange risk management program and other conversion gains and losses. +2021 FORM 10-K 35 +Table of Contents +The breakdown of Revenues is as follows: +(Dollars in millions) +FISCAL 2021 FISCAL 2020 % CHANGE +% CHANGE EXCLUDING CURRENCY CHANGES (1) +FISCAL 2019 % CHANGE +% CHANGE EXCLUDING CURRENCY CHANGES (1) +North America $ 17,179 $ 14,484 19 % 19 % $ 15,902 -9 % -9 % +Europe, Middle East & Africa 11,456 9,347 23 % 17 % 9,812 -5 % -1 % +Greater China 8,290 6,679 24 % 19 % 6,208 8 % 11 % +Asia Pacific & Latin America (2) +5,343 5,028 6 % 8 % 5,254 -4 % 1 % +Global Brand Divisions (3) +25 30 -17 % -17 % 42 -29 % -26 % +TOTAL NIKE BRAND 42,293 35,568 19 % 17 % 37,218 -4 % -2 % +Converse 2,205 1,846 19 % 16 % 1,906 -3 % -1 % +Corporate (4) +40 (11) — — (7) — — +TOTAL NIKE, INC. REVENUES $ 44,538 $ 37,403 19 % 17 % $ 39,117 -4 % -2 % +(1) The percent change excluding currency changes represents a non-GAAP financial measure. See "Use of Non-GAAP Financial Measures" for further information. +(2) Refer to Note 20 — Acquisitions and Divestitures within the accompanying Notes to the Consolidated Financial Statements for additional information on the transition of our NIKE Brand business in Brazil to a third-party distributor. +(3) Global Brand Divisions revenues include NIKE Brand licensing and other miscellaneous revenues that are not part of a geographic operating segment. +(4) Corporate revenues primarily consist of foreign currency hedge gains and losses related to revenues generated by entities within the NIKE Brand geographic operating segments and Converse, but managed through our central foreign exchange risk management program. +The primary financial measure used by the Company to evaluate performance of individual operating segments is EBIT, which represents Net income before Interest expense (income), net and Income tax expense in the Consolidated Statements of Income. As discussed in Note 17 — Operating Segments and Related Information in the accompanying Notes to the Consolidated Financial Statements, certain corporate costs are not included in EBIT of our operating segments. +The breakdown of earnings before interest and taxes is as follows: +(Dollars in millions) +FISCAL 2021 FISCAL 2020 % CHANGE FISCAL 2019 % CHANGE +North America $ 5,089 $ 2,899 76 % $ 3,925 -26 % +Europe, Middle East & Africa 2,435 1,541 58 % 1,995 -23 % +Greater China 3,243 2,490 30 % 2,376 5 % +Asia Pacific & Latin America 1,530 1,184 29 % 1,323 -11 % +Global Brand Divisions (3,656) (3,468) -5 % (3,262) -6 % +TOTAL NIKE BRAND (1) +$ 8,641 $ 4,646 86 % $ 6,357 -27 % +Converse 543 297 83 % 303 -2 % +Corporate +(2,261) (1,967) -15 % (1,810) -9 % +TOTAL NIKE, INC. EARNINGS BEFORE INTEREST AND TAXES (1) +$ 6,923 $ 2,976 133 % $ 4,850 -39 % +EBIT margin (1) +15.5 % 8.0 % 12.4 % +Interest expense (income), net 262 89 — 49 — +TOTAL NIKE, INC. INCOME BEFORE INCOME TAXES $ 6,661 $ 2,887 131 % $ 4,801 -40 % +(1) Total NIKE Brand EBIT, Total NIKE, Inc. EBIT and EBIT Margin, represent non-GAAP financial measures. See "Use of Non-GAAP Financial Measures" for further information. +2021 FORM 10-K 36 +Table of Contents +NORTH AMERICA +(Dollars in millions) +FISCAL 2021 FISCAL 2020 % CHANGE % CHANGE EXCLUDING CURRENCY CHANGES FISCAL 2019 % CHANGE % CHANGE EXCLUDING CURRENCY CHANGES +Revenues by: +Footwear $ 11,644 $ 9,329 25 % 25 % $ 10,045 -7 % -7 % +Apparel 5,028 4,639 8 % 8 % 5,260 -12 % -12 % +Equipment 507 516 -2 % -2 % 597 -14 % -14 % +TOTAL REVENUES $ 17,179 $ 14,484 19 % 19 % $ 15,902 -9 % -9 % +Revenues by: +Sales to Wholesale Customers $ 10,186 $ 9,371 9 % 9 % $ 10,875 -14 % -14 % +Sales through NIKE Direct 6,993 5,113 37 % 37 % 5,027 2 % 2 % +TOTAL REVENUES $ 17,179 $ 14,484 19 % 19 % $ 15,902 -9 % -9 % +EARNINGS BEFORE INTEREST AND TAXES $ 5,089 $ 2,899 76 % $ 3,925 -26 % +We believe there continues to be a meaningful shift in the way consumers shop for product and make purchasing decisions across each of our geographies. Consumers are demanding a constant flow of fresh and innovative product, and have an expectation for superior service and rapid delivery, all fueled by the shift toward digital and mono-brand experiences in NIKE Direct. We anticipate continued evolution within the retail landscape, driven by shifting consumer traffic patterns across digital and physical channels. Specifically in North America, we remain focused on building long-term momentum with our strategic wholesale customers, which offer a differentiated retail experience. Additionally, over the last three years we have significantly reduced the number of undifferentiated wholesale accounts. During fiscal 2021, we took further steps towards account and channel consolidation by reprioritizing product allocation to benefit NIKE Direct and our differentiated strategic wholesale customers. We expect that over the next two fiscal years, we will more aggressively accelerate these changes as we work to reprofile the shape of the marketplace and recapture wholesale revenue declines over time. +FISCAL 2021 COMPARED TO FISCAL 2020 +On a currency-neutral basis, North America revenues increased 19%, driven by growth in nearly all key categories, led by Sportswear and the Jordan Brand. NIKE Direct revenues increased 37%, driven by strong digital sales growth of 73%, comparable store sales growth of 5% and the addition of new stores. +Footwear revenues increased 25% on a currency-neutral basis due to higher revenues in several key categories, led by Sportswear and the Jordan Brand. Unit sales of footwear increased 17%, while higher ASP per pair contributed approximately 8 percentage points of footwear revenue growth. Higher ASP per pair was primarily due to higher NIKE Direct and full-price ASPs, in part reflecting lower-discounts, as well as the favorable impact of growth in our NIKE Direct business. +On a currency-neutral basis, apparel revenues increased 8% for fiscal 2021 driven by growth in all key categories, led by Sportswear. Unit sales of apparel increased 8%, while ASP per unit was flat, as the favorable impact of growth in our NIKE Direct business was offset by lower full-price ASP. +Reported EBIT increased 76% driven by higher revenues, lower selling and administrative expense as a percent of revenues and gross margin expansion. Gross margin increased approximately 430 basis points, primarily due to lower other costs, higher full-price ASP, reflecting lower discounts, the favorable impact of growth in our NIKE Direct business and lower product costs. The decrease in other costs was primarily due to annualizing the impacts of COVID-19 from fiscal 2020, including lower factory cancellation charges, lower inventory obsolescence reserves and the favorable rate impact of fixed supply chain costs on a higher volume of wholesale shipments. Selling and administrative expense decreased due to lower operating overhead and demand creation expense. Operating overhead expense decreased primarily as a result of lower bad debt and wage-related expenses, partially offset by higher NIKE Direct variable costs. The decrease in demand creation expense was primarily due to lower advertising and marketing expense for brand events and our retail operations, as well as lower sports marketing expense, partially offset by continued investments in digital marketing to support heightened digital demand. +2021 FORM 10-K 37 +Table of Contents +EUROPE, MIDDLE EAST & AFRICA +(Dollars in millions) +FISCAL 2021 FISCAL 2020 % CHANGE % CHANGE EXCLUDING CURRENCY CHANGES FISCAL 2019 % CHANGE % CHANGE EXCLUDING CURRENCY CHANGES +Revenues by: +Footwear $ 6,970 $ 5,892 18 % 13 % $ 6,293 -6 % -3 % +Apparel 3,996 3,053 31 % 25 % 3,087 -1 % 2 % +Equipment 490 402 22 % 19 % 432 -7 % -3 % +TOTAL REVENUES $ 11,456 $ 9,347 23 % 17 % $ 9,812 -5 % -1 % +Revenues by: +Sales to Wholesale Customers $ 7,812 $ 6,574 19 % 14 % $ 7,076 -7 % -4 % +Sales through NIKE Direct 3,644 2,773 31 % 25 % 2,736 1 % 5 % +TOTAL REVENUES $ 11,456 $ 9,347 23 % 17 % $ 9,812 -5 % -1 % +EARNINGS BEFORE INTEREST AND TAXES $ 2,435 $ 1,541 58 % $ 1,995 -23 % +FISCAL 2021 COMPARED TO FISCAL 2020 +On a currency-neutral basis, EMEA revenues for fiscal 2021 grew 17%, driven by higher revenues across nearly all territories, led by UK & Ireland and Central Europe, which grew 34% and 20%, respectively. Revenues increased in all key categories, led by Sportswear and the Jordan Brand. NIKE Direct revenues increased 25%, driven by strong digital sales growth of 67%, partially offset by a 10% decline in comparable store sales, primarily due to reduced physical retail traffic, in part resulting from temporary store closures and safety-related measures in response to COVID-19 . +Currency-neutral footwear revenues increased 13%, driven by higher revenues in nearly all key categories, led by Sportswear and the Jordan Brand. Unit sales of footwear increased 9% and higher ASP per pair contributed approximately 4 percentage points, resulting from higher full-price ASP and the favorable impact of growth in our NIKE Direct business. +Currency-neutral apparel revenues increased 25% due to growth in all key categories, led by Sportswear and Football (Soccer). Unit sales of apparel increased 26%, while lower ASP per unit reduced apparel revenues by approximately 1 percentage point. Lower ASP per unit was primarily due to a lower mix of NIKE Direct sales, partially offset by higher full-price ASP, in part reflecting lower discounts. +Reported EBIT increased 58% as higher revenues and lower selling and administrative expense more than offset a decline in gross margin. Gross margin decreased approximately 110 basis points primarily due to lower NIKE Direct margins and unfavorable changes in standard foreign currency exchange rates, which more than offset lower product costs and lower other costs. The decrease in other costs was primarily due to annualizing the impacts of COVID-19, including lower inventory obsolescence reserves, as well as the favorable rate impact of fixed supply chain costs on a higher volume of wholesale shipments. Selling and administrative expense decreased due to lower demand creation and operating overhead expense. The decrease in demand creation expense was primarily driven by lower retail brand presentation costs and lower sports marketing expense. Lower operating overhead expense was primarily due to lower bad debt and travel and related expenses, partially offset by higher NIKE Direct variable costs. +2021 FORM 10-K 38 +Table of Contents +GREATER CHINA +(Dollars in millions) +FISCAL 2021 FISCAL 2020 % CHANGE % CHANGE EXCLUDING CURRENCY CHANGES FISCAL 2019 % CHANGE % CHANGE EXCLUDING CURRENCY CHANGES +Revenues by: +Footwear $ 5,748 $ 4,635 24 % 19 % $ 4,262 9 % 12 % +Apparel 2,347 1,896 24 % 19 % 1,808 5 % 8 % +Equipment 195 148 32 % 26 % 138 7 % 11 % +TOTAL REVENUES $ 8,290 $ 6,679 24 % 19 % $ 6,208 8 % 11 % +Revenues by: +Sales to Wholesale Customers $ 4,513 $ 3,803 19 % 14 % $ 3,726 2 % 6 % +Sales through NIKE Direct 3,777 2,876 31 % 26 % 2,482 16 % 20 % +TOTAL REVENUES $ 8,290 $ 6,679 24 % 19 % $ 6,208 8 % 11 % +EARNINGS BEFORE INTEREST AND TAXES $ 3,243 $ 2,490 30 % $ 2,376 5 % +FISCAL 2021 COMPARED TO FISCAL 2020 +On a currency-neutral basis, Greater China revenues for fiscal 2021 increased 19%, driven by higher revenues in all key categories, led by Sportswear, the Jordan Brand and NIKE Basketball. NIKE Direct revenues increased 26%, driven by digital sales growth of 26%, comparable store sales growth of 22% and the addition of new stores. +Currency-neutral footwear revenues increased 19%, driven by growth in all key categories, led by Sportswear, the Jordan Brand and NIKE Basketball. Unit sales of footwear increased 20%, while lower ASP per pair reduced footwear revenues by approximately 1 percentage point, driven by an unfavorable full-price mix, partially offset by higher full-price ASP, due to lower discounts. +Currency-neutral apparel revenue growth of 19% was fueled by higher revenues in nearly all key categories, most notably Sportswear. Unit sales of apparel increased 18%, while higher ASP per unit contributed approximately 1 percentage point of apparel revenue growth. Higher ASP was driven by higher off-price ASP, partially offset by lower NIKE Direct ASP due to higher levels of promotion to liquidate excess inventory through our factory stores. +Reported EBIT increased 30% as higher revenues and lower selling and administrative expense more than offset a decline in gross margin. Gross margin decreased approximately 200 basis points primarily due to unfavorable changes in standard foreign currency exchange rates and higher product costs. Selling and administrative expense decreased due to lower demand creation expense, partially offset by higher operating overhead expense. Demand creation expense decreased primarily due to lower advertising and marketing, as well as digital marketing expenses. Growth in operating overhead expense was driven by higher investments within our NIKE Direct operations. +2021 FORM 10-K 39 +Table of Contents +ASIA PACIFIC & LATIN AMERICA +(Dollars in millions) +FISCAL 2021 FISCAL 2020 % CHANGE % CHANGE EXCLUDING CURRENCY CHANGES FISCAL 2019 % CHANGE % CHANGE EXCLUDING CURRENCY CHANGES +Revenues by: +Footwear $ 3,659 $ 3,449 6 % 8 % $ 3,622 -5 % 0 % +Apparel 1,494 1,365 9 % 10 % 1,395 -2 % 3 % +Equipment 190 214 -11 % -9 % 237 -10 % -4 % +TOTAL REVENUES $ 5,343 $ 5,028 6 % 8 % $ 5,254 -4 % 1 % +Revenues by: +Sales to Wholesale Customers $ 3,387 $ 3,408 -1 % 2 % $ 3,746 -9 % -4 % +Sales through NIKE Direct 1,956 1,620 21 % 22 % 1,508 7 % 12 % +TOTAL REVENUES $ 5,343 $ 5,028 6 % 8 % $ 5,254 -4 % 1 % +EARNINGS BEFORE INTEREST AND TAXES $ 1,530 $ 1,184 29 % $ 1,323 -11 % +As discussed previously, our NIKE Brand business in Brazil transitioned to a distributor operating model during the third quarter of fiscal 2021 and our NIKE Brand businesses in Argentina, Chile and Uruguay have remained classified as held-for-sale. The impacts of closing the Brazil transaction as well as entering into agreements to transition these entities in the prior year are included within Corporate and are not reflected in the APLA operating segment results. For more information see Note 20 — Acquisitions and Divestitures within the accompanying Notes to the Consolidated Financial Statements. +FISCAL 2021 COMPARED TO FISCAL 2020 +On a currency-neutral basis, APLA revenues increased 8% for fiscal 2021. The increase was due to higher revenues across most territories, led by a 15% increase in Japan, a 37% increase in Pacific, which includes Australia and New Zealand, and a 12% increase in Korea, partially offset by a decline in Latin Distributors of 48%. Additionally, the transition of our NIKE Brand business in Brazil to a third-party distributor operating model reduced APLA revenue growth by approximately 2 percentage points. Revenues increased in most key categories, led by Sportswear and the Jordan Brand. NIKE Direct revenues increased 22%, primarily fueled by strong digital sales growth of 73%, partially offset by comparable store sales declines of 4%, largely due to reduced physical retail traffic, in part resulting from safety-related measures in response to COVID-19 . +Currency-neutral footwear revenues increased 8% for fiscal 2021 due to higher revenues in several key categories, primarily the Jordan Brand and Sportswear. Unit sales of footwear decreased 5%, while higher ASP per pair contributed approximately 13 percentage points of footwear revenue growth, driven by higher full-price and NIKE Direct ASPs, in part reflecting inflationary conditions in our SOCO territory, which includes Argentina, Chile and Uruguay, as well as the favorable impact of growth in our NIKE Direct business. +Currency-neutral apparel revenues increased 10% for fiscal 2021 due to higher revenues in most key categories, led by Sportswear. Unit sales of apparel increased 5%, while higher ASP per unit contributed approximately 5 percentage points of apparel revenue growth. Higher ASP per unit was primarily driven by higher full-price ASP, in part reflecting inflationary conditions in our SOCO territory. +Reported EBIT increased 29% for fiscal 2021 driven by higher revenues, lower selling and administrative expense and gross margin expansion. Gross margin increased approximately 130 basis points as higher full-price ASP, net of discounts, in part reflecting inflationary conditions in our SOCO territory, and lower other costs, were partially offset by higher product costs, unfavorable standard foreign currency exchange rates and lower margin in our NIKE Direct business. The decrease in other costs was primarily due to annualizing the impacts of COVID-19, including lower factory cancellation charges and lower inventory obsolescence reserves. Selling and administrative expense decreased due to lower demand creation and operating overhead expense. The decrease in demand creation expense was primarily due to lower advertising and marketing expense, as well as a decline in sports marketing costs. Lower operating overhead expense was primarily due to lower bad debt and travel and related costs, partially offset by higher NIKE Direct variable costs. +2021 FORM 10-K 40 +Table of Contents +GLOBAL BRAND DIVISIONS +(Dollars in millions) +FISCAL 2021 FISCAL 2020 % CHANGE % CHANGE EXCLUDING CURRENCY CHANGES FISCAL 2019 % CHANGE % CHANGE EXCLUDING CURRENCY CHANGES +Revenues $ 25 $ 30 -17 % -17 % $ 42 -29 % -26 % +Earnings (Loss) Before Interest and Taxes $ (3,656) $ (3,468) -5 % $ (3,262) -6 % +Global Brand Divisions primarily represent demand creation and operating overhead expense, including product creation and design expenses that are centrally managed for the NIKE Brand, as well as costs associated with NIKE Direct global digital operations and enterprise technology. Global Brand Divisions revenues include NIKE Brand licensing and other miscellaneous revenues that are not part of a geographic operating segment. +FISCAL 2021 COMPARED TO FISCAL 2020 +Global Brand Divisions' loss before interest and taxes increased 5% for fiscal 2021 due to higher total selling and administrative expense, driven by higher operating overhead expense, partially offset by lower demand creation expense. The increase in operating overhead expense was primarily due to continued investments in digital capabilities, partially offset by lower travel and related expenses. Lower demand creation expense was primarily due to lower sports marketing costs. +CONVERSE +(Dollars in millions) +FISCAL 2021 FISCAL 2020 % CHANGE % CHANGE EXCLUDING CURRENCY CHANGES FISCAL 2019 % CHANGE % CHANGE EXCLUDING CURRENCY CHANGES +Revenues by: +Footwear $ 1,986 $ 1,642 21 % 17 % $ 1,658 -1 % 1 % +Apparel 104 89 17 % 13 % 118 -25 % -22 % +Equipment 29 25 16 % 14 % 24 4 % 8 % +Other (1) +86 90 -4 % -1 % 106 -15 % -14 % +TOTAL REVENUES $ 2,205 $ 1,846 19 % 16 % $ 1,906 -3 % -1 % +Revenues by: +Sales to Wholesale Customers $ 1,353 $ 1,154 17 % 13 % $ 1,247 -7 % -5 % +Sales through Direct to Consumer 766 602 27 % 24 % 553 9 % 11 % +Other (1) +86 90 -4 % -1 % 106 -15 % -14 % +TOTAL REVENUES $ 2,205 $ 1,846 19 % 16 % $ 1,906 -3 % -1 % +EARNINGS BEFORE INTEREST AND TAXES $ 543 $ 297 83 % $ 303 -2 % +(1) Other revenues consist of territories serviced by third-party licensees who pay royalties to Converse for the use of its registered trademarks and other intellectual property rights. We do not own the Converse trademarks in Japan and accordingly do not earn revenues in Japan. +FISCAL 2021 COMPARED TO FISCAL 2020 +On a currency-neutral basis, Converse revenues increased 16% for fiscal 2021 . The increase in revenues was driven by revenue growth across Western Europe, North America and Asia. Wholesale revenues increased 13%, driven primarily by growth in Western Europe and Asia, in part due to the impacts of COVID-19 in the prior year. Direct to consumer revenues increased 24%, driven by strong digital sales growth across North America and Western Europe. Combined unit sales within the wholesale and direct to consumer channels increased 9%, while ASP increased 8%, primarily due to growth in full-price sales, including through our digital channel. +Reported EBIT increased 83% , driven by higher revenues and lower selling and administrative expense. Gross margin was flat, as higher full-price ASP, net of discounts, and the favorable rate impact of fixed supply chain costs on a higher volume of wholesale shipments was offset by higher product costs and unfavorable changes in standard foreign currency exchange rates. Selling and administrative expense decreased due to lower operating overhead and demand creation expense. Operating overhead expense decreased primarily due to lower bad debt, travel and related costs and other administrative costs. Demand creation expense decreased as a result of lower advertising and marketing, as well as digital marketing expenses. +2021 FORM 10-K 41 +Table of Contents +CORPORATE +(Dollars in millions) +FISCAL 2021 FISCAL 2020 % CHANGE FISCAL 2019 % CHANGE +Revenues $ 40 $ (11) — $ (7) — +Earnings (Loss) Before Interest and Taxes $ (2,261) $ (1,967) -15 % $ (1,810) -9 % +Corporate revenues primarily consist of foreign currency hedge gains and losses related to revenues generated by entities within the NIKE Brand geographic operating segments and Converse, but managed through our central foreign exchange risk management program. +The Corporate loss before interest and taxes primarily consists of unallocated general and administrative expenses, including expenses associated with centrally managed departments; depreciation and amortization related to our corporate headquarters; unallocated insurance, benefit and compensation programs, including stock-based compensation; and certain foreign currency gains and losses. +In addition to the foreign currency gains and losses recognized in Corporate revenues, foreign currency results in Corporate include gains and losses resulting from the difference between actual foreign currency exchange rates and standard rates used to record non-functional currency denominated product purchases within the NIKE Brand geographic operating segments and Converse; related foreign currency hedge results; conversion gains and losses arising from remeasurement of monetary assets and liabilities in non-functional currencies; and certain other foreign currency derivative instruments. +FISCAL 2021 COMPARED TO FISCAL 2020 +Corporate's loss before interest and taxes increased $294 million during fiscal 2021, primarily due to the following: +• an unfavorable change in net foreign currency gains and losses of $241 million related to the remeasurement of monetary assets and liabilities denominated in non-functional currencies and the impact of certain foreign currency derivative instruments, reported as a component of consolidated Other (income) expense, net; +• a favorable change of $132 million related to the difference between actual foreign currency exchange rates and standard foreign currency exchange rates assigned to the NIKE Brand geographic operating segments and Converse, net of hedge gains and losses; these results are reported as a component of consolidated gross margin; and +• an unfavorable change of $185 million in part due to restructuring-related costs of $294 million associated with changes to our organizational model announced in July 2020, partially offset by the $405 million charge in the prior year related to our planned distributor transition within APLA. +For more information related to our distributor partnership transition within APLA, as well as more information related to our organizational realignment and related costs, refer to Note 20 — Acquisitions and Divestitures and Note 21 — Restructuring, respectively, within the accompanying Notes to the Consolidated Financial Statements. +FOREIGN CURRENCY EXPOSURES AND HEDGING PRACTICES +OVERVIEW +As a global company with significant operations outside the United States, in the normal course of business we are exposed to risk arising from changes in currency exchange rates. Our primary foreign currency exposures arise from the recording of transactions denominated in non-functional currencies and the translation of foreign currency denominated results of operations, financial position and cash flows into U.S. Dollars. +Our foreign exchange risk management program is intended to lessen both the positive and negative effects of currency fluctuations on our consolidated results of operations, financial position and cash flows. We manage global foreign exchange risk centrally on a portfolio basis to address those risks material to NIKE, Inc. We manage these exposures by taking advantage of natural offsets and currency correlations existing within the portfolio and, where practical and material, by hedging a portion of the remaining exposures using derivative instruments such as forward contracts and options. As described below, the implementation of the NIKE Trading Company (NTC) and our foreign currency adjustment program enhanced our ability to manage our foreign exchange risk by increasing the natural offsets and currency correlation benefits existing within our portfolio of foreign exchange exposures. Our hedging policy is designed to partially or entirely offset the impact of exchange rate changes on the underlying net exposures being hedged. Where exposures are hedged, our program has the effect of delaying the impact of exchange rate movements on our Consolidated Financial Statements; the length of the delay is dependent upon hedge horizons. We do not hold or issue derivative instruments for trading or speculative purposes. +Refer to Note 6 — Fair Value Measurements and Note 14 — Risk Management and Derivatives in the accompanying Notes to the Consolidated Financial Statements for additional description of outstanding derivatives at each reported period end. +2021 FORM 10-K 42 +Table of Contents +TRANSACTIONAL EXPOSURES +We conduct business in various currencies and have transactions which subject us to foreign currency risk. Our most significant transactional foreign currency exposures are: +• Product Costs — NIKE's product costs are exposed to fluctuations in foreign currencies in the following ways: +1. Product purchases denominated in currencies other than the functional currency of the transacting entity: +a. Certain NIKE entities purchase product from the NTC, a wholly-owned sourcing hub that buys NIKE branded products from third-party factories, predominantly in U.S. Dollars. The NTC, whose functional currency is the U.S. Dollar, then sells the products to NIKE entities in their respective functional currencies. NTC sales to a NIKE entity with a different functional currency results in a foreign currency exposure for the NTC. +b. Other NIKE entities purchase product directly from third-party factories in U.S. Dollars. These purchases generate a foreign currency exposure for those NIKE entities with a functional currency other than the U.S. Dollar. +In both purchasing scenarios, a weaker U.S. Dollar reduces inventory costs incurred by NIKE whereas a stronger U.S. Dollar increases its cost. +2. Factory input costs: NIKE operates a foreign currency adjustment program with certain factories. The program is designed to more effectively manage foreign currency risk by assuming certain of the factories' foreign currency exposures, some of which are natural offsets to our existing foreign currency exposures. Under this program, our payments to these factories are adjusted for rate fluctuations in the basket of currencies (“factory currency exposure index”) in which the labor, materials and overhead costs incurred by the factories in the production of NIKE branded products (“factory input costs”) are denominated. +For the currency within the factory currency exposure indices that is the local or functional currency of the factory, the currency rate fluctuation affecting the product cost is recorded within Inventories and is recognized in Cost of sales when the related product is sold to a third-party. All currencies within the indices, excluding the U.S. Dollar and the local or functional currency of the factory, are recognized as embedded derivative contracts and are recorded at fair value through Other (income) expense, net. Refer to Note 14 — Risk Management and Derivatives in the accompanying Notes to the Consolidated Financial Statements for additional detail. +As an offset to the impacts of the fluctuating U.S. Dollar on our non-functional currency denominated product purchases described above, a strengthening U.S. Dollar against the foreign currencies within the factory currency exposure indices reduces NIKE's U.S. Dollar inventory cost. Conversely, a weakening U.S. Dollar against the indexed foreign currencies increases our inventory cost. +• Non-Functional Currency Denominated External Sales — A portion of our NIKE Brand and Converse revenues associated with European operations are earned in currencies other than the Euro (e.g., the British Pound) but are recognized at a subsidiary that uses the Euro as its functional currency. These sales generate a foreign currency exposure. +• Other Costs — Non-functional currency denominated costs, such as endorsement contracts, also generate foreign currency risk, though to a lesser extent. In certain cases, the Company has entered into contractual agreements which have payments indexed to foreign currencies that create embedded derivative contracts recorded at fair value through Other (income) expense, net. Refer to Note 14 — Risk Management and Derivatives in the accompanying Notes to the Consolidated Financial Statements for additional detail. +• Non-Functional Currency Denominated Monetary Assets and Liabilities — Our global subsidiaries have various assets and liabilities, primarily receivables and payables, including intercompany receivables and payables, denominated in currencies other than their functional currencies. These balance sheet items are subject to remeasurement which may create fluctuations in Other (income) expense, net within our consolidated results of operations. +MANAGING TRANSACTIONAL EXPOSURES +Transactional exposures are managed on a portfolio basis within our foreign currency risk management program. We manage these exposures by taking advantage of natural offsets and currency correlations that exist within the portfolio and may also elect to use currency forward and option contracts to hedge the remaining effect of exchange rate fluctuations on probable forecasted future cash flows, including certain product cost exposures, non-functional currency denominated external sales and other costs described above. Generally, these are accounted for as cash flow hedges, except for hedges of the embedded derivative components of the product cost exposures and other contractual agreements. +2021 FORM 10-K 43 +Table of Contents +Certain currency forward contracts used to manage the foreign exchange exposure of non-functional currency denominated monetary assets and liabilities subject to remeasurement, and embedded derivative contracts are not formally designated as hedging instruments. Accordingly, changes in fair value of these instruments are recognized in Other (income) expense, net and are intended to offset the foreign currency impact of the remeasurement of the related non-functional currency denominated asset or liability or the embedded derivative contract being hedged. +TRANSLATIONAL EXPOSURES +Many of our foreign subsidiaries operate in functional currencies other than the U.S. Dollar. Fluctuations in currency exchange rates create volatility in our reported results as we are required to translate the balance sheets, operational results and cash flows of these subsidiaries into U.S. Dollars for consolidated reporting. The translation of foreign subsidiaries' non-U.S. Dollar denominated balance sheets into U.S. Dollars for consolidated reporting results in a cumulative translation adjustment to Accumulated other comprehensive income (loss) within Shareholders' equity. In the translation of our Consolidated Statements of Income, a weaker U.S. Dollar in relation to foreign functional currencies benefits our consolidated earnings whereas a stronger U.S. Dollar reduces our consolidated earnings. The impact of foreign exchange rate fluctuations on the translation of our consolidated Revenues was a benefit of approximately $893 million, a detriment of approximately $867 million and a detriment of approximately $1,236 million for the years ended May 31, 2021, 2020 and 2019, respectively. The impact of foreign exchange rate fluctuations on the translation of our Income before income taxes was a benefit of approximately $260 million, a detriment of approximately $212 million and a detriment of approximately $233 million for the years ended May 31, 2021, 2020 and 2019, respectively. +Management generally identifies hyper-inflationary markets as those markets whose cumulative inflation rate over a three-year period exceeds 100%. Management has concluded our Argentina subsidiary within our APLA operating segment is operating in a hyper-inflationary market. As a result, beginning in the second quarter of fiscal 2019, the functional currency of our Argentina subsidiary changed from the local currency to the U.S. Dollar. As of and for the period ended May 31, 2021, this change did not have a material impact on our results of operations or financial condition and we do not anticipate it will have a material impact in future periods based on current rates. +MANAGING TRANSLATIONAL EXPOSURES +To minimize the impact of translating foreign currency denominated revenues and expenses into U.S. Dollars for consolidated reporting, certain foreign subsidiaries use excess cash to purchase U.S. Dollar denominated available-for-sale investments. The variable future cash flows associated with the purchase and subsequent sale of these U.S. Dollar denominated investments at non-U.S. Dollar functional currency subsidiaries creates a foreign currency exposure that qualifies for hedge accounting under U.S. GAAP. We utilize forward contracts and/or options to mitigate the variability of the forecasted future purchases and sales of these U.S. Dollar investments. The combination of the purchase and sale of the U.S. Dollar investment and the hedging instrument has the effect of partially offsetting the year-over-year foreign currency translation impact on net earnings in the period the investments are sold. Hedges of the purchase of U.S. Dollar denominated available-for-sale investments are accounted for as cash flow hedges. +We estimate the combination of translation of foreign currency-denominated profits from our international businesses and the year-over-year change in foreign currency related gains and losses included in Other (income) expense, net had a favorable impact of approximately $19 million and unfavorable impacts of $91 million and $97 million on our Income before income taxes for the years ended May 31, 2021, 2020 and 2019, respectively. +NET INVESTMENTS IN FOREIGN SUBSIDIARIES +We are also exposed to the impact of foreign exchange fluctuations on our investments in wholly-owned foreign subsidiaries denominated in a currency other than the U.S. Dollar, which could adversely impact the U.S. Dollar value of these investments and therefore the value of future repatriated earnings. We have, in the past, hedged and may, in the future, hedge net investment positions in certain foreign subsidiaries to mitigate the effects of foreign exchange fluctuations on these net investments. These hedges are accounted for as net investment hedges in accordance with U.S. GAAP. There were no outstanding net investment hedges as of May 31, 2021 and 2020. There were no cash flows from net investment hedge settlements for the years ended May 31, 2021, 2020 and 2019. +2021 FORM 10-K 44 +Table of Contents +LIQUIDITY AND CAPITAL RESOURCES +CASH FLOW ACTIVITY +Cash provided (used) by operations was an inflow of $6,657 million for fiscal 2021 compared to $2,485 million for fiscal 2020. Net income, adjusted for non-cash items, generated $6,612 million of operating cash inflow for fiscal 2021 compared to $3,730 million for fiscal 2020. The increase primarily reflects the recovery of our business operations from the impact of COVID-19. The net change in working capital and other assets and liabilities resulted in an increase to Cash provided (used) by operations of $45 million for fiscal 2021, compared to a decrease of $1,245 million for fiscal 2020. The net change in working capital was impacted by a $2,361 million decrease in Inventories, driven by strong consumer demand as we return to healthy inventory levels across markets closed in the prior year due to COVID-19. An increase in Accounts Payable and Accrued Liabilities also contributed to the net change in working capital, primarily due to reduced spending in fiscal 2020 as a result of COVID-19. In addition, the net change in working capital was impacted by a $2,845 million increase in Accounts receivable, net, primarily driven by higher revenues in the fourth quarter of fiscal 2021. +Cash provided (used) by investing activities was an outflow of $3,800 million for fiscal 2021, compared to an outflow of $1,028 million for fiscal 2020, primarily driven by higher purchases of short-term investments. During fiscal 2021, the net change in investments (including sales, maturities and purchases) resulted in a cash outflow of $3,276 million compared to a cash inflow of $27 million in fiscal 2020. Additionally, during fiscal 2021, we continued investing in our infrastructure to support future growth, specifically focused around digital capabilities, our end-to-end technology foundation, our corporate facilities and improvements across our supply chain. In future periods, we expect to make annual capital expenditures of approximately 3% of annual revenues. +Cash provided (used) by financing activities was an outflow of $1,459 million for fiscal 2021 compared to an inflow of $2,491 million for fiscal 2020. This change was primarily due to the net proceeds from a $5,942 million corporate bond issuance in the fourth quarter of fiscal 2020, partially offset by lower share repurchases during fiscal 2021. +During the fourth quarter of fiscal 2020, to enhance our liquidity position in response to COVID-19, we elected to temporarily suspend share repurchases under our existing share repurchase program. The existing program remained authorized by the Board of Directors and during the fourth quarter of fiscal 2021, we began repurchasing shares under the program. In fiscal 2021, we purchased 4.9 million shares of NIKE's Class B Common Stock for $650 million (an average price of $133.54 per share) under the four-year, $15 billion share repurchase program approved by the Board of Directors in June 2018. As of May 31, 2021, we had repurchased 50.0 million shares at a cost of $4,669 million (an average price of $93.33 per share) under this program. We continue to expect funding of share repurchases will come from operating cash flows and excess cash. The timing and the amount of share repurchases will be dictated by our capital needs and stock market conditions. +CAPITAL RESOURCES +On July 23, 2019, we filed a shelf registration statement (the “Shelf”) with the U.S. Securities and Exchange Commission (SEC) which permits us to issue an unlimited amount of debt securities from time to time. The Shelf expires on July 23, 2022. +On August 16, 2019, we entered into a committed credit facility agreement with a syndicate of banks which provides for up to $2 billion of borrowings, with the option to increase borrowings up to $3 billion in total upon lender approval. The facility matures on August 16, 2024, with a one-year extension option prior to any anniversary of the closing date, provided that in no event shall the facility extend beyond August 16, 2026. This facility replaces the prior $2 billion credit facility agreement entered into on August 28, 2015, which would have matured August 28, 2020. On March 15, 2021, we entered into a committed credit facility agreement with a syndicate of banks which provides for up to $1 billion of borrowings, with the option to increase borrowings up to $1.5 billion in total upon lender approval. The facility matures on March 14, 2022, with a 364-day extension option up to 30 days prior to the existing termination date, provided that in no event shall the facility extend beyond March 13, 2023. This facility replaces the prior $2 billion credit facility agreement entered into on April 6, 2020, which would have matured on April 5, 2021. As of May 31, 2021 and 2020, no amounts were outstanding under our committed credit facilities. Refer to Note 7 — Short-Term Borrowings and Credit Lines for additional information. +We currently have long-term debt ratings of AA- and A1 from Standard and Poor's Corporation and Moody's Investor Services, respectively. As it relates to our committed credit facilities entered into on August 16, 2019 and March 15, 2021, if our long-term debt ratings were to decline, the facility fees and interest rates would increase. Conversely, if our long-term debt ratings were to improve, the facility fees and interest rates would decrease. Changes in our long-term debt ratings would not trigger acceleration of maturity of any then-outstanding borrowings or any future borrowings under the committed credit facilities. Under these facilities, we have agreed to various covenants. These covenants include limits on our disposal of assets and the amount of debt secured by liens we may incur. In the event we were to have any borrowings outstanding under these facilities, failed to meet any covenant and were unable to obtain a waiver from a majority of the banks in the syndicate, any borrowings would become +2021 FORM 10-K 45 +Table of Contents +immediately due and payable. As of May 31, 2021, we were in full compliance with each of these covenants and believe it is unlikely we will fail to meet any of these covenants in the foreseeable future. +Liquidity was also provided by our $3 billion commercial paper program, which we decreased from $4 billion in connection with the new credit facility agreement, entered into on March 15, 2021, as described above. During the fiscal year ended May 31, 2021, the maximum amount of commercial paper borrowings outstanding at any point was $248 million. No commercial paper was outstanding as of May 31, 2021. As of May 31, 2020, we had $248 million of commercial paper outstanding at a weighted average interest rate of 1.65%. +We may continue to issue commercial paper or other debt securities depending on general corporate needs. We currently have short-term debt ratings of A1+ and P1 from Standard and Poor's Corporation and Moody's Investor Services, respectively. +To date, we have not experienced difficulty accessing the credit markets; however, future volatility in the capital markets may increase costs associated with issuing commercial paper or other debt instruments or affect our ability to access those markets. +As of May 31, 2021, we had cash, cash equivalents and short-term investments totaling $13.5 billion, primarily consisting of commercial paper, corporate notes, deposits held at major banks, money market funds, U.S. government sponsored enterprise obligations, U.S. Treasury obligations and other investment grade fixed-income securities. Our fixed-income investments are exposed to both credit and interest rate risk. All of our investments are investment grade to minimize our credit risk. While individual securities have varying durations, as of May 31, 2021, the weighted-average days to maturity of our cash equivalents and short-term investments portfolio was 54 days. +We believe that existing cash, cash equivalents, short-term investments and cash generated by operations, together with access to external sources of funds as described above, will be sufficient to meet our domestic and foreign capital needs in the foreseeable future. +We utilize a variety of tax planning and financing strategies to manage our worldwide cash and deploy funds to locations where they are needed. We indefinitely reinvest a significant portion of our foreign earnings, and our current plans do not demonstrate a need to repatriate these earnings. Should we require additional capital in the United States, we may determine to repatriate indefinitely reinvested foreign funds or raise capital in the United States through debt. Given our existing structure, if we were to repatriate indefinitely reinvested foreign earnings, we would be required to accrue and pay withholding taxes in certain foreign jurisdictions. +OFF-BALANCE SHEET ARRANGEMENTS +In connection with various contracts and agreements, we routinely provide indemnification relating to the enforceability of intellectual property rights, coverage for legal issues that arise and other items where we are acting as the guarantor. Currently, we have several such agreements in place. Based on our historical experience and the estimated probability of future loss, we have determined that the fair value of such indemnification is not material to our financial position or results of operations. +CONTRACTUAL OBLIGATIONS +Our significant long-term contractual obligations as of May 31, 2021, and significant endorsement contracts, including related marketing commitments, entered into through the date of this report are as follows: +DESCRIPTION OF COMMITMENT CASH PAYMENTS DUE DURING THE YEAR ENDING MAY 31, +(Dollars in millions) +2022 2023 2024 2025 2026 THEREAFTER TOTAL +Operating Leases $ 534 $ 530 $ 490 $ 437 $ 357 $ 1,397 $ 3,745 +Long-Term Debt (1) +286 786 275 1,275 251 11,290 14,163 +Endorsement Contracts (2) +1,502 1,244 1,091 966 726 2,863 8,392 +Product Purchase Obligations (3) +6,448 — — — — — 6,448 +Other Purchase Obligations (4) +1,347 541 331 191 96 230 2,736 +Transition Tax Related to the Tax Cuts and Jobs Act (5) +86 86 161 215 268 — 816 +TOTAL $ 10,203 $ 3,187 $ 2,348 $ 3,084 $ 1,698 $ 15,780 $ 36,300 +(1) The cash payments due for long-term debt include estimated interest payments. Estimates of interest payments are based on outstanding principal amounts, applicable fixed interest rates or currently effective interest rates as of May 31, 2021 (if variable), timing of scheduled payments and the term of the debt obligations. +(2) The amounts listed for endorsement contracts represent approximate amounts of base compensation and minimum guaranteed royalty fees we are obligated to pay athlete, public figure, sport team and league endorsers of our products. Actual payments under some contracts may be higher than the amounts listed as these contracts provide for bonuses to be paid to the endorsers based upon athletic achievements and/or royalties on product sales in future periods. Actual payments under some contracts may also be lower as these contracts include provisions for reduced payments if athletic performance declines in future periods. +2021 FORM 10-K 46 +Table of Contents +In addition to the cash payments, we are obligated to furnish our endorsers with NIKE product for their use. It is not possible to determine how much we will spend on this product on an annual basis as the contracts generally do not stipulate a specific amount of cash to be spent on the product. The amount of product provided to the endorsers will depend on many factors, including general playing conditions, the number of sporting events in which they participate and our own decisions regarding product and marketing initiatives. In addition, the costs to design, develop, source and purchase the products furnished to the endorsers are incurred over a period of time and are not necessarily tracked separately from similar costs incurred for products sold to customers. +(3) We generally order product at least four to five months in advance of sale based primarily on advanced orders received from external wholesale customers and internal orders from our direct to consumer operations. The amounts listed for product purchase obligations represent agreements (including open purchase orders) to purchase products in the ordinary course of business that are enforceable and legally binding and specify all significant terms. In some cases, prices are subject to change throughout the production process. +(4) Other purchase obligations primarily include construction, service and marketing commitments, including marketing commitments associated with endorsement contracts, made in the ordinary course of business. The amounts represent the minimum payments required by legally binding contracts and agreements that specify all significant terms, and may include open purchase orders for non-product purchases. +(5) Represents the future cash payments due as part of the transition tax on deemed repatriation of undistributed earnings of foreign subsidiaries, which is reflected net of foreign tax credits we utilized. Refer to Part II, Item 8. Financial Statements and Supplementary Data, Note 9 - Income Taxes, in our fiscal 2020 Form 10-K, which was filed with the United States Securities and Exchange Commission on July 24, 2020 for additional information. +In addition to the above, we have long-term obligations for uncertain tax positions and various post-retirement benefits for which we are not able to reasonably estimate when cash payments will occur. Refer to Note 9 — Income Taxes and Note 13 — Benefit Plans in the accompanying Notes to the Consolidated Financial Statements for further information related to uncertain tax positions and post-retirement benefits, respectively. +We also have the following outstanding short-term debt obligations as of May 31, 2021. Refer to Note 7 — Short-Term Borrowings and Credit Lines in the accompanying Notes to the Consolidated Financial Statements for further description and interest rates related to the short-term debt obligations listed below. +(Dollars in millions) +MAY 31, 2021 +Notes payable, due at mutually agreed-upon dates within one year of issuance or on demand $ 2 +As of May 31, 2021, we had bank guarantees and letters of credit outstanding totaling $275 million, issued primarily for real estate agreements, self-insurance programs and other general business obligations. +NEW ACCOUNTING PRONOUNCEMENTS +Refer to Note 1 — Summary of Significant Accounting Policies in the accompanying Notes to the Consolidated Financial Statements for recently adopted accounting standards. +CRITICAL ACCOUNTING POLICIES +Our previous discussion and analysis of our financial condition and results of operations are based upon our Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. Note 1 — Summary of Significant Accounting Policies in the accompanying Notes to the Consolidated Financial Statements describes the significant accounting policies and methods used in the preparation of our Consolidated Financial Statements. +We believe the estimates, assumptions and judgments involved in the accounting policies described below have the greatest potential impact on our Consolidated Financial Statements, so we consider these to be our critical accounting policies and estimates. Management has reviewed and discussed these critical accounting policies with the Audit & Finance Committee of the Board of Directors. +These policies require that we make estimates in the preparation of our Consolidated Financial Statements as of a given date. Because of the uncertainty inherent in these matters, actual results could differ from the estimates we use in applying the critical accounting policies. Within the context of these critical accounting policies, we are not currently aware of any reasonably likely events or circumstances that would result in materially different amounts being reported. +REVENUE RECOGNITION +Beginning in fiscal 2019, we adopted Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606). Our revenue recognition policies under Topic 606 are described in the following paragraphs. +Revenue transactions associated with the sale of NIKE Brand footwear, apparel and equipment, as well as Converse products, comprise a single performance obligation, which consists of the sale of products to customers either through wholesale or direct to consumer channels. We satisfy the performance obligation and record revenues when transfer of control to the customer has occurred, based on the terms of sale. A customer is considered to have control once they are able to direct the use and receive +2021 FORM 10-K 47 +Table of Contents +substantially all of the benefits of the product. Control is transferred to wholesale customers upon shipment or upon receipt depending on the country of the sale and the agreement with the customer. Control transfers to retail store customers at the time of sale and to substantially all digital commerce customers upon shipment. The transaction price is determined based upon the invoiced sales price, less anticipated sales returns, discounts and miscellaneous claims from customers. Payment terms for wholesale transactions depend on the country of sale or agreement with the customer and payment is generally required within 90 days or less of shipment to or receipt by the wholesale customer. Payment is due at the time of sale for retail store and digital commerce transactions. +As part of our revenue recognition policy, consideration promised in our contracts with customers is variable due to anticipated reductions, such as sales returns, discounts and miscellaneous claims from customers. We estimate the most likely amount we will be entitled to receive and record an anticipated reduction against Revenues, with an offsetting increase to Accrued liabilities at the time revenues are recognized. The estimated cost of inventory for product returns is recorded in Prepaid expenses and other current assets on the Consolidated Balance Sheets. +The provision for anticipated sales returns consists of both contractual return rights and discretionary authorized returns. Provisions for post-invoice sales discounts consist of both contractual programs and discretionary discounts that are expected to be granted at a later date. +Estimates of discretionary authorized returns, discounts and claims are based on (1) historical rates, (2) specific identification of outstanding returns not yet received from customers and outstanding discounts and claims and (3) estimated returns, discounts and claims expected but not yet finalized with customers. Actual returns, discounts and claims in any future period are inherently uncertain and may differ from estimates recorded. If actual or expected future returns, discounts or claims were significantly different than reserves established, a reduction or increase to net revenues would be recorded in the period in which such determination was made. +Refer also to Note 1 — Summary of Significant Accounting Policies and Note 16 — Revenues for additional information in the accompanying Notes to the Consolidated Financial Statements. +INVENTORY RESERVES +We make ongoing estimates relating to the net realizable value of inventories based upon our assumptions about future demand and market conditions. If we estimate the net realizable value of our inventory is less than the cost of the inventory recorded on our books, we record a reserve equal to the difference between the cost of the inventory and the estimated net realizable value. This reserve is recorded as a charge to Cost of sales. If changes in market conditions result in reductions to the estimated net realizable value of our inventory below our previous estimate, we would increase our reserve in the period in which we made such a determination. +CONTINGENT PAYMENTS UNDER ENDORSEMENT CONTRACTS +A significant amount of our Demand creation expense relates to payments under endorsement contracts. In general, endorsement payments are expensed on a straight-line basis over the term of the contract. However, certain contract elements may be accounted for differently based upon the facts and circumstances of each individual contract. +Certain contracts provide for contingent payments to endorsers based upon specific achievements in their sports (e.g., winning a championship). We record demand creation expense for these amounts when the endorser achieves the specific goal. +Certain contracts provide for variable payments based upon endorsers maintaining a level of performance in their sport over an extended period of time (e.g., maintaining a specified ranking in a sport for a year). When we determine payments are probable, the amounts are reported in Demand creation expense ratably over the contract period based on our best estimate of the endorser's performance. In these instances, to the extent actual payments to the endorser differ from our estimate due to changes in the endorser's performance, adjustments to Demand creation expense may be recorded in a future period. +Certain contracts provide for royalty payments to endorsers based upon a predetermined percent of sales of particular products, which we record in Cost of sales as the related sales occur. For contracts containing minimum guaranteed royalty payments, we record the amount of any guaranteed payment in excess of that earned through sales of product within Demand creation expense. +PROPERTY, PLANT AND EQUIPMENT AND DEFINITE-LIVED ASSETS +We review the carrying value of long-lived assets or asset groups to be used in operations whenever events or changes in circumstances indicate the carrying amount of the assets might not be recoverable. Factors that would necessitate an impairment assessment include a significant adverse change in the extent or manner in which an asset is used, a significant adverse change in legal factors or the business climate that could affect the value of the asset or a significant decline in the observable market value of an asset, among others. If such facts indicate a potential impairment, we would assess the recoverability of an asset +2021 FORM 10-K 48 +Table of Contents +group by determining if the carrying value of the asset group exceeds the sum of the projected undiscounted cash flows expected to result from the use and eventual disposition of the assets over the remaining economic life of the primary asset in the asset group. If the recoverability test indicates the carrying value of the asset group is not recoverable, we will estimate the fair value of the asset group using appropriate valuation methodologies that would typically include an estimate of discounted cash flows. Any impairment would be measured as the difference between the asset group's carrying amount and its estimated fair value. +HEDGE ACCOUNTING FOR DERIVATIVES +We use derivative contracts to hedge certain anticipated foreign currency and interest rate transactions as well as certain non-functional currency monetary assets and liabilities. When the specific criteria to qualify for hedge accounting has been met, changes in the fair value of contracts hedging probable forecasted future cash flows are recorded in Accumulated other comprehensive income (loss), rather than Net income, until the underlying hedged transaction affects Net income. In most cases, this results in gains and losses on hedge derivatives being released from Accumulated other comprehensive income (loss) into Net income sometime after the maturity of the derivative. One of the criteria for this accounting treatment is that the notional value of these derivative contracts should not be in excess of the designated amount of anticipated transactions. By their very nature, our estimates of anticipated transactions may fluctuate over time and may ultimately vary from actual transactions. When the designated amount of anticipated or actual transactions decline below hedged levels, or if it is no longer probable a forecasted transaction will occur by the end of the originally specified time period or within an additional two-month period of time thereafter, we are required to reclassify the cumulative change in fair value of the over-hedged portion of the related hedge contract from Accumulated other comprehensive income (loss) to Other (income) expense, net during the quarter in which the decrease occurs. In rare circumstances, the additional period of time may exceed two months due to extenuating circumstances related to the nature of the forecasted transaction that are outside our control or influence. +INCOME TAXES +We are subject to taxation in the United States, as well as various state and foreign jurisdictions. The determination of our provision for income taxes requires significant judgment, the use of estimates and the interpretation and application of complex tax laws. On an interim basis, we estimate our effective tax rate for the full fiscal year. This estimated annual effective tax rate is then applied to the year-to-date Income before income taxes excluding infrequently occurring or unusual items, to determine the year-to-date Income tax expense. The income tax effects of infrequent or unusual items are recognized in the interim period in which they occur. As the fiscal year progresses, we continually refine our estimate based upon actual events and earnings by jurisdiction during the year. This continual estimation process periodically results in a change to our expected effective tax rate for the fiscal year. When this occurs, we adjust the income tax provision during the quarter in which the change in estimate occurs. +We record valuation allowances against our deferred tax assets, when necessary. Realization of deferred tax assets (such as net operating loss carry-forwards) is dependent on future taxable earnings and is therefore uncertain. At least quarterly, we assess the likelihood that our deferred tax asset balance will be recovered from future taxable income. To the extent we believe that recovery is not likely, we establish a valuation allowance against our net deferred tax asset, which increases our Income tax expense in the period when such determination is made. +We have not recorded withholding tax expense for foreign earnings we have determined to be indefinitely reinvested within certain of our foreign jurisdictions. The amount of earnings indefinitely reinvested offshore is due to the actual deployment of such earnings in our offshore operations and our expectations of the future cash needs of our U.S. and foreign entities. Withholding tax consequences are also a factor in determining the amount of foreign earnings to be indefinitely reinvested offshore. +We carefully review all factors that drive the ultimate disposition of foreign earnings determined to be reinvested offshore and apply stringent standards to overcome the presumption of repatriation. Despite this approach, because the determination is based on expected working capital and other capital needs in jurisdictions where the earnings are generated, the possibility exists that foreign earnings declared as indefinitely reinvested may be repatriated. For instance, the actual cash needs of our U.S. operations may exceed our current expectations, or the actual cash needs of our foreign entities may be less than our current expectations. This would result in additional withholding tax expense in the year we determined amounts were no longer indefinitely reinvested offshore. +On a quarterly basis, we evaluate the probability a tax position will be effectively sustained and the appropriateness of the amount recognized for uncertain tax positions based on factors including changes in facts or circumstances, changes in tax law, settled audit issues and new audit activity. Changes in our assessment may result in the recognition of a tax benefit or an additional charge to the tax provision in the period our assessment changes. We recognize interest and penalties related to income tax matters in Income tax expense. +Refer to Note 9 — Income Taxes in the accompanying Notes to the Consolidated Financial Statements for additional information. +2021 FORM 10-K 49 +Table of Contents +OTHER CONTINGENCIES +In the ordinary course of business, we are involved in legal proceedings regarding contractual and employment relationships, product liability claims, trademark rights and a variety of other matters. We record contingent liabilities resulting from claims against us when a loss is assessed to be probable and the amount of the loss is reasonably estimable. Assessing probability of loss and estimating probable losses requires analysis of multiple factors, including in some cases judgments about the potential actions of third-party claimants and courts. Recorded contingent liabilities are based on the best information available and actual losses in any future period are inherently uncertain. If future adjustments to estimated probable future losses or actual losses exceed our recorded liability for such claims, we would record additional charges during the period in which the actual loss or change in estimate occurred. In addition to contingent liabilities recorded for probable losses, we disclose contingent liabilities when there is a reasonable possibility the ultimate loss will materially exceed the recorded liability. While we cannot predict the outcome of pending legal matters with certainty, we do not believe any currently identified claim, proceeding or litigation, either individually or in aggregate, will have a material impact on our results of operations, financial position or cash flows. +2021 FORM 10-K 50 +Table of Contents +ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK +In the normal course of business and consistent with established policies and procedures, we employ a variety of financial instruments to manage exposure to fluctuations in the value of foreign currencies and interest rates. It is our policy to utilize these financial instruments only where necessary to finance our business and manage such exposures; we do not enter into these transactions for trading or speculative purposes. +We are exposed to foreign currency fluctuations, primarily as a result of our international sales, product sourcing and funding activities. Our foreign exchange risk management program is intended to lessen both the positive and negative effects of currency fluctuations on our consolidated results of operations, financial position and cash flows. We use forward and option contracts to hedge certain anticipated, but not yet firmly committed, transactions as well as certain firm commitments and the related receivables and payables, including third-party and intercompany transactions. We have, in the past, and may in the future, also use forward or options contracts to hedge our investment in the net assets of certain international subsidiaries to offset foreign currency translation adjustments related to our net investment in those subsidiaries. Where exposures are hedged, our program has the effect of delaying the impact of exchange rate movements on our Consolidated Financial Statements. +The timing for hedging exposures, as well as the type and duration of the hedge instruments employed, are guided by our hedging policies and determined based upon the nature of the exposure and prevailing market conditions. Typically, the Company may enter into hedge contracts starting up to 12 to 24 months in advance of the forecasted transaction and may place incremental hedges up to 100% of the exposure by the time the forecasted transaction occurs. The majority of derivatives outstanding as of May 31, 2021, are designated as foreign currency cash flow hedges, primarily for Euro/U.S. Dollar, British Pound/Euro, Chinese Yuan/U.S. Dollar and Japanese Yen/U.S. Dollar currency pairs. Refer to Note 14 — Risk Management and Derivatives in the accompanying Notes to the Consolidated Financial Statements for additional information. +Our earnings are also exposed to movements in short- and long-term market interest rates. Our objective in managing this interest rate exposure is to limit the impact of interest rate changes on earnings and cash flows and to reduce overall borrowing costs. To achieve these objectives, we maintain a mix of commercial paper, bank loans, and fixed-rate debt of varying maturities. +MARKET RISK MEASUREMENT +We monitor foreign exchange risk, interest rate risk and related derivatives using a variety of techniques including a review of market value, sensitivity analysis and Value-at-Risk (“VaR”). Our market-sensitive derivative and other financial instruments are foreign currency forward contracts, foreign currency option contracts, intercompany loans denominated in non-functional currencies and fixed interest rate U.S. Dollar denominated debt. +We use VaR to monitor the foreign exchange risk of our foreign currency forward and foreign currency option derivative instruments only. The VaR determines the maximum potential one-day loss in the fair value of these foreign exchange rate-sensitive financial instruments. The VaR model estimates assume normal market conditions and a 95% confidence level. There are various modeling techniques that can be used in the VaR computation. Our computations are based on interrelationships between currencies and interest rates (a “variance/co-variance” technique). These interrelationships are a function of foreign exchange currency market changes and interest rate changes over the preceding one-year period. The value of foreign currency options does not change on a one-to-one basis with changes in the underlying currency rate. We adjust the potential loss in option value for the estimated sensitivity (the “delta” and “gamma”) to changes in the underlying currency rate. This calculation reflects the impact of foreign currency rate fluctuations on the derivative instruments only and does not include the impact of such rate fluctuations on non-functional currency transactions (such as anticipated transactions, firm commitments, cash balances and accounts and loans receivable and payable), including those which are hedged by these instruments. +The VaR model is a risk analysis tool and does not purport to represent actual losses in fair value we will incur nor does it consider the potential effect of favorable changes in market rates. It also does not represent the full extent of the possible loss that may occur. Actual future gains and losses will differ from those estimated because of changes or differences in market rates and interrelationships, hedging instruments and hedge percentages, timing and other factors. +The estimated maximum one-day loss in fair value on our foreign currency sensitive derivative financial instruments, derived using the VaR model, was $92 million and $48 million as of May 31, 2021 and 2020, respectively. The VaR increased year-over-year as a result of an increase in foreign currency volatilities as of May 31, 2021. Such a hypothetical loss in the fair value of our derivatives would be offset by increases in the value of the underlying transactions being hedged. The average monthly change in the fair values of foreign currency forward and foreign currency option derivative instruments was $184 million and $126 million during fiscal 2021 and fiscal 2020, respectively. +2021 FORM 10-K 51 +Table of Contents +The instruments not included in the VaR are intercompany loans denominated in non-functional currencies and fixed interest rate U.S. Dollar denominated debt. Intercompany loans and related interest amounts are eliminated in consolidation. Furthermore, our non-functional currency intercompany loans are substantially hedged against foreign exchange risk through the use of forward contracts, which are included in the VaR calculation above. Therefore, we consider the interest rate and foreign currency market risks associated with our non-functional currency intercompany loans to be immaterial to our consolidated financial position, results of operations and cash flows. +Details of third-party debt are provided in the table below. The table presents principal cash flows and related weighted average interest rates by expected maturity dates. +EXPECTED MATURITY DATE YEAR ENDING MAY 31, +(Dollars in millions) +2022 2023 2024 2025 2026 THEREAFTER TOTAL FAIR VALUE +Interest Rate Risk +Long-term U.S. Dollar debt — Fixed rate +Principal payments $ — $ 500 $ — $ 1,000 $ — $ 8,000 $ 9,500 $ 10,275 +Average interest rate 0.0 % 2.3 % 0.0 % 2.4 % 0.0 % 3.1 % 3.0 % +2021 FORM 10-K 52 +Table of Contents +ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA +Management of NIKE, Inc. is responsible for the information and representations contained in this report. The financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and include certain amounts based on our best estimates and judgments. Other financial information in this report is consistent with these financial statements. +Our accounting systems include controls designed to reasonably assure assets are safeguarded from unauthorized use or disposition and provide for the preparation of financial statements in conformity with U.S. GAAP. These systems are supplemented by the selection and training of qualified financial personnel and an organizational structure providing for appropriate segregation of duties. +An internal corporate audit department reviews the results of its work with the Audit & Finance Committee of the Board of Directors, presently comprised of three outside, independent directors. The Audit & Finance Committee is responsible for the appointment of the independent registered public accounting firm and reviews, with the independent registered public accounting firm, management and the internal corporate audit staff, the scope and the results of the annual audit, the effectiveness of the accounting control system and other matters relating to the financial affairs of NIKE as the Audit & Finance Committee deems appropriate. The independent registered public accounting firm and the internal corporate auditors have full access to the Audit & Finance Committee, with and without the presence of management, to discuss any appropriate matters. +2021 FORM 10-K 53 +Table of Contents +MANAGEMENT'S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING +Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13(a) - 15(f) and Rule 15(d) - 15(f) of the Securities Exchange Act of 1934, as amended. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the financial statements for external purposes in accordance with generally accepted accounting principles in the United States of America. Internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of assets of the Company that could have a material effect on the financial statements. +Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +Under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, our management conducted an evaluation of the effectiveness of our internal control over financial reporting based upon the framework in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on the results of our evaluation, our management concluded that our internal control over financial reporting was effective as of May 31, 2021. +PricewaterhouseCoopers LLP, an independent registered public accounting firm, has audited (1) the Consolidated Financial Statements and (2) the effectiveness of our internal control over financial reporting as of May 31, 2021, as stated in their report herein. +John J. Donahoe II Matthew Friend +President and Chief Executive Officer Executive Vice President and Chief Financial Officer +2021 FORM 10-K 54 +Table of Contents +Report of Independent Registered Public Accounting Firm +To the Board of Directors and Shareholders of NIKE, Inc. +Opinions on the Financial Statements and Internal Control over Financial Reporting +We have audited the accompanying consolidated balance sheets of NIKE, Inc. and its subsidiaries (the “Company”) as of May 31, 2021 and 2020, and the related consolidated statements of income, of comprehensive income, of shareholders' equity and of cash flows for each of the three years in the period ended May 31, 2021, including the related notes and financial statement schedule listed in the index appearing under Item 15(a)(2) (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of May 31, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). +In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of May 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended May 31, 2021 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of May 31, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO. +Changes in Accounting Principles +As discussed in Note 1 to the consolidated financial statements, the Company changed the manner in which it accounts for leases as of June 1, 2019 and the manner in which it accounts for revenue from contracts with customers and the manner in which it accounts for income taxes related to intra-entity transfers other than inventory as of June 1, 2018. +Basis for Opinions +The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on the Company's consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. +Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. +Definition and Limitations of Internal Control over Financial Reporting +A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. +2021 FORM 10-K 55 +Table of Contents +Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +Critical Audit Matters +The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. +Accounting for Income Taxes +As described in Notes 1 and 9 to the consolidated financial statements, the Company recorded income tax expense of $934 million for the year ended May 31, 2021, and has net deferred tax assets of $1,133 million, including a valuation allowance of $12 million, and total gross unrecognized tax benefits, excluding related interest and penalties, of $896 million as of May 31, 2021, $609 million of which would affect the Company's effective tax rate if recognized in future periods. The realization of deferred tax assets is dependent on future taxable earnings. Management assesses the scheduled reversal of deferred tax liabilities, projected future taxable income and available tax planning strategies and considers foreign tax credit utilization in making this assessment of realization. A valuation allowance is established against the net deferred tax asset to the extent that recovery is not likely. The Company is subject to taxation in the United States, as well as various state and foreign jurisdictions. As disclosed by management, the use of significant judgment and estimates, as well as the interpretation and application of complex tax laws is required by management to determine the Company's provision for income taxes. +The principal considerations for our determination that performing procedures relating to the accounting for income taxes is a critical audit matter are the high degree of auditor judgment, subjectivity and effort in performing procedures and evaluating audit evidence relating to (i) management's assessment of complex tax laws and regulations, including recent court rulings, as it relates to determining the provision for income taxes and other tax positions, and (ii) management's assessment of realizability of deferred tax assets, specifically around future taxable income, foreign tax credit utilization and available tax planning strategies. In addition, the audit effort involved the use of professionals with specialized skill and knowledge. +Addressing the matters involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the provision for income taxes and other tax positions, including controls over management's assessments of the realizability of deferred tax assets. These procedures also included, among others, evaluating the effect on the Company's tax provision of changes in its legal entity structure, evaluating changes in and compliance with tax laws, and testing management's tax calculations including the Company's forecast of future taxable income, tax planning strategies, and foreign tax credit utilization of deferred tax assets. Professionals with specialized skill and knowledge were used to assist in evaluating the application of relevant tax laws, the provision for income taxes and the reasonableness of management's assessments of whether certain tax positions are more-likely-than-not of being sustained. +/s/ PricewaterhouseCoopers LLP +Portland, Oregon +July 20, 2021 +We have served as the Company's auditor since 1974. +2021 FORM 10-K 56 +Table of Contents +NIKE, INC. +CONSOLIDATED STATEMENTS OF INCOME +YEAR ENDED MAY 31, +(In millions, except per share data) +2021 2020 2019 +Revenues $ 44,538 $ 37,403 $ 39,117 +Cost of sales 24,576 21,162 21,643 +Gross profit 19,962 16,241 17,474 +Demand creation expense 3,114 3,592 3,753 +Operating overhead expense 9,911 9,534 8,949 +Total selling and administrative expense 13,025 13,126 12,702 +Interest expense (income), net 262 89 49 +Other (income) expense, net 14 139 ( 78 ) +Income before income taxes 6,661 2,887 4,801 +Income tax expense 934 348 772 +NET INCOME $ 5,727 $ 2,539 $ 4,029 +Earnings per common share: +Basic $ 3.64 $ 1.63 $ 2.55 +Diluted $ 3.56 $ 1.60 $ 2.49 +Weighted average common shares outstanding: +Basic 1,573.0 1,558.8 1,579.7 +Diluted 1,609.4 1,591.6 1,618.4 +The accompanying Notes to the Consolidated Financial Statements are an integral part of this statement. +2021 FORM 10-K 57 +Table of Contents +NIKE, INC. +CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME +YEAR ENDED MAY 31, +(Dollars in millions) +2021 2020 2019 +Net income $ 5,727 $ 2,539 $ 4,029 +Other comprehensive income (loss), net of tax: +Change in net foreign currency translation adjustment 496 ( 148 ) ( 173 ) +Change in net gains (losses) on cash flow hedges ( 825 ) ( 130 ) 503 +Change in net gains (losses) on other 5 ( 9 ) ( 7 ) +Total other comprehensive income (loss), net of tax ( 324 ) ( 287 ) 323 +TOTAL COMPREHENSIVE INCOME $ 5,403 $ 2,252 $ 4,352 +The accompanying Notes to the Consolidated Financial Statements are an integral part of this statement. +2021 FORM 10-K 58 +Table of Contents +NIKE, INC. +CONSOLIDATED BALANCE SHEETS +MAY 31, +(In millions) +2021 2020 +ASSETS +Current assets: +Cash and equivalents $ 9,889 $ 8,348 +Short-term investments 3,587 439 +Accounts receivable, net 4,463 2,749 +Inventories 6,854 7,367 +Prepaid expenses and other current assets 1,498 1,653 +Total current assets 26,291 20,556 +Property, plant and equipment, net 4,904 4,866 +Operating lease right-of-use assets, net 3,113 3,097 +Identifiable intangible assets, net 269 274 +Goodwill 242 223 +Deferred income taxes and other assets 2,921 2,326 +TOTAL ASSETS $ 37,740 $ 31,342 +LIABILITIES AND SHAREHOLDERS' EQUITY +Current liabilities: +Current portion of long-term debt $ — $ 3 +Notes payable 2 248 +Accounts payable 2,836 2,248 +Current portion of operating lease liabilities 467 445 +Accrued liabilities 6,063 5,184 +Income taxes payable 306 156 +Total current liabilities 9,674 8,284 +Long-term debt 9,413 9,406 +Operating lease liabilities 2,931 2,913 +Deferred income taxes and other liabilities 2,955 2,684 +Commitments and contingencies (Note 18) +Redeemable preferred stock — — +Shareholders' equity: +Common stock at stated value: +Class A convertible — 305 and 315 shares outstanding +— — +Class B — 1,273 and 1,243 shares outstanding +3 3 +Capital in excess of stated value 9,965 8,299 +Accumulated other comprehensive income (loss) ( 380 ) ( 56 ) +Retained earnings (deficit) 3,179 ( 191 ) +Total shareholders' equity 12,767 8,055 +TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 37,740 $ 31,342 +The accompanying Notes to the Consolidated Financial Statements are an integral part of this statement. +2021 FORM 10-K 59 +Table of Contents +NIKE, INC. +CONSOLIDATED STATEMENTS OF CASH FLOWS +YEAR ENDED MAY 31, +(Dollars in millions) +2021 2020 2019 +Cash provided (used) by operations: +Net income $ 5,727 $ 2,539 $ 4,029 +Adjustments to reconcile net income to net cash provided (used) by operations: +Depreciation 744 721 705 +Deferred income taxes ( 385 ) ( 380 ) 34 +Stock-based compensation 611 429 325 +Amortization, impairment and other 53 398 15 +Net foreign currency adjustments ( 138 ) 23 233 +Changes in certain working capital components and other assets and liabilities: +(Increase) decrease in accounts receivable ( 1,606 ) 1,239 ( 270 ) +(Increase) decrease in inventories 507 ( 1,854 ) ( 490 ) +(Increase) decrease in prepaid expenses, operating lease right-of-use assets and other current and non-current assets ( 182 ) ( 654 ) ( 203 ) +Increase (decrease) in accounts payable, accrued liabilities, operating lease liabilities and other current and non-current liabilities 1,326 24 1,525 +Cash provided (used) by operations 6,657 2,485 5,903 +Cash provided (used) by investing activities: +Purchases of short-term investments ( 9,961 ) ( 2,426 ) ( 2,937 ) +Maturities of short-term investments 4,236 74 1,715 +Sales of short-term investments 2,449 2,379 2,072 +Additions to property, plant and equipment ( 695 ) ( 1,086 ) ( 1,119 ) +Other investing activities 171 31 5 +Cash provided (used) by investing activities ( 3,800 ) ( 1,028 ) ( 264 ) +Cash provided (used) by financing activities: +Proceeds from borrowings, net of debt issuance costs — 6,134 — +Increase (decrease) in notes payable, net ( 52 ) 49 ( 325 ) +Repayment of borrowings ( 197 ) ( 6 ) ( 6 ) +Proceeds from exercise of stock options and other stock issuances 1,172 885 700 +Repurchase of common stock ( 608 ) ( 3,067 ) ( 4,286 ) +Dividends — common and preferred ( 1,638 ) ( 1,452 ) ( 1,332 ) +Other financing activities ( 136 ) ( 52 ) ( 44 ) +Cash provided (used) by financing activities ( 1,459 ) 2,491 ( 5,293 ) +Effect of exchange rate changes on cash and equivalents 143 ( 66 ) ( 129 ) +Net increase (decrease) in cash and equivalents 1,541 3,882 217 +Cash and equivalents, beginning of year 8,348 4,466 4,249 +CASH AND EQUIVALENTS, END OF YEAR $ 9,889 $ 8,348 $ 4,466 +Supplemental disclosure of cash flow information: +Cash paid during the year for: +Interest, net of capitalized interest $ 293 $ 140 $ 153 +Income taxes 1,177 1,028 757 +Non-cash additions to property, plant and equipment 179 121 160 +Dividends declared and not paid 438 385 347 +The accompanying Notes to the Consolidated Financial Statements are an integral part of this statement. +2021 FORM 10-K 60 +Table of Contents +NIKE, INC. +CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY +COMMON STOCK CAPITAL IN EXCESS OF STATED VALUE ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) RETAINED EARNINGS (DEFICIT) TOTAL +CLASS A CLASS B +(In millions, except per share data) +SHARES AMOUNT SHARES AMOUNT +Balance at May 31, 2018 329 $ — 1,272 $ 3 $ 6,384 $ ( 92 ) $ 3,517 $ 9,812 +Stock options exercised 18 539 539 +Conversion to Class B Common Stock ( 14 ) 14 — +Repurchase of Class B Common Stock ( 54 ) ( 227 ) ( 4,056 ) ( 4,283 ) +Dividends on common stock ($ 0.86 per share) and preferred stock ($ 0.10 per share) +( 1,360 ) ( 1,360 ) +Issuance of shares to employees, net of shares withheld for employee taxes 3 142 ( 3 ) 139 +Stock-based compensation 325 325 +Net income 4,029 4,029 +Other comprehensive income (loss) 323 323 +Adoption of ASU 2016-16 (Note 1) ( 507 ) ( 507 ) +Adoption of ASC Topic 606 (Note 1) 23 23 +Balance at May 31, 2019 315 $ — 1,253 $ 3 $ 7,163 $ 231 $ 1,643 $ 9,040 +Stock options exercised 20 703 703 +Repurchase of Class B Common Stock ( 34 ) ( 161 ) ( 2,872 ) ( 3,033 ) +Dividends on common stock ($ 0.955 per share) and preferred stock ($ 0.10 per share) +( 1,491 ) ( 1,491 ) +Issuance of shares to employees, net of shares withheld for employee taxes 4 165 ( 9 ) 156 +Stock-based compensation 429 429 +Net income 2,539 2,539 +Other comprehensive income (loss) ( 287 ) ( 287 ) +Adoption of ASC Topic 842 (Note 1) ( 1 ) ( 1 ) +Balance at May 31, 2020 315 $ — 1,243 $ 3 $ 8,299 $ ( 56 ) $ ( 191 ) $ 8,055 +Stock options exercised 21 954 954 +Conversion to Class B Common Stock ( 10 ) 10 — +Repurchase of Class B Common Stock ( 5 ) ( 28 ) ( 622 ) ( 650 ) +Dividends on common stock ($ 1.070 per share) and preferred stock ($ 0.10 per share) +( 1,692 ) ( 1,692 ) +Issuance of shares to employees, net of shares withheld for employee taxes 4 129 ( 43 ) 86 +Stock-based compensation 611 611 +Net income 5,727 5,727 +Other comprehensive income (loss) ( 324 ) ( 324 ) +Balance at May 31, 2021 305 $ — 1,273 $ 3 $ 9,965 $ ( 380 ) $ 3,179 $ 12,767 +The accompanying Notes to the Consolidated Financial Statements are an integral part of this statement. +2021 FORM 10-K 61 +Table of Contents +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +Note 1 Summary of Significant Accounting Policies +63 +Note 2 Inventories +69 +Note 3 Property, Plant and Equipment +69 +Note 4 Identifiable Intangible Assets and Goodwill +70 +Note 5 Accrued Liabilities +70 +Note 6 Fair Value Measurements +70 +Note 7 Short-Term Borrowings and Credit Lines +72 +Note 8 Long-Term Debt +73 +Note 9 Income Taxes +74 +Note 10 Redeemable Preferred Stock +77 +Note 11 Common Stock and Stock-Based Compensation +77 +Note 12 Earnings Per Share +79 +Note 13 Benefit Plans +79 +Note 14 Risk Management and Derivatives +80 +Note 15 Accumulated Other Comprehensive Income (Loss) +84 +Note 16 Revenues +86 +Note 17 Operating Segments and Related Information +87 +Note 18 Commitments and Contingencies +91 +Note 19 Leases +91 +Note 20 Acquisitions and Divestitures +92 +Note 21 Restructuring +93 +2021 FORM 10-K 62 +Table of Contents +NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES +DESCRIPTION OF BUSINESS +NIKE, Inc. is a worldwide leader in the design, development and worldwide marketing and selling of athletic footwear, apparel, equipment, accessories and services. NIKE, Inc. portfolio brands include the NIKE Brand, Jordan Brand, Hurley, prior to its divestiture in fiscal 2020, and Converse. The NIKE Brand is focused on performance athletic footwear, apparel, equipment, accessories and services across a wide range of sport categories, amplified with sport-inspired lifestyle products carrying the Swoosh trademark, as well as other NIKE Brand trademarks. The Jordan Brand is focused on athletic and casual footwear, apparel and accessories using the Jumpman trademark. Sales and operating results of Jordan Brand products are reported within the respective NIKE Brand geographic operating segments. Sales and operating results of Hurley brand products, prior to its divestiture in fiscal 2020, were reported within the NIKE Brand's North America geographic operating segment. Refer to Note 20 — Acquisitions and Divestitures for information regarding the divestiture of the Company's wholly-owned subsidiary, Hurley. Converse designs, distributes, licenses and sells casual sneakers, apparel and accessories under the Converse, Chuck Taylor, All Star, One Star, Star Chevron and Jack Purcell trademarks. In some markets outside the U.S., these trademarks are licensed to third parties who design, distribute, market and sell similar products. Operating results of the Converse brand are reported on a stand-alone basis. +BASIS OF CONSOLIDATION +The Consolidated Financial Statements include the accounts of NIKE, Inc. and its subsidiaries (the "Company" or "NIKE"). All significant intercompany transactions and balances have been eliminated. +REVENUE RECOGNITION +Beginning in fiscal 2019, the Company adopted Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606). The Company's revenue recognition policies under Topic 606 are described in the following paragraphs. +Revenue transactions associated with the sale of NIKE Brand footwear, apparel and equipment, as well as Converse products, comprise a single performance obligation, which consists of the sale of products to customers either through wholesale or direct to consumer channels. The Company satisfies the performance obligation and records revenues when transfer of control to the customer has occurred, based on the terms of sale. A customer is considered to have control once they are able to direct the use and receive substantially all of the benefits of the product. +Control is transferred to wholesale customers upon shipment or upon receipt depending on the country of the sale and the agreement with the customer. Control transfers to retail store customers at the time of sale and to substantially all digital commerce customers upon shipment. The transaction price is determined based upon the invoiced sales price, less anticipated sales returns, discounts and miscellaneous claims from customers. Payment terms for wholesale transactions depend on the country of sale or agreement with the customer and payment is generally required within 90 days or less of shipment to or receipt by the wholesale customer. Payment is due at the time of sale for retail store and digital commerce transactions. +Consideration for trademark licensing contracts is earned through sales-based or usage-based royalty arrangements, and the associated revenues are recognized over the license period. +Taxes assessed by governmental authorities that are both imposed on and concurrent with a specific revenue-producing transaction, and are collected by the Company from a customer, are excluded from Revenues and Cost of sales in the Consolidated Statements of Income. Shipping and handling costs associated with outbound freight after control over a product has transferred to a customer are accounted for as fulfillment costs and are included in Cost of sales when the related revenues are recognized. +SALES-RELATED RESERVES +Consideration promised in the Company's contracts with customers is variable due to anticipated reductions, such as sales returns, discounts and miscellaneous claims from customers. The Company estimates the most likely amount it will be entitled to receive and records an anticipated reduction against Revenues, with an offsetting increase to Accrued liabilities at the time revenues are recognized. The estimated cost of inventory for product returns is recorded in Prepaid expenses and other current assets on the Consolidated Balance Sheets. +The provision for anticipated sales returns consists of both contractual return rights and discretionary authorized returns. Provisions for post-invoice sales discounts consist of both contractual programs and discretionary discounts that are expected to be granted at a later date. +2021 FORM 10-K 63 +Table of Contents +Estimates of discretionary authorized returns, discounts and claims are based on (1) historical rates, (2) specific identification of outstanding returns not yet received from customers and outstanding discounts and claims and (3) estimated returns, discounts and claims expected but not yet finalized with customers. Actual returns, discounts and claims in any future period are inherently uncertain and thus may differ from estimates recorded. If actual or expected future returns, discounts or claims are significantly greater or lower than the reserves established, a reduction or increase to net Revenues is recorded in the period in which such determination is made. +COST OF SALES +Cost of sales consists primarily of inventory costs, as well as warehousing costs (including the cost of warehouse labor), third-party royalties, certain foreign currency hedge gains and losses and product design costs. Shipping and handling costs are expensed as incurred and included in Cost of sales. +DEMAND CREATION EXPENSE +Demand creation expense consists of advertising and promotion costs, including costs of endorsement contracts, complimentary products, television, digital and print advertising and media costs, brand events and retail brand presentation. Advertising production costs are expensed the first time an advertisement is run. Advertising media costs are expensed when the advertisement appears. Costs related to brand events are expensed when the event occurs. Costs related to retail brand presentation are expensed when the presentation is complete and delivered. +A significant amount of the Company's promotional expenses result from payments under endorsement contracts. In general, endorsement payments are expensed on a straight-line basis over the term of the contract. However, certain contracts contain elements that may be accounted for differently based upon the facts and circumstances of each individual contract. Prepayments made under contracts are included in Prepaid expenses and other current assets or Deferred income taxes and other assets depending on the period to which the prepayment applies. +Certain contracts provide for contingent payments to endorsers based upon specific achievements in their sport (e.g., winning a championship). The Company records Demand creation expense for these amounts when the endorser achieves the specific goal. +Certain contracts provide for variable payments based upon endorsers maintaining a level of performance in their sport over an extended period of time (e.g., maintaining a specified ranking in a sport for a year). When the Company determines payments are probable, the amounts are reported in Demand creation expense ratably over the contract period based on the Company's best estimate of the endorser's performance. In these instances, to the extent actual payments to the endorser differ from the Company's estimate due to changes in the endorser's performance, adjustments to Demand creation expense may be recorded in a future period. +Certain contracts provide for royalty payments to endorsers based upon a predetermined percent of sales of particular products, which the Company records in Cost of sales as the related sales occur. For contracts containing minimum guaranteed royalty payments, the Company records the amount of any guaranteed payment in excess of that earned through sales of product within Demand creation expense. +Through cooperative advertising programs, the Company reimburses its wholesale customers for certain costs of advertising the Company's products. The Company records these costs in Demand creation expense at the point in time it is obligated to its customers for the costs. This obligation may arise prior to the related advertisement being run. +Total advertising and promotion expenses, which the Company refers to as Demand creation expense, were $ 3,114 million, $ 3,592 million and $ 3,753 million for the years ended May 31, 2021, 2020 and 2019, respectively. Prepaid advertising and promotion expenses totaled $ 630 million and $ 686 million at May 31, 2021 and 2020, respectively, of which $ 338 million and $ 326 million, respectively, were recorded in Prepaid expenses and other current assets, and $ 292 million and $ 360 million, respectively, were recorded in Deferred income taxes and other assets, depending on the period to which the prepayment applied. +OPERATING OVERHEAD EXPENSE +Operating overhead expense consists primarily of wage and benefit-related expenses, research and development costs, bad debt expense as well as other administrative expenses such as rent, depreciation and amortization, professional services, meetings and travel. +2021 FORM 10-K 64 +Table of Contents +CASH AND EQUIVALENTS +Cash and equivalents represent cash and short-term, highly liquid investments, that are both readily convertible to known amounts of cash, and so near their maturity they present insignificant risk of changes in value because of changes in interest rates, including commercial paper, U.S. Treasury, U.S. Agency, money market funds, time deposits and corporate debt securities with maturities of 90 days or less at the date of purchase. +SHORT-TERM INVESTMENTS +Short-term investments consist of highly liquid investments, including commercial paper, U.S. Treasury, U.S. Agency, time deposits and corporate debt securities with maturities over 90 days at the date of purchase. At May 31, 2021 and 2020, Short-term investments consisted of available-for-sale debt securities, which are recorded at fair value with unrealized gains and losses reported, net of tax, in Accumulated other comprehensive income (loss), unless unrealized losses are determined to be unrecoverable. Realized gains and losses on the sale of securities are determined by specific identification. The Company considers all available-for-sale debt securities, including those with maturity dates beyond 12 months, as available to support current operational liquidity needs and, therefore, classifies all securities with maturity dates beyond 90 days at the date of purchase as current assets within Short-term investments on the Consolidated Balance Sheets. +Refer to Note 6 — Fair Value Measurements for more information on the Company's Short-term investments. +ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS RECEIVABLE +Accounts receivable, net consist primarily of amounts due from customers. The Company makes ongoing estimates relating to the collectability of its accounts receivable and maintains an allowance for expected losses resulting from the inability of its customers to make required payments. In addition to judgments about the creditworthiness of significant customers based on ongoing credit evaluations, the Company considers historical levels of credit losses, as well as macroeconomic and industry trends, such as the impacts of COVID–19, to determine the amount of the allowance. Accounts receivable with anticipated collection dates greater than 12 months from the balance sheet date and related allowances are considered non-current and recorded in Deferred income taxes and other assets. The allowance for uncollectible accounts receivable was $ 93 million and $ 214 million as of May 31, 2021 and 2020, respectively. +INVENTORY VALUATION +Inventories are stated at lower of cost and net realizable value, and valued on either an average or a specific identification cost basis. In some instances, the Company ships products directly from its suppliers to the customer, with the related inventory and cost of sales recognized on a specific identification basis. Inventory costs primarily consist of product cost from the Company's suppliers, as well as inbound freight, import duties, taxes, insurance, logistics and other handling fees. +PROPERTY, PLANT AND EQUIPMENT AND DEPRECIATION +Property, plant and equipment are recorded at cost. Depreciation is determined on a straight-line basis for land improvements, buildings and leasehold improvements over 2 to 40 years and for machinery and equipment over 2 to 15 years. +Depreciation and amortization of assets used in manufacturing, warehousing and product distribution are recorded in Cost of sales. Depreciation and amortization of all other assets are recorded in Operating overhead expense. +SOFTWARE DEVELOPMENT COSTS +Expenditures for major software purchases and software developed for internal use are capitalized and amortized over a 2 - to 12 -year period on a straight-line basis. The Company's policy provides for the capitalization of external direct costs associated with developing or obtaining internal use computer software. The Company also capitalizes certain payroll and payroll-related costs for employees who are directly associated with internal use computer software projects. The amount of capitalizable payroll costs with respect to these employees is limited to the time directly spent on such projects. Costs associated with preliminary project stage activities, training, maintenance and all other post-implementation stage activities are expensed as incurred. +Development costs of computer software to be sold, leased or otherwise marketed as an integral part of a product are subject to capitalization beginning when a product's technological feasibility has been established and ending when a product is available for general release to customers. In most instances, the Company's products are released soon after technological feasibility has been established; therefore, software development costs incurred subsequent to achievement of technological feasibility are usually not significant, and generally, most software development costs have been expensed as incurred. +2021 FORM 10-K 65 +Table of Contents +IMPAIRMENT OF LONG-LIVED ASSETS +The Company reviews the carrying value of long-lived assets or asset groups to be used in operations whenever events or changes in circumstances indicate the carrying amount of the assets might not be recoverable. Factors that would necessitate an impairment assessment include a significant adverse change in the extent or manner in which an asset is used, a significant adverse change in legal factors or the business climate that could affect the value of the asset or a significant decline in the observable market value of an asset, among others. If such facts indicate a potential impairment, the Company would assess the recoverability of an asset group by determining if the carrying value of the asset group exceeds the sum of the projected undiscounted cash flows expected to result from the use and eventual disposition of the assets over the remaining economic life of the primary asset in the asset group. If the recoverability test indicates that the carrying value of the asset group is not recoverable, the Company will estimate the fair value of the asset group using appropriate valuation methodologies, which would typically include an estimate of discounted cash flows. Any impairment would be measured as the difference between the asset group's carrying amount and its estimated fair value. +GOODWILL AND INDEFINITE-LIVED INTANGIBLE ASSETS +The Company performs annual impairment tests on goodwill and intangible assets with indefinite lives in the fourth quarter of each fiscal year or when events occur or circumstances change that would, more likely than not, reduce the fair value of a reporting unit or an intangible asset with an indefinite life below its carrying value. Events or changes in circumstances that may trigger interim impairment reviews include significant changes in business climate, operating results, planned investments in the reporting unit, planned divestitures or an expectation that the carrying amount may not be recoverable, among other factors. +For purposes of testing goodwill for impairment, the Company allocates goodwill across its reporting units, which are considered the Company's operating segments. The Company may first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events and circumstances, the Company determines it is more likely than not that the fair value of the reporting unit is greater than its carrying amount, an impairment test is unnecessary. If an impairment test is necessary, the Company will estimate the fair value of its related reporting units. If the carrying value of a reporting unit exceeds its fair value, the goodwill of that reporting unit is determined to be impaired and the Company will proceed with recording an impairment charge equal to the excess of the carrying value over the related fair value. +Indefinite-lived intangible assets primarily consist of acquired trade names and trademarks. The Company may first perform a qualitative assessment to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired. If, after assessing the totality of events and circumstances, the Company determines it is more likely than not that the indefinite-lived intangible asset is not impaired, no quantitative fair value measurement is necessary. If a quantitative fair value measurement calculation is required for these intangible assets, the Company primarily utilizes the relief-from-royalty method. This method assumes trade names and trademarks have value to the extent their owner is relieved of the obligation to pay royalties for the benefits received from them. This method requires the Company to estimate the future revenues for the related brands, the appropriate royalty rate and the weighted average cost of capital. If the carrying value of the indefinite-lived intangible exceeds its fair value, the asset is determined to be impaired, and the Company will proceed with recording an impairment charge equal to the excess of the carrying value over the related fair value. +OPERATING LEASES +Beginning in fiscal 2020, the Company adopted Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842) . Periods prior to fiscal 2020 have not been restated and continue to be reported in accordance with the Company's historical accounting policies. The Company's lease recognition policies under Topic 842 are described in the following paragraphs. +The Company primarily leases retail store space, certain distribution and warehouse facilities, office space, equipment and other non-real estate assets. The Company determines if an arrangement is a lease at inception and begins recording lease activity at the commencement date, which is generally the date in which the Company takes possession of or controls the physical use of the asset. Lease components are not separated from nonlease components for real estate leases within the Company's lease portfolio. Right-of-use (ROU) assets and lease liabilities are recognized based on the present value of lease payments over the lease term with lease expense recognized on a straight-line basis. The Company's incremental borrowing rate is used to determine the present value of future lease payments unless the implicit rate is readily determinable. +Lease agreements may contain rent escalation clauses, renewal or termination options, rent holidays or certain landlord incentives, including tenant improvement allowances. ROU assets include amounts for scheduled rent increases and are reduced by the amount of lease incentives. The lease term includes the non-cancelable period of the lease and options to extend or terminate the lease when it is reasonably certain the Company will exercise those options. The Company does not record leases with an initial term of 12 months or less on the Consolidated Balance Sheets, and recognizes related lease payments in the Consolidated Statements of Income on a straight-line basis over the lease term. Certain lease agreements include variable lease +2021 FORM 10-K 66 +Table of Contents +payments, which are based on a percent of retail sales over specified levels or adjust periodically for inflation as a result of changes in a published index, primarily the Consumer Price Index, and are expensed as incurred. +FAIR VALUE MEASUREMENTS +The Company measures certain financial assets and liabilities at fair value on a recurring basis, including derivatives, equity securities and available-for-sale debt securities. Fair value is the price the Company would receive to sell an asset or pay to transfer a liability in an orderly transaction with a market participant at the measurement date. The Company uses a three-level hierarchy established by the Financial Accounting Standards Board (FASB) that prioritizes fair value measurements based on the types of inputs used for the various valuation techniques (market approach, income approach and cost approach). +The levels of the fair value hierarchy are described below: +• Level 1: Quoted prices in active markets for identical assets or liabilities. +• Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly; these include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active. +• Level 3: Unobservable inputs with little or no market data available, which require the reporting entity to develop its own assumptions. +The Company's assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. Financial assets and liabilities are classified in their entirety based on the most conservative level of input that is significant to the fair value measurement. +Pricing vendors are utilized for a majority of Level 1 and Level 2 investments. These vendors either provide a quoted market price in an active market or use observable inputs without applying significant adjustments in their pricing. Observable inputs include broker quotes, interest rates and yield curves observable at commonly quoted intervals, volatilities and credit risks. The fair value of derivative contracts is determined using observable market inputs such as the daily market foreign currency rates, forward pricing curves, currency volatilities, currency correlations and interest rates and considers nonperformance risk of the Company and its counterparties. +The Company's fair value measurement process includes comparing fair values to another independent pricing vendor to ensure appropriate fair values are recorded. +Refer to Note 6 — Fair Value Measurements for additional information. +FOREIGN CURRENCY TRANSLATION AND FOREIGN CURRENCY TRANSACTIONS +Adjustments resulting from translating foreign functional currency financial statements into U.S. Dollars are included in the foreign currency translation adjustment, a component of Accumulated other comprehensive income (loss) in Total shareholders' equity. +The Company's global subsidiaries have various monetary assets and liabilities, primarily receivables and payables, which are denominated in currencies other than their functional currency. These balance sheet items are subject to remeasurement, the impact of which is recorded in Other (income) expense, net, within the Consolidated Statements of Income. +ACCOUNTING FOR DERIVATIVES AND HEDGING ACTIVITIES +The Company uses derivative financial instruments to reduce its exposure to changes in foreign currency exchange rates and interest rates. All derivatives are recorded at fair value on the Consolidated Balance Sheets and changes in the fair value of derivative financial instruments are either recognized in Accumulated other comprehensive income (loss) (a component of Total shareholders' equity), Long-term debt or Net income depending on the nature of the underlying exposure, whether the derivative is formally designated as a hedge and, if designated, the extent to which the hedge is effective. The Company classifies the cash flows at settlement from derivatives in the same category as the cash flows from the related hedged items. For undesignated hedges and designated cash flow hedges, this is primarily within the Cash provided by operations component of the Consolidated Statements of Cash Flows. For designated net investment hedges, this is within the Cash used by investing activities component of the Consolidated Statements of Cash Flows. For the Company's fair value hedges, which are interest rate swaps used to mitigate the change in fair value of its fixed-rate debt attributable to changes in interest rates, the related cash flows from periodic interest payments are reflected within the Cash provided by operations component of the Consolidated Statements of Cash Flows. Refer to Note 14 — Risk Management and Derivatives for additional information on the Company's risk management program and derivatives. +2021 FORM 10-K 67 +Table of Contents +STOCK-BASED COMPENSATION +The Company accounts for stock-based compensation by estimating the fair value, net of estimated forfeitures, of equity awards and recognizing the related expense as Cost of sales or Operating overhead expense, as applicable, in the Consolidated Statements of Income on a straight-line basis over the vesting period. Substantially all awards vest ratably over four years of continued employment, with stock options expiring 10 years from the date of grant. The fair value of options, stock appreciation rights and employees' purchase rights under the employee stock purchase plans (ESPPs) is determined using the Black-Scholes option pricing model. The fair value of restricted stock and restricted stock units is established by the market price on the date of grant. +Refer to Note 11 — Common Stock and Stock-Based Compensation for additional information on the Company's stock-based compensation programs. +INCOME TAXES +The Company accounts for income taxes using the asset and liability method. This approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of assets and liabilities. The Company records a valuation allowance to reduce deferred tax assets to the amount management believes is more likely than not to be realized. Realization of deferred tax assets is dependent on future taxable earnings and is therefore uncertain. At least quarterly, the Company assesses taxable income in prior carryback periods, the scheduled reversal of deferred tax liabilities, projected future taxable income and available tax planning strategies. The Company uses forecasts of taxable income and considers foreign tax credit utilization in making this assessment of realization, which are inherently uncertain and can result in significant variation between estimated and actual results. To the extent the Company believes that recovery is not likely, a valuation allowance is established against the net deferred tax asset, which increases the Company’s income tax expense in the period when such determination is made. +The Company recognizes a tax benefit from uncertain tax positions in the financial statements only when it is more likely than not the position will be sustained upon examination by relevant tax authorities. The Company recognizes interest and penalties related to income tax matters in Income tax expense. +Refer to Note 9 — Income Taxes for further discussion. +EARNINGS PER SHARE +Basic earnings per common share is calculated by dividing Net income by the weighted average number of common shares outstanding during the year. Diluted earnings per common share is calculated by adjusting weighted average outstanding shares, assuming conversion of all potentially dilutive stock options and awards. +Refer to Note 12 — Earnings Per Share for further discussion. +MANAGEMENT ESTIMATES +The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates, including estimates relating to assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Additionally, the extent to which the evolving COVID-19 pandemic impacts the Company's financial statements will depend on a number of factors, including the magnitude and duration of the pandemic. There remains risk that COVID-19 could have a material, adverse impact on future revenue growth as well as overall profitability and may lead to higher than normal inventory levels in various markets, adverse impacts on the global supply chain, revised payment terms with certain wholesale customers, higher sales-related reserves, factory cancellation costs and a volatile effective tax rate driven by changes in the mix of earnings across the Company's jurisdictions. +RECENTLY ADOPTED ACCOUNTING STANDARDS +In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory . The updated guidance requires companies to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. Income tax effects of intra-entity transfers of inventory will continue to be deferred until the inventory has been sold to a third party. The Company adopted the standard on June 1, 2018, using a modified retrospective approach, with the cumulative effect of applying the new standard recognized in Retained earnings at the date of adoption. The adoption resulted in reductions to Retained earnings , Deferred income taxes and other assets and Prepaid +2021 FORM 10-K 68 +Table of Contents +expenses and other current assets of $ 507 million, $ 422 million and $ 45 million, respectively, and an increase in Deferred income taxes and other liabilities of $ 40 million on the Consolidated Balance Sheets. +NOTE 2 — INVENTORIES +Inventory balances of $ 6,854 million and $ 7,367 million as of May 31, 2021 and 2020, respectively, were substantially all finished goods. +NOTE 3 — PROPERTY, PLANT AND EQUIPMENT +Property, plant and equipment, net included the following: +MAY 31, +(Dollars in millions) +2021 2020 +Land and improvements $ 363 $ 345 +Buildings 3,365 2,442 +Machinery and equipment 3,023 2,751 +Internal-use software 1,391 1,483 +Leasehold improvements 1,608 1,554 +Construction in process 311 1,086 +Total property, plant and equipment, gross 10,061 9,661 +Less accumulated depreciation 5,157 4,795 +TOTAL PROPERTY, PLANT AND EQUIPMENT, NET $ 4,904 $ 4,866 +Capitalized interest was not material for the years ended May 31, 2021, 2020 and 2019. +NOTE 4 — IDENTIFIABLE INTANGIBLE ASSETS AND GOODWILL +Identifiable intangible assets, net consist of indefinite-lived trademarks, acquired trademarks and other intangible assets. The following table summarizes the Company's Identifiable intangible assets, net balances as of May 31, 2021 and 2020: +MAY 31, +2021 2020 +(Dollars in millions) +GROSS CARRYING AMOUNT ACCUMULATED AMORTIZATION NET CARRYING AMOUNT GROSS CARRYING AMOUNT ACCUMULATED AMORTIZATION NET CARRYING AMOUNT +Indefinite-lived trademarks $ 246 $ — $ 246 $ 246 $ — $ 246 +Acquired trademarks and other 50 27 23 47 19 28 +IDENTIFIABLE INTANGIBLE ASSETS, NET $ 296 $ 27 $ 269 $ 293 $ 19 $ 274 +Goodwill was $ 242 million and $ 223 million as of May 31, 2021 and 2020, respectively, and there were no accumulated impairment losses as of May 31, 2021 and 2020. Additionally, the impact to Goodwill during fiscal 2021 and 2020 as a result of acquisitions and divestitures was not material. +2021 FORM 10-K 69 +Table of Contents +NOTE 5 — ACCRUED LIABILITIES +Accrued liabilities included the following: +MAY 31, +(Dollars in millions) +2021 2020 +Compensation and benefits, excluding taxes $ 1,472 $ 1,248 +Sales-related reserves 1,077 1,178 +Allowance for expected loss on sale (1) +358 405 +Other 3,156 2,353 +TOTAL ACCRUED LIABILITIES $ 6,063 $ 5,184 +(1) Refer to Note 20 — Acquisitions and Divestitures for additional information. +NOTE 6 — FAIR VALUE MEASUREMENTS +The following tables present information about the Company's financial assets measured at fair value on a recurring basis as of May 31, 2021 and 2020, and indicate the level in the fair value hierarchy in which the Company classifies the fair value measurement. Refer to Note 1 — Summary of Significant Accounting Policies for additional detail regarding the Company's fair value measurement methodology. +MAY 31, 2021 +(Dollars in millions) +ASSETS AT FAIR VALUE CASH AND EQUIVALENTS SHORT-TERM INVESTMENTS +Cash $ 840 $ 840 $ — +Level 1: +U.S. Treasury securities 2,892 — 2,892 +Level 2: +Commercial paper and bonds 748 57 691 +Money market funds 7,701 7,701 — +Time deposits 1,293 1,291 2 +U.S. Agency securities 2 — 2 +Total Level 2 9,744 9,049 695 +TOTAL $ 13,476 $ 9,889 $ 3,587 +MAY 31, 2020 +(Dollars in millions) +ASSETS AT FAIR VALUE CASH AND EQUIVALENTS SHORT-TERM INVESTMENTS +Cash $ 596 $ 596 $ — +Level 1: +U.S. Treasury securities 1,204 800 404 +Level 2: +Commercial paper and bonds 32 — 32 +Money market funds 5,973 5,973 — +Time deposits 981 979 2 +U.S. Agency securities 1 — 1 +Total Level 2 6,987 6,952 35 +TOTAL $ 8,787 $ 8,348 $ 439 +As of May 31, 2021, the Company held $ 2,993 million of available-for-sale debt securities with maturity dates within one year and $ 594 million with maturity dates over one year and less than five years in Short-term investments on the Consolidated Balance Sheets. The fair value of the Company's available-for-sale debt securities approximates their amortized cost. +Included in Interest expense (income), net was interest income related to the Company's investment portfolio of $ 34 million, $ 62 million and $ 82 million for the years ended May 31, 2021, 2020 and 2019, respectively. +2021 FORM 10-K 70 +Table of Contents +The Company records the assets and liabilities of its derivative financial instruments on a gross basis on the Consolidated Balance Sheets. The Company's derivative financial instruments are subject to master netting arrangements that allow for the offset of assets and liabilities in the event of default or early termination of the contract. Any amounts of cash collateral received related to these instruments associated with the Company's credit-related contingent features are recorded in Cash and equivalents and Accrued liabilities, the latter of which would further offset against the Company's derivative asset balance. Any amounts of cash collateral posted related to these instruments associated with the Company's credit-related contingent features are recorded in Prepaid expenses and other current assets, which would further offset against the Company's derivative liability balance. Cash collateral received or posted related to the Company's credit-related contingent features is presented in the Cash provided by operations component of the Consolidated Statements of Cash Flows. The Company does not recognize amounts of non-cash collateral received, such as securities, on the Consolidated Balance Sheets. For further information related to credit risk, refer to Note 14 — Risk Management and Derivatives. +The following tables present information about the Company's derivative assets and liabilities measured at fair value on a recurring basis and indicate the level in the fair value hierarchy in which the Company classifies the fair value measurement: +MAY 31, 2021 +DERIVATIVE ASSETS DERIVATIVE LIABILITIES +(Dollars in millions) ASSETS AT FAIR VALUE OTHER CURRENT ASSETS OTHER LONG-TERM ASSETS LIABILITIES AT FAIR VALUE ACCRUED LIABILITIES OTHER LONG-TERM LIABILITIES +Level 2: +Foreign exchange forwards and options (1) +$ 92 $ 76 $ 16 $ 456 $ 415 $ 41 +Embedded derivatives — — — 1 1 — +TOTAL $ 92 $ 76 $ 16 $ 457 $ 416 $ 41 +(1) If the foreign exchange derivative instruments had been netted on the Consolidated Balance Sheets, the asset and liability positions each would have been reduced by $ 93 million as of May 31, 2021. As of that date, the Company had posted $ 39 million of cash collateral to various counterparties related to foreign exchange derivative instruments. No amount of collateral was received on the Company's derivative asset balance as of May 31, 2021. +MAY 31, 2020 +DERIVATIVE ASSETS DERIVATIVE LIABILITIES +(Dollars in millions) +ASSETS AT FAIR VALUE OTHER CURRENT ASSETS OTHER LONG-TERM ASSETS LIABILITIES AT FAIR VALUE ACCRUED LIABILITIES OTHER LONG-TERM LIABILITIES +Level 2: +Foreign exchange forwards and options (1) +$ 94 $ 91 $ 3 $ 205 $ 188 $ 17 +Embedded derivatives 1 1 — 2 2 — +TOTAL $ 95 $ 92 $ 3 $ 207 $ 190 $ 17 +(1) If the foreign exchange derivative instruments had been netted on the Consolidated Balance Sheets, the asset and liability positions each would have been reduced by $ 76 million as of May 31, 2020. As of that date, no amount of cash collateral had been received or posted on the derivative asset and liability balances related to these foreign exchange derivative instruments. +For additional information related to the Company's derivative financial instruments, refer to Note 14 — Risk Management and Derivatives. For fair value information regarding Notes payable and Long-term debt, refer to Note 7 — Short-Term Borrowings and Credit Lines and Note 8 — Long-Term Debt, respectively. +The carrying amounts of other current financial assets and other current financial liabilities approximate fair value. +NON-RECURRING FAIR VALUE MEASUREMENTS +As further discussed in Note 20 — Acquisitions and Divestitures, during fiscal 2020, the Company met the criteria to recognize the related assets and liabilities of its Brazil, Argentina, Chile and Uruguay entities as held-for-sale. This required the Company to remeasure the disposal groups at fair value, less costs to sell, which is considered a Level 3 fair value measurement and was based on each transaction's estimated consideration. During fiscal 2021, the Company continued to use estimated consideration to measure the fair value of each disposal group. +All other assets or liabilities required to be measured at fair value on a non-recurring basis as of May 31, 2021 and 2020 were immaterial. +2021 FORM 10-K 71 +Table of Contents +NOTE 7 — SHORT-TERM BORROWINGS AND CREDIT LINES +Notes payable as of May 31, 2021 and 2020, are summarized below: +MAY 31, +2021 2020 +(Dollars in millions) +BORROWINGS INTEREST RATE BORROWINGS INTEREST RATE +Notes payable: +Commercial paper (1) +$ — 0.00 % $ 248 1.65 % +U.S. operations — 0.00 % — 0.00 % +(2) +Non-U.S. operations 2 17.80 % +(2) +— 0.00 % +TOTAL NOTES PAYABLE $ 2 $ 248 +(1) Commercial paper borrowings and repayments with original maturities greater than three months are included in Proceeds from borrowings, net of debt issuance costs and Repayment of borrowings, respectively, on the Consolidated Statements of Cash Flows. +(2) Weighted average interest rate includes non-interest bearing overdrafts. +The carrying amounts reflected in the Consolidated Balance Sheets for Notes payable approximate fair value. +On August 16, 2019, the Company entered into a committed credit facility agreement with a syndicate of banks, which provides up to $ 2 billion of borrowings, with the option to increase borrowings up to $ 3 billion in total upon lender approval. The facility matures on August 16, 2024, with a one-year extension option prior to any anniversary of the closing date, provided that in no event shall the facility extend beyond August 16, 2026. Based on the Company's current long-term senior unsecured debt ratings of AA- and A1 from Standard and Poor's Corporation and Moody's Investor Services, respectively, the interest rate charged on any outstanding borrowings would be the prevailing London Interbank Offered Rate (LIBOR) plus 0.46 %. The facility fee is 0.04 % of the total commitment. This facility replaces the prior $ 2 billion credit facility agreement entered into on August 28, 2015, which would have matured August 28, 2020. +On March 15, 2021, the Company entered into a committed credit facility agreement with a syndicate of banks, which provides up to $ 1 billion of borrowings, with the option to increase borrowings up to $ 1.5 billion in total upon lender approval. The facility matures on March 14, 2022, with a 364 -day extension option up to 30 days prior to the existing termination date, provided that in no event shall the facility extend beyond March 13, 2023. This facility replaces the prior $ 2 billion credit facility agreement entered into on April 6, 2020, which would have matured on April 5, 2021. Based on the Company's current long-term senior unsecured debt ratings of AA- and A1 from Standard and Poor's Corporation and Moody's Investor Services, respectively, the interest rate charged on any outstanding borrowings would be the prevailing LIBOR plus 0.50 %. The facility fee is 0.03 % of the total undrawn commitment. Additionally, the Company decreased its $ 4 billion commercial paper program to $ 3 billion in connection with the new credit facility agreement. +As of and for the periods ended May 31, 2021 and 2020, no amounts were outstanding under any of the Company's committed credit facilities. +2021 FORM 10-K 72 +Table of Contents +NOTE 8 — LONG-TERM DEBT +Long-term debt, net of unamortized premiums, discounts and debt issuance costs, comprises the following: +BOOK VALUE OUTSTANDING +AS OF MAY 31, +Scheduled Maturity (Dollars and Yen in millions) +ORIGINAL PRINCIPAL INTEREST RATE INTEREST PAYMENTS 2021 2020 +Corporate Term Debt: (1)(2) +May 1, 2023 $ 500 2.25 % Semi-Annually $ 499 $ 499 +March 27, 2025 1,000 2.40 % Semi-Annually 995 994 +November 1, 2026 1,000 2.38 % Semi-Annually 996 995 +March 27, 2027 1,000 2.75 % Semi-Annually 995 994 +March 27, 2030 1,500 2.85 % Semi-Annually 1,490 1,489 +March 27, 2040 1,000 3.25 % Semi-Annually 986 985 +May 1, 2043 500 3.63 % Semi-Annually 496 495 +November 1, 2045 1,000 3.88 % Semi-Annually 984 984 +November 1, 2046 500 3.38 % Semi-Annually 491 491 +March 27, 2050 1,500 3.38 % Semi-Annually 1,481 1,480 +Japanese Yen Notes: (3) +August 20, 2001 through November 20, 2020 +¥ 9,000 2.60 % Quarterly $ — $ 2 +August 20, 2001 through November 20, 2020 +4,000 2.00 % Quarterly — 1 +Total 9,413 9,409 +Less current maturities — 3 +TOTAL LONG-TERM DEBT $ 9,413 $ 9,406 +(1) These senior unsecured obligations rank equally with the Company's other unsecured and unsubordinated indebtedness. +(2) The bonds are redeemable at the Company's option at a price equal to the greater of (i) 100 % of the aggregate principal amount of the notes to be redeemed or (ii) the sum of the present values of the remaining scheduled payments, plus in each case, accrued and unpaid interest. However, the bonds also feature a par call provision, which allows for the bonds to be redeemed at a price equal to 100 % of the aggregate principal amount of the notes being redeemed, plus accrued and unpaid interest on or after the Par Call Date, as defined in the respective notes. +(3) NIKE Logistics YK assumed a total of ¥ 13.0 billion in loans as part of its agreement to purchase a distribution center in Japan, which serves as collateral for the loans. These loans matured in equal quarterly installments during the period August 20, 2001 through November 20, 2020. +The scheduled maturity of Long-term debt in each of the years ending May 31, 2022 through 2026, are $ 0 million, $ 500 million, $ 0 million, $ 1,000 million and $ 0 million, respectively, at face value. +The Company's Long-term debt is recorded at adjusted cost, net of unamortized premiums, discounts and debt issuance costs. The fair value of long-term debt is estimated based upon quoted prices for similar instruments or quoted prices for identical instruments in inactive markets (Level 2). The fair value of the Company's Long-term debt, including the current portion, was approximately $ 10,275 million and $ 10,645 million as of May 31, 2021 and 2020, respectively. +2021 FORM 10-K 73 +Table of Contents +NOTE 9 — INCOME TAXES +Income before income taxes is as follows: +YEAR ENDED MAY 31, +(Dollars in millions) +2021 2020 2019 +Income before income taxes: +United States $ 5,723 $ 2,954 $ 593 +Foreign 938 ( 67 ) 4,208 +TOTAL INCOME BEFORE INCOME TAXES $ 6,661 $ 2,887 $ 4,801 +The provision for income taxes is as follows: +YEAR ENDED MAY 31, +(Dollars in millions) +2021 2020 2019 +Current: +United States +Federal $ 328 $ ( 109 ) $ 74 +State 134 81 56 +Foreign 857 756 608 +Total Current 1,319 728 738 +Deferred: +United States +Federal ( 371 ) ( 231 ) ( 33 ) +State ( 34 ) ( 47 ) ( 9 ) +Foreign 20 ( 102 ) 76 +Total Deferred ( 385 ) ( 380 ) 34 +TOTAL INCOME TAX EXPENSE $ 934 $ 348 $ 772 +A reconciliation from the U.S. statutory federal income tax rate to the effective income tax rate is as follows: +YEAR ENDED MAY 31, +2021 2020 2019 +Federal income tax rate 21.0 % 21.0 % 21.0 % +State taxes, net of federal benefit 1.3 % 0.8 % 1.0 % +Foreign earnings 0.2 % 5.9 % - 1.1 % +Foreign-derived intangible income benefit - 3.7 % - 8.1 % — % +Excess tax benefits from share-based compensation - 4.5 % - 7.2 % - 3.6 % +Income tax audits and contingency reserves 1.5 % - 1.4 % 1.3 % +U.S. research and development tax credit - 0.9 % - 1.8 % - 1.0 % +Other, net - 0.9 % 2.9 % - 1.5 % +EFFECTIVE INCOME TAX RATE 14.0 % 12.1 % 16.1 % +On December 22, 2017, the United States enacted the Tax Cuts and Jobs Act (the "Tax Act"), which significantly changed U.S. tax law and included a provision to tax global intangible low-taxed income (GILTI) of foreign subsidiaries. The Company recognizes taxes due under the GILTI provision as a current period expense. +The effective tax rate for the fiscal year ended May 31, 2021, was higher than the effective tax rate for the fiscal year ended May 31, 2020, due to a change in the proportion of earnings taxed in the U.S., related to the recovery from the impact of the COVID-19 pandemic and less favorable impacts from discrete items such as stock-based compensation. Income tax audit and contingency reserves for the fiscal year ended May 31, 2021, reflects recognition of a reserve of 1.2 % related to Altera Corp. v. Commissioner , where the taxpayer was denied a hearing before the U.S. Supreme Court on June 22, 2020, thereby ratifying the Ninth Circuit Court's decision and requiring the inclusion of stock-based compensation in intercompany cost-sharing arrangements, and other matters of 0.3 %. +2021 FORM 10-K 74 +Table of Contents +The effective tax rate for the fiscal year ended May 31, 2020, was lower than the effective tax rate for the fiscal year ended May 31, 2019, due to increased benefits from discrete items such as stock-based compensation. The foreign earnings rate impact shown above for the fiscal year ended May 31, 2020, includes withholding taxes of 6.5 % and held for sale accounting items of 2.9 %, offset by a benefit for statutory rate differences and other items of 3.5 %. The foreign derived intangible income benefit reflects U.S. tax benefits introduced by the Tax Act for companies serving foreign markets. This benefit became available to the Company as a result of a restructuring of its intellectual property interests. Income tax audit and contingency reserves reflect benefits associated with the modification of the treatment of certain research and development expenditures of 2.9 % offset by an increase related to the resolution of an audit by the U.S. Internal Revenue Service ("IRS") and other matters of 1.5 %. Included in other is the deferral of income tax effects related to intra-entity transfers of inventory of 2.3 % and other items of 0.6 %. +Deferred tax assets and liabilities comprise the following as of: +MAY 31, +(Dollars in millions) +2021 2020 +Deferred tax assets: +Inventories (1) +$ 78 $ 84 +Sales return reserves (1) +100 115 +Deferred compensation (1) +350 295 +Stock-based compensation 175 168 +Reserves and accrued liabilities (1) +96 120 +Operating lease liabilities 499 491 +Intangibles 187 — +Capitalized research and development expenditures 349 189 +Net operating loss carry-forwards (1) +15 21 +Other (1) +178 127 +Total deferred tax assets 2,027 1,610 +Valuation allowance (1) +( 12 ) ( 26 ) +Total deferred tax assets after valuation allowance 2,015 1,584 +Deferred tax liabilities: +Foreign withholding tax on undistributed earnings of foreign subsidiaries ( 182 ) ( 165 ) +Property, plant and equipment (1) +( 255 ) ( 232 ) +Right-of-use assets ( 431 ) ( 423 ) +Other (1) +( 14 ) ( 32 ) +Total deferred tax liabilities ( 882 ) ( 852 ) +NET DEFERRED TAX ASSET $ 1,133 $ 732 +(1) The above amounts exclude deferred taxes held-for-sale as of May 31, 2021 and 2020. See Note 20 — Acquisitions and Divestitures for additional information. +The following is a reconciliation of the changes in the gross balance of unrecognized tax benefits as of: +MAY 31, +(Dollars in millions) +2021 2020 2019 +Unrecognized tax benefits, beginning of the period $ 771 $ 808 $ 698 +Gross increases related to prior period tax positions 77 181 85 +Gross decreases related to prior period tax positions ( 22 ) ( 171 ) ( 32 ) +Gross increases related to current period tax positions 59 50 81 +Settlements ( 5 ) ( 58 ) — +Lapse of statute of limitations ( 6 ) ( 28 ) ( 35 ) +Changes due to currency translation 22 ( 11 ) 11 +UNRECOGNIZED TAX BENEFITS, END OF THE PERIOD $ 896 $ 771 $ 808 +As of May 31, 2021, total gross unrecognized tax benefits, excluding related interest and penalties, were $ 896 million, $ 609 million of which would affect the Company's effective tax rate if recognized in future periods. The majority of the total gross unrecognized tax benefits are long-term in nature and included within Deferred income taxes and other liabilities on the Consolidated Balance Sheets. +2021 FORM 10-K 75 +Table of Contents +The Company recognizes interest and penalties related to income tax matters in income tax expense. The liability for payment of interest and penalties increased by $ 45 million during the year ended May 31, 2021, decreased by $ 16 million during the fiscal year ended May 31, 2020, and increased by $ 17 million during the fiscal year ended May 31, 2019. As of May 31, 2021 and 2020, accrued interest and penalties related to uncertain tax positions were $ 203 million and $ 158 million, respectively (excluding federal benefit). +As of May 31, 2021 and 2020, long-term income taxes payable were $ 640 million and $ 757 million, respectively, and were included within Deferred income taxes and other liabilities on the Consolidated Balance Sheets. +The Company is subject to taxation in the United States, as well as various state and foreign jurisdictions. The Company is currently under audit by the IRS for fiscal years 2017 through 2019. The Company has closed all U.S. federal income tax matters through fiscal 2016, with the exception of certain transfer pricing adjustments. Tax years after 2010 remain open in certain major foreign jurisdictions. Although the timing of resolution of audits is not certain, the Company evaluates all domestic and foreign audit issues in the aggregate, along with the expiration of applicable statutes of limitations, and estimates that it is reasonably possible the total gross unrecognized tax benefits could decrease by up to $ 40 million within the next 12 months. In January 2019, the European Commission opened a formal investigation to examine whether the Netherlands has breached State Aid rules when granting certain tax rulings to the Company. The Company believes the investigation is without merit. If this matter is adversely resolved, the Netherlands may be required to assess additional amounts with respect to current and prior periods, and the Company's Netherlands income taxes in the future could increase. +The Company historically provided for U.S. income taxes on the undistributed earnings of foreign subsidiaries unless they were considered indefinitely reinvested outside the United States. As a result of the enactment of the Tax Act, in fiscal 2018 the Company reevaluated its historic indefinite reinvestment assertion and determined that any historical or future undistributed earnings of foreign subsidiaries are no longer considered to be indefinitely reinvested. Effective January 1, 2020, however, the tax law in the Netherlands, one of the Company's major jurisdictions, changed. As a result of the change in law, the Company's undistributed earnings in the Netherlands are subject to withholding tax upon distribution. It is the Company's intention to indefinitely reinvest the historical earnings of certain foreign subsidiaries outside North America prior to May 31, 2020, to ensure there is sufficient working capital to expand operations outside the United States. Accordingly, the Company has not recorded a deferred tax liability related to foreign withholding taxes on approximately $ 10.3 billion of undistributed earnings of these foreign subsidiaries as of May 31, 2021. Withholding taxes of approximately $ 1.5 billion would be payable upon the remittance of these undistributed earnings as of May 31, 2021. +A portion of the Company's foreign operations benefit from a tax holiday, which is set to expire in 2031 . This tax holiday may be extended when certain conditions are met or may be terminated early if certain conditions are not met. The tax benefit attributable to this tax holiday was $ 238 million, $ 238 million and $ 167 million for the fiscal years ended May 31, 2021, 2020 and 2019, respectively. The benefit of the tax holiday on diluted earnings per common share was $ 0.15 , $ 0.15 and $ 0.10 for the fiscal years ended May 31, 2021, 2020 and 2019, respectively. +Deferred tax assets as of May 31, 2021 and 2020, were reduced by a valuation allowance. For the fiscal year ended May 31, 2021, a valuation allowance was provided for U.S. capital loss carryforwards and on tax benefits generated by certain entities with operating losses. For the fiscal year ended May 31, 2020, a valuation allowance was provided for U.S. foreign tax credit carryforwards and on tax benefits generated by certain entities with operating losses. There was a $ 14 million net decrease in the valuation allowance for the fiscal year ended May 31, 2021, compared to a $ 62 million net decrease for the fiscal year ended May 31, 2020, and $ 7 million net decrease for the year ended May 31, 2019. +The Company has available domestic and foreign loss carry-forwards of $ 65 million as of May 31, 2021. If not utilized, such losses will expire as follows: +YEAR ENDING MAY 31, +(Dollars in millions) +2022 2023 2024 2025 2026-2041 INDEFINITE TOTAL +Net operating losses $ — $ — $ — $ — $ 42 $ 23 $ 65 +2021 FORM 10-K 76 +Table of Contents +NOTE 10 — REDEEMABLE PREFERRED STOCK +Sojitz America is the sole owner of the Company's authorized redeemable preferred stock, $ 1 par value, which is redeemable at the option of Sojitz America or the Company at par value aggregating $ 0.3 million. A cumulative dividend of $ 0.10 per share is payable annually on May 31, and no dividends may be declared or paid on the common stock of the Company unless dividends on the redeemable preferred stock have been declared and paid in full. There have been no changes in the redeemable preferred stock in the fiscal years ended May 31, 2021, 2020 and 2019. As the holder of the redeemable preferred stock, Sojitz America does not have general voting rights but does have the right to vote as a separate class on the sale of all or substantially all of the assets of the Company and its subsidiaries; on merger, consolidation, liquidation or dissolution of the Company; or on the sale or assignment of the NIKE trademark for athletic footwear sold in the United States. The redeemable preferred stock has been fully issued to Sojitz America and is not blank check preferred stock. The Company's articles of incorporation do not permit the issuance of additional preferred stock. +NOTE 11 — COMMON STOCK AND STOCK-BASED COMPENSATION +COMMON STOCK +The authorized number of shares of Class A Common Stock, no par value, and Class B Common Stock, no par value, are 400 million and 2,400 million, respectively. Each share of Class A Common Stock is convertible into one share of Class B Common Stock. Voting rights of Class B Common Stock are limited in certain circumstances with respect to the election of directors. There are no differences in the dividend and liquidation preferences or participation rights of the holders of Class A and Class B Common Stock. From time to time, the Company's Board of Directors authorizes share repurchase programs for the repurchase of Class B Common Stock. The value of repurchased shares is deducted from Total shareholders' equity through allocation to Capital in excess of stated value and Retained earnings. +STOCK-BASED COMPENSATION +The NIKE, Inc. Stock Incentive Plan (the “Stock Incentive Plan”) provides for the issuance of up to 798 million previously unissued shares of Class B Common Stock in connection with equity awards granted under the Stock Incentive Plan. The Stock Incentive Plan authorizes the grant of non-statutory stock options, incentive stock options, stock appreciation rights, restricted stock, restricted stock units and performance-based awards. The exercise price for stock options and stock appreciation rights may not be less than the fair market value of the underlying shares on the date of grant. A committee of the Board of Directors administers the Stock Incentive Plan. The committee has the authority to determine the employees to whom awards will be made, the amount of the awards and the other terms and conditions of the awards. The Company generally grants stock options and restricted stock on an annual basis. Substantially all awards under the Stock Incentive Plan vest ratably over 4 years of continued employment, with stock options expiring 10 years from the date of grant. +The following table summarizes the Company's total stock-based compensation expense recognized in Cost of sales or Operating overhead expense, as applicable: +YEAR ENDED MAY 31, +(Dollars in millions) +2021 2020 2019 +Stock options (1) +$ 323 $ 237 $ 207 +ESPPs 63 53 40 +Restricted stock (1) +225 139 78 +TOTAL STOCK-BASED COMPENSATION EXPENSE $ 611 $ 429 $ 325 +(1) Expense for stock options includes the expense associated with stock appreciation rights. Accelerated stock option expense is primarily recorded for employees meeting certain retirement eligibility requirements and was $ 67 million, $ 53 million and $ 41 million for the fiscal years ended May 31, 2021, 2020 and 2019, respectively. During fiscal 2021, an immaterial amount of accelerated stock option and restricted stock expense was also recorded for certain employees impacted by the Company's organizational realignment. For more information, see Note 21 — Restructuring. +The income tax benefit related to stock-based compensation expense was $ 297 million, $ 207 million and $ 175 million for the fiscal years ended May 31, 2021, 2020 and 2019, respectively, and reported within Income tax expense. +2021 FORM 10-K 77 +Table of Contents +STOCK OPTIONS +The weighted average fair value per share of the options granted during the years ended May 31, 2021, 2020 and 2019, computed as of the grant date using the Black-Scholes pricing model, was $ 26.75 , $ 18.71 and $ 22.78 , respectively. The weighted average assumptions used to estimate these fair values were as follows: +YEAR ENDED MAY 31, +2021 2020 2019 +Dividend yield 0.9 % 1.0 % 1.0 % +Expected volatility 27.3 % 23.0 % 26.6 % +Weighted average expected life (in years) 6.0 6.0 6.0 +Risk-free interest rate 0.4 % 1.5 % 2.8 % +Expected volatilities are based on the historical volatility of the Company's common stock, the implied volatility in market traded options on the Company's common stock with a term greater than one year , as well as other factors. The weighted average expected life of options is based on an analysis of historical and expected future exercise patterns. The interest rate is based on the U.S. Treasury (constant maturity) risk-free rate in effect at the date of grant for periods corresponding with the expected term of the options. +The following summarizes the stock option transactions under the plan discussed above: +SHARES (1) +WEIGHTED AVERAGE OPTION PRICE +(In millions) +Options outstanding as of May 31, 2020 88.1 $ 60.98 +Exercised ( 20.7 ) 46.31 +Forfeited ( 3.8 ) 95.87 +Granted 14.7 112.65 +Options outstanding as of May 31, 2021 78.3 $ 72.88 +(1) Includes stock appreciation rights transactions. +Options exercisable as of May 31, 2021, were 44.2 million and had a weighted average option price of $ 57.43 per share. The aggregate intrinsic value for options outstanding and exercisable as of May 31, 2021, was $ 4,976 million and $ 3,494 million, respectively. The total intrinsic value of the options exercised during the years ended May 31, 2021, 2020 and 2019 was $ 1,571 million, $ 1,161 million and $ 938 million, respectively. The intrinsic value is the amount by which the market value of the underlying stock exceeds the exercise price of the options. The weighted average contractual life remaining for options outstanding and options exercisable as of May 31, 2021, was 5.9 years and 4.2 years, respectively. As of May 31, 2021, the Company had $ 415 million of unrecognized compensation costs from stock options, net of estimated forfeitures, to be recognized in Cost of sales or Operating overhead expense, as applicable, over a weighted average remaining period of 2.5 years. +EMPLOYEE STOCK PURCHASE PLANS +In addition to the Stock Incentive Plan, the Company gives employees the right to purchase shares at a discount from the market price under employee stock purchase plans (ESPPs). Subject to the annual statutory limit, employees are eligible to participate through payroll deductions of up to 10 % of their compensation. At the end of each six-month offering period, shares are purchased by the participants at 85 % of the lower of the fair market value at the beginning or the end of the offering period. Employees purchased 2.5 million, 2.7 million and 2.5 million shares during each of the fiscal years ended May 31, 2021, 2020 and 2019, respectively. +RESTRICTED STOCK AND RESTRICTED STOCK UNITS +Recipients of restricted stock are entitled to cash dividends and to vote their respective shares throughout the period of restriction. Recipients of restricted stock units are entitled to dividend equivalent cash payments upon vesting. The number of restricted stock and restricted stock units vested includes shares of common stock withheld by the Company on behalf of employees to satisfy the minimum statutory tax withholding requirements. +2021 FORM 10-K 78 +Table of Contents +The following summarizes the restricted stock and restricted stock unit activity under the plan discussed above: +SHARES WEIGHTED AVERAGE GRANT DATE +FAIR VALUE +(In millions) +Nonvested as of May 31, 2020 6.8 $ 79.84 +Vested ( 2.7 ) 76.95 +Forfeited ( 1.1 ) 81.70 +Granted 3.6 113.84 +Nonvested as of May 31, 2021 6.6 $ 99.70 +The weighted average fair value per share of restricted stock and restricted stock units granted for the years ended May 31, 2021, 2020 and 2019, computed as of the grant date, was $ 113.84 , $ 88.26 and $ 80.95 , respectively. During the years ended May 31, 2021, 2020 and 2019, the aggregate fair value of restricted stock and restricted stock units vested was $ 310 million, $ 98 million and $ 44 million, respectively, computed as of the date of vesting. As of May 31, 2021, the Company had $ 448 million of unrecognized compensation costs from restricted stock and restricted stock units, net of estimated forfeitures, to be recognized in Cost of sales or Operating overhead expense, as applicable, over a weighted average remaining period of 2.5 years. +NOTE 12 — EARNINGS PER SHARE +The following is a reconciliation from basic earnings per common share to diluted earnings per common share. The computations of diluted earnings per common share excluded restricted stock and options, including shares under ESPPs, to purchase an additional 11.3 million, 30.6 million and 17.5 million shares of common stock outstanding for the fiscal years ended May 31, 2021, 2020 and 2019, respectively, because the awards were anti-dilutive. +YEAR ENDED MAY 31, +(In millions, except per share data) +2021 2020 2019 +Net income available to common stockholders $ 5,727 $ 2,539 $ 4,029 +Determination of shares: +Weighted average common shares outstanding 1,573.0 1,558.8 1,579.7 +Assumed conversion of dilutive stock options and awards 36.4 32.8 38.7 +DILUTED WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 1,609.4 1,591.6 1,618.4 +Earnings per common share: +Basic $ 3.64 $ 1.63 $ 2.55 +Diluted $ 3.56 $ 1.60 $ 2.49 +NOTE 13 — BENEFIT PLANS +The Company has a qualified 401(k) Savings and Profit Sharing Plan, in which all U.S. employees are able to participate. The Company matches a portion of employee contributions to the savings plan. Company contributions to the savings plan were $ 110 million, $ 107 million and $ 90 million and included in Cost of sales or Operating overhead expense, as applicable, for the years ended May 31, 2021, 2020 and 2019, respectively. The terms of the plan also allow for annual discretionary profit sharing contributions, as recommended by senior management and approved by the Board of Directors, to the accounts of eligible U.S. employees who work at least 1,000 hours in a year. There were no profit sharing contributions made to the plan for the fiscal years ended May 31, 2021 and 2020. Profit sharing contributions of $ 37 million were made to the plan and included in Cost of sales or Operating overhead expense, as applicable, for the year ended May 31, 2019. +The Company also has a Long-Term Incentive Plan (LTIP) adopted by the Board of Directors and approved by shareholders in September 1997, which has been amended from time to time. The Company recognized $ 78 million, $ 66 million and $ 83 million of Operating overhead expense related to cash awards under the LTIP during the years ended May 31, 2021, 2020 and 2019, respectively. +The Company allows certain highly compensated employees and non-employee directors of the Company to defer compensation under a nonqualified deferred compensation plan. Deferred compensation plan liabilities were $ 944 million and $ 725 million as of +2021 FORM 10-K 79 +Table of Contents +May 31, 2021 and 2020, respectively, and primarily classified in Deferred income taxes and other liabilities on the Consolidated Balance Sheets. +The Company has pension plans in various countries worldwide. The pension plans are only available to local employees and are generally government mandated. The liability related to the unfunded pension liabilities of the plans was $ 64 million and $ 79 million as of May 31, 2021 and 2020, respectively, and primarily classified as non-current in Deferred income taxes and other liabilities on the Consolidated Balance Sheets. +NOTE 14 — RISK MANAGEMENT AND DERIVATIVES +The Company is exposed to global market risks, including the effect of changes in foreign currency exchange rates and interest rates, and uses derivatives to manage financial exposures that occur in the normal course of business. The Company does not hold or issue derivatives for trading or speculative purposes. +The Company may elect to designate certain derivatives as hedging instruments under U.S. GAAP. The Company formally documents all relationships between designated hedging instruments and hedged items as well as its risk management objectives and strategies for undertaking hedge transactions. This process includes linking all derivatives designated as hedges to either recognized assets or liabilities or forecasted transactions and assessing, both at inception and on an ongoing basis, the effectiveness of the hedging relationships. +The majority of derivatives outstanding as of May 31, 2021, are designated as foreign currency cash flow hedges, primarily for Euro/U.S. Dollar, British Pound/Euro, Chinese Yuan/U.S. Dollar and Japanese Yen/U.S. Dollar currency pairs. All derivatives are recognized on the Consolidated Balance Sheets at fair value and classified based on the instrument's maturity date. +2021 FORM 10-K 80 +Table of Contents +The following tables present the fair values of derivative instruments included within the Consolidated Balance Sheets: +DERIVATIVE ASSETS +BALANCE SHEET LOCATION MAY 31, +(Dollars in millions) +2021 2020 +Derivatives formally designated as hedging instruments: +Foreign exchange forwards and options Prepaid expenses and other current assets $ 42 $ 43 +Foreign exchange forwards and options Deferred income taxes and other assets 16 1 +Total derivatives formally designated as hedging instruments 58 44 +Derivatives not designated as hedging instruments: +Foreign exchange forwards and options Prepaid expenses and other current assets 34 48 +Embedded derivatives Prepaid expenses and other current assets — 1 +Foreign exchange forwards and options Deferred income taxes and other assets — 2 +Total derivatives not designated as hedging instruments 34 51 +TOTAL DERIVATIVE ASSETS $ 92 $ 95 +DERIVATIVE LIABILITIES +BALANCE SHEET LOCATION MAY 31, +(Dollars in millions) +2021 2020 +Derivatives formally designated as hedging instruments: +Foreign exchange forwards and options Accrued liabilities $ 385 $ 173 +Foreign exchange forwards and options Deferred income taxes and other liabilities 41 17 +Total derivatives formally designated as hedging instruments 426 190 +Derivatives not designated as hedging instruments: +Foreign exchange forwards and options Accrued liabilities 30 15 +Embedded derivatives Accrued liabilities 1 2 +Total derivatives not designated as hedging instruments 31 17 +TOTAL DERIVATIVE LIABILITIES $ 457 $ 207 +The following table presents the amounts in the Consolidated Statements of Income in which the effects of cash flow hedges are recorded and the effects of cash flow hedge activity on these line items for the fiscal years ended May 31, 2021, 2020 and 2019: +YEAR ENDED MAY 31, +2021 2020 2019 +(Dollars in millions) +TOTAL AMOUNT OF +GAIN (LOSS) +ON CASH FLOW +HEDGE ACTIVITY TOTAL AMOUNT OF +GAIN (LOSS) +ON CASH FLOW +HEDGE ACTIVITY TOTAL AMOUNT OF +GAIN (LOSS) +ON CASH FLOW +HEDGE ACTIVITY +Revenues $ 44,538 $ 45 $ 37,403 $ ( 17 ) $ 39,117 $ ( 5 ) +Cost of sales 24,576 51 21,162 364 21,643 53 +Demand creation expense 3,114 3 3,592 ( 2 ) 3,753 — +Other (income) expense, net 14 ( 47 ) 139 181 ( 78 ) 35 +Interest expense (income), net 262 ( 7 ) 89 ( 7 ) 49 ( 7 ) +2021 FORM 10-K 81 +Table of Contents +The following tables present the amounts affecting the Consolidated Statements of Income for the years ended May 31, 2021, 2020 and 2019: +(Dollars in millions) +AMOUNT OF GAIN (LOSS) +RECOGNIZED IN OTHER +COMPREHENSIVE INCOME (LOSS) ON DERIVATIVES (1) +AMOUNT OF GAIN (LOSS) +RECLASSIFIED FROM ACCUMULATED +OTHER COMPREHENSIVE +INCOME (LOSS) INTO INCOME (1) +YEAR ENDED MAY 31, LOCATION OF GAIN (LOSS) +RECLASSIFIED FROM ACCUMULATED +OTHER COMPREHENSIVE INCOME +(LOSS) INTO INCOME YEAR ENDED MAY 31, +2021 2020 2019 2021 2020 2019 +Derivatives designated as +cash flow hedges: +Foreign exchange forwards +and options +$ ( 61 ) $ 28 $ 14 Revenues $ 45 $ ( 17 ) $ ( 5 ) +Foreign exchange forwards +and options +( 563 ) 283 405 Cost of sales 51 364 53 +Foreign exchange forwards +and options +5 1 2 Demand creation expense 3 ( 2 ) — +Foreign exchange forwards +and options +( 163 ) 90 156 Other (income) expense, net ( 47 ) 181 35 +Interest rate swaps (2) +— — — Interest expense (income), net ( 7 ) ( 7 ) ( 7 ) +Total designated cash +flow hedges +$ ( 782 ) $ 402 $ 577 $ 45 $ 519 $ 76 +(1) For the fiscal years ended May 31, 2021, 2020 and 2019, the amounts recorded in Other (income) expense, net as a result of the discontinuance of cash flow hedges because the forecasted transactions were no longer probable of occurring were immaterial. +(2) Gains and losses associated with terminated interest rate swaps, which were previously designated as cash flow hedges and recorded in Accumulated other comprehensive income (loss), will be released through Interest expense (income), net over the term of the issued debt. +AMOUNT OF GAIN (LOSS) RECOGNIZED +IN INCOME ON DERIVATIVES +LOCATION OF GAIN (LOSS) +RECOGNIZED IN INCOME +ON DERIVATIVES +YEAR ENDED MAY 31, +(Dollars in millions) +2021 2020 2019 +Derivatives not designated as hedging instruments: +Foreign exchange forwards and options $ ( 150 ) $ 76 $ 166 Other (income) expense, net +Embedded derivatives ( 17 ) ( 1 ) 7 Other (income) expense, net +CASH FLOW HEDGES +All changes in fair value of derivatives designated as cash flow hedge instruments are recorded in Accumulated other comprehensive income (loss) until Net income is affected by the variability of cash flows of the hedged transaction. Effective hedge results are classified in the Consolidated Statements of Income in the same manner as the underlying exposure. When it is no longer probable the forecasted hedged transaction will occur in the initially identified time period, hedge accounting is discontinued and the Company accounts for the associated derivative as an undesignated instrument as discussed below. Additionally, the gains and losses associated with derivatives no longer designated as cash flow hedge instruments in Accumulated other comprehensive income (loss) are recognized immediately in Other (income) expense, net, if it is probable the forecasted hedged transaction will not occur by the end of the initially identified time period or within an additional two-month period thereafter. In rare circumstances, the additional period of time may exceed two months due to extenuating circumstances related to the nature of the forecasted transaction that are outside the control or influence of the Company. +The purpose of the Company's foreign exchange risk management program is to lessen both the positive and negative effects of currency fluctuations on the Company's consolidated results of operations, financial position and cash flows. Foreign currency exposures the Company may elect to hedge in this manner include product costs, non-functional currency denominated revenues, intercompany revenues, demand creation expenses, investments in U.S. Dollar denominated available-for-sale debt securities and certain other intercompany transactions. +Product cost foreign currency exposures are primarily generated through non-functional currency denominated product purchases and the foreign currency adjustment program described below. NIKE entities primarily purchase product in two ways: (1) Certain NIKE entities purchase product from the NIKE Trading Company (NTC), a wholly-owned sourcing hub that buys NIKE branded products from third party factories, predominantly in U.S. Dollars. The NTC, whose functional currency is the U.S. Dollar, then sells the product to NIKE entities in their respective functional currencies. NTC sales to a NIKE entity with a different +2021 FORM 10-K 82 +Table of Contents +functional currency result in a foreign currency exposure for the NTC. (2) Other NIKE entities purchase product directly from third party factories in U.S. Dollars. These purchases generate a foreign currency exposure for those NIKE entities with a functional currency other than the U.S. Dollar. +The Company operates a foreign currency adjustment program with certain factories. The program is designed to more effectively manage foreign currency risk by assuming certain of the factories' foreign currency exposures, some of which are natural offsets to the Company's existing foreign currency exposures. Under this program, the Company's payments to these factories are adjusted for rate fluctuations in the basket of currencies (“factory currency exposure index”) in which the labor, materials and overhead costs incurred by the factories in the production of NIKE branded products (“factory input costs”) are denominated. For the portion of the indices denominated in the local or functional currency of the factory, the Company may elect to place formally designated cash flow hedges. For all currencies within the indices, excluding the U.S. Dollar and the local or functional currency of the factory, an embedded derivative contract is created upon the factory's acceptance of NIKE's purchase order. Embedded derivative contracts are separated from the related purchase order, as further described within the Embedded Derivatives section below. +The Company's policy permits the utilization of derivatives to reduce its foreign currency exposures where internal netting or other strategies cannot be effectively employed. Typically, the Company may enter into hedge contracts starting up to 12 to 24 months in advance of the forecasted transaction and may place incremental hedges up to 100 % of the exposure by the time the forecasted transaction occurs. The total notional amount of outstanding foreign currency derivatives designated as cash flow hedges was $ 17.4 billion as of May 31, 2021. +As of May 31, 2021, approximately $ 369 million of deferred net losses (net of tax) on both outstanding and matured derivatives in Accumulated other comprehensive income (loss) are expected to be reclassified to Net income during the next 12 months concurrent with the underlying hedged transactions also being recorded in Net income. Actual amounts ultimately reclassified to Net income are dependent on the exchange rates in effect when derivative contracts currently outstanding mature. As of May 31, 2021, the maximum term over which the Company hedges exposures to the variability of cash flows for its forecasted transactions was 24 months. +FAIR VALUE HEDGES +The Company has, in the past, been exposed to the risk of changes in the fair value of certain fixed-rate debt attributable to changes in interest rates. Derivatives used by the Company to hedge this risk are receive-fixed, pay-variable interest rate swaps. The Company had no interest rate swaps designated as fair value hedges as of May 31, 2021. +NET INVESTMENT HEDGES +The Company has, in the past, hedged and may, in the future, hedge the risk of variability in foreign currency-denominated net investments in wholly-owned international operations. All changes in fair value of the derivatives designated as net investment hedges are reported in Accumulated other comprehensive income (loss) along with the foreign currency translation adjustments on those investments. The Company had no outstanding net investment hedges as of May 31, 2021. +UNDESIGNATED DERIVATIVE INSTRUMENTS +The Company may elect to enter into foreign exchange forwards to mitigate the change in fair value of specific assets and liabilities on the Consolidated Balance Sheets and/or embedded derivative contracts. These undesignated instruments are recorded at fair value as a derivative asset or liability on the Consolidated Balance Sheets with their corresponding change in fair value recognized in Other (income) expense, net, together with the remeasurement gain or loss from the hedged balance sheet position and/or embedded derivative contract. The total notional amount of outstanding undesignated derivative instruments was $ 4.8 billion as of May 31, 2021. +EMBEDDED DERIVATIVES +As part of the foreign currency adjustment program described above, an embedded derivative contract is created upon the factory's acceptance of NIKE's purchase order for currencies within the factory currency exposure indices that are neither the U.S. Dollar nor the local or functional currency of the factory. In addition, embedded derivative contracts are created when the Company enters into certain other contractual agreements which have payments that are indexed to currencies that are not the functional currency of either substantial party to the contracts. Embedded derivative contracts are treated as foreign currency forward contracts that are bifurcated from the related contract and recorded at fair value as a derivative asset or liability on the Consolidated Balance Sheets with their corresponding change in fair value recognized in Other (income) expense, net, through the date the foreign currency fluctuations cease to exist. +As of May 31, 2021, the total notional amount of embedded derivatives outstanding was approximately $ 415 million. +2021 FORM 10-K 83 +Table of Contents +CREDIT RISK +The Company is exposed to credit-related losses in the event of nonperformance by counterparties to hedging instruments. The counterparties to all derivative transactions are major financial institutions with investment grade credit ratings; however, this does not eliminate the Company's exposure to credit risk with these institutions. This credit risk is limited to the unrealized gains in such contracts should any of these counterparties fail to perform as contracted. To manage this risk, the Company has established strict counterparty credit guidelines that are continually monitored. +The Company's derivative contracts contain credit risk-related contingent features designed to protect against significant deterioration in counterparties' creditworthiness and their ultimate ability to settle outstanding derivative contracts in the normal course of business. The Company's bilateral credit-related contingent features generally require the owing entity, either the Company or the derivative counterparty, to post collateral for the portion of the fair value in excess of $ 50 million should the fair value of outstanding derivatives per counterparty be greater than $ 50 million. Additionally, a certain level of decline in credit rating of either the Company or the counterparty could trigger collateral requirements. As of May 31, 2021, the Company was in compliance with all credit risk-related contingent features, and derivative instruments with such features were in a net liability position of approximately $ 364 million. Accordingly, the Company posted $ 39 million of cash collateral as a result of these contingent features. Further, as of May 31, 2021, the Company had received no cash collateral from various counterparties to its derivative contracts. The Company considers the impact of the risk of counterparty default to be immaterial. +For additional information related to the Company's derivative financial instruments and collateral, refer to Note 6 — Fair Value Measurements. +NOTE 15 — ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) +The changes in Accumulated other comprehensive income (loss), net of tax, were as follows: +(Dollars in millions) +FOREIGN CURRENCY TRANSLATION ADJUSTMENT (1) +CASH FLOW HEDGES +NET INVESTMENT HEDGES (1) +OTHER TOTAL +Balance at May 31, 2020 $ ( 494 ) $ 390 $ 115 $ ( 67 ) $ ( 56 ) +Other comprehensive income (loss): +Other comprehensive gains (losses) before reclassifications (2) +499 ( 788 ) — ( 8 ) ( 297 ) +Reclassifications to net income of previously deferred (gains) losses (3) +( 3 ) ( 37 ) — 13 ( 27 ) +Total other comprehensive income (loss) 496 ( 825 ) — 5 ( 324 ) +Balance at May 31, 2021 $ 2 $ ( 435 ) $ 115 $ ( 62 ) $ ( 380 ) +(1) The accumulated foreign currency translation adjustment and net investment hedge gains/losses related to an investment in a foreign subsidiary are reclassified to Net income upon sale or upon complete or substantially complete liquidation of the respective entity. +(2) Net of tax benefit (expense) of $ 0 million, $( 6 ) million, $ 0 million, $( 1 ) million and $( 7 ) million, respectively. +(3) Net of tax (benefit) expense of $ 0 million, $ 8 million, $ 0 million, $ 0 million and $ 8 million, respectively. +(Dollars in millions) +FOREIGN CURRENCY TRANSLATION ADJUSTMENT (1) +CASH FLOW HEDGES +NET INVESTMENT HEDGES (1) +OTHER TOTAL +Balance at May 31, 2019 $ ( 346 ) $ 520 $ 115 $ ( 58 ) $ 231 +Other comprehensive income (loss): +Other comprehensive gains (losses) before reclassifications (2) +( 149 ) 387 — ( 8 ) 230 +Reclassifications to net income of previously deferred (gains) losses (3) +1 ( 517 ) — ( 1 ) ( 517 ) +Total other comprehensive income (loss) ( 148 ) ( 130 ) — ( 9 ) ( 287 ) +Balance at May 31, 2020 $ ( 494 ) $ 390 $ 115 $ ( 67 ) $ ( 56 ) +(1) The accumulated foreign currency translation adjustment and net investment hedge gains/losses related to an investment in a foreign subsidiary are reclassified to Net income upon sale or upon complete or substantially complete liquidation of the respective entity. +(2) Net of tax benefit (expense) of $ 0 million, $( 15 ) million, $ 0 million, $ 1 million and $( 14 ) million, respectively. +(3) Net of tax (benefit) expense of $ 0 million, $ 2 million, $ 0 million, $ 0 million and $ 2 million, respectively. +2021 FORM 10-K 84 +Table of Contents +The following table summarizes the reclassifications from Accumulated other comprehensive income (loss) to the Consolidated Statements of Income: +AMOUNT OF GAIN (LOSS) +RECLASSIFIED FROM ACCUMULATED +OTHER COMPREHENSIVE INCOME +(LOSS) INTO INCOME LOCATION OF GAIN (LOSS) +RECLASSIFIED FROM ACCUMULATED +OTHER COMPREHENSIVE INCOME +(LOSS) INTO INCOME +YEAR ENDED MAY 31, +(Dollars in millions) +2021 2020 +Gains (losses) on foreign currency translation adjustment $ 3 $ ( 1 ) Other (income) expense, net +Total before tax 3 ( 1 ) +Tax (expense) benefit — — +Gain (loss) net of tax 3 ( 1 ) +Gains (losses) on cash flow hedges: +Foreign exchange forwards and options $ 45 ( 17 ) Revenues +Foreign exchange forwards and options 51 364 Cost of sales +Foreign exchange forwards and options 3 ( 2 ) Demand creation expense +Foreign exchange forwards and options ( 47 ) 181 Other (income) expense, net +Interest rate swaps ( 7 ) ( 7 ) Interest expense (income), net +Total before tax 45 519 +Tax (expense) benefit ( 8 ) ( 2 ) +Gain (loss) net of tax 37 517 +Gains (losses) on other ( 13 ) 1 Other (income) expense, net +Total before tax ( 13 ) 1 +Tax (expense) benefit — — +Gain (loss) net of tax ( 13 ) 1 +Total net gain (loss) reclassified for the period $ 27 $ 517 +2021 FORM 10-K 85 +Table of Contents +NOTE 16 — REVENUES +DISAGGREGATION OF REVENUES +The following tables present the Company's Revenues disaggregated by reportable operating segment, major product line and distribution channel: +YEAR ENDED MAY 31, 2021 +(Dollars in millions) +NORTH AMERICA EUROPE, MIDDLE EAST & AFRICA GREATER CHINA +ASIA PACIFIC & LATIN AMERICA (1) +GLOBAL BRAND DIVISIONS TOTAL NIKE BRAND CONVERSE CORPORATE TOTAL NIKE, INC. +Revenues by: +Footwear $ 11,644 $ 6,970 $ 5,748 $ 3,659 $ — $ 28,021 $ 1,986 $ — $ 30,007 +Apparel 5,028 3,996 2,347 1,494 — 12,865 104 — 12,969 +Equipment 507 490 195 190 — 1,382 29 — 1,411 +Other — — — — 25 25 86 40 151 +TOTAL REVENUES $ 17,179 $ 11,456 $ 8,290 $ 5,343 $ 25 $ 42,293 $ 2,205 $ 40 $ 44,538 +Revenues by: +Sales to Wholesale Customers $ 10,186 $ 7,812 $ 4,513 $ 3,387 $ — $ 25,898 $ 1,353 $ — $ 27,251 +Sales through Direct to Consumer 6,993 3,644 3,777 1,956 — 16,370 766 — 17,136 +Other — — — — 25 25 86 40 151 +TOTAL REVENUES $ 17,179 $ 11,456 $ 8,290 $ 5,343 $ 25 $ 42,293 $ 2,205 $ 40 $ 44,538 +(1) Refer to Note 20 — Acquisitions and Divestitures for additional information on the transition of the Company's NIKE Brand business in Brazil to a third-party distributor. +YEAR ENDED MAY 31, 2020 +(Dollars in millions) +NORTH AMERICA EUROPE, MIDDLE EAST & AFRICA GREATER CHINA ASIA PACIFIC & LATIN AMERICA GLOBAL BRAND DIVISIONS TOTAL NIKE BRAND CONVERSE CORPORATE TOTAL NIKE, INC. +Revenues by: +Footwear $ 9,329 $ 5,892 $ 4,635 $ 3,449 $ — $ 23,305 $ 1,642 $ — $ 24,947 +Apparel 4,639 3,053 1,896 1,365 — 10,953 89 — 11,042 +Equipment 516 402 148 214 — 1,280 25 — 1,305 +Other — — — — 30 30 90 ( 11 ) 109 +TOTAL REVENUES $ 14,484 $ 9,347 $ 6,679 $ 5,028 $ 30 $ 35,568 $ 1,846 $ ( 11 ) $ 37,403 +Revenues by: +Sales to Wholesale Customers $ 9,371 $ 6,574 $ 3,803 $ 3,408 $ — $ 23,156 $ 1,154 $ — $ 24,310 +Sales through Direct to Consumer 5,113 2,773 2,876 1,620 — 12,382 602 — 12,984 +Other — — — — 30 30 90 ( 11 ) 109 +TOTAL REVENUES $ 14,484 $ 9,347 $ 6,679 $ 5,028 $ 30 $ 35,568 $ 1,846 $ ( 11 ) $ 37,403 +2021 FORM 10-K 86 +Table of Contents +YEAR ENDED MAY 31, 2019 +(Dollars in millions) +NORTH AMERICA EUROPE, MIDDLE EAST & AFRICA GREATER CHINA ASIA PACIFIC & LATIN AMERICA GLOBAL BRAND DIVISIONS TOTAL NIKE BRAND CONVERSE CORPORATE TOTAL NIKE, INC. +Revenues by: +Footwear $ 10,045 $ 6,293 $ 4,262 $ 3,622 $ — $ 24,222 $ 1,658 $ — $ 25,880 +Apparel 5,260 3,087 1,808 1,395 — 11,550 118 — 11,668 +Equipment 597 432 138 237 — 1,404 24 — 1,428 +Other — — — — 42 42 106 ( 7 ) 141 +TOTAL REVENUES $ 15,902 $ 9,812 $ 6,208 $ 5,254 $ 42 $ 37,218 $ 1,906 $ ( 7 ) $ 39,117 +Revenues by: +Sales to Wholesale Customers $ 10,875 $ 7,076 $ 3,726 $ 3,746 $ — $ 25,423 $ 1,247 $ — $ 26,670 +Sales through Direct to Consumer 5,027 2,736 2,482 1,508 — 11,753 553 — 12,306 +Other — — — — 42 42 106 ( 7 ) 141 +TOTAL REVENUES $ 15,902 $ 9,812 $ 6,208 $ 5,254 $ 42 $ 37,218 $ 1,906 $ ( 7 ) $ 39,117 +For the fiscal years ended May 31, 2021, 2020 and 2019, Global Brand Divisions revenues include NIKE Brand licensing and other miscellaneous revenues that are not part of a geographic operating segment. Converse Other revenues were primarily attributable to licensing businesses. Corporate revenues primarily consisted of foreign currency hedge gains and losses related to revenues generated by entities within the NIKE Brand geographic operating segments and Converse but managed through the Company's central foreign exchange risk management program. +As of May 31, 2021 and 2020, the Company did not have any contract assets and had an immaterial amount of contract liabilities recorded in Accrued liabilities on the Consolidated Balance Sheets. +SALES-RELATED RESERVES +As of May 31, 2021 and 2020, the Company's sales-related reserve balance, which includes returns, post-invoice sales discounts and miscellaneous claims, was $ 1,077 million and $ 1,178 million, respectively, recorded in Accrued liabilities on the Consolidated Balance Sheets. The estimated cost of inventory for expected product returns was $ 269 million and $ 313 million as of May 31, 2021 and 2020, respectively, and was recorded in Prepaid expenses and other current assets on the Consolidated Balance Sheets. +MAJOR CUSTOMERS +No customer accounted for 10% or more of the Company's consolidated net Revenues during the fiscal years ended May 31, 2021, 2020 and 2019. +NOTE 17 — OPERATING SEGMENTS AND RELATED INFORMATION +The Company's operating segments are evidence of the structure of the Company's internal organization. The NIKE Brand segments are defined by geographic regions for operations participating in NIKE Brand sales activity. +Each NIKE Brand geographic segment operates predominantly in one industry: the design, development, marketing and selling of athletic footwear, apparel and equipment. The Company's reportable operating segments for the NIKE Brand are: North America; Europe, Middle East & Africa (EMEA); Greater China; and Asia Pacific & Latin America (APLA), and include results for the NIKE and Jordan brands, results for the Hurley brand, prior to its divestiture in fiscal 2020, were included in North America. Refer to Note 20 — Acquisitions and Divestitures for information regarding the fiscal 2020 divestiture of the Company's wholly-owned subsidiary, Hurley, and the planned transition of NIKE Brand businesses in certain countries within APLA to third-party distributors. +The Company's NIKE Direct operations are managed within each NIKE Brand geographic operating segment. Converse is also a reportable segment for the Company and operates in one industry: the design, marketing, licensing and selling of athletic lifestyle sneakers, apparel and accessories. +Global Brand Divisions is included within the NIKE Brand for presentation purposes to align with the way management views the Company. Global Brand Divisions revenues include NIKE Brand licensing and other miscellaneous revenues that are not part of a +2021 FORM 10-K 87 +Table of Contents +geographic operating segment. Global Brand Divisions costs represent demand creation and operating overhead expense that include product creation and design expenses centrally managed for the NIKE Brand, as well as costs associated with NIKE Direct global digital operations and enterprise technology. +Corporate consists primarily of unallocated general and administrative expenses, including expenses associated with centrally managed departments; depreciation and amortization related to the Company's headquarters; unallocated insurance, benefit and compensation programs, including stock-based compensation; and certain foreign currency gains and losses, including certain hedge gains and losses. For the fiscal year ended May 31, 2020, Corporate included a non-recurring impairment charge, recognized as a result of the Company's decision to transition certain NIKE Brand businesses within APLA to a third-party distributor. This charge primarily reflected the anticipated release of associated non-cash cumulative foreign currency translation losses. For more information regarding this charge, refer to Note 20 — Acquisitions and Divestitures . +The primary financial measure used by the Company to evaluate performance of individual operating segments is earnings before interest and taxes (EBIT), which represents Net income before Interest expense (income), net and Income tax expense in the Consolidated Statements of Income. +As part of the Company's centrally managed foreign exchange risk management program, standard foreign currency rates are assigned twice per year to each NIKE Brand entity in the Company's geographic operating segments and to Converse. These rates are set approximately nine and twelve months in advance of the future selling seasons to which they relate (specifically, for each currency, one standard rate applies to the fall and holiday selling seasons, and one standard rate applies to the spring and summer selling seasons) based on average market spot rates in the calendar month preceding the date they are established. Inventories and Cost of sales for geographic operating segments and Converse reflect the use of these standard rates to record non-functional currency product purchases in the entity's functional currency. Differences between assigned standard foreign currency rates and actual market rates are included in Corporate, together with foreign currency hedge gains and losses generated from the Company's centrally managed foreign exchange risk management program and other conversion gains and losses. +Accounts receivable, net, Inventories and Property, plant and equipment, net for operating segments are regularly reviewed by management and are therefore provided below. +2021 FORM 10-K 88 +Table of Contents +YEAR ENDED MAY 31, +(Dollars in millions) +2021 2020 2019 +REVENUES +North America $ 17,179 $ 14,484 $ 15,902 +Europe, Middle East & Africa 11,456 9,347 9,812 +Greater China 8,290 6,679 6,208 +Asia Pacific & Latin America 5,343 5,028 5,254 +Global Brand Divisions 25 30 42 +Total NIKE Brand 42,293 35,568 37,218 +Converse 2,205 1,846 1,906 +Corporate 40 ( 11 ) ( 7 ) +TOTAL NIKE, INC. REVENUES $ 44,538 $ 37,403 $ 39,117 +EARNINGS BEFORE INTEREST AND TAXES +North America $ 5,089 $ 2,899 $ 3,925 +Europe, Middle East & Africa 2,435 1,541 1,995 +Greater China 3,243 2,490 2,376 +Asia Pacific & Latin America 1,530 1,184 1,323 +Global Brand Divisions ( 3,656 ) ( 3,468 ) ( 3,262 ) +Converse 543 297 303 +Corporate ( 2,261 ) ( 1,967 ) ( 1,810 ) +Interest expense (income), net 262 89 49 +TOTAL NIKE, INC. INCOME BEFORE INCOME TAXES $ 6,661 $ 2,887 $ 4,801 +ADDITIONS TO PROPERTY, PLANT AND EQUIPMENT +North America $ 98 $ 110 $ 117 +Europe, Middle East & Africa 153 139 233 +Greater China 94 28 49 +Asia Pacific & Latin America 54 41 47 +Global Brand Divisions 278 438 278 +Total NIKE Brand 677 756 724 +Converse 7 12 18 +Corporate 107 356 333 +TOTAL ADDITIONS TO PROPERTY, PLANT AND EQUIPMENT $ 791 $ 1,124 $ 1,075 +DEPRECIATION +North America $ 130 $ 148 $ 149 +Europe, Middle East & Africa 136 132 111 +Greater China 46 44 50 +Asia Pacific & Latin America 43 46 53 +Global Brand Divisions 222 214 195 +Total NIKE Brand 577 584 558 +Converse 26 25 31 +Corporate 141 112 116 +TOTAL DEPRECIATION $ 744 $ 721 $ 705 +2021 FORM 10-K 89 +Table of Contents +AS OF MAY 31, +(Dollars in millions) +2021 2020 +ACCOUNTS RECEIVABLE, NET +North America $ 1,777 $ 1,020 +Europe, Middle East & Africa 1,349 712 +Greater China 288 321 +Asia Pacific & Latin America (1) +643 425 +Global Brand Divisions 128 65 +Total NIKE Brand 4,185 2,543 +Converse 225 149 +Corporate 53 57 +TOTAL ACCOUNTS RECEIVABLE, NET $ 4,463 $ 2,749 +INVENTORIES +North America $ 2,851 $ 3,077 +Europe, Middle East & Africa 1,821 2,070 +Greater China 1,247 882 +Asia Pacific & Latin America (1) +667 770 +Global Brand Divisions 153 137 +Total NIKE Brand 6,739 6,936 +Converse 290 341 +Corporate ( 175 ) 90 +TOTAL INVENTORIES $ 6,854 $ 7,367 +PROPERTY, PLANT AND EQUIPMENT, NET +North America $ 617 $ 645 +Europe, Middle East & Africa 982 885 +Greater China 288 214 +Asia Pacific & Latin America (1) +304 296 +Global Brand Divisions 780 830 +Total NIKE Brand 2,971 2,870 +Converse 63 80 +Corporate 1,870 1,916 +TOTAL PROPERTY, PLANT AND EQUIPMENT, NET $ 4,904 $ 4,866 +(1) Excludes assets held-for-sale as of May 31, 2021. See Note 20 — Acquisitions and Divestitures for additional information. +REVENUES AND LONG-LIVED ASSETS BY GEOGRAPHIC AREA +After allocation of revenues for Global Brand Divisions, Converse and Corporate to geographical areas based on the location where the sales originated, revenues by geographical area are essentially the same as reported above for the NIKE Brand operating segments with the exception of the United States. Revenues derived in the United States were $ 17,363 million, $ 14,625 million and $ 16,091 million for the fiscal years ended May 31, 2021, 2020 and 2019, respectively. +The Company's largest concentrations of long-lived assets primarily consist of the Company's corporate headquarters, retail locations and distribution facilities in the United States and China, as well as distribution facilities in Belgium. Long-lived assets attributable to operations in these countries, which primarily consists of property, plant and equipment, net and operating lease ROU assets, net, were as follows: +MAY 31, +(Dollars in millions) +2021 2020 +United States $ 4,927 $ 5,114 +Belgium 676 606 +China 518 457 +2021 FORM 10-K 90 +Table of Contents +NOTE 18 — COMMITMENTS AND CONTINGENCIES +As of May 31, 2021 and 2020, the Company had bank guarantees and letters of credit outstanding totaling $ 275 million and $ 239 million, respectively, issued primarily for real estate agreements, self-insurance programs and other general business obligations. +In connection with various contracts and agreements, the Company provides routine indemnification relating to the enforceability of intellectual property rights, coverage for legal issues that arise and other items where the Company is acting as the guarantor. Currently, the Company has several such agreements in place. However, based on the Company's historical experience and the estimated probability of future loss, the Company has determined the fair value of such indemnification is not material to the Company's financial position or results of operations. +In the ordinary course of business, the Company is involved in various legal proceedings involving contractual and employment relationships, product liability claims, trademark rights and a variety of other matters. While the Company cannot predict the outcome of its pending legal matters with certainty, the Company does not believe any currently identified claim, proceeding or litigation, either individually or in aggregate, will have a material impact on the Company's results of operations, financial position or cash flows. +NOTE 19 — LEASES +Lease expense is recognized in Cost of sales or Operating overhead expense within the Consolidated Statements of Income, based on the underlying nature of the leased asset. For the fiscal year ended May 31, 2021, lease expense primarily consisted of operating lease costs of $ 589 million, along with $ 347 million primarily related to variable lease costs, which includes an immaterial amount of short-term lease costs. For the fiscal year ended May 31, 2020, lease expense primarily consisted of operating lease costs of $ 569 million, along with $ 337 million primarily related to variable lease costs, which includes an immaterial amount of short-term lease costs. Prior to the adoption of Topic 842, and in accordance with ASC Topic 840 - Leases , rent expense, excluding executory costs, was $ 829 million for the fiscal year ended May 31, 2019. As of and for the fiscal years ended May 31, 2021 and 2020, finance leases were not a material component of the Company's lease portfolio. +The undiscounted cash flows for future maturities of the Company’s operating lease liabilities and the reconciliation to the Operating lease liabilities recognized in the Company’s Consolidated Balance Sheets are as follows: +(Dollars in millions) +AS OF MAY 31, 2021 (1) +Fiscal 2022 $ 534 +Fiscal 2023 530 +Fiscal 2024 490 +Fiscal 2025 437 +Fiscal 2026 357 +Thereafter 1,397 +Total undiscounted future cash flows related to lease payments $ 3,745 +Less: Interest 347 +Present value of lease liabilities $ 3,398 +(1) Excludes $ 78 million as of May 31, 2021, of future operating lease payments for lease agreements signed but not yet commenced. +The following table includes supplemental information used to calculate the present value of Operating lease liabilities: +AS OF MAY 31, +2021 2020 +Weighted-average remaining lease term (in years) 8.3 8.7 +Weighted-average discount rate 2.3 % 2.4 % +2021 FORM 10-K 91 +Table of Contents +The following table includes supplemental cash and non-cash information related to operating leases: +YEAR ENDED MAY 31, +(Dollars in millions) +2021 2020 +Cash paid for amounts included in the measurement of lease liabilities: +Operating cash flows from operating leases $ 583 $ 532 +Operating lease right-of-use assets obtained in exchange for new operating lease liabilities $ 489 $ 705 +(1) +(1) Excludes the amount initially capitalized in conjunction with the adoption of Topic 842. +NOTE 20 — ACQUISITIONS AND DIVESTITURES +ACQUISITIONS +During fiscal 2021, 2020 and 2019, the Company made multiple acquisitions focused on gaining new capabilities to fuel its Consumer Direct Offense strategy, serving consumers personally at a global scale. The impact of acquisitions, individually and in aggregate, was not considered material to the Company's Consolidated Financial Statements. +DIVESTITURES +During fiscal 2020, as a result of the Company's decision to transition its wholesale and direct to consumer operating model in certain countries within its APLA operating segment, the Company signed definitive agreements to sell its NIKE Brand businesses in Brazil, Argentina, Chile and Uruguay to third-party distributors. Specifically, NIKE entered into agreements to sell its operations in Argentina, Chile and Uruguay to Grupo Axo and to sell substantially all of its operations in Brazil to Grupo SBF S.A., through its wholly-owned subsidiary. The Company has maintained a small operation in Brazil focused on certain sports marketing assets, local manufacturing and Converse. +As a result of this decision, beginning in fiscal 2020, the related assets and liabilities of these entities were classified as held-for-sale within Prepaid expenses and other current assets and Accrued liabilities, respectively, on the Consolidated Balance Sheets. +BRAZIL +During fiscal 2021, the transaction with Grupo SBF S.A. closed, and the Company recognized a loss of approximately $ 50 million within Other (income) expense, net classified within Corporate, on the Consolidated Statements of Income. Cash proceeds received were reflected within Other investing activities on the Consolidated Statements of Cash Flows. +As of May 31, 2020, held-for-sale assets and liabilities consisted of the following: +• Held-for-sale assets of $ 272 million, primarily consisting of $ 142 million of Inventories and $ 101 million of Accounts receivable, net; and +• Held-for-sale liabilities of $ 91 million, primarily consisting of $ 51 million of Accrued liabilities. +ARGENTINA, CHILE AND URUGUAY +During fiscal 2021, the Company and Grupo Axo mutually agreed to terminate the sale and purchase agreement for the transition of NIKE’s businesses in Argentina, Chile and Uruguay to a distributor partnership. However, as the Company remains committed to selling its legal entities in all three countries and granting distribution rights to third-party distributors, the assets and liabilities of the entities have remained classified as held-for-sale on the Consolidated Balance Sheets. +As of May 31, 2021, held-for-sale assets and liabilities consisted of the following: +• Held-for-sale assets of $ 175 million, primarily consisting of $ 76 million of Inventories and $ 59 million of Accounts receivable, net; and +• Held-for-sale liabilities of $ 72 million, primarily consisting of $ 25 million of Accounts payable and $ 22 million of Accrued liabilities. +As of May 31, 2020, held-for-sale assets and liabilities consisted of the following: +• Held-for-sale assets of $ 234 million, primarily consisting of $ 122 million of Inventories and $ 50 million of Prepaid expenses and other current assets; and +• Held-for-sale liabilities of $ 55 million, primarily consisting of $ 34 million of Accrued liabilities. +2021 FORM 10-K 92 +Table of Contents +The Company has recognized total expected net losses of $ 358 million as of May 31, 2021, related to the Argentina, Chile and Uruguay transaction within Other (income) expense, net, classified within Corporate, and a corresponding allowance within Accrued liabilities on the Consolidated Balance Sheets. The initial expected loss of $ 405 million recognized in fiscal 2020 and subsequently adjusted for changes in fair value is largely due to the anticipated release of the cumulative net foreign currency translation losses. These losses will be reclassified from Accumulated other comprehensive income (loss) to Net income upon sale of the legal entities. For more information see Note 6 — Fair Value Measurements. +OTHER DIVESTITURES +On October 29, 2019, the Company signed a definitive agreement to sell the assets and liabilities of its wholly-owned subsidiary brand, Hurley. The transaction closed on December 6, 2019, and the impacts of the divestiture were not considered material to the Company's Consolidated Financial Statements. +NOTE 21 — RESTRUCTURING +During the first quarter of fiscal 2021, the Company announced a new digitally empowered phase of its Consumer Direct Offense strategy: Consumer Direct Acceleration. As a result, management announced a series of leadership and operating model changes to streamline and speed up strategic execution for the Company. These changes resulted in a net reduction of the Company's global workforce, and during fiscal 2021, the Company incurred pre-tax charges of $ 294 million, which relate to employee termination costs and, to a lesser extent, stock-based compensation expense. This amount reflects the continued evaluation and variability of the Company's original estimate of employee termination costs and required changes in assumptions used to calculate stock-based compensation expense. The related cash expenditures primarily took place throughout fiscal 2021, and all related actions are substantially complete. +As of May 31, 2021, the Company recognized employee termination costs of $ 214 million and $ 35 million within Operating overhead expense and Cost of sales, respectively, on the Consolidated Statements of Income. These costs were classified within Corporate. +The activity was recognized within Accrued liabilities as follows: +(Dollars in millions) +Balance at May 31, 2020 $ — +Employee termination costs 249 +Cash payments ( 212 ) +Foreign currency translation and other 1 +Balance at May 31, 2021 $ 38 +Additionally, the related stock-based compensation expense recorded within Operating overhead expense and Costs of sales was $ 41 million and $ 4 million, respectively, for the fiscal year ended May 31, 2021. +2021 FORM 10-K 93 +Table of Contents +ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE +There has been no change of accountants nor any disagreements with accountants on any matter of accounting principles or practices or financial statement disclosure required to be reported under this Item. +ITEM 9A. CONTROLS AND PROCEDURES +We maintain disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in our Securities Exchange Act of 1934, as amended ("the Exchange Act") reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. +We carry out a variety of ongoing procedures, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, to evaluate the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of May 31, 2021. +“Management's Annual Report on Internal Control Over Financial Reporting” is included in Item 8 of this Report. +We are continuing several transformation initiatives to centralize and simplify our business processes and systems. These are long-term initiatives, which we believe will enhance our internal control over financial reporting due to increased automation and further integration of related processes. We will continue to monitor our internal control over financial reporting for effectiveness throughout these transformation initiatives. +There have not been any changes in our internal control over financial reporting during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. +ITEM 9B. OTHER INFORMATION +No disclosure is required under this item. +2021 FORM 10-K 94 +Table of Contents +PART III +ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE +The information required by Item 401 of Regulation S-K regarding directors is included under “NIKE, Inc. Board of Directors” in the definitive Proxy Statement for our 2021 Annual Meeting of Shareholders and is incorporated herein by reference. The information required by Item 401 of Regulation S-K regarding executive officers is included under “Information about our Executive Officers” in Item 1 of this Report. The information required by Item 406 of Regulation S-K is included under “Corporate Governance — Board Structure and Responsibilities — Code of Conduct” in the definitive Proxy Statement for our 2021 Annual Meeting of Shareholders and is incorporated herein by reference. The information required by Items 407(d)(4) and (d)(5) of Regulation S-K regarding the Audit & Finance Committee of the Board of Directors is included under “Corporate Governance — Board Structure and Responsibilities — Board Committees” in the definitive Proxy Statement for our 2021 Annual Meeting of Shareholders and is incorporated herein by reference. +ITEM 11. EXECUTIVE COMPENSATION +The information required by Items 402, 407(e)(4) and 407(e)(5) of Regulation S-K regarding executive compensation is included under “Corporate Governance — Director Compensation for Fiscal 2021,” “Compensation Discussion and Analysis,” and “Stock Ownership Information — Transactions with Related Persons — Compensation Committee Interlocks and Insider Participation,” in the definitive Proxy Statement for our 2021 Annual Meeting of Shareholders and is incorporated herein by reference. +ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS +The information required by Item 201(d) of Regulation S-K is included under “Compensation Discussion and Analysis — Executive Compensation Tables — Equity Compensation Plan Information” in the definitive Proxy Statement for our 2021 Annual Meeting of Shareholders and is incorporated herein by reference. The information required by Item 403 of Regulation S-K is included under “Stock Ownership Information — Stock Holdings of Certain Owners and Management” in the definitive Proxy Statement for our 2021 Annual Meeting of Shareholders and is incorporated herein by reference. +ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE +The information required by Items 404 and 407(a) of Regulation S-K is included under “Stock Ownership Information — Transactions with Related Persons” and “Corporate Governance — Individual Board Skills Matrix — Director Independence” in the definitive Proxy Statement for our 2021 Annual Meeting of Shareholders and is incorporated herein by reference. +ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES +The information required by Item 9(e) of Schedule 14A is included under “Audit Matters — Ratification of Appointment of Independent Registered Public Accounting Firm” in the definitive Proxy Statement for our 2021 Annual Meeting of Shareholders and is incorporated herein by reference. +2021 FORM 10-K 95 +Table of Contents +PART IV +ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES +(a) The following documents are filed as part of this report: +FORM 10-K PAGE NO. +1. Financial Statements: +Report of Independent Registered Public Accounting Firm +55 +Consolidated Statemen ts of Income for each of the three years ended May 31, 202 1 , May 31, 20 20 and May 31, 20 1 9 +57 +Consolidated Statements of Comprehensive Income for each of the three years ended May 31, 202 1 , May 31, 20 20 and May 31, 201 9 +58 +Consolidated Bal ance Sheets at May 31, 202 1 and May 31, 20 2 0 +59 +Consolidated St atements of Cash Flows for each of the three years ended May 31, 202 1 , May 31, 20 20 and May 31, 201 9 +60 +Consolidated Statements of Shareholders' Equity for each of the three years ended May 31, 202 1 , May 31, 20 20 and May 31, 201 9 +61 +Notes to Consolidated Financial Statements +62 +2. Financial Statement Schedule: +II — Valuation and Qualifying Accounts for the years ended May 31, 202 1 , 20 20 and 201 9 +99 +All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. +3. Exhibits: +3.1 +Restated Articles of Incorporation, as amended (incorporated by reference to Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended November 30, 2015). +3.2 +Fifth Restated Bylaws, as amended (incorporated by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K filed June 19, 2020). +4.1 +Restated Articles of Incorporation, as amended (see Exhibit 3.1). +4.2 +Fifth Restated Bylaws, as amended (see Exhibit 3.2). +4.3 +Indenture dated as of April 26, 2013, by and between NIKE, Inc. and Deutsche Bank Trust Company Americas, as trustee (incorporated by reference to Exhibit 4.1 to the Company's Form 8-K filed April 26, 2013). +4.4 +Second Supplemental Indenture, dated as of October 29, 2015, by and between NIKE, Inc. and Deutsche Bank Trust Company Americas, as trustee, including the form of 3.875% Notes due 2045 (incorporated by reference to Exhibit 4.2 to the Company's Form 8-K filed October 29, 2015). +4.5 +Third Supplemental Indenture, dated as of October 21, 2016, by and between NIKE, Inc. and Deutsche Bank Trust Company Americas, as trustee, including the form of 2.375% Notes due 2026 and form of 3.375% Notes due 2046 (incorporated by reference to Exhibit 4.2 to the Company's Form 8-K filed October 21, 2016). +4.6 +Fourth Supplemental Indenture, dated as of March 27, 2020, by and between NIKE, Inc. and Deutsche Bank Trust Company Americas, as trustee, including the form of 2.400% Notes due 2025, form of 2.750% Notes due 2027, form of 2.850% Notes due 2030, form of 3.250% Notes due 2040 and form of 3.375% Notes due 2050 (incorporated by reference to Exhibit 4.2 to the Company's Form 8-K filed March 27, 2020). +4.7 +Description of Registrants Securities (incorporated by reference to Exhibit 4.6 to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 2019). +10.1 +Form of Non-Statutory Stock Option Agreement for options granted to non-employee directors under the 1990 Stock Incentive Plan (incorporated by reference to Exhibit 10.2 to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 2010).* +10.2 +Form of Restricted Stock Agreement for non-employee directors under the 1990 Stock Incentive Plan (incorporated by reference to Exhibit 10.4 to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 2014).* +10.3 +Form of Non-Statutory Stock Option Agreement for options granted to executives under the Stock Incentive Plan (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended February 28, 2018).* +2021 FORM 10-K 96 +Table of Contents +10.4 +Form of Indemnity Agreement entered into between the Company and each of its officers and directors (incorporated by reference to Exhibit 10.2 to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 2008).* +10.5 +NIKE, Inc. 1990 Stock Incentive Plan (incorporated by reference to Exhibit 10.7 to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 2014).* +10.6 +NIKE, Inc. Deferred Compensation Plan (Amended and Restated effective April 1, 2013) (incorporated by reference to Exhibit 10.9 to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 2013).* +10.7 +NIKE, Inc. Deferred Compensation Plan (Amended and Restated effective June 1, 2004) (applicable to amounts deferred before January 1, 2005) (incorporated by reference to Exhibit 10.6 to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 2004).* +10.8 +Amendment No. 1 effective January 1, 2008 to the NIKE, Inc. Deferred Compensation Plan (June 1, 2004 Restatement) (incorporated by reference to Exhibit 10.9 to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 2009).* +10.9 +NIKE, Inc. Foreign Subsidiary Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended November 30, 2008).* +10.10 +Amended and Restated Covenant Not to Compete and Non-Disclosure Agreement between NIKE, Inc. and Mark G. Parker dated July 24, 2008 (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed July 24, 2008).* +10.11 +Form of Restricted Stock Unit Agreement under the Stock Incentive Plan (incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended February 28, 2018).* +10.12 +Form of Covenant Not to Compete and Non-Disclosure Agreement between NIKE, Inc. and its executive officers (other than Mark G. Parker and John J. Donahoe II) (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed February 18, 2020).* +10.13 +Policy for Recoupment of Incentive Compensation (incorporated by reference to Exhibit 10.3 to the Company's Current Report on Form 8-K filed July 20, 2010).* +10.14 +N IKE, Inc. Stock Incentive P lan (incorporated by reference to Exhibit 10. 2 to the Company's Current Report on Form 8-K filed September 23 , 20 15 ).* +10.15 +Form of Discretionary Performance Award Agreement (incorporated by reference to Exhibit 10.22 to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 2018).* +10.16 +NIKE, Inc. Amended and Restated Long-Term Incentive Plan (incorporated by reference to Exhibit A to the Company's definitive Proxy Statement filed July 25, 2017).* +10.17 +Offer Letter between NIKE, Inc. and John J. Donahoe II (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed October 22, 2019).* +10.18 +Form of Covenant Not to Compete and Non-Disclosure Agreement between NIKE, Inc. and John J. Donahoe II (incorporated by reference to Exhibit 10.3 to the Company's Current Report on Form 8-K filed October 22, 2019).* +10.19 +Form of Performance-Based Stock Option Agreement (incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K filed October 22, 2019). +10.20 +Letter Agreement between NIKE, Inc. and Mark G. Parker (incorporated by reference to Exhibit 10.6 to the Company's Current Report on Form 8-K filed October 22, 2019).* +10.21 +Credit Agreement, d ated as of March 15 , 202 1 , among NIKE, Inc., Bank of America, N.A., as Administrative Agent, and the other Banks named therein (incorporated by reference to Exhibit 10. 1 to the Company's Current Report on Form 8 - K filed March 18, 2021 ). +10.22 +NIKE, Inc. Executive Performance Sharing Plan (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed June 19, 2020).* +10.23 +NIKE, Inc. Amended and Restated Long-Term Incentive Plan (incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K filed June 19, 2020).* +10.24 +Form of Non-Statutory Stock Option Agreement under the NIKE, Inc. Stock Incentive Plan (incorporated by reference to Exhibit 10.3 to the Company's Current Report on Form 8-K filed June 19, 2020).* +10.25 +Form of Restricted Stock Unit Agreement under the NIKE, Inc. Stock Incentive Plan (incorporated by reference to Exhibit 10.4 to the Company's Current Report on Form 8-K filed June 19, 2020).* +10.26 +Credit Agreement dated as of August 16, 2019, among NIKE, Inc., Bank of America, N.A., as Administrative Agent, Citibank N.A., as Syndication Agent, Deutsche Bank Securities, Inc., HSBC Bank USA, National Association and JPMorgan Chase, N.A., as Co-Documentation Agents, and the other Banks named therein (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed August 20, 2019). +10.27 +NIKE, Inc. Stock Incentive Plan (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed September 18, 2020)* +10.28 +NIKE, Inc. Performance-Based Restricted Stock Unit Agreement (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on June 17, 2021) * +21 +Subsidiaries of the Registrant. +23 +Consent of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm (included within this Annual Report on Form 10-K). +31.1 +Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer. +31.2 +Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer. +32 +Section 1350 Certifications. +2021 FORM 10-K 97 +Table of Contents +101.INS Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. +101.SCH Inline XBRL Taxonomy Extension Schema +101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase +101.DEF Inline XBRL Taxonomy Extension Definition Document +101.LAB Inline XBRL Taxonomy Extension Label Linkbase +101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase +104 Cover Page Interactive Data File - formatted in Inline XBRL and included in Exhibit 101 +* Management contract or compensatory plan or arrangement. +The Exhibits filed herewith do not include certain instruments with respect to long-term debt of NIKE and its subsidiaries, inasmuch as the total amount of debt authorized under any such instrument does not exceed 10 percent of the total assets of NIKE and its subsidiaries on a consolidated basis. NIKE agrees, pursuant to Item 601(b)(4)(iii) of Regulation S-K, that it will furnish a copy of any such instrument to the SEC upon request. +Upon written request to Investor Relations, NIKE, Inc., One Bowerman Drive, Beaverton, Oregon 97005-6453, NIKE will furnish shareholders with a copy of any Exhibit upon payment of $0.10 per page, which represents our reasonable expenses in furnishing Exhibits. +2021 FORM 10-K 98 +Table of Contents +SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS +(Dollars in millions) BALANCE AT +BEGINNING OF +PERIOD CHARGED TO +COSTS AND +EXPENSES +CHARGED +TO OTHER +ACCOUNTS (1) +WRITE-OFFS, +NET BALANCE +AT END +OF PERIOD +Sales returns reserve +For the fiscal year ended May 31, 2019 (2)(3) +$ 734 $ 2,209 $ ( 30 ) $ ( 2,070 ) $ 843 +For the fiscal year ended May 31, 2020 (3) +843 2,227 ( 31 ) ( 2,357 ) 682 +For the fiscal year ended May 31, 2021 682 2,571 41 ( 2,699 ) 595 +(1) Amounts included in this column primarily relate to foreign currency translation. +(2) As a result of the adoption of ASC Topic 606 during the first quarter of fiscal 2019, an asset for the estimated cost of inventory for expected product returns is now recognized separately from the liability for sales returns reserves, which is presented above. +(3) During the fourth quarter of fiscal 2021, management identified misstatements related to the amounts disclosed within Charged to Costs and Expenses and Write-offs, net. Specifically, Charged to Costs and Expenses was understated by $ 286 million and $ 250 million for fiscal 2020 and fiscal 2019, respectively, with a corresponding understatement of Write-offs, net. The Company assessed the materiality of these misstatements on prior period financial statements in accordance with U.S. Securities and Exchange Commission Staff Accounting Bulletin No. 99, Materiality, codified in ASC 250, Presentation of Financial Statements, and concluded these misstatements were not material to any prior period. As such, the Company has revised the amounts disclosed within Charged to Costs and Expenses and Write-offs, net for the fiscal years 2020 and 2019. These misstatements did not impact the Consolidated Balance Sheets, Consolidated Statements of Income, or Consolidated Statements of Cash Fl ows. +2021 FORM 10-K 99 +Table of Contents +ITEM 16. FORM 10-K SUMMARY +None. +2021 FORM 10-K 100 +Table of Contents +Consent of Independent Registered Public Accounting Firm +We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (Nos. 033-63995, 333-63581, 333-63583, 333-68864, 333-68886, 333-71660, 333-104822, 333-117059, 333-133360, 333-164248, 333-171647, 333-173727, 333-208900 and 333-215439) and the Registration Statement on Form S-3 (No. 333-232770) of NIKE, Inc. of our report dated July 20, 2021 relating to the financial statements and financial statement schedule and the effectiveness of internal control over financial reporting, which appears in this Form 10-K. +/s/ PricewaterhouseCoopers LLP +Portland, Oregon +July 20, 2021 +2021 FORM 10-K 101 +Table of Contents +SIGNATURES +Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. +NIKE, INC. +By: +/s/ JOHN J. DONAHOE II +John J. Donahoe II +President and Chief Executive Officer +Date: July 20, 2021 +Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. +SIGNATURE TITLE DATE +PRINCIPAL EXECUTIVE OFFICER AND DIRECTOR: +/s/ JOHN J. DONAHOE II +John J. Donahoe II +President and Chief Executive Officer July 20, 2021 +PRINCIPAL FINANCIAL OFFICER: +/s/ MATTHEW FRIEND +Matthew Friend +Executive Vice President and Chief Financial Officer July 20, 2021 +PRINCIPAL ACCOUNTING OFFICER: +/s/ CHRIS L. ABSTON +Chris L. Abston +Vice President and Corporate Controller July 20, 2021 +DIRECTORS: +/s/ MARK G. PARKER +Mark G. Parker +Director, Chairman of the Board July 20, 2021 +/s/ CATHLEEN A. BENKO +Cathleen A. Benko +Director July 20, 2021 +/s/ ELIZABETH J. COMSTOCK +Elizabeth J. Comstock +Director July 20, 2021 +/s/ JOHN G. CONNORS +John G. Connors +Director July 20, 2021 +/s/ TIMOTHY D. COOK +Timothy D. Cook +Director July 20, 2021 +/s/ THASUNDA B. DUCKETT +Thasunda B. Duckett +Director July 20, 2021 +/s/ ALAN B. GRAF, JR. +Alan B. Graf, Jr. +Director July 20, 2021 +/s/ PETER B. HENRY +Peter B. Henry +Director July 20, 2021 +/s/ TRAVIS A. KNIGHT +Travis A. Knight +Director July 20, 2021 +/s/ MICHELLE A. PELUSO +Michelle A. Peluso +Director July 20, 2021 +/s/ JOHN W. ROGERS, JR. +John W. Rogers, Jr. +Director July 20, 2021 +2021 FORM 10-K 102 \ No newline at end of file diff --git a/raw/filings/0000320187/2020/0000320187-21-000028/filing_metadata.csv b/raw/filings/0000320187/2020/0000320187-21-000028/filing_metadata.csv new file mode 100644 index 0000000000000000000000000000000000000000..7945c4f2e1a21c59a79e1dc1435348cbd5c3e452 --- /dev/null +++ b/raw/filings/0000320187/2020/0000320187-21-000028/filing_metadata.csv @@ -0,0 +1,2 @@ +cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing +0000320187,NKE,"NIKE, Inc.",10-K,2021-07-20,2021-05-31,2021-07-21T00:11:03.000Z,0000320187-21-000028,nke-20210531.htm,10-K,18131690,1,1,https://www.sec.gov/Archives/edgar/data/320187/000032018721000028/nke-20210531.htm,https://www.sec.gov/Archives/edgar/data/320187/000032018721000028/,2020,2020,1 diff --git a/raw/filings/0000320187/2020/0000320187-21-000028/item1.txt b/raw/filings/0000320187/2020/0000320187-21-000028/item1.txt new file mode 100644 index 0000000000000000000000000000000000000000..7b241891e6bd8634ec6dc388643e2f8203643c47 --- /dev/null +++ b/raw/filings/0000320187/2020/0000320187-21-000028/item1.txt @@ -0,0 +1,132 @@ +ITEM 1. BUSINESS +GENERAL +NIKE, Inc. was incorporated in 1967 under the laws of the State of Oregon. As used in this report, the terms “we,” “us,” “NIKE” and the “Company” refer to NIKE, Inc. and its predecessors, subsidiaries and affiliates, collectively, unless the context indicates otherwise. Our NIKE digital commerce website is located at www.nike.com . On our NIKE corporate website, located at investors.nike.com , we post the following filings as soon as reasonably practicable after they are electronically filed with, or furnished to, the United States Securities and Exchange Commission (the “SEC”): our annual report on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities and Exchange Act of 1934, as amended. Our definitive Proxy Statements are also posted on our corporate website. All such filings on our corporate website are available free of charge. Copies of these filings are also available on the SEC's website ( www.sec.gov ). Also available on our corporate website are the charters of the committees of our Board of Directors, as well as our corporate governance guidelines and code of ethics; copies of any of these documents will be provided in print to any shareholder who submits a request in writing to NIKE Investor Relations, One Bowerman Drive, Beaverton, Oregon 97005-6453. +Our principal business activity is the design, development and worldwide marketing and selling of athletic footwear, apparel, equipment, accessories and services. NIKE is the largest seller of athletic footwear and apparel in the world. We sell our products directly to consumers through NIKE-owned retail stores and digital platforms (which we refer to collectively as our “NIKE Direct” operations) and to retail accounts and a mix of independent distributors, licensees and sales representatives in virtually all countries around the world. We also offer interactive consumer services and experiences through our digital platforms. Virtually all of our products are manufactured by independent contractors. Nearly all footwear and apparel products are produced outside the United States, while equipment products are produced both in the United States and abroad. +PRODUCTS +We focus our NIKE Brand product offerings in six key categories: Running, NIKE Basketball, the Jordan Brand, Football (Soccer), Training and Sportswear (our sports-inspired lifestyle products). We also market products designed for kids, as well as for other athletic and recreational uses, such as American football, baseball, cricket, golf, lacrosse, skateboarding, tennis, volleyball, walking, wrestling and other outdoor activities. In June 2020, we announced that we will align our product creation and category organizations around a new consumer construct focused on Men’s, Women’s and Kids'. This approach is intended to allow us to create product that better meets individual consumer needs, including more specialization of our category approach, while re-aligning and simplifying our business to accelerate our largest growth opportunities. +NIKE's athletic footwear products are designed primarily for specific athletic use, although a large percentage of the products are worn for casual or leisure purposes. We place considerable emphasis on innovation and high-quality construction in the development and manufacturing of our products. Sportswear, the Jordan Brand and Running are currently our top-selling footwear categories, and we expect them to continue to lead in footwear sales. +We also sell sports apparel covering the above-mentioned categories, which feature the same trademarks and are sold predominantly through the same marketing and distribution channels as athletic footwear. Our sports apparel, similar to our athletic footwear products, is designed primarily for athletic use, although many of the products are worn for casual or leisure purposes, and demonstrates our commitment to innovation and high-quality construction. Sportswear, Training, Football (Soccer) and Running are currently our top-selling apparel categories, and we expect them to continue to lead in apparel sales. We often market footwear, apparel and accessories in “collections” of similar use or by category. We also market apparel with licensed college and professional team and league logos. +We sell a line of performance equipment and accessories under the NIKE Brand name, including bags, socks, sport balls, eyewear, timepieces, digital devices, bats, gloves, protective equipment and other equipment designed for sports activities. We also sell small amounts of various plastic products to other manufacturers through our wholly-owned subsidiary, NIKE IHM, Inc., doing business as Air Manufacturing Innovation. +2021 FORM 10-K 1 +Table of Contents +Our Jordan Brand designs, distributes and licenses athletic and casual footwear, apparel and accessories predominantly focused on basketball using the Jumpman trademark. Sales and operating results for Jordan Brand products are reported within the respective NIKE Brand geographic operating segments. +Our wholly-owned subsidiary brand, Converse, headquartered in Boston, Massachusetts, designs, distributes and licenses casual sneakers, apparel and accessories under the Converse, Chuck Taylor, All Star, One Star, Star Chevron and Jack Purcell trademarks. Operating results of the Converse brand are reported on a stand-alone basis. +In addition to the products we sell to our wholesale customers and directly to consumers through our NIKE Direct operations, we have also entered into license agreements that permit unaffiliated parties to manufacture and sell, using NIKE-owned trademarks, certain apparel, digital devices and applications and other equipment designed for sports activities. +We also offer interactive consumer services and experiences through our digital platforms, including fitness and activity apps; sport, fitness and wellness content; and digital services and features in retail stores that enhance the consumer experience. +SALES AND MARKETING +We experience moderate fluctuations in aggregate sales volume during the year. Historically, revenues in the first and fourth fiscal quarters have slightly exceeded those in the second and third quarters. However, the mix of product sales may vary considerably as a result of changes in seasonal and geographic demand for particular types of footwear, apparel and equipment, as well as other macroeconomic, strategic, operating and logistics-related factors, as evidenced by the impact of the COVID-19 pandemic. +Because NIKE is a consumer products company, the relative popularity and availability of various sports and fitness activities, as well as changing design trends, affect the demand for our products. We must, therefore, respond to trends and shifts in consumer preferences by adjusting the mix of existing product offerings, developing new products, styles and categories and influencing sports and fitness preferences through extensive marketing. Failure to respond in a timely and adequate manner could have a material adverse effect on our sales and profitability. This is a continuing risk. Refer to Item 1A. Risk Factors. +We report our NIKE Brand operations based on our internal geographic organization. Each NIKE Brand geographic segment operates predominantly in one industry: the design, development, marketing and selling of athletic footwear, apparel and equipment. The Company's reportable operating segments for the NIKE Brand are: North America; Europe, Middle East & Africa (EMEA); Greater China; and Asia Pacific & Latin America (APLA), and include results for the NIKE and Jordan brands. The Hurley brand results, prior to its divestiture in fiscal 2020, were included in North America. Sales through our NIKE Direct operations are managed within each geographic operating segment. +Converse is also a reportable operating segment and operates predominately in one industry: the design, marketing, licensing and selling of casual sneakers, apparel and accessories. Converse direct to consumer operations, including digital commerce, are reported within the Converse operating segment results. +UNITED STATES MARKET +For fiscal 2021, NIKE Brand and Converse sales in the United States accounted for approximately 39% of total revenues, compared to 39% and 41% for fiscal 2020 and fiscal 2019, respectively. We sell our NIKE Brand, Jordan Brand and Converse products to thousands of retail accounts in the United States, including a mix of footwear stores, sporting goods stores, athletic specialty stores, department stores, skate, tennis and golf shops and other retail accounts. In the United States, we utilize NIKE sales offices to solicit such sales. During fiscal 2021, our three largest United States customers accounted for approximately 24% of sales in the United States. +Our NIKE Direct and Converse direct to consumer operations sell NIKE Brand, Jordan Brand and Converse products to consumers through various digital platforms. In addition, our NIKE Direct and Converse direct to consumer operations sell products through the following number of retail stores in the United States: +U.S. RETAIL STORES NUMBER +NIKE Brand factory stores 204 +NIKE Brand in-line stores (including employee-only stores) 30 +Converse stores (including factory stores) 91 +TOTAL 325 +In the United States, NIKE has seven significant distribution centers. Four are located in Memphis, Tennessee, two of which are owned and two of which are leased. Two other distribution centers, one located in Indianapolis, Indiana and one located in Dayton, Tennessee, are leased and operated by third-party logistics providers. One distribution center for Converse is located in +2021 FORM 10-K 2 +Table of Contents +Ontario, California, which is leased. There are other smaller distribution facilities located in various parts of the United States, some of which are leased or operated by third-parties. +INTERNATIONAL MARKETS +For fiscal 2021, non-U.S. NIKE Brand and Converse sales accounted for approximately 61% of total revenues, compared to 61% and 59% for fiscal 2020 and fiscal 2019, respectively. We sell our products to retail accounts through our own NIKE Direct operations and through a mix of independent distributors, licensees and sales representatives around the world. We sell to thousands of retail accounts and ship products from 70 distribution centers outside of the United States. During fiscal 2021, NIKE's three largest customers outside of the United States accounted for approximately 15% of total non-U.S. sales. +In addition to NIKE-owned and Converse-owned digital commerce platforms in over 45 countries, our NIKE Direct and Converse direct to consumer businesses operate the following number of retail stores outside the United States: +NON-U.S. RETAIL STORES NUMBER +NIKE Brand factory stores 618 +NIKE Brand in-line stores (including employee-only stores) 46 +Converse stores (including factory stores) 59 +TOTAL 723 +International branch offices and subsidiaries of NIKE are located in Argentina, Australia, Austria, Belgium, Bermuda, Brazil, Canada, Chile, China, Croatia, the Czech Republic, Denmark, Finland, France, Germany, Greece, Hong Kong, Hungary, India, Indonesia, Ireland, Israel, Italy, Japan, Korea, Macau, Malaysia, Mexico, the Netherlands, New Zealand, Norway, the Philippines, Poland, Portugal, Russia, Singapore, Slovenia, South Africa, Spain, Sri Lanka, Sweden, Switzerland, Taiwan, Thailand, Turkey, the United Arab Emirates, the United Kingdom, Uruguay and Vietnam. +SIGNIFICANT CUSTOMER +No customer accounted for 10% or more of our consolidated net Revenues during fiscal 2021. +PRODUCT RESEARCH, DESIGN AND DEVELOPMENT +We believe our research, design and development efforts are key factors in our success. Technical innovation in the design and manufacturing process of footwear, apparel and athletic equipment receives continued emphasis as we strive to produce products that help to enhance athletic performance, reduce injury and maximize comfort, while reducing waste. +In addition to our own staff of specialists in the areas of biomechanics, chemistry, exercise physiology, engineering, digital technologies, industrial design, sustainability and related fields, we also utilize research committees and advisory boards made up of athletes, coaches, trainers, equipment managers, orthopedists, podiatrists, physicians and other experts who consult with us and review certain designs, materials and concepts for product and manufacturing process improvements and compliance with product safety regulations around the world. Employee athletes, athletes engaged under sports marketing contracts and other athletes wear-test and evaluate products during the design and development process. +As we continue to develop new technologies, we are simultaneously focused on the design of innovative products and experiences incorporating such technologies throughout our product categories and consumer applications. Using market intelligence and research, our various design teams identify opportunities to leverage new technologies in existing categories to respond to consumer preferences. The proliferation of NIKE Air, Zoom, Free, Flywire, Dri-Fit, Flyknit, Flyweave, FlyEase, ZoomX, Air Max, React and Adapt technologies, among others, typifies our dedication to designing innovative products. +MANUFACTURING +We are supplied by 191 footwear factories located in 14 countries. Virtually all of our footwear is manufactured outside of the United States by over 15 independent contract manufacturers, which often operate multiple factories. The largest single footwear factory accounted for approximately 9% of total fiscal 2021 NIKE Brand footwear production. For fiscal 2021, contract factories in Vietnam, Indonesia and China manufactured approximately 51%, 24% and 21% of total NIKE Brand footwear, respectively. We also have manufacturing agreements with independent contract manufacturers in Argentina and India to manufacture footwear for sale primarily within those countries. For fiscal 2021, four footwear contract manufacturers each accounted for greater than 10% of footwear production and in the aggregate accounted for approximately 61% of NIKE Brand footwear production. +2021 FORM 10-K 3 +Table of Contents +We are supplied by 344 apparel factories located in 33 countries. The largest single apparel factory accounted for approximately 8% of total fiscal 2021 NIKE Brand apparel production. Virtually all of our apparel is manufactured outside of the United States by independent contract manufacturers, which often operate multiple factories. For fiscal 2021, contract factories in Vietnam, China and Cambodia produced approximately 30%, 19% and 12% of total NIKE Brand apparel, respectively. For fiscal 2021, two apparel contract manufacturers each accounted for more than 10% of apparel production, and the top five contract manufacturers in the aggregate accounted for approximately 51% of NIKE Brand apparel production. +The principal materials used in our footwear products are natural and synthetic rubber, plastic compounds, foam cushioning materials, natural and synthetic leather, nylon, polyester and canvas, as well as polyurethane films used to make NIKE Air-Sole cushioning components. During fiscal 2021, Air Manufacturing Innovation, a wholly-owned subsidiary, with facilities near Beaverton, Oregon, in Dong Nai Province, Vietnam, and St. Charles, Missouri, as well as independent contractors in China and Vietnam, were our suppliers of materials and cushioning components used in footwear. Air Manufacturing Innovation also manufactures and sells small amounts of various other plastic products to other manufacturers. The principal materials used in our apparel products are natural and synthetic fabrics, yarns and threads (both virgin and recycled); specialized performance fabrics designed to efficiently wick moisture away from the body, retain heat and repel rain and/or snow; and plastic and metal hardware. NIKE's independent contractors and suppliers buy raw materials for the manufacturing of our footwear, apparel and equipment products. Most raw materials are available and purchased by those independent contractors and suppliers in the countries where manufacturing takes place. NIKE's independent contractors and suppliers have thus far experienced little difficulty in satisfying raw material requirements for the production of our products. +Since 1972, Sojitz Corporation of America (“Sojitz America”), a large Japanese trading company and the sole owner of our redeemable preferred stock, has performed import-export financing services for us. +INTERNATIONAL OPERATIONS AND TRADE +Our international operations and sources of supply are subject to the usual risks of doing business abroad, such as the implementation of, or potential changes in, foreign and domestic trade policies, increases in import duties, anti-dumping measures, quotas, safeguard measures, trade restrictions, restrictions on the transfer of funds and, in certain parts of the world, political tensions, instability, conflicts, nationalism and terrorism. We have not, to date, been materially affected by any such risk but cannot predict the likelihood of such material effects occurring in the future. +In recent years, uncertain global and regional economic and political conditions have affected international trade and increased protectionist actions around the world. These trends are affecting many global manufacturing and service sectors, and the footwear and apparel industries, as a whole, are not immune. Companies in our industry are facing trade protectionism in many different regions, and, in nearly all cases, we are working together with industry groups to address trade issues and reduce the impact to the industry, while observing applicable competition laws. Notwithstanding our efforts, protectionist measures have resulted in increases in the cost of our products, and additional measures, if implemented, could adversely affect sales and/or profitability for NIKE, as well as the imported footwear and apparel industry as a whole. +We monitor protectionist trends and developments throughout the world that may materially impact our industry, and we engage in administrative and judicial processes to mitigate trade restrictions. We are actively monitoring actions that may result in additional anti-dumping measures and could affect our industry. We are also monitoring for and advocating against other impediments that may limit or delay customs clearance for imports of footwear, apparel and equipment. NIKE also advocates for trade liberalization for footwear and apparel in a number of regional and bilateral free trade agreements. Changes in, and responses to, U.S. trade policies, including the imposition of tariffs or penalties on imported goods or retaliatory measures by other countries, could negatively affect U.S. corporations, including NIKE, with business operations and/or consumer markets in those countries, which could also make it necessary for us to change the way we conduct business, either of which may have an adverse effect on our business, financial condition or our results of operations. In addition, with respect to proposed trade restrictions, we work with a broad coalition of global businesses and trade associations representing a wide variety of sectors to help ensure that any legislation enacted and implemented (i) addresses legitimate and core concerns, (ii) is consistent with international trade rules and (iii) reflects and considers domestic economies and the important role they may play in the global economic community. +Where trade protection measures are implemented, we believe we have the ability to develop, over a period of time, adequate alternative sources of supply for the products obtained from our present suppliers. If events prevented us from acquiring products from our suppliers in a particular country, our operations could be temporarily disrupted and we could experience an adverse financial impact. However, we believe we could abate any such disruption, and that much of the adverse impact on supply would, therefore, be of a short-term nature, although alternate sources of supply might not be as cost-effective and could have an ongoing adverse impact on profitability. +Our international operations are also subject to compliance with the U.S. Foreign Corrupt Practices Act, or "FCPA", and other anti-bribery laws applicable to our operations. We source a significant portion of our products from, and have important consumer +2021 FORM 10-K 4 +Table of Contents +markets, outside of the United States, and we have an ethics and compliance program to address compliance with the FCPA and similar laws by us, our employees, agents, suppliers and other partners. +COMPETITION +The athletic footwear, apparel and equipment industry is highly competitive on a worldwide basis. We compete internationally with a significant number of athletic and leisure footwear companies, athletic and leisure apparel companies, sports equipment companies and large companies having diversified lines of athletic and leisure footwear, apparel and equipment, including adidas, Anta, ASICS, Li Ning, lululemon athletica, Puma, Under Armour and V.F. Corporation, among others. The intense competition and the rapid changes in technology and consumer preferences in the markets for athletic and leisure footwear and apparel and athletic equipment constitute significant risk factors in our operations. Refer to Item 1A. Risk Factors for additional information. +NIKE is the largest seller of athletic footwear and apparel in the world. Important aspects of competition in this industry are: +• Product attributes such as quality; performance and reliability; new product style, design, innovation and development; as well as consumer price/value. +• Consumer connection, engagement and affinity for brands and products, developed through marketing, promotion and digital experiences; social media interaction; customer support and service; identification with prominent and influential athletes, influencers, public figures, coaches, teams, colleges and sports leagues who endorse our brands and use our products and active engagement through sponsored sporting events and clinics. +• Effective sourcing and distribution of products, with attractive merchandising and presentation at retail, both in-store and on digital platforms. +We believe that we are competitive in all of these areas. +TRADEMARKS AND PATENTS +We believe that our intellectual property rights are important to our brand, our success and our competitive position. We strategically pursue available protections of these rights and vigorously protect them against third-party theft and infringement. +We use trademarks on nearly all of our products and believe having distinctive marks that are readily identifiable is an important factor in creating a market for our goods, in identifying our brands and the Company, and in distinguishing our goods from the goods of others. We consider our NIKE and Swoosh Design trademarks to be among our most valuable assets and we have registered these trademarks in almost 170 jurisdictions worldwide. In addition, we own many other trademarks that we use in marketing our products. We own common law rights in the trade dress of several significant shoe designs and elements. For certain trade dress, we have sought and obtained trademark registrations. +We have copyright protection in our design, graphics and other original works. When appropriate, we also obtain registered copyrights. +We file for, own and maintain many U.S. and foreign utility and design patents protecting components, technologies, materials, manufacturing techniques, features, functionality, and industrial designs used in and for the manufacture of various athletic and leisure footwear and apparel, athletic equipment and digital devices and related software applications. These patents expire at various times. +We believe our success depends upon our capabilities in areas such as design, research and development, production and marketing and is supported by our intellectual property rights, such as trademarks, patents and trade secrets, among others. +We have followed a policy of applying for and registering intellectual property rights in the United States and select foreign countries on trademarks, inventions, innovations and designs that we deem valuable. We also continue to vigorously protect our intellectual property, including trademarks, patents and trade secrets against third-party infringement. +HUMAN CAPITAL RESOURCES +At NIKE, we consider the strength and effective management of our workforce to be essential to the ongoing success of our business. We believe that it is important to attract, develop and retain a diverse and engaged workforce at all levels of our business and that such a workforce fosters creativity and accelerates innovation. We are focused on building an increasingly diverse talent pipeline that reflects our consumers, athletes and the communities we serve. +2021 FORM 10-K 5 +Table of Contents +CULTURE +Each employee shapes NIKE’s culture through behaviors and practices. This starts with our Maxims, which represent our core values and, along with our Code of Conduct, feature the fundamental behaviors that help anchor, inform and guide us and apply to all employees. Our mission is to bring inspiration and innovation to every athlete in the world, which includes the belief that if you have a body, you are an athlete. We aim to do this by creating groundbreaking sport innovations, making our products more sustainably, building a creative and diverse global team and making a positive impact in communities where we live and work. Our mission is aligned with our deep commitment to maintaining an environment where all NIKE employees have the opportunity to reach their full potential, to connect to our brands and to shape the culture in which they work. We believe providing for growth and retention of our employees is essential in fostering such a culture and are dedicated to giving access to training programs and career development opportunities, including trainings on NIKE’s values, history and business, trainings on developing leadership skills at all levels, tools and resources for managers and qualified tuition reimbursement opportunities. +As part of our commitment to empowering our employees to help shape our culture, we source employee feedback through our Engagement Survey program. The program provides every employee throughout the globe an opportunity to provide confidential feedback on key areas known to drive employee engagement, including their satisfaction with their managers, their work and the Company generally. The program also measures our employees’ emotional commitment to NIKE as well as NIKE’s culture of diversity, equity and inclusion. NIKE also provides multiple points of contact for employees to speak up if they experience something that does not align with our values or otherwise violates our workplace policies, even if they are uncertain what they observed or heard is a violation of company policy. +As part of our commitment to make a positive impact on our communities, we have maintained a goal of investing 1.5% of our prior fiscal year’s pre-tax income into global communities, with an emphasis on inspiring kids to be active through play and sport. We increased that annual goal to 2% for fiscal 2022 forward. Our community investments are an important part of our culture in that we also support employees in giving back to community organizations through donations and volunteering, which are matched by the NIKE Foundation where eligible. +EMPLOYEE BASE +As of May 31, 2021, we had approximately 73,300 employees worldwide, including retail and part-time employees. We also utilize independent contractors and temporary personnel to supplement our workforce. +None of our employees are represented by a union, except for certain employees in the APLA geography, where local law requires those employees to be represented by a trade union. Also, in some countries outside of the United States, local laws require employee representation by works councils (which may be entitled to information and consultation on certain Company decisions) or by organizations similar to a union. In certain European countries, we are required by local law to enter into, and/or comply with, industry-wide or national collective bargaining agreements. NIKE has never experienced a material interruption of operations due to labor disagreements. +DIVERSITY, EQUITY AND INCLUSION (DE&I) +DE&I is a strategic priority for NIKE and we are committed to having an increasingly diverse team and culture. We aim to foster an inclusive workplace through recruitment, development and retention of diverse talent with the goal of expanding representation across all dimensions of diversity over the long term. In fiscal 2021, we elevated our DE&I team to sit at the heart of NIKE’s People and Culture Strategy and combined our Talent and Diversity & Inclusion teams under a single leader. We also announced certain targets for the Company to work toward by fiscal 2025, including increasing representation of women in our global corporate workforce and leadership positions, as well as increasing representation of U.S. racial and ethnic minorities in our U.S. corporate workforce and at the Director level and above. +We have enhanced our efforts to recruit diverse talent through our traditional channels and launched new initiatives, such as partnerships with athletes and sports-related organizations to create apprenticeship programs and new partnerships with organizations, colleges and universities that serve diverse populations. Additionally, we are prioritizing DE&I education so that all NIKE employees and leaders have the cultural awareness and understanding to build diverse and inclusive teams. We also have Employee Networks, collectively known as NikeUNITED, representing various employee groups. +Our DE&I focus extends beyond our workforce and includes our communities, which we support in a number of ways. We have committed to investments through both the NIKE and Jordan Brands that aim to address racial inequality and improve diversity and representation in our communities. We also are leveraging our global scale to accelerate business diversity, including investing in business training programs for women and increasing the proportion of services supplied by minority-owned businesses. +2021 FORM 10-K 6 +Table of Contents +COMPENSATION AND BENEFITS +NIKE’s total rewards are intended to be competitive and equitable, meet the diverse needs of our global teammates and reinforce our values. We are committed to providing comprehensive, competitive and equitable pay and benefits to our employees, and we have invested, and aim to continue to invest, in our employees through growth and development and well-being initiatives. Our initiatives in this area include: +• We are committed to competitive pay and to reviewing our pay and promotion practices annually. +• We have an annual company bonus plan and a retail-focused bonus plan applicable to all eligible employees. Both programs are focused on rewarding employees for company performance, which we believe reinforces our culture and rewards behaviors that support collaboration and teamwork. +• We provide comprehensive family care benefits in the U.S. and globally where practicable. +• Our Military Leave benefit provides up to 12 weeks of paid time off every 12 months, and we enhanced our Military Leave benefit for employees called up to serve as part of the U.S. COVID-19 response. +• We offer free access to our Sport Centers at our World Headquarters (WHQ) for our full-time employees and North America store employees. +• We provide employees free access to mindfulness and meditation resources, including membership to Headspace as well as live classes through our Sport Centers. +• Our global Employee Assistance Program (EAP) provides free and confidential counseling to all global employees and their families. +• As part of our continued commitment to support our teammates through pay and benefits, we introduced the following new and enhanced employee programs in fiscal 2021: +◦ We enhanced our family care program through additional leaves, backup care and child/elder care assistance, and we introduced an income-based childcare subsidy, expanding childcare support to employees beyond those at WHQ. +◦ We enhanced U.S. mental health care coverage. +◦ We updated our transgender healthcare coverage to provide employees covered on the U.S. Health Plan access to both restorative services and personalized care. +COVID-19 RESPONSE +Since the start of the COVID-19 pandemic, NIKE has been, and continues to be, committed to supporting our employees and communities. Some of the ways NIKE responded during the pandemic to support employees include: +• Throughout the pandemic NIKE has provided pay continuity for our retail, Air Manufacturing Innovation and distribution center employees—employees who were particularly affected by closures and reduced hours in fiscal 2020 and fiscal 2021. We have also taken precautions to provide a safe working environment, encouraging and supporting work-from-home whenever possible and instituting protective policies and procedures for when remote work is not possible. +• We provided a two-to-one match for all employee donations to community organizations providing COVID relief and support anywhere in the world. +• We offer two weeks of paid COVID-19 sick leave for all employees, in addition to existing paid time off benefits and legally mandated sick leave programs, which covers physical health as well as mental and emotional well-being and care for a family member. We also provide the option for employees to utilize up to two weeks of paid time off in advance of accrued balances, if needed. +• As part of our holistic approach to support our employees in their wellness journey during quarantine mandates, we offered NTC Premium, the NIKE Training Club’s subscription-based service, for free to our employees globally. +• In addition to our existing EAP, we enhanced mental healthcare to include virtual care, access to insomnia and anxiety apps and increased EAP support. +• We also supported certain eligible employees who work from home due to COVID-19 health and safety measures by providing them with select technology and ergonomic products through a NIKE-exclusive portal. +Additional information related to our human capital strategy can be found in our FY20 NIKE, Inc. Impact Report, which is available on the Purpose section of our website. Information contained on or accessible through our websites is not incorporated +2021 FORM 10-K 7 +Table of Contents +into, and does not form a part of, this Annual Report or any other report or document we file with the SEC, and any references to our websites are intended to be inactive textual references only. +2021 FORM 10-K 8 +Table of Contents +INFORMATION ABOUT OUR EXECUTIVE OFFICERS +The executive officers of NIKE, Inc. as of July 20, 2021, are as follows: +Mark G. Parker , Executive Chairman — Mr. Parker, 65, is Executive Chairman of the Board of Directors and served as President and Chief Executive Officer from 2006 - January 2020. He has been employed by NIKE since 1979 with primary responsibilities in product research, design and development, marketing and brand management. Mr. Parker was appointed divisional Vice President in charge of product development in 1987, corporate Vice President in 1989, General Manager in 1993, Vice President of Global Footwear in 1998 and President of the NIKE Brand in 2001. +John J. Donahoe II , President and Chief Executive Officer — Mr. Donahoe, 61, was appointed President and Chief Executive Officer in January 2020 and has been a director since 2014. He brings expertise in digital commerce, technology and global strategy. He previously served as President and Chief Executive Officer at ServiceNow, Inc. Prior to joining ServiceNow, Inc., he served as President and Chief Executive Officer of eBay, Inc. He also held leadership roles at Bain & Company for two decades. +Andrew Campion , Chief Operating Officer — Mr. Campion, 49, joined NIKE in 2007 as Vice President of Global Planning and Development, leading strategic and financial planning. He was appointed Chief Financial Officer of the NIKE Brand in 2010, responsible for leading all aspects of financial management for the Company's flagship brand. In 2014, he was appointed Senior Vice President, Strategy, Finance and Investor Relations. Mr. Campion assumed the role of Executive Vice President and Chief Financial Officer in August 2015. In April 2020, he was appointed Chief Operating Officer and leads NIKE's global technology and digital transformation, demand and supply management, manufacturing, distribution and logistics, sustainability, workplace design and connectivity, and procurement. Prior to joining NIKE, he held leadership roles in strategic planning, mergers and acquisitions, financial planning and analysis, operations and planning, investor relations and tax at The Walt Disney Company. +Matthew Friend , Executive Vice President and Chief Financial Officer — Mr. Friend, 43, joined NIKE in 2009 as Senior Director of Corporate Strategy and Development, and was appointed Chief Financial Officer of Emerging Markets in 2011. In 2014, Mr. Friend was appointed Chief Financial Officer of Global Categories, Product and Functions, and was subsequently appointed Chief Financial Officer of the NIKE Brand in 2016. He was also appointed Vice President of Investor Relations in 2019. Mr. Friend was appointed as Executive Vice President and Chief Financial Officer of NIKE, Inc. in April 2020. Prior to joining NIKE, he worked in the financial industry including roles as VP of investment banking and mergers and acquisitions at Goldman Sachs and Morgan Stanley. +Hilary K. Krane , Executive Vice President, Chief Administrative Officer and General Counsel — Ms. Krane, 57, joined NIKE as Vice President and General Counsel in 2010. In 2011, her responsibilities expanded, and she became Vice President, General Counsel and Corporate Affairs. Ms. Krane was appointed Executive Vice President, Chief Administrative Officer and General Counsel in 2013. Prior to joining NIKE, Ms. Krane was General Counsel and Senior Vice President for Corporate Affairs at Levi Strauss & Co. from 2006 to 2010. From 1996 to 2006, she was a Partner and Assistant General Counsel at PricewaterhouseCoopers LLP. +Monique S. Matheson , Executive Vice President, Global Human Resources — Ms. Matheson, 54, joined NIKE in 1998, with primary responsibilities in the human resources function. She was appointed as Vice President and Senior Business Partner in 2011 and Vice President, Chief Talent and Diversity Officer in 2012. Ms. Matheson was appointed Executive Vice President, Global Human Resources in 2017. +Heidi O'Neill , President of Consumer and Marketplace — Ms. O'Neill, 56, joined NIKE in 1998, and held a variety of leadership roles, including President of NIKE Direct, where she was responsible for NIKE's connection to its consumer globally through the Company's retail and digital-commerce business. She also led NIKE's women's business for seven years, growing it into a multi-billion dollar business, and leading the Company's North America apparel business as VP/GM. Ms. O'Neill was appointed as President of Consumer and Marketplace in April 2020 and is responsible for NIKE's Direct business, including all stores, e-commerce and apps globally. +2021 FORM 10-K 9 +Table of Contents \ No newline at end of file diff --git a/raw/filings/0000320187/2020/0000320187-21-000028/item13.txt b/raw/filings/0000320187/2020/0000320187-21-000028/item13.txt new file mode 100644 index 0000000000000000000000000000000000000000..641ea8b088616d65fe2b1f64dde64de573950841 --- /dev/null +++ b/raw/filings/0000320187/2020/0000320187-21-000028/item13.txt @@ -0,0 +1,2 @@ +ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE +The information required by Items 404 and 407(a) of Regulation S-K is included under “Stock Ownership Information — Transactions with Related Persons” and “Corporate Governance — Individual Board Skills Matrix — Director Independence” in the definitive Proxy Statement for our 2021 Annual Meeting of Shareholders and is incorporated herein by reference. \ No newline at end of file diff --git a/raw/filings/0000320187/2020/0000320187-21-000028/item9a.txt b/raw/filings/0000320187/2020/0000320187-21-000028/item9a.txt new file mode 100644 index 0000000000000000000000000000000000000000..80bee6c1004196fc64cf0982edbef0686c83a613 --- /dev/null +++ b/raw/filings/0000320187/2020/0000320187-21-000028/item9a.txt @@ -0,0 +1,6 @@ +ITEM 9A. CONTROLS AND PROCEDURES +We maintain disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in our Securities Exchange Act of 1934, as amended ("the Exchange Act") reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. +We carry out a variety of ongoing procedures, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, to evaluate the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of May 31, 2021. +“Management's Annual Report on Internal Control Over Financial Reporting” is included in Item 8 of this Report. +We are continuing several transformation initiatives to centralize and simplify our business processes and systems. These are long-term initiatives, which we believe will enhance our internal control over financial reporting due to increased automation and further integration of related processes. We will continue to monitor our internal control over financial reporting for effectiveness throughout these transformation initiatives. +There have not been any changes in our internal control over financial reporting during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. \ No newline at end of file diff --git a/raw/filings/0000320187/2020/0000320187-21-000028/rp_note.txt b/raw/filings/0000320187/2020/0000320187-21-000028/rp_note.txt new file mode 100644 index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391 diff --git a/raw/filings/0000320187/2020/0000320187-21-000028/rpt_disclosure.txt b/raw/filings/0000320187/2020/0000320187-21-000028/rpt_disclosure.txt new file mode 100644 index 0000000000000000000000000000000000000000..5c6194dbf5a47cb317a3117011386c9a325e4223 --- /dev/null +++ b/raw/filings/0000320187/2020/0000320187-21-000028/rpt_disclosure.txt @@ -0,0 +1,3 @@ +TRANSACTIONS WITH RELATED PERSONS +Philip H. Knight, the father of NIKE director Travis A. Knight, serves as Chairman Emeritus, which provides a standing invitation for Philip H. Knight to attend meetings of the Board and its committees as a non-voting observer. In fiscal 2021, as Chairman Emeritus, Mr. Knight received an annual salary of $500,000, and medical and dental insurance coverage generally available to employees. +The Company’s written policy requires the Corporate Responsibility, Sustainability & Governance Committee to review any transaction or proposed transaction with a related person that would be required to be reported under Item 404(a) of Regulation S-K, and to determine whether to ratify or approve the transaction, with ratification or approval to occur only if the committee determines that the transaction is fair to the Company or that approval or ratification of the transaction is in the interest of the Company. \ No newline at end of file diff --git a/raw/filings/0000320187/2021/0000320187-22-000038/filing.txt b/raw/filings/0000320187/2021/0000320187-22-000038/filing.txt new file mode 100644 index 0000000000000000000000000000000000000000..dbfcfa3ff032aa4ab43a6162d081a13ef05058e7 --- /dev/null +++ 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nke:MisstatementsIdentifiedFourthQuarter2022Member srt:RestatementAdjustmentMember nke:SECSchedule1209AllowanceSalesReturnsMember 2019-06-01 2020-05-31 0000320187 srt:RestatementAdjustmentMember nke:MisstatementsIdentifiedFourthQuarter2021Member nke:SECSchedule1209AllowanceSalesReturnsMember 2019-06-01 2020-05-31 +Table of Contents +UNITED STATES +SECURITIES AND EXCHANGE COMMISSION +Washington, D.C. 20549 +FORM 10-K +(Mark One) +☑ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 +FOR THE FISCAL YEAR ENDED MAY 31 , 2022 +OR +☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 +FOR THE TRANSITION PERIOD FROM TO . +Commission File No. 1-10635 +NIKE, Inc. +(Exact name of Registrant as specified in its charter) +Oregon +93-0584541 +(State or other jurisdiction of incorporation) +(IRS Employer Identification No.) +One Bowerman Drive , Beaverton , Oregon 97005-6453 +(Address of principal executive offices and zip code) +( 503 ) 671-6453 +(Registrant's telephone number, including area code) +SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: +Class B Common Stock +NKE +New York Stock Exchange +(Title of each class) +(Trading symbol) +(Name of each exchange on which registered) +SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: +NONE +Indicate by check mark: +YES +NO +• +if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. +þ +¨ +• +if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. +¨ +þ +• +whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. +þ +¨ +• +whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). +þ +¨ +• +whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. +Large accelerated filer +þ +Accelerated filer +☐ +Non-accelerated filer +☐ +Smaller reporting company +☐ +Emerging growth company +☐ +• +if an emerging growth company, if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. +¨ +• +whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. +☑ +• +whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). +☐ +þ +As of November 30, 2021, the aggregate market values of the Registrant's Common Stock held by non-affiliates were: +Class A +$ 12,101,887,328 +Class B +215,898,023,875 +$ 227,999,911,203 +As of July 8, 2022, the number of shares of the Registrant's Common Stock outstanding were: +Class A +304,903,252 +Class B +1,263,652,653 +1,568,555,905 +DOCUMENTS INCORPORATED BY REFERENCE: +Parts of Registrant's Proxy Statement for the Annual Meeting of Shareholders to be held on September 9, 2022, are incorporated by reference into Part III of this Report. +Table of Contents +NIKE, INC. +ANNUAL REPORT ON FORM 10-K +TABLE OF CONTENTS +PAGE +PART I +1 +ITEM 1. +Business +1 +General +1 +Products +1 +Sales and Marketing +2 +Our Markets +2 +Significant Customer +3 +Product Research, Design and Development +3 +Manufacturing +3 +International Operations and Trade +4 +Competition +5 +Trademarks and Patents +5 +Human Capital Resources +6 +Information about our Executive Officers +8 +ITEM 1A. +Risk Factors +9 +ITEM 1B. +Unresolved Staff Comments +24 +ITEM 2. +Properties +24 +ITEM 3. +Legal Proceedings +24 +ITEM 4. +Mine Safety Disclosures +24 +PART II +25 +ITEM 5. +Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities +25 +ITEM 6. +Selected Financial Data +27 +ITEM 7. +Management's Discussion and Analysis of Financial Condition and Results of Operations +28 +ITEM 7A. +Quantitative and Qualitative Disclosures about Market Risk +50 +ITEM 8. +Financial Statements and Supplementary Data +52 +ITEM 9. +Changes in and Disagreements with Accountants on Accounting and Financial Disclosure +93 +ITEM 9A. +Controls and Procedures +93 +ITEM 9B. +Other Information +93 +ITEM 9C. +Disclosure Regarding Foreign Jurisdictions that Prevent Inspections +93 +PART III +94 +(Except for the information set forth under “Information about our Executive Officers” in Item 1 above, Part III is incorporated by reference from the Proxy Statement for the NIKE, Inc. 20 2 2 Annual Meeting of Shareholders.) +ITEM 10. +Directors, Executive Officers and Corporate Governance +94 +ITEM 11. +Executive Compensation +94 +ITEM 12. +Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters +94 +ITEM 13. +Certain Relationships and Related Transactions and Director Independence +94 +ITEM 14. +Principal Accountant Fees and Services +94 +PART IV +95 +ITEM 15. +Exhibits and Financial Statement Schedules +95 +ITEM 16. +Form 10-K Summary +99 +Signatures +101 +Table of Contents +PART I +ITEM 1. BUSINESS +GENERAL +NIKE, Inc. was incorporated in 1967 under the laws of the State of Oregon. As used in this report, the terms “we,” “us,” “NIKE” and the “Company” refer to NIKE, Inc. and its predecessors, subsidiaries and affiliates, collectively, unless the context indicates otherwise. Our NIKE digital commerce website is located at www.nike.com . On our NIKE corporate website, located at investors.nike.com , we post the following filings as soon as reasonably practicable after they are electronically filed with, or furnished to, the United States Securities and Exchange Commission (the “SEC”): our annual report on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities and Exchange Act of 1934, as amended. Our definitive Proxy Statements are also posted on our corporate website. All such filings on our corporate website are available free of charge. Copies of these filings are also available on the SEC's website ( www.sec.gov ). Also available on our corporate website are the charters of the committees of our Board of Directors, as well as our corporate governance guidelines and code of ethics; copies of any of these documents will be provided in print to any shareholder who submits a request in writing to NIKE Investor Relations, One Bowerman Drive, Beaverton, Oregon 97005-6453. Information contained on or accessible through our website is not incorporated into, and does not form a part of, this Annual Report or any other report or document we file with the SEC, and any references to our website are intended to be inactive textual references only. +Our principal business activity is the design, development and worldwide marketing and selling of athletic footwear, apparel, equipment, accessories and services. NIKE is the largest seller of athletic footwear and apparel in the world. We sell our products through NIKE Direct operations, which are comprised of both NIKE-owned retail stores and sales through our digital platforms (also referred to as "NIKE Brand Digital"), to retail accounts and to a mix of independent distributors, licensees and sales representatives in virtually all countries around the world. We also offer interactive consumer services and experiences through our digital platforms. Virtually all of our products are manufactured by independent contractors. Nearly all footwear and apparel products are manufactured outside the United States, while equipment products are manufactured both in the United States and abroad. +All references to fiscal 2022, 2021, 2020 and 2019 are to NIKE, Inc.'s fiscal years ended May 31, 2022, 2021, 2020 and 2019, respectively. Any references to other fiscal years refer to a fiscal year ending on May 31 of that year. +PRODUCTS +Our NIKE Brand product offerings are aligned around our consumer construct focused on Men’s, Women’s and Kids’. We also design products specifically for the Jordan Brand and Converse. We believe this approach allows us to create products that better meet individual consumer needs while accelerating our largest growth opportunities. +NIKE’s athletic footwear products are designed primarily for specific athletic use, although a large percentage of the products are worn for casual or leisure purposes. We place considerable emphasis on innovation and high-quality construction in the development and manufacturing of our products. Our Men’s, Women’s and Jordan Brand footwear products currently lead in footwear sales and we expect them to continue to do so. +We also sell sports apparel, which features the same trademarks and are sold predominantly through the same marketing and distribution channels as athletic footwear. Our sports apparel, similar to our athletic footwear products, is designed primarily for athletic use, although many of the products are worn for casual or leisure purposes, and demonstrates our commitment to innovation and high-quality construction. Our Men’s and Women’s apparel products currently lead in apparel sales and we expect them to continue to do so. We often market footwear, apparel and accessories in “collections” of similar use or by category. We also market apparel with licensed college and professional team and league logos. +We sell a line of performance equipment and accessories under the NIKE Brand name, including bags, socks, sport balls, eyewear, timepieces, digital devices, bats, gloves, protective equipment and other equipment designed for sports activities. We also sell small amounts of various plastic products to other manufacturers through our wholly-owned subsidiary, NIKE IHM, Inc., doing business as Air Manufacturing Innovation. +2022 FORM 10-K 1 +Table of Contents +Our Jordan Brand designs, distributes and licenses athletic and casual footwear, apparel and accessories predominantly focused on basketball performance and culture using the Jumpman trademark. Sales and operating results for Jordan Brand products are reported within the respective NIKE Brand geographic operating segments. +Our wholly-owned subsidiary brand, Converse, headquartered in Boston, Massachusetts, designs, distributes and licenses casual sneakers, apparel and accessories under the Converse, Chuck Taylor, All Star, One Star, Star Chevron and Jack Purcell trademarks. Operating results of the Converse brand are reported on a stand-alone basis. +In addition to the products we sell to our wholesale customers and directly to consumers through our NIKE Direct operations, we have also entered into license agreements that permit unaffiliated parties to manufacture and sell, using NIKE-owned trademarks, certain apparel, digital devices and applications and other equipment designed for sports activities. +We also offer interactive consumer services and experiences as well as digital products through our digital platforms, including fitness and activity apps; sport, fitness and wellness content; and digital services and features in retail stores that enhance the consumer experience. +SALES AND MARKETING +We experience moderate fluctuations in aggregate sales volume during the year. Historically, revenues in the first and fourth fiscal quarters have slightly exceeded those in the second and third fiscal quarters. However, the mix of product sales may vary considerably as a result of changes in seasonal and geographic demand for particular types of footwear, apparel and equipment, as well as other macroeconomic, strategic, operating and logistics-related factors, as evidenced by the impact of the COVID-19 pandemic. +Because NIKE is a consumer products company, the relative popularity and availability of various sports and fitness activities, as well as changing design trends, affect the demand for our products. We must, therefore, respond to trends and shifts in consumer preferences by adjusting the mix of existing product offerings, developing new products, styles and categories and influencing sports and fitness preferences through extensive marketing. Failure to respond in a timely and adequate manner could have a material adverse effect on our sales and profitability. This is a continuing risk. Refer to Item 1A. Risk Factors. +OUR MARKETS +We report our NIKE Brand operations based on our internal geographic organization. Each NIKE Brand geographic segment operates predominantly in one industry: the design, development, marketing and selling of athletic footwear, apparel and equipment. The Company's reportable operating segments for the NIKE Brand are: North America; Europe, Middle East & Africa (EMEA); Greater China; and Asia Pacific & Latin America (APLA), and include results for the NIKE and Jordan brands. The Hurley brand results, prior to its divestiture in fiscal 2020, were included in North America. Sales through our NIKE Direct operations are managed within each geographic operating segment. +Converse is also a reportable operating segment and operates predominately in one industry: the design, marketing, licensing and selling of casual sneakers, apparel and accessories. Converse direct to consumer operations, including digital commerce, are reported within the Converse operating segment results. +UNITED STATES MARKET +For fiscal 2022, NIKE Brand and Converse sales in the United States accounted for approximately 40% of total revenues, compared to 39% for both fiscal 2021 and fiscal 2020. We sell our NIKE Brand, Jordan Brand and Converse products to thousands of retail accounts in the United States, including a mix of footwear stores, sporting goods stores, athletic specialty stores, department stores, skate, tennis and golf shops and other retail accounts. In the United States, we utilize NIKE sales offices to solicit such sales. During fiscal 2022, our three largest United States customers accounted for approximately 22% of sales in the United States. +Our NIKE Direct and Converse direct to consumer operations sell NIKE Brand, Jordan Brand and Converse products to consumers through various digital platforms. In addition, our NIKE Direct and Converse direct to consumer operations sell products through the following number of retail stores in the United States: +U.S. RETAIL STORES NUMBER +NIKE Brand factory stores 209 +NIKE Brand in-line stores (including employee-only stores) 48 +Converse stores (including factory stores) 87 +TOTAL 344 +2022 FORM 10-K 2 +Table of Contents +In the United States, NIKE has eight significant distribution centers. Five are located in or near Memphis, Tennessee, two of which are owned and three of which are leased. Two other distribution centers, one located in Indianapolis, Indiana and one located in Dayton, Tennessee, are leased and operated by third-party logistics providers. One distribution center for Converse is located in Ontario, California, which is leased. There are other smaller distribution facilities located in various parts of the United States, some of which are leased or operated by third parties. +INTERNATIONAL MARKETS +For fiscal 2022, non-U.S. NIKE Brand and Converse sales accounted for approximately 60% of total revenues, compared to 61% for fiscal 2021 and fiscal 2020. We sell our products to retail accounts through our own NIKE Direct operations and through a mix of independent distributors, licensees and sales representatives around the world. We sell to thousands of retail accounts and ship products from 72 distribution centers outside of the United States. During fiscal 2022, NIKE's three largest customers outside of the United States accounted for approximately 14% of total non-U.S. sales. +In addition to NIKE-owned and Converse-owned digital commerce platforms in over 45 countries, our NIKE Direct and Converse direct to consumer businesses operate the following number of retail stores outside the United States: +NON-U.S. RETAIL STORES NUMBER +NIKE Brand factory stores 597 +NIKE Brand in-line stores (including employee-only stores) 47 +Converse stores (including factory stores) 58 +TOTAL 702 +International branch offices and subsidiaries of NIKE are located in Argentina, Australia, Austria, Belgium, Bermuda, Brazil, Canada, Chile, China, Croatia, the Czech Republic, Denmark, Finland, France, Germany, Greece, Hong Kong, Hungary, India, Indonesia, Ireland, Israel, Italy, Japan, Korea, Macau, Malaysia, Mexico, the Netherlands, New Zealand, Norway, the Philippines, Poland, Portugal, Russia, Singapore, Slovenia, South Africa, Spain, Sri Lanka, Sweden, Switzerland, Taiwan, Thailand, Turkey, the United Arab Emirates, the United Kingdom, Uruguay and Vietnam. +SIGNIFICANT CUSTOMER +No customer accounted for 10% or more of our consolidated net Revenues during fiscal 2022. +PRODUCT RESEARCH, DESIGN AND DEVELOPMENT +We believe our research, design and development efforts are key factors in our success. Technical innovation in the design and manufacturing process of footwear, apparel and athletic equipment receives continued emphasis as we strive to produce products that help to enhance athletic performance, reduce injury and maximize comfort, while decreasing our environmental impact. +In addition to our own staff of specialists in the areas of biomechanics, chemistry, exercise physiology, engineering, digital technologies, industrial design, sustainability and related fields, we also utilize research committees and advisory boards made up of athletes, coaches, trainers, equipment managers, orthopedists, podiatrists, physicians and other experts who consult with us and review certain designs, materials and concepts for product and manufacturing, design and other process improvements and compliance with product safety regulations around the world. Employee athletes, athletes engaged under sports marketing contracts and other athletes wear-test and evaluate products during the design and development process. +As we continue to develop new technologies, we are simultaneously focused on the design of innovative products and experiences incorporating such technologies throughout our product categories and consumer applications. Using market intelligence and research, our various design teams identify opportunities to leverage new technologies in existing categories to respond to consumer preferences. The proliferation of Nike Air, Zoom, Nike Free, Flywire, Dri-Fit, Flyknit, FlyEase, ZoomX, Air Max, Nike React and Nike Adapt technologies, among others, typifies our dedication to designing innovative products. +MANUFACTURING +Virtually all of our footwear and apparel products are manufactured outside the United States by independent manufacturers with whom we contract and refer to as “contract manufacturers.” Many of these contract manufacturers operate multiple finished goods contract factories. We are also supplied, primarily indirectly, by a number of materials, or “Tier 2,” suppliers, who provide the principal materials used in footwear and apparel finished goods products. As of May 31, 2022, we had 139 strategic Tier 2 suppliers. +2022 FORM 10-K 3 +Table of Contents +As of May 31, 2022, we were supplied by 120 finished goods footwear contract factories located in 11 countries. For fiscal 2022, contract factories in Vietnam, Indonesia and China manufactured approximately 44%, 30% and 20% of total NIKE Brand footwear, respectively. The largest single footwear contract factory accounted for approximately 8% of total fiscal 2022 NIKE Brand footwear production. For fiscal 2022, four footwear contract manufacturers each accounted for greater than 10% of footwear production and in the aggregate accounted for approximately 58% of NIKE Brand footwear production. +As of May 31, 2022, we were supplied by 279 finished goods apparel contract factories located in 33 countries. For fiscal 2022, contract factories in Vietnam, China and Cambodia manufactured approximately 26%, 20% and 16% of total NIKE Brand apparel, respectively. The largest single apparel contract factory accounted for approximately 10% of total fiscal 2022 NIKE Brand apparel production. For fiscal 2022, two apparel contract manufacturers each accounted for more than 10% of apparel production, and the top five contract manufacturers in the aggregate accounted for approximately 54% of NIKE Brand apparel production. +NIKE’s contract manufacturers buy raw materials for the manufacturing of our footwear, apparel and equipment products. Most raw materials are available and purchased by those contract manufacturers in the countries where manufacturing takes place. +The principal materials used in our footwear products are natural and synthetic rubber, plastic compounds, foam cushioning materials, natural and synthetic leather, nylon, polyester and natural fiber textiles, as well as polyurethane films used to make NIKE Air-Sole cushioning components. During fiscal 2022, Air Manufacturing Innovation, a wholly-owned subsidiary, with facilities near Beaverton, Oregon, in Dong Nai Province, Vietnam, and St. Charles, Missouri, as well as contract manufacturers in China and Vietnam, were our suppliers of NIKE Air-Sole cushioning components used in footwear. +The principal materials used in our apparel products are natural and synthetic fabrics, yarns and threads (both virgin and recycled); specialized performance fabrics designed to efficiently wick moisture away from the body, retain heat and repel rain and/or snow; and plastic and metal hardware. +In fiscal 2022, COVID-19 had impacts throughout our supply chain, including loss of production as well as production and transportation delays. However, COVID-19 has not materially impacted the number or concentration of finished goods factories, contract manufacturers, or Tier 2 suppliers in countries where we source footwear and apparel products. Despite competition for certain materials during fiscal 2022, contract manufacturers were able to source sufficient quantities of raw materials for use in our footwear and apparel products. Refer to Item 1A. Risk Factors, for additional discussion of the impact of COVID-19 and sourcing risks on our business. +Since 1972, Sojitz Corporation of America (“Sojitz America”), a large Japanese trading company and the sole owner of our redeemable preferred stock, has performed import-export financing services for us. +INTERNATIONAL OPERATIONS AND TRADE +Our international operations and sources of supply are subject to the usual risks of doing business abroad, such as the implementation of, or potential changes in, foreign and domestic trade policies, increases in import duties, anti-dumping measures, quotas, safeguard measures, trade restrictions, restrictions on the transfer of funds and, in certain parts of the world, political tensions, instability, conflicts, nationalism and terrorism, and resulting sanctions and other measures imposed in response to such issues. We have not, to date, been materially affected by any such risk but cannot predict the likelihood of such material effects occurring in the future. +In recent years, uncertain global and regional economic and political conditions have affected international trade and increased protectionist actions around the world. These trends are affecting many global manufacturing and service sectors, and the footwear and apparel industries, as a whole, are not immune. Companies in our industry are facing trade protectionism in many different regions, and, in nearly all cases, we are working together with industry groups to address trade issues and reduce the impact to the industry, while observing applicable competition laws. Notwithstanding our efforts, protectionist measures have resulted in increases in the cost of our products, and additional measures, if implemented, could adversely affect sales and/or profitability for NIKE, as well as the imported footwear and apparel industry as a whole. +We monitor protectionist trends and developments throughout the world that may materially impact our industry, and we engage in administrative and judicial processes to mitigate trade restrictions. We are actively monitoring actions that may result in additional anti-dumping measures and could affect our industry. We are also monitoring for and advocating against other impediments that may limit or delay customs clearance for imports of footwear, apparel and equipment. NIKE also advocates for trade liberalization for footwear and apparel in a number of regional and bilateral free trade agreements. Changes in, and responses to, U.S. trade policies, including the imposition of tariffs or penalties on imported goods or retaliatory measures by other countries, have negatively affected, and could in the future negatively affect, U.S. corporations, including NIKE, with business operations and/or consumer markets in those countries, which could also make it necessary for us to change the way we conduct business, either of which may have an adverse effect on our business, financial condition or our results of operations. In addition, with respect to proposed trade restrictions, we work with a broad coalition of global businesses and trade associations representing a wide variety of sectors to help ensure that any legislation enacted and implemented (i) addresses +2022 FORM 10-K 4 +Table of Contents +legitimate and core concerns, (ii) is consistent with international trade rules and (iii) reflects and considers domestic economies and the important role they may play in the global economic community. +Where trade protection measures are implemented, we believe we have the ability to develop, over a period of time, adequate alternative sources of supply for the products obtained from our present suppliers. If events prevented us from acquiring products from our suppliers in a particular country, our operations could be temporarily disrupted and we could experience an adverse financial impact. However, we believe we could abate any such disruption, and that much of the adverse impact on supply would, therefore, be of a short-term nature, although alternate sources of supply might not be as cost-effective and could have an ongoing adverse impact on profitability. +Our international operations are also subject to compliance with the U.S. Foreign Corrupt Practices Act, or "FCPA", and other anti-bribery laws applicable to our operations. We source a significant portion of our products from, and have important consumer markets, outside of the United States. We have an ethics and compliance program to address compliance with the FCPA and similar laws by us, our employees, agents, suppliers and other partners. Refer to Item 1A. Risk Factors for additional information on risks relating to our international operations. +COMPETITION +The athletic footwear, apparel and equipment industry is highly competitive on a worldwide basis. We compete internationally with a significant number of athletic and leisure footwear companies, athletic and leisure apparel companies, sports equipment companies and large companies having diversified lines of athletic and leisure footwear, apparel and equipment, including adidas, Anta, ASICS, Li Ning, lululemon athletica, Puma, Under Armour and V.F. Corporation, among others. The intense competition and the rapid changes in technology and consumer preferences in the markets for athletic and leisure footwear and apparel and athletic equipment constitute significant risk factors in our operations. Refer to Item 1A. Risk Factors for additional information. +NIKE is the largest seller of athletic footwear and apparel in the world. Important aspects of competition in this industry are: +• Product attributes such as quality; performance and reliability; new product style, design, innovation and development; as well as consumer price/value. +• Consumer connection, engagement and affinity for brands and products, developed through marketing, promotion and digital experiences; social media interaction; customer support and service; identification with prominent and influential athletes, influencers, public figures, coaches, teams, colleges and sports leagues who endorse our brands and use our products and active engagement through sponsored sporting events and clinics. +• Effective sourcing and distribution of products, with attractive merchandising and presentation at retail, both in-store and on digital platforms. +We believe that we are competitive in all of these areas. +TRADEMARKS AND PATENTS +We believe that our intellectual property rights are important to our brand, our success and our competitive position. We strategically pursue available protections of these rights and vigorously protect them against third-party theft and infringement. +We use trademarks on nearly all of our products and packaging, and in our marketing materials, and believe having distinctive marks that are readily identifiable is an important factor in creating a market for our goods, in identifying our brands and the Company, and in distinguishing our goods from the goods of others. We consider our NIKE and Swoosh Design trademarks to be among our most valuable assets and we have registered these trademarks in over 190 jurisdictions worldwide. In addition, we own many other trademarks that we use in marketing our products. We own common law rights in the trade dress of several distinctive shoe designs and elements. For certain trade dress, we have sought and obtained trademark registrations. +We have copyright protection in our designs, graphics, software applications, digital goods and other original works. When appropriate, we also obtain registered copyrights. +We file for, own and maintain many U.S. and foreign utility and design patents protecting components, technologies, materials, manufacturing techniques, features, functionality, and industrial designs used in and for the manufacture of various athletic, performance, and leisure footwear and apparel, including physical and digital versions thereof, athletic equipment, and digital devices, and related software applications. These patents expire at various times. +We believe our success depends upon our capabilities in areas such as design, research and development, production and marketing and is supported and protected by our intellectual property rights, such as trademarks, utility and design patents, copyrights, and trade secrets, among others. +2022 FORM 10-K 5 +Table of Contents +We have followed a policy of applying for and registering intellectual property rights in the United States and select foreign countries on trademarks, inventions, innovations and designs that we deem valuable. We also continue to vigorously protect our intellectual property, including trademarks, patents and trade secrets against third-party infringement and misappropriation. +HUMAN CAPITAL RESOURCES +At NIKE, we consider the strength and effective management of our workforce to be essential to the ongoing success of our business. We believe that it is important to attract, develop and retain a diverse and engaged workforce at all levels of our business and that such a workforce fosters creativity and accelerates innovation. We are focused on building an increasingly diverse talent pipeline that reflects our consumers, athletes and the communities we serve. +CULTURE +Each employee shapes NIKE’s culture through behaviors and practices. This starts with our Maxims, which represent our core values and, along with our Code of Conduct, feature the fundamental behaviors that help anchor, inform and guide us and apply to all employees. Our mission is to bring inspiration and innovation to every athlete in the world, which includes the belief that if you have a body, you are an athlete. We aim to do this by creating groundbreaking sport innovations, making our products more sustainably, building a creative and diverse global team, supporting the well-being of our employees and making a positive impact in communities where we live and work. Our mission is aligned with our deep commitment to maintaining an environment where all NIKE employees have the opportunity to reach their full potential, to connect to our brands and to shape the culture in which they work. We believe providing for growth and retention of our employees is essential in fostering such a culture and are dedicated to giving access to training programs and career development opportunities, including trainings on NIKE’s values, history and business, trainings on developing leadership skills at all levels, tools and resources for managers and qualified tuition reimbursement opportunities. +As part of our commitment to empowering our employees to help shape our culture, we source employee feedback through our Engagement Survey program. The program provides every employee throughout the globe an opportunity to provide confidential feedback on key areas known to drive employee engagement, including their satisfaction with their managers, their work and the Company generally. The program also measures our employees’ emotional commitment to NIKE as well as NIKE’s culture of diversity, equity and inclusion. NIKE also provides multiple points of contact for employees to speak up if they experience something that does not align with our values or otherwise violates our workplace policies, even if they are uncertain what they observed or heard is a violation of company policy. +As part of our commitment to make a positive impact on our communities, we maintain a goal of investing 2% of our prior fiscal year’s pre-tax income into global communities, up from 1.5% in fiscal 2021. The focus of this investment continues to be inspiring kids to be active through play and sport as well as uniting and inspiring communities to create a better and more equitable future for all. Our community investments are an important part of our culture in that we also support employees in giving back to community organizations through donations and volunteering, which are matched by the NIKE Foundation where eligible. +EMPLOYEE BASE +As of May 31, 2022, we had approximately 79,100 employees worldwide, including retail and part-time employees. We also utilize independent contractors and temporary personnel to supplement our workforce. +None of our employees are represented by a union, except certain employees in the EMEA and APLA geographies are members of and/or represented by trade unions, as allowed or required by local law and/or collective bargaining agreements. Also, in some countries outside of the United States, local laws require employee representation by works councils (which may be entitled to information and consultation on certain subsidiary decisions) or by organizations similar to a union. In certain European countries, we are required by local law to enter into, and/or comply with, industry-wide or national collective bargaining agreements. NIKE has never experienced a material interruption of operations due to labor disagreements. +DIVERSITY, EQUITY AND INCLUSION (DE&I) +DE&I is a strategic priority for NIKE and we are committed to having an increasingly diverse team and culture. We aim to foster an inclusive workplace through recruitment, development and retention of diverse talent with the goal of expanding representation across all dimensions of diversity over the long term. We remain committed to the targets announced in fiscal 2021 for the Company to work toward by fiscal 2025, including increasing representation of women in our global corporate workforce and leadership positions, as well as increasing representation of U.S. racial and ethnic minorities in our U.S. corporate workforce and at the Director level and above. +We continue to enhance our efforts to recruit diverse talent through our traditional channels and have launched new initiatives, such as partnerships with athletes and sports-related organizations to create apprenticeship programs and new partnerships with +2022 FORM 10-K 6 +Table of Contents +organizations, colleges and universities that serve diverse populations. Additionally, we are prioritizing DE&I education so that all NIKE employees and leaders have the cultural awareness and understanding to build diverse and inclusive teams. We also have Employee Networks, collectively known as NikeUNITED, representing various employee groups. +Our DE&I focus extends beyond our workforce and includes our communities, which we support in a number of ways. We have committed to investments that aim to address racial inequality and improve diversity and representation in our communities. We also are leveraging our global scale to accelerate business diversity, including investing in business training programs for women and increasing the proportion of services supplied by minority-owned businesses. +COMPENSATION AND BENEFITS +NIKE’s total rewards are intended to be competitive and equitable, meet the diverse needs of our global teammates and reinforce our values. We are committed to providing comprehensive, competitive and equitable pay and benefits to our employees, and we have invested, and aim to continue to invest, in our employees through growth and development and well-being initiatives. Our initiatives in this area include: +• We are committed to competitive pay and to reviewing our pay and promotion practices annually. +• We have an annual company bonus plan and a retail-focused bonus plan applicable to all eligible employees. Both programs are focused on rewarding employees for company performance, which we believe reinforces our culture and rewards behaviors that support collaboration and teamwork. +• We provide comprehensive family care benefits in the U.S. and globally where practicable, including family planning coverage, backup care and child/elder care assistance as well as an income-based childcare subsidy for eligible employees. +• Our Military Leave benefit provides up to 12 weeks of paid time off every 12 months, and we enhanced our Military Leave benefit for employees called up to serve as part of the U.S. COVID-19 response. +• We offer free access to our Sport Centers at our World Headquarters (WHQ) for our full-time employees and North America store employees. +• We provide employees free access to mindfulness and meditation resources, including membership to Headspace as well as live classes through our Sport Centers. +• Our global Employee Assistance Program (EAP) provides free and confidential counseling to all global employees and their families. +• We provide transgender healthcare coverage for eligible employees covered on the U.S. Health Plan, including access to both restorative services and personal care. +COVID-19 RESPONSE +Since the start of the COVID-19 pandemic, the health and safety of our employees has remained a priority. We have continued to follow and communicate guidance provided by the Centers for Disease Control and Prevention (CDC) and local public health authorities, as well as mandates set by state and local law as a part of our continued response and focus on mitigating the spread of COVID-19. We developed a comprehensive risk assessment, infection control plans, and employee education campaigns. Our robust health and safety measures have included staffing a team of fully dedicated contact tracers, sourcing and distributing over 1 million NIKE face coverings to teammates worldwide, facilitating access to COVID-19 testing, and offering on-site vaccination clinics in collaboration with local public health agencies. As the pandemic continues, we continue to strongly encourage that all employees become fully vaccinated. We continue to support our employees by offering all eligible employees paid COVID-19 sick leave for two weeks, in addition to existing paid time off benefits and legally mandated sick leave programs, which covers physical health, mental and emotional well-being and care for a family member. We also provide the option for employees to utilize up to two weeks of paid time off in advance of accrued balances, if needed. +Additional information related to our human capital strategy can be found in our FY21 NIKE, Inc. Impact Report, which is available on the Impact section of our website. Information contained on or accessible through our websites is not incorporated into, and does not form a part of, this Annual Report or any other report or document we file with the SEC, and any references to our websites are intended to be inactive textual references only. +2022 FORM 10-K 7 +Table of Contents +INFORMATION ABOUT OUR EXECUTIVE OFFICERS +The executive officers of NIKE, Inc. as of July 21, 2022, are as follows: +Mark G. Parker , Executive Chairman — Mr. Parker, 66, is Executive Chairman of the Board of Directors and served as President and Chief Executive Officer from 2006 - January 2020. He has been employed by NIKE since 1979 with primary responsibilities in product research, design and development, marketing and brand management. Mr. Parker was appointed divisional Vice President in charge of product development in 1987, corporate Vice President in 1989, General Manager in 1993, Vice President of Global Footwear in 1998 and President of the NIKE Brand in 2001. +John J. Donahoe II , President and Chief Executive Officer — Mr. Donahoe, 62, was appointed President and Chief Executive Officer in January 2020 and has been a director since 2014. He brings expertise in digital commerce, technology and global strategy. He previously served as President and Chief Executive Officer at ServiceNow, Inc. Prior to joining ServiceNow, Inc., he served as President and Chief Executive Officer of eBay, Inc. He also held leadership roles at Bain & Company for two decades. +Andrew Campion , Chief Operating Officer — Mr. Campion, 50, joined NIKE in 2007 as Vice President of Global Planning and Development, leading strategic and financial planning. He was appointed Chief Financial Officer of the NIKE Brand in 2010, responsible for leading all aspects of financial management for the Company's flagship brand. In 2014, he was appointed Senior Vice President, Strategy, Finance and Investor Relations. Mr. Campion assumed the role of Executive Vice President and Chief Financial Officer in August 2015. In April 2020, he was appointed Chief Operating Officer and leads NIKE's global technology and digital transformation, demand and supply management, manufacturing, distribution and logistics, sustainability, workplace design and connectivity, and procurement. Prior to joining NIKE, he held leadership roles in strategic planning, mergers and acquisitions, financial planning and analysis, operations and planning, investor relations and tax at The Walt Disney Company. +Matthew Friend , Executive Vice President and Chief Financial Officer — Mr. Friend, 44, joined NIKE in 2009 as Senior Director of Corporate Strategy and Development, and was appointed Chief Financial Officer of Emerging Markets in 2011. In 2014, Mr. Friend was appointed Chief Financial Officer of Global Categories, Product and Functions, and was subsequently appointed Chief Financial Officer of the NIKE Brand in 2016. He was also appointed Vice President of Investor Relations in 2019. Mr. Friend was appointed as Executive Vice President and Chief Financial Officer of NIKE, Inc. in April 2020. Prior to joining NIKE, he worked in the financial industry including roles as VP of investment banking and mergers and acquisitions at Goldman Sachs and Morgan Stanley. +Ann M. Miller , Executive Vice President, Chief Legal Officer — Ms. Miller, 48, joined NIKE in 2007 and serves as EVP, Chief Legal Officer for NIKE, Inc. In her capacity as Chief Legal Officer, she oversees all legal, compliance, government & public affairs, social community impact, security, resilience and investigation matters of the Company. For the past six years, she served as Vice President, Corporate Secretary and Chief Ethics & Compliance Officer. She previously served as Converse's General Counsel, and brings more than 20 years of legal and business expertise to her role. Prior to joining NIKE, Ms. Miller worked at the law firm Sullivan & Cromwell. +Monique S. Matheson , Executive Vice President, Chief Human Resources Officer — Ms. Matheson, 55, joined NIKE in 1998, with primary responsibilities in the human resources function. She was appointed as Vice President and Senior Business Partner in 2011 and Vice President, Chief Talent and Diversity Officer in 2012. Ms. Matheson was appointed Executive Vice President, Global Human Resources in 2017. +Heidi O'Neill , President of Consumer and Marketplace — Ms. O'Neill, 57, joined NIKE in 1998, and held a variety of leadership roles, including President of NIKE Direct, where she was responsible for NIKE's connection to its consumer globally through the Company's retail and digital-commerce business. She also led NIKE's women's business for seven years, growing it into a multi-billion dollar business, and leading the Company's North America apparel business as VP/GM. Ms. O'Neill was appointed as President of Consumer and Marketplace in April 2020 and is responsible for NIKE's Direct business, including all stores, e-commerce and apps globally. +2022 FORM 10-K 8 +Table of Contents +ITEM 1A. RISK FACTORS +Special Note Regarding Forward-Looking Statements and Analyst Reports +Certain written and oral statements, other than purely historic information, including estimates, projections, statements relating to NIKE’s business plans, objectives and expected operating or financial results and the assumptions upon which those statements are based, made or incorporated by reference from time to time by NIKE or its representatives in this report, other reports, filings with the SEC, press releases, conferences or otherwise, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements include, without limitation, any statement that may predict, forecast, indicate or imply future results, performance or achievements, and may contain the words “believe,” “anticipate,” “expect,” “estimate,” “project,” “will be,” “will continue,” “will likely result” or words or phrases of similar meaning. Forward-looking statements involve risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. The risks and uncertainties are detailed from time to time in reports filed by NIKE with the SEC, including reports filed on Forms 8-K, 10-Q and 10-K, and include, among others, the following: health epidemics, pandemics and similar outbreaks, including the COVID-19 pandemic; international, national and local political, civil, economic and market conditions; the size and growth of the overall athletic or leisure footwear, apparel and equipment markets; intense competition among designers, marketers, distributors and sellers of athletic or leisure footwear, apparel and equipment for consumers and endorsers; demographic changes; changes in consumer preferences; popularity of particular designs, categories of products and sports; seasonal and geographic demand for NIKE products; difficulties in anticipating or forecasting changes in consumer preferences, consumer demand for NIKE products and the various market factors described above; our ability to execute on our sustainability strategy and achieve our sustainability-related goals and targets, including sustainable product offerings; difficulties in implementing, operating and maintaining NIKE’s increasingly complex information technology systems and controls, including, without limitation, the systems related to demand and supply planning and inventory control; interruptions in data and information technology systems; consumer data security; fluctuations and difficulty in forecasting operating results, including, without limitation, the fact that advance orders may not be indicative of future revenues due to changes in shipment timing, the changing mix of orders with shorter lead times, and discounts, order cancellations and returns; the ability of NIKE to sustain, manage or forecast its growth and inventories; the size, timing and mix of purchases of NIKE’s products; increases in the cost of materials, labor and energy used to manufacture products; new product development and introduction; the ability to secure and protect trademarks, patents and other intellectual property; product performance and quality; customer service; adverse publicity and an inability to maintain NIKE’s reputation and brand image, including without limitation, through social media or in connection with brand damaging events; the loss of significant customers or suppliers; dependence on distributors and licensees; business disruptions; increased costs of freight and transportation to meet delivery deadlines; increases in borrowing costs due to any decline in NIKE’s debt ratings; changes in business strategy or development plans; general risks associated with doing business outside of the United States, including, without limitation, exchange rate fluctuations, inflation, import duties, tariffs, quotas, sanctions, political and economic instability, conflicts and terrorism; the potential impact of new and existing laws, regulations or policy, including, without limitation, tariffs, import/export, trade, wage and hour or labor and immigration regulations or policies; changes in government regulations; the impact of, including business and legal developments relating to, climate change, extreme weather conditions and natural disasters; litigation, regulatory proceedings, sanctions or any other claims asserted against NIKE; the ability to attract and retain qualified employees, and any negative public perception with respect to key personnel or our corporate culture, values or purpose; the effects of NIKE’s decision to invest in or divest of businesses or capabilities and other factors referenced or incorporated by reference in this report and other reports. +Risk Factors +The risks included here are not exhaustive. Other sections of this report may include additional factors which could adversely affect NIKE’s business and financial performance. Moreover, NIKE operates in a very competitive and rapidly changing environment. New risks emerge from time to time and it is not possible for management to predict all such risks, nor can it assess the impact of all such risks on NIKE’s business or the extent to which any risk, or combination of risks, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results. +Investors should also be aware that while NIKE does, from time to time, communicate with securities analysts, it is against NIKE’s policy to disclose to them any material non-public information or other confidential commercial information. Accordingly, shareholders should not assume that NIKE agrees with any statement or report issued by any analyst irrespective of the content of the statement or report. Furthermore, NIKE has a policy against confirming financial forecasts or projections issued by others. Thus, to the extent that reports issued by securities analysts contain any projections, forecasts or opinions, such reports are not the responsibility of NIKE. +2022 FORM 10-K 9 +Table of Contents +Economic and Industry Risks +Global economic conditions could have a material adverse effect on our business, operating results and financial condition. +The uncertain state of the global economy continues to impact businesses around the world. If global economic and financial market conditions deteriorate, the following factors could have a material adverse effect on our business, operating results and financial condition: +• Our sales are impacted by discretionary spending by consumers. Declines in consumer spending have in the past and in the future may result in reduced demand for our products, increased inventories, reduced orders from retailers for our products, order cancellations, lower revenues, higher discounts and lower gross margins. +• In the future, we may be unable to access financing in the credit and capital markets at reasonable rates in the event we find it desirable to do so. +• We conduct transactions in various currencies, which creates exposure to fluctuations in foreign currency exchange rates relative to the U.S. Dollar. Continued volatility in the markets and exchange rates for foreign currencies and contracts in foreign currencies could have a significant impact on our reported operating results and financial condition. +• Continued volatility in the availability and prices for commodities and raw materials we use in our products and in our supply chain (such as cotton or petroleum derivatives) could have a material adverse effect on our costs, gross margins and profitability. In addition, supply chain issues caused by factors including the COVID-19 pandemic and geopolitical conflicts have impacted and may continue to impact the availability, pricing and timing for obtaining commodities and raw materials. +• If retailers of our products experience declining revenues or experience difficulty obtaining financing in the capital and credit markets to purchase our products, this could result in reduced orders for our products, order cancellations, late retailer payments, extended payment terms, higher accounts receivable, reduced cash flows, greater expense associated with collection efforts and increased bad debt expense. +• If retailers of our products experience severe financial difficulty, some may become insolvent and cease business operations, which could negatively impact the sale of our products to consumers. If contract manufacturers of our products or other participants in our supply chain experience difficulty obtaining financing in the capital and credit markets to purchase raw materials or to finance capital equipment and other general working capital needs, it may result in delays or non-delivery of shipments of our products. +Our financial condition and results of operations have been, and could in the future be, adversely affected by the COVID-19 pandemic. +A novel strain of coronavirus (COVID-19) was first identified in Wuhan, China in December 2019, and subsequently declared a pandemic by the World Health Organization. The COVID-19 pandemic and preventative measures taken to contain or mitigate the pandemic have caused, and may in the future cause, business slowdown or shutdown in affected areas and significant disruption in the financial markets, both globally and in the United States. These events have led to and could again lead to adverse impacts to our global supply chain, factory cancellation costs, store closures, and a decline in retail traffic and discretionary spending by consumers and, in turn, materially impact our business, sales, financial condition and results of operations as well as cause a volatile effective tax rate driven by changes in the mix of earnings across our jurisdictions. We cannot predict whether, and to what degree, our sales, operations and financial results could in the future be affected by the pandemic and preventative measures. Risks presented by the COVID-19 pandemic include, but are not limited to: +• Deterioration in economic conditions in the United States and globally, including the effect of prolonged periods of inflation on our consumers and vendors; +• Disruption to our distribution centers, contract manufacturers, finished goods contract factories and other vendors, through the effects of facility closures, increased operating costs, reductions in operating hours, labor shortages, and real time changes in operating procedures, such as additional cleaning and disinfection procedures, which have had, and could in the future again have, a significant impact on our planned inventory production and distribution, including higher inventory levels or inventory shortages in various markets; +• Impacts to our distribution and logistics providers’ ability to operate, including labor and container shortages, and increases in their operating costs. These supply chain effects have had, and could in the future have, an adverse effect on our ability to meet consumer demand, including digital demand, and have in the past resulted in and could in the future result in extended inventory transit times and an increase in our costs of production and distribution, including increased freight and logistics costs and other expenses; +• Decreased retail traffic as a result of store closures, reduced operating hours, social distancing restrictions and/or changes in consumer behavior; +2022 FORM 10-K 10 +Table of Contents +• Reduced consumer demand for our products if consumers seek to reduce or delay discretionary spending in response to the impacts of COVID-19, including as a result of a rise in unemployment rates, higher costs of borrowing, inflation and diminished consumer confidence; +• Cancellation or postponement of sports seasons and sporting events in multiple countries, including in the United States, and bans on large public gatherings, which have reduced consumer spending on our products and could impact the effectiveness of our arrangements with key endorsers; +• The risk that any safety protocols in NIKE-owned or affiliated facilities, including our offices, will not be effective or not be perceived as effective, or that any virus-related illnesses will be linked or alleged to be linked to such facilities, whether accurate or not; +• Incremental costs resulting from the adoption of preventative measures and compliance with regulatory requirements, including providing facial coverings and hand sanitizer, rearranging operations to follow social distancing protocols, conducting temperature checks, COVID-19 testing and undertaking regular and thorough disinfecting of surfaces; +• Bankruptcies or other financial difficulties facing our wholesale customers, which could cause them to be unable to make or delay making payments to us, or result in revised payment terms, cancellation or reduction of their orders; +• Operational risk, including but not limited to cybersecurity risks, as a result of continued workforce remote work arrangements, and restrictions on employee travel; and +• Significant disruption of and volatility in global financial markets, which could have a negative impact on our ability to access capital in the future. +We continue to monitor the latest developments regarding the pandemic and have made certain assumptions regarding the pandemic for purposes of our operating, financial and tax planning projections, including assumptions regarding the duration and severity of the pandemic and the global macroeconomic impacts of the pandemic. However, we are unable to accurately predict the extent of the impact of the pandemic on our business, operations and financial condition due to the uncertainty of future developments. In particular, we believe the ultimate impacts on our business, results of operations, cash flows and financial condition will depend on, among other things, the further spread and duration of COVID-19, including emerging variant strains of COVID-19, the requirements to take action to help limit the spread of the illness, the impact of the easing of restrictions in various regions, the availability, widespread distribution and acceptance, as well as the safety and efficacy of vaccines for COVID-19 and the economic impacts of the pandemic. Even in those regions where we have experienced business recovery, should those regions fail to fully contain COVID-19 or suffer a COVID-19 relapse, those markets may not recover as quickly or at all, which could have a material adverse effect on our business, results of operations and financial condition. Additionally, COVID-19 related disruptions are making it more challenging to compare our performance, including our revenue growth and overall profitability, across quarters and fiscal years. The pandemic may also affect our business, results of operations or financial condition in a manner that is not presently known to us or that we currently do not consider to present significant risks. +In addition, the impact of COVID-19 may also exacerbate, or occur concurrently with, other risks discussed in this Item 1A. Risk Factors, any of which could have a material effect on us . +Our products, services and experiences face intense competition. +NIKE is a consumer products company and the relative popularity of various sports and fitness activities and changing design trends affect the demand for our products, services and experiences. The athletic footwear, apparel and equipment industry is highly competitive both in the United States and worldwide. We compete internationally with a significant number of athletic and leisure footwear companies, athletic and leisure apparel companies, sports equipment companies, private labels and large companies that have diversified lines of athletic and leisure footwear, apparel and equipment. We also compete with other companies for the production capacity of contract manufacturers that produce our products. In addition, we and our contract manufacturers compete with other companies and industries for raw materials used in our products. Our NIKE Direct operations, both through our digital commerce operations and retail stores, also compete with multi-brand retailers, which sell our products through their digital platforms and physical stores, and with digital commerce platforms. In addition, we compete with respect to the digital services and experiences we are able to offer our consumers, including fitness and activity apps; sport, fitness and wellness content and services; and digital services and features in retail stores that enhance the consumer experience. +Product offerings, technologies, marketing expenditures (including expenditures for advertising and endorsements), pricing, costs of production, customer service, digital commerce platforms, digital services and experiences and social media presence are areas of intense competition. These, in addition to ongoing rapid changes in technology, a reduction in barriers to the creation of new footwear and apparel companies and consumer preferences in the markets for athletic and leisure footwear, apparel, and equipment, services and experiences, constitute significant risk factors in our operations. In addition, the competitive nature of retail, including shifts in the ways in which consumers shop, and the continued proliferation of digital commerce, constitutes a risk factor implicating our NIKE Direct and wholesale operations. If we do not adequately and timely anticipate and respond to our +2022 FORM 10-K 11 +Table of Contents +competitors, our costs may increase, demand for our products may decline, possibly significantly, or we may need to reduce wholesale or suggested retail prices for our products. +Economic factors beyond our control, and changes in the global economic environment, including fluctuations in inflation and currency exchange rates, could result in lower revenues, higher costs and decreased margins and earnings. +A majority of our products are manufactured and sold outside of the United States, and we conduct purchase and sale transactions in various currencies, which creates exposure to the volatility of global economic conditions, including fluctuations in inflation and foreign currency exchange rates. Central banks may deploy various strategies to combat inflation, including increasing interest rates, which may impact our borrowing costs. Additionally, there has been, and may continue to be, volatility in currency exchange rates including as a result of U.S. policy changes and the Russia and Ukraine conflict that impact the U.S. Dollar value relative to other international currencies. Our international revenues and expenses generally are derived from sales and operations in foreign currencies, and these revenues and expenses could be affected by currency fluctuations, specifically amounts recorded in foreign currencies and translated into U.S. Dollars for consolidated financial reporting, as weakening of foreign currencies relative to the U.S. Dollar adversely affects the U.S. Dollar value of the Company's foreign currency-denominated sales and earnings. Currency exchange rate fluctuations could also disrupt the business of the independent manufacturers that produce our products by making their purchases of raw materials more expensive and more difficult to finance. Foreign currency fluctuations have adversely affected and could continue to have an adverse effect on our results of operations and financial condition. +We may hedge certain foreign currency exposures to lessen and delay, but not to completely eliminate, the effects of foreign currency fluctuations on our financial results. Since the hedging activities are designed to lessen volatility, they not only reduce the negative impact of a stronger U.S. Dollar or other trading currency, but they also reduce the positive impact of a weaker U.S. Dollar or other trading currency. Our future financial results could be significantly affected by the value of the U.S. Dollar in relation to the foreign currencies in which we conduct business. The degree to which our financial results are affected for any given time period will depend in part upon our hedging activities. +We may be adversely affected by the financial health of our customers. +We extend credit to our customers based on an assessment of a customer's financial condition, generally without requiring collateral. To assist in the scheduling of production and the shipping of our products, we offer certain customers the opportunity to place orders five to six months ahead of delivery under our futures ordering program. These advance orders may be canceled under certain conditions, and the risk of cancellation may increase when dealing with financially unstable retailers or retailers struggling with economic uncertainty. In the past, some customers have experienced financial difficulties up to and including bankruptcies, which have had an adverse effect on our sales, our ability to collect on receivables and our financial condition. When the retail economy weakens or as consumer behavior shifts, retailers may be more cautious with orders. A slowing or changing economy in our key markets could adversely affect the financial health of our customers, which in turn could have an adverse effect on our results of operations and financial condition. In addition, product sales are dependent in part on high quality merchandising and an appealing retail environment to attract consumers, which requires continuing investments by retailers. Retailers that experience financial difficulties may fail to make such investments or delay them, resulting in lower sales and orders for our products. The ongoing financial uncertainty surrounding COVID-19, particularly for retailers, could also have an effect on our sales, our ability to collect on receivables and our financial condition. +Climate change and other sustainability-related matters, or legal, regulatory or market responses thereto, may have an adverse impact on our business and results of operations. +There are concerns that increased levels of carbon dioxide and other greenhouse gases in the atmosphere have caused, and may continue to cause, potentially at a growing rate, increases in global temperatures, changes in weather patterns and increasingly frequent and/or prolonged extreme weather and climate events. Climate change may also exacerbate challenges relating to the availability and quality of water and raw materials, including those used in the production of our products, and may result in changes in regulations or consumer preferences, which could in turn affect our business, operating results and financial condition. For example, there has been increased focus by governmental and non-governmental organizations, consumers, customers, employees and other stakeholders on products that are sustainably made and other sustainability matters, including responsible sourcing and deforestation, the use of plastic, energy and water, the recyclability or recoverability of packaging and materials transparency, any of which may require us to incur increased costs for additional transparency, due diligence and reporting. In addition, federal, state or local governmental authorities in various countries have proposed, and are likely to continue to propose, legislative and regulatory initiatives to reduce or mitigate the impacts of climate change on the environment. Various countries and regions are following different approaches to the regulation of climate change, which could increase the complexity of, and potential cost related to complying with, such regulations. Any of the foregoing may require us to make additional investments in facilities and equipment, may impact the availability and cost of key raw materials used in the production of our products or the demand for our products, and, in turn, may adversely impact our business, operating results and financial condition. +2022 FORM 10-K 12 +Table of Contents +Although we have announced sustainability-related goals and targets, there can be no assurance that our stakeholders will agree with our strategies, and any perception, whether or not valid, that we have failed to achieve, or to act responsibly with respect to, such matters or to effectively respond to new or additional legal or regulatory requirements regarding climate change, could result in adverse publicity and adversely affect our business and reputation. Execution of these strategies and achievement of our goals is subject to risks and uncertainties, many of which are outside of our control. These risks and uncertainties include, but are not limited to, our ability to execute our strategies and achieve our goals within the currently projected costs and the expected timeframes; the availability and cost of raw materials and renewable energy; unforeseen production, design, operational and technological difficulties; the outcome of research efforts and future technology developments, including the ability to scale projects and technologies on a commercially competitive basis such as carbon sequestration and/or other related processes; compliance with, and changes or additions to, global and regional regulations, taxes, charges, mandates or requirements relating to greenhouse gas emissions, carbon costs or climate-related goals; adapting products to customer preferences and customer acceptance of sustainable supply chain solutions; and the actions of competitors and competitive pressures. As a result, there is no assurance that we will be able to successfully execute our strategies and achieve our sustainability-related goals, which could damage our reputation and customer and other stakeholder relationships and have an adverse effect on our business, results of operations and financial condition. +Extreme weather conditions and natural disasters could negatively impact our operating results and financial condition. +Given the broad and global scope of our operations, we are particularly vulnerable to the physical risks of climate change, such as shifts in weather patterns. Extreme weather conditions in the areas in which our retail stores, suppliers, manufacturers, customers, distribution centers, offices, headquarters and vendors are located could adversely affect our operating results and financial condition. Moreover, natural disasters such as earthquakes, hurricanes, wildfires and tsunamis, whether occurring in the United States or abroad, and their related consequences and effects, including energy shortages and public health issues, have in the past temporarily disrupted, and could in the future disrupt, our operations, the operations of our vendors, manufacturers and other suppliers or have in the past resulted in, and in the future could result in, economic instability that may negatively impact our operating results and financial condition. In particular, if a natural disaster or severe weather event were to occur in an area in which we or our suppliers, manufacturers, employees, customers, distribution centers and vendors are located, our continued success would depend, in part, on the safety and availability of the relevant personnel and facilities and proper functioning of our or third parties' computer, network, telecommunication and other systems and operations. In addition, a natural disaster or severe weather event could negatively impact retail traffic to our stores or stores that carry our products and could have an adverse impact on consumer spending, any of which could in turn result in negative point-of-sale trends for our merchandise. Further, climate change may increase both the frequency and severity of extreme weather conditions and natural disasters, which may affect our business operations, either in a particular region or globally, as well as the activities of our third-party vendors and other suppliers, manufacturers and customers. We believe the diversity of locations in which we operate, our operational size, disaster recovery and business continuity planning and our information technology systems and networks, including the Internet and third-party services (“Information Technology Systems”) position us well, but may not be sufficient for all or for concurrent eventualities. If we were to experience a local or regional disaster or other business continuity event or concurrent events, we could still experience operational challenges, in particular depending upon how a local or regional event may affect our human capital across our operations or with regard to particular aspects of our operations, such as key executive officers or personnel. For example, our World Headquarters are located in an active seismic zone, which is at a higher risk for earthquakes and the related consequences or effects. Further, if we are unable to find alternative suppliers, replace capacity at key manufacturing or distribution locations or quickly repair damage to our Information Technology Systems or supply systems, we could be late in delivering, or be unable to deliver, products to our customers. These events could result in reputational damage, lost sales, cancellation charges or markdowns, all of which could have an adverse effect on our business, results of operations and financial condition. +Business and Operational Risks +Failure to maintain our reputation, brand image and culture could negatively impact our business. +Our iconic brands have worldwide recognition, and our success depends on our ability to maintain and enhance our brand image and reputation. Maintaining, promoting and growing our brands will depend on our design and marketing efforts, including advertising and consumer campaigns, product innovation and product quality. Our commitment to product innovation, quality and sustainability, and our continuing investment in design (including materials), marketing and sustainability measures may not have the desired impact on our brand image and reputation. In addition, our success in maintaining, extending and expanding our brand image depends on our ability to adapt to a rapidly changing media and digital environment, including our increasing reliance on social media and digital dissemination of advertising campaigns on our digital platforms and through our digital experiences and products. We could be adversely impacted if we fail to achieve any of these objectives. +Our brand value also depends on our ability to maintain a positive consumer perception of our corporate integrity, purpose and brand culture. Negative claims or publicity involving us, our culture and values, our products, services and experiences, consumer data, or any of our key employees, endorsers, sponsors or suppliers could seriously damage our reputation and brand image, regardless of whether such claims are accurate. For example, while we require our suppliers of our products to operate +2022 FORM 10-K 13 +Table of Contents +their business in compliance with applicable laws and regulations, we do not control their practices. Negative publicity relating to a violation or an alleged violation of policies or laws by such suppliers could damage our brand image and diminish consumer trust in our brand. Further, our reputation and brand image could be damaged as a result of our support of, association with or lack of support or disapproval of certain social causes, as well as any decisions we make to continue to conduct, or change, certain of our activities in response to such considerations. Social media, which accelerates and potentially amplifies the scope of negative publicity, can increase the challenges of responding to negative claims. Adverse publicity about regulatory or legal action against us, or by us, could also damage our reputation and brand image, undermine consumer confidence in us and reduce long-term demand for our products, even if the regulatory or legal action is unfounded or not material to our operations. If the reputation, culture or image of any of our brands is tarnished or if we receive negative publicity, then our sales, financial condition and results of operations could be materially and adversely affected. +Our business is affected by seasonality, which could result in fluctuations in our operating results. +We experience moderate fluctuations in aggregate sales volume during the year. Historically, revenues in the first and fourth fiscal quarters have slightly exceeded those in the second and third fiscal quarters. However, the mix of product sales may vary considerably from time to time or in the future as a result of strategic shifts in our business, changes in COVID-19 related cancellations or postponements and seasonal or geographic demand for particular types of footwear, apparel and equipment and in connection with the timing, cancellation or postponement of significant sporting events, such as the NBA Finals, Olympics or the World Cup, among others. In addition, our customers may cancel orders, change delivery schedules or change the mix of products ordered with minimal notice. As a result, we may not be able to accurately predict our quarterly sales. Accordingly, our results of operations are likely to fluctuate significantly from period to period. This seasonality, along with other factors that are beyond our control, including economic conditions, changes in consumer preferences, weather conditions, outbreaks of disease, social or political unrest, availability of import quotas, transportation disruptions and currency exchange rate fluctuations, could adversely affect our business and cause our results of operations to fluctuate. Our operating margins are also sensitive to a number of additional factors that are beyond our control, including manufacturing and transportation costs, shifts in product sales mix and geographic sales trends, all of which we expect to continue. Results of operations in any period should not be considered indicative of the results to be expected for any future period. +If we are unable to anticipate consumer preferences and develop new products, we may not be able to maintain or increase our revenues and profits. +Our success depends on our ability to identify, originate and define product trends as well as to anticipate, gauge and react to changing consumer demands in a timely manner. However, lead times for many of our products may make it more difficult for us to respond rapidly to new or changing product trends or consumer preferences. All of our products are subject to changing consumer preferences that cannot be predicted with certainty. Our new products may not receive consumer acceptance as consumer preferences could shift rapidly to different types of performance products or away from these types of products altogether, and our future success depends in part on our ability to anticipate and respond to these changes. If we fail to anticipate accurately and respond to trends and shifts in consumer preferences by adjusting the mix of existing product offerings, developing new products, designs, styles and categories, and influencing sports and fitness preferences through extensive marketing, we could experience lower sales, excess inventories or lower profit margins, any of which could have an adverse effect on our results of operations and financial condition. In addition, we market our products globally through a diverse spectrum of advertising and promotional programs and campaigns, including social media, mobile applications and online advertising. If we do not successfully market our products or if advertising and promotional costs increase, these factors could have an adverse effect on our business, financial condition and results of operations. +We rely on technical innovation and high-quality products to compete in the market for our products. +Technical innovation and quality control in the design and manufacturing processes of footwear, apparel, equipment and other products and services are essential to the commercial success of our products and development of new products. Research and development play a key role in technical innovation. We rely upon specialists in the fields of biomechanics, chemistry, exercise physiology, engineering, digital technologies, industrial design, sustainability and related fields, as well as research committees and advisory boards made up of athletes, coaches, trainers, equipment managers, orthopedists, podiatrists and other experts to develop and test cutting-edge performance products. While we strive to produce products that help to enhance athletic performance and reduce injury and maximize comfort, if we fail to introduce technical innovation in our products, consumer demand for our products could decline, and if we experience problems with the quality of our products, we may incur substantial expense to remedy the problems and loss of consumer confidence. +Failure to continue to obtain or maintain high-quality endorsers of our products could harm our business. +We establish relationships with professional athletes, sports teams and leagues, as well as other public figures, including artists, designers and influencers, to develop, evaluate and promote our products, as well as establish product authenticity with consumers. However, as competition in our industry has increased, the costs associated with establishing and retaining such sponsorships and other relationships have increased. If we are unable to maintain our current associations with professional athletes, sports teams and leagues, or other public figures, or to do so at a reasonable cost, we could lose the high visibility or +2022 FORM 10-K 14 +Table of Contents +on-field authenticity associated with our products, and we may be required to modify and substantially increase our marketing investments. As a result, our brands, net revenues, expenses and profitability could be harmed. +Furthermore, if certain endorsers were to stop using our products contrary to their endorsement agreements, our business could be adversely affected. In addition, actions taken or statements made by athletes, teams or leagues, or other endorsers, associated with our products or brand that harm the reputations of those athletes, teams or leagues, or endorsers, could also seriously harm our brand image with consumers and, as a result, could have an adverse effect on our sales and financial condition. In addition, poor or non-performance by our endorsers, a failure to continue to correctly identify promising athletes, public figures or sports organizations, to use and endorse our products and brand or a failure to enter into cost-effective endorsement arrangements with prominent athletes, public figures and sports organizations could adversely affect our brand, sales and profitability. +Failure to accurately forecast consumer demand could lead to excess inventories or inventory shortages, which could result in decreased operating margins, reduced cash flows and harm to our business. +To meet anticipated demand for our products, we purchase products from manufacturers outside of our futures ordering program and in advance of customer orders, which we hold in inventory and resell to customers. There is a risk we may be unable to sell excess products ordered from manufacturers. Inventory levels in excess of customer demand may result in inventory write-downs, and the sale of excess inventory at discounted prices could significantly impair our brand image and have an adverse effect on our operating results, financial condition and cash flows. Conversely, if we underestimate consumer demand for our products or if our manufacturers fail to supply products we require at the time we need them, we may experience inventory shortages. Inventory shortages could delay shipments to customers, negatively impact retailer, distributor and consumer relationships and diminish brand loyalty. The difficulty in forecasting demand also makes it difficult to estimate our future results of operations, financial condition and cash flows from period to period. A failure to accurately predict the level of demand for our products could adversely affect our net revenues and net income, and we are unlikely to forecast such effects with any certainty in advance. +Our NIKE Direct operations have required and will continue to require a substantial investment and commitment of resources and are subject to numerous risks and uncertainties. +Our NIKE Direct operations, including our retail stores and digital platforms, have required and will continue to require significant investment. Our NIKE Direct stores have required and will continue to require substantial fixed investment in equipment and leasehold improvements and personnel. We have entered into substantial operating lease commitments for retail space. Certain stores have been designed and built to serve as high-profile venues to promote brand awareness and marketing activities and to integrate with our digital platforms. Because of their unique design and technological elements, locations and size, these stores require substantially more investment than other stores. Due to the high fixed-cost structure associated with our NIKE Direct retail stores, a decline in sales, a shift in consumer behavior away from brick-and-mortar retail, or the closure, temporary or otherwise, or poor performance of individual or multiple stores could result in significant lease termination costs, write-offs of equipment and leasehold improvements and employee-related costs. +Many factors unique to retail operations, some of which are beyond our control, pose risks and uncertainties. Risks include, but are not limited to: credit card fraud; mismanagement of existing retail channel partners; and inability to manage costs associated with store construction and operation. +In addition, we have made significant investments in digital technologies and information systems for the digital aspect of our NIKE Direct operations, and our digital offerings will require co ntinued investment in the development and upgrading of our technology platforms. In order to deliver high-quality digital experiences, our digital platforms must be designed effectively and work well with a range of other technologies, systems, networks, and standards that we do not control. We may not be successful in developing platforms that operate effectively with these technologies, systems, networks or standards. A growing portion of consumers access our NIKE Direct digital platforms, but in the event that it is more difficult for consumers to access and use our digital platforms, consumers find that our digital platforms do not effectively meet their needs or expectations or consumers choose not to access or use our digital platforms or use devices that do not offer access to our platforms, the success of our NIKE Direct operations could be adversely impacted. Our competitors may develop, or have already developed, digital experiences, features, content, services or technologies that are similar to ours or that achieve greater acceptance. +We may not realize a satisfactory return on our investment in our NIKE Direct operations and management's attention from our other business opportunities could be diverted, which could have an adverse effect on our business, financial condition or results of operations. +If the technology-based systems that give our consumers the ability to shop or interact with us online do not function effectively, our operating results, as well as our ability to grow our digital commerce business globally or to retain our customer base, could be materially adversely affected. +Many of our consumers shop with us through our digital platforms. Increasingly, consumers are using mobile-based devices and applications to shop online with us and with our competitors, and to do comparison shopping, as well as to engage with us and our competitors through digital services and experiences that are offered on mobile platforms. We are increasingly using social +2022 FORM 10-K 15 +Table of Contents +media and proprietary mobile applications to interact with our consumers and as a means to enhance their shopping experience. Any failure on our part to provide attractive, effective, reliable, secure, user-friendly digital commerce platforms that offer a wide assortment of merchandise with rapid delivery options and that continually meet the changing expectations of online shoppers or any failure to provide attractive digital experiences to our customers could place us at a competitive disadvantage, result in the loss of digital commerce and other sales, harm our reputation with consumers, have a material adverse impact on the growth of our digital commerce business globally and have a material adverse impact on our business and results of operations. In addition, as use of our digital platforms continues to grow, we will need an increasing amount of technical infrastructure to continue to satisfy our consumers' needs. If we fail to continue to effectively scale and adapt our digital platforms to accommodate increased consumer demand, our business may be subject to interruptions, delays or failures and consumer demand for our products and digital experiences could decline. +Risks specific to our digital commerce business also include diversion of sales from our and our retailers' brick and mortar stores, difficulty in recreating the in-store experience through direct channels and liability for online content. Our failure to successfully respond to these risks might adversely affect sales in our digital commerce business, as well as damage our reputation and brands. +We rely significantly on information technology to operate our business, including our supply chain and retail operations, and any failure, inadequacy or interruption of that technology could harm our ability to effectively operate our business. +We are heavily dependent on Information Technology Systems, across our supply chain, including product design, production, forecasting, ordering, manufacturing, transportation, sales and distribution, as well as for processing financial information for external and internal reporting purposes, retail operations and other business activities. Information Technology Systems are critical to many of our operating activities and our business processes and may be negatively impacted by any service interruption or shutdown. For example, our ability to effectively manage and maintain our inventory and to ship products to customers on a timely basis depends significantly on the reliability of these Information Technology Systems. Over a number of years, we have implemented Information Technology Systems in all of the geographical regions in which we operate. Our work to integrate, secure and enhance these systems and related processes in our global operations is ongoing and NIKE will continue to invest in these efforts. We cannot provide assurance, however, that the measures we take to secure and enhance these systems will be sufficient to protect our Information Technology Systems and prevent cyber-attacks, system failures or data or information loss. The failure of these systems to operate effectively, including as a result of security breaches, viruses, hackers, malware, natural disasters, vendor business interruptions or other causes, failure to properly maintain, protect, repair or upgrade systems, or problems with transitioning to upgraded or replacement systems could cause delays in product fulfillment and reduced efficiency of our operations, could require significant capital investments to remediate the problem which may not be sufficient to cover all eventualities, and may have an adverse effect on our reputation, results of operations and financial condition. In addition, the increased use of employee-owned devices for communications as well as work-from-home arrangements, such as those implemented in response to the COVID-19 pandemic, present additional operational risks to our Information Technology Systems, including, but not limited to, increased risks of cyber-attacks. Further, like other companies in the retail industry, we have in the past experienced, and we expect to continue to experience, cyber-attacks, including phishing, and other attempts to breach, or gain unauthorized access to, our systems. To date, these attacks have not had a material impact on our operations, but we cannot provide assurance that they will not have an impact in the future. +We also use Information Technology Systems to process financial information and results of operations for internal reporting purposes and to comply with regulatory financial reporting, legal and tax requirements. If Information Technology Systems suffer severe damage, disruption or shutdown and our business continuity plans, or those of our vendors, do not effectively resolve the issues in a timely manner, we could experience delays in reporting our financial results, which could result in lost revenues and profits, as well as reputational damage. Furthermore, we depend on Information Technology Systems and personal data collection for digital marketing, digital commerce, consumer engagement and the marketing and use of our digital products and services. We also rely on our ability to engage in electronic communications throughout the world between and among our employees as well as with other third parties, including customers, suppliers, vendors and consumers. Any interruption in Information Technology Systems may impede our ability to engage in the digital space and result in lost revenues, damage to our reputation, and loss of users. +We are subject to the risk our licensees may not generate expected sales or maintain the value of our brands. +We currently license, and expect to continue licensing, certain of our proprietary rights, such as trademarks or copyrighted material, to third parties. If our licensees fail to successfully market and sell licensed products, or fail to obtain sufficient capital or effectively manage their business operations, customer relationships, labor relationships, supplier relationships or credit risks, it could adversely affect our revenues, both directly from reduced royalties received and indirectly from reduced sales of our other products. +We also rely on our licensees to help preserve the value of our brands. Although we attempt to protect our brands through approval rights over the design, production processes, quality, packaging, merchandising, distribution, advertising and promotion +2022 FORM 10-K 16 +Table of Contents +of our licensed products, we cannot completely control the use of our licensed brands by our licensees. The misuse of a brand by or negative publicity involving a licensee could have a material adverse effect on that brand and on us. +Consolidation of retailers or concentration of retail market share among a few retailers may increase and concentrate our credit risk and impair our ability to sell products. +The athletic footwear, apparel and equipment retail markets in some countries are dominated by a few large athletic footwear, apparel and equipment retailers with many stores and accelerating digital commerce capabilities. The market shares of these retailers may increase through acquisitions and construction of additional stores and investments in digital capacity, and as a result of attrition as struggling retailers exit the market. Consolidation of our retailers will concentrate our credit risk with a smaller set of retailers, any of whom may experience declining sales or a shortage of liquidity, including as a result of the COVID-19 pandemic. In addition, increasing market share concentration among a few retailers in a particular country or region increases the risk that if any one of them substantially reduces their purchases of our products, we may be unable to find sufficient retail outlets for our products to sustain the same level of sales and revenues. +If one or more of our counterparty financial institutions default on their obligations to us or fail, we may incur significant losses. +As part of our hedging activities, we enter into transactions involving derivative financial instruments, which may include forward contracts, commodity futures contracts, option contracts, collars and swaps with various financial institutions. In addition, we have significant amounts of cash, cash equivalents and other investments on deposit or in accounts with banks or other financial institutions in the United States and abroad. As a result, we are exposed to the risk of default by or failure of counterparty financial institutions. The risk of counterparty default or failure may be heightened during economic downturns and periods of uncertainty in the financial markets. If one of our counterparties were to become insolvent or file for bankruptcy, our ability to recover losses incurred as a result of default, or our assets deposited or held in accounts with such counterparty, may be limited by the counterparty's liquidity or the applicable laws governing the insolvency or bankruptcy proceedings. In the event of default or failure of one or more of our counterparties, we could incur significant losses, which could negatively impact our results of operations and financial condition. +We rely on a concentrated source base of contract manufacturers to supply a significant portion of our footwear products. +As of May 31, 2022, we were supplied by 120 finished goods footwear contract factories located in 11 countries. We rely upon contract manufacturers, which we do not own or operate, to manufacture all of the footwear products we sell. For fiscal 2022, four footwear contract manufacturers each accounted for greater than 10% of footwear production and in the aggregate accounted for approximately 58% of NIKE Brand footwear production. Our ability to meet our customers' needs depends on our ability to maintain a steady supply of products from our contract manufacturers. If one or more of our significant suppliers were to sever their relationship with us or significantly alter the terms of our relationship, including due to changes in applicable trade policies, or be unable to perform, including as a result of the COVID-19 pandemic, we may not be able to obtain replacement products in a timely manner, which could have a material adverse effect on our business operations, sales, financial condition or results of operations. Additionally, if any of our primary footwear contract manufacturers fail to make timely shipments, do not meet our quality standards or otherwise fail to deliver us product in accordance with our plans, there could be a material adverse effect on our results of operations. +Certain of our footwear contract manufacturers are highly specialized and only produce a specific type of product. Such contract manufacturers may go out of business if consumer preferences or market conditions change such that there is no longer sufficient demand for the types of products they produce. If, in the future, the relevant products are again in demand and the specialized contract manufacturers no longer exist, we may not be able to locate replacement facilities to manufacture certain footwear products in a timely manner or at all, which could have a material adverse effect on our sales, financial condition or results of operations. +The market for prime real estate is competitive. +Our ability to effectively obtain real estate to open new retail stores and otherwise conduct our operations, both domestically and internationally, depends on the availability of real estate that meets our criteria for traffic, square footage, co-tenancies, lease economics, demographics and other factors. We also must be able to effectively renew our existing real estate leases. In addition, from time to time, we seek to downsize, consolidate, reposition or close some of our real estate locations, which may require modification of an existing lease. Failure to secure adequate new locations or successfully modify leases for existing locations, or failure to effectively manage the profitability of our existing fleet of retail stores, could have an adverse effect on our operating results and financial condition. +Additionally, the economic environment may make it difficult to determine the fair market rent of real estate properties domestically and internationally. This could impact the quality of our decisions to exercise lease options at previously negotiated rents and to renew expiring leases at negotiated rents. Any adverse effect on the quality of these decisions could impact our ability to retain real estate locations adequate to meet our targets or efficiently manage the profitability of our existing fleet of stores, which could have an adverse effect on our operating results and financial condition. +2022 FORM 10-K 17 +Table of Contents +The success of our business depends, in part, on high-quality employees, including key personnel as well as our ability to maintain our workplace culture and values. +Our success depends in part on the continued service of high-quality employees, including key executive officers and personnel. The loss of the services of key individuals, or any negative perception with respect to these individuals, or our workplace culture or values, could harm our business. Our success also depends on our ability to recruit, retain and engage our personnel sufficiently, both to maintain our current business and to execute our strategic initiatives. Competition for employees in our industry is intense and we may not be successful in attracting and retaining such personnel. Changes to our current and future office environments or adoption of a new work model that expects employees to work on-site for a specified number of days with some flexibility to work remotely on other days, may not meet the needs or expectations of our employees or may not be perceived as favorable compared to other companies' policies, which could negatively impact our ability to attract, hire and retain our employees. In addition, shifts in U.S. immigration policy could negatively impact our ability to attract, hire and retain highly skilled employees who are from outside the United States. W e also believe that our corporate culture has been a key driver of our success, and we have invested substantial time and resources in building, maintaining and evolving our culture. Any failure to preserve and evolve our culture could negatively affect our future success, including our ability to retain and recruit employees. +Our business operations and financial performance could be adversely affected by changes in our relationship with our workforce or changes to United States or foreign employment regulations. +We have significant exposure to changes in domestic and foreign laws governing our relationships with our workforce, including wage and hour laws and regulations, fair labor standards, minimum wage requirements, overtime pay, unemployment tax rates, workers' compensation rates, citizenship requirements and payroll taxes, which could have a direct impact on our operating costs. A significant increase in minimum wage or overtime rates in countries where we have workforce could have a significant impact on our operating costs and may require that we relocate those operations or take other steps to mitigate such increases, all of which may cause us to incur additional costs. There is also a risk of potential claims that we have violated laws related to discrimination and harassment, health and safety, wage and hour laws, criminal activity, personal injury and other claims. In addition, if there were a significant increase in the number of members of our workforce who are members of labor organizations or become parties to collective bargaining agreements, we could be vulnerable to a strike, work stoppage or other labor action, which could have an adverse effect on our business. +Risks Related to Operating a Global Business +Our international operations involve inherent risks which could result in harm to our business. +Virtually all of our athletic footwear and apparel is manufactured outside of the United States, and the majority of our products are sold outside of the United States. Accordingly, we are subject to the risks generally associated with global trade and doing business abroad, which include foreign laws and regulations, varying consumer preferences across geographic regions, political tensions, unrest, disruptions or delays in cross-border shipments and changes in economic conditions in countries in which our products are manufactured or where we sell products. Changes in the U.S. government's import and export policies, including trade restrictions, sanctions and countersanctions, increased tariffs or quotas, embargoes, safeguards or customs restrictions, could require us to change the way we conduct business and adversely affect our results of operations. +In addition, disease outbreaks, including the recent COVID-19 pandemic, terrorist acts and military conflict have increased the risks of doing business abroad. These factors, among others, could affect our ability to manufacture products or procure materials, or our costs for manufacturing and procuring materials, our ability to import products, our ability to sell products in international markets and our cost of doing business. If any of these or other factors make the conduct of business in a particular country undesirable or impractical, our business could be adversely affected. In addition, many of our imported products are subject to duties, tariffs or quotas that affect the cost and quantity of various types of goods imported into the United States and other countries. Any country in which our products are produced or sold may eliminate, adjust or impose new quotas, duties, tariffs, safeguard measures, anti-dumping duties, cargo restrictions to prevent terrorism, restrictions on the transfer of currency, climate change legislation, product safety regulations or other charges or restrictions, any of which could have an adverse effect on our results of operations and financial condition. +Furthermore, we are subject to the U.S. Foreign Corrupt Practices Act as well as the anti-corruption laws of other countries in which we operate. Although we implement policies and procedures designed to promote compliance with these laws, our employees, independent contractors, contract manufacturers, suppliers and agents, as well as those companies to which we outsource certain of our business operations, may take actions in violation of our policies. Any such violation could result in sanctions or other penalties and have an adverse effect on our business, reputation and operating results. +Our products are subject to risks associated with overseas sourcing, manufacturing and financing. +The principal materials used in our footwear products — natural and synthetic rubber, plastic compounds, foam cushioning materials, natural and synthetic leather, nylon, polyester and natural fiber textiles and polyurethane films — are locally available to manufacturers. The principal materials used in our apparel products — natural and synthetic fabrics, yarns and threads (both virgin and recycled), specialized performance fabrics designed to efficiently wick moisture away from the body, retain heat and repel rain and/or snow as well as plastic and metal hardware — are also available in countries where our manufacturing takes +2022 FORM 10-K 18 +Table of Contents +place. Both our apparel and footwear products are dependent upon the ability of our contract manufacturers to locate, train, employ and retain adequate personnel. NIKE contract manufacturers and materials suppliers buy raw materials and are subject to wage rates and other labor standards that are oftentimes regulated by the governments of the countries in which our products are manufactured. +There could be a significant disruption in the supply of fabrics or raw materials from current sources or, in the event of a disruption or heightened competition for such materials, our contract manufacturers might not be able to locate alternative suppliers of materials of comparable quality at an acceptable price or at all. Further, our contract manufacturers have experienced and may continue to experience in the future, unexpected closures, unexpected increases in work wages or other changes in labor standards, whether government mandated or otherwise, and increases in compliance costs due to governmental regulation concerning certain metals, fabrics or raw materials used in the manufacturing of our products. In addition, we cannot be certain that manufacturers that we do not contract and that we refer to as "unaffiliated manufacturers" will be able to fill our orders in a timely manner. If we experience significant increases in demand, or reductions in the availability of materials, or need to replace an existing contract manufacturer or materials supplier, there can be no assurance additional supplies of fabrics or raw materials or additional manufacturing capacity will be available when required on terms acceptable to us, or at all, or that any contract manufacturer, unaffiliated manufacturer, or any materials supplier would allocate sufficient capacity to us in order to meet our requirements. In addition, even if we are able to expand existing or find new manufacturing capacity or sources of materials, we may encounter delays in production and added costs as a result of the time it takes to train suppliers and manufacturers in our methods, products, quality control standards and labor, health and safety standards. Any delays, interruption or increased costs in labor or wages, in the supply of materials or in the manufacturing of our products could have an adverse effect on our ability to meet retail customer and consumer demand for our products and result in lower revenues and net income both in the short- and long-term. +Because contract manufacturers make a majority of our products outside of our principal sales markets, our products must be transported by third parties over large geographic distances. Delays in the shipment or delivery of our products due to the availability of transportation, container shortages, labor shortages, including work stoppages or port strikes, infrastructure and port congestion or other factors, and costs and delays associated with consolidating or transitioning between manufacturers, have adversely impacted, and could in the future adversely impact the availability of our products and, in turn, our financial performance. In addition, delays in the shipment or delivery of our products, manufacturing delays or unexpected demand for our products have required us, and may in the future require us to use faster, but more expensive, transportation methods such as air freight, which could adversely affect our profit margins. The cost of oil is a significant component in manufacturing and transportation costs, so increases in the price of petroleum products can adversely affect our profit margins. Changes in U.S. trade policies, including modifications to import tariffs and existing trade policies and agreements, have also had, and could continue to have a significant impact on our activities in foreign jurisdictions, and could adversely affect our reputation or results of operations. +Our success depends on our global distribution facilities. +We distribute our products to customers directly from the factory and through distribution centers located throughout the world. Our ability to meet customer expectations, manage inventory, complete sales and achieve objectives for operating efficiencies and growth, particularly in emerging markets, depends on the proper operation of our distribution facilities, the development or expansion of additional distribution capabilities and the timely performance of services by third parties (including those involved in shipping product to and from our distribution facilities). Our distribution facilities have in the past and could be interrupted by information technology problems, disasters such as earthquakes or fires or outbreaks of disease or government actions taken to mitigate their spread. Any significant failure in our distribution facilities could result in an adverse effect on our business. We maintain business interruption insurance, but it may not adequately protect us from adverse effects caused by significant disruptions in our distribution facilities. +Legal, Regulatory, and Compliance Risks +We are subject to a complex array of laws and regulations and litigation and other legal and regulatory proceedings, which could have an adverse effect on our business, financial condition and results of operations. +As a multinational corporation with operations and distribution channels throughout the world, we are subject to and must comply with extensive laws and regulations in the United States and other jurisdictions in which we have operations and distribution channels. If we or our employees, agents, suppliers, and other partners fail to comply with any of these laws or regulations, such failure could subject us to fines, sanctions or other penalties that could negatively affect our reputation, business, financial condition and results of operations. Furthermore, laws, regulations and policies and the interpretation of such, can conflict among jurisdictions and compliance in one jurisdiction may result in legal or reputational risks in another jurisdiction. We are involved in various types of claims, lawsuits, regulatory proceedings and government investigations relating to our business, our products and the actions of our employees and representatives, including contractual and employment relationships, product liability, antitrust, trademark rights and a variety of other matters. It is not possible to predict with certainty the outcome of any such legal or regulatory proceedings or investigations, and we could in the future incur judgments, fines or penalties, or enter into settlements of lawsuits and claims that could have a material adverse effect on our business, financial condition and results of +2022 FORM 10-K 19 +Table of Contents +operations and negatively impact our reputation. The global nature of our business means legal and compliance risks, such as anti-bribery, anti-corruption, fraud, trade, environmental, competition, privacy and other regulatory matters, will continue to exist and additional legal proceedings and other contingencies have and will continue to arise from time to time, which could adversely affect us. In addition, the adoption of new laws or regulations, or changes in the interpretation of existing laws or regulations, may result in significant unanticipated legal and reputational risks. Moreover, the regulation of certain transactions we engage in, including those involving non-fungible tokens ("NFTs") and cryptocurrencies, remains in an early stage and subject to significant uncertainty. As a result, we are required to exercise our judgment as to whether or how certain laws or regulations apply, or may in the future apply, and it is possible that legislators, regulators and courts may disagree with our conclusions. Any current or future legal or regulatory proceedings could divert management's attention from our operations and result in substantial legal fees. +Changes to U.S. or other countries' trade policies and tariff and import/export regulations or our failure to comply with such regulations may have a material adverse effect on our reputation, business, financial condition and results of operations. +Changes in U.S. or international social, political, regulatory and economic conditions could impact our business, reputation, financial condition and results of operations. In particular, political and economic instability, geopolitical conflicts, political unrest, civil strife, terrorist activity, acts of war, public corruption, expropriation, nationalism and other economic or political uncertainties in the United States or internationally could interrupt and negatively affect the sale of our products or other business operations. Any negative sentiment toward the United States as a result of any such changes could also adversely affect our business. +In addition, changes in laws and policies governing foreign trade, manufacturing, development and investment in the territories or countries where we currently sell our products or conduct our business could adversely affect our business. U.S. presidential administrations have instituted or proposed changes in trade policies that include the negotiation or termination of trade agreements, the imposition of higher tariffs on imports into the U.S., economic sanctions on individuals, corporations or countries, and other government regulations affecting trade between the U.S. and other countries where we conduct our business. It may be time-consuming and expensive for us to alter our business operations in order to adapt to or comply with any such changes. +Changes or proposed changes in U.S. or other countries' trade policies may result in restrictions and economic disincentives on international trade. Tariffs and other changes in U.S. trade policy have in the past and could in the future trigger retaliatory actions by affected countries, and certain foreign governments have instituted or are considering imposing retaliatory measures on certain U.S. goods. Further, any emerging protectionist or nationalist trends either in the United States or in other countries could affect the trade environment. The Company, similar to many other multinational corporations, does a significant amount of business that would be impacted by changes to the trade policies of the United States and foreign countries (including governmental action related to tariffs, international trade agreements, or economic sanctions). Such changes have the potential to adversely impact the U.S. economy or certain sectors thereof or the economy of another country in which we conduct operations, our industry and the global demand for our products, and as a result, could have a material adverse effect on our business, financial condition and results of operations. +Failure to adequately protect or enforce our intellectual property rights could adversely affect our business. +We periodically discover counterfeit reproductions of our products or products that otherwise infringe our intellectual property rights. If we are unsuccessful in enforcing our intellectual property rights, continued sales of these products could adversely affect our sales and our brand and could result in a shift of consumer preference away from our products. +The actions we take to establish and protect our intellectual property rights may not be adequate to prevent imitation of our products by others. We also may be unable to prevent others from seeking to block sales of our products as violations of proprietary rights. +We may be subject to liability if third parties successfully claim we infringe their intellectual property rights. Defending infringement claims could be expensive and time-consuming and might result in our entering into costly license agreements. We also may be subject to significant damages or injunctions against development, manufacturing, use, importation and/or sale of certain products. +We take various actions to prevent the unauthorized use and/or disclosure of our confidential information and intellectual property rights. These actions include contractual measures such as entering into non-disclosure and non-compete agreements and agreements relating to our collaborations with third parties and providing confidential information awareness training. Our controls and efforts to prevent unauthorized use and/or disclosure of confidential information and intellectual property rights might not always be effective. For example, confidential information related to business strategy, innovations, new technologies, mergers and acquisitions, unpublished financial results or personal data could be prematurely, inadvertently, or improperly used and/or disclosed, resulting in a loss of reputation, loss of intellectual property rights, a decline in our stock price and/or a negative impact on our market position, and could lead to damages, fines, penalties or injunctions. In addition, new products we offer, such as NFTs, may raise various novel intellectual property law considerations, including adequacy and scope of assignment, licensing, transfer, copyright and other right-of-use issues. +2022 FORM 10-K 20 +Table of Contents +In addition, the laws of certain countries may not protect or allow enforcement of intellectual property rights to the same extent as the laws of the United States. We may face significant expenses and liability in connection with the protection of our intellectual property rights, including outside the United States, and if we are unable to successfully protect our rights or resolve intellectual property conflicts with others, our business or financial condition may be adversely affected. +We are subject to data security and privacy risks that could negatively affect our results, operations or reputation. +In addition to our own sensitive and proprietary business information, we handle transactional and personal information about our wholesale customers and consumers and users of our digital experiences, which include online distribution channels and product engagement, adaptive products and personal fitness applications. Hackers and data thieves are increasingly sophisticated and operate social engineering, such as phishing, and large-scale, complex automated attacks that can evade detection for long periods of time. Any breach of our or our service providers' networks, or other vendor systems, may result in the loss of confidential business and financial data, misappropriation of our consumers', users' or employees' personal information or a disruption of our business. Any of these outcomes could have a material adverse effect on our business, including unwanted media attention, impairment of our consumer and customer relationships, damage to our reputation; resulting in lost sales and consumers, fines, lawsuits, or significant legal and remediation expenses. We also may need to expend significant resources to protect against, respond to and/or redress problems caused by any breach. +In addition, we must comply with increasingly complex and rigorous, and sometimes conflicting, regulatory standards enacted to protect business and personal data in the United States, Europe and elsewhere. For example, the European Union adopted the General Data Protection Regulation (the “GDPR”), which became effective on May 25, 2018; five states in the United States (California, Virginia, Colorado, Utah, and Connecticut) passed data privacy laws in 2020 and 2021; China enacted the Data Security Law and Personal Information Protection Law, which became effective on September 1, 2021 and November 1, 2021, respectively, and additional jurisdictions have adopted or are considering proposing or adopting similar regulations. These laws impose additional obligations on companies regarding the handling of personal data and provide certain individual privacy rights to persons whose data is stored. Compliance with existing, proposed and recently enacted laws and regulations (including implementation of the privacy and process enhancements called for under laws in the European Union, United States and China) can be costly and time consuming, and any failure to comply with these regulatory standards could subject us to legal and reputational risks. Misuse of or failure to secure personal information could also result in violation of data privacy laws and regulations, proceedings against the Company by governmental entities or others, imposition of fines by governmental authorities and damage to our reputation and credibility and could have a negative impact on revenues and profits. +We could be subject to changes in tax rates, adoption of new tax laws, additional tax liabilities or increased volatility in our effective tax rate. +We earn a substantial portion of our income in foreign countries and, as such, we are subject to the tax laws in the United States and numerous foreign jurisdictions. Current economic and political conditions make tax laws and regulations, or their interpretation and application, in any jurisdiction subject to significant change. +Proposals to reform U.S. and foreign tax laws could significantly impact how U.S. multinational corporations are taxed on foreign earnings and could increase the U.S. corporate tax rate. Although we cannot predict whether or in what form these proposals will pass, several of the proposals considered, if enacted into law, could have an adverse impact on our effective tax rate, income tax expense and cash flows. +Portions of our operations are subject to a reduced tax rate or are under various tax holidays. We also utilize tax rulings and other agreements to obtain certainty in treatment of certain tax matters. These holidays expire from time to time and may be extended when certain conditions are met, or terminated if certain conditions are not met. The impact of any changes in conditions would be the loss of certainty in treatment thus potentially impacting our effective income tax rate. For example, in January 2019, the European Commission opened a formal investigation to examine whether the Netherlands has breached State Aid rules when granting certain tax rulings to the Company. If this matter is adversely resolved, the Netherlands may be required to assess additional amounts with respect to prior periods, and the Company's income taxes related to prior periods in the Netherlands could increase. +We are also subject to the examination of our tax returns by the United States Internal Revenue Service (“IRS”) and other tax authorities. We regularly assess the likelihood of an adverse outcome resulting from these examinations to determine the adequacy of its provision for income taxes. Although we believe our tax provisions are adequate, the final determination of tax audits and any related disputes could be materially different from our historical income tax provisions and accruals. The results of audits or related disputes could have an adverse effect on our financial statements for the period or periods for which the applicable final determinations are made. For example, we and our subsidiaries are also engaged in a number of intercompany transactions across multiple tax jurisdictions. Although we believe we have clearly reflected the economics of these transactions and the proper local transfer pricing documentation is in place, tax authorities may propose and sustain adjustments that could result in changes that may impact our mix of earnings in countries with differing statutory tax rates. +2022 FORM 10-K 21 +Table of Contents +Failure of our contractors or our licensees' contractors to comply with our code of conduct, local laws and other standards could harm our business. +We have license agreements that permit independent parties to manufacture or contract for the manufacture of products using our intellectual property. We require the contractors that directly manufacture our products and our licensees that make products using our intellectual property (including, indirectly, their contract manufacturers) to comply with a code of conduct and other environmental, human rights, health and safety standards for the benefit of workers. We also require our contract manufacturers and the contractors of our licensees to comply with applicable standards for product safety. Notwithstanding their contractual obligations, from time to time contractors may not comply with such standards or applicable local law or our licensees may fail to enforce such standards or applicable local law on their contractors. If one or more of our direct or indirect contractors violates or fails to comply with, or is accused of violating or failing to comply with, such standards and laws, this could harm our reputation or result in a product recall and, as a result, could have an adverse effect on our sales and financial condition. Negative publicity regarding production methods, alleged unethical or illegal practices or workplace or related conditions of any of our suppliers, manufacturers or licensees could adversely affect our brand image and sales, force us to locate alternative suppliers, manufacturers or licenses or result in the imposition of additional regulations, including new or additional quotas, tariffs, sanctions, product safety regulations or other regulatory measures, by governmental authorities. +Risks Related to Our Securities, Investments and Liquidity +Our financial results may be adversely affected if substantial investments in businesses and operations fail to produce expected returns. +From time to time, we may invest in technology, business infrastructure, new businesses or capabilities, product offering and manufacturing innovation and expansion of existing businesses, such as our NIKE Direct operations, which require substantial cash investments and management attention. We believe cost-effective investments are essential to business growth and profitability; however, significant investments are subject to typical risks and uncertainties inherent in developing a new business or expanding an existing business. The failure of any significant investment to provide expected returns or profitability could have a material adverse effect on our financial results and divert management attention from more profitable business operations. See also “ Our NIKE Direct operations have required and will continue to require a substantial investment and commitment of resources and are subject to numerous risks and uncertainties .” +The sale of a large number of shares of common stock by our principal stockholder could depress the market price of our common stock. +As of June 30, 2022, Swoosh, LLC beneficially owned approximately 77% of our Class A Common Stock. If, on June 30, 2022, all of these shares were converted into Class B Common Stock, the commensurate ownership percentage of our Class B Common Stock would be approximately 16%. The shares are available for resale, subject to the requirements of the U.S. securities laws and the terms of the limited liability company agreement governing Swoosh, LLC. The sale or prospect of a sale of a substantial number of these shares could have an adverse effect on the market price of our common stock. Swoosh, LLC was formed by Philip H. Knight, our Chairman Emeritus, to hold the majority of his shares of Class A Common Stock. Mr. Knight does not have voting rights with respect to Swoosh, LLC, although Travis Knight, his son and a NIKE director, has a significant role in the management of the Class A Common Stock owned by Swoosh, LLC. +Changes in our credit ratings or macroeconomic conditions may affect our liquidity, increasing borrowing costs and limiting our financing options. +Our long-term debt is currently rated Investment Grade by Standard & Poor's and Moody's Investors Service. If our credit ratings are lowered, borrowing costs for our existing facilities or for future long-term debt or short-term credit facilities may increase and our financing options, including our access to credit or capital markets, could be adversely affected. We may also be subject to restrictive covenants that would reduce our flexibility to, among other things, incur additional indebtedness, make restricted payments, pledge assets as security, make investments, loans, advances, guarantees and acquisitions, undergo fundamental changes and enter into transactions with affiliates. Failure to comply with such covenants could result in a default, and as a result, the commitments of our lenders under our credit agreements may be terminated and the maturity of amounts owed may be accelerated. In addition, macroeconomic conditions, such as increased volatility or disruption in the credit markets, could adversely affect our ability to refinance existing debt. +If our internal controls are ineffective, our operating results could be adversely affected. +Our internal control over financial reporting may not prevent or detect misstatements because of its inherent limitations, including the possibility of human error, the circumvention or overriding of controls or fraud. Even effective internal controls can provide only reasonable assurance with respect to the preparation and fair presentation of financial statements. If we fail to maintain the adequacy of our internal controls, including any failure to implement required new or improved controls, or if we experience difficulties in their implementation, our business and operating results could be harmed and we could fail to meet our financial reporting obligations. +2022 FORM 10-K 22 +Table of Contents +If our estimates or judgments relating to our critical accounting estimates prove to be incorrect, our operating results could be adversely affected. +The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. We base our estimates on historical experience and on various other assumptions we believe to be reasonable under the circumstances, as provided in “Management's Discussion and Analysis of Financial Condition and Results of Operations.” The results of these estimates form the basis for making judgments about the carrying values of assets, liabilities and equity, and the amount of revenues and expenses that are not readily apparent from other sources. Significant assumptions and estimates used in preparing our consolidated financial statements include those related to revenue recognition, inventory reserves, contingent payments under endorsement contracts, accounting for property, plant and equipment and definite-lived assets, hedge accounting for derivatives, income taxes and other contingencies. Our operating results may be adversely affected if our assumptions change or if actual circumstances differ from those in our assumptions, which could cause our operating results to fall below the expectations of securities analysts and investors, resulting in a decline in the price of our Class B Common Stock. +Anti-takeover provisions may impair an acquisition of the Company or reduce the price of our common stock. +There are provisions within our articles of incorporation and Oregon law intended to protect shareholder interests by providing the Board of Directors a means to attempt to deny coercive takeover attempts or to negotiate with a potential acquirer in order to obtain more favorable terms. Such provisions include a control share acquisition statute, a freeze-out statute, two classes of stock that vote separately on certain issues, and the fact that holders of Class A Common Stock elect three-quarters of the Board of Directors rounded down to the next whole number. However, such provisions could discourage, delay or prevent an unsolicited merger, acquisition or other change in control of our company that some shareholders might believe to be in their best interests or in which shareholders might receive a premium for their common stock over the prevailing market price. These provisions could also discourage proxy contests for control of the Company. +We may fail to meet market expectations, which could cause the price of our stock to decline. +Our Class B Common Stock is traded publicly, and at any given time various securities analysts follow our financial results and issue reports on us. These reports include information about our historical financial results as well as analysts' opinions of our future performance, which may, in part, be based upon any guidance we have provided. Analysts' estimates are often different from our estimates or expectations. If our operating results are below the estimates or expectations of public market analysts and investors, our stock price could decline. In the past, securities class action litigation has been brought against NIKE and other companies following a decline in the market price of their securities. If our stock price is volatile for any reason, we may become involved in this type of litigation in the future. Any litigation could result in reputational damage, substantial costs and a diversion of management's attention and resources needed to successfully run our business. +2022 FORM 10-K 23 +Table of Contents +ITEM 1B. UNRESOLVED STAFF COMMENTS +None. +ITEM 2. PROPERTIES +The following is a summary of principal properties owned or leased by NIKE: +The NIKE World Campus, owned by NIKE and located near Beaverton, Oregon, USA, is an approximately 400-acre site consisting of over 40 buildings which, together with adjacent leased properties, functions as our world headquarters and is occupied by approximately 11,200 employees engaged in management, research, design, development, marketing, finance and other administrative functions serving nearly all of our segments. We lease a similar, but smaller, administrative facility in Hilversum, the Netherlands, which serves as the headquarters for our Europe, Middle East & Africa geography and management of certain brand functions for our non-U.S. operations. We also lease an office complex in Shanghai, China, our headquarters for our Greater China geography, occupied by employees focused on implementing our wholesale, NIKE Direct and merchandising strategies in the region, among other functions. +In the United States, NIKE has eight significant distribution centers. Five are located in or near Memphis, Tennessee, two of which are owned and three of which are leased. Two other distribution centers, one located in Indianapolis, Indiana and one located in Dayton, Tennessee, are leased and operated by third-party logistics providers. One distribution center for Converse is located in Ontario, California, which is leased. NIKE has a number of distribution facilities outside the United States, some of which are leased and operated by third-party logistics providers. The most significant distribution facilities outside the United States are located in Laakdal, Belgium; Taicang, China; Tomisato, Japan and Icheon, Korea, all of which we own, as well as in Suzhou, China, which is leased and operated by a third-party logistics provider. +Air Manufacturing Innovation manufactures cushioning components used in footwear at NIKE-owned and leased facilities located near Beaverton, Oregon, and in Dong Nai Province, Vietnam, as well as at NIKE-owned facilities in St. Charles, Missouri. +Aside from the principal properties described above, we lease many offices worldwide for sales and administrative purposes. We lease approximately 1,041 retail stores worldwide, which primarily consist of factory stores. See “United States Market” and “International Markets” for additional information regarding our retail stores. Our leases expire at various dates through the fiscal year 2043. +ITEM 3. LEGAL PROCEEDINGS +We do not believe there are any material pending legal proceedings, other than ordinary routine litigation incidental to our business, to which we are a party or of which any of our property is the subject. Refer to Note 18 — Commitments and Contingencies in the accompanying Notes to the Consolidated Financial Statements for further information. +ITEM 4. MINE SAFETY DISCLOSURES +Not applicable. +2022 FORM 10-K 24 +Table of Contents +PART II +ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES +NIKE's Class B Common Stock is listed on the New York Stock Exchange and trades under the symbol NKE. At July 8, 2022, there were 22,214 holders of record of NIKE's Class B Common Stock and 15 holders of record of NIKE's Class A Common Stock. These figures do not include beneficial owners who hold shares in nominee name. The Class A Common Stock is not publicly traded, but each share is convertible upon request of the holder into one share of Class B Common Stock. Refer to our Consolidated Statements of Shareholders' Equity for dividends declared on the Class A and Class B Common Stock. +In June 2018, the Board of Directors approved a four-year, $15 billion share repurchase program. As of May 31, 2022, the Company had repurchased a total of 77.4 million shares at an average price of $111.98 per share for a total approximate cost of $8.7 billion under this program. +In June 2022, the Board of Directors authorized a new four-year, $18 billion program to repurchase shares of the Company's Class B common stock. The Company's new program will replace the current $15 billion share repurchase program, which will be terminated in fiscal 2023. Repurchases under the Company's new program will be made in open market or privately negotiated transactions in compliance with the Securities and Exchange Commission Rule 10b-18, subject to market conditions, applicable legal requirements and other relevant factors. The new share repurchase program does not obligate the Company to acquire any particular amount of common stock, and it may be suspended at any time at the Company's discretion. +All share repurchases were made under NIKE's publicly announced program, and there are no other programs under which the Company repurchases shares. The following table presents a summary of share repurchases made during the quarter ended May 31, 2022: +PERIOD TOTAL NUMBER OF SHARES PURCHASED AVERAGE PRICE +PAID PER SHARE APPROXIMATE DOLLAR +VALUE OF SHARES THAT +MAY YET BE PURCHASED +UNDER THE PLANS +OR PROGRAMS +(IN MILLIONS) +March 1 — March 31, 2022 3,729,125 $ 129.76 $ 6,915 +April 1 — April 30, 2022 2,645,732 $ 129.85 $ 6,571 +May 1 — May 31, 2022 2,078,150 $ 112.74 $ 6,337 +8,453,007 $ 125.61 +2022 FORM 10-K 25 +Table of Contents +PERFORMANCE GRAPH +The following graph demonstrates a five-year comparison of cumulative total returns for NIKE's Class B Common Stock; the Standard & Poor's 500 Stock Index; the Dow Jones U.S. Footwear Index; and the Standard & Poor's Apparel, Accessories & Luxury Goods Index. The graph assumes an investment of $100 on May 31, 2017, in each of the indices and our Class B Common Stock. Each of the indices assumes that all dividends were reinvested on the day of issuance. +COMPARISON OF 5-YEAR CUMULATIVE TOTAL RETURN AMONG NIKE, INC.; S&P 500 INDEX; THE DOW JONES U.S. FOOTWEAR INDEX; AND S&P APPAREL, ACCESSORIES & LUXURY GOODS INDEX +The Dow Jones U.S. Footwear Index consists of NIKE, Crocs Inc., Deckers Outdoor Corporation and Skechers U.S.A., Inc. Because NIKE is part of the Dow Jones U.S. Footwear Index, the price and returns of NIKE stock have a substantial effect on this index. The Standard & Poor's Apparel, Accessories & Luxury Goods Index consists of PVH Corporation, Ralph Lauren Corporation, Tapestry, Inc., Under Armour, Inc. and V.F. Corporation. The Dow Jones U.S. Footwear Index and the Standard & Poor's Apparel, Accessories & Luxury Goods Index include companies in two major lines of business in which the Company competes. The indices do not encompass all of the Company's competitors, nor all product categories and lines of business in which the Company is engaged. +The stock performance shown on the performance graph above is not necessarily indicative of future performance. The Company will not make or endorse any predictions as to future stock performance. +The performance graph above is being furnished solely to accompany this Report pursuant to Item 201(e) of Regulation S-K, is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing. +2022 FORM 10-K 26 +Table of Contents +ITEM 6. SELECTED FINANCIAL DATA +Not applicable. +2022 FORM 10-K 27 +Table of Contents +ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS +NIKE designs, develops, markets and sells athletic footwear, apparel, equipment, accessories and services worldwide. We are the largest seller of athletic footwear and apparel in the world. We sell our products through NIKE Direct operations, which is comprised of both NIKE-owned retail stores and sales through our digital platforms (also referred to as "NIKE Brand Digital"), to retail accounts and to a mix of independent distributors, licensees and sales representatives in virtually all countries around the world. Our goal is to deliver value to our shareholders by building a profitable global portfolio of branded footwear, apparel, equipment and accessories businesses. Our strategy is to achieve long-term revenue growth by creating innovative, “must-have” products, building deep personal consumer connections with our brands and delivering compelling consumer experiences through digital platforms and at retail. +Through the Consumer Direct Acceleration, we are focusing on creating the marketplace of the future through more premium, consistent and seamless consumer experiences, leading with digital and our owned stores, as well as select wholesale partners that share our marketplace vision. Over the last several years, as we have executed against the Consumer Direct Acceleration, we have grown our NIKE Direct business to be approximately 42% of total NIKE Brand revenues for fiscal 2022, and we have reduced the number of wholesale accounts globally. Additionally, we have aligned our product creation and category organizations around a new consumer construct focused on Men’s, Women’s and Kids’ and continue to invest in data and analytics, demand sensing, insight gathering, inventory management and other areas to create an end-to-end technology foundation, which we expect will further accelerate our digital transformation. We believe this unified approach will accelerate growth and unlock more efficiency for our business, while driving speed and responsiveness as we serve consumers globally. +During fiscal 2021, we substantially completed a series of leadership and operating model changes to streamline and speed up the strategic execution of the Consumer Direct Acceleration. These changes resulted in a net reduction of our global workforce and during fiscal 2021, we incurred pre-tax charges of $294 million, which relate to employee termination costs and, to a lesser extent, stock-based compensation expense. For fiscal 2022, we recognized an immaterial amount of related employee termination costs and, to a lesser extent, stock-based compensation expense. W e expect future annual wage-related savings will be reinvested to execute against this next phase of our strategy. For more information related to our organizational realignment and related costs, see Note 21 — Restructuring within the accompanying Notes to the Consolidated Financial Statements. +COVID-19 AND MARKET DYNAMICS UPDATE +The COVID-19 pandemic and its impacts on the global supply chain created volatility in our fiscal 2022 business results and operations globally. Despite these challenges, we achieved record Revenues for fiscal 2022, which increased 5% compared to the prior fiscal year with gross margin expansion of 120 basis points. Our NIKE Direct business continued its momentum, growing 14% and 15% on a reported and currency-neutral basis, respectively, led by North America, APLA and EMEA, partially offset by declines in Greater China due to a COVID-19 resurgence in the third and fourth quarters of fiscal 2022 as well as marketplace dynamics. During fiscal 2022, nearly all of our owned stores remained open across North America, EMEA and APLA. In Greater China however, due to a COVID-19 resurgence, we experienced a higher level of temporary store closures, with some operating on reduced hours, as well as lower physical traffic compared to pre-pandemic levels. +During the first quarter of fiscal 2022, the majority of NIKE Brand and Converse contract manufacturers in Vietnam and Indonesia were subject to government mandated shutdowns due to COVID-19. As a result of these closures, we lost approximately three months of production, impacting available product supply throughout fiscal 2022. Globally, nearly all of our supplier base is currently operational without restrictions and with factory production exceeding pre-closure production levels. In addition, our supply of available inventory continued to be impacted in the fourth quarter of fiscal 2022 as extended inventory transit times drove elevated levels of in-transit inventory. These supply chain impacts and a COVID-19 resurgence in Greater China, combined with other factors, caused Inventories to grow to $8.4 billion, an increase of 23% compared to fiscal 2021. +We also experienced elevated transportation, logistics and fulfillment costs as a result of this dynamic environment, which partially offset gross margin expansion in fiscal 2022. +Inventory transit times as well as logistics and fulfillment costs are expected to remain elevated. We also expect product costs to remain elevated due to higher input costs. In the first quarter of fiscal 2023, we expect gross margin could be negatively impacted by increased promotional activity to sell seasonal product arriving late due to the combination of temporary factory closures at the beginning of fiscal 2022 and continued elevated transit times. To mitigate the impact across our business, our teams are continuing to leverage our operational playbook and taking actions where we can, including balancing inventory across our geographies, pricing actions and employing a seasonless approach to products. Despite these short-term dynamics, we believe our Consumer Direct Acceleration strategy continues to drive our business towards our long-term financial goals. +During fiscal 2022, we continued to invest in our digital transformation and brand campaigns as the world returned to sport, and we expect to maintain our multi-year investment plans in order to transform our business of the future. +2022 FORM 10-K 28 +Table of Contents +We expect the operating environment could remain volatile in fiscal 2023 as there remains risk that COVID-19 variants may continue to cause disruption to our operations and could have a material adverse impact on future revenue growth as well as overall profitability. +For more information refer to Item 1A. Risk Factors, within Part I, Item 1. Business. +FISCAL 2022 OVERVIEW +In fiscal 2022, NIKE, Inc. achieved record Revenues of $46.7 billion, which increased 5% and 6% on a reported and currency-neutral basis, respectively, driven by higher revenues in EMEA, North America and APLA, partially offset by declines in Greater China. The NIKE Brand, which represents over 90% of NIKE, Inc. Revenues, increased 5% and 6% on a reported and currency-neutral basis, respectively, compared to fiscal 2021. NIKE Direct grew 14% and 15%, on a reported and currency-neutral basis, respectively, driven by an increase of 18% in NIKE Brand Digital, as growth in North America, APLA and EMEA was partially offset by a decline in Greater China. Wholesale revenues declined 1% as declines in North America and Greater China were partially offset by growth in EMEA and APLA. Revenues for Converse increased 6% and 7%, on a reported and currency-neutral basis, respecti vely, led by double-digit growth in our direct to consumer business, partially offset by lower wholesale revenues. +Income before income taxes remained flat for fiscal 2022, as higher revenues and gross margin expansion were offset by higher selling and administrative expense. NIKE, Inc. gross margin increased 120 basis points, led by margin expansion in our NIKE Direct business, a higher mix of full-price sales and favorable changes in net foreign currency exchange rates, including hedges, partially offset by elevated freight and logistics costs and higher inventory obsolescence reserves primarily recognized in Greater China in the fourth quarter of fiscal 2022. Selling and administrative expense increased due to higher Operating overhead and Demand creation expense. Operating overhead expense increased primarily due to higher strategic technology investments as well as increases in wage-related expenses and NIKE Direct variable costs. This activity was partially offset by higher restructuring-related costs in the prior year related to our organizational realignment. For more information, see Note 21 — Restructuring within the accompanying Notes to the Consolidated Financial Statements. Demand creation expense increased primarily due to normalization of spend against brand campaigns and continued investments in digital marketing to support heightened digital demand. ROIC as of May 31, 2022 was 46.5% compared to 48.8% as of May 31, 2021. ROIC is considered a non-GAAP financial measure, see "Use of Non-GAAP Financial Measures" for further information. +During the fourth quarter of fiscal 2022, we entered into separate definitive agreements to sell our legal entities in Argentina and Uruguay as well as our legal entity in Chile to third-party distributors. The assets and liabilities of these entities will remain classified as held-for-sale on our Consolidated Balance Sheets until the transactions close, which is expected to occur prior to the end of the third quarter of fiscal 2023. For more information related to our planned distributor partnership transition within APLA, see Note 20 — Acquisitions and Divestitures within the accompanying Notes to the Consolidated Financial Statements. In future quarters, as we shift from a wholesale and direct to consumer operating model to a distributor operating model within these countries, we expect consolidated NIKE, Inc. and APLA revenue growth will be reduced due to differences in commercial terms. However, over time we expect the future operating model to have a favorable impact on our overall profitability as we reduce selling and administrative expenses, as well as lessen exposure to foreign exchange rate volatility. +Economic sanctions imposed on Russia during the fourth quarter of fiscal 2022, impacted our local business and a reduction in the Ruble liquidity affected our ability to manage operational impact and related foreign currency risk. As a result, we deconsolidated our Russian legal entities, the net revenues of which were less than one percent of consolidated net Revenues for fiscal 2021. The deconsolidation of our Russian legal entities resulted in a one-time, pre-tax charge of $96 million recognized within Other (income) expense, net, classified within Corporate. Subsequent to the end of fiscal 2022, we made the decision to leave the Russian marketplace. +While foreign currency markets remain volatile, in part due to geopolitical dynamics which have led to a stronger U.S. Dollar, we continue to see opportunities to drive future growth and profitability. We remain committed to effectively managing our business and mitigating financial market risks to achieve our financial goals over the long-term by executing against the operational strategies outlined above. +For discussion related to the results of operations and changes in financial condition for fiscal 2021 compared to fiscal 2020 refer to Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in our fiscal 2021 Form 10-K, which was filed with the United States Securities and Exchange Commission on July 20, 2021. +USE OF NON-GAAP FINANCIAL MEASURES +Throughout this Annual Report on Form 10-K, we discuss non-GAAP financial measures, including references to wholesale equivalent revenues, currency-neutral revenues, Total NIKE Brand earnings before interest and taxes (EBIT) and Total NIKE, Inc. EBIT, as well as EBIT Margin and ROIC, which should be considered in addition to, and not in lieu of, the financial measures calculated and presented in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). References to wholesale equivalent revenues are intended to provide context as to the total size of our NIKE Brand market footprint if we had no NIKE Direct operations. NIKE Brand wholesale equivalent revenues consist of (1) sales to external wholesale customers and (2) internal sales from our wholesale operations to our NIKE Direct operations, which are charged at prices comparable to those charged to external wholesale customers. Additionally, currency-neutral revenues are calculated +2022 FORM 10-K 29 +Table of Contents +using actual exchange rates in use during the comparative prior year period to enhance the visibility of the underlying business trends, excluding the impact of translation arising from foreign currency exchange rate fluctuations. EBIT is calculated as Net Income before Interest expense (income), net and Income tax expense in the Consolidated Statements of Income. EBIT Margin is calculated as EBIT divided by total NIKE, Inc. Revenues. ROIC represents a performance measure that management believes is useful information in understanding the Company's ability to effectively manage invested capital, see the table below for how the Company calculates this measure. +Management uses these non-GAAP financial measures when evaluating the Company's performance, including when making financial and operating decisions. Additionally, management believes these non-GAAP financial measures provide investors with additional financial information that should be considered when assessing our underlying business performance and trends. However, references to wholesale equivalent revenues, currency-neutral revenues, ROIC, EBIT and EBIT margin should not be considered in isolation or as a substitute for other financial measures calculated and presented in accordance with U.S. GAAP and may not be comparable to similarly titled non-GAAP measures used by other companies. +Our ROIC calculation as of May 31, 2022 and 2021 is as follows: +FOR THE TRAILING FOUR QUARTERS ENDED +(Dollars in millions) MAY 31, 2022 MAY 31, 2021 +Numerator +Net income $ 6,046 $ 5,727 +Add: Interest expense (income), net 205 262 +Add: Income tax expense 605 934 +Earnings before interest and taxes 6,856 6,923 +Income tax adjustment (1) +(624) (970) +Earnings before interest and after taxes $ 6,232 $ 5,953 +AVERAGE FOR THE TRAILING FIVE QUARTERS ENDED +MAY 31, 2022 MAY 31, 2021 +Denominator +Total debt (2) +$ 12,722 $ 12,890 +Add: Shareholders' equity 14,425 10,523 +Less: Cash and equivalents and Short-term investments 13,748 11,217 +Total invested capital $ 13,399 $ 12,196 +RETURN ON INVESTED CAPITAL 46.5 % 48.8 % +(1) Equals Earnings before interest and taxes multiplied by the effective tax rate as of the respective quarter end. +(2) Total debt includes the following: 1) Current portion of long-term debt, 2) Notes Payable, 3) Current portion of operating lease liabilities, 4) Long-term debt and 5) Operating lease liabilities. +2022 FORM 10-K 30 +Table of Contents +RESULTS OF OPERATIONS +(Dollars in millions, except per share data) +FISCAL 2022 FISCAL 2021 % CHANGE FISCAL 2020 % CHANGE +Revenues $ 46,710 $ 44,538 5 % $ 37,403 19 % +Cost of sales 25,231 24,576 3 % 21,162 16 % +Gross profit 21,479 19,962 8 % 16,241 23 % +Gross margin 46.0 % 44.8 % 43.4 % +Demand creation expense 3,850 3,114 24 % 3,592 -13 % +Operating overhead expense 10,954 9,911 11 % 9,534 4 % +Total selling and administrative expense 14,804 13,025 14 % 13,126 -1 % +% of revenues 31.7 % 29.2 % 35.1 % +Interest expense (income), net 205 262 — 89 — +Other (income) expense, net (181) 14 — 139 — +Income before income taxes 6,651 6,661 0 % 2,887 131 % +Income tax expense 605 934 -35 % 348 168 % +Effective tax rate 9.1 % 14.0 % 12.1 % +NET INCOME $ 6,046 $ 5,727 6 % $ 2,539 126 % +Diluted earnings per common share $ 3.75 $ 3.56 5 % $ 1.60 123 % +2022 FORM 10-K 31 +Table of Contents +CONSOLIDATED OPERATING RESULTS +REVENUES +(Dollars in millions) +FISCAL 2022 FISCAL 2021 % CHANGE +% CHANGE EXCLUDING CURRENCY CHANGES (1) +FISCAL 2020 % CHANGE +% CHANGE EXCLUDING CURRENCY CHANGES (1) +NIKE, Inc. Revenues: +NIKE Brand Revenues by: +Footwear $ 29,143 $ 28,021 4 % 4 % $ 23,305 20 % 18 % +Apparel 13,567 12,865 5 % 6 % 10,953 17 % 15 % +Equipment 1,624 1,382 18 % 18 % 1,280 8 % 7 % +Global Brand Divisions (2) +102 25 308 % 302 % 30 -17 % -17 % +Total NIKE Brand Revenues 44,436 42,293 5 % 6 % 35,568 19 % 17 % +Converse 2,346 2,205 6 % 7 % 1,846 19 % 16 % +Corporate (3) +(72) 40 — — (11) — — +TOTAL NIKE, INC. REVENUES $ 46,710 $ 44,538 5 % 6 % $ 37,403 19 % 17 % +Supplemental NIKE Brand Revenues Details: +NIKE Brand Revenues by: +Sales to Wholesale Customers $ 25,608 $ 25,898 -1 % -1 % $ 23,156 12 % 10 % +Sales through NIKE Direct 18,726 16,370 14 % 15 % 12,382 32 % 30 % +Global Brand Divisions (2) +102 25 308 % 302 % 30 -17 % -17 % +TOTAL NIKE BRAND REVENUES $ 44,436 $ 42,293 5 % 6 % $ 35,568 19 % 17 % +NIKE Brand Revenues on a Wholesale Equivalent Basis: (1) +Sales to Wholesale Customers $ 25,608 $ 25,898 -1 % -1 % $ 23,156 12 % 10 % +Sales from our Wholesale Operations to NIKE Direct Operations 10,543 9,872 7 % 7 % 7,452 32 % 30 % +TOTAL NIKE BRAND WHOLESALE EQUIVALENT REVENUES $ 36,151 $ 35,770 1 % 1 % $ 30,608 17 % 15 % +NIKE Brand Wholesale Equivalent Revenues by: (1),(4) +Men's $ 18,797 $ 18,391 2 % 3 % $ 16,430 12 % 10 % +Women's 8,273 8,225 1 % 1 % 6,954 18 % 16 % +NIKE Kids' 4,874 4,882 0 % 0 % 4,199 16 % 14 % +Jordan Brand 5,122 4,780 7 % 7 % 3,687 30 % 27 % +Others (5) +(915) (508) -80 % -79 % (662) 23 % 24 % +TOTAL NIKE BRAND WHOLESALE EQUIVALENT REVENUES $ 36,151 $ 35,770 1 % 1 % $ 30,608 17 % 15 % +(1) The percent change excluding currency changes and the presentation of wholesale equivalent revenues represent non-GAAP financial measures. See "Use of Non-GAAP Financial Measures" for further information. +(2) Global Brand Divisions revenues include NIKE Brand licensing and other miscellaneous revenues that are not part of a geographic operating segment. +(3) Corporate revenues primarily consist of foreign currency hedge gains and losses related to revenues generated by entities within the NIKE Brand geographic operating segments and Converse, but managed through our central foreign exchange risk management program. +(4) As a result of the Consumer Direct Acceleration strategy, announced in fiscal 2021, the Company is now organized around a new consumer construct of Men's, Women's and Kids'. Beginning in the first quarter of fiscal 2022, unisex products are classified within Men's, and Jordan Brand revenues are separately reported. Certain prior year amounts have been reclassified to conform to fiscal 2022 presentation. These changes had no impact on previously reported consolidated results of operations or shareholders' equity. For additional information about the Consumer Direct Acceleration refer to Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations within the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 2021. +(5) Others include products not allocated to Men’s, Women’s, NIKE Kids’ and Jordan Brand, as well as certain adjustments that are not allocated to products designated by consumer. +2022 FORM 10-K 32 +Table of Contents +FISCAL 2022 NIKE BRAND REVENUE HIGHLIGHTS +The following tables present NIKE Brand revenues disaggregated by reportable operating segment, distribution channel and major product line: +FISCAL 2022 COMPARED TO FISCAL 2021 +On a currency-neutral basis, NIKE, Inc. Revenues increased 6% for fiscal 2022, driven by higher revenues in EMEA, North America and APLA, partially offset by lower revenues in Greater China. Higher revenues in EMEA and North America each contributed approximately 3 percentage points to NIKE, Inc. Revenues, and APLA contributed approximately 2 percentage points, while lower revenues in Greater China reduced NIKE, Inc. Revenues by approximately 2 percentage points. +On a currency-neutral basis, NIKE Brand footwear revenues increased 4% for fiscal 2022, driven by growth in NIKE Direct, partially offset by a decline in our wholesale business. Unit sales of footwear decreased 3%, while higher average selling price (ASP) per pair contributed approximately 7 percentage points of footwear revenue growth. Higher ASP per pair was primarily due to higher NIKE Direct ASP, the favorable impact of growth in our NIKE Direct business, higher full-price ASP, net of discounts, on a wholesale equivalent basis, and a higher mix of full-price sales. +Currency-neutral NIKE Brand apparel revenues increased 6% for fiscal 2022, driven primarily by growth in Men's. Unit sales of apparel remained flat, and higher ASP per unit contributed approximately 6 percentage points of apparel revenue growth. Higher ASP per unit was primarily due to higher full-price and NIKE Direct ASPs. +On a reported basis, NIKE Direct revenues represented approximately 42% of our total NIKE Brand revenues for fiscal 2022 compared to 39% for fiscal 2021. NIKE Brand Digital sales were $10.7 billion for fiscal 2022 compared to $9.1 billion for fiscal 2021. On a currency-neutral basis, NIKE Direct revenues increased 15% for fiscal 2022, driven by NIKE Brand Digital sales growth of 18%, comparable store sales growth of 10%, in part due to improved physical retail traffic, and the addition of new stores. Comparable store sales, which exclude NIKE Brand Digital sales, comprises revenues from NIKE-owned in-line and factory stores for which all three of the following requirements have been met: (1) the store has been open at least one year, (2) square footage has not changed by more than 15% within the past year and (3) the store has not been permanently repositioned within the past year. Comparable store sales includes revenues from stores that were temporarily closed during the period as a result of COVID-19. Comparable store sales represents a performance measure that we believe is useful information for management and investors in understanding the performance of our established NIKE-owned in-line and factory stores. Management considers this metric when making financial and operating decisions. The method of calculating comparable store sales varies across the retail industry. As a result, our calculation of this metric may not be comparable to similarly titled measures used by other companies. +On a currency-neutral basis, fiscal 2022 NIKE Brand revenue growth of 6% was primarily driven by increases in Men's and the Jordan Brand, which grew 3% and 7%, respectively. +2022 FORM 10-K 33 +Table of Contents +GROSS MARGIN +FISCAL 2022 COMPARED TO FISCAL 2021 +For fiscal 2022, our consolidated gross profit increased 8% to $21,479 million compared to $19,962 million for fiscal 2021. Gross margin increased 120 basis points to 46.0% for fiscal 2022 compared to 44.8% for fiscal 2021 due to the following: +*Wholesale equivalent +The increase in gross margin for fiscal 2022 was primarily due to higher margin in our NIKE Direct business, a higher mix of full-price sales on a wholesale equivalent basis and favorable changes in net foreign currency exchange rates, including hedges. This activity was partially offset by higher product costs on a wholesale equivalent basis, largely due to elevated freight and logistics costs as well as an increase in other costs primarily due to higher inventory obsolescence reserves recognized in Greater China in the fourth quarter of fiscal 2022. +TOTAL SELLING AND ADMINISTRATIVE EXPENSE +(Dollars in millions) +FISCAL 2022 FISCAL 2021 % CHANGE FISCAL 2020 % CHANGE +Demand creation expense (1) +$ 3,850 $ 3,114 24 % $ 3,592 -13 % +Operating overhead expense 10,954 9,911 11 % 9,534 4 % +Total selling and administrative expense $ 14,804 $ 13,025 14 % $ 13,126 -1 % +% of revenues 31.7 % 29.2 % 250 bps 35.1 % (590) bps +(1) Demand creation expense consists of advertising and promotion costs, including costs of endorsement contracts, complimentary product, television, digital and print advertising and media costs, brand events and retail brand presentation. +FISCAL 2022 COMPARED TO FISCAL 2021 +Demand creation expense increased 24% for fiscal 2022, primarily due to higher advertising and marketing spend against brand campaigns as we experienced marketplace closures in the prior year due to COVID-19, as well as continued investments in digital marketing to support heightened digital demand. Changes in foreign currency exchange rates decreased Demand creation expense by approximately 1 percentage point. +Operating overhead expense increased 11% for fiscal 2022, primarily due to higher strategic technology investments and increases in wage-related expenses and NIKE Direct variable costs. This activity was partially offset by higher restructuring-related costs in the prior year related to our organizational realignment. For more information, see Note 21 — Restructuring within the accompanying Notes to the Consolidated Financial Statements. Changes in foreign currency exchange rates had an insignificant impact on Operating overhead expense. +OTHER (INCOME) EXPENSE, NET +(Dollars in millions) +FISCAL 2022 FISCAL 2021 FISCAL 2020 +Other (income) expense, net $ (181) $ 14 $ 139 +Other (income) expense, net comprises foreign currency conversion gains and losses from the remeasurement of monetary assets and liabilities denominated in non-functional currencies and the impact of certain foreign currency derivative instruments, as well as unusual or non-operating transactions that are outside the normal course of business. +FISCAL 2022 COMPARED TO FISCAL 2021 +Other (income) expense, net changed from $14 million of other expense, net in fiscal 2021 to $181 million of other income, net in the current year, primarily due to a $219 million net favorable change in foreign currency conversion gains and losses, including hedges, as well as a net favorable impact related to our strategic distributor partnership transition within APLA, partially offset by the one-time charge related to the deconsolidation of our Russian operations. +2022 FORM 10-K 34 +Table of Contents +For more information related to our distributor partnership transition within APLA, see Note 20 — Acquisitions and Divestitures within the accompanying Notes to the Consolidated Financial Statements. +We estimate the combination of the translation of foreign currency-denominated profits from our international businesses, and the year-over-year change in foreign currency-related gains and losses included in Other (income) expense, net had a favorable impact on our Income before income taxes of $132 million for fiscal 2022. +INCOME TAXES +FISCAL 2022 FISCAL 2021 % CHANGE FISCAL 2020 % CHANGE +Effective tax rate 9.1 % 14.0 % (490) bps 12.1 % 190 bps +FISCAL 2022 COMPARED TO FISCAL 2021 +Our effective tax rate was 9.1% for fiscal 2022, compared to 14.0% for fiscal 2021, primarily due to a shift in our earnings mix and recognition of a non-cash, one-time benefit related to the onshoring of certain non-U.S. intangible property ownership rights in the fourth quarter of fiscal 2022. +OPERATING SEGMENTS +Our operating segments are evidence of the structure of the Company's internal organization. The NIKE Brand segments are defined by geographic regions for operations participating in NIKE Brand sales activity. +Each NIKE Brand geographic segment operates predominantly in one industry: the design, development, marketing and selling of athletic footwear, apparel and equipment. The Company's reportable operating segments for the NIKE Brand are: North America; Europe, Middle East & Africa (EMEA); Greater China; and Asia Pacific & Latin America (APLA), and include results for the NIKE and Jordan brands. The Company's NIKE Direct operations are managed within each geographic operating segment. Converse is also a reportable operating segment for the Company and operates predominately in one industry: the design, marketing, licensing and selling of athletic lifestyle sneakers, apparel and accessories. +As part of our centrally managed foreign exchange risk management program, standard foreign currency exchange rates are assigned twice per year to each NIKE Brand entity in our geographic operating segments and Converse. These rates are set approximately nine and twelve months in advance of the future selling seasons to which they relate (specifically, for each currency, one standard rate applies to the fall and holiday selling seasons and one standard rate applies to the spring and summer selling seasons) based on average market spot rates in the calendar month preceding the date they are established. Inventories and Cost of sales for geographic operating segments and Converse reflect the use of these standard rates to record non-functional currency product purchases into the entity's functional currency. Differences between assigned standard foreign currency exchange rates and actual market rates are included in Corporate, together with foreign currency hedge gains and losses generated from our centrally managed foreign exchange risk management program and other conversion gains and losses. +2022 FORM 10-K 35 +Table of Contents +The breakdown of Revenues is as follows: +(Dollars in millions) +FISCAL 2022 FISCAL 2021 % CHANGE +% CHANGE EXCLUDING CURRENCY CHANGES (1) +FISCAL 2020 % CHANGE +% CHANGE EXCLUDING CURRENCY CHANGES (1) +North America $ 18,353 $ 17,179 7 % 7 % $ 14,484 19 % 19 % +Europe, Middle East & Africa 12,479 11,456 9 % 12 % 9,347 23 % 17 % +Greater China 7,547 8,290 -9 % -13 % 6,679 24 % 19 % +Asia Pacific & Latin America (2) +5,955 5,343 11 % 16 % 5,028 6 % 8 % +Global Brand Divisions (3) +102 25 308 % 302 % 30 -17 % -17 % +TOTAL NIKE BRAND 44,436 42,293 5 % 6 % 35,568 19 % 17 % +Converse 2,346 2,205 6 % 7 % 1,846 19 % 16 % +Corporate (4) +(72) 40 — — (11) — — +TOTAL NIKE, INC. REVENUES $ 46,710 $ 44,538 5 % 6 % $ 37,403 19 % 17 % +(1) The percent change excluding currency changes represents a non-GAAP financial measure. See "Use of Non-GAAP Financial Measures" for further information. +(2) Refer to Note 20 — Acquisitions and Divestitures within the accompanying Notes to the Consolidated Financial Statements for additional information on the transition of our NIKE Brand business in Brazil to a third-party distributor. +(3) Global Brand Divisions revenues include NIKE Brand licensing and other miscellaneous revenues that are not part of a geographic operating segment. +(4) Corporate revenues primarily consist of foreign currency hedge gains and losses related to revenues generated by entities within the NIKE Brand geographic operating segments and Converse, but managed through our central foreign exchange risk management program. +The primary financial measure used by the Company to evaluate performance of individual operating segments is EBIT, which represents Net income before Interest expense (income), net and Income tax expense in the Consolidated Statements of Income. As discussed in Note 17 — Operating Segments and Related Information in the accompanying Notes to the Consolidated Financial Statements, certain corporate costs are not included in EBIT of our operating segments. +The breakdown of earnings before interest and taxes is as follows: +(Dollars in millions) +FISCAL 2022 FISCAL 2021 % CHANGE FISCAL 2020 % CHANGE +North America $ 5,114 $ 5,089 0 % $ 2,899 76 % +Europe, Middle East & Africa 3,293 2,435 35 % 1,541 58 % +Greater China 2,365 3,243 -27 % 2,490 30 % +Asia Pacific & Latin America 1,896 1,530 24 % 1,184 29 % +Global Brand Divisions (4,262) (3,656) -17 % (3,468) -5 % +TOTAL NIKE BRAND (1) +$ 8,406 $ 8,641 -3 % $ 4,646 86 % +Converse 669 543 23 % 297 83 % +Corporate +(2,219) (2,261) 2 % (1,967) -15 % +TOTAL NIKE, INC. EARNINGS BEFORE INTEREST AND TAXES (1) +$ 6,856 $ 6,923 -1 % $ 2,976 133 % +EBIT margin (1) +14.7 % 15.5 % 8.0 % +Interest expense (income), net 205 262 — 89 — +TOTAL NIKE, INC. INCOME BEFORE INCOME TAXES $ 6,651 $ 6,661 0 % $ 2,887 131 % +(1) Total NIKE Brand EBIT, Total NIKE, Inc. EBIT and EBIT Margin represent non-GAAP financial measures. See "Use of Non-GAAP Financial Measures" for further information. +2022 FORM 10-K 36 +Table of Contents +NORTH AMERICA +(Dollars in millions) +FISCAL 2022 FISCAL 2021 % CHANGE % CHANGE EXCLUDING CURRENCY CHANGES FISCAL 2020 % CHANGE % CHANGE EXCLUDING CURRENCY CHANGES +Revenues by: +Footwear $ 12,228 $ 11,644 5 % 5 % $ 9,329 25 % 25 % +Apparel 5,492 5,028 9 % 9 % 4,639 8 % 8 % +Equipment 633 507 25 % 25 % 516 -2 % -2 % +TOTAL REVENUES $ 18,353 $ 17,179 7 % 7 % $ 14,484 19 % 19 % +Revenues by: +Sales to Wholesale Customers $ 9,621 $ 10,186 -6 % -6 % $ 9,371 9 % 9 % +Sales through NIKE Direct 8,732 6,993 25 % 25 % 5,113 37 % 37 % +TOTAL REVENUES $ 18,353 $ 17,179 7 % 7 % $ 14,484 19 % 19 % +EARNINGS BEFORE INTEREST AND TAXES $ 5,114 $ 5,089 0 % $ 2,899 76 % +FISCAL 2022 COMPARED TO FISCAL 2021 +On a currency-neutral basis, North America revenues increased 7%, due primarily to higher revenues in Men's and the Jordan Brand. NIKE Direct revenues increased 25%, driven by strong digital sales growth of 30%, comparable store sales growth of 17% and the addition of new stores. +Footwear revenues increased 5% on a currency-neutral basis, driven by growth in NIKE Direct, partially offset by a decline in our wholesale business. Unit sales of footwear decreased 4%, while higher ASP per pair contributed approximately 9 percentage points of footwear revenue growth. Higher ASP per pair was primarily due to higher NIKE Direct ASP, the favorable impact of growth in our NIKE Direct business and a higher mix of full-price sales. +On a currency-neutral basis, apparel revenues increased 9%, driven primarily by higher revenues in Men's. Unit sales of apparel decreased 2%, while higher ASP per unit contributed approximately 11 percentage points of apparel revenue growth. The increase in ASP per unit was primarily driven by higher full-price and NIKE Direct ASPs as well as a higher mix of full-price sales. +Reported EBIT remained flat as higher revenues were offset by higher selling and administrative expense and gross margin contraction. Gross margin decreased approximately 10 basis points, largely due to higher product and other costs, partially offset by higher margins and the favorable impact of growth in our NIKE Direct business, a higher mix of full-price sales and higher full-price ASP, net of discounts, primarily due to strategic pricing actions. Higher product and other costs were primarily due to increased freight, logistics and warehousing costs. Selling and administrative expense increased due to higher demand creation and operating overhead expense. Demand creation expense increased primarily as a result of higher advertising and marketing expense, as well as higher digital marketing investments. The increase in operating overhead expense reflected higher wage-related costs as well as an increase in NIKE Direct variable costs. +2022 FORM 10-K 37 +Table of Contents +EUROPE, MIDDLE EAST & AFRICA +(Dollars in millions) +FISCAL 2022 FISCAL 2021 % CHANGE % CHANGE EXCLUDING CURRENCY CHANGES FISCAL 2020 % CHANGE % CHANGE EXCLUDING CURRENCY CHANGES +Revenues by: +Footwear $ 7,388 $ 6,970 6 % 9 % $ 5,892 18 % 13 % +Apparel 4,527 3,996 13 % 16 % 3,053 31 % 25 % +Equipment 564 490 15 % 17 % 402 22 % 19 % +TOTAL REVENUES $ 12,479 $ 11,456 9 % 12 % $ 9,347 23 % 17 % +Revenues by: +Sales to Wholesale Customers $ 8,377 $ 7,812 7 % 10 % $ 6,574 19 % 14 % +Sales through NIKE Direct 4,102 3,644 13 % 15 % 2,773 31 % 25 % +TOTAL REVENUES $ 12,479 $ 11,456 9 % 12 % $ 9,347 23 % 17 % +EARNINGS BEFORE INTEREST AND TAXES $ 3,293 $ 2,435 35 % $ 1,541 58 % +FISCAL 2022 COMPARED TO FISCAL 2021 +On a currency-neutral basis, EMEA revenues for fiscal 2022 grew 12%, due primarily to higher revenues in Men’s, the Jordan Brand and Women's. NIKE Direct revenues increased 15%, primarily due to comparable store sales growth of 30% due to improved physical retail traffic, in part resulting from temporary store closures and safety-related measures in response to COVID-19 in the prior year, as well as digital sales growth of 8%. +Currency-neutral footwear revenues increased 9%, driven by higher revenues in the Jordan Brand and Men's. Unit sales of footwear decreased 1%, while higher ASP per pair contributed approximately 10 percentage points of footwear revenue growth. Higher ASP per pair was primarily due to higher NIKE Direct and full-price ASPs as well as a higher mix of full-price sales. +Currency-neutral apparel revenues increased 16% due primarily to higher revenues in Men's and Women's. Unit sales of apparel increased 9%, while higher ASP per unit contributed approximately 7 percentage points of apparel revenue growth, primarily due to higher full-price and NIKE Direct ASPs. +Reported EBIT increased 35% as gross margin expansion and higher revenues more than offset higher selling and administrative expense. Gross margin increased approximately 570 basis points primarily due to higher NIKE Direct margins, favorable changes in standard foreign currency exchange rates, a higher mix of full-price sales and higher full-price ASP, net of discounts, partially offset by higher product costs. Higher full-price ASP, net of discounts, was largely due to strategic pricing actions, while higher product costs were primarily due to increased freight and logistics costs. Selling and administrative expense increased due to higher demand creation and operating overhead expense. Higher demand creation expense was driven by higher advertising and marketing expense. Higher operating overhead expense was primarily due to increases in wage-related expenses and professional services. +2022 FORM 10-K 38 +Table of Contents +GREATER CHINA +(Dollars in millions) +FISCAL 2022 FISCAL 2021 % CHANGE % CHANGE EXCLUDING CURRENCY CHANGES FISCAL 2020 % CHANGE % CHANGE EXCLUDING CURRENCY CHANGES +Revenues by: +Footwear $ 5,416 $ 5,748 -6 % -10 % $ 4,635 24 % 19 % +Apparel 1,938 2,347 -17 % -21 % 1,896 24 % 19 % +Equipment 193 195 -1 % -6 % 148 32 % 26 % +TOTAL REVENUES $ 7,547 $ 8,290 -9 % -13 % $ 6,679 24 % 19 % +Revenues by: +Sales to Wholesale Customers $ 4,081 $ 4,513 -10 % -14 % $ 3,803 19 % 14 % +Sales through NIKE Direct 3,466 3,777 -8 % -12 % 2,876 31 % 26 % +TOTAL REVENUES $ 7,547 $ 8,290 -9 % -13 % $ 6,679 24 % 19 % +EARNINGS BEFORE INTEREST AND TAXES $ 2,365 $ 3,243 -27 % $ 2,490 30 % +FISCAL 2022 COMPARED TO FISCAL 2021 +On a currency-neutral basis, Greater China revenues for fiscal 2022 decreased 13%, reflecting impacts from supply chain constraints, government restrictions due to COVID-19 as well as marketplace dynamics. The decrease in revenues was primarily due to lower revenues in Men’s and Women's. NIKE Direct revenues decreased 12% due to digital sales declines of 15% and comparable store sales declines of 14%, in part due to reduced physical retail traffic as a result of government restrictions due to COVID-19 as well as ongoing marketplace dynamics, partially offset by the addition of new stores. +Currency-neutral footwear revenues decreased 10%, driven primarily by lower revenues in Men's and Women's. Unit sales of footwear decreased 7%, while lower ASP per pair reduced footwear revenues by approximately 3 percentage points, driven by lower NIKE Direct and full-price ASPs, reflecting higher discounts. +Currency-neutral apparel revenues decreased 21%, due primarily to lower revenues in Men's and Women's. Unit sales of apparel decreased 15%, while lower ASP per unit reduced apparel revenues by approximately 6 percentage points, primarily due to lower NIKE Direct and full-price ASPs, reflecting higher discounts. +Reported EBIT decreased 27% due to lower revenues, gross margin contraction and higher selling and administrative expense. Gross margin decreased approximately 390 basis points, reflecting impacts from COVID-19 related government restrictions which reduced physical retail traffic and led to higher inventory obsolescence reserves recognized primarily in the fourth quarter of fiscal 2022. The decrease in gross margin was also largely due to higher product costs and lower NIKE Direct margins. This activity was partially offset by favorable changes in standard foreign currency exchange rates. Selling and administrative expense increased due to higher demand creation and operating overhead expense. Growth in demand creation expense was primarily due to higher advertising and marketing expense. Operating overhead expense increased largely due to higher wage-related costs and higher strategic technology investments. +2022 FORM 10-K 39 +Table of Contents +ASIA PACIFIC & LATIN AMERICA +(Dollars in millions) +FISCAL 2022 FISCAL 2021 % CHANGE % CHANGE EXCLUDING CURRENCY CHANGES FISCAL 2020 % CHANGE % CHANGE EXCLUDING CURRENCY CHANGES +Revenues by: +Footwear $ 4,111 $ 3,659 12 % 17 % $ 3,449 6 % 8 % +Apparel 1,610 1,494 8 % 12 % 1,365 9 % 10 % +Equipment 234 190 23 % 28 % 214 -11 % -9 % +TOTAL REVENUES $ 5,955 $ 5,343 11 % 16 % $ 5,028 6 % 8 % +Revenues by: +Sales to Wholesale Customers $ 3,529 $ 3,387 4 % 8 % $ 3,408 -1 % 2 % +Sales through NIKE Direct 2,426 1,956 24 % 30 % 1,620 21 % 22 % +TOTAL REVENUES $ 5,955 $ 5,343 11 % 16 % $ 5,028 6 % 8 % +EARNINGS BEFORE INTEREST AND TAXES $ 1,896 $ 1,530 24 % $ 1,184 29 % +As discussed previously, our NIKE Brand business in Brazil transitioned to a distributor operating model during fiscal 2021. During the fourth quarter of fiscal 2022, we signed separate definitive agreements to sell our legal entities in Argentina and Uruguay as well as our legal entity in Chile to third-party distributors. The assets and liabilities of our legal entities in Argentina, Chile and Uruguay will remain classified as held-for-sale on the Consolidated Balance Sheets until the transactions close, which is expected to occur prior to the end of the third quarter of fiscal 2023. The impacts of closing the Brazil transaction as well as classifying the Argentina, Chile, and Uruguay entities as held-for-sale in fiscal 2020 are included within Corporate and are not reflected in the APLA operating segment results. For more information see Note 20 — Acquisitions and Divestitures within the accompanying Notes to the Consolidated Financial Statements. +FISCAL 2022 COMPARED TO FISCAL 2021 +On a currency-neutral basis, APLA revenues increased 16% for fiscal 2022. The increase was due to higher revenues across nearly all territories, driven by SOCO (which comprises Argentina, Chile and Uruguay), Mexico and Korea, which increased 58%, 35% and 16%, respectively. Revenues increased primarily due to higher revenues in Men’s and Women's. NIKE Direct revenues increased 30%, primarily due to digital sales growth of 51% and comparable store sales growth of 13%, in part due to improved physical retail traffic, partially offset by store closures. +Currency-neutral footwear revenues increased 17% for fiscal 2022 in part due to higher revenues in Women's and Men's. Unit sales of footwear increased 2%, while higher ASP per pair contributed approximately 15 percentage points of footwear revenue growth. Higher ASP per pair was driven by higher NIKE Direct ASP, higher full-price ASP, reflecting lower discounts, higher off-price ASP and a higher mix of full-price sales. Higher ASPs, in part, reflect inflationary conditions in our SOCO territory. +Currency-neutral apparel revenues increased 12% for fiscal 2022 due primarily to higher revenues in Men's. Unit sales of apparel increased 3%, while higher ASP per unit contributed approximately 9 percentage points of apparel revenue growth, driven by higher full-price ASP, reflecting lower discounts, as well as higher NIKE Direct and off-price ASPs. Higher ASPs, in part, reflect inflationary conditions in our SOCO territory. +Reported EBIT increased 24% for fiscal 2022, as higher revenues and gross margin expansion more than offset higher selling and administrative expense. Gross margin increased approximately 400 basis points primarily due to higher margins and the favorable impact of growth in our NIKE Direct business, higher full-price ASP largely due to lower discounts, favorable changes in standard foreign currency exchange rates, lower other costs as well as a higher mix of full-price sales. The decrease in other costs was primarily due to lower warehousing costs. Selling and administrative expense increased due to higher demand creation and operating overhead expense. Higher demand creation expense was primarily due to higher digital marketing investments to support heightened digital demand. The increase in operating overhead expense was primarily due to an increase in NIKE Direct variable expenses as well as higher bad debt expense. +2022 FORM 10-K 40 +Table of Contents +GLOBAL BRAND DIVISIONS +(Dollars in millions) +FISCAL 2022 FISCAL 2021 % CHANGE % CHANGE EXCLUDING CURRENCY CHANGES FISCAL 2020 % CHANGE % CHANGE EXCLUDING CURRENCY CHANGES +Revenues $ 102 $ 25 308 % 302 % $ 30 -17 % -17 % +Earnings (Loss) Before Interest and Taxes $ (4,262) $ (3,656) -17 % $ (3,468) -5 % +Global Brand Divisions primarily represent demand creation and operating overhead expense, including product creation and design expenses that are centrally managed for the NIKE Brand, as well as costs associated with NIKE Direct global digital operations and enterprise technology. Global Brand Divisions revenues include NIKE Brand licensing and other miscellaneous revenues that are not part of a geographic operating segment. +FISCAL 2022 COMPARED TO FISCAL 2021 +Global Brand Divisions' loss before interest and taxes increased 17% for fiscal 2022 due to higher total selling and administrative expense, driven by higher operating overhead and demand creation expense. Higher operating overhead expense was primarily due to an increase in strategic technology investments, continued investment in digital capabilities and higher wage-related expenses. Higher demand creation expense was primarily due to higher advertising and marketing expense and higher sports marketing costs. +CONVERSE +(Dollars in millions) +FISCAL 2022 FISCAL 2021 % CHANGE % CHANGE EXCLUDING CURRENCY CHANGES FISCAL 2020 % CHANGE % CHANGE EXCLUDING CURRENCY CHANGES +Revenues by: +Footwear $ 2,094 $ 1,986 5 % 6 % $ 1,642 21 % 17 % +Apparel 103 104 -1 % -3 % 89 17 % 13 % +Equipment 26 29 -10 % -16 % 25 16 % 14 % +Other (1) +123 86 43 % 42 % 90 -4 % -1 % +TOTAL REVENUES $ 2,346 $ 2,205 6 % 7 % $ 1,846 19 % 16 % +Revenues by: +Sales to Wholesale Customers $ 1,292 $ 1,353 -5 % -4 % $ 1,154 17 % 13 % +Sales through Direct to Consumer 931 766 22 % 22 % 602 27 % 24 % +Other (1) +123 86 43 % 42 % 90 -4 % -1 % +TOTAL REVENUES $ 2,346 $ 2,205 6 % 7 % $ 1,846 19 % 16 % +EARNINGS BEFORE INTEREST AND TAXES $ 669 $ 543 23 % $ 297 83 % +(1) Other revenues consist of territories serviced by third-party licensees who pay royalties to Converse for the use of its registered trademarks and other intellectual property rights. We do not own the Converse trademarks in Japan and accordingly do not earn revenues in Japan. +FISCAL 2022 COMPARED TO FISCAL 2021 +On a currency-neutral basis, Converse revenues increased 7% for fiscal 2022 due to revenue growth in North America, Western Europe and licensee markets, partially offset by declines in Asia. Direct to consumer revenues increased 22%, led by strong digital demand. Wholesale revenues decreased 4%, primarily due to ongoing marketplace dynamics in China as well as global supply chain constraints. Combined unit sales within the wholesale and direct to consumer channels decreased 6%, while ASP increased 12%, driven by growth in direct to consume r. +Reported EBIT increased 23%, driven by gross margin expansion and higher revenues, partially offset by higher selling and administrative expense. Gross margin increased approximately 360 basis points as higher margins in direct to consumer, growth in licensee revenues, favorable changes in standard foreign currency exchange rates, and higher full-price ASP, net of discounts, were partially offset by higher product costs due to increased freight, duty and logistics costs. Selling and administrative expense increased due to higher demand creation and operating overhead expense. Demand creation expense increased primarily due to higher advertising and marketing expense, while operating overhead increased primarily due to higher professional services costs. +2022 FORM 10-K 41 +Table of Contents +CORPORATE +(Dollars in millions) +FISCAL 2022 FISCAL 2021 % CHANGE FISCAL 2020 % CHANGE +Revenues $ (72) $ 40 — $ (11) — +Earnings (Loss) Before Interest and Taxes $ (2,219) $ (2,261) 2 % $ (1,967) -15 % +Corporate revenues primarily consist of foreign currency hedge gains and losses related to revenues generated by entities within the NIKE Brand geographic operating segments and Converse, but managed through our central foreign exchange risk management program. +The Corporate loss before interest and taxes primarily consists of unallocated general and administrative expenses, including expenses associated with centrally managed departments; depreciation and amortization related to our corporate headquarters; unallocated insurance, benefit and compensation programs, including stock-based compensation; and certain foreign currency gains and losses. +In addition to the foreign currency gains and losses recognized in Corporate revenues, foreign currency results in Corporate include gains and losses resulting from the difference between actual foreign currency exchange rates and standard rates used to record non-functional currency denominated product purchases within the NIKE Brand geographic operating segments and Converse; related foreign currency hedge results; conversion gains and losses arising from remeasurement of monetary assets and liabilities in non-functional currencies; and certain other foreign currency derivative instruments. +FISCAL 2022 COMPARED TO FISCAL 2021 +Corporate's loss before interest and taxes decreased $42 million during fiscal 2022, primarily due to the following: +• a favorable change in net foreign currency gains and losses of $219 million related to the remeasurement of monetary assets and liabilities denominated in non-functional currencies and the impact of certain foreign currency derivative instruments, reported as a component of consolidated Other (income) expense, net; +• an unfavorable change of $190 million related to the difference between actual foreign currency exchange rates and standard foreign currency exchange rates assigned to the NIKE Brand geographic operating segments and Converse, net of hedge gains and losses; these results are reported as a component of consolidated gross margin; and +• a favorable change of $13 million largely due to higher restructuring-related costs associated with our organizational realignment in the prior year and, to a lesser extent, a net favorable impact related to our strategic distributor partnership transition within APLA in the current year, partially offset by the one-time charge related to the deconsolidation of our Russian operations and higher administrative and wage-related expenses in fiscal 2022. +FOREIGN CURRENCY EXPOSURES AND HEDGING PRACTICES +OVERVIEW +As a global company with significant operations outside the United States, in the normal course of business we are exposed to risk arising from changes in currency exchange rates. Our primary foreign currency exposures arise from the recording of transactions denominated in non-functional currencies and the translation of foreign currency denominated results of operations, financial position and cash flows into U.S. Dollars. +Our foreign exchange risk management program is intended to lessen both the positive and negative effects of currency fluctuations on our consolidated results of operations, financial position and cash flows. We manage global foreign exchange risk centrally on a portfolio basis to address those risks material to NIKE, Inc. We manage these exposures by taking advantage of natural offsets and currency correlations existing within the portfolio and, where practical and material, by hedging a portion of the remaining exposures using derivative instruments such as forward contracts and options. As described below, the implementation of the NIKE Trading Company (NTC) and our foreign currency adjustment program enhanced our ability to manage our foreign exchange risk by increasing the natural offsets and currency correlation benefits existing within our portfolio of foreign exchange exposures. Our hedging policy is designed to partially or entirely offset the impact of exchange rate changes on the underlying net exposures being hedged. Where exposures are hedged, our program has the effect of delaying the impact of exchange rate movements on our Consolidated Financial Statements; the length of the delay is dependent upon hedge horizons. We do not hold or issue derivative instruments for trading or speculative purposes. +Refer to Note 6 — Fair Value Measurements and Note 14 — Risk Management and Derivatives in the accompanying Notes to the Consolidated Financial Statements for additional description of outstanding derivatives at each reported period end. +2022 FORM 10-K 42 +Table of Contents +TRANSACTIONAL EXPOSURES +We conduct business in various currencies and have transactions which subject us to foreign currency risk. Our most significant transactional foreign currency exposures are: +• Product Costs — NIKE's product costs are exposed to fluctuations in foreign currencies in the following ways: +1. Product purchases denominated in currencies other than the functional currency of the transacting entity: +a. Certain NIKE entities purchase product from the NTC, a wholly-owned sourcing hub that buys NIKE branded products from third-party factories, predominantly in U.S. Dollars. The NTC, whose functional currency is the U.S. Dollar, then sells the products to NIKE entities in their respective functional currencies. NTC sales to a NIKE entity with a different functional currency results in a foreign currency exposure for the NTC. +b. Other NIKE entities purchase product directly from third-party factories in U.S. Dollars. These purchases generate a foreign currency exposure for those NIKE entities with a functional currency other than the U.S. Dollar. +In both purchasing scenarios, a weaker U.S. Dollar reduces inventory costs incurred by NIKE whereas a stronger U.S. Dollar increases its cost. +2. Factory input costs: NIKE operates a foreign currency adjustment program with certain factories. The program is designed to more effectively manage foreign currency risk by assuming certain of the factories' foreign currency exposures, some of which are natural offsets to our existing foreign currency exposures. Under this program, our payments to these factories are adjusted for rate fluctuations in the basket of currencies (“factory currency exposure index”) in which the labor, materials and overhead costs incurred by the factories in the production of NIKE branded products (“factory input costs”) are denominated. +For the currency within the factory currency exposure indices that is the local or functional currency of the factory, the currency rate fluctuation affecting the product cost is recorded within Inventories and is recognized in Cost of sales when the related product is sold to a third-party. All currencies within the indices, excluding the U.S. Dollar and the local or functional currency of the factory, are recognized as embedded derivative contracts and are recorded at fair value through Other (income) expense, net. Refer to Note 14 — Risk Management and Derivatives in the accompanying Notes to the Consolidated Financial Statements for additional detail. +As an offset to the impacts of the fluctuating U.S. Dollar on our non-functional currency denominated product purchases described above, a strengthening U.S. Dollar against the foreign currencies within the factory currency exposure indices reduces NIKE's U.S. Dollar inventory cost. Conversely, a weakening U.S. Dollar against the indexed foreign currencies increases our inventory cost. +• Non-Functional Currency Denominated External Sales — A portion of our NIKE Brand and Converse revenues associated with European operations are earned in currencies other than the Euro (e.g., the British Pound) but are recognized at a subsidiary that uses the Euro as its functional currency. These sales generate a foreign currency exposure. +• Other Costs — Non-functional currency denominated costs, such as endorsement contracts, also generate foreign currency risk, though to a lesser extent. In certain cases, the Company has entered into contractual agreements which have payments indexed to foreign currencies that create embedded derivative contracts recorded at fair value through Other (income) expense, net. Refer to Note 14 — Risk Management and Derivatives in the accompanying Notes to the Consolidated Financial Statements for additional detail. +• Non-Functional Currency Denominated Monetary Assets and Liabilities — Our global subsidiaries have various assets and liabilities, primarily receivables and payables, including intercompany receivables and payables, denominated in currencies other than their functional currencies. These balance sheet items are subject to remeasurement which may create fluctuations in Other (income) expense, net within our consolidated results of operations. +MANAGING TRANSACTIONAL EXPOSURES +Transactional exposures are managed on a portfolio basis within our foreign currency risk management program. We manage these exposures by taking advantage of natural offsets and currency correlations that exist within the portfolio and may also elect to use currency forward and option contracts to hedge the remaining effect of exchange rate fluctuations on probable forecasted future cash flows, including certain product cost exposures, non-functional currency denominated external sales and other costs described above. Generally, these are accounted for as cash flow hedges, except for hedges of the embedded derivative components of the product cost exposures and other contractual agreements. +2022 FORM 10-K 43 +Table of Contents +Certain currency forward contracts used to manage the foreign exchange exposure of non-functional currency denominated monetary assets and liabilities subject to remeasurement, and embedded derivative contracts are not formally designated as hedging instruments. Accordingly, changes in fair value of these instruments are recognized in Other (income) expense, net and are intended to offset the foreign currency impact of the remeasurement of the related non-functional currency denominated asset or liability or the embedded derivative contract being hedged. +TRANSLATIONAL EXPOSURES +Many of our foreign subsidiaries operate in functional currencies other than the U.S. Dollar. Fluctuations in currency exchange rates create volatility in our reported results as we are required to translate the balance sheets, operational results and cash flows of these subsidiaries into U.S. Dollars for consolidated reporting. The translation of foreign subsidiaries' non-U.S. Dollar denominated balance sheets into U.S. Dollars for consolidated reporting results in a cumulative translation adjustment to Accumulated other comprehensive income (loss) within Shareholders' equity. In the translation of our Consolidated Statements of Income, a weaker U.S. Dollar in relation to foreign functional currencies benefits our consolidated earnings whereas a stronger U.S. Dollar reduces our consolidated earnings. The impact of foreign exchange rate fluctuations on the translation of our consolidated Revenues was a detriment of approximately $295 million, a benefit of approximately $893 million and a detriment of approximately $867 million for the years ended May 31, 2022, 2021 and 2020, respectively. The impact of foreign exchange rate fluctuations on the translation of our Income before income taxes was a detriment of approximately $87 million, a benefit of approximately $260 million and a detriment of approximately $212 million for the years ended May 31, 2022, 2021 and 2020, respectively. +Management generally identifies hyper-inflationary markets as those markets whose cumulative inflation rate over a three-year period exceeds 100%. Management has concluded our Argentina subsidiary within our APLA operating segment is operating in a hyper-inflationary market. As a result, beginning in the second quarter of fiscal 2019, the functional currency of our Argentina subsidiary changed from the local currency to the U.S. Dollar. As of and for the period ended May 31, 2022, this change did not have a material impact on our results of operations or financial condition, and we do not anticipate it will have a material impact in future periods based on current rates. +MANAGING TRANSLATIONAL EXPOSURES +To minimize the impact of translating foreign currency denominated revenues and expenses into U.S. Dollars for consolidated reporting, certain foreign subsidiaries use excess cash to purchase U.S. Dollar denominated available-for-sale investments. The variable future cash flows associated with the purchase and subsequent sale of these U.S. Dollar denominated investments at non-U.S. Dollar functional currency subsidiaries creates a foreign currency exposure that qualifies for hedge accounting under U.S. GAAP. We utilize forward contracts and/or options to mitigate the variability of the forecasted future purchases and sales of these U.S. Dollar investments. The combination of the purchase and sale of the U.S. Dollar investment and the hedging instrument has the effect of partially offsetting the year-over-year foreign currency translation impact on net earnings in the period the investments are sold. Hedges of the purchase of U.S. Dollar denominated available-for-sale investments are accounted for as cash flow hedges. +We estimate the combination of translation of foreign currency-denominated profits from our international businesses and the year-over-year change in foreign currency related gains and losses included in Other (income) expense, net had favorable impacts of approximately $132 million and $19 million and an unfavorable impact of approximately $91 million on our Income before income taxes for the years ended May 31, 2022, 2021 and 2020, respectively. +NET INVESTMENTS IN FOREIGN SUBSIDIARIES +We are also exposed to the impact of foreign exchange fluctuations on our investments in wholly-owned foreign subsidiaries denominated in a currency other than the U.S. Dollar, which could adversely impact the U.S. Dollar value of these investments and therefore the value of future repatriated earnings. We have, in the past, hedged and may, in the future, hedge net investment positions in certain foreign subsidiaries to mitigate the effects of foreign exchange fluctuations on these net investments. These hedges are accounted for as net investment hedges in accordance with U.S. GAAP. There were no outstanding net investment hedges as of May 31, 2022 and 2021. There were no cash flows from net investment hedge settlements for the years ended May 31, 2022, 2021 and 2020. +2022 FORM 10-K 44 +Table of Contents +LIQUIDITY AND CAPITAL RESOURCES +CASH FLOW ACTIVITY +Cash provided (used) by operations was an inflow of $5,188 million for fiscal 2022 compared to $6,657 million for fiscal 2021. Net income, adjusted for non-cash items, generated $6,848 million of operating cash inflow for fiscal 2022 compared to $6,612 million for fiscal 2021. The net change in working capital and other assets and liabilities resulted in a decrease to Cash provided (used) by operations of $1,660 million for fiscal 2022, compared to an increase of $45 million for fiscal 2021. The net change in working capital was unfavorably impacted by a $2,183 million increase in Inventories, partially offset by a favorable impact from a $1,102 million decrease in Accounts receivable. These changes were, in part, due to supply chain constraints, which caused higher levels of in-transit inventory and therefore a lower supply of available inventory to meet consumer demand. +Cash provided (used) by investing activities was an outflow of $1,524 million for fiscal 2022, compared to an outflow of $3,800 million for fiscal 2021, primarily driven by the net change in short-term investments. During fiscal 2022, the net change in short-term investments (including sales, maturities and purchases) resulted in a cash outflow of $747 million compared to a cash outflow of $3,276 million in fiscal 2021. Additionally, during fiscal 2022, we continued investing in our infrastructure to support future growth, specifically focused around digital capabilities, our end-to-end technology foundation, our corporate facilities and improvements across our supply chain. In future periods, we expect to make annual capital expenditures of approximately 3% of annual revenues. +Cash provided (used) by financing activities was an outflow of $4,836 million for fiscal 2022 compared to an outflow of $1,459 million for fiscal 2021. This change was driven by our resumption of the share repurchase program in the fourth quarter of fiscal 2021, resulting in $4,014 million of share repurchases during fiscal 2022 compared to $608 million during fiscal 2021. +In fiscal 2022, we purchased 27.3 million shares of NIKE's Class B Common Stock for $3,994 million (an average price of $146.11 per share) under the four-year, $15 billion share repurchase program approved by the Board of Directors in June 2018. As of May 31, 2022, we had repurchased 77.4 million shares at a cost of $8,663 million (an average price of $111.98 per share) under this program. In June 2022, the Board of Directors authorized a new four-year, $18 billion program to repurchase shares of the Company's Class B common stock. The new program will replace the current $15 billion share repurchase program, which will be terminated in fiscal 2023. Repurchases under the new program will be made in open market or privately negotiated transactions in compliance with the Securities and Exchange Commission Rule 10b-18, subject to market conditions, applicable legal requirements and other relevant factors. The new share repurchase program does not obligate the Company to acquire any particular amount of common stock, and it may be suspended at any time at our discretion. We continue to expect funding of share repurchases will come from operating cash flows and excess cash. The timing and the amount of share repurchases will be dictated by our capital needs and stock market conditions. +CAPITAL RESOURCES +On July 23, 2019, we filed a shelf registration statement (the “Shelf”) with the U.S. Securities and Exchange Commission (SEC) which permits us to issue an unlimited amount of debt securities from time to time. The Shelf expires on July 23, 2022, and we plan to file a new shelf registration statement with the SEC in July 2022. +On March 11, 2022, we entered into a 364-day committed credit facility agreement with a syndicate of banks which provides for up to $1 billion of borrowings, with the option to increase borrowings up to $1.5 billion in total with lender approval. The facility matures on March 10, 2023, with an option to extend the maturity date an additional 364 days. This facility replaces the prior $1 billion 364-day credit facility agreement entered into on March 15, 2021, which would have matured on March 14, 2022. Refer to Note 7 — Short-Term Borrowings and Credit Lines for additional information. +On March 11, 2022, we also entered into a five-year committed credit facility agreement with a syndicate of banks which provides for up to $2 billion of borrowings, with the option to increase borrowings up to $3 billion in total with lender approval. The facility matures on March 11, 2027, with options to extend the maturity date up to an additional two years. This facility replaces the prior $2 billion five-year credit facility agreement entered into on August 16, 2019, which would have matured on August 16, 2024. Refer to Note 7 — Short-Term Borrowings and Credit Lines for additional information. +We currently have long-term debt ratings of AA- and A1 from Standard and Poor's Corporation and Moody's Investor Services, respectively. As it relates to our committed credit facilities entered into on March 11, 2022, if our long-term debt ratings were to decline, the facility fees and interest rates would increase. Conversely, if our long-term debt ratings were to improve, the facility fees and interest rates would decrease. Changes in our long-term debt ratings would not trigger acceleration of maturity of any then-outstanding borrowings or any future borrowings under the committed credit facilities. Under these facilities, we have agreed to various covenants. These covenants include limits on our disposal of assets and the amount of debt secured by liens we may incur. In the event we were to have any borrowings outstanding under these facilities, failed to meet any covenant and were unable to obtain a waiver from a majority of the banks in the syndicate, any borrowings would become immediately due and +2022 FORM 10-K 45 +Table of Contents +payable. As of May 31, 2022, we were in full compliance with each of these covenants and believe it is unlikely we will fail to meet any of these covenants in the foreseeable future. +Liquidity is also provided by our $3 billion commercial paper program. As of and for the fiscal year ended May 31, 2022, we did not have any borrowings outstanding under our $3 billion program. As of May 31, 2021, we had no commercial paper outstanding. +We may continue to issue commercial paper or other debt securities depending on general corporate needs. +To date, we have not experienced difficulty accessing the credit markets; however, future volatility in the capital markets may increase costs associated with issuing commercial paper or other debt instruments or affect our ability to access those markets. +As of May 31, 2022, we had cash, cash equivalents and short-term investments totaling $13.0 billion, primarily consisting of commercial paper, corporate notes, deposits held at major banks, money market funds, U.S. government sponsored enterprise obligations, U.S. Treasury obligations and other investment grade fixed-income securities. Our fixed-income investments are exposed to both credit and interest rate risk. All of our investments are investment grade to minimize our credit risk. While individual securities have varying durations, as of May 31, 2022, the weighted-average days to maturity of our cash equivalents and short-term investments portfolio was 113 days. +We believe that existing cash, cash equivalents, short-term investments and cash generated by operations, together with access to external sources of funds as described above, will be sufficient to meet our domestic and foreign capital needs in the foreseeable future. +Our material cash requirements as of May 31, 2022, were as follows: +• Debt Obligations — Refer to Note 7 — Short-Term Borrowings and Credit Lines and Note 8 — Long-Term Debt in the accompanying Notes to the Consolidated Financial Statements for further information. +• Operating Leases — Refer to Note 19 — Leases in the accompanying Notes to the Consolidated Financial Statements for further information. +• Endorsement Contracts — As of May 31, 2022, we had endorsement contract obligations of $7.6 billion, with $1.3 billion payable within 12 months, representing approximate amounts of base compensation and minimum guaranteed royalty fees we are obligated to pay athlete, public figure, sport team and league endorsers of our products. Actual payments under some contracts may be higher than these amounts as these contracts provide for bonuses to be paid to the endorsers based upon athletic achievements and/or royalties on product sales in future periods. Actual payments under some contracts may also be lower as these contracts include provisions for reduced payments if athletic performance declines in future periods. In addition to the cash payments, we are obligated to furnish our endorsers with NIKE product for their use. It is not possible to determine how much we will spend on this product on an annual basis as the amount of product provided to the endorsers will depend on many factors and the contracts generally do not stipulate a minimum amount of cash to be spent on the product. +• Product Purchase Obligations — As of May 31, 2022, we had product purchase obligations of $6.6 billion, all of which are payable within the next 12 months. Product purchase obligations represent agreements (including open purchase orders) to purchase products in the ordinary course of business that are enforceable and legally binding and specify all significant terms. We generally order product at least four to five months in advance of sale based primarily on advanced orders received from external wholesale customers and internal orders from our direct to consumer operations. In some cases, prices are subject to change throughout the production process. +• Other Purchase Obligations — As of May 31, 2022, we had $3.1 billion of other purchase obligations, with $1.7 billion payable within the next 12 months. Other purchase obligations primarily include technology investments, construction, service and marketing commitments, including marketing commitments associated with endorsement contracts, made in the ordinary course of business. The amounts represent the minimum payments required by legally binding contracts and agreements that specify all significant terms, and may include open purchase orders for non-product purchases. +In addition to the above, we have long-term obligations for uncertain tax positions and various post-retirement benefits for which we are not able to reasonably estimate when cash payments will occur. Refer to Note 9 — Income Taxes and Note 13 — Benefit Plans in the accompanying Notes to the Consolidated Financial Statements for further information related to uncertain tax positions and post-retirement benefits, respectively. +As a part of the transition tax related to the Tax Cuts and Jobs Act, as of May 31, 2022, we had $730 million in estimated future cash payments, with $86 million payable within the next 12 months. These amounts represent the transition tax on deemed repatriation of undistributed earnings of foreign subsidiaries, which are reflected net of foreign tax credits we utilized. Refer to Part II, Item 8. Financial Statements and Supplementary Data, Note 9 - Income Taxes, in our fiscal 2020 Form 10-K, which was filed with the United States Securities and Exchange Commission on July 24, 2020, for additional information. +2022 FORM 10-K 46 +Table of Contents +Refer to Note 18 — Commitments and Contingencies in the accompanying Notes to the Consolidated Financial Statements for further information related to our off-balance sheet arrangements, bank guarantees and letters of credit. +OFF-BALANCE SHEET ARRANGEMENTS +In connection with various contracts and agreements, we routinely provide indemnification relating to the enforceability of intellectual property rights, coverage for legal issues that arise and other items where we are acting as the guarantor. Currently, we have several such agreements in place. Based on our historical experience and the estimated probability of future loss, we have determined that the fair value of such indemnification is not material to our financial position or results of operations. +NEW ACCOUNTING PRONOUNCEMENTS +We do not expect that any recently issued accounting pronouncements will have a material effect on our Consolidated Financial Statements. +CRITICAL ACCOUNTING ESTIMATES +Our previous discussion and analysis of our financial condition and results of operations are based upon our Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. Note 1 — Summary of Significant Accounting Policies in the accompanying Notes to the Consolidated Financial Statements describes the significant accounting policies and methods used in the preparation of our Consolidated Financial Statements. +We believe the assumptions and judgments involved in the accounting estimates described below have the greatest potential impact on our Consolidated Financial Statements, so we consider these to be our critical accounting estimates. Management has reviewed and discussed these critical accounting estimates with the Audit & Finance Committee of the Board of Directors. +These policies require that we make estimates in the preparation of our Consolidated Financial Statements as of a given date. Because of the uncertainty inherent in these matters, actual results could differ from the estimates we use in applying the critical accounting estimates. Within the context of these critical accounting estimates, we are not currently aware of any reasonably likely events or circumstances that would result in materially different amounts being reported. +REVENUE RECOGNITION +Revenue is recognized when transfer of control to the customer has occurred, which is either upon shipment or upon receipt, depending on the terms of sale. The transaction price is determined based upon the invoiced sales price, less anticipated sales returns, discounts and miscellaneous claims from customers. +The provision for anticipated sales returns consists of both contractual return rights and discretionary authorized returns. Provisions for post-invoice sales discounts consist of both contractual programs and discretionary discounts that are expected to be granted at a later date. +Estimates of discretionary authorized returns, discounts and claims are based on (1) historical rates, (2) specific identification of outstanding returns not yet received from customers and outstanding discounts and claims and (3) estimated returns, discounts and claims expected but not yet finalized with customers. Actual returns, discounts and claims in any future period are inherently uncertain and may differ from estimates recorded. If actual or expected future returns, discounts or claims were significantly different than reserves established, a reduction or increase to net revenues would be recorded in the period in which such determination was made. +Refer also to Note 1 — Summary of Significant Accounting Policies and Note 16 — Revenues in the accompanying Notes to the Consolidated Financial Statements for additional information. +INVENTORY RESERVES +We make ongoing estimates relating to the net realizable value of inventories based upon our assumptions about future demand and market conditions. If we estimate the net realizable value of our inventory is less than the cost of the inventory recorded on our books, we record a reserve equal to the difference between the cost of the inventory and the estimated net realizable value. This reserve is recorded as a charge to Cost of sales. If changes in market conditions result in reductions to the estimated net realizable value of our inventory below our previous estimate, we would increase our reserve in the period in which we made such a determination. +2022 FORM 10-K 47 +Table of Contents +CONTINGENT PAYMENTS UNDER ENDORSEMENT CONTRACTS +A significant amount of our Demand creation expense relates to payments under endorsement contracts. In general, endorsement payments are expensed on a straight-line basis over the term of the contract. However, certain contract elements may be accounted for differently based upon the facts and circumstances of each individual contract. +Certain contracts provide for contingent payments to endorsers based upon specific achievements in their sports (e.g., winning a championship). We record Demand creation expense for these amounts when the endorser achieves the specific goal. +Certain contracts provide for variable payments based upon endorsers maintaining a level of performance in their sport over an extended period of time (e.g., maintaining a specified ranking in a sport for a year). When we determine payments are probable, the amounts are reported in Demand creation expense ratably over the contract period based on our best estimate of the endorser's performance. In these instances, to the extent actual payments to the endorser differ from our estimate due to changes in the endorser's performance, adjustments to Demand creation expense may be recorded in a future period. +Certain contracts provide for royalty payments to endorsers based upon a predetermined percent of sales of particular products, which we record in Cost of sales as the related sales occur. For contracts containing minimum guaranteed royalty payments, we record the amount of any guaranteed payment in excess of that earned through sales of product within Demand creation expense. +PROPERTY, PLANT AND EQUIPMENT AND DEFINITE-LIVED ASSETS +We review the carrying value of long-lived assets or asset groups to be used in operations whenever events or changes in circumstances indicate the carrying amount of the assets might not be recoverable. Factors that would necessitate an impairment assessment include a significant adverse change in the extent or manner in which an asset is used, a significant adverse change in legal factors or the business climate that could affect the value of the asset or a significant decline in the observable market value of an asset, among others. If such facts indicate a potential impairment, we would assess the recoverability of an asset group by determining if the carrying value of the asset group exceeds the sum of the projected undiscounted cash flows expected to result from the use and eventual disposition of the assets over the remaining economic life of the primary asset in the asset group. If the recoverability test indicates the carrying value of the asset group is not recoverable, we will estimate the fair value of the asset group using appropriate valuation methodologies that would typically include an estimate of discounted cash flows. Any impairment would be measured as the difference between the asset group's carrying amount and its estimated fair value. +HEDGE ACCOUNTING FOR DERIVATIVES +We use derivative contracts to hedge certain anticipated foreign currency and interest rate transactions as well as certain non-functional currency monetary assets and liabilities. When the specific criteria to qualify for hedge accounting has been met, changes in the fair value of contracts hedging probable forecasted future cash flows are recorded in Accumulated other comprehensive income (loss), rather than Net income, until the underlying hedged transaction affects Net income. In most cases, this results in gains and losses on hedge derivatives being released from Accumulated other comprehensive income (loss) into Net income sometime after the maturity of the derivative. One of the criteria for this accounting treatment is that the notional value of these derivative contracts should not be in excess of the designated amount of anticipated transactions. By their very nature, our estimates of anticipated transactions may fluctuate over time and may ultimately vary from actual transactions. When the designated amount of anticipated or actual transactions decline below hedged levels, or if it is no longer probable a forecasted transaction will occur by the end of the originally specified time period or within an additional two-month period of time thereafter, we are required to reclassify the cumulative change in fair value of the over-hedged portion of the related hedge contract from Accumulated other comprehensive income (loss) to Other (income) expense, net during the quarter in which the decrease occurs. In rare circumstances, the additional period of time may exceed two months due to extenuating circumstances related to the nature of the forecasted transaction that are outside our control or influence. +INCOME TAXES +We are subject to taxation in the United States, as well as various state and foreign jurisdictions. The determination of our provision for income taxes requires significant judgment, the use of estimates and the interpretation and application of complex tax laws. On an interim basis, we estimate our effective tax rate for the full fiscal year. This estimated annual effective tax rate is then applied to the year-to-date Income before income taxes excluding infrequently occurring or unusual items, to determine the year-to-date Income tax expense. The income tax effects of infrequent or unusual items are recognized in the interim period in which they occur. As the fiscal year progresses, we continually refine our estimate based upon actual events and earnings by jurisdiction during the year. This continual estimation process periodically results in a change to our expected effective tax rate for the fiscal year. When this occurs, we adjust the income tax provision during the quarter in which the change in estimate occurs. +2022 FORM 10-K 48 +Table of Contents +We record valuation allowances against our deferred tax assets, when necessary. Realization of deferred tax assets (such as net operating loss carry-forwards) is dependent on future taxable earnings and is therefore uncertain. At least quarterly, we assess the likelihood that our deferred tax asset balance will be recovered from future taxable income. To the extent we believe that recovery is not likely, we establish a valuation allowance against our net deferred tax asset, which increases our Income tax expense in the period when such determination is made. +We historically had not provided for deferred income taxes on the undistributed earnings of certain foreign subsidiaries as they were considered indefinitely reinvested outside the U.S. During the fourth quarter of fiscal 2022, in connection with a change in our legal entity structure that reduced the withholding tax consequences of a decision to remit undistributed earnings in the Netherlands, we changed our assertion regarding our ability and intent to indefinitely reinvest undistributed earnings of certain foreign subsidiaries. We have evaluated our historic indefinite reinvestment assertion as a result of the legal entity restructuring and determined that any historical or future undistributed earnings of foreign subsidiaries are no longer considered to be indefinitely reinvested. There is no deferred tax liability associated with those earnings. +On a quarterly basis, we evaluate the probability a tax position will be effectively sustained and the appropriateness of the amount recognized for uncertain tax positions based on factors including changes in facts or circumstances, changes in tax law, settled audit issues and new audit activity. Changes in our assessment may result in the recognition of a tax benefit or an additional charge to the tax provision in the period our assessment changes. We recognize interest and penalties related to income tax matters in Income tax expense. +Refer to Note 9 — Income Taxes in the accompanying Notes to the Consolidated Financial Statements for additional information. +OTHER CONTINGENCIES +In the ordinary course of business, we are involved in legal proceedings regarding contractual and employment relationships, product liability claims, trademark rights and a variety of other matters. We record contingent liabilities resulting from claims against us when a loss is assessed to be probable and the amount of the loss is reasonably estimable. Assessing probability of loss and estimating probable losses requires analysis of multiple factors, including in some cases judgments about the potential actions of third-party claimants and courts. Recorded contingent liabilities are based on the best information available and actual losses in any future period are inherently uncertain. If future adjustments to estimated probable future losses or actual losses exceed our recorded liability for such claims, we would record additional charges during the period in which the actual loss or change in estimate occurred. In addition to contingent liabilities recorded for probable losses, we disclose contingent liabilities when there is a reasonable possibility the ultimate loss will materially exceed the recorded liability. +Refer to Note 18 — Commitments and Contingencies in the accompanying Notes to the Consolidated Financial Statements for additional information. +2022 FORM 10-K 49 +Table of Contents +ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK +In the normal course of business and consistent with established policies and procedures, we employ a variety of financial instruments to manage exposure to fluctuations in the value of foreign currencies and interest rates. It is our policy to utilize these financial instruments only where necessary to finance our business and manage such exposures; we do not enter into these transactions for trading or speculative purposes. +We are exposed to foreign currency fluctuations, primarily as a result of our international sales, product sourcing and funding activities. Our foreign exchange risk management program is intended to lessen both the positive and negative effects of currency fluctuations on our consolidated results of operations, financial position and cash flows. We use forward and option contracts to hedge certain anticipated, but not yet firmly committed, transactions as well as certain firm commitments and the related receivables and payables, including third-party and intercompany transactions. We have, in the past, and may in the future, also use forward or options contracts to hedge our investment in the net assets of certain international subsidiaries to offset foreign currency translation adjustments related to our net investment in those subsidiaries. Where exposures are hedged, our program has the effect of delaying the impact of exchange rate movements on our Consolidated Financial Statements. +The timing for hedging exposures, as well as the type and duration of the hedge instruments employed, are guided by our hedging policies and determined based upon the nature of the exposure and prevailing market conditions. Typically, the Company may enter into hedge contracts starting up to 12 to 24 months in advance of the forecasted transaction and may place incremental hedges up to 100% of the exposure by the time the forecasted transaction occurs. The majority of derivatives outstanding as of May 31, 2022, are designated as foreign currency cash flow hedges, primarily for Euro/U.S. Dollar, British Pound/Euro, Chinese Yuan/U.S. Dollar, and Japanese Yen/U.S. Dollar currency pairs. Refer to Note 14 — Risk Management and Derivatives in the accompanying Notes to the Consolidated Financial Statements for additional information. +Our earnings are also exposed to movements in short- and long-term market interest rates. Our objective in managing this interest rate exposure is to limit the impact of interest rate changes on earnings and cash flows and to reduce overall borrowing costs. To achieve these objectives, we maintain a mix of commercial paper, bank loans, and fixed-rate debt of varying maturities. +MARKET RISK MEASUREMENT +We monitor foreign exchange risk, interest rate risk and related derivatives using a variety of techniques including a review of market value, sensitivity analysis and Value-at-Risk (“VaR”). Our market-sensitive derivative and other financial instruments are foreign currency forward contracts, foreign currency option contracts, intercompany loans denominated in non-functional currencies and fixed interest rate U.S. Dollar denominated debt. +We use VaR to monitor the foreign exchange risk of our foreign currency forward and foreign currency option derivative instruments only. The VaR determines the maximum potential one-day loss in the fair value of these foreign exchange rate-sensitive financial instruments. The VaR model estimates assume normal market conditions and a 95% confidence level. There are various modeling techniques that can be used in the VaR computation. Our computations are based on interrelationships between currencies and interest rates (a “variance/co-variance” technique). These interrelationships are a function of foreign exchange currency market changes and interest rate changes over the preceding one-year period. The value of foreign currency options does not change on a one-to-one basis with changes in the underlying currency rate. We adjust the potential loss in option value for the estimated sensitivity (the “delta” and “gamma”) to changes in the underlying currency rate. This calculation reflects the impact of foreign currency rate fluctuations on the derivative instruments only and does not include the impact of such rate fluctuations on non-functional currency transactions (such as anticipated transactions, firm commitments, cash balances and accounts and loans receivable and payable), including those which are hedged by these instruments. +The VaR model is a risk analysis tool and does not purport to represent actual losses in fair value we will incur nor does it consider the potential effect of favorable changes in market rates. It also does not represent the full extent of the possible loss that may occur. Actual future gains and losses will differ from those estimated because of changes or differences in market rates and interrelationships, hedging instruments and hedge percentages, timing and other factors. +The estimated maximum one-day loss in fair value on our foreign currency sensitive derivative financial instruments, derived using the VaR model, was $99 million and $92 million as of May 31, 2022 and 2021, respectively. The VaR increased year-over-year as a result of an increase in foreign currency volatilities as of May 31, 2022. Such a hypothetical loss in the fair value of our derivatives would be offset by increases in the value of the underlying transactions being hedged. The average monthly change in the fair values of foreign currency forward and foreign currency option derivative instruments was $170 million and $184 million during fiscal 2022 and fiscal 2021, respectively. +2022 FORM 10-K 50 +Table of Contents +The instruments not included in the VaR are intercompany loans denominated in non-functional currencies and fixed interest rate U.S. Dollar denominated debt. Intercompany loans and related interest amounts are eliminated in consolidation. Furthermore, our non-functional currency intercompany loans are substantially hedged against foreign exchange risk through the use of forward contracts, which are included in the VaR calculation above. Therefore, we consider the interest rate and foreign currency market risks associated with our non-functional currency intercompany loans to be immaterial to our consolidated financial position, results of operations and cash flows. +Details of third-party debt are provided in the table below. The table presents principal cash flows and related weighted average interest rates by expected maturity dates. +EXPECTED MATURITY DATE YEAR ENDING MAY 31, +(Dollars in millions) +2023 2024 2025 2026 2027 THEREAFTER TOTAL FAIR VALUE +Interest Rate Risk +Long-term U.S. Dollar debt — Fixed rate +Principal payments $ 500 $ — $ 1,000 $ — $ 2,000 $ 6,000 $ 9,500 $ 8,933 +Average interest rate 2.3 % 0.0 % 2.4 % 0.0 % 2.6 % 3.3 % 3.0 % +2022 FORM 10-K 51 +Table of Contents +ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA +Management of NIKE, Inc. is responsible for the information and representations contained in this report. The financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and include certain amounts based on our best estimates and judgments. Other financial information in this report is consistent with these financial statements. +Our accounting systems include controls designed to reasonably assure assets are safeguarded from unauthorized use or disposition and provide for the preparation of financial statements in conformity with U.S. GAAP. These systems are supplemented by the selection and training of qualified financial personnel and an organizational structure providing for appropriate segregation of duties. +An internal corporate audit department reviews the results of its work with the Audit & Finance Committee of the Board of Directors, presently comprised of three outside, independent directors. The Audit & Finance Committee is responsible for the appointment of the independent registered public accounting firm and reviews, with the independent registered public accounting firm, management and the internal corporate audit staff, the scope and the results of the annual audit, the effectiveness of the accounting control system and other matters relating to the financial affairs of NIKE as the Audit & Finance Committee deems appropriate. The independent registered public accounting firm and the internal corporate auditors have full access to the Audit & Finance Committee, with and without the presence of management, to discuss any appropriate matters. +2022 FORM 10-K 52 +Table of Contents +MANAGEMENT'S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING +Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13(a) - 15(f) and Rule 15(d) - 15(f) of the Securities Exchange Act of 1934, as amended. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the financial statements for external purposes in accordance with generally accepted accounting principles in the United States of America. Internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of assets of the Company that could have a material effect on the financial statements. +Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +Under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, our management conducted an evaluation of the effectiveness of our internal control over financial reporting based upon the framework in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on the results of our evaluation, our management concluded that our internal control over financial reporting was effective as of May 31, 2022. +PricewaterhouseCoopers LLP, an independent registered public accounting firm, has audited (1) the Consolidated Financial Statements and (2) the effectiveness of our internal control over financial reporting as of May 31, 2022, as stated in their report herein. +John J. Donahoe II Matthew Friend +President and Chief Executive Officer Executive Vice President and Chief Financial Officer +2022 FORM 10-K 53 +Table of Contents +Report of Independent Registered Public Accounting Firm +To the Board of Directors and Shareholders of NIKE, Inc. +Opinions on the Financial Statements and Internal Control over Financial Reporting +We have audited the accompanying consolidated balance sheets of NIKE, Inc. and its subsidiaries (the “Company”) as of May 31, 2022 and 2021, and the related consolidated statements of income, of comprehensive income, of shareholders' equity and of cash flows for each of the three years in the period ended May 31, 2022, including the related notes and financial statement schedule listed in the index appearing under Item 15(a)(2) (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of May 31, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). +In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of May 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended May 31, 2022 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of May 31, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO. +Change in Accounting Principle +As discussed in Note 1 to the consolidated financial statements, the Company changed the manner in which it accounts for leases as of June 1, 2019. +Basis for Opinions +The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. +Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. +Definition and Limitations of Internal Control over Financial Reporting +A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. +2022 FORM 10-K 54 +Table of Contents +Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +Critical Audit Matters +The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. +Accounting for Income Taxes +As described in Notes 1 and 9 to the consolidated financial statements, the Company recorded income tax expense of $605 million for the year ended May 31, 2022, and has net deferred tax assets of $1,665 million, including a valuation allowance of $19 million, and total gross unrecognized tax benefits, excluding related interest and penalties, of $848 million as of May 31, 2022, $626 million of which would affect the Company's effective tax rate if recognized in future periods. The realization of deferred tax assets is dependent on future taxable earnings. Management assesses the scheduled reversal of deferred tax liabilities, projected future taxable income and available tax planning strategies and considers foreign tax credit utilization in making this assessment of realization. A valuation allowance is established against the net deferred tax asset to the extent that recovery is not likely. The Company is subject to taxation in the United States, as well as various state and foreign jurisdictions. As disclosed by management, the use of significant judgment and estimates, as well as the interpretation and application of complex tax laws is required by management to determine the Company's provision for income taxes. +The principal considerations for our determination that performing procedures relating to the accounting for income taxes is a critical audit matter are a high degree of auditor judgment, subjectivity and effort in performing procedures and evaluating audit evidence relating to (i) management's assessment of complex tax laws and regulations as it relates to determining the provision for income taxes and (ii) management's assessment of the realizability of deferred tax assets, specifically related to available tax planning strategies. In addition, the audit effort involved the use of professionals with specialized skill and knowledge. +Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to income taxes, including controls over management's assessment of the realizability of deferred tax assets. These procedures also included, among others, evaluating the effect on the Company's tax provision of changes in its legal entity structure, evaluating changes in and compliance with tax laws, and testing the calculation of the provision of income taxes, including assessing management’s tax planning strategies for the utilization of deferred tax assets. Professionals with specialized skill and knowledge were used to assist in evaluating changes in and compliance with the tax laws and regulations and the provision for income taxes. +/s/ PricewaterhouseCoopers LLP +Portland, Oregon +July 21, 2022 +We have served as the Company's auditor since 1974. +2022 FORM 10-K 55 +Table of Contents +NIKE, INC. +CONSOLIDATED STATEMENTS OF INCOME +YEAR ENDED MAY 31, +(In millions, except per share data) +2022 2021 2020 +Revenues $ 46,710 $ 44,538 $ 37,403 +Cost of sales 25,231 24,576 21,162 +Gross profit 21,479 19,962 16,241 +Demand creation expense 3,850 3,114 3,592 +Operating overhead expense 10,954 9,911 9,534 +Total selling and administrative expense 14,804 13,025 13,126 +Interest expense (income), net 205 262 89 +Other (income) expense, net ( 181 ) 14 139 +Income before income taxes 6,651 6,661 2,887 +Income tax expense 605 934 348 +NET INCOME $ 6,046 $ 5,727 $ 2,539 +Earnings per common share: +Basic $ 3.83 $ 3.64 $ 1.63 +Diluted $ 3.75 $ 3.56 $ 1.60 +Weighted average common shares outstanding: +Basic 1,578.8 1,573.0 1,558.8 +Diluted 1,610.8 1,609.4 1,591.6 +The accompanying Notes to the Consolidated Financial Statements are an integral part of this statement. +2022 FORM 10-K 56 +Table of Contents +NIKE, INC. +CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME +YEAR ENDED MAY 31, +(Dollars in millions) +2022 2021 2020 +Net income $ 6,046 $ 5,727 $ 2,539 +Other comprehensive income (loss), net of tax: +Change in net foreign currency translation adjustment ( 522 ) 496 ( 148 ) +Change in net gains (losses) on cash flow hedges 1,214 ( 825 ) ( 130 ) +Change in net gains (losses) on other 6 5 ( 9 ) +Total other comprehensive income (loss), net of tax 698 ( 324 ) ( 287 ) +TOTAL COMPREHENSIVE INCOME $ 6,744 $ 5,403 $ 2,252 +The accompanying Notes to the Consolidated Financial Statements are an integral part of this statement. +2022 FORM 10-K 57 +Table of Contents +NIKE, INC. +CONSOLIDATED BALANCE SHEETS +MAY 31, +(In millions) +2022 2021 +ASSETS +Current assets: +Cash and equivalents $ 8,574 $ 9,889 +Short-term investments 4,423 3,587 +Accounts receivable, net 4,667 4,463 +Inventories 8,420 6,854 +Prepaid expenses and other current assets 2,129 1,498 +Total current assets 28,213 26,291 +Property, plant and equipment, net 4,791 4,904 +Operating lease right-of-use assets, net 2,926 3,113 +Identifiable intangible assets, net 286 269 +Goodwill 284 242 +Deferred income taxes and other assets 3,821 2,921 +TOTAL ASSETS $ 40,321 $ 37,740 +LIABILITIES AND SHAREHOLDERS' EQUITY +Current liabilities: +Current portion of long-term debt $ 500 $ — +Notes payable 10 2 +Accounts payable 3,358 2,836 +Current portion of operating lease liabilities 420 467 +Accrued liabilities 6,220 6,063 +Income taxes payable 222 306 +Total current liabilities 10,730 9,674 +Long-term debt 8,920 9,413 +Operating lease liabilities 2,777 2,931 +Deferred income taxes and other liabilities 2,613 2,955 +Commitments and contingencies (Note 18) +Redeemable preferred stock — — +Shareholders' equity: +Common stock at stated value: +Class A convertible — 305 and 305 shares outstanding +— — +Class B — 1,266 and 1,273 shares outstanding +3 3 +Capital in excess of stated value 11,484 9,965 +Accumulated other comprehensive income (loss) 318 ( 380 ) +Retained earnings (deficit) 3,476 3,179 +Total shareholders' equity 15,281 12,767 +TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 40,321 $ 37,740 +The accompanying Notes to the Consolidated Financial Statements are an integral part of this statement. +2022 FORM 10-K 58 +Table of Contents +NIKE, INC. +CONSOLIDATED STATEMENTS OF CASH FLOWS +YEAR ENDED MAY 31, +(Dollars in millions) +2022 2021 2020 +Cash provided (used) by operations: +Net income $ 6,046 $ 5,727 $ 2,539 +Adjustments to reconcile net income to net cash provided (used) by operations: +Depreciation 717 744 721 +Deferred income taxes ( 650 ) ( 385 ) ( 380 ) +Stock-based compensation 638 611 429 +Amortization, impairment and other 123 53 398 +Net foreign currency adjustments ( 26 ) ( 138 ) 23 +Changes in certain working capital components and other assets and liabilities: +(Increase) decrease in accounts receivable ( 504 ) ( 1,606 ) 1,239 +(Increase) decrease in inventories ( 1,676 ) 507 ( 1,854 ) +(Increase) decrease in prepaid expenses, operating lease right-of-use assets and other current and non-current assets ( 845 ) ( 182 ) ( 654 ) +Increase (decrease) in accounts payable, accrued liabilities, operating lease liabilities and other current and non-current liabilities 1,365 1,326 24 +Cash provided (used) by operations 5,188 6,657 2,485 +Cash provided (used) by investing activities: +Purchases of short-term investments ( 12,913 ) ( 9,961 ) ( 2,426 ) +Maturities of short-term investments 8,199 4,236 74 +Sales of short-term investments 3,967 2,449 2,379 +Additions to property, plant and equipment ( 758 ) ( 695 ) ( 1,086 ) +Other investing activities ( 19 ) 171 31 +Cash provided (used) by investing activities ( 1,524 ) ( 3,800 ) ( 1,028 ) +Cash provided (used) by financing activities: +Proceeds from borrowings, net of debt issuance costs — — 6,134 +Increase (decrease) in notes payable, net 15 ( 52 ) 49 +Repayment of borrowings — ( 197 ) ( 6 ) +Proceeds from exercise of stock options and other stock issuances 1,151 1,172 885 +Repurchase of common stock ( 4,014 ) ( 608 ) ( 3,067 ) +Dividends — common and preferred ( 1,837 ) ( 1,638 ) ( 1,452 ) +Other financing activities ( 151 ) ( 136 ) ( 52 ) +Cash provided (used) by financing activities ( 4,836 ) ( 1,459 ) 2,491 +Effect of exchange rate changes on cash and equivalents ( 143 ) 143 ( 66 ) +Net increase (decrease) in cash and equivalents ( 1,315 ) 1,541 3,882 +Cash and equivalents, beginning of year 9,889 8,348 4,466 +CASH AND EQUIVALENTS, END OF YEAR $ 8,574 $ 9,889 $ 8,348 +Supplemental disclosure of cash flow information: +Cash paid during the year for: +Interest, net of capitalized interest $ 290 $ 293 $ 140 +Income taxes 1,231 1,177 1,028 +Non-cash additions to property, plant and equipment 160 179 121 +Dividends declared and not paid 480 438 385 +The accompanying Notes to the Consolidated Financial Statements are an integral part of this statement. +2022 FORM 10-K 59 +Table of Contents +NIKE, INC. +CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY +COMMON STOCK CAPITAL IN EXCESS OF STATED VALUE ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) RETAINED EARNINGS (DEFICIT) TOTAL +CLASS A CLASS B +(In millions, except per share data) +SHARES AMOUNT SHARES AMOUNT +Balance at May 31, 2019 315 $ — 1,253 $ 3 $ 7,163 $ 231 $ 1,643 $ 9,040 +Stock options exercised 20 703 703 +Repurchase of Class B Common Stock ( 34 ) ( 161 ) ( 2,872 ) ( 3,033 ) +Dividends on common stock ($ 0.955 per share) and preferred stock ($ 0.10 per share) +( 1,491 ) ( 1,491 ) +Issuance of shares to employees, net of shares withheld for employee taxes 4 165 ( 9 ) 156 +Stock-based compensation 429 429 +Net income 2,539 2,539 +Other comprehensive income (loss) ( 287 ) ( 287 ) +Adoption of ASC Topic 842 (Note 1) ( 1 ) ( 1 ) +Balance at May 31, 2020 315 $ — 1,243 $ 3 $ 8,299 $ ( 56 ) $ ( 191 ) $ 8,055 +Stock options exercised 21 954 954 +Conversion to Class B Common Stock ( 10 ) 10 — +Repurchase of Class B Common Stock ( 5 ) ( 28 ) ( 622 ) ( 650 ) +Dividends on common stock ($ 1.070 per share) and preferred stock ($ 0.10 per share) +( 1,692 ) ( 1,692 ) +Issuance of shares to employees, net of shares withheld for employee taxes 4 129 ( 43 ) 86 +Stock-based compensation 611 611 +Net income 5,727 5,727 +Other comprehensive income (loss) ( 324 ) ( 324 ) +Balance at May 31, 2021 305 $ — 1,273 $ 3 $ 9,965 $ ( 380 ) $ 3,179 $ 12,767 +Stock options exercised 17 924 924 +Repurchase of Class B Common Stock ( 27 ) ( 186 ) ( 3,808 ) ( 3,994 ) +Dividends on common stock ($ 1.190 per share) and preferred stock ($ 0.10 per share) +( 1,886 ) ( 1,886 ) +Issuance of shares to employees, net of shares withheld for employee taxes 3 143 ( 55 ) 88 +Stock-based compensation 638 638 +Net income 6,046 6,046 +Other comprehensive income (loss) 698 698 +Balance at May 31, 2022 305 $ — 1,266 $ 3 $ 11,484 $ 318 $ 3,476 $ 15,281 +The accompanying Notes to the Consolidated Financial Statements are an integral part of this statement. +2022 FORM 10-K 60 +Table of Contents +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +Note 1 Summary of Significant Accounting Policies +62 +Note 2 Inventories +67 +Note 3 Property, Plant and Equipment +68 +Note 4 Identifiable Intangible Assets and Goodwill +68 +Note 5 Accrued Liabilities +68 +Note 6 Fair Value Measurements +69 +Note 7 Short-Term Borrowings and Credit Lines +71 +Note 8 Long-Term Debt +72 +Note 9 Income Taxes +73 +Note 10 Redeemable Preferred Stock +76 +Note 11 Common Stock and Stock-Based Compensation +76 +Note 12 Earnings Per Share +78 +Note 13 Benefit Plans +78 +Note 14 Risk Management and Derivatives +79 +Note 15 Accumulated Other Comprehensive Income (Loss) +83 +Note 16 Revenues +85 +Note 17 Operating Segments and Related Information +86 +Note 18 Commitments and Contingencies +90 +Note 19 Leases +90 +Note 20 Acquisitions and Divestitures +91 +Note 21 Restructuring +92 +2022 FORM 10-K 61 +Table of Contents +NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES +DESCRIPTION OF BUSINESS +NIKE, Inc. is a worldwide leader in the design, development and worldwide marketing and selling of athletic footwear, apparel, equipment, accessories and services. NIKE, Inc. portfolio brands include the NIKE Brand, Jordan Brand, Hurley, prior to its divestiture in fiscal 2020, and Converse. The NIKE Brand is focused on performance athletic footwear, apparel, equipment, accessories and services across Men's, Women's and Kids', amplified with sport-inspired lifestyle products carrying the Swoosh trademark, as well as other NIKE Brand trademarks. The Jordan Brand is focused on athletic and casual footwear, apparel and accessories using the Jumpman trademark. Sales and operating results of Jordan Brand products are reported within the respective NIKE Brand geographic operating segments. Sales and operating results of Hurley brand products, prior to its divestiture in fiscal 2020, were reported within the NIKE Brand's North America geographic operating segment. Refer to Note 20 — Acquisitions and Divestitures for information regarding the divestiture of the Company's wholly-owned subsidiary, Hurley. Converse designs, distributes, licenses and sells casual sneakers, apparel and accessories under the Converse, Chuck Taylor, All Star, One Star, Star Chevron and Jack Purcell trademarks. In some markets outside the U.S., these trademarks are licensed to third parties who design, distribute, market and sell similar products. Operating results of the Converse brand are reported on a stand-alone basis. +BASIS OF CONSOLIDATION +The Consolidated Financial Statements include the accounts of NIKE, Inc. and its subsidiaries (the "Company" or "NIKE"). All significant intercompany transactions and balances have been eliminated. +Economic sanctions imposed on Russia during the fourth quarter of fiscal 2022, impacted the Company's local business and a reduction in the Ruble liquidity affected the Company's ability to manage operational impact and related foreign currency risk. As a result, the Company deconsolidated its Russian legal entities, which resulted in a one-time, pre-tax charge of $ 96 million recognized within Other (income) expense, net, classified within Corporate. Subsequent to the end of fiscal 2022, the Company made the decision to leave the Russian marketplace. +REVENUE RECOGNITION +Revenue transactions associated with the sale of NIKE Brand footwear, apparel and equipment, as well as Converse products, comprise a single performance obligation, which consists of the sale of products to customers either through wholesale or direct to consumer channels. The Company satisfies the performance obligation and records revenues when transfer of control to the customer has occurred, based on the terms of sale. A customer is considered to have control once they are able to direct the use and receive substantially all of the benefits of the product. +Control is transferred to wholesale customers upon shipment or upon receipt depending on the country of the sale and the agreement with the customer. Control transfers to retail store customers at the time of sale and to substantially all digital commerce customers upon shipment. The transaction price is determined based upon the invoiced sales price, less anticipated sales returns, discounts and miscellaneous claims from customers. Payment terms for wholesale transactions depend on the country of sale or agreement with the customer and payment is generally required within 90 days or less of shipment to or receipt by the wholesale customer. Payment is due at the time of sale for retail store and digital commerce transactions. +Consideration for trademark licensing contracts is earned through sales-based or usage-based royalty arrangements, and the associated revenues are recognized over the license period. +Taxes assessed by governmental authorities that are both imposed on and concurrent with a specific revenue-producing transaction, and are collected by the Company from a customer, are excluded from Revenues and Cost of sales in the Consolidated Statements of Income. Shipping and handling costs associated with outbound freight after control over a product has transferred to a customer are accounted for as fulfillment costs and are included in Cost of sales when the related revenues are recognized. +SALES-RELATED RESERVES +Consideration promised in the Company's contracts with customers is variable due to anticipated reductions, such as sales returns, discounts and miscellaneous claims from customers. The Company estimates the most likely amount it will be entitled to receive and records an anticipated reduction against Revenues, with an offsetting increase to Accrued liabilities at the time revenues are recognized. The estimated cost of inventory for product returns is recorded in Prepaid expenses and other current assets on the Consolidated Balance Sheets. +2022 FORM 10-K 62 +Table of Contents +The provision for anticipated sales returns consists of both contractual return rights and discretionary authorized returns. Provisions for post-invoice sales discounts consist of both contractual programs and discretionary discounts that are expected to be granted at a later date. +Estimates of discretionary authorized returns, discounts and claims are based on (1) historical rates, (2) specific identification of outstanding returns not yet received from customers and outstanding discounts and claims and (3) estimated returns, discounts and claims expected but not yet finalized with customers. Actual returns, discounts and claims in any future period are inherently uncertain and thus may differ from estimates recorded. If actual or expected future returns, discounts or claims are significantly greater or lower than the reserves established, a reduction or increase to net Revenues is recorded in the period in which such determination is made. +COST OF SALES +Cost of sales consists primarily of inventory costs, as well as warehousing costs (including the cost of warehouse labor), third-party royalties, certain foreign currency hedge gains and losses and product design costs. Shipping and handling costs are expensed as incurred and included in Cost of sales. +DEMAND CREATION EXPENSE +Demand creation expense consists of advertising and promotion costs, including costs of endorsement contracts, complimentary products, television, digital and print advertising as well as media costs, brand events and retail brand presentation. Advertising production costs are expensed the first time an advertisement is run. Advertising media costs are expensed when the advertisement appears. Costs related to brand events are expensed when the event occurs. Costs related to retail brand presentation are expensed when the presentation is complete and delivered. +A significant amount of the Company's promotional expenses result from payments under endorsement contracts. In general, endorsement payments are expensed on a straight-line basis over the term of the contract. However, certain contracts contain elements that may be accounted for differently based upon the facts and circumstances of each individual contract. Prepayments made under contracts are included in Prepaid expenses and other current assets or Deferred income taxes and other assets depending on the period to which the prepayment applies. +Certain contracts provide for contingent payments to endorsers based upon specific achievements in their sport (e.g., winning a championship). The Company records Demand creation expense for these amounts when the endorser achieves the specific goal. +Certain contracts provide for variable payments based upon endorsers maintaining a level of performance in their sport over an extended period of time (e.g., maintaining a specified ranking in a sport for a year). When the Company determines payments are probable, the amounts are reported in Demand creation expense ratably over the contract period based on the Company's best estimate of the endorser's performance. In these instances, to the extent actual payments to the endorser differ from the Company's estimate due to changes in the endorser's performance, adjustments to Demand creation expense may be recorded in a future period. +Certain contracts provide for royalty payments to endorsers based upon a predetermined percent of sales of particular products, which the Company records in Cost of sales as the related sales occur. For contracts containing minimum guaranteed royalty payments, the Company records the amount of any guaranteed payment in excess of that earned through sales of product within Demand creation expense. +Through cooperative advertising programs, the Company reimburses its wholesale customers for certain costs of advertising the Company's products. To the extent the Company receives a distinct good or service in exchange for consideration paid to the customer does not exceed the fair value of that good or service, the amounts reimbursed are recorded in Demand creation expense. +Total advertising and promotion expenses, which the Company refers to as Demand creation expense, were $ 3,850 million, $ 3,114 million and $ 3,592 million for the years ended May 31, 2022, 2021 and 2020, respectively. Prepaid advertising and promotion expenses totaled $ 773 million and $ 630 million at May 31, 2022 and 2021, respectively, of which $ 329 million and $ 338 million, respectively, were recorded in Prepaid expenses and other current assets, and $ 444 million and $ 292 million, respectively, were recorded in Deferred income taxes and other assets, depending on the period to which the prepayment applied. +OPERATING OVERHEAD EXPENSE +Operating overhead expense consists primarily of wage and benefit-related expenses, research and development costs, bad debt expense as well as other administrative expenses such as rent, depreciation and amortization, professional services, certain technology investments, meetings and travel. +2022 FORM 10-K 63 +Table of Contents +CASH AND EQUIVALENTS +Cash and equivalents represent cash and short-term, highly liquid investments, that are both readily convertible to known amounts of cash and so near their maturity they present insignificant risk of changes in value because of changes in interest rates, with maturities three months or less at the date of purchase. +SHORT-TERM INVESTMENTS +Short-term investments consist of highly liquid investments with maturities over 90 days at the date of purchase. At May 31, 2022 and 2021, Short-term investments consisted of available-for-sale debt securities, which are recorded at fair value with unrealized gains and losses reported, net of tax, in Accumulated other comprehensive income (loss), unless unrealized losses are determined to be unrecoverable. Realized gains and losses on the sale of securities are determined by specific identification. The Company considers all available-for-sale debt securities, including those with maturity dates beyond 12 months, as available to support current operational liquidity needs and, therefore, classifies all securities with maturity dates beyond three months at the date of purchase as current assets within Short-term investments on the Consolidated Balance Sheets. +Refer to Note 6 — Fair Value Measurements for more information on the Company's Short-term investments. +ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS RECEIVABLE +Accounts receivable, net consist primarily of amounts due from customers. The Company makes ongoing estimates relating to the collectability of its accounts receivable and maintains an allowance for expected losses resulting from the inability of its customers to make required payments. In addition to judgments about the creditworthiness of significant customers based on ongoing credit evaluations, the Company considers historical levels of credit losses, as well as macroeconomic and industry trends to determine the amount of the allowance. Accounts receivable with anticipated collection dates greater than 12 months from the balance sheet date and related allowances are considered non-current and recorded in Deferred income taxes and other assets. The allowance for uncollectible accounts receivable was $ 34 million and $ 93 million as of May 31, 2022 and 2021, respectively. +INVENTORY VALUATION +Inventories are stated at lower of cost and net realizable value and valued on either an average or a specific identification cost basis. In some instances, the Company ships products directly from its suppliers to the customer, with the related inventory and cost of sales recognized on a specific identification basis. Inventory costs primarily consist of product cost from the Company's suppliers, as well as inbound freight, import duties, taxes, insurance, logistics and other handling fees. +PROPERTY, PLANT AND EQUIPMENT AND DEPRECIATION +Property, plant and equipment are recorded at cost. Depreciation is determined on a straight-line basis for land improvements, buildings and leasehold improvements over 2 to 40 years and for machinery and equipment over 2 to 15 years. +Depreciation and amortization of assets used in manufacturing, warehousing and product distribution are recorded in Cost of sales. Depreciation and amortization of all other assets are recorded in Operating overhead expense. +SOFTWARE DEVELOPMENT COSTS +Expenditures for major software purchases and software developed for internal use are capitalized and amortized over 2 to 12 years on a straight-line basis. The Company's policy provides for the capitalization of external direct costs associated with developing or obtaining internal use computer software. The Company also capitalizes certain payroll and payroll-related costs for employees who are directly associated with internal use computer software projects. The amount of capitalizable payroll costs with respect to these employees is limited to the time directly spent on such projects. Costs associated with preliminary project stage activities, training, maintenance and all other post-implementation stage activities are expensed as incurred. +Development costs of computer software to be sold, leased or otherwise marketed as an integral part of a product are subject to capitalization beginning when a product's technological feasibility has been established and ending when a product is available for general release to customers. In most instances, the Company's products are released soon after technological feasibility has been established; therefore, software development costs incurred subsequent to achievement of technological feasibility are usually not significant, and generally, most software development costs have been expensed as incurred. +2022 FORM 10-K 64 +Table of Contents +IMPAIRMENT OF LONG-LIVED ASSETS +The Company reviews the carrying value of long-lived assets or asset groups to be used in operations whenever events or changes in circumstances indicate the carrying amount of the assets might not be recoverable. Factors that would necessitate an impairment assessment include a significant adverse change in the extent or manner in which an asset is used, a significant adverse change in legal factors or the business climate that could affect the value of the asset or a significant decline in the observable market value of an asset, among others. If such facts indicate a potential impairment, the Company would assess the recoverability of an asset group by determining if the carrying value of the asset group exceeds the sum of the projected undiscounted cash flows expected to result from the use and eventual disposition of the assets over the remaining economic life of the primary asset in the asset group. If the recoverability test indicates that the carrying value of the asset group is not recoverable, the Company will estimate the fair value of the asset group using appropriate valuation methodologies, which would typically include an estimate of discounted cash flows. Any impairment would be measured as the difference between the asset group's carrying amount and its estimated fair value. +GOODWILL AND INDEFINITE-LIVED INTANGIBLE ASSETS +The Company performs annual impairment tests on goodwill and intangible assets with indefinite lives in the fourth quarter of each fiscal year or when events occur or circumstances change that would, more likely than not, reduce the fair value of a reporting unit or an intangible asset with an indefinite life below its carrying value. Events or changes in circumstances that may trigger interim impairment reviews include significant changes in business climate, operating results, planned investments in the reporting unit, planned divestitures or an expectation that the carrying amount may not be recoverable, among other factors. +For purposes of testing goodwill for impairment, the Company allocates goodwill across its reporting units, which are considered the Company's operating segments. The Company may first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events and circumstances, the Company determines it is more likely than not that the fair value of the reporting unit is greater than its carrying amount, an impairment test is unnecessary. If an impairment test is necessary, the Company will estimate the fair value of its related reporting units. If the carrying value of a reporting unit exceeds its fair value, the goodwill of that reporting unit is determined to be impaired and the Company will proceed with recording an impairment charge equal to the excess of the carrying value over the related fair value. +Indefinite-lived intangible assets primarily consist of acquired trade names and trademarks. The Company may first perform a qualitative assessment to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired. If, after assessing the totality of events and circumstances, the Company determines it is more likely than not that the indefinite-lived intangible asset is not impaired, no quantitative fair value measurement is necessary. If a quantitative fair value measurement calculation is required for these intangible assets, the Company primarily utilizes the relief-from-royalty method. This method assumes trade names and trademarks have value to the extent their owner is relieved of the obligation to pay royalties for the benefits received from them. This method requires the Company to estimate the future revenues for the related brands, the appropriate royalty rate and the weighted average cost of capital. If the carrying value of the indefinite-lived intangible exceeds its fair value, the asset is determined to be impaired, and the Company will proceed with recording an impairment charge equal to the excess of the carrying value over the related fair value. +OPERATING LEASES +Beginning in fiscal 2020, the Company adopted Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842) . The Company's lease recognition policies under Topic 842 are described in the following paragraphs. +The Company primarily leases retail store space, certain distribution and warehouse facilities, office space, equipment and other non-real estate assets. The Company determines if an arrangement is a lease at inception and begins recording lease activity at the commencement date, which is generally the date in which the Company takes possession of or controls the physical use of the asset. Lease components are not separated from non-lease components for real estate leases within the Company's lease portfolio. Right-of-use (ROU) assets and lease liabilities are recognized based on the present value of lease payments over the lease term with lease expense recognized on a straight-line basis. The Company's incremental borrowing rate is used to determine the present value of future lease payments unless the implicit rate is readily determinable. +Lease agreements may contain rent escalation clauses, renewal or termination options, rent holidays or certain landlord incentives, including tenant improvement allowances. ROU assets include amounts for scheduled rent increases and are reduced by the amount of lease incentives. The lease term includes the non-cancelable period of the lease and options to extend or terminate the lease when it is reasonably certain the Company will exercise those options. The Company does not record leases with an initial term of 12 months or less on the Consolidated Balance Sheets and recognizes related lease payments in the Consolidated Statements of Income on a straight-line basis over the lease term. Certain lease agreements include variable lease +2022 FORM 10-K 65 +Table of Contents +payments, which are based on a percent of retail sales over specified levels or adjust periodically for inflation as a result of changes in a published index, primarily the Consumer Price Index, and are expensed as incurred. +FAIR VALUE MEASUREMENTS +The Company measures certain financial assets and liabilities at fair value on a recurring basis, including derivatives, equity securities and available-for-sale debt securities. Fair value is the price the Company would receive to sell an asset or pay to transfer a liability in an orderly transaction with a market participant at the measurement date. The Company uses a three-level hierarchy that prioritizes fair value measurements based on the types of inputs used, as follows: +• Level 1: Quoted prices in active markets for identical assets or liabilities. +• Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly; these include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active. +• Level 3: Unobservable inputs with little or no market data available, which require the reporting entity to develop its own assumptions. +The Company's assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. Financial assets and liabilities are classified in their entirety based on the most conservative level of input that is significant to the fair value measurement. +Pricing vendors are utilized for a majority of Level 1 and Level 2 investments. These vendors either provide a quoted market price in an active market or use observable inputs without applying significant adjustments in their pricing. Observable inputs include broker quotes, interest rates and yield curves observable at commonly quoted intervals, volatilities and credit risks. The fair value of derivative contracts is determined using observable market inputs such as the daily market foreign currency rates, forward pricing curves, currency volatilities, currency correlations and interest rates and considers nonperformance risk of the Company and its counterparties. +The Company's fair value measurement process includes comparing fair values to another independent pricing vendor to ensure appropriate fair values are recorded. +Refer to Note 6 — Fair Value Measurements for additional information. +FOREIGN CURRENCY TRANSLATION AND FOREIGN CURRENCY TRANSACTIONS +Adjustments resulting from translating foreign functional currency financial statements into U.S. Dollars are included in the foreign currency translation adjustment, a component of Accumulated other comprehensive income (loss) in Total shareholders' equity. +The Company's global subsidiaries have various monetary assets and liabilities, primarily receivables and payables, which are denominated in currencies other than their functional currency. These balance sheet items are subject to remeasurement, the impact of which is recorded in Other (income) expense, net, within the Consolidated Statements of Income. +ACCOUNTING FOR DERIVATIVES AND HEDGING ACTIVITIES +The Company uses derivative financial instruments to reduce its exposure to changes in foreign currency exchange rates and interest rates. All derivatives are recorded at fair value on the Consolidated Balance Sheets and changes in the fair value of derivative financial instruments are either recognized in Accumulated other comprehensive income (loss) (a component of Total shareholders' equity), Long-term debt or Net income depending on the nature of the underlying exposure, whether the derivative is formally designated as a hedge and, if designated, the extent to which the hedge is effective. The Company classifies the cash flows at settlement from derivatives in the same category as the cash flows from the related hedged items. For undesignated hedges and designated cash flow hedges, this is primarily within the Cash provided by operations component of the Consolidated Statements of Cash Flows. For designated net investment hedges, this is within the Cash used by investing activities component of the Consolidated Statements of Cash Flows. For the Company's fair value hedges, which are interest rate swaps used to mitigate the change in fair value of its fixed-rate debt attributable to changes in interest rates, the related cash flows from periodic interest payments are reflected within the Cash provided by operations component of the Consolidated Statements of Cash Flows. +Refer to Note 14 — Risk Management and Derivatives for additional information on the Company's risk management program and derivatives. +2022 FORM 10-K 66 +Table of Contents +STOCK-BASED COMPENSATION +The Company accounts for stock-based compensation by estimating the fair value, net of estimated forfeitures, of equity awards and recognizing the related expense as Cost of sales or Operating overhead expense, as applicable, in the Consolidated Statements of Income on a straight-line basis over the vesting period. Substantially all awards vest ratably over four years of continued employment, with stock options expiring 10 years from the date of grant. Performance-based restricted stock units vest based on the Company's achievement of certain performance criteria throughout the three-year performance period and continued employment through the vesting date. The fair value of options, stock appreciation rights and employees' purchase rights under the employee stock purchase plans (ESPPs) is determined using the Black-Scholes option pricing model. The fair value of restricted stock and time-vesting restricted stock units is established by the market price on the date of grant. The fair value of performance-based restricted stock units is estimated as of the grant date using a Monte Carlo simulation. +Refer to Note 11 — Common Stock and Stock-Based Compensation for additional information on the Company's stock-based compensation programs. +INCOME TAXES +The Company accounts for income taxes using the asset and liability method. This approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of assets and liabilities. The Company records a valuation allowance to reduce deferred tax assets to the amount management believes is more likely than not to be realized. Realization of deferred tax assets is dependent on future taxable earnings and is therefore uncertain. At least quarterly, the Company assesses taxable income in prior carryback periods, the scheduled reversal of deferred tax liabilities, projected future taxable income and available tax planning strategies. The Company uses forecasts of taxable income and considers foreign tax credit utilization in making this assessment of realization, which are inherently uncertain and can result in significant variation between estimated and actual results. To the extent the Company believes that recovery is not likely, a valuation allowance is established against the net deferred tax asset, which increases the Company’s income tax expense in the period when such determination is made. +The Company recognizes a tax benefit from uncertain tax positions in the financial statements only when it is more likely than not the position will be sustained upon examination by relevant tax authorities. The Company recognizes interest and penalties related to income tax matters in Income tax expense. +Refer to Note 9 — Income Taxes for further discussion. +EARNINGS PER SHARE +Basic earnings per common share is calculated by dividing Net income by the weighted average number of common shares outstanding during the year. Diluted earnings per common share is calculated by adjusting weighted average outstanding shares, assuming conversion of all potentially dilutive stock options and awards. +Refer to Note 12 — Earnings Per Share for further discussion. +MANAGEMENT ESTIMATES +The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates, including estimates relating to assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Additionally, the extent to which the evolving COVID-19 pandemic impacts the Company's financial statements will depend on a number of factors, including the further spread and duration of COVID-19 and the economic impacts of the pandemic. There remains risk that COVID-19 could have a material, adverse impact on future revenue growth as well as overall profitability . +NOTE 2 — INVENTORIES +Inventory balances of $ 8,420 million and $ 6,854 million as of May 31, 2022 and 2021, respectively, were substantially all finished goods. +2022 FORM 10-K 67 +Table of Contents +NOTE 3 — PROPERTY, PLANT AND EQUIPMENT +Property, plant and equipment, net included the following: +MAY 31, +(Dollars in millions) +2022 2021 +Land and improvements $ 330 $ 363 +Buildings 3,170 3,365 +Machinery and equipment 2,870 3,023 +Internal-use software 1,616 1,391 +Leasehold improvements 1,712 1,608 +Construction in process 399 311 +Total property, plant and equipment, gross 10,097 10,061 +Less accumulated depreciation 5,306 5,157 +TOTAL PROPERTY, PLANT AND EQUIPMENT, NET $ 4,791 $ 4,904 +Capitalized interest was not material for the fiscal years ended May 31, 2022, 2021 and 2020. +NOTE 4 — IDENTIFIABLE INTANGIBLE ASSETS AND GOODWILL +Identifiable intangible assets, net consist of indefinite-lived trademarks, acquired trademarks and other intangible assets. The following table summarizes the Company's Identifiable intangible assets, net balances: +MAY 31, +2022 2021 +(Dollars in millions) +GROSS CARRYING AMOUNT ACCUMULATED AMORTIZATION NET CARRYING AMOUNT GROSS CARRYING AMOUNT ACCUMULATED AMORTIZATION NET CARRYING AMOUNT +Indefinite-lived trademarks $ 259 $ — $ 259 $ 246 $ — $ 246 +Acquired trademarks and other 66 39 27 50 27 23 +IDENTIFIABLE INTANGIBLE ASSETS, NET $ 325 $ 39 $ 286 $ 296 $ 27 $ 269 +Goodwill was $ 284 million and $ 242 million as of May 31, 2022 and 2021, respectively, and there were no accumulated impairment losses as of May 31, 2022 and 2021. Additionally, the impact to Goodwill during fiscal 2022 and 2021 as a result of acquisitions and divestitures was not material. +NOTE 5 — ACCRUED LIABILITIES +Accrued liabilities included the following: +MAY 31, +(Dollars in millions) +2022 2021 +Compensation and benefits, excluding taxes $ 1,297 $ 1,472 +Sales-related reserves 1,015 1,077 +Allowance for expected loss on sale (1) +397 358 +Other 3,511 3,156 +TOTAL ACCRUED LIABILITIES $ 6,220 $ 6,063 +(1) Refer to Note 20 — Acquisitions and Divestitures for additional information. +2022 FORM 10-K 68 +Table of Contents +NOTE 6 — FAIR VALUE MEASUREMENTS +The following tables present information about the Company's financial assets measured at fair value on a recurring basis as of May 31, 2022 and 2021, and indicate the level in the fair value hierarchy in which the Company classifies the fair value measurement. Refer to Note 1 — Summary of Significant Accounting Policies for additional detail regarding the Company's fair value measurement methodology. +MAY 31, 2022 +(Dollars in millions) +ASSETS AT FAIR VALUE CASH AND EQUIVALENTS SHORT-TERM INVESTMENTS +Cash $ 839 $ 839 $ — +Level 1: +U.S. Treasury securities 3,801 8 3,793 +Level 2: +Commercial paper and bonds 660 37 623 +Money market funds 6,458 6,458 — +Time deposits 1,237 1,232 5 +U.S. Agency securities 2 — 2 +Total Level 2 8,357 7,727 630 +TOTAL $ 12,997 $ 8,574 $ 4,423 +MAY 31, 2021 +(Dollars in millions) +ASSETS AT FAIR VALUE CASH AND EQUIVALENTS SHORT-TERM INVESTMENTS +Cash $ 840 $ 840 $ — +Level 1: +U.S. Treasury securities 2,892 — 2,892 +Level 2: +Commercial paper and bonds 748 57 691 +Money market funds 7,701 7,701 — +Time deposits 1,293 1,291 2 +U.S. Agency securities 2 — 2 +Total Level 2 9,744 9,049 695 +TOTAL $ 13,476 $ 9,889 $ 3,587 +As of May 31, 2022, the Company held $ 2,617 million of available-for-sale debt securities with maturity dates within one year and $ 1,806 million with maturity dates over one year and less than five years in Short-term investments on the Consolidated Balance Sheets. The fair value of the Company's available-for-sale debt securities approximates their amortized cost. +Included in Interest expense (income), net was interest income related to the Company's investment portfolio of $ 94 million, $ 34 million and $ 62 million for the years ended May 31, 2022, 2021 and 2020, respectively. +The Company records the assets and liabilities of its derivative financial instruments on a gross basis on the Consolidated Balance Sheets. The Company's derivative financial instruments are subject to master netting arrangements that allow for the offset of assets and liabilities in the event of default or early termination of the contract. Any amounts of cash collateral received related to these instruments associated with the Company's credit-related contingent features are recorded in Cash and equivalents and Accrued liabilities, the latter of which would further offset against the Company's derivative asset balance. Any amounts of cash collateral posted related to these instruments associated with the Company's credit-related contingent features are recorded in Prepaid expenses and other current assets, which would further offset against the Company's derivative liability balance. Cash collateral received or posted related to the Company's credit-related contingent features is presented in the Cash provided by operations component of the Consolidated Statements of Cash Flows. The Company does not recognize amounts of non-cash collateral received, such as securities, on the Consolidated Balance Sheets. For further information related to credit risk, refer to Note 14 — Risk Management and Derivatives. +The following tables present information about the Company's derivative assets and liabilities measured at fair value on a recurring basis and indicate the level in the fair value hierarchy in which the Company classifies the fair value measurement: +2022 FORM 10-K 69 +Table of Contents +MAY 31, 2022 +DERIVATIVE ASSETS DERIVATIVE LIABILITIES +(Dollars in millions) ASSETS AT FAIR VALUE OTHER CURRENT ASSETS OTHER LONG-TERM ASSETS LIABILITIES AT FAIR VALUE ACCRUED LIABILITIES OTHER LONG-TERM LIABILITIES +Level 2: +Foreign exchange forwards and options (1) +$ 875 $ 669 $ 206 $ 76 $ 65 $ 11 +Embedded derivatives 5 5 — 1 1 — +TOTAL $ 880 $ 674 $ 206 $ 77 $ 66 $ 11 +(1) If the foreign exchange derivative instruments had been netted on the Consolidated Balance Sheets, the asset and liability positions each would have been reduced by $ 76 million as of May 31, 2022. As of that date, the Company received $ 486 million of cash collateral from counterparties related to foreign exchange derivative instruments. No amount of collateral was posted on the derivative liability balance as of May 31, 2022. +MAY 31, 2021 +DERIVATIVE ASSETS DERIVATIVE LIABILITIES +(Dollars in millions) +ASSETS AT FAIR VALUE OTHER CURRENT ASSETS OTHER LONG-TERM ASSETS LIABILITIES AT FAIR VALUE ACCRUED LIABILITIES OTHER LONG-TERM LIABILITIES +Level 2: +Foreign exchange forwards and options (1) +$ 92 $ 76 $ 16 $ 456 $ 415 $ 41 +Embedded derivatives — — — 1 1 — +TOTAL $ 92 $ 76 $ 16 $ 457 $ 416 $ 41 +(1) If the foreign exchange derivative instruments had been netted on the Consolidated Balance Sheets, the asset and liability positions each would have been reduced by $ 93 million as of May 31, 2021. As of that date, the Company had posted $ 39 million of cash collateral to various counterparties related to foreign exchange derivative instruments. No amount of collateral was received on the Company's derivative asset balance as of May 31, 2021. +For additional information related to the Company's derivative financial instruments, refer to Note 14 — Risk Management and Derivatives. For fair value information regarding Notes payable and Long-term debt, refer to Note 7 — Short-Term Borrowings and Credit Lines and Note 8 — Long-Term Debt, respectively. +The carrying amounts of other current financial assets and other current financial liabilities approximate fair value. +NON-RECURRING FAIR VALUE MEASUREMENTS +As further discussed in Note 20 — Acquisitions and Divestitures, during fiscal 2020, the Company met the criteria to recognize the related assets and liabilities of its Brazil, Argentina, Chile and Uruguay entities as held-for-sale. This required the Company to remeasure the disposal groups at fair value, less costs to sell, which is considered a Level 3 fair value measurement and was based on each transaction's estimated consideration. During fiscal 2022, the Company continued to use estimated consideration to measure the fair value of each disposal group. +All other assets or liabilities required to be measured at fair value on a non-recurring basis as of May 31, 2022 and 2021 were immaterial. +2022 FORM 10-K 70 +Table of Contents +NOTE 7 — SHORT-TERM BORROWINGS AND CREDIT LINES +Notes payable as of May 31, 2022 and 2021, are summarized below: +MAY 31, +2022 2021 +(Dollars in millions) +BORROWINGS INTEREST RATE BORROWINGS INTEREST RATE +Notes payable: +U.S. operations $ — 0.00 % — 0.00 % +Non-U.S. operations $ 10 19.80 % +(1) +$ 2 17.80 % +(1) +TOTAL NOTES PAYABLE $ 10 $ 2 +(1) Weighted average interest rate includes non-interest bearing overdrafts. +The carrying amounts reflected in the Consolidated Balance Sheets for Notes payable approximate fair value. +On March 11, 2022, the Company entered into a 364 -day committed credit facility agreement with a syndicate of banks, which provides for up to $ 1 billion of borrowings, with an option to increase borrowings up to $ 1.5 billion in total with lender approval. The facility matures on March 10, 2023, with an option to extend the maturity date an additional 364 days. This facility replaces the prior $ 1 billion 364 -day credit facility agreement entered into on March 15, 2021, which would have matured on March 14, 2022. Based on the Company's current long-term senior unsecured debt ratings of AA- and A1 from Standard and Poor's Corporation and Moody's Investor Services, respectively, the interest rate charged on any outstanding borrowings would be the prevailing Term Secured Overnight Financing Rate (Term SOFR) for the applicable interest period plus 0.60 %. The facility fee is 0.02 % of the total undrawn commitment. +On March 11, 2022, the Company also entered into a five-year committed credit facility agreement with a syndicate of banks which provides for up to $ 2 billion of borrowings, with the option to increase borrowings up to $ 3 billion in total with lender approval. The facility matures on March 11, 2027, with options to extend the maturity date up to an additional two years . This facility replaces the prior $ 2 billion five-year credit facility agreement entered into on August 16, 2019, which would have matured on August 16, 2024. Based on the Company's current long-term senior unsecured debt ratings of AA- and A1 from Standard and Poor's Corporation and Moody's Investor Services, respectively, the interest rate charged on any outstanding borrowings would be the prevailing Term SOFR for the applicable interest period plus 0.60 %. The facility fee is 0.04 % of the total undrawn commitment. +As of and for the periods ended May 31, 2022 and 2021, no amounts were outstanding under any of the Company's committed credit facilities. +2022 FORM 10-K 71 +Table of Contents +NOTE 8 — LONG-TERM DEBT +Long-term debt, net of unamortized premiums, discounts and debt issuance costs, comprises the following: +BOOK VALUE OUTSTANDING +AS OF MAY 31, +Scheduled Maturity (Dollars in millions) +ORIGINAL PRINCIPAL INTEREST RATE INTEREST PAYMENTS 2022 2021 +Corporate Term Debt: (1)(2) +May 1, 2023 $ 500 2.25 % Semi-Annually $ 500 $ 499 +March 27, 2025 1,000 2.40 % Semi-Annually 996 995 +November 1, 2026 1,000 2.38 % Semi-Annually 997 996 +March 27, 2027 1,000 2.75 % Semi-Annually 996 995 +March 27, 2030 1,500 2.85 % Semi-Annually 1,491 1,490 +March 27, 2040 1,000 3.25 % Semi-Annually 986 986 +May 1, 2043 500 3.63 % Semi-Annually 496 496 +November 1, 2045 1,000 3.88 % Semi-Annually 985 984 +November 1, 2046 500 3.38 % Semi-Annually 492 491 +March 27, 2050 1,500 3.38 % Semi-Annually 1,481 1,481 +Total 9,420 9,413 +Less Current Portion of Long-Term Debt 500 — +TOTAL LONG-TERM DEBT $ 8,920 $ 9,413 +(1) These senior unsecured obligations rank equally with the Company's other unsecured and unsubordinated indebtedness. +(2) The bonds are redeemable at the Company's option at a price equal to the greater of (i) 100 % of the aggregate principal amount of the notes to be redeemed or (ii) the sum of the present values of the remaining scheduled payments, plus in each case, accrued and unpaid interest. However, the bonds also feature a par call provision, which allows for the bonds to be redeemed at a price equal to 100 % of the aggregate principal amount of the notes being redeemed, plus accrued and unpaid interest on or after the Par Call Date, as defined in the respective notes. +The scheduled maturity of Long-term debt in each of the years ending May 31, 2023 through 2027, are $ 500 million, $ 0 million , $ 1,000 million, $ 0 million and $ 2,000 million, respectively, at face value. +The Company's Long-term debt is recorded at adjusted cost, net of unamortized premiums, discounts and debt issuance costs. The fair value of long-term debt is estimated based upon quoted prices for similar instruments or quoted prices for identical instruments in inactive markets (Level 2). The fair value of the Company's Long-term debt, including the current portion, was approximately $ 8,933 million and $ 10,275 million as of May 31, 2022 and 2021, respectively. +2022 FORM 10-K 72 +Table of Contents +NOTE 9 — INCOME TAXES +Income before income taxes is as follows: +YEAR ENDED MAY 31, +(Dollars in millions) +2022 2021 2020 +Income before income taxes: +United States $ 6,020 $ 5,723 $ 2,954 +Foreign 631 938 ( 67 ) +TOTAL INCOME BEFORE INCOME TAXES $ 6,651 $ 6,661 $ 2,887 +The provision for income taxes is as follows: +YEAR ENDED MAY 31, +(Dollars in millions) +2022 2021 2020 +Current: +United States +Federal $ 231 $ 328 $ ( 109 ) +State 98 134 81 +Foreign 926 857 756 +Total Current 1,255 1,319 728 +Deferred: +United States +Federal ( 522 ) ( 371 ) ( 231 ) +State ( 16 ) ( 34 ) ( 47 ) +Foreign ( 112 ) 20 ( 102 ) +Total Deferred ( 650 ) ( 385 ) ( 380 ) +TOTAL INCOME TAX EXPENSE $ 605 $ 934 $ 348 +A reconciliation from the U.S. statutory federal income tax rate to the effective income tax rate is as follows: +YEAR ENDED MAY 31, +2022 2021 2020 +Federal income tax rate 21.0 % 21.0 % 21.0 % +State taxes, net of federal benefit 1.4 % 1.3 % 0.8 % +Foreign earnings - 1.8 % 0.2 % 5.9 % +Subpart F deferred tax benefit - 4.7 % 0.0 % 0.0 % +Foreign-derived intangible income benefit - 4.1 % - 3.7 % - 8.1 % +Excess tax benefits from share-based compensation - 4.9 % - 4.5 % - 7.2 % +Income tax audits and contingency reserves 1.5 % 1.5 % - 1.4 % +U.S. research and development tax credit - 1.0 % - 0.9 % - 1.8 % +Other, net 1.7 % - 0.9 % 2.9 % +EFFECTIVE INCOME TAX RATE 9.1 % 14.0 % 12.1 % +On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (the "Tax Act"), which significantly changed U.S. tax law and included a provision to tax global intangible low-taxed income (GILTI) of foreign subsidiaries. The Company recognizes taxes due under the GILTI provision as a current period expense. +The effective tax rate for the fiscal year ended May 31, 2022 was lower than the effective tax rate for the fiscal year ended May 31, 2021. The decrease was primarily due to a shift in the Company's earnings mix and recognition of a non-cash, one-time benefit related to the onshoring of the Company's non-U.S. intangible property. During the fourth quarter of fiscal 2022, the Company onshored certain non-U.S. intangible property ownership rights and implemented changes in the Company's legal entity structure. The tax restructuring increases the possibility that foreign earnings in future periods will be subject to tax in the U.S. due to Subpart F of the Internal Revenue Code. The Company recognized a deferred tax asset and corresponding non-cash deferred income tax benefit of 4.7 %, to establish the deferred tax deduction that is expected to reduce taxable income in future periods. +2022 FORM 10-K 73 +Table of Contents +The effective tax rate for the fiscal year ended May 31, 2021 was higher than the effective tax rate for the fiscal year ended May 31, 2020, due to a change in the proportion of earnings taxed in the U.S., related to the recovery from the impact of the COVID-19 pandemic and less favorable impacts from discrete items such as stock-based compensation. Income tax audit and contingency reserves for the fiscal year ended May 31, 2021, reflects recognition of a reserve of 1.2 % related to Altera Corp. v. Commissioner , where the taxpayer was denied a hearing before the U.S. Supreme Court on June 22, 2020, thereby ratifying the Ninth Circuit Court's decision and requiring the inclusion of stock-based compensation in intercompany cost-sharing arrangements, and other matters of 0.3 %. +Deferred tax assets and liabilities comprise the following as of: +MAY 31, +(Dollars in millions) +2022 2021 +Deferred tax assets: +Inventories (1) +$ 136 $ 78 +Sales return reserves (1) +109 100 +Deferred compensation (1) +313 350 +Stock-based compensation 195 175 +Reserves and accrued liabilities (1) +145 96 +Operating lease liabilities 508 499 +Intangibles 275 187 +Capitalized research and development expenditures 353 349 +Net operating loss carry-forwards 8 15 +Subpart F deferred tax 313 — +Foreign tax credit carry-forward 103 — +Other (1) +148 178 +Total deferred tax assets 2,606 2,027 +Valuation allowance ( 19 ) ( 12 ) +Total deferred tax assets after valuation allowance 2,587 2,015 +Deferred tax liabilities: +Foreign withholding tax on undistributed earnings of foreign subsidiaries ( 146 ) ( 182 ) +Property, plant and equipment (1) +( 247 ) ( 255 ) +Right-of-use assets ( 437 ) ( 431 ) +Other (1) +( 92 ) ( 14 ) +Total deferred tax liabilities ( 922 ) ( 882 ) +NET DEFERRED TAX ASSET $ 1,665 $ 1,133 +(1) The above amounts exclude deferred taxes held-for-sale as of May 31, 2022 and 2021. See Note 20 — Acquisitions and Divestitures for additional information. +The following is a reconciliation of the changes in the gross balance of unrecognized tax benefits as of: +MAY 31, +(Dollars in millions) +2022 2021 2020 +Unrecognized tax benefits, beginning of the period $ 896 $ 771 $ 808 +Gross increases related to prior period tax positions 71 77 181 +Gross decreases related to prior period tax positions ( 145 ) ( 22 ) ( 171 ) +Gross increases related to current period tax positions 62 59 50 +Settlements ( 17 ) ( 5 ) ( 58 ) +Lapse of statute of limitations ( 10 ) ( 6 ) ( 28 ) +Changes due to currency translation ( 9 ) 22 ( 11 ) +UNRECOGNIZED TAX BENEFITS, END OF THE PERIOD $ 848 $ 896 $ 771 +As of May 31, 2022, total gross unrecognized tax benefits, excluding related interest and penalties, were $ 848 million, of which $ 626 million would affect the Company's effective tax rate if recognized in future periods. The majority of the total gross unrecognized tax benefits are long-term in nature and included within Deferred income taxes and other liabilities on the Consolidated Balance Sheets. +2022 FORM 10-K 74 +Table of Contents +The Company recognizes interest and penalties related to income tax matters in Income tax expense. The liability for payment of interest and penalties increased by $ 45 million during the fiscal year ended May 31, 2022, increased by $ 45 million during the fiscal year ended May 31, 2021, and decreased by $ 16 million during the fiscal year ended May 31, 2020. As of May 31, 2022 and 2021, accrued interest and penalties related to uncertain tax positions were $ 248 million and $ 203 million, respectively (excluding federal benefit) and included within Deferred income taxes and other liabilities on the Consolidated Balance Sheets. +As of May 31, 2022 and 2021, long-term income taxes payable were $ 535 million and $ 640 million, respectively, and were included within Deferred income taxes and other liabilities on the Consolidated Balance Sheets. +The Company is subject to taxation in the U.S., as well as various state and foreign jurisdictions. The Company is currently under audit by the U.S. IRS for fiscal years 2017 through 2019. The Company has closed all U.S. federal income tax matters through fiscal 2016, with the exception of certain transfer pricing adjustments. Tax years after 2011 remain open in certain major foreign jurisdictions. Although the timing of resolution of audits is not certain, the Company evaluates all domestic and foreign audit issues in the aggregate, along with the expiration of applicable statutes of limitations, and estimates that it is reasonably possible the total gross unrecognized tax benefits could decrease by up to $ 20 million within the next 12 months. In January 2019, the European Commission opened a formal investigation to examine whether the Netherlands has breached State Aid rules when granting certain tax rulings to the Company. The Company believes the investigation is without merit. If this matter is adversely resolved, the Netherlands may be required to assess additional amounts with respect to prior periods, and the Company's income taxes related to prior periods in the Netherlands could increase. +The Company historically had not provided for deferred income taxes on the undistributed earnings of certain foreign subsidiaries as they were considered indefinitely reinvested outside the U.S. During the fourth quarter of fiscal 2022, in connection with a change in the Company's legal entity structure that reduced the withholding tax consequences of a decision to remit undistributed earnings in the Netherlands, the Company changed its assertion regarding its ability and intent to indefinitely reinvest undistributed earnings of certain foreign subsidiaries. The Company has evaluated its historic indefinite reinvestment assertion as a result of the legal entity restructuring and determined that any historical or future undistributed earnings of foreign subsidiaries are no longer considered to be indefinitely reinvested. There is no deferred tax liability associated with those earnings. +A portion of the Company's foreign operations benefit from a tax holiday, which is set to expire in 2031 . This tax holiday may be extended when certain conditions are met or may be terminated early if certain conditions are not met. The tax benefit attributable to this tax holiday, before taking into consideration other U.S. indirect tax provisions, was $ 221 million, $ 238 million and $ 238 million for the fiscal years ended May 31, 2022, 2021 and 2020, respectively. The benefit of the tax holiday on diluted earnings per common share was $ 0.14 , $ 0.15 and $ 0.15 for the fiscal years ended May 31, 2022, 2021 and 2020, respectively. +Deferred tax assets as of May 31, 2022 and 2021, were reduced by a valuation allowance. For the fiscal year ended May 31, 2022, a valuation allowance was provided for U.S. capital loss carryforwards and on tax benefits generated by certain entities with operating losses. For the fiscal year ended May 31, 2021, a valuation allowance was provided for U.S. capital loss carryforwards and on tax benefits generated by certain entities with operating losses. There was a $ 7 million net increase in the valuation allowance for the fiscal year ended May 31, 2022, compared to a $ 14 million net decrease for the fiscal year ended May 31, 2021, and $ 62 million net decrease for the fiscal year ended May 31, 2020. +The Company has recorded deferred tax assets of $ 103 million as of May 31, 2022 for U.S. foreign tax credit carry-forwards which will begin to expire in 2032. +The Company has available domestic and foreign loss carry-forwards of $ 44 million as of May 31, 2022. If not utilized, such losses will expire as follows: +YEAR ENDING MAY 31, +(Dollars in millions) +2023 2024 2025 2026 2027-2042 INDEFINITE TOTAL +Net operating losses $ — $ — $ — $ — $ 7 $ 37 $ 44 +2022 FORM 10-K 75 +Table of Contents +NOTE 10 — REDEEMABLE PREFERRED STOCK +Sojitz America is the sole owner of the Company's authorized redeemable preferred stock, $ 1 par value, which is redeemable at the option of Sojitz America or the Company at par value aggregating $ 0.3 million. A cumulative dividend of $ 0.10 per share is payable annually on May 31, and no dividends may be declared or paid on the common stock of the Company unless dividends on the redeemable preferred stock have been declared and paid in full. There have been no changes in the redeemable preferred stock in the fiscal years ended May 31, 2022, 2021 and 2020. As the holder of the redeemable preferred stock, Sojitz America does not have general voting rights but does have the right to vote as a separate class on the sale of all or substantially all of the assets of the Company and its subsidiaries; on merger, consolidation, liquidation or dissolution of the Company; or on the sale or assignment of the NIKE trademark for athletic footwear sold in the United States. The redeemable preferred stock has been fully issued to Sojitz America and is not blank check preferred stock. The Company's articles of incorporation do not permit the issuance of additional preferred stock. +NOTE 11 — COMMON STOCK AND STOCK-BASED COMPENSATION +COMMON STOCK +The authorized number of shares of Class A Common Stock, no par value, and Class B Common Stock, no par value, are 400 million and 2,400 million, respectively. Each share of Class A Common Stock is convertible into one share of Class B Common Stock. Voting rights of Class B Common Stock are limited in certain circumstances with respect to the election of directors. There are no differences in the dividend and liquidation preferences or participation rights of the holders of Class A and Class B Common Stock. From time to time, the Company's Board of Directors authorizes share repurchase programs for the repurchase of Class B Common Stock. The value of repurchased shares is deducted from Total shareholders' equity through allocation to Capital in excess of stated value and Retained earnings. +STOCK-BASED COMPENSATION +The NIKE, Inc. Stock Incentive Plan (the “Stock Incentive Plan”) provides for the issuance of up to 798 million previously unissued shares of Class B Common Stock in connection with equity awards granted under the Stock Incentive Plan. The Stock Incentive Plan authorizes the grant of non-statutory stock options, incentive stock options, stock appreciation rights, and stock awards, including restricted stock and restricted stock units. Restricted stock units include both time-vesting restricted stock units (RSUs) as well as performance-based restricted stock units (PSUs). A committee of the Board of Directors administers the Stock Incentive Plan and has the authority to determine the employees to whom awards will be made, the amount of the awards and the other terms and conditions of the awards. The Company generally grants stock options, restricted stock and restricted stock units on an annual basis. The exercise price for stock options and stock appreciation rights may not be less than the fair market value of the underlying shares on the date of grant. Substantially all awards under the Stock Incentive Plan vest ratably over 4 years of continued employment, with stock options expiring 10 years from the date of grant. During the fiscal year ended May 31, 2022, under the Stock Incentive Plan, the Company granted PSUs which replaced cash-based long-term incentive awards historically granted under the Company's Long-Term Incentive Plan. The impact of granting PSUs during the fiscal year ended May 31, 2022, was not material to the Company’s Consolidated Financial Statements. +The following table summarizes the Company's total stock-based compensation expense recognized in Cost of sales or Operating overhead expense, as applicable: +YEAR ENDED MAY 31, +(Dollars in millions) +2022 2021 2020 +Stock options (1) +$ 297 $ 323 $ 237 +ESPPs 60 63 53 +Restricted stock and restricted stock units (1)(2) +281 225 139 +TOTAL STOCK-BASED COMPENSATION EXPENSE $ 638 $ 611 $ 429 +(1) Expense for stock options includes the expense associated with stock appreciation rights. Accelerated stock option expense is primarily recorded for employees meeting certain retirement eligibility requirements and was $ 57 million, $ 67 million and $ 53 million for the fiscal years ended May 31, 2022, 2021 and 2020, respectively. During fiscal 2022 and 2021, an immaterial amount of accelerated stock option and restricted stock unit expense was also recorded for certain employees impacted by the Company's organizational realignment. For more information, see Note 21 — Restructuring. +(2) Restricted stock units includes RSUs and PSUs. +The income tax benefit related to stock-based compensation expense was $ 327 million, $ 297 million and $ 207 million for the fiscal years ended May 31, 2022, 2021 and 2020, respectively, and reported within Income tax expense. +2022 FORM 10-K 76 +Table of Contents +STOCK OPTIONS +The weighted average fair value per share of the options granted during the years ended May 31, 2022, 2021 and 2020, computed as of the grant date using the Black-Scholes pricing model, was $ 37.53 , $ 26.75 and $ 18.71 , respectively. The weighted average assumptions used to estimate these fair values were as follows: +YEAR ENDED MAY 31, +2022 2021 2020 +Dividend yield 0.8 % 0.9 % 1.0 % +Expected volatility 24.9 % 27.3 % 23.0 % +Weighted average expected life (in years) 5.8 6.0 6.0 +Risk-free interest rate 0.9 % 0.4 % 1.5 % +Expected volatilities are based on an analysis of the historical volatility of the Company's common stock, the implied volatility in market traded options on the Company's common stock with a term greater than one year , as well as other factors. The weighted average expected life of options is based on an analysis of historical and expected future exercise patterns. The interest rate is based on the U.S. Treasury (constant maturity) risk-free rate in effect at the date of grant for periods corresponding with the expected term of the options. +The following summarizes the stock option transactions under the plan discussed above: +SHARES (1) +WEIGHTED AVERAGE OPTION PRICE +(In millions) +Options outstanding as of May 31, 2021 78.3 $ 72.88 +Exercised ( 17.1 ) 54.32 +Forfeited ( 2.5 ) 114.89 +Granted 9.3 164.91 +Options outstanding as of May 31, 2022 68.0 $ 88.66 +(1) Includes stock appreciation rights transactions. +Options exercisable as of May 31, 2022 were 40.3 million and had a weighted average option price of $ 68.15 per share. The aggregate intrinsic value for options outstanding and exercisable as of May 31, 2022 was $ 2,456 million and $ 2,045 million, respectively. The total intrinsic value of the options exercised during the years ended May 31, 2022, 2021 and 2020 was $ 1,742 million, $ 1,571 million and $ 1,161 million, respectively. The intrinsic value is the amount by which the market value of the underlying stock exceeds the exercise price of the options. The weighted average contractual life remaining for options outstanding and options exercisable as of May 31, 2022 was 6.0 years and 4.6 years, respectively. As of May 31, 2022, the Company had $ 405 million of unrecognized compensation costs from stock options, net of estimated forfeitures, to be recognized in Cost of sales or Operating overhead expense, as applicable, over a weighted average remaining period of 2.5 years. +EMPLOYEE STOCK PURCHASE PLANS +In addition to the Stock Incentive Plan, the Company gives employees the right to purchase shares at a discount from the market price under employee stock purchase plans (ESPPs). Subject to the annual statutory limit, employees are eligible to participate through payroll deductions of up to 10 % of their compensation. At the end of each six-month offering period, shares are purchased by the participants at 85 % of the lower of the fair market value at the beginning or the end of the offering period. Employees purchased 2.0 million, 2.5 million and 2.7 million shares during each of the fiscal years ended May 31, 2022, 2021 and 2020, respectively. +RESTRICTED STOCK AND RESTRICTED STOCK UNITS +Recipients of restricted stock are entitled to cash dividends and to vote their respective shares throughout the period of restriction. Recipients of restricted stock units, which includes RSUs and PSUs, are entitled to dividend equivalent cash payments upon vesting. The number of shares of restricted stock and restricted stock units vested includes shares of common stock withheld by the Company on behalf of employees to satisfy the minimum statutory tax withholding requirements. +PSUs provide the right to receive shares of the Company's common stock based on the Company's achievement of certain performance criteria throughout the three-year performance period and continued employment through the vesting date. As such, the number of shares issued at the end of the performance period may range between 0 % and 200 % of the original target award amount ( 100 %). +2022 FORM 10-K 77 +Table of Contents +The following summarizes the restricted stock and restricted stock unit activity under the plan discussed above: +SHARES WEIGHTED AVERAGE GRANT DATE +FAIR VALUE +(In millions) +Nonvested as of May 31, 2021 6.6 $ 99.70 +Vested ( 2.3 ) 93.70 +Forfeited ( 0.7 ) 123.54 +Granted (1) +3.1 168.04 +Nonvested as of May 31, 2022 6.7 $ 130.88 +(1) Includes 0.5 million PSUs, which are presented assuming issuance at the original target award amount (100%). +The weighted average fair value per share of restricted stock and RSUs granted for the fiscal years ended May 31, 2022, 2021 and 2020, computed as of the grant date, was $ 153.63 , $ 113.84 and $ 88.26 , respectively. During the fiscal years ended May 31, 2022, 2021 and 2020, the aggregate fair value of vested restricted stock and RSUs was $ 354 million, $ 310 million and $ 98 million, respectively, computed as of the date of vesting. +The weighted average fair value per share of PSUs granted for the fiscal year ended May 31, 2022, computed as of the grant date was $ 239.38 . The fair value of PSUs is estimated on the grant date using a Monte Carlo simulation assuming a weighted average expected volatility of 27.1 % and weighted average risk-free interest rate of 0.5 %. Expected volatilities are based on an analysis of the historical volatility of the Company's common stock at the date of grant for periods corresponding with the vesting period of the PSU. The interest rate is based on the U.S. Treasury (constant maturity) risk-free rate in effect at the date of grant for periods corresponding with the vesting period of the PSU. No PSUs vested during the fiscal year ended May 31, 2022. +As of May 31, 2022, the Company had $ 587 million of unrecognized compensation costs from restricted stock and restricted stock units, net of estimated forfeitures, to be recognized in Cost of sales or Operating overhead expense, as applicable, over a weighted average remaining period of 2.4 years. +NOTE 12 — EARNINGS PER SHARE +The following is a reconciliation from basic earnings per common share to diluted earnings per common share. The computations of diluted earnings per common share excluded restricted stock, restricted stock units and options, including shares under ESPPs, to purchase an estimated additional 9.4 million, 11.3 million and 30.6 million shares of common stock outstanding for the fiscal years ended May 31, 2022, 2021 and 2020, respectively, because the awards were assumed to be anti-dilutive. +YEAR ENDED MAY 31, +(In millions, except per share data) +2022 2021 2020 +Net income available to common stockholders $ 6,046 $ 5,727 $ 2,539 +Determination of shares: +Weighted average common shares outstanding 1,578.8 1,573.0 1,558.8 +Assumed conversion of dilutive stock options and awards 32.0 36.4 32.8 +DILUTED WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 1,610.8 1,609.4 1,591.6 +Earnings per common share: +Basic $ 3.83 $ 3.64 $ 1.63 +Diluted $ 3.75 $ 3.56 $ 1.60 +NOTE 13 — BENEFIT PLANS +The Company has a qualified 401(k) Savings and Profit Sharing Plan, in which all U.S. employees are able to participate. The Company matches a portion of employee contributions to the savings plan. Company contributions to the savings plan were $ 126 million, $ 110 million and $ 107 million and included in Cost of sales or Operating overhead expense, as applicable, for the years ended May 31, 2022, 2021 and 2020, respectively. The terms of the plan also allow for annual discretionary profit sharing contributions, as recommended by senior management and approved by the Board of Directors, to the accounts of eligible U.S. employees who work at least 1,000 hours in a year. There were no profit sharing contributions made to the plan for the fiscal years ended May 31, 2022, 2021 and 2020. +2022 FORM 10-K 78 +Table of Contents +The Company also has a Long-Term Incentive Plan (LTIP) adopted by the Board of Directors and approved by shareholders in September 1997, which has been amended from time to time. The Company recognized $ 16 million, $ 78 million and $ 66 million of Operating overhead expense related to cash awards under the LTIP during the years ended May 31, 2022, 2021 and 2020, respectively. During the fiscal year ended May 31, 2022, under the Stock Incentive Plan, the Company granted PSUs which replaced cash-based long-term incentive awards historically granted under the Company's LTIP. Refer to Note 11 — Common Stock and Stock-Based Compensation for further information related to PSUs. +The Company allows certain highly compensated employees and non-employee directors of the Company to defer compensation under a nonqualified deferred compensation plan. A rabbi trust was established to fund the Company's nonqualified deferred compensation plan obligation. The assets in the rabbi trust of approximately $ 876 million and $ 945 million as of May 31, 2022 and 2021, respectively, primarily consist of company owned life insurance policies recorded at their cash surrender value and are classified in Deferred income taxes and other assets on the Consolidated Balance Sheets. Deferred compensation plan liabilities were $ 890 million and $ 944 million as of May 31, 2022 and 2021, respectively, and primarily classified in Deferred income taxes and other liabilities on the Consolidated Balance Sheets. +The Company has pension plans in various countries worldwide. The pension plans are only available to local employees and are generally government mandated. The liability related to the unfunded pension liabilities of the plans was $ 30 million and $ 64 million as of May 31, 2022 and 2021, respectively, and primarily classified as non-current in Deferred income taxes and other liabilities on the Consolidated Balance Sheets. +NOTE 14 — RISK MANAGEMENT AND DERIVATIVES +The Company is exposed to global market risks, including the effect of changes in foreign currency exchange rates and interest rates, and uses derivatives to manage financial exposures that occur in the normal course of business. The Company does not hold or issue derivatives for trading or speculative purposes. +The Company may elect to designate certain derivatives as hedging instruments under U.S. GAAP. The Company formally documents all relationships between designated hedging instruments and hedged items as well as its risk management objectives and strategies for undertaking hedge transactions. This process includes linking all derivatives designated as hedges to either recognized assets or liabilities or forecasted transactions and assessing, both at inception and on an ongoing basis, the effectiveness of the hedging relationships. +The majority of derivatives outstanding as of May 31, 2022, are designated as foreign currency cash flow hedges, primarily for Euro/U.S. Dollar, British Pound/Euro, Chinese Yuan/U.S. Dollar and Japanese Yen/U.S. Dollar currency pairs. All derivatives are recognized on the Consolidated Balance Sheets at fair value and classified based on the instrument's maturity date. +2022 FORM 10-K 79 +Table of Contents +The following tables present the fair values of derivative instruments included within the Consolidated Balance Sheets: +DERIVATIVE ASSETS +BALANCE SHEET LOCATION MAY 31, +(Dollars in millions) +2022 2021 +Derivatives formally designated as hedging instruments: +Foreign exchange forwards and options Prepaid expenses and other current assets $ 639 $ 42 +Foreign exchange forwards and options Deferred income taxes and other assets 206 16 +Total derivatives formally designated as hedging instruments 845 58 +Derivatives not designated as hedging instruments: +Foreign exchange forwards and options Prepaid expenses and other current assets 30 34 +Embedded derivatives Prepaid expenses and other current assets 5 — +Total derivatives not designated as hedging instruments 35 34 +TOTAL DERIVATIVE ASSETS $ 880 $ 92 +DERIVATIVE LIABILITIES +BALANCE SHEET LOCATION MAY 31, +(Dollars in millions) +2022 2021 +Derivatives formally designated as hedging instruments: +Foreign exchange forwards and options Accrued liabilities $ 37 $ 385 +Foreign exchange forwards and options Deferred income taxes and other liabilities 11 41 +Total derivatives formally designated as hedging instruments 48 426 +Derivatives not designated as hedging instruments: +Foreign exchange forwards and options Accrued liabilities 28 30 +Embedded derivatives Accrued liabilities 1 1 +Total derivatives not designated as hedging instruments 29 31 +TOTAL DERIVATIVE LIABILITIES $ 77 $ 457 +The following table presents the amounts in the Consolidated Statements of Income in which the effects of cash flow hedges are recorded and the effects of cash flow hedge activity on these line items for the fiscal years ended May 31, 2022, 2021 and 2020: +YEAR ENDED MAY 31, +2022 2021 2020 +(Dollars in millions) +TOTAL AMOUNT OF +GAIN (LOSS) +ON CASH FLOW +HEDGE ACTIVITY TOTAL AMOUNT OF +GAIN (LOSS) +ON CASH FLOW +HEDGE ACTIVITY TOTAL AMOUNT OF +GAIN (LOSS) +ON CASH FLOW +HEDGE ACTIVITY +Revenues $ 46,710 $ ( 82 ) $ 44,538 $ 45 $ 37,403 $ ( 17 ) +Cost of sales 25,231 ( 23 ) 24,576 51 21,162 364 +Demand creation expense 3,850 1 3,114 3 3,592 ( 2 ) +Other (income) expense, net ( 181 ) 130 14 ( 47 ) 139 181 +Interest expense (income), net 205 ( 7 ) 262 ( 7 ) 89 ( 7 ) +2022 FORM 10-K 80 +Table of Contents +The following tables present the amounts affecting the Consolidated Statements of Income for the years ended May 31, 2022, 2021 and 2020: +(Dollars in millions) +AMOUNT OF GAIN (LOSS) +RECOGNIZED IN OTHER +COMPREHENSIVE INCOME (LOSS) ON DERIVATIVES (1) +AMOUNT OF GAIN (LOSS) +RECLASSIFIED FROM ACCUMULATED +OTHER COMPREHENSIVE +INCOME (LOSS) INTO INCOME (1) +YEAR ENDED MAY 31, LOCATION OF GAIN (LOSS) +RECLASSIFIED FROM ACCUMULATED +OTHER COMPREHENSIVE INCOME +(LOSS) INTO INCOME YEAR ENDED MAY 31, +2022 2021 2020 2022 2021 2020 +Derivatives designated as +cash flow hedges: +Foreign exchange forwards +and options +$ ( 39 ) $ ( 61 ) $ 28 Revenues $ ( 82 ) $ 45 $ ( 17 ) +Foreign exchange forwards +and options +889 ( 563 ) 283 Cost of sales ( 23 ) 51 364 +Foreign exchange forwards +and options +( 6 ) 5 1 Demand creation expense 1 3 ( 2 ) +Foreign exchange forwards +and options +492 ( 163 ) 90 Other (income) expense, net 130 ( 47 ) 181 +Interest rate swaps (2) +— — — Interest expense (income), net ( 7 ) ( 7 ) ( 7 ) +Total designated cash +flow hedges +$ 1,336 $ ( 782 ) $ 402 $ 19 $ 45 $ 519 +(1) For the fiscal years ended May 31, 2022, 2021 and 2020, the amounts recorded in Other (income) expense, net as a result of the discontinuance of cash flow hedges because the forecasted transactions were no longer probable of occurring were immaterial. +(2) Gains and losses associated with terminated interest rate swaps, which were previously designated as cash flow hedges and recorded in Accumulated other comprehensive income (loss), will be released through Interest expense (income), net over the term of the issued debt. +AMOUNT OF GAIN (LOSS) RECOGNIZED +IN INCOME ON DERIVATIVES +LOCATION OF GAIN (LOSS) +RECOGNIZED IN INCOME +ON DERIVATIVES +YEAR ENDED MAY 31, +(Dollars in millions) +2022 2021 2020 +Derivatives not designated as hedging instruments: +Foreign exchange forwards and options $ 40 $ ( 150 ) $ 76 Other (income) expense, net +Embedded derivatives ( 2 ) ( 17 ) ( 1 ) Other (income) expense, net +CASH FLOW HEDGES +All changes in fair value of derivatives designated as cash flow hedge instruments are recorded in Accumulated other comprehensive income (loss) until Net income is affected by the variability of cash flows of the hedged transaction. Effective hedge results are classified in the Consolidated Statements of Income in the same manner as the underlying exposure. When it is no longer probable the forecasted hedged transaction will occur in the initially identified time period, hedge accounting is discontinued and the Company accounts for the associated derivative as an undesignated instrument as discussed below. Additionally, the gains and losses associated with derivatives no longer designated as cash flow hedge instruments in Accumulated other comprehensive income (loss) are recognized immediately in Other (income) expense, net, if it is probable the forecasted hedged transaction will not occur by the end of the initially identified time period or within an additional two-month period thereafter. In rare circumstances, the additional period of time may exceed two months due to extenuating circumstances related to the nature of the forecasted transaction that are outside the control or influence of the Company. +The purpose of the Company's foreign exchange risk management program is to lessen both the positive and negative effects of currency fluctuations on the Company's consolidated results of operations, financial position and cash flows. Foreign currency exposures the Company may elect to hedge in this manner include product costs, non-functional currency denominated revenues, intercompany revenues, demand creation expenses, investments in U.S. Dollar denominated available-for-sale debt securities and certain other intercompany transactions. +Product cost foreign currency exposures are primarily generated through non-functional currency denominated product purchases and the foreign currency adjustment program described below. NIKE entities primarily purchase product in two ways: (1) Certain NIKE entities purchase product from the NIKE Trading Company (NTC), a wholly-owned sourcing hub that buys NIKE branded products from third party factories, predominantly in U.S. Dollars. The NTC, whose functional currency is the U.S. Dollar, then sells the product to NIKE entities in their respective functional currencies. NTC sales to a NIKE entity with a different +2022 FORM 10-K 81 +Table of Contents +functional currency result in a foreign currency exposure for the NTC. (2) Other NIKE entities purchase product directly from third party factories in U.S. Dollars. These purchases generate a foreign currency exposure for those NIKE entities with a functional currency other than the U.S. Dollar. +The Company operates a foreign currency adjustment program with certain factories. The program is designed to more effectively manage foreign currency risk by assuming certain of the factories' foreign currency exposures, some of which are natural offsets to the Company's existing foreign currency exposures. Under this program, the Company's payments to these factories are adjusted for rate fluctuations in the basket of currencies (“factory currency exposure index”) in which the labor, materials and overhead costs incurred by the factories in the production of NIKE branded products (“factory input costs”) are denominated. For the portion of the indices denominated in the local or functional currency of the factory, the Company may elect to place formally designated cash flow hedges. For all currencies within the indices, excluding the U.S. Dollar and the local or functional currency of the factory, an embedded derivative contract is created upon the factory's acceptance of NIKE's purchase order. Embedded derivative contracts are separated from the related purchase order, as further described within the Embedded Derivatives section below. +The Company's policy permits the utilization of derivatives to reduce its foreign currency exposures where internal netting or other strategies cannot be effectively employed. Typically, the Company may enter into hedge contracts starting up to 12 to 24 months in advance of the forecasted transaction and may place incremental hedges up to 100 % of the exposure by the time the forecasted transaction occurs. The total notional amount of outstanding foreign currency derivatives designated as cash flow hedges was $ 18.5 billion as of May 31, 2022. +As of May 31, 2022, approximately $ 607 million of deferred net gains (net of tax) on both outstanding and matured derivatives in Accumulated other comprehensive income (loss) are expected to be reclassified to Net income during the next 12 months concurrent with the underlying hedged transactions also being recorded in Net income. Actual amounts ultimately reclassified to Net income are dependent on the exchange rates in effect when derivative contracts currently outstanding mature. As of May 31, 2022, the maximum term over which the Company hedges exposures to the variability of cash flows for its forecasted transactions was 24 months. +FAIR VALUE HEDGES +The Company has, in the past, been exposed to the risk of changes in the fair value of certain fixed-rate debt attributable to changes in interest rates. Derivatives used by the Company to hedge this risk are receive-fixed, pay-variable interest rate swaps. The Company had no interest rate swaps designated as fair value hedges as of May 31, 2022. +NET INVESTMENT HEDGES +The Company has, in the past, hedged and may, in the future, hedge the risk of variability in foreign currency-denominated net investments in wholly-owned international operations. All changes in fair value of the derivatives designated as net investment hedges are reported in Accumulated other comprehensive income (loss) along with the foreign currency translation adjustments on those investments. The Company had no outstanding net investment hedges as of May 31, 2022. +UNDESIGNATED DERIVATIVE INSTRUMENTS +The Company may elect to enter into foreign exchange forwards to mitigate the change in fair value of specific assets and liabilities on the Consolidated Balance Sheets and/or embedded derivative contracts. These undesignated instruments are recorded at fair value as a derivative asset or liability on the Consolidated Balance Sheets with their corresponding change in fair value recognized in Other (income) expense, net, together with the remeasurement gain or loss from the hedged balance sheet position and/or embedded derivative contract. The total notional amount of outstanding undesignated derivative instruments was $ 3 billion as of May 31, 2022. +EMBEDDED DERIVATIVES +As part of the foreign currency adjustment program described above, an embedded derivative contract is created upon the factory's acceptance of NIKE's purchase order for currencies within the factory currency exposure indices that are neither the U.S. Dollar nor the local or functional currency of the factory. In addition, embedded derivative contracts are created when the Company enters into certain other contractual agreements which have payments that are indexed to currencies that are not the functional currency of either substantial party to the contracts. Embedded derivative contracts are treated as foreign currency forward contracts that are bifurcated from the related contract and recorded at fair value as a derivative asset or liability on the Consolidated Balance Sheets with their corresponding change in fair value recognized in Other (income) expense, net, through the date the foreign currency fluctuations cease to exist. +As of May 31, 2022, the total notional amount of embedded derivatives outstanding was approximately $ 584 million. +2022 FORM 10-K 82 +Table of Contents +CREDIT RISK +The Company is exposed to credit-related losses in the event of nonperformance by counterparties to hedging instruments. The counterparties to all derivative transactions are major financial institutions with investment grade credit ratings; however, this does not eliminate the Company's exposure to credit risk with these institutions. This credit risk is limited to the unrealized gains in such contracts should any of these counterparties fail to perform as contracted. To manage this risk, the Company has established strict counterparty credit guidelines that are continually monitored. +The Company's derivative contracts contain credit risk-related contingent features designed to protect against significant deterioration in counterparties' creditworthiness and their ultimate ability to settle outstanding derivative contracts in the normal course of business. The Company's bilateral credit-related contingent features generally require the owing entity, either the Company or the derivative counterparty, to post collateral for the portion of the fair value in excess of $ 50 million should the fair value of outstanding derivatives per counterparty be greater than $ 50 million. Additionally, a certain level of decline in credit rating of either the Company or the counterparty could trigger collateral requirements. As of May 31, 2022, the Company was in compliance with all credit risk-related contingent features, and no derivative instruments with such features were in a net liability position. Accordingly, the Company posted no cash collateral as a result of these contingent features. Further, as of May 31, 2022, the Company had received $ 486 million in cash collateral from various counterparties to its derivative contracts. The Company considers the impact of the risk of counterparty default to be immaterial. +For additional information related to the Company's derivative financial instruments and collateral, refer to Note 6 — Fair Value Measurements. +NOTE 15 — ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) +The changes in Accumulated other comprehensive income (loss), net of tax, were as follows: +(Dollars in millions) +FOREIGN CURRENCY TRANSLATION ADJUSTMENT (1) +CASH FLOW HEDGES +NET INVESTMENT HEDGES (1) +OTHER TOTAL +Balance at May 31, 2021 $ 2 $ ( 435 ) $ 115 $ ( 62 ) $ ( 380 ) +Other comprehensive income (loss): +Other comprehensive gains (losses) before reclassifications (2) +( 522 ) 1,222 — 28 728 +Reclassifications to net income of previously deferred (gains) losses (3) +— ( 8 ) — ( 22 ) ( 30 ) +Total other comprehensive income (loss) ( 522 ) 1,214 — 6 698 +Balance at May 31, 2022 $ ( 520 ) $ 779 $ 115 $ ( 56 ) $ 318 +(1) The accumulated foreign currency translation adjustment and net investment hedge gains/losses related to an investment in a foreign subsidiary are reclassified to Net income upon sale or upon complete or substantially complete liquidation of the respective entity. +(2) Net of tax benefit (expense) of $ 0 million , $( 114 ) million, $ 0 million , $( 9 ) million and $( 123 ) million, respectively. +(3) Net of tax (benefit) expense of $ 0 million , $ 11 million, $ 0 million , $ 9 million and $ 20 million, respectively. +(Dollars in millions) +FOREIGN CURRENCY TRANSLATION ADJUSTMENT (1) +CASH FLOW HEDGES +NET INVESTMENT HEDGES (1) +OTHER TOTAL +Balance at May 31, 2020 $ ( 494 ) $ 390 $ 115 $ ( 67 ) $ ( 56 ) +Other comprehensive income (loss): +Other comprehensive gains (losses) before reclassifications (2) +499 ( 788 ) — ( 8 ) ( 297 ) +Reclassifications to net income of previously deferred (gains) losses (3) +( 3 ) ( 37 ) — 13 ( 27 ) +Total other comprehensive income (loss) 496 ( 825 ) — 5 ( 324 ) +Balance at May 31, 2021 $ 2 $ ( 435 ) $ 115 $ ( 62 ) $ ( 380 ) +(1) The accumulated foreign currency translation adjustment and net investment hedge gains/losses related to an investment in a foreign subsidiary are reclassified to Net income upon sale or upon complete or substantially complete liquidation of the respective entity. +(2) Net of tax benefit (expense) of $ 0 million , $( 6 ) million, $ 0 million , $( 1 ) million and $( 7 ) million, respectively. +(3) Net of tax (benefit) expense of $ 0 million , $ 8 million, $ 0 million , $ 0 million and $ 8 million, respectively. +2022 FORM 10-K 83 +Table of Contents +The following table summarizes the reclassifications from Accumulated other comprehensive income (loss) to the Consolidated Statements of Income: +AMOUNT OF GAIN (LOSS) +RECLASSIFIED FROM ACCUMULATED +OTHER COMPREHENSIVE INCOME +(LOSS) INTO INCOME LOCATION OF GAIN (LOSS) +RECLASSIFIED FROM ACCUMULATED +OTHER COMPREHENSIVE INCOME +(LOSS) INTO INCOME +YEAR ENDED MAY 31, +(Dollars in millions) +2022 2021 +Gains (losses) on foreign currency translation adjustment $ — $ 3 Other (income) expense, net +Total before tax 3 +Tax (expense) benefit — — +Gain (loss) net of tax — 3 +Gains (losses) on cash flow hedges: +Foreign exchange forwards and options $ ( 82 ) 45 Revenues +Foreign exchange forwards and options ( 23 ) 51 Cost of sales +Foreign exchange forwards and options 1 3 Demand creation expense +Foreign exchange forwards and options 130 ( 47 ) Other (income) expense, net +Interest rate swaps ( 7 ) ( 7 ) Interest expense (income), net +Total before tax 19 45 +Tax (expense) benefit ( 11 ) ( 8 ) +Gain (loss) net of tax 8 37 +Gains (losses) on other 31 ( 13 ) Other (income) expense, net +Total before tax 31 ( 13 ) +Tax (expense) benefit ( 9 ) — +Gain (loss) net of tax 22 ( 13 ) +Total net gain (loss) reclassified for the period $ 30 $ 27 +2022 FORM 10-K 84 +Table of Contents +NOTE 16 — REVENUES +DISAGGREGATION OF REVENUES +The following tables present the Company's Revenues disaggregated by reportable operating segment, major product line and distribution channel: +YEAR ENDED MAY 31, 2022 +(Dollars in millions) +NORTH AMERICA EUROPE, MIDDLE EAST & AFRICA GREATER CHINA ASIA PACIFIC & LATIN AMERICA GLOBAL BRAND DIVISIONS TOTAL NIKE BRAND CONVERSE CORPORATE TOTAL NIKE, INC. +Revenues by: +Footwear $ 12,228 $ 7,388 $ 5,416 $ 4,111 $ — $ 29,143 $ 2,094 $ — $ 31,237 +Apparel 5,492 4,527 1,938 1,610 — 13,567 103 — 13,670 +Equipment 633 564 193 234 — 1,624 26 — 1,650 +Other — — — — 102 102 123 ( 72 ) 153 +TOTAL REVENUES $ 18,353 $ 12,479 $ 7,547 $ 5,955 $ 102 $ 44,436 $ 2,346 $ ( 72 ) $ 46,710 +Revenues by: +Sales to Wholesale Customers $ 9,621 $ 8,377 $ 4,081 $ 3,529 $ — $ 25,608 $ 1,292 $ — $ 26,900 +Sales through Direct to Consumer 8,732 4,102 3,466 2,426 — 18,726 931 — 19,657 +Other — — — — 102 102 123 ( 72 ) 153 +TOTAL REVENUES $ 18,353 $ 12,479 $ 7,547 $ 5,955 $ 102 $ 44,436 $ 2,346 $ ( 72 ) $ 46,710 +YEAR ENDED MAY 31, 2021 +(Dollars in millions) +NORTH AMERICA EUROPE, MIDDLE EAST & AFRICA GREATER CHINA +ASIA PACIFIC & LATIN AMERICA (1) +GLOBAL BRAND DIVISIONS TOTAL NIKE BRAND CONVERSE CORPORATE TOTAL NIKE, INC. +Revenues by: +Footwear $ 11,644 $ 6,970 $ 5,748 $ 3,659 $ — $ 28,021 $ 1,986 $ — $ 30,007 +Apparel 5,028 3,996 2,347 1,494 — 12,865 104 — 12,969 +Equipment 507 490 195 190 — 1,382 29 — 1,411 +Other — — — — 25 25 86 40 151 +TOTAL REVENUES $ 17,179 $ 11,456 $ 8,290 $ 5,343 $ 25 $ 42,293 $ 2,205 $ 40 $ 44,538 +Revenues by: +Sales to Wholesale Customers $ 10,186 $ 7,812 $ 4,513 $ 3,387 $ — $ 25,898 $ 1,353 $ — $ 27,251 +Sales through Direct to Consumer 6,993 3,644 3,777 1,956 — 16,370 766 — 17,136 +Other — — — — 25 25 86 40 151 +TOTAL REVENUES $ 17,179 $ 11,456 $ 8,290 $ 5,343 $ 25 $ 42,293 $ 2,205 $ 40 $ 44,538 +(1) Refer to Note 20 — Acquisitions and Divestitures for additional information on the transition of the Company's NIKE Brand business in Brazil to a third-party distributor. +2022 FORM 10-K 85 +Table of Contents +YEAR ENDED MAY 31, 2020 +(Dollars in millions) +NORTH AMERICA EUROPE, MIDDLE EAST & AFRICA GREATER CHINA ASIA PACIFIC & LATIN AMERICA GLOBAL BRAND DIVISIONS TOTAL NIKE BRAND CONVERSE CORPORATE TOTAL NIKE, INC. +Revenues by: +Footwear $ 9,329 $ 5,892 $ 4,635 $ 3,449 $ — $ 23,305 $ 1,642 $ — $ 24,947 +Apparel 4,639 3,053 1,896 1,365 — 10,953 89 — 11,042 +Equipment 516 402 148 214 — 1,280 25 — 1,305 +Other — — — — 30 30 90 ( 11 ) 109 +TOTAL REVENUES $ 14,484 $ 9,347 $ 6,679 $ 5,028 $ 30 $ 35,568 $ 1,846 $ ( 11 ) $ 37,403 +Revenues by: +Sales to Wholesale Customers $ 9,371 $ 6,574 $ 3,803 $ 3,408 $ — $ 23,156 $ 1,154 $ — $ 24,310 +Sales through Direct to Consumer 5,113 2,773 2,876 1,620 — 12,382 602 — 12,984 +Other — — — — 30 30 90 ( 11 ) 109 +TOTAL REVENUES $ 14,484 $ 9,347 $ 6,679 $ 5,028 $ 30 $ 35,568 $ 1,846 $ ( 11 ) $ 37,403 +For the fiscal years ended May 31, 2022, 2021 and 2020, Global Brand Divisions revenues include NIKE Brand licensing and other miscellaneous revenues that are not part of a geographic operating segment. Converse Other revenues were primarily attributable to licensing businesses. Corporate revenues primarily consisted of foreign currency hedge gains and losses related to revenues generated by entities within the NIKE Brand geographic operating segments and Converse but managed through the Company's central foreign exchange risk management program. +As of May 31, 2022 and 2021, the Company did not have any contract assets and had an immaterial amount of contract liabilities recorded in Accrued liabilities on the Consolidated Balance Sheets. +SALES-RELATED RESERVES +As of May 31, 2022 and 2021, the Company's sales-related reserve balance, which includes returns, post-invoice sales discounts and miscellaneous claims, was $ 1,015 million and $ 1,077 million, respectively, recorded in Accrued liabilities on the Consolidated Balance Sheets. The estimated cost of inventory for expected product returns was $ 194 million and $ 269 million as of May 31, 2022 and 2021, respectively, and was recorded in Prepaid expenses and other current assets on the Consolidated Balance Sheets. +MAJOR CUSTOMERS +No customer accounted for 10% or more of the Company's consolidated net Revenues during the fiscal years ended May 31, 2022, 2021 and 2020. +NOTE 17 — OPERATING SEGMENTS AND RELATED INFORMATION +The Company's operating segments are evidence of the structure of the Company's internal organization. The NIKE Brand segments are defined by geographic regions for operations participating in NIKE Brand sales activity. +Each NIKE Brand geographic segment operates predominantly in one industry: the design, development, marketing and selling of athletic footwear, apparel and equipment. The Company's reportable operating segments for the NIKE Brand are: North America; Europe, Middle East & Africa (EMEA); Greater China; and Asia Pacific & Latin America (APLA), and include results for the NIKE and Jordan brands, results for the Hurley brand, prior to its divestiture in fiscal 2020, were included in North America. Refer to Note 20 — Acquisitions and Divestitures for information regarding the fiscal 2020 divestiture of the Company's wholly-owned subsidiary, Hurley, and the planned transition of NIKE Brand businesses in certain countries within APLA to third-party distributors. +The Company's NIKE Direct operations are managed within each NIKE Brand geographic operating segment. Converse is also a reportable segment for the Company and operates in one industry: the design, marketing, licensing and selling of athletic lifestyle sneakers, apparel and accessories. +Global Brand Divisions is included within the NIKE Brand for presentation purposes to align with the way management views the Company. Global Brand Divisions revenues include NIKE Brand licensing and other miscellaneous revenues that are not part of a +2022 FORM 10-K 86 +Table of Contents +geographic operating segment. Global Brand Divisions costs represent demand creation and operating overhead expense that include product creation and design expenses centrally managed for the NIKE Brand, as well as costs associated with NIKE Direct global digital operations and enterprise technology. +Corporate consists primarily of unallocated general and administrative expenses, including expenses associated with centrally managed departments; depreciation and amortization related to the Company's headquarters; unallocated insurance, benefit and compensation programs, including stock-based compensation; and certain foreign currency gains and losses, including certain hedge gains and losses. For the fiscal year ended May 31, 2020, Corporate included a non-recurring impairment charge, recognized as a result of the Company's decision to transition certain NIKE Brand businesses within APLA to a third-party distributor. This charge primarily reflected the anticipated release of associated non-cash cumulative foreign currency translation losses. For more information regarding this charge, refer to Note 20 — Acquisitions and Divestitures . +The primary financial measure used by the Company to evaluate performance of individual operating segments is earnings before interest and taxes (EBIT), which represents Net income before Interest expense (income), net and Income tax expense in the Consolidated Statements of Income. +As part of the Company's centrally managed foreign exchange risk management program, standard foreign currency rates are assigned twice per year to each NIKE Brand entity in the Company's geographic operating segments and to Converse. These rates are set approximately nine and twelve months in advance of the future selling seasons to which they relate (specifically, for each currency, one standard rate applies to the fall and holiday selling seasons, and one standard rate applies to the spring and summer selling seasons) based on average market spot rates in the calendar month preceding the date they are established. Inventories and Cost of sales for geographic operating segments and Converse reflect the use of these standard rates to record non-functional currency product purchases in the entity's functional currency. Differences between assigned standard foreign currency rates and actual market rates are included in Corporate, together with foreign currency hedge gains and losses generated from the Company's centrally managed foreign exchange risk management program and other conversion gains and losses. +Accounts receivable, net, Inventories and Property, plant and equipment, net for operating segments are regularly reviewed by management and are therefore provided below. +2022 FORM 10-K 87 +Table of Contents +YEAR ENDED MAY 31, +(Dollars in millions) +2022 2021 2020 +REVENUES +North America $ 18,353 $ 17,179 $ 14,484 +Europe, Middle East & Africa 12,479 11,456 9,347 +Greater China 7,547 8,290 6,679 +Asia Pacific & Latin America 5,955 5,343 5,028 +Global Brand Divisions 102 25 30 +Total NIKE Brand 44,436 42,293 35,568 +Converse 2,346 2,205 1,846 +Corporate ( 72 ) 40 ( 11 ) +TOTAL NIKE, INC. REVENUES $ 46,710 $ 44,538 $ 37,403 +EARNINGS BEFORE INTEREST AND TAXES +North America $ 5,114 $ 5,089 $ 2,899 +Europe, Middle East & Africa 3,293 2,435 1,541 +Greater China 2,365 3,243 2,490 +Asia Pacific & Latin America 1,896 1,530 1,184 +Global Brand Divisions ( 4,262 ) ( 3,656 ) ( 3,468 ) +Converse 669 543 297 +Corporate ( 2,219 ) ( 2,261 ) ( 1,967 ) +Interest expense (income), net 205 262 89 +TOTAL NIKE, INC. INCOME BEFORE INCOME TAXES $ 6,651 $ 6,661 $ 2,887 +ADDITIONS TO PROPERTY, PLANT AND EQUIPMENT +North America $ 146 $ 98 $ 110 +Europe, Middle East & Africa 197 153 139 +Greater China 78 94 28 +Asia Pacific & Latin America 56 54 41 +Global Brand Divisions 222 278 438 +Total NIKE Brand 699 677 756 +Converse 9 7 12 +Corporate 103 107 356 +TOTAL ADDITIONS TO PROPERTY, PLANT AND EQUIPMENT $ 811 $ 791 $ 1,124 +DEPRECIATION +North America $ 124 $ 130 $ 148 +Europe, Middle East & Africa 134 136 132 +Greater China 41 46 44 +Asia Pacific & Latin America 42 43 46 +Global Brand Divisions 220 222 214 +Total NIKE Brand 561 577 584 +Converse 22 26 25 +Corporate 134 141 112 +TOTAL DEPRECIATION $ 717 $ 744 $ 721 +2022 FORM 10-K 88 +Table of Contents +AS OF MAY 31, +(Dollars in millions) +2022 2021 +ACCOUNTS RECEIVABLE, NET +North America $ 1,850 $ 1,777 +Europe, Middle East & Africa 1,351 1,349 +Greater China 406 288 +Asia Pacific & Latin America (1) +664 643 +Global Brand Divisions 113 128 +Total NIKE Brand 4,384 4,185 +Converse 230 225 +Corporate 53 53 +TOTAL ACCOUNTS RECEIVABLE, NET $ 4,667 $ 4,463 +INVENTORIES +North America $ 4,098 $ 2,851 +Europe, Middle East & Africa 1,887 1,821 +Greater China 1,044 1,247 +Asia Pacific & Latin America (1) +686 667 +Global Brand Divisions 197 153 +Total NIKE Brand 7,912 6,739 +Converse 279 290 +Corporate 229 ( 175 ) +TOTAL INVENTORIES $ 8,420 $ 6,854 +PROPERTY, PLANT AND EQUIPMENT, NET +North America $ 639 $ 617 +Europe, Middle East & Africa 920 982 +Greater China 303 288 +Asia Pacific & Latin America (1) +274 304 +Global Brand Divisions 789 780 +Total NIKE Brand 2,925 2,971 +Converse 49 63 +Corporate 1,817 1,870 +TOTAL PROPERTY, PLANT AND EQUIPMENT, NET $ 4,791 $ 4,904 +(1) Excludes assets held-for-sale as of May 31, 2022 and 2021. See Note 20 — Acquisitions and Divestitures for additional information. +REVENUES AND LONG-LIVED ASSETS BY GEOGRAPHIC AREA +After allocation of revenues for Global Brand Divisions, Converse and Corporate to geographical areas based on the location where the sales originated, revenues by geographical area are essentially the same as reported above for the NIKE Brand operating segments with the exception of the United States. Revenues derived in the United States were $ 18,749 million, $ 17,363 million and $ 14,625 million for the fiscal years ended May 31, 2022, 2021 and 2020, respectively. +The Company's largest concentrations of long-lived assets primarily consist of the Company's corporate headquarters, retail locations and distribution facilities in the United States and China, as well as distribution facilities in Belgium. Long-lived assets attributable to operations in these countries, which consist of property, plant and equipment, net and operating lease ROU assets, net, were as follows: +MAY 31, +(Dollars in millions) +2022 2021 +United States $ 4,916 $ 4,927 +Belgium 646 676 +China 538 518 +2022 FORM 10-K 89 +Table of Contents +NOTE 18 — COMMITMENTS AND CONTINGENCIES +As of May 31, 2022 and 2021, the Company had bank guarantees and letters of credit outstanding totaling $ 289 million and $ 275 million, respectively, issued primarily for real estate agreements, self-insurance programs and other general business obligations. +In connection with various contracts and agreements, the Company provides routine indemnification relating to the enforceability of intellectual property rights, coverage for legal issues that arise and other items where the Company is acting as the guarantor. Currently, the Company has several such agreements in place. However, based on the Company's historical experience and the estimated probability of future loss, the Company has determined the fair value of such indemnification is not material to the Company's financial position or results of operations. +In the ordinary course of business, the Company is subject to various legal proceedings, claims and government investigations relating to its business, products and actions of its employees and representatives, including contractual and employment relationships, product liability, antitrust, customs, intellectual property and other matters. The outcome of these legal matters is inherently uncertain, and the Company cannot predict the eventual outcome of currently pending matters, the timing of their ultimate resolution or the eventual losses, fines, penalties or consequences relating to those matters. When a loss related to a legal proceeding or claim is probable and reasonably estimable, the Company accrues its best estimate for the ultimate resolution of the matter. If one or more legal matters were to be resolved against the Company in a reporting period for amounts above management's expectations, the Company's financial position, operating results and cash flows for that reporting period could be materially adversely affected. In the opinion of management, based on its current knowledge and after consultation with counsel, the Company does not believe any currently pending legal matters will have a material adverse impact on the Company's results of operations, financial position or cash flows, except as described below. +BELGIAN CUSTOMS CLAIM +The Company has received claims for certain years from the Belgian Customs Authorities for alleged underpaid duties related to products imported beginning in fiscal 2018. The Company disputes these claims and plans to appeal. At this time, the Company is unable to estimate the range of loss and cannot predict the final outcome as it could take several years to reach a resolution on this matter. If this matter is ultimately resolved against the Company, the amounts owed, including fines, penalties and other consequences relating to the matter, could have a material adverse effect on the Company's results of operations, financial position and cash flows. +NOTE 19 — LEASES +Lease expense is recognized in Cost of sales or Operating overhead expense within the Consolidated Statements of Income, based on the underlying nature of the leased asset. For the fiscal years ended May 31, 2022, 2021 and 2020, lease expense primarily consisted of operating lease costs of $ 593 million, $ 589 million and $ 569 million, respectively. Lease expense also consisted of $ 366 million, $ 347 million and $ 337 million for fiscal years ended May 31, 2022, 2021 and 2020, respectively, primarily related to variable lease costs, which includes an immaterial amount of short-term lease costs. As of and for the fiscal years ended May 31, 2022 and 2021 and 2020, finance leases were not a material component of the Company's lease portfolio. +The undiscounted cash flows for future maturities of the Company’s operating lease liabilities and the reconciliation to the Operating lease liabilities recognized in the Company’s Consolidated Balance Sheets are as follows: +(Dollars in millions) +AS OF MAY 31, 2022 (1) +Fiscal 2023 $ 491 +Fiscal 2024 543 +Fiscal 2025 490 +Fiscal 2026 405 +Fiscal 2027 350 +Thereafter 1,250 +Total undiscounted future cash flows related to lease payments $ 3,529 +Less interest 332 +Present value of lease liabilities $ 3,197 +(1) Excludes $ 175 million as of May 31, 2022, of future operating lease payments for lease agreements signed but not yet commenced. +2022 FORM 10-K 90 +Table of Contents +The following table includes supplemental information used to calculate the present value of Operating lease liabilities: +AS OF MAY 31, +2022 2021 +Weighted-average remaining lease term (in years) 7.8 8.3 +Weighted-average discount rate 2.3 % 2.3 % +The following table includes supplemental cash and non-cash information related to operating leases: +YEAR ENDED MAY 31, +(Dollars in millions) +2022 2021 2020 +Cash paid for amounts included in the measurement of lease liabilities: +Operating cash flows from operating leases $ 589 $ 583 $ 532 +Operating lease right-of-use assets obtained in exchange for new operating lease liabilities $ 537 $ 489 $ 705 +(1) +(1) Excludes the amount initially capitalized in conjunction with the adoption of Topic 842. +NOTE 20 — ACQUISITIONS AND DIVESTITURES +ACQUISITIONS +During fiscal 2022, 2021 and 2020, the Company made multiple acquisitions focused on gaining new capabilities to fuel its Consumer Direct Offense strategy, serving consumers personally at a global scale. The impact of acquisitions, individually and in aggregate, was not considered material to the Company's Consolidated Financial Statements. +DIVESTITURES +During fiscal 2020, as a result of the Company's decision to transition its wholesale and direct to consumer operating model in certain countries within its APLA operating segment to third-party distributors, the related assets and liabilities of these entities were classified as held-for-sale within Prepaid expenses and other current assets and Accrued liabilities, respectively, on the Consolidated Balance Sheets. +During the fourth quarter of fiscal 2022, the Company entered into separate definitive agreements to sell its entities in Argentina and Uruguay as well as its entity in Chile to third-party distributors. The assets and liabilities of these entities will remain classified as held-for-sale on the Consolidated Balance Sheets until the transactions close, which is expected to occur prior to the end of the third quarter of fiscal 2023. +As of May 31, 2022, held-for-sale assets were $ 182 million, primarily consisting of $ 73 million of Accounts receivable, net and $ 59 million of Inventories; held-for-sale liabilities were $ 58 million, primarily consisting of $ 26 million of Accrued liabilities and $ 20 million of Accounts payable. +As of May 31, 2021, held-for-sale assets were $ 175 million, primarily consisting of $ 76 million of Inventories and $ 59 million of Accounts receivable, net; held-for-sale liabilities were $ 72 million, primarily consisting of $ 25 million of Accounts payable and $ 22 million of Accrued liabilities. +2022 FORM 10-K 91 +Table of Contents +The Company has recognized total expected net losses of $ 397 million as of May 31, 2022, related to the Argentina, Uruguay and Chile transactions within Other (income) expense, net, classified within Corporate, and a corresponding allowance within Accrued liabilities on the Consolidated Balance Sheets. The initial expected loss of $ 405 million recognized in fiscal 2020 was largely due to the anticipated release of the cumulative net foreign currency translation losses and subsequently adjusted for changes in fair value. These losses will be reclassified from Accumulated other comprehensive income (loss) to Net income upon sale of the legal entities. At the completion of the sale of the Argentina and Uruguay entities, the Company expects to recognize future losses, in part due to changes in foreign currency exchange rates. The losses are not expected to be material to the Company's Consolidated Financial Statements. For more information see Note 6 — Fair Value Measurements. +OTHER DIVESTITURES +During fiscal 2020, the Company entered into a definitive agreement to sell substantially all of its NIKE Brand operations in Brazil and shift to a distributor operating model. During fiscal 2021, the transaction closed and the Company recognized a loss of approximately $ 50 million within Other (income) expense, net classified within Corporate, on the Consolidated Statements of Income. Cash proceeds received were reflected within Other investing activities on the Consolidated Statements of Cash Flows. +On October 29, 2019, the Company signed a definitive agreement to sell the assets and liabilities of its wholly-owned subsidiary brand, Hurley. The transaction closed on December 6, 2019, and the impacts of the divestiture were not considered material to the Company's Consolidated Financial Statements. +NOTE 21 — RESTRUCTURING +In fiscal 2021, the Company announced a new digitally empowered phase of its Consumer Direct Offense strategy: Consumer Direct Acceleration. During fiscal 2021, the Company substantially completed a series of leadership and operating model changes to streamline and speed up the strategic execution of the Consumer Direct Acceleration. +For the fiscal year ended May 31, 2021, the Company recognized employee termination costs of $ 214 million and $ 35 million within Operating overhead expense and Cost of sales, respectively, and made cash payments of $ 212 million. Additionally, the related stock-based compensation expense recorded within Operating overhead expense and Cost of sales was $ 41 million and $ 4 million, respectively, for the fiscal year ended May 31, 2021 . +For the fiscal year ended May 31, 2022 , the Co mpany recognized an immaterial amount of related employee termination costs and, to a lesser extent, stock-based compensation expense. +For all periods presented these costs were classified within Corporate. +2022 FORM 10-K 92 +Table of Contents +ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE +There has been no change of accountants nor any disagreements with accountants on any matter of accounting principles or practices or financial statement disclosure required to be reported under this Item. +ITEM 9A. CONTROLS AND PROCEDURES +We maintain disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in our Securities Exchange Act of 1934, as amended (the "Exchange Act") reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. +We carry out a variety of ongoing procedures, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, to evaluate the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of May 31, 2022. +“Management's Annual Report on Internal Control Over Financial Reporting” is included in Item 8 of this Report. +We are continuing several transformation initiatives to centralize and simplify our business processes and systems. These are long-term initiatives, which we believe will enhance our internal control over financial reporting due to increased automation and further integration of related processes. We will continue to monitor our internal control over financial reporting for effectiveness throughout these transformation initiatives. +There have not been any changes in our internal control over financial reporting during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. +ITEM 9B. OTHER INFORMATION +No disclosure is required under this item. +ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS +Not applicable. +2022 FORM 10-K 93 +Table of Contents +PART III +ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE +The information required by Item 401 of Regulation S-K regarding directors is included under “Corporate Governance — NIKE, Inc. Board of Directors” in the definitive Proxy Statement for our 2022 Annual Meeting of Shareholders and is incorporated herein by reference. The information required by Item 401 of Regulation S-K regarding executive officers is included under “Information about our Executive Officers” in Item 1 of this Report. The information required by Item 406 of Regulation S-K is included under “Corporate Governance — Board Structure and Responsibilities — Code of Conduct” in the definitive Proxy Statement for our 2022 Annual Meeting of Shareholders and is incorporated herein by reference. The information required by Items 407(d)(4) and (d)(5) of Regulation S-K regarding the Audit & Finance Committee of the Board of Directors is included under “Corporate Governance — Board Structure and Responsibilities — Board Committees” in the definitive Proxy Statement for our 2022 Annual Meeting of Shareholders and is incorporated herein by reference. +ITEM 11. EXECUTIVE COMPENSATION +The information required by Items 402, 407(e)(4) and 407(e)(5) of Regulation S-K regarding executive compensation is included under “Corporate Governance — Director Compensation for Fiscal 2022,” “Compensation Discussion and Analysis,” "Executive Compensation Tables," and “Stock Ownership Information — Transactions with Related Persons — Compensation Committee Interlocks and Insider Participation,” in the definitive Proxy Statement for our 2022 Annual Meeting of Shareholders and is incorporated herein by reference. +ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS +The information required by Item 201(d) of Regulation S-K is included under “Executive Compensation Tables — Equity Compensation Plan Information” in the definitive Proxy Statement for our 2022 Annual Meeting of Shareholders and is incorporated herein by reference. The information required by Item 403 of Regulation S-K is included under “Stock Ownership Information — Stock Holdings of Certain Owners and Management” in the definitive Proxy Statement for our 2022 Annual Meeting of Shareholders and is incorporated herein by reference. +ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE +The information required by Items 404 and 407(a) of Regulation S-K is included under “Stock Ownership Information — Transactions with Related Persons” and “Corporate Governance — Individual Board Skills Matrix — Director Independence” in the definitive Proxy Statement for our 2022 Annual Meeting of Shareholders and is incorporated herein by reference. +ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES +The information required by Item 9(e) of Schedule 14A is included under “Audit Matters — Ratification of Appointment of Independent Registered Public Accounting Firm” in the definitive Proxy Statement for our 2022 Annual Meeting of Shareholders and is incorporated herein by reference. +2022 FORM 10-K 94 +Table of Contents +PART IV +ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES +(a) The following documents are filed as part of this report: +FORM 10-K PAGE NO. +1. Financial Statements: +Report of Independent Registered Public Accounting Firm (PCAOB ID 238 ) +54 +Consolidated Statements of Income for each of the three years ended May 31, 202 2 , May 31, 202 1 and May 31, 20 20 +56 +Consolidated Statements of Comprehensive Income for each of the three years ended May 31, 202 2 , May 31, 202 1 and May 31, 20 20 +57 +Consolidated Balance Sheets at May 31, 202 2 and May 31, 202 1 +58 +Consolidated Statements of Cash Flows for each of the three years ended May 31, 202 2 , May 31, 202 1 and May 31, 20 20 +59 +Consolidated Statements of Shareholders' Equity for each of the three years ended May 31, 202 2 , May 31, 202 1 and May 31, 20 20 +60 +Notes to Consolidated Financial Statements +61 +2. Financial Statement Schedule: +II — Valuation and Qualifying Accounts for the years ended May 31, 202 2 , 202 1 and 20 20 +98 +All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. +3. Exhibits: +3.1 +Restated Articles of Incorporation, as amended (incorporated by reference to Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended November 30, 2015). +3.2 +Fifth Restated Bylaws, as amended (incorporated by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K filed June 19, 2020). +4.1 +Restated Articles of Incorporation, as amended (see Exhibit 3.1). +4.2 +Fifth Restated Bylaws, as amended (see Exhibit 3.2). +4.3 +Indenture dated as of April 26, 2013, by and between NIKE, Inc. and Deutsche Bank Trust Company Americas, as trustee (incorporated by reference to Exhibit 4.1 to the Company's Form 8-K filed April 26, 2013). +4.4 +Second Supplemental Indenture, dated as of October 29, 2015, by and between NIKE, Inc. and Deutsche Bank Trust Company Americas, as trustee, including the form of 3.875% Notes due 2045 (incorporated by reference to Exhibit 4.2 to the Company's Form 8-K filed October 29, 2015). +4.5 +Third Supplemental Indenture, dated as of October 21, 2016, by and between NIKE, Inc. and Deutsche Bank Trust Company Americas, as trustee, including the form of 2.375% Notes due 2026 and form of 3.375% Notes due 2046 (incorporated by reference to Exhibit 4.2 to the Company's Form 8-K filed October 21, 2016). +4.6 +Fourth Supplemental Indenture, dated as of March 27, 2020, by and between NIKE, Inc. and Deutsche Bank Trust Company Americas, as trustee, including the form of 2.400% Notes due 2025, form of 2.750% Notes due 2027, form of 2.850% Notes due 2030, form of 3.250% Notes due 2040 and form of 3.375% Notes due 2050 (incorporated by reference to Exhibit 4.2 to the Company's Form 8-K filed March 27, 2020). +4.7 +Description of Registrants Securities (incorporated by reference to Exhibit 4.6 to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 2019). +10.1 +Form of Non-Statutory Stock Option Agreement for options granted to non-employee directors under the 1990 Stock Incentive Plan (incorporated by reference to Exhibit 10.2 to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 2010).* +10.2 +Form of Restricted Stock Agreement for non-employee directors under the 1990 Stock Incentive Plan (incorporated by reference to Exhibit 10.4 to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 2014).* +10.3 +Form of Non-Statutory Stock Option Agreement for options granted to executives under the Stock Incentive Plan (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended February 28, 2018).* +2022 FORM 10-K 95 +Table of Contents +10.4 +Form of Indemnity Agreement entered into between the Company and each of its officers and directors (incorporated by reference to Exhibit 10.2 to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 2008).* +10.5 +NIKE, Inc. 1990 Stock Incentive Plan (incorporated by reference to Exhibit 10.7 to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 2014).* +10.6 +NIKE, Inc. Deferred Compensation Plan (Amended and Restated effective April 1, 2013) (incorporated by reference to Exhibit 10.9 to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 2013).* +10.7 +NIKE, Inc. Deferred Compensation Plan (Amended and Restated effective June 1, 2004) (applicable to amounts deferred before January 1, 2005) (incorporated by reference to Exhibit 10.6 to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 2004).* +10.8 +Amendment No. 1 effective January 1, 2008 to the NIKE, Inc. Deferred Compensation Plan (June 1, 2004 Restatement) (incorporated by reference to Exhibit 10.9 to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 2009).* +10.9 +NIKE, Inc. Foreign Subsidiary Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended November 30, 2008).* +10.10 +Amended and Restated Covenant Not to Compete and Non-Disclosure Agreement between NIKE, Inc. and Mark G. Parker dated July 24, 2008 (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed July 24, 2008).* +10.11 +Form of Restricted Stock Unit Agreement under the Stock Incentive Plan (incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended February 28, 2018).* +10.12 +Form of Covenant Not to Compete and Non-Disclosure Agreement between NIKE, Inc. and its executive officers (other than Mark G. Parker and John J. Donahoe II) (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed February 18, 2020).* +10.13 +Policy for Recoupment of Incentive Compensation (incorporated by reference to Exhibit 10.3 to the Company's Current Report on Form 8-K filed July 20, 2010).* +10.14 +NIKE, Inc. Stock Incentive Plan (incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K filed September 23, 2015).* +10.15 +Form of Discretionary Performance Award Agreement (incorporated by reference to Exhibit 10.22 to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 2018).* +10.16 +NIKE, Inc. Amended and Restated Long-Term Incentive Plan (incorporated by reference to Exhibit A to the Company's definitive Proxy Statement filed July 25, 2017).* +10.17 +Offer Letter between NIKE, Inc. and John J. Donahoe II (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed October 22, 2019).* +10.18 +Form of Covenant Not to Compete and Non-Disclosure Agreement between NIKE, Inc. and John J. Donahoe II (incorporated by reference to Exhibit 10.3 to the Company's Current Report on Form 8-K filed October 22, 2019).* +10.19 +Form of Performance-Based Stock Option Agreement (incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K filed October 22, 2019). +10.20 +Letter Agreement between NIKE, Inc. and Mark G. Parker (incorporated by reference to Exhibit 10.6 to the Company's Current Report on Form 8-K filed October 22, 2019).* +10.21 +NIKE, Inc. Executive Performance Sharing Plan (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed June 19, 2020).* +10.22 +NIKE, Inc. Amended and Restated Long-Term Incentive Plan (incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K filed June 19, 2020).* +10.23 +Form of Non-Statutory Stock Option Agreement under the NIKE, Inc. Stock Incentive Plan (incorporated by reference to Exhibit 10.3 to the Company's Current Report on Form 8-K filed June 19, 2020).* +10.24 +Form of Restricted Stock Unit Agreement under the NIKE, Inc. Stock Incentive Plan (incorporated by reference to Exhibit 10.4 to the Company's Current Report on Form 8-K filed June 19, 2020).* +10.25 +NIKE, Inc. Stock Incentive Plan (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed September 18, 2020)* +10.26 +NIKE, Inc. Performance-Based Restricted Stock Unit Agreement (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on June 17, 2021) * +10.27 +Credit Agreement, dated as of March 11, 2022, among NIKE, Inc., Bank of America, N.A., as Administrative Agent, and the other Banks named therein (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed March 14, 2022). +10.28 +Credit Agreement, dated as of March 11, 2022, among NIKE, Inc., Bank of America, N.A., as Administrative Agent, and the other Banks named therein (incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K filed March 14, 2022). +21 +Subsidiaries of the Registrant. +23 +Consent of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm (included within this Annual Report on Form 10-K). +31.1 +Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer. +31.2 +Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer. +32 +Section 1350 Certifications. +101.INS Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. +2022 FORM 10-K 96 +Table of Contents +101.SCH Inline XBRL Taxonomy Extension Schema +101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase +101.DEF Inline XBRL Taxonomy Extension Definition Document +101.LAB Inline XBRL Taxonomy Extension Label Linkbase +101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase +104 Cover Page Interactive Data File - formatted in Inline XBRL and included in Exhibit 101 +* Management contract or compensatory plan or arrangement. +The Exhibits filed herewith do not include certain instruments with respect to long-term debt of NIKE and its subsidiaries, inasmuch as the total amount of debt authorized under any such instrument does not exceed 10 percent of the total assets of NIKE and its subsidiaries on a consolidated basis. NIKE agrees, pursuant to Item 601(b)(4)(iii) of Regulation S-K, that it will furnish a copy of any such instrument to the SEC upon request. +2022 FORM 10-K 97 +Table of Contents +SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS +(Dollars in millions) BALANCE AT +BEGINNING OF +PERIOD CHARGED TO +COSTS AND +EXPENSES +CHARGED +TO OTHER +ACCOUNTS (1) +WRITE-OFFS, +NET BALANCE +AT END +OF PERIOD +Sales returns reserve +For the fiscal year ended May 31, 2020 (2) +$ 843 $ 2,263 $ ( 31 ) $ ( 2,393 ) $ 682 +For the fiscal year ended May 31, 2021 (2) +682 2,617 41 ( 2,745 ) 595 +For the fiscal year ended May 31, 2022 595 2,573 ( 31 ) ( 2,612 ) 525 +(1) Amounts included in this column primarily relate to foreign currency translation. +(2) During the fourth quarter of fiscal 2022, management identified misstatements related to the amounts disclosed within Charged to Costs and Expenses and Write-offs, net. Specifically, Charged to Costs and Expenses was understated by $ 46 million for fiscal 2021 and $ 36 million for fiscal 2020 with a corresponding understatement of Write-offs, net. Additionally, during the fourth quarter of fiscal 2021, management identified misstatements related to the amounts disclosed within Charged to Costs and Expenses and Write-offs, net. Specifically, Charged to Costs and Expenses was understated by $ 286 million for fiscal 2020 with a corresponding understatement of Write-offs, net. The Company assessed the materiality of these misstatements on prior period financial statements in accordance with U.S. Securities and Exchange Commission Staff Accounting Bulletin No. 99, Materiality, codified in ASC 250, Presentation of Financial Statements, and concluded these misstatements were not material to any prior period. As such, the Company has revised the amounts disclosed within Charged to Costs and Expenses and Write-offs, net for fiscal year 2021 and 2020. These misstatements did not impact the Consolidated Balance Sheets, Consolidated Statements of Income, or Consolidated Statements of Cash Flows. +2022 FORM 10-K 98 +Table of Contents +ITEM 16. FORM 10-K SUMMARY +None. +2022 FORM 10-K 99 +Table of Contents +Consent of Independent Registered Public Accounting Firm +We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (Nos. 033-63995, 333-63581, 333-63583, 333-68864, 333-68886, 333-71660, 333-104822, 333-117059, 333-133360, 333-164248, 333-171647, 333-173727, 333-208900 and 333-215439) and the Registration Statement on Form S-3 (No. 333-232770) of NIKE, Inc. of our report dated July 21, 2022 relating to the financial statements, financial statement schedule and the effectiveness of internal control over financial reporting, which appears in this Form 10-K. +/s/ PricewaterhouseCoopers LLP +Portland, Oregon +July 21, 2022 +2022 FORM 10-K 100 +Table of Contents +SIGNATURES +Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. +NIKE, INC. +By: +/s/ JOHN J. DONAHOE II +John J. Donahoe II +President and Chief Executive Officer +Date: July 21, 2022 +Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. +SIGNATURE TITLE DATE +PRINCIPAL EXECUTIVE OFFICER AND DIRECTOR: +/s/ JOHN J. DONAHOE II +John J. Donahoe II +President and Chief Executive Officer July 21, 2022 +PRINCIPAL FINANCIAL OFFICER: +/s/ MATTHEW FRIEND +Matthew Friend +Executive Vice President and Chief Financial Officer July 21, 2022 +PRINCIPAL ACCOUNTING OFFICER: +/s/ CHRIS L. ABSTON +Chris L. Abston +Vice President and Corporate Controller July 21, 2022 +DIRECTORS: +/s/ MARK G. PARKER +Mark G. Parker +Director, Chairman of the Board July 21, 2022 +/s/ CATHLEEN A. BENKO +Cathleen A. Benko +Director July 21, 2022 +/s/ ELIZABETH J. COMSTOCK +Elizabeth J. Comstock +Director July 21, 2022 +/s/ TIMOTHY D. COOK +Timothy D. Cook +Director July 21, 2022 +/s/ THASUNDA B. DUCKETT +Thasunda B. Duckett +Director July 21, 2022 +/s/ ALAN B. GRAF, JR. +Alan B. Graf, Jr. +Director July 21, 2022 +/s/ PETER B. HENRY +Peter B. Henry +Director July 21, 2022 +/s/ TRAVIS A. KNIGHT +Travis A. Knight +Director July 21, 2022 +/s/ MICHELLE A. PELUSO +Michelle A. Peluso +Director July 21, 2022 +/s/ JOHN W. ROGERS, JR. +John W. Rogers, Jr. +Director July 21, 2022 +2022 FORM 10-K 101 \ No newline at end of file diff --git a/raw/filings/0000320187/2021/0000320187-22-000038/filing_metadata.csv b/raw/filings/0000320187/2021/0000320187-22-000038/filing_metadata.csv new file mode 100644 index 0000000000000000000000000000000000000000..16d048040812135f2056cdecda49f1e10cbeca0a --- /dev/null +++ b/raw/filings/0000320187/2021/0000320187-22-000038/filing_metadata.csv @@ -0,0 +1,2 @@ +cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing +0000320187,NKE,"NIKE, Inc.",10-K,2022-07-21,2022-05-31,2022-07-22T00:05:53.000Z,0000320187-22-000038,nke-20220531.htm,10-K,17968538,1,1,https://www.sec.gov/Archives/edgar/data/320187/000032018722000038/nke-20220531.htm,https://www.sec.gov/Archives/edgar/data/320187/000032018722000038/,2021,2021,1 diff --git a/raw/filings/0000320187/2021/0000320187-22-000038/item1.txt b/raw/filings/0000320187/2021/0000320187-22-000038/item1.txt new file mode 100644 index 0000000000000000000000000000000000000000..84100757066d563073178d335507a8872b599628 --- /dev/null +++ b/raw/filings/0000320187/2021/0000320187-22-000038/item1.txt @@ -0,0 +1,126 @@ +ITEM 1. BUSINESS +GENERAL +NIKE, Inc. was incorporated in 1967 under the laws of the State of Oregon. As used in this report, the terms “we,” “us,” “NIKE” and the “Company” refer to NIKE, Inc. and its predecessors, subsidiaries and affiliates, collectively, unless the context indicates otherwise. Our NIKE digital commerce website is located at www.nike.com . On our NIKE corporate website, located at investors.nike.com , we post the following filings as soon as reasonably practicable after they are electronically filed with, or furnished to, the United States Securities and Exchange Commission (the “SEC”): our annual report on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities and Exchange Act of 1934, as amended. Our definitive Proxy Statements are also posted on our corporate website. All such filings on our corporate website are available free of charge. Copies of these filings are also available on the SEC's website ( www.sec.gov ). Also available on our corporate website are the charters of the committees of our Board of Directors, as well as our corporate governance guidelines and code of ethics; copies of any of these documents will be provided in print to any shareholder who submits a request in writing to NIKE Investor Relations, One Bowerman Drive, Beaverton, Oregon 97005-6453. Information contained on or accessible through our website is not incorporated into, and does not form a part of, this Annual Report or any other report or document we file with the SEC, and any references to our website are intended to be inactive textual references only. +Our principal business activity is the design, development and worldwide marketing and selling of athletic footwear, apparel, equipment, accessories and services. NIKE is the largest seller of athletic footwear and apparel in the world. We sell our products through NIKE Direct operations, which are comprised of both NIKE-owned retail stores and sales through our digital platforms (also referred to as "NIKE Brand Digital"), to retail accounts and to a mix of independent distributors, licensees and sales representatives in virtually all countries around the world. We also offer interactive consumer services and experiences through our digital platforms. Virtually all of our products are manufactured by independent contractors. Nearly all footwear and apparel products are manufactured outside the United States, while equipment products are manufactured both in the United States and abroad. +All references to fiscal 2022, 2021, 2020 and 2019 are to NIKE, Inc.'s fiscal years ended May 31, 2022, 2021, 2020 and 2019, respectively. Any references to other fiscal years refer to a fiscal year ending on May 31 of that year. +PRODUCTS +Our NIKE Brand product offerings are aligned around our consumer construct focused on Men’s, Women’s and Kids’. We also design products specifically for the Jordan Brand and Converse. We believe this approach allows us to create products that better meet individual consumer needs while accelerating our largest growth opportunities. +NIKE’s athletic footwear products are designed primarily for specific athletic use, although a large percentage of the products are worn for casual or leisure purposes. We place considerable emphasis on innovation and high-quality construction in the development and manufacturing of our products. Our Men’s, Women’s and Jordan Brand footwear products currently lead in footwear sales and we expect them to continue to do so. +We also sell sports apparel, which features the same trademarks and are sold predominantly through the same marketing and distribution channels as athletic footwear. Our sports apparel, similar to our athletic footwear products, is designed primarily for athletic use, although many of the products are worn for casual or leisure purposes, and demonstrates our commitment to innovation and high-quality construction. Our Men’s and Women’s apparel products currently lead in apparel sales and we expect them to continue to do so. We often market footwear, apparel and accessories in “collections” of similar use or by category. We also market apparel with licensed college and professional team and league logos. +We sell a line of performance equipment and accessories under the NIKE Brand name, including bags, socks, sport balls, eyewear, timepieces, digital devices, bats, gloves, protective equipment and other equipment designed for sports activities. We also sell small amounts of various plastic products to other manufacturers through our wholly-owned subsidiary, NIKE IHM, Inc., doing business as Air Manufacturing Innovation. +2022 FORM 10-K 1 +Table of Contents +Our Jordan Brand designs, distributes and licenses athletic and casual footwear, apparel and accessories predominantly focused on basketball performance and culture using the Jumpman trademark. Sales and operating results for Jordan Brand products are reported within the respective NIKE Brand geographic operating segments. +Our wholly-owned subsidiary brand, Converse, headquartered in Boston, Massachusetts, designs, distributes and licenses casual sneakers, apparel and accessories under the Converse, Chuck Taylor, All Star, One Star, Star Chevron and Jack Purcell trademarks. Operating results of the Converse brand are reported on a stand-alone basis. +In addition to the products we sell to our wholesale customers and directly to consumers through our NIKE Direct operations, we have also entered into license agreements that permit unaffiliated parties to manufacture and sell, using NIKE-owned trademarks, certain apparel, digital devices and applications and other equipment designed for sports activities. +We also offer interactive consumer services and experiences as well as digital products through our digital platforms, including fitness and activity apps; sport, fitness and wellness content; and digital services and features in retail stores that enhance the consumer experience. +SALES AND MARKETING +We experience moderate fluctuations in aggregate sales volume during the year. Historically, revenues in the first and fourth fiscal quarters have slightly exceeded those in the second and third fiscal quarters. However, the mix of product sales may vary considerably as a result of changes in seasonal and geographic demand for particular types of footwear, apparel and equipment, as well as other macroeconomic, strategic, operating and logistics-related factors, as evidenced by the impact of the COVID-19 pandemic. +Because NIKE is a consumer products company, the relative popularity and availability of various sports and fitness activities, as well as changing design trends, affect the demand for our products. We must, therefore, respond to trends and shifts in consumer preferences by adjusting the mix of existing product offerings, developing new products, styles and categories and influencing sports and fitness preferences through extensive marketing. Failure to respond in a timely and adequate manner could have a material adverse effect on our sales and profitability. This is a continuing risk. Refer to Item 1A. Risk Factors. +OUR MARKETS +We report our NIKE Brand operations based on our internal geographic organization. Each NIKE Brand geographic segment operates predominantly in one industry: the design, development, marketing and selling of athletic footwear, apparel and equipment. The Company's reportable operating segments for the NIKE Brand are: North America; Europe, Middle East & Africa (EMEA); Greater China; and Asia Pacific & Latin America (APLA), and include results for the NIKE and Jordan brands. The Hurley brand results, prior to its divestiture in fiscal 2020, were included in North America. Sales through our NIKE Direct operations are managed within each geographic operating segment. +Converse is also a reportable operating segment and operates predominately in one industry: the design, marketing, licensing and selling of casual sneakers, apparel and accessories. Converse direct to consumer operations, including digital commerce, are reported within the Converse operating segment results. +UNITED STATES MARKET +For fiscal 2022, NIKE Brand and Converse sales in the United States accounted for approximately 40% of total revenues, compared to 39% for both fiscal 2021 and fiscal 2020. We sell our NIKE Brand, Jordan Brand and Converse products to thousands of retail accounts in the United States, including a mix of footwear stores, sporting goods stores, athletic specialty stores, department stores, skate, tennis and golf shops and other retail accounts. In the United States, we utilize NIKE sales offices to solicit such sales. During fiscal 2022, our three largest United States customers accounted for approximately 22% of sales in the United States. +Our NIKE Direct and Converse direct to consumer operations sell NIKE Brand, Jordan Brand and Converse products to consumers through various digital platforms. In addition, our NIKE Direct and Converse direct to consumer operations sell products through the following number of retail stores in the United States: +U.S. RETAIL STORES NUMBER +NIKE Brand factory stores 209 +NIKE Brand in-line stores (including employee-only stores) 48 +Converse stores (including factory stores) 87 +TOTAL 344 +2022 FORM 10-K 2 +Table of Contents +In the United States, NIKE has eight significant distribution centers. Five are located in or near Memphis, Tennessee, two of which are owned and three of which are leased. Two other distribution centers, one located in Indianapolis, Indiana and one located in Dayton, Tennessee, are leased and operated by third-party logistics providers. One distribution center for Converse is located in Ontario, California, which is leased. There are other smaller distribution facilities located in various parts of the United States, some of which are leased or operated by third parties. +INTERNATIONAL MARKETS +For fiscal 2022, non-U.S. NIKE Brand and Converse sales accounted for approximately 60% of total revenues, compared to 61% for fiscal 2021 and fiscal 2020. We sell our products to retail accounts through our own NIKE Direct operations and through a mix of independent distributors, licensees and sales representatives around the world. We sell to thousands of retail accounts and ship products from 72 distribution centers outside of the United States. During fiscal 2022, NIKE's three largest customers outside of the United States accounted for approximately 14% of total non-U.S. sales. +In addition to NIKE-owned and Converse-owned digital commerce platforms in over 45 countries, our NIKE Direct and Converse direct to consumer businesses operate the following number of retail stores outside the United States: +NON-U.S. RETAIL STORES NUMBER +NIKE Brand factory stores 597 +NIKE Brand in-line stores (including employee-only stores) 47 +Converse stores (including factory stores) 58 +TOTAL 702 +International branch offices and subsidiaries of NIKE are located in Argentina, Australia, Austria, Belgium, Bermuda, Brazil, Canada, Chile, China, Croatia, the Czech Republic, Denmark, Finland, France, Germany, Greece, Hong Kong, Hungary, India, Indonesia, Ireland, Israel, Italy, Japan, Korea, Macau, Malaysia, Mexico, the Netherlands, New Zealand, Norway, the Philippines, Poland, Portugal, Russia, Singapore, Slovenia, South Africa, Spain, Sri Lanka, Sweden, Switzerland, Taiwan, Thailand, Turkey, the United Arab Emirates, the United Kingdom, Uruguay and Vietnam. +SIGNIFICANT CUSTOMER +No customer accounted for 10% or more of our consolidated net Revenues during fiscal 2022. +PRODUCT RESEARCH, DESIGN AND DEVELOPMENT +We believe our research, design and development efforts are key factors in our success. Technical innovation in the design and manufacturing process of footwear, apparel and athletic equipment receives continued emphasis as we strive to produce products that help to enhance athletic performance, reduce injury and maximize comfort, while decreasing our environmental impact. +In addition to our own staff of specialists in the areas of biomechanics, chemistry, exercise physiology, engineering, digital technologies, industrial design, sustainability and related fields, we also utilize research committees and advisory boards made up of athletes, coaches, trainers, equipment managers, orthopedists, podiatrists, physicians and other experts who consult with us and review certain designs, materials and concepts for product and manufacturing, design and other process improvements and compliance with product safety regulations around the world. Employee athletes, athletes engaged under sports marketing contracts and other athletes wear-test and evaluate products during the design and development process. +As we continue to develop new technologies, we are simultaneously focused on the design of innovative products and experiences incorporating such technologies throughout our product categories and consumer applications. Using market intelligence and research, our various design teams identify opportunities to leverage new technologies in existing categories to respond to consumer preferences. The proliferation of Nike Air, Zoom, Nike Free, Flywire, Dri-Fit, Flyknit, FlyEase, ZoomX, Air Max, Nike React and Nike Adapt technologies, among others, typifies our dedication to designing innovative products. +MANUFACTURING +Virtually all of our footwear and apparel products are manufactured outside the United States by independent manufacturers with whom we contract and refer to as “contract manufacturers.” Many of these contract manufacturers operate multiple finished goods contract factories. We are also supplied, primarily indirectly, by a number of materials, or “Tier 2,” suppliers, who provide the principal materials used in footwear and apparel finished goods products. As of May 31, 2022, we had 139 strategic Tier 2 suppliers. +2022 FORM 10-K 3 +Table of Contents +As of May 31, 2022, we were supplied by 120 finished goods footwear contract factories located in 11 countries. For fiscal 2022, contract factories in Vietnam, Indonesia and China manufactured approximately 44%, 30% and 20% of total NIKE Brand footwear, respectively. The largest single footwear contract factory accounted for approximately 8% of total fiscal 2022 NIKE Brand footwear production. For fiscal 2022, four footwear contract manufacturers each accounted for greater than 10% of footwear production and in the aggregate accounted for approximately 58% of NIKE Brand footwear production. +As of May 31, 2022, we were supplied by 279 finished goods apparel contract factories located in 33 countries. For fiscal 2022, contract factories in Vietnam, China and Cambodia manufactured approximately 26%, 20% and 16% of total NIKE Brand apparel, respectively. The largest single apparel contract factory accounted for approximately 10% of total fiscal 2022 NIKE Brand apparel production. For fiscal 2022, two apparel contract manufacturers each accounted for more than 10% of apparel production, and the top five contract manufacturers in the aggregate accounted for approximately 54% of NIKE Brand apparel production. +NIKE’s contract manufacturers buy raw materials for the manufacturing of our footwear, apparel and equipment products. Most raw materials are available and purchased by those contract manufacturers in the countries where manufacturing takes place. +The principal materials used in our footwear products are natural and synthetic rubber, plastic compounds, foam cushioning materials, natural and synthetic leather, nylon, polyester and natural fiber textiles, as well as polyurethane films used to make NIKE Air-Sole cushioning components. During fiscal 2022, Air Manufacturing Innovation, a wholly-owned subsidiary, with facilities near Beaverton, Oregon, in Dong Nai Province, Vietnam, and St. Charles, Missouri, as well as contract manufacturers in China and Vietnam, were our suppliers of NIKE Air-Sole cushioning components used in footwear. +The principal materials used in our apparel products are natural and synthetic fabrics, yarns and threads (both virgin and recycled); specialized performance fabrics designed to efficiently wick moisture away from the body, retain heat and repel rain and/or snow; and plastic and metal hardware. +In fiscal 2022, COVID-19 had impacts throughout our supply chain, including loss of production as well as production and transportation delays. However, COVID-19 has not materially impacted the number or concentration of finished goods factories, contract manufacturers, or Tier 2 suppliers in countries where we source footwear and apparel products. Despite competition for certain materials during fiscal 2022, contract manufacturers were able to source sufficient quantities of raw materials for use in our footwear and apparel products. Refer to Item 1A. Risk Factors, for additional discussion of the impact of COVID-19 and sourcing risks on our business. +Since 1972, Sojitz Corporation of America (“Sojitz America”), a large Japanese trading company and the sole owner of our redeemable preferred stock, has performed import-export financing services for us. +INTERNATIONAL OPERATIONS AND TRADE +Our international operations and sources of supply are subject to the usual risks of doing business abroad, such as the implementation of, or potential changes in, foreign and domestic trade policies, increases in import duties, anti-dumping measures, quotas, safeguard measures, trade restrictions, restrictions on the transfer of funds and, in certain parts of the world, political tensions, instability, conflicts, nationalism and terrorism, and resulting sanctions and other measures imposed in response to such issues. We have not, to date, been materially affected by any such risk but cannot predict the likelihood of such material effects occurring in the future. +In recent years, uncertain global and regional economic and political conditions have affected international trade and increased protectionist actions around the world. These trends are affecting many global manufacturing and service sectors, and the footwear and apparel industries, as a whole, are not immune. Companies in our industry are facing trade protectionism in many different regions, and, in nearly all cases, we are working together with industry groups to address trade issues and reduce the impact to the industry, while observing applicable competition laws. Notwithstanding our efforts, protectionist measures have resulted in increases in the cost of our products, and additional measures, if implemented, could adversely affect sales and/or profitability for NIKE, as well as the imported footwear and apparel industry as a whole. +We monitor protectionist trends and developments throughout the world that may materially impact our industry, and we engage in administrative and judicial processes to mitigate trade restrictions. We are actively monitoring actions that may result in additional anti-dumping measures and could affect our industry. We are also monitoring for and advocating against other impediments that may limit or delay customs clearance for imports of footwear, apparel and equipment. NIKE also advocates for trade liberalization for footwear and apparel in a number of regional and bilateral free trade agreements. Changes in, and responses to, U.S. trade policies, including the imposition of tariffs or penalties on imported goods or retaliatory measures by other countries, have negatively affected, and could in the future negatively affect, U.S. corporations, including NIKE, with business operations and/or consumer markets in those countries, which could also make it necessary for us to change the way we conduct business, either of which may have an adverse effect on our business, financial condition or our results of operations. In addition, with respect to proposed trade restrictions, we work with a broad coalition of global businesses and trade associations representing a wide variety of sectors to help ensure that any legislation enacted and implemented (i) addresses +2022 FORM 10-K 4 +Table of Contents +legitimate and core concerns, (ii) is consistent with international trade rules and (iii) reflects and considers domestic economies and the important role they may play in the global economic community. +Where trade protection measures are implemented, we believe we have the ability to develop, over a period of time, adequate alternative sources of supply for the products obtained from our present suppliers. If events prevented us from acquiring products from our suppliers in a particular country, our operations could be temporarily disrupted and we could experience an adverse financial impact. However, we believe we could abate any such disruption, and that much of the adverse impact on supply would, therefore, be of a short-term nature, although alternate sources of supply might not be as cost-effective and could have an ongoing adverse impact on profitability. +Our international operations are also subject to compliance with the U.S. Foreign Corrupt Practices Act, or "FCPA", and other anti-bribery laws applicable to our operations. We source a significant portion of our products from, and have important consumer markets, outside of the United States. We have an ethics and compliance program to address compliance with the FCPA and similar laws by us, our employees, agents, suppliers and other partners. Refer to Item 1A. Risk Factors for additional information on risks relating to our international operations. +COMPETITION +The athletic footwear, apparel and equipment industry is highly competitive on a worldwide basis. We compete internationally with a significant number of athletic and leisure footwear companies, athletic and leisure apparel companies, sports equipment companies and large companies having diversified lines of athletic and leisure footwear, apparel and equipment, including adidas, Anta, ASICS, Li Ning, lululemon athletica, Puma, Under Armour and V.F. Corporation, among others. The intense competition and the rapid changes in technology and consumer preferences in the markets for athletic and leisure footwear and apparel and athletic equipment constitute significant risk factors in our operations. Refer to Item 1A. Risk Factors for additional information. +NIKE is the largest seller of athletic footwear and apparel in the world. Important aspects of competition in this industry are: +• Product attributes such as quality; performance and reliability; new product style, design, innovation and development; as well as consumer price/value. +• Consumer connection, engagement and affinity for brands and products, developed through marketing, promotion and digital experiences; social media interaction; customer support and service; identification with prominent and influential athletes, influencers, public figures, coaches, teams, colleges and sports leagues who endorse our brands and use our products and active engagement through sponsored sporting events and clinics. +• Effective sourcing and distribution of products, with attractive merchandising and presentation at retail, both in-store and on digital platforms. +We believe that we are competitive in all of these areas. +TRADEMARKS AND PATENTS +We believe that our intellectual property rights are important to our brand, our success and our competitive position. We strategically pursue available protections of these rights and vigorously protect them against third-party theft and infringement. +We use trademarks on nearly all of our products and packaging, and in our marketing materials, and believe having distinctive marks that are readily identifiable is an important factor in creating a market for our goods, in identifying our brands and the Company, and in distinguishing our goods from the goods of others. We consider our NIKE and Swoosh Design trademarks to be among our most valuable assets and we have registered these trademarks in over 190 jurisdictions worldwide. In addition, we own many other trademarks that we use in marketing our products. We own common law rights in the trade dress of several distinctive shoe designs and elements. For certain trade dress, we have sought and obtained trademark registrations. +We have copyright protection in our designs, graphics, software applications, digital goods and other original works. When appropriate, we also obtain registered copyrights. +We file for, own and maintain many U.S. and foreign utility and design patents protecting components, technologies, materials, manufacturing techniques, features, functionality, and industrial designs used in and for the manufacture of various athletic, performance, and leisure footwear and apparel, including physical and digital versions thereof, athletic equipment, and digital devices, and related software applications. These patents expire at various times. +We believe our success depends upon our capabilities in areas such as design, research and development, production and marketing and is supported and protected by our intellectual property rights, such as trademarks, utility and design patents, copyrights, and trade secrets, among others. +2022 FORM 10-K 5 +Table of Contents +We have followed a policy of applying for and registering intellectual property rights in the United States and select foreign countries on trademarks, inventions, innovations and designs that we deem valuable. We also continue to vigorously protect our intellectual property, including trademarks, patents and trade secrets against third-party infringement and misappropriation. +HUMAN CAPITAL RESOURCES +At NIKE, we consider the strength and effective management of our workforce to be essential to the ongoing success of our business. We believe that it is important to attract, develop and retain a diverse and engaged workforce at all levels of our business and that such a workforce fosters creativity and accelerates innovation. We are focused on building an increasingly diverse talent pipeline that reflects our consumers, athletes and the communities we serve. +CULTURE +Each employee shapes NIKE’s culture through behaviors and practices. This starts with our Maxims, which represent our core values and, along with our Code of Conduct, feature the fundamental behaviors that help anchor, inform and guide us and apply to all employees. Our mission is to bring inspiration and innovation to every athlete in the world, which includes the belief that if you have a body, you are an athlete. We aim to do this by creating groundbreaking sport innovations, making our products more sustainably, building a creative and diverse global team, supporting the well-being of our employees and making a positive impact in communities where we live and work. Our mission is aligned with our deep commitment to maintaining an environment where all NIKE employees have the opportunity to reach their full potential, to connect to our brands and to shape the culture in which they work. We believe providing for growth and retention of our employees is essential in fostering such a culture and are dedicated to giving access to training programs and career development opportunities, including trainings on NIKE’s values, history and business, trainings on developing leadership skills at all levels, tools and resources for managers and qualified tuition reimbursement opportunities. +As part of our commitment to empowering our employees to help shape our culture, we source employee feedback through our Engagement Survey program. The program provides every employee throughout the globe an opportunity to provide confidential feedback on key areas known to drive employee engagement, including their satisfaction with their managers, their work and the Company generally. The program also measures our employees’ emotional commitment to NIKE as well as NIKE’s culture of diversity, equity and inclusion. NIKE also provides multiple points of contact for employees to speak up if they experience something that does not align with our values or otherwise violates our workplace policies, even if they are uncertain what they observed or heard is a violation of company policy. +As part of our commitment to make a positive impact on our communities, we maintain a goal of investing 2% of our prior fiscal year’s pre-tax income into global communities, up from 1.5% in fiscal 2021. The focus of this investment continues to be inspiring kids to be active through play and sport as well as uniting and inspiring communities to create a better and more equitable future for all. Our community investments are an important part of our culture in that we also support employees in giving back to community organizations through donations and volunteering, which are matched by the NIKE Foundation where eligible. +EMPLOYEE BASE +As of May 31, 2022, we had approximately 79,100 employees worldwide, including retail and part-time employees. We also utilize independent contractors and temporary personnel to supplement our workforce. +None of our employees are represented by a union, except certain employees in the EMEA and APLA geographies are members of and/or represented by trade unions, as allowed or required by local law and/or collective bargaining agreements. Also, in some countries outside of the United States, local laws require employee representation by works councils (which may be entitled to information and consultation on certain subsidiary decisions) or by organizations similar to a union. In certain European countries, we are required by local law to enter into, and/or comply with, industry-wide or national collective bargaining agreements. NIKE has never experienced a material interruption of operations due to labor disagreements. +DIVERSITY, EQUITY AND INCLUSION (DE&I) +DE&I is a strategic priority for NIKE and we are committed to having an increasingly diverse team and culture. We aim to foster an inclusive workplace through recruitment, development and retention of diverse talent with the goal of expanding representation across all dimensions of diversity over the long term. We remain committed to the targets announced in fiscal 2021 for the Company to work toward by fiscal 2025, including increasing representation of women in our global corporate workforce and leadership positions, as well as increasing representation of U.S. racial and ethnic minorities in our U.S. corporate workforce and at the Director level and above. +We continue to enhance our efforts to recruit diverse talent through our traditional channels and have launched new initiatives, such as partnerships with athletes and sports-related organizations to create apprenticeship programs and new partnerships with +2022 FORM 10-K 6 +Table of Contents +organizations, colleges and universities that serve diverse populations. Additionally, we are prioritizing DE&I education so that all NIKE employees and leaders have the cultural awareness and understanding to build diverse and inclusive teams. We also have Employee Networks, collectively known as NikeUNITED, representing various employee groups. +Our DE&I focus extends beyond our workforce and includes our communities, which we support in a number of ways. We have committed to investments that aim to address racial inequality and improve diversity and representation in our communities. We also are leveraging our global scale to accelerate business diversity, including investing in business training programs for women and increasing the proportion of services supplied by minority-owned businesses. +COMPENSATION AND BENEFITS +NIKE’s total rewards are intended to be competitive and equitable, meet the diverse needs of our global teammates and reinforce our values. We are committed to providing comprehensive, competitive and equitable pay and benefits to our employees, and we have invested, and aim to continue to invest, in our employees through growth and development and well-being initiatives. Our initiatives in this area include: +• We are committed to competitive pay and to reviewing our pay and promotion practices annually. +• We have an annual company bonus plan and a retail-focused bonus plan applicable to all eligible employees. Both programs are focused on rewarding employees for company performance, which we believe reinforces our culture and rewards behaviors that support collaboration and teamwork. +• We provide comprehensive family care benefits in the U.S. and globally where practicable, including family planning coverage, backup care and child/elder care assistance as well as an income-based childcare subsidy for eligible employees. +• Our Military Leave benefit provides up to 12 weeks of paid time off every 12 months, and we enhanced our Military Leave benefit for employees called up to serve as part of the U.S. COVID-19 response. +• We offer free access to our Sport Centers at our World Headquarters (WHQ) for our full-time employees and North America store employees. +• We provide employees free access to mindfulness and meditation resources, including membership to Headspace as well as live classes through our Sport Centers. +• Our global Employee Assistance Program (EAP) provides free and confidential counseling to all global employees and their families. +• We provide transgender healthcare coverage for eligible employees covered on the U.S. Health Plan, including access to both restorative services and personal care. +COVID-19 RESPONSE +Since the start of the COVID-19 pandemic, the health and safety of our employees has remained a priority. We have continued to follow and communicate guidance provided by the Centers for Disease Control and Prevention (CDC) and local public health authorities, as well as mandates set by state and local law as a part of our continued response and focus on mitigating the spread of COVID-19. We developed a comprehensive risk assessment, infection control plans, and employee education campaigns. Our robust health and safety measures have included staffing a team of fully dedicated contact tracers, sourcing and distributing over 1 million NIKE face coverings to teammates worldwide, facilitating access to COVID-19 testing, and offering on-site vaccination clinics in collaboration with local public health agencies. As the pandemic continues, we continue to strongly encourage that all employees become fully vaccinated. We continue to support our employees by offering all eligible employees paid COVID-19 sick leave for two weeks, in addition to existing paid time off benefits and legally mandated sick leave programs, which covers physical health, mental and emotional well-being and care for a family member. We also provide the option for employees to utilize up to two weeks of paid time off in advance of accrued balances, if needed. +Additional information related to our human capital strategy can be found in our FY21 NIKE, Inc. Impact Report, which is available on the Impact section of our website. Information contained on or accessible through our websites is not incorporated into, and does not form a part of, this Annual Report or any other report or document we file with the SEC, and any references to our websites are intended to be inactive textual references only. +2022 FORM 10-K 7 +Table of Contents +INFORMATION ABOUT OUR EXECUTIVE OFFICERS +The executive officers of NIKE, Inc. as of July 21, 2022, are as follows: +Mark G. Parker , Executive Chairman — Mr. Parker, 66, is Executive Chairman of the Board of Directors and served as President and Chief Executive Officer from 2006 - January 2020. He has been employed by NIKE since 1979 with primary responsibilities in product research, design and development, marketing and brand management. Mr. Parker was appointed divisional Vice President in charge of product development in 1987, corporate Vice President in 1989, General Manager in 1993, Vice President of Global Footwear in 1998 and President of the NIKE Brand in 2001. +John J. Donahoe II , President and Chief Executive Officer — Mr. Donahoe, 62, was appointed President and Chief Executive Officer in January 2020 and has been a director since 2014. He brings expertise in digital commerce, technology and global strategy. He previously served as President and Chief Executive Officer at ServiceNow, Inc. Prior to joining ServiceNow, Inc., he served as President and Chief Executive Officer of eBay, Inc. He also held leadership roles at Bain & Company for two decades. +Andrew Campion , Chief Operating Officer — Mr. Campion, 50, joined NIKE in 2007 as Vice President of Global Planning and Development, leading strategic and financial planning. He was appointed Chief Financial Officer of the NIKE Brand in 2010, responsible for leading all aspects of financial management for the Company's flagship brand. In 2014, he was appointed Senior Vice President, Strategy, Finance and Investor Relations. Mr. Campion assumed the role of Executive Vice President and Chief Financial Officer in August 2015. In April 2020, he was appointed Chief Operating Officer and leads NIKE's global technology and digital transformation, demand and supply management, manufacturing, distribution and logistics, sustainability, workplace design and connectivity, and procurement. Prior to joining NIKE, he held leadership roles in strategic planning, mergers and acquisitions, financial planning and analysis, operations and planning, investor relations and tax at The Walt Disney Company. +Matthew Friend , Executive Vice President and Chief Financial Officer — Mr. Friend, 44, joined NIKE in 2009 as Senior Director of Corporate Strategy and Development, and was appointed Chief Financial Officer of Emerging Markets in 2011. In 2014, Mr. Friend was appointed Chief Financial Officer of Global Categories, Product and Functions, and was subsequently appointed Chief Financial Officer of the NIKE Brand in 2016. He was also appointed Vice President of Investor Relations in 2019. Mr. Friend was appointed as Executive Vice President and Chief Financial Officer of NIKE, Inc. in April 2020. Prior to joining NIKE, he worked in the financial industry including roles as VP of investment banking and mergers and acquisitions at Goldman Sachs and Morgan Stanley. +Ann M. Miller , Executive Vice President, Chief Legal Officer — Ms. Miller, 48, joined NIKE in 2007 and serves as EVP, Chief Legal Officer for NIKE, Inc. In her capacity as Chief Legal Officer, she oversees all legal, compliance, government & public affairs, social community impact, security, resilience and investigation matters of the Company. For the past six years, she served as Vice President, Corporate Secretary and Chief Ethics & Compliance Officer. She previously served as Converse's General Counsel, and brings more than 20 years of legal and business expertise to her role. Prior to joining NIKE, Ms. Miller worked at the law firm Sullivan & Cromwell. +Monique S. Matheson , Executive Vice President, Chief Human Resources Officer — Ms. Matheson, 55, joined NIKE in 1998, with primary responsibilities in the human resources function. She was appointed as Vice President and Senior Business Partner in 2011 and Vice President, Chief Talent and Diversity Officer in 2012. Ms. Matheson was appointed Executive Vice President, Global Human Resources in 2017. +Heidi O'Neill , President of Consumer and Marketplace — Ms. O'Neill, 57, joined NIKE in 1998, and held a variety of leadership roles, including President of NIKE Direct, where she was responsible for NIKE's connection to its consumer globally through the Company's retail and digital-commerce business. She also led NIKE's women's business for seven years, growing it into a multi-billion dollar business, and leading the Company's North America apparel business as VP/GM. Ms. O'Neill was appointed as President of Consumer and Marketplace in April 2020 and is responsible for NIKE's Direct business, including all stores, e-commerce and apps globally. +2022 FORM 10-K 8 +Table of Contents \ No newline at end of file diff --git a/raw/filings/0000320187/2021/0000320187-22-000038/item13.txt b/raw/filings/0000320187/2021/0000320187-22-000038/item13.txt new file mode 100644 index 0000000000000000000000000000000000000000..5946810350e64837374d4b0783343f038295a82a --- /dev/null +++ b/raw/filings/0000320187/2021/0000320187-22-000038/item13.txt @@ -0,0 +1,2 @@ +ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE +The information required by Items 404 and 407(a) of Regulation S-K is included under “Stock Ownership Information — Transactions with Related Persons” and “Corporate Governance — Individual Board Skills Matrix — Director Independence” in the definitive Proxy Statement for our 2022 Annual Meeting of Shareholders and is incorporated herein by reference. \ No newline at end of file diff --git a/raw/filings/0000320187/2021/0000320187-22-000038/item9a.txt b/raw/filings/0000320187/2021/0000320187-22-000038/item9a.txt new file mode 100644 index 0000000000000000000000000000000000000000..9ecf0c86ad2a0dc552ffad3d8738fa0ed06bb9c8 --- /dev/null +++ b/raw/filings/0000320187/2021/0000320187-22-000038/item9a.txt @@ -0,0 +1,6 @@ +ITEM 9A. CONTROLS AND PROCEDURES +We maintain disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in our Securities Exchange Act of 1934, as amended (the "Exchange Act") reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. +We carry out a variety of ongoing procedures, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, to evaluate the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of May 31, 2022. +“Management's Annual Report on Internal Control Over Financial Reporting” is included in Item 8 of this Report. +We are continuing several transformation initiatives to centralize and simplify our business processes and systems. These are long-term initiatives, which we believe will enhance our internal control over financial reporting due to increased automation and further integration of related processes. We will continue to monitor our internal control over financial reporting for effectiveness throughout these transformation initiatives. +There have not been any changes in our internal control over financial reporting during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. \ No newline at end of file diff --git a/raw/filings/0000320187/2021/0000320187-22-000038/rp_note.txt b/raw/filings/0000320187/2021/0000320187-22-000038/rp_note.txt new file mode 100644 index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391 diff --git a/raw/filings/0000320187/2021/0000320187-22-000038/rpt_disclosure.txt b/raw/filings/0000320187/2021/0000320187-22-000038/rpt_disclosure.txt new file mode 100644 index 0000000000000000000000000000000000000000..8d49350e99258ac830f6c6cb2c75199a395d4228 --- /dev/null +++ b/raw/filings/0000320187/2021/0000320187-22-000038/rpt_disclosure.txt @@ -0,0 +1,5 @@ +TRANSACTIONS WITH RELATED PERSONS +Philip Knight, the father of NIKE director Travis Knight, serves as Chairman Emeritus, which provides a standing invitation for Philip Knight to attend meetings of the Board and its committees as a non-voting observer. In fiscal 2023, as Chairman Emeritus, Mr. Knight received an annual salary of $500,000, and medical and dental insurance coverage generally available to employees. +John Donahoe II and the Company have entered into time sharing agreements under which Mr. Donahoe reimburses the Company for limited personal use of Company aircraft, which is intended to increase his security, availability, and productivity. In fiscal 2023, Mr. Donahoe reimbursed the Company approximately $395,000 under the time sharing agreements. +Mark Parker's son, Matthew Parker, was employed by the Company in fiscal 2023 in a non-executive role for which the Company paid Matthew Parker aggregate compensation of approximately $135,000. The compensation and benefits received by Matthew Parker were consistent with compensation and benefits paid to other employees holding similar positions. +The Company's written policy requires the Corporate Responsibility, Sustainability & Governance Committee to review any transaction or proposed transaction with a related person that would be required to be reported under Item 404(a) of Regulation S-K, and to determine whether to ratify or approve the transaction, with ratification or approval to occur only if the committee determines that the transaction is fair to the Company or that approval or ratification of the transaction is in the interest of the Company. \ No newline at end of file diff --git a/raw/filings/0000320187/2022/0000320187-23-000039/filing.txt b/raw/filings/0000320187/2022/0000320187-23-000039/filing.txt new file mode 100644 index 0000000000000000000000000000000000000000..709edf1ca48136bc31ab959eed4389f8f7959169 --- /dev/null +++ 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SECTION 12(B) OF THE ACT: +Class B Common Stock +NKE +New York Stock Exchange +(Title of each class) +(Trading symbol) +(Name of each exchange on which registered) +SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: +NONE +Indicate by check mark: +YES +NO +• +if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. +þ +¨ +• +if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. +¨ +þ +• +whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. +þ +¨ +• +whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). +þ +¨ +• +whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. +Large accelerated filer +þ +Accelerated filer +☐ +Non-accelerated filer +☐ +Smaller reporting company +☐ +Emerging growth company +☐ +• +if an emerging growth company, if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. +¨ +• +whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. +þ +• +if securities are registered pursuant to Section 12(b) of the Act, whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. +¨ +• +whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant's executive officers during the relevant recovery period pursuant to § 240.10D-1(b). +¨ +• +whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). +☐ +þ +As of November 30, 2022, the aggregate market values of the Registrant's Common Stock held by non-affiliates were: +Class A +$ 7,831,564,572 +Class B +136,467,702,472 +$ 144,299,267,044 +Table of Contents +As of July 12, 2023, the number of shares of the Registrant's Common Stock outstanding were: +Class A +304,897,252 +Class B +1,225,074,356 +1,529,971,608 +DOCUMENTS INCORPORATED BY REFERENCE: +Parts of Registrant's Proxy Statement for the Annual Meeting of Shareholders to be held on September 12, 2023, are incorporated by reference into Part III of this report. +Table of Contents +NIKE, INC. +ANNUAL REPORT ON FORM 10-K +TABLE OF CONTENTS +PAGE +PART I +1 +ITEM 1. +Business +1 +General +1 +Products +1 +Sales and Marketing +2 +Our Markets +2 +Significant Customer +3 +Product Research, Design and Development +3 +Manufacturing +3 +International Operations and Trade +4 +Competition +5 +Trademarks and Patents +5 +Human Capital Resources +6 +Available Information and Websites +7 +Information about our Executive Officers +8 +ITEM 1A. +Risk Factors +9 +ITEM 1B. +Unresolved Staff Comments +24 +ITEM 2. +Properties +24 +ITEM 3. +Legal Proceedings +24 +ITEM 4. +Mine Safety Disclosures +24 +PART II +25 +ITEM 5. +Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities +25 +ITEM 6. +Reserved +27 +ITEM 7. +Management's Discussion and Analysis of Financial Condition and Results of Operations +28 +ITEM 7A. +Quantitative and Qualitative Disclosures about Market Risk +49 +ITEM 8. +Financial Statements and Supplementary Data +51 +ITEM 9. +Changes in and Disagreements with Accountants on Accounting and Financial Disclosure +91 +ITEM 9A. +Controls and Procedures +91 +ITEM 9B. +Other Information +91 +ITEM 9C. +Disclosure Regarding Foreign Jurisdictions that Prevent Inspections +91 +PART III +92 +(Except for the information set forth under “Information about our Executive Officers” in Item 1 above, Part III is incorporated by reference from the Proxy Statement for the NIKE, Inc. 202 3 Annual Meeting of Shareholders.) +ITEM 10. +Directors, Executive Officers and Corporate Governance +92 +ITEM 11. +Executive Compensation +92 +ITEM 12. +Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters +92 +ITEM 13. +Certain Relationships and Related Transactions and Director Independence +92 +ITEM 14. +Principal Accountant Fees and Services +92 +PART IV +93 +ITEM 15. +Exhibits and Financial Statement Schedules +93 +ITEM 16. +Form 10-K Summary +97 +Signatures +99 +Table of Contents +PART I +ITEM 1. BUSINESS +GENERAL +NIKE, Inc. was incorporated in 1967 under the laws of the State of Oregon. As used in this Annual Report on Form 10-K (this "Annual Report"), the terms "we," "us," "our," "NIKE" and the "Company" refer to NIKE, Inc. and its predecessors, subsidiaries and affiliates, collectively, unless the context indicates otherwise. +Our principal business activity is the design, development and worldwide marketing and selling of athletic footwear, apparel, equipment, accessories and services. NIKE is the largest seller of athletic footwear and apparel in the world. We sell our products through NIKE Direct operations, which are comprised of both NIKE-owned retail stores and sales through our digital platforms (also referred to as "NIKE Brand Digital"), to retail accounts and to a mix of independent distributors, licensees and sales representatives in nearly all countries around the world. We also offer interactive consumer services and experiences through our digital platforms. Nearly all of our products are manufactured by independent contractors. Nearly all footwear and apparel products are manufactured outside the United States, while equipment products are manufactured both in the United States and abroad. +All references to fiscal 2023, 2022, 2021 and 2020 are to NIKE, Inc.'s fiscal years ended May 31, 2023, 2022, 2021 and 2020, respectively. Any references to other fiscal years refer to a fiscal year ending on May 31 of that year. +PRODUCTS +Our NIKE Brand product offerings are aligned around our consumer construct focused on Men's, Women's and Kids'. We also design products specifically for the Jordan Brand and Converse. We believe this approach allows us to create products that better meet individual consumer needs while accelerating our largest growth opportunities. +NIKE's athletic footwear products are designed primarily for specific athletic use, although a large percentage of the products are worn for casual or leisure purposes. We place considerable emphasis on innovation and high-quality construction in the development and manufacturing of our products. Our Men's, Women's and Jordan Brand footwear products currently lead in footwear sales and we expect them to continue to do so. +We also sell sports apparel, which features the same trademarks and are sold predominantly through the same marketing and distribution channels as athletic footwear. Our sports apparel, similar to our athletic footwear products, is designed primarily for athletic use, although many of the products are worn for casual or leisure purposes, and demonstrates our commitment to innovation and high-quality construction. Our Men's and Women's apparel products currently lead in apparel sales and we expect them to continue to do so. We often market footwear, apparel and accessories in "collections" of similar use or by category. We also market apparel with licensed college and professional team and league logos. +We sell a line of performance equipment and accessories under the NIKE Brand name, including bags, socks, sport balls, eyewear, timepieces, digital devices, bats, gloves, protective equipment and other equipment designed for sports activities. We also sell small amounts of various plastic products to other manufacturers through our wholly-owned subsidiary, NIKE IHM, Inc., doing business as Air Manufacturing Innovation. +Our Jordan Brand designs, distributes and licenses athletic and casual footwear, apparel and accessories predominantly focused on basketball performance and culture using the Jumpman trademark. Sales and operating results for Jordan Brand products are reported within the respective NIKE Brand geographic operating segments. +Our wholly-owned subsidiary brand, Converse, headquartered in Boston, Massachusetts, designs, distributes and licenses casual sneakers, apparel and accessories under the Converse, Chuck Taylor, All Star, One Star, Star Chevron and Jack Purcell trademarks. Operating results of the Converse brand are reported on a stand-alone basis. +In addition to the products we sell to our wholesale customers and directly to consumers through our NIKE Direct operations, we have also entered into license agreements that permit unaffiliated parties to manufacture and sell, using NIKE-owned trademarks, certain apparel, digital devices and applications and other equipment designed for sports activities. +2023 FORM 10-K 1 +Table of Contents +We also offer interactive consumer services and experiences as well as digital products through our digital platforms, including fitness and activity apps; sport, fitness and wellness content; and digital services and features in retail stores that enhance the consumer experience. +SALES AND MARKETING +We experience moderate fluctuations in aggregate sales volume during the year. Historically, revenues in the first and fourth fiscal quarters have slightly exceeded those in the second and third fiscal quarters. However, the mix of product sales may vary considerably as a result of changes in seasonal and geographic demand for particular types of footwear, apparel and equipment, as well as other macroeconomic, strategic, operating and logistics-related factors. +Because NIKE is a consumer products company, the relative popularity and availability of various sports and fitness activities, as well as changing design trends, affect the demand for our products. We must, therefore, respond to trends and shifts in consumer preferences by adjusting the mix of existing product offerings, developing new products, styles and categories and influencing sports and fitness preferences through extensive marketing. Failure to respond in a timely and adequate manner could have a material adverse effect on our sales and profitability. This is a continuing risk. Refer to Item 1A. Risk Factors. +OUR MARKETS +We report our NIKE Brand operations based on our internal geographic organization. Each NIKE Brand geographic segment operates predominantly in one industry: the design, development, marketing and selling of athletic footwear, apparel and equipment. The Company's reportable operating segments for the NIKE Brand are: North America; Europe, Middle East & Africa ("EMEA"); Greater China; and Asia Pacific & Latin America ("APLA"), and include results for the NIKE and Jordan brands. Sales through our NIKE Direct operations are managed within each geographic operating segment. +Converse is also a reportable operating segment and operates predominately in one industry: the design, marketing, licensing and selling of casual sneakers, apparel and accessories. Converse direct to consumer operations, including digital commerce, are reported within the Converse operating segment results. +UNITED STATES MARKET +For fiscal 2023, NIKE Brand and Converse sales in the United States accounted for approximately 43% of total revenues, compared to 40% and 39% for fiscal 2022 and fiscal 2021, respectively. We sell our products to thousands of retail accounts in the United States, including a mix of footwear stores, sporting goods stores, athletic specialty stores, department stores, skate, tennis and golf shops and other retail accounts. In the United States, we utilize NIKE sales offices to solicit such sales. During fiscal 2023, our three largest United States customers accounted for approximately 22% of sales in the United States. +Our NIKE Direct and Converse direct to consumer operations sell our products to consumers through various digital platforms. In addition, our NIKE Direct and Converse direct to consumer operations sell products through the following number of retail stores in the United States: +U.S. RETAIL STORES NUMBER +NIKE Brand factory stores 213 +NIKE Brand in-line stores (including employee-only stores) 74 +Converse stores (including factory stores) 82 +TOTAL 369 +In the United States, NIKE has eight significant distribution centers. Refer to Item 2. Properties for further information. +2023 FORM 10-K 2 +Table of Contents +INTERNATIONAL MARKETS +For fiscal 2023, non-U.S. NIKE Brand and Converse sales accounted for approximately 57% of total revenues, compared to 60% and 61% for fiscal 2022 and fiscal 2021, respectively. We sell our products to retail accounts through our own NIKE Direct operations and through a mix of independent distributors, licensees and sales representatives around the world. We sell to thousands of retail accounts and ship products from 67 distribution centers outside of the United States. Refer to Item 2. Properties for further information on distribution facilities outside of the United States. During fiscal 2023, NIKE's three largest customers outside of the United States accounted for approximately 14% of total non-U.S. sales. +In addition to NIKE-owned and Converse-owned digital commerce platforms in over 40 countries, our NIKE Direct and Converse direct to consumer businesses operate the following number of retail stores outside the United States: +NON-U.S. RETAIL STORES NUMBER +NIKE Brand factory stores 560 +NIKE Brand in-line stores (including employee-only stores) 49 +Converse stores (including factory stores) 54 +TOTAL 663 +SIGNIFICANT CUSTOMER +No customer accounted for 10% or more of our consolidated net Revenues during fiscal 2023. +PRODUCT RESEARCH, DESIGN AND DEVELOPMENT +We believe our research, design and development efforts are key factors in our success. Technical innovation in the design and manufacturing process of footwear, apparel and athletic equipment receives continued emphasis as we strive to produce products that help to enhance athletic performance, reduce injury and maximize comfort, while decreasing our environmental impact. +In addition to our own staff of specialists in the areas of biomechanics, chemistry, exercise physiology, engineering, digital technologies, industrial design, sustainability and related fields, we also utilize research committees and advisory boards made up of athletes, coaches, trainers, equipment managers, orthopedists, podiatrists, physicians and other experts who consult with us and review certain designs, materials and concepts for product and manufacturing, design and other process improvements and compliance with product safety regulations around the world. Employee athletes, athletes engaged under sports marketing contracts and other athletes wear-test and evaluate products during the design and development process. +As we continue to develop new technologies, we are simultaneously focused on the design of innovative products and experiences incorporating such technologies throughout our product categories and consumer applications. Using market intelligence and research, our various design teams identify opportunities to leverage new technologies in existing categories to respond to consumer preferences. The proliferation of Nike Air, Zoom, Free, Dri-FIT, Flyknit, FlyEase, ZoomX, Air Max, React and Forward technologies, among others, typifies our dedication to designing innovative products. +MANUFACTURING +Nearly all of our footwear and apparel products are manufactured outside the United States by independent manufacturers ("contract manufacturers"), many of which operate multiple factories. We are also supplied, primarily indirectly, by a number of materials, or "Tier 2" suppliers, who provide the principal materials used in footwear and apparel finished goods products. As of May 31, 2023, we had 146 strategic Tier 2 suppliers. +As of May 31, 2023, our contract manufacturers operated 123 finished goods footwear factories located in 11 countries. For fiscal 2023, NIKE Brand footwear finished goods were manufactured by 15 contract manufacturers, many of which operate multiple factories. The largest single finished goods footwear factory accounted for approximately 9% of total fiscal 2023 NIKE Brand footwear production. For fiscal 2023, factories in Vietnam, Indonesia and China manufactured approximately 50%, 27% and 18% of total NIKE Brand footwear, respectively. For fiscal 2023, four footwear contract manufacturers each accounted for greater than 10% of footwear production and in the aggregate accounted for approximately 58% of NIKE Brand footwear production. +As of May 31, 2023, our contract manufacturers operated 291 finished goods apparel factories located in 31 countries. For fiscal 2023, NIKE Brand apparel finished goods were manufactured by 55 contract manufacturers, many of which operate multiple factories. The largest single finished goods apparel factory accounted for approximately 8% of total fiscal 2023 NIKE Brand apparel production. For fiscal 2023, factories in Vietnam, China and Cambodia manufactured approximately 29%, 18% and 16% +2023 FORM 10-K 3 +Table of Contents +of total NIKE Brand apparel, respectively. For fiscal 2023, one apparel contract manufacturer accounted for more than 10% of apparel production, and the top five contract manufacturers in the aggregate accounted for approximately 52% of NIKE Brand apparel production. +NIKE's contract manufacturers buy raw materials for the manufacturing of our footwear, apparel and equipment products. Most raw materials are available and purchased by those contract manufacturers in the countries where manufacturing takes place. +The principal materials used in our footwear products are natural and synthetic rubber, plastic compounds, foam cushioning materials, natural and synthetic leather, nylon, polyester and natural fiber textiles, as well as polyurethane films used to make NIKE Air-Sole cushioning components. During fiscal 2023, Air Manufacturing Innovation, a wholly-owned subsidiary, with facilities near Beaverton, Oregon, in Dong Nai Province, Vietnam, and St. Charles, Missouri, as well as contract manufacturers in China and Vietnam, were our suppliers of NIKE Air-Sole cushioning components used in footwear. +The principal materials used in our apparel products are natural and synthetic fabrics, yarns and threads (both virgin and recycled); specialized performance fabrics designed to efficiently wick moisture away from the body, retain heat and repel rain and/or snow; and plastic and metal hardware. +In fiscal 2023, we experienced ongoing supply chain volatility during the first part of the year, which improved gradually during the course of the year. We also experienced higher supply chain network costs primarily due to inflationary pressures during the year. Despite competition for certain materials during fiscal 2023, contract manufacturers were able to source sufficient quantities of raw materials for use in our footwear and apparel products. Refer to Item 1A. Risk Factors, for additional discussion of the impact of sourcing risks on our business. +Since 1972, Sojitz Corporation of America ("Sojitz America"), a large Japanese trading company and the sole owner of our redeemable preferred stock, has performed import-export financing services for us. +INTERNATIONAL OPERATIONS AND TRADE +Our international operations and sources of supply are subject to the usual risks of doing business abroad, such as the implementation of, or potential changes in, foreign and domestic trade policies, increases in import duties, anti-dumping measures, quotas, safeguard measures, trade restrictions, restrictions on the transfer of funds and, in certain parts of the world, political tensions, instability, conflicts, nationalism and terrorism, and resulting sanctions and other measures imposed in response to such issues. We have not, to date, been materially affected by any such risk but cannot predict the likelihood of such material effects occurring in the future. +In recent years, uncertain global and regional economic and political conditions have affected international trade and increased protectionist actions around the world. These trends are affecting many global manufacturing and service sectors, and the footwear and apparel industries, as a whole, are not immune. Companies in our industry are facing trade protectionism in many different regions, and, in nearly all cases, we are working together with industry groups to address trade issues and reduce the impact to the industry, while observing applicable competition laws. Notwithstanding our efforts, protectionist measures have resulted in increases in the cost of our products, and additional measures, if implemented, could adversely affect sales and/or profitability for NIKE, as well as the imported footwear and apparel industry as a whole. +We monitor protectionist trends and developments throughout the world that may materially impact our industry, and we engage in administrative and judicial processes to mitigate trade restrictions. We are actively monitoring actions that may result in additional anti-dumping measures and could affect our industry. We are also monitoring for and advocating against other impediments that may limit or delay customs clearance for imports of footwear, apparel and equipment. NIKE also advocates for trade liberalization for footwear and apparel in a number of bilateral and multilateral free trade agreements. Changes in, and responses to, U.S. trade policies, including the imposition of tariffs or penalties on imported goods or retaliatory measures by other countries, have negatively affected, and could in the future negatively affect, U.S. corporations, including NIKE, with business operations and/or consumer markets in those countries, which could also make it necessary for us to change the way we conduct business, either of which may have an adverse effect on our business, financial condition or our results of operations. In addition, with respect to proposed trade restrictions, we work with a broad coalition of global businesses and trade associations representing a wide variety of sectors to help ensure that any legislation enacted and implemented (i) addresses legitimate and core concerns, (ii) is consistent with international trade rules and (iii) reflects and considers domestic economies and the important role they may play in the global economic community. +Where trade protection measures are implemented, we believe we have the ability to develop, over a period of time, adequate alternative sources of supply for the products obtained from our present suppliers. If events prevented us from acquiring products from our suppliers in a particular country, our operations could be temporarily disrupted and we could experience an adverse financial impact. However, we believe we could abate any such disruption, and that much of the adverse impact on supply would, therefore, be of a short-term nature, although alternate sources of supply might not be as cost-effective and could have an ongoing adverse impact on profitability. +2023 FORM 10-K 4 +Table of Contents +Our international operations are also subject to compliance with the U.S. Foreign Corrupt Practices Act (the "FCPA"), and other anti-bribery laws applicable to our operations. We source a significant portion of our products from, and have important consumer markets, outside of the United States. We have an ethics and compliance program to address compliance with the FCPA and similar laws by us, our employees, agents, suppliers and other partners. Refer to Item 1A. Risk Factors for additional information on risks relating to our international operations. +COMPETITION +The athletic footwear, apparel and equipment industry is highly competitive on a worldwide basis. We compete internationally with a significant number of athletic and leisure footwear companies, athletic and leisure apparel companies, sports equipment companies and large companies having diversified lines of athletic and leisure footwear, apparel and equipment, including adidas, Anta, ASICS, Li Ning, lululemon athletica, New Balance, Puma, Under Armour and V.F. Corporation, among others. The intense competition and the rapid changes in technology and consumer preferences in the markets for athletic and leisure footwear and apparel and athletic equipment constitute significant risk factors in our operations. Refer to Item 1A. Risk Factors for additional information. +NIKE is the largest seller of athletic footwear and apparel in the world. Important aspects of competition in this industry are: +• Product attributes such as quality; performance and reliability; new product style, design, innovation and development; as well as consumer price/value. +• Consumer connection, engagement and affinity for brands and products, developed through marketing, promotion and digital experiences; social media interaction; customer support and service; identification with prominent and influential athletes, influencers, public figures, coaches, teams, colleges and sports leagues who endorse our brands and use our products and active engagement through sponsored sporting events and clinics. +• Effective sourcing and distribution of products, with attractive merchandising and presentation at retail, both in-store and on digital platforms. +We believe that we are competitive in all of these areas. +TRADEMARKS AND PATENTS +We believe that our intellectual property rights are important to our brand, our success and our competitive position. We strategically pursue available protections of these rights and vigorously protect them against third-party theft and infringement. +We use trademarks on nearly all of our products and packaging, and in our marketing materials, and believe having distinctive marks that are readily identifiable is an important factor in creating a market for our goods, in identifying our brands and the Company, and in distinguishing our goods from the goods of others. We consider our NIKE and Swoosh Design trademarks to be among our most valuable assets and we have registered these trademarks in over 190 jurisdictions worldwide. In addition, we own many other trademarks that we use in marketing our products. We own common law rights in the trade dress of several distinctive shoe designs and elements. For certain trade dress, we have sought and obtained trademark registrations. +We have copyright protection in our designs, graphics, software applications, digital goods and other original works. When appropriate, we also obtain registered copyrights. +We file for, own and maintain many U.S. and foreign utility and design patents protecting components, technologies, materials, manufacturing techniques, features, functionality, and industrial designs used in and for the manufacture of various athletic, performance, and leisure footwear and apparel, including physical and digital versions thereof, athletic equipment, and digital devices, and related software applications. These patents expire at various times. +We believe our success depends upon our capabilities in areas such as design, research and development, production and marketing and is supported and protected by our intellectual property rights, such as trademarks, utility and design patents, copyrights, and trade secrets, among others. +We have followed a policy of applying for and registering intellectual property rights in the United States and select foreign countries on trademarks, inventions, innovations and designs that we deem valuable. We also continue to vigorously protect our intellectual property, including trademarks, patents and trade secrets against third-party infringement and misappropriation. +2023 FORM 10-K 5 +Table of Contents +HUMAN CAPITAL RESOURCES +At NIKE, we consider the strength and effective management of our workforce to be essential to the ongoing success of our business. We believe that it is important to attract, develop and retain a diverse and engaged workforce at all levels of our business and that such a workforce fosters creativity and accelerates innovation. We are focused on building an increasingly diverse talent pipeline that reflects our consumers, athletes and the communities we serve. +CULTURE +Each employee shapes NIKE's culture through behaviors and practices. This starts with our Maxims, which represent our core values and, along with our Code of Conduct, feature the fundamental behaviors that help anchor, inform and guide us and apply to all employees. Our mission is to bring inspiration and innovation to every athlete in the world, which includes the belief that if you have a body, you are an athlete. We aim to do this by creating groundbreaking sport innovations, making our products more sustainably, building a creative and diverse global team, supporting the well-being of our employees and making a positive impact in communities where we live and work. Our mission is aligned with our deep commitment to maintaining an environment where all NIKE employees have the opportunity to reach their full potential, to connect to our brands and to shape our workplace culture. We believe providing for growth and retention of our employees is essential in fostering such a culture and are dedicated to giving access to training programs and career development opportunities, including trainings on NIKE's values, history and business, trainings on developing leadership skills at all levels, tools and resources for managers and qualified tuition reimbursement opportunities. +As part of our commitment to empowering our employees to help shape our culture, we source employee feedback through our Engagement Survey program, including several corporate pulse surveys. The program provides every employee throughout the globe an opportunity to provide confidential feedback on key areas known to drive employee engagement, including their satisfaction with their managers, their work and the Company generally. The program also measures our employees’ emotional commitment to NIKE as well as NIKE's culture of diversity, equity and inclusion. NIKE also provides multiple points of contact for employees to speak up if they experience something that does not align with our values or otherwise violates our workplace policies, even if they are uncertain what they observed or heard is a violation of company policy. +As part of our commitment to make a positive impact on our communities, we maintain a goal of investing 2% of our prior fiscal year's pre-tax income into global communities. The focus of this investment continues to be inspiring kids to be active through play and sport as well as uniting and inspiring communities to create a better and more equitable future for all. Our community investments are an important part of our culture in that we also support employees in giving back to community organizations through donations and volunteering, which are matched by the NIKE Foundation where eligible. +EMPLOYEE BASE +As of May 31, 2023, we had approximately 83,700 employees worldwide, including retail and part-time employees. We also utilize independent contractors and temporary personnel to supplement our workforce. +None of our employees are represented by a union, except certain employees in the EMEA and APLA geographies are members of and/or represented by trade unions, as allowed or required by local law and/or collective bargaining agreements. Also, in some countries outside of the United States, local laws require employee representation by works councils (which may be entitled to information and consultation on certain subsidiary decisions) or by organizations similar to a union. In certain European countries, we are required by local law to enter into, and/or comply with, industry-wide or national collective bargaining agreements. NIKE has never experienced a material interruption of operations due to labor disagreements. +DIVERSITY, EQUITY AND INCLUSION +Diversity, equity and inclusion ("DE&I") is a strategic priority for NIKE and we are committed to having an increasingly diverse team and culture. We aim to foster an inclusive and accessible workplace through recruitment, development and retention of diverse talent with the goal of expanding representation across all dimensions of diversity over the long term. We remain committed to the targets announced in fiscal 2021 for the Company to work toward by fiscal 2025, including increasing representation of women in our global corporate workforce and leadership positions, as well as increasing representation of U.S. racial and ethnic minorities in our U.S. corporate workforce and at the Director level and above. +We continue to enhance our efforts to recruit diverse talent through our traditional channels and through initiatives, such as partnerships with athletes and sports-related organizations to create apprenticeship programs and new partnerships with organizations, colleges and universities that serve diverse populations. Additionally, we are prioritizing DE&I education so that all NIKE employees and leaders have the cultural awareness and understanding to lead inclusively and build diverse and inclusive teams. We also have Employee Networks, collectively known as NikeUNITED, representing various employee groups. +2023 FORM 10-K 6 +Table of Contents +Our DE&I focus extends beyond our workforce and includes our communities, which we support in a number of ways. We have committed to investments that aim to address racial inequality and improve diversity and representation in our communities. We also are leveraging our global scale to accelerate business diversity, including investing in business training programs for women and increasing the proportion of services supplied by minority-owned businesses. +COMPENSATION AND BENEFITS +NIKE's total rewards are intended to be competitive and equitable, meet the diverse needs of our global teammates and reinforce our values. We are committed to providing comprehensive, competitive and equitable pay and benefits to our employees, and we have invested, and aim to continue to invest, in our employees through growth and development and holistic well-being initiatives. Our initiatives in this area include: +• We are committed to competitive pay and to reviewing our pay and promotion practices annually. +• We have an annual company bonus plan and a retail-focused bonus plan applicable to all eligible employees. Both programs are focused on rewarding employees for company performance, which we believe reinforces our culture and rewards behaviors that support collaboration and teamwork. +• We provide comprehensive family care benefits in the U.S. and globally where practicable, including family planning coverage, backup care and child/elder care assistance as well as an income-based childcare subsidy for eligible employees. +• Our Military Leave benefit provides up to 12 weeks of paid time off every 12 months. +• We offer free access to our Sport Centers at our world headquarters for our full-time employees and North America store employees. +• We provide employees free access to mindfulness and meditation resources, as well as live classes through our Sport Centers. +• We provide all employees and their families globally with free and confidential visits with a mental health counselor through a third-party provider and our global Employee Assistance Program (EAP). +• We provide support to our employees in a variety of ways during times of crisis, including pay continuity under certain circumstances, our natural disaster assistance program, and ongoing support for challenges related to the COVID-19 pandemic. +• We provide a hybrid work approach for the majority of employees, as well as a Four Week Flex, which provides employees an opportunity to work from a location of their choice for up to four weeks per year. +• We offer a Well-Being Week where we close our corporate offices for a full-week in the summer and Well-Being Days for our teammates in our retail stores and distribution centers, and encourage our teammates to focus on their well-being. +• We provide inclusive family planning benefits and transgender healthcare coverage for eligible employees covered on the U.S. Health Plan, including access to both restorative services and personal care. +• We provide all U.S. employees with unlimited free financial coaching through a third-party provider. +Additional information related to our human capital strategy can be found in our FY22 NIKE, Inc. Impact Report, which is available on the Impact section of about.nike.com. Information contained on or accessible through our websites is not incorporated into, and does not form a part of, this Annual Report or any other report or document we file with the SEC, and any references to our websites are intended to be inactive textual references only. +AVAILABLE INFORMATION AND WEBSITES +Our NIKE digital commerce website is located at www.nike.com. On our NIKE corporate website, located at investors.nike.com, we post the following filings as soon as reasonably practicable after they are electronically filed with, or furnished to, the United States Securities and Exchange Commission (the "SEC"): our annual report on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities and Exchange Act of 1934, as amended. Our proxy statements are also posted on our corporate website. All such filings on our corporate website are available free of charge. Copies of these filings are also available on the SEC's website at www.sec.gov. Also available on our corporate website are the charters of the committees of our Board of Directors, as well as our corporate governance guidelines and code of ethics. Copies of any of these documents will be provided in print to any shareholder who submits a request in writing to NIKE Investor Relations, One Bowerman Drive, Beaverton, Oregon 97005-6453. Information contained on or accessible through our website is not incorporated into, and does not form a part of, this Annual Report or any other report or document we file with the SEC, and any references to our website are intended to be inactive textual references only. +2023 FORM 10-K 7 +Table of Contents +INFORMATION ABOUT OUR EXECUTIVE OFFICERS +The executive officers of NIKE, Inc. as of July 20, 2023, are as follows: +Mark G. Parker , Executive Chairman — Mr. Parker, 67, is Executive Chairman of the Board of Directors and served as President and Chief Executive Officer from 2006 - January 2020. He has been employed by NIKE since 1979 with primary responsibilities in product research, design and development, marketing and brand management. Mr. Parker was appointed divisional Vice President in charge of product development in 1987, corporate Vice President in 1989, General Manager in 1993, Vice President of Global Footwear in 1998 and President of the NIKE Brand in 2001. +John J. Donahoe II , President and Chief Executive Officer — Mr. Donahoe, 63, was appointed President and Chief Executive Officer in January 2020 and has been a director since 2014. He brings expertise in digital commerce, technology and global strategy. He previously served as President and Chief Executive Officer at ServiceNow, Inc. Prior to joining ServiceNow, Inc., he served as President and Chief Executive Officer of eBay, Inc. He also held leadership roles at Bain & Company for two decades. +Matthew Friend , Executive Vice President and Chief Financial Officer — Mr. Friend, 45, joined NIKE in 2009 and leads the Company's finance, demand & supply management, procurement and global places & services organizations. He joined NIKE as Senior Director of Corporate Strategy and Development, and was appointed Chief Financial Officer of Emerging Markets in 2011. In 2014, Mr. Friend was appointed Chief Financial Officer of Global Categories, Product and Functions, and was subsequently appointed Chief Financial Officer of the NIKE Brand in 2016. He was also appointed Vice President of Investor Relations in 2019. Mr. Friend was appointed as Executive Vice President and Chief Financial Officer of NIKE, Inc. in April 2020. Prior to joining NIKE, he worked in the financial industry including roles as VP of investment banking and mergers and acquisitions at Goldman Sachs and Morgan Stanley. +Monique S. Matheson , Executive Vice President, Chief Human Resources Officer — Ms. Matheson, 56, joined NIKE in 1998, with primary responsibilities in the human resources function. She was appointed as Vice President and Senior Business Partner in 2011 and Vice President, Chief Talent and Diversity Officer in 2012. Ms. Matheson was appointed Executive Vice President, Global Human Resources in 2017. +Ann M. Miller , Executive Vice President, Chief Legal Officer — Ms. Miller, 49, joined NIKE in 2007 and serves as EVP, Chief Legal Officer for NIKE, Inc. In her capacity as Chief Legal Officer, she oversees all legal, compliance, government & public affairs, social community impact, security, resilience and investigation matters of the Company. For the past six years, she served as Vice President, Corporate Secretary and Chief Ethics & Compliance Officer. She previously served as Converse's General Counsel, and brings more than 20 years of legal and business expertise to her role. Prior to joining NIKE, Ms. Miller worked at the law firm Sullivan & Cromwell. +Heidi O'Neill , President, Consumer, Brand & Product — Ms. O'Neill, 58, joined NIKE in 1998 and leads the integration of global Men's, Women's & Kids' consumer teams, the entire global product engine and global brand marketing and sports marketing to build deep storytelling, relationships and engagement with the brand. Since joining NIKE, she has held a variety of key roles, including leading NIKE's marketplace and four geographic operating regions, leading NIKE Direct and accelerating NIKE's retail and digital-commerce business and creating and leading NIKE's Women’s business. Prior to NIKE, Ms. O'Neill held roles at Levi Strauss & Company and Foote, Cone & Belding. +Craig Williams , President, Geographies & Marketplace — Mr. Williams, 54, joined NIKE in 2019 and leads NIKE's four geographies and marketplace across the NIKE Direct and wholesale business. In addition, he leads the Supply Chain and Logistics organization. Mr. Williams joined NIKE as President of Jordan Brand overseeing a team of designers, product developers, marketers and business leaders. Prior to NIKE, he was Senior Vice President, The Coca-Cola Co., and President of The McDonald's Division (TMD) Worldwide. Mr. Williams has also held roles at CIBA Vision and Kraft Foods Inc., and served five years in the U.S. Navy as a Naval Nuclear Power Officer. +2023 FORM 10-K 8 +Table of Contents +ITEM 1A. RISK FACTORS +Special Note Regarding Forward-Looking Statements and Analyst Reports +Certain written and oral statements, other than purely historic information, including estimates, projections, statements relating to NIKE's business plans, objectives and expected operating or financial results and the assumptions upon which those statements are based, made or incorporated by reference from time to time by NIKE or its representatives in this Annual Report, other reports, filings with the SEC, press releases, conferences or otherwise, are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements include, without limitation, any statement that may predict, forecast, indicate or imply future results, performance or achievements, and may contain the words "believe," "anticipate," "expect," "estimate," "project," "will be," "will continue," "will likely result" or words or phrases of similar meaning. Forward-looking statements involve risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. The risks and uncertainties are detailed from time to time in reports filed by NIKE with the SEC, including reports filed on Forms 8-K, 10-Q and 10-K, and include, among others, the following: international, national and local political, civil, economic and market conditions, including high, and increases in, inflation and interest rates; the size and growth of the overall athletic or leisure footwear, apparel and equipment markets; intense competition among designers, marketers, distributors and sellers of athletic or leisure footwear, apparel and equipment for consumers and endorsers; demographic changes; changes in consumer preferences; popularity of particular designs, categories of products and sports; seasonal and geographic demand for NIKE products; difficulties in anticipating or forecasting changes in consumer preferences, consumer demand for NIKE products and the various market factors described above; our ability to execute on our sustainability strategy and achieve our sustainability-related goals and targets, including sustainable product offerings; difficulties in implementing, operating and maintaining NIKE's increasingly complex information technology systems and controls, including, without limitation, the systems related to demand and supply planning and inventory control; interruptions in data and information technology systems; consumer data security; fluctuations and difficulty in forecasting operating results, including, without limitation, the fact that advance orders may not be indicative of future revenues due to changes in shipment timing, the changing mix of orders with shorter lead times, and discounts, order cancellations and returns; the ability of NIKE to sustain, manage or forecast its growth and inventories; the size, timing and mix of purchases of NIKE's products; increases in the cost of materials, labor and energy used to manufacture products; new product development and introduction; the ability to secure and protect trademarks, patents and other intellectual property; product performance and quality; customer service; adverse publicity and an inability to maintain NIKE's reputation and brand image, including without limitation, through social media or in connection with brand damaging events; the loss of significant customers or suppliers; dependence on distributors and licensees; business disruptions; increased costs of freight and transportation to meet delivery deadlines; increases in borrowing costs due to any decline in NIKE's debt ratings; changes in business strategy or development plans; general risks associated with doing business outside of the United States, including, without limitation, exchange rate fluctuations, import duties, tariffs, quotas, sanctions, political and economic instability, conflicts and terrorism; the potential impact of new and existing laws, regulations or policy, including, without limitation, tariffs, import/export, trade, wage and hour or labor and immigration regulations or policies; changes in government regulations; the impact of, including business and legal developments relating to, climate change, extreme weather conditions and natural disasters; litigation, regulatory proceedings, sanctions or any other claims asserted against NIKE; the ability to attract and retain qualified employees, and any negative public perception with respect to key personnel or our corporate culture, values or purpose; the effects of NIKE's decision to invest in or divest of businesses or capabilities; health epidemics, pandemics and similar outbreaks, including the COVID-19 pandemic; and other factors referenced or incorporated by reference in this Annual Report and other reports. +Investors should also be aware that while NIKE does, from time to time, communicate with securities analysts, it is against NIKE's policy to disclose to them any material non-public information or other confidential commercial information. Accordingly, shareholders should not assume that NIKE agrees with any statement or report issued by any analyst irrespective of the content of the statement or report. Furthermore, NIKE has a policy against confirming financial forecasts or projections issued by others. Thus, to the extent that reports issued by securities analysts contain any projections, forecasts or opinions, such reports are not the responsibility of NIKE. +Risk Factors +The risks included here are not exhaustive. Other sections of this Annual Report may include additional factors which could adversely affect NIKE's business and financial performance. Moreover, NIKE operates in a very competitive and rapidly changing environment. New risks emerge from time to time and it is not possible for management to predict all such risks, nor can it assess the impact of all such risks on NIKE's business or the extent to which any risk, or combination of risks, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results. +2023 FORM 10-K 9 +Table of Contents +Economic and Industry Risks +Global economic conditions could have a material adverse effect on our business, operating results and financial condition. +The uncertain state of the global economy, including high and rising levels of inflation and interest rates and the risk of a recession, continues to impact businesses around the world. If global economic and financial market conditions deteriorate, the following factors, among others, could have a material adverse effect on our business, operating results and financial condition: +• Our sales are impacted by discretionary spending by consumers. Declines in consumer spending have in the past resulted in and may in the future result in reduced demand for our products, increased inventories, reduced orders from retailers for our products, order cancellations, lower revenues, higher discounts and lower gross margins. +• In the future, we may be unable to access financing in the credit and capital markets at reasonable rates in the event we find it desirable to do so. +• We conduct transactions in various currencies, which creates exposure to fluctuations in foreign currency exchange rates relative to the U.S. Dollar. Continued volatility in the markets and exchange rates for foreign currencies and contracts in foreign currencies has had and could continue to have a significant impact on our reported operating results and financial condition. +• Continued volatility in the availability and prices for commodities and raw materials we use in our products and in our supply chain (such as cotton or petroleum derivatives) has had and could in the future have a material adverse effect on our costs, gross margins and profitability. In addition, supply chain issues caused by factors including the COVID-19 pandemic and geopolitical conflicts have impacted and may continue to impact the availability, pricing and timing for obtaining commodities and raw materials. +• If retailers of our products experience declining revenues or experience difficulty obtaining financing in the capital and credit markets to purchase our products, this could result in reduced orders for our products, order cancellations, late retailer payments, extended payment terms, higher accounts receivable, reduced cash flows, greater expense associated with collection efforts and increased bad debt expense. +• In the past, certain retailers of our products have experienced severe financial difficulty, become insolvent and ceased business operations, and this could occur in the future, which could negatively impact the sale of our products to consumers. +• If contract manufacturers of our products or other participants in our supply chain experience difficulty obtaining financing in the capital and credit markets to purchase raw materials or to finance capital equipment and other general working capital needs, it may result in delays or non-delivery of shipments of our products. +Our products, services and experiences face intense competition. +NIKE is a consumer products company and the relative popularity of various sports and fitness activities and changing design trends affect the demand for our products, services and experiences. The athletic footwear, apparel and equipment industry is highly competitive both in the United States and worldwide. We compete internationally with a significant number of athletic and leisure footwear companies, athletic and leisure apparel companies, sports equipment companies, private labels and large companies that have diversified lines of athletic and leisure footwear, apparel and equipment. We also compete with other companies for the production capacity of contract manufacturers that produce our products. In addition, we and our contract manufacturers compete with other companies and industries for raw materials used in our products. Our NIKE Direct operations, both through our digital commerce operations and retail stores, also compete with multi-brand retailers, which sell our products through their digital platforms and physical stores, and with digital commerce platforms. In addition, we compete with respect to the digital services and experiences we are able to offer our consumers, including fitness and activity apps; sport, fitness and wellness content and services; and digital services and features in retail stores that enhance the consumer experience. +Product offerings, technologies, marketing expenditures (including expenditures for advertising and endorsements), pricing, costs of production, customer service, digital commerce platforms, digital services and experiences and social media presence are areas of intense competition. These, in addition to ongoing rapid changes in technology, a reduction in barriers to the creation of new footwear and apparel companies and consumer preferences in the markets for athletic and leisure footwear, apparel, and equipment, services and experiences, constitute significant risk factors in our operations. In addition, the competitive nature of retail, including shifts in the ways in which consumers shop, and the continued proliferation of digital commerce, constitutes a risk factor implicating our NIKE Direct and wholesale operations. If we do not adequately and timely anticipate and respond to our competitors, our costs may increase, demand for our products may decline, possibly significantly, or we may need to reduce wholesale or suggested retail prices for our products. +2023 FORM 10-K 10 +Table of Contents +Economic factors beyond our control, and changes in the global economic environment, including fluctuations in inflation and currency exchange rates, could result in lower revenues, higher costs and decreased margins and earnings. +A majority of our products are manufactured and sold outside of the United States, and we conduct purchase and sale transactions in various currencies, which creates exposure to the volatility of global economic conditions, including fluctuations in inflation and foreign currency exchange rates. Central banks may deploy various strategies to combat inflation, including increasing interest rates, which may impact our borrowing costs. Additionally, there has been, and may continue to be, volatility in currency exchange rates that impact the U.S. Dollar value relative to other international currencies. Our international revenues and expenses generally are derived from sales and operations in foreign currencies, and these revenues and expenses are affected by currency fluctuations, specifically amounts recorded in foreign currencies and translated into U.S. Dollars for consolidated financial reporting, as weakening of foreign currencies relative to the U.S. Dollar adversely affects the U.S. Dollar value of the Company's foreign currency-denominated sales and earnings. Currency exchange rate fluctuations could also disrupt the business of the independent manufacturers that produce our products by making their purchases of raw materials more expensive and more difficult to finance. Foreign currency fluctuations have adversely affected and could continue to have an adverse effect on our results of operations and financial condition. +We hedge certain foreign currency exposures to lessen and delay, but not to completely eliminate, the effects of foreign currency fluctuations on our financial results. Since the hedging activities are designed to lessen volatility, they not only reduce the negative impact of a stronger U.S. Dollar or other trading currency, but they also reduce the positive impact of a weaker U.S. Dollar or other trading currency. Our future financial results have in the past been and could in the future be significantly affected by the value of the U.S. Dollar in relation to the foreign currencies in which we conduct business. The degree to which our financial results are affected for any given time period will depend in part upon our hedging activities. +We may be adversely affected by the financial health of our wholesale customers. +We extend credit to our customers based on an assessment of a customer's financial condition, generally without requiring collateral. To assist in the scheduling of production and the shipping of our products, we offer certain customers the opportunity to place orders five to six months ahead of delivery under our futures ordering program. These advance orders may be canceled under certain conditions, and the risk of cancellation increases when dealing with financially unstable retailers or retailers struggling with economic uncertainty. In the past, some customers have experienced financial difficulties up to and including bankruptcies, which have had an adverse effect on our sales, our ability to collect on receivables and our financial condition. When the retail economy weakens or as consumer behavior shifts, retailers tend to be more cautious with orders. A slowing or changing economy in our key markets, including a recession, could adversely affect the financial health of our customers, which in turn could have an adverse effect on our results of operations and financial condition. In addition, product sales are dependent in part on high quality merchandising and an appealing retail environment to attract consumers, which requires continuing investments by retailers. Retailers that experience financial difficulties may fail to make such investments or delay them, resulting in lower sales and orders for our products. +Climate change and other sustainability-related matters, or legal, regulatory or market responses thereto, may have an adverse impact on our business and results of operations. +There are concerns that increased levels of carbon dioxide and other greenhouse gases in the atmosphere have caused, and may continue to cause, potentially at a growing rate, increases in global temperatures, changes in weather patterns and increasingly frequent and/or prolonged extreme weather and climate events. Climate change may also exacerbate challenges relating to the availability and quality of water and raw materials, including those used in the production of our products, and may result in changes in regulations or consumer preferences, which could in turn affect our business, operating results and financial condition. For example, there has been increased focus by governmental and non-governmental organizations, consumers, customers, employees and other stakeholders on products that are sustainably made and other sustainability matters, including responsible sourcing and deforestation, the use of plastic, energy and water, the recyclability or recoverability of packaging and materials transparency, any of which may require us to incur increased costs for additional transparency, due diligence and reporting. In addition, federal, state or local governmental authorities in various countries have proposed, and are likely to continue to propose, legislative and regulatory initiatives to reduce or mitigate the impacts of climate change on the environment. Various countries and regions are following different approaches to the regulation of climate change, which could increase the complexity of, and potential cost related to complying with, such regulations. Any of the foregoing may require us to make additional investments in facilities and equipment, may impact the availability and cost of key raw materials used in the production of our products or the demand for our products, and, in turn, may adversely impact our business, operating results and financial condition. +Although we have announced sustainability-related goals and targets, there can be no assurance that our stakeholders will agree with our strategies, and any perception, whether or not valid, that we have failed to achieve, or to act responsibly with respect to, such matters or to effectively respond to new or additional legal or regulatory requirements regarding climate change, could result in adverse publicity and adversely affect our business and reputation. Execution of these strategies and achievement of our goals is subject to risks and uncertainties, many of which are outside of our control. These risks and uncertainties include, but are not +2023 FORM 10-K 11 +Table of Contents +limited to, our ability to execute our strategies and achieve our goals within the currently projected costs and the expected timeframes; the availability and cost of raw materials and renewable energy; unforeseen production, design, operational and technological difficulties; the outcome of research efforts and future technology developments, including the ability to scale projects and technologies on a commercially competitive basis such as carbon sequestration and/or other related processes; compliance with, and changes or additions to, global and regional regulations, taxes, charges, mandates or requirements relating to greenhouse gas emissions, carbon costs or climate-related goals; adapting products to customer preferences and customer acceptance of sustainable supply chain solutions; and the actions of competitors and competitive pressures. As a result, there is no assurance that we will be able to successfully execute our strategies and achieve our sustainability-related goals, which could damage our reputation and customer and other stakeholder relationships and have an adverse effect on our business, results of operations and financial condition. +Extreme weather conditions and natural disasters could negatively impact our operating results and financial condition. +Given the broad and global scope of our operations, we are particularly vulnerable to the physical risks of climate change, such as shifts in weather patterns. Extreme weather conditions in the areas in which our retail stores, suppliers, manufacturers, customers, distribution centers, offices, headquarters and vendors are located could adversely affect our operating results and financial condition. Moreover, natural disasters such as earthquakes, hurricanes, wildfires, tsunamis, floods or droughts, whether occurring in the United States or abroad, and their related consequences and effects, including energy shortages and public health issues, have in the past temporarily disrupted, and could in the future disrupt, our operations, the operations of our vendors, manufacturers and other suppliers or have in the past resulted in, and in the future could result in, economic instability that may negatively impact our operating results and financial condition. In particular, if a natural disaster or severe weather event were to occur in an area in which we or our suppliers, manufacturers, employees, customers, distribution centers or vendors are located, our continued success would depend, in part, on the safety and availability of the relevant personnel and facilities and proper functioning of our or third parties' computer, network, telecommunication and other systems and operations. In addition, a natural disaster or severe weather event could negatively impact retail traffic to our stores or stores that carry our products and could have an adverse impact on consumer spending, any of which could in turn result in negative point-of-sale trends for our merchandise. Further, climate change may increase both the frequency and severity of extreme weather conditions and natural disasters, which may affect our business operations, either in a particular region or globally, as well as the activities of our third-party vendors and other suppliers, manufacturers and customers. We believe the diversity of locations in which we operate, our operational size, disaster recovery and business continuity planning and our information technology systems and networks, including the Internet and third-party services ("Information Technology Systems"), position us well, but may not be sufficient for all or for concurrent eventualities. If we were to experience a local or regional disaster or other business continuity event or concurrent events, we could experience operational challenges, in particular depending upon how a local or regional event may affect our human capital across our operations or with regard to particular aspects of our operations, such as key executive officers or personnel. For example, our world headquarters is located in an active seismic zone, which is at a higher risk for earthquakes and the related consequences or effects. Further, if we are unable to find alternative suppliers, replace capacity at key manufacturing or distribution locations or quickly repair damage to our Information Technology Systems or supply systems, we could be late in delivering, or be unable to deliver, products to our customers. These events could result in reputational damage, lost sales, cancellation charges or markdowns, all of which could have an adverse effect on our business, results of operations and financial condition. +Our financial condition and results of operations have been, and could in the future be, adversely affected by a pandemic, epidemic or other public health emergency. +Pandemics, including the COVID-19 pandemic, and other public health emergencies, and preventative measures taken to contain or mitigate such crises have caused, and may in the future cause, business slowdown or shutdown in affected areas and significant disruption in the financial markets, both globally and in the United States. These events have led to and could again lead to adverse impacts to our global supply chain, factory cancellation costs, store closures, and a decline in retail traffic and discretionary spending by consumers and, in turn, materially impact our business, sales, financial condition and results of operations as well as cause a volatile effective tax rate driven by changes in the mix of earnings across our jurisdictions. We cannot predict whether, and to what degree, our sales, operations and financial results could in the future be affected by the pandemic and preventative measures. Risks presented by pandemics and other public health emergencies include, but are not limited to: +• Deterioration in economic conditions in the United States and globally, including the effect of prolonged periods of inflation on our consumers and vendors; +• Disruption to our distribution centers, contract manufacturers, finished goods factories and other vendors, through the effects of facility closures, increased operating costs, reductions in operating hours, labor shortages, and real time changes in operating procedures, such as additional cleaning and disinfection procedures, which have had, and could in the future again have, a significant impact on our planned inventory production and distribution, including higher inventory levels or inventory shortages in various markets; +2023 FORM 10-K 12 +Table of Contents +• Impacts to our distribution and logistics providers' ability to operate, including labor and container shortages, and increases in their operating costs. These supply chain effects have had, and could in the future have, an adverse effect on our ability to meet consumer demand, including digital demand, and have in the past resulted in and could in the future result in extended inventory transit times and an increase in our costs of production and distribution, including increased freight and logistics costs and other expenses; +• Decreased retail traffic as a result of store closures, reduced operating hours, social distancing restrictions and/or changes in consumer behavior; +• Reduced consumer demand for our products, including as a result of a rise in unemployment rates, higher costs of borrowing, inflation and diminished consumer confidence; +• Cancellation or postponement of sports seasons and sporting events in multiple countries, and bans on large public gatherings, which have reduced and in the future could reduce consumer spending on our products and could impact the effectiveness of our arrangements with key endorsers; +• The risk that any safety protocols in NIKE-owned or affiliated facilities, including our offices, will not be effective or not be perceived as effective, or that any virus-related illnesses will be linked or alleged to be linked to such facilities, whether accurate or not; +• Incremental costs resulting from the adoption of preventative measures and compliance with regulatory requirements, including providing facial coverings and hand sanitizer, rearranging operations to follow social distancing protocols, conducting temperature checks, testing and undertaking regular and thorough disinfecting of surfaces; +• Bankruptcies or other financial difficulties facing our wholesale customers, which could cause them to be unable to make or delay making payments to us, or result in revised payment terms, cancellation or reduction of their orders; and +• Significant disruption of and volatility in global financial markets, which could have a negative impact on our ability to access capital in the future. +We cannot reasonably predict the ultimate impact of any pandemic or public health emergency, including the extent of any adverse impact on our business, results of operations and financial condition, which will depend on, among other things, the duration and spread of the pandemic or public health emergency, the impact of governmental regulations that have been, and may continue to be, imposed in response, the effectiveness of actions taken to contain or mitigate the outbreak, the availability, safety and efficacy of vaccines, including against emerging variants of the infectious disease, and global economic conditions. Additionally, disruptions have in the past made it more challenging to compare our performance, including our revenue growth and overall profitability, across quarters and fiscal years, and could have this effect in the future. Any pandemic or public health emergency may also affect our business, results of operations or financial condition in a manner that is not presently known to us or that we currently do not consider to present significant risks and may also exacerbate, or occur concurrently with, other risks discussed in this Item 1A. Risk Factors, any of which could have a material effect on us. +Business and Operational Risks +Failure to maintain our reputation, brand image and culture could negatively impact our business. +Our iconic brands have worldwide recognition, and our success depends on our ability to maintain and enhance our brand image and reputation. Maintaining, promoting and growing our brands will depend on our design and marketing efforts, including advertising and consumer campaigns, product innovation and product quality. Our commitment to product innovation, quality and sustainability, and our continuing investment in design (including materials), marketing and sustainability measures may not have the desired impact on our brand image and reputation. In addition, our success in maintaining, extending and expanding our brand image depends on our ability to adapt to a rapidly changing media and digital environment, including our reliance on social media and other digital advertising networks, and digital dissemination of advertising campaigns on our digital platforms and through our digital experiences and products. We could be adversely impacted if we fail to achieve any of these objectives. +Our brand value also depends on our ability to maintain a positive consumer perception of our corporate integrity, purpose and brand culture. Negative claims or publicity involving us, our culture and values, our products, services and experiences, consumer data, or any of our key employees, endorsers, sponsors, suppliers or partners could seriously damage our reputation and brand image, regardless of whether such claims are accurate. For example, while we require our suppliers of our products to operate their business in compliance with applicable laws and regulations, we do not control their practices. Negative publicity relating to a violation or an alleged violation of policies or laws by such suppliers could damage our brand image and diminish consumer trust in our brand. Further, our reputation and brand image could be damaged as a result of our support of, association with or lack of support or disapproval of certain social causes, as well as any decisions we make to continue to conduct, or change, certain of our activities in response to such considerations. Social media, which accelerates and potentially amplifies the scope of negative publicity, can increase the challenges of responding to negative claims. Adverse publicity about regulatory or legal action against us, or by us, could also damage our reputation and brand image, undermine consumer confidence in us and reduce long-term demand for our products, even if the regulatory or legal action is unfounded or not material to our operations. If +2023 FORM 10-K 13 +Table of Contents +the reputation, culture or image of any of our brands is tarnished or if we receive negative publicity, then our sales, financial condition and results of operations could be materially and adversely affected. +Our business is affected by seasonality, which could result in fluctuations in our operating results. +We experience moderate fluctuations in aggregate sales volume during the year. Historically, revenues in the first and fourth fiscal quarters have slightly exceeded those in the second and third fiscal quarters. However, the mix of product sales may vary considerably from time to time or in the future as a result of strategic shifts in our business and seasonal or geographic demand for particular types of footwear, apparel and equipment and in connection with the timing of significant sporting events, such as the NBA Finals, Olympics or the World Cup, among others. In addition, our customers may cancel orders, change delivery schedules or change the mix of products ordered with minimal notice. As a result, we may not be able to accurately predict our quarterly sales. Accordingly, our results of operations are likely to fluctuate significantly from period to period. This seasonality, along with other factors that are beyond our control, including economic conditions, changes in consumer preferences, weather conditions, outbreaks of disease, social or political unrest, availability of import quotas, transportation disruptions and currency exchange rate fluctuations, has in the past adversely affected and could in the future adversely affect our business and cause our results of operations to fluctuate. Our operating margins are also sensitive to a number of additional factors that are beyond our control, including manufacturing and transportation costs, shifts in product sales mix and geographic sales trends, all of which we expect to continue. Results of operations in any period should not be considered indicative of the results to be expected for any future period. +If we are unable to anticipate consumer preferences and develop new products, we may not be able to maintain or increase our revenues and profits. +Our success depends on our ability to identify, originate and define product trends as well as to anticipate, gauge and react to changing consumer demands in a timely manner. However, lead times for many of our products may make it more difficult for us to respond rapidly to new or changing product trends or consumer preferences. All of our products are subject to changing consumer preferences that cannot be predicted with certainty. Our new products may not receive consumer acceptance as consumer preferences could shift rapidly to different types of performance products or away from these types of products altogether, and our future success depends in part on our ability to anticipate and respond to these changes. If we fail to anticipate accurately and respond to trends and shifts in consumer preferences by adjusting the mix of existing product offerings, developing new products, designs, styles and categories, and influencing sports and fitness preferences through extensive marketing, we could experience lower sales, excess inventories or lower profit margins, any of which could have an adverse effect on our results of operations and financial condition. In addition, we market our products globally through a diverse spectrum of advertising and promotional programs and campaigns, including social media and other digital advertising networks. If we do not successfully market our products or if advertising and promotional costs increase, these factors could have an adverse effect on our business, financial condition and results of operations. +We rely on technical innovation and high-quality products to compete in the market for our products. +Technical innovation and quality control in the design and manufacturing processes of footwear, apparel, equipment and other products and services are essential to the commercial success of our products and development of new products. Research and development play a key role in technical innovation. We rely upon specialists in the fields of biomechanics, chemistry, exercise physiology, engineering, digital technologies, industrial design, sustainability and related fields, as well as research committees and advisory boards made up of athletes, coaches, trainers, equipment managers, orthopedists, podiatrists and other experts to develop and test cutting-edge performance products. While we strive to produce products that help to enhance athletic performance and reduce injury and maximize comfort, if we fail to introduce technical innovation in our products, consumer demand for our products could decline, and if we experience problems with the quality of our products, we may incur substantial expense to remedy the problems and loss of consumer confidence. +Failure to continue to obtain or maintain high-quality endorsers of our products could harm our business. +We establish relationships with professional athletes, sports teams and leagues, as well as other public figures, including artists, designers and influencers, to develop, evaluate and promote our products, as well as establish product authenticity with consumers. However, as competition in our industry has increased, the costs associated with establishing and retaining such sponsorships and other relationships have increased, and competition to attract and retain high-quality endorsers has increased. If we are unable to maintain our current associations with professional athletes, sports teams and leagues, or other public figures, or to do so at a reasonable cost, we could lose the high visibility or on-field authenticity associated with our products, and we may be required to modify and substantially increase our marketing investments. As a result, our brands, net revenues, expenses and profitability could be harmed. +Furthermore, if certain endorsers were to stop using our products contrary to their endorsement agreements, our business could be adversely affected. In addition, actions taken or statements made by athletes, teams or leagues, or other endorsers, associated with our products or brand that harm the reputations of those athletes, teams or leagues, or endorsers, or our decisions to cease collaborating with certain endorsers in light of actions taken or statements made by them, have in the past harmed and could in the future seriously harm our brand image with consumers and, as a result, could have an adverse effect on +2023 FORM 10-K 14 +Table of Contents +our sales and financial condition. Poor or non-performance by our endorsers, a failure to continue to correctly identify promising athletes, public figures or sports organizations, to use and endorse our products and brand or a failure to enter into cost-effective endorsement arrangements with prominent athletes, public figures and sports organizations could adversely affect our brand, sales and profitability. +Failure to accurately forecast consumer demand could lead to excess inventories or inventory shortages, which could result in decreased operating margins, reduced cash flows and harm to our business. +To meet anticipated demand for our products, we purchase products from manufacturers outside of our futures ordering program and in advance of customer orders, which we hold in inventory and resell to customers. There is a risk we may be unable to sell excess products ordered from manufacturers. Inventory levels in excess of customer demand may result in inventory write-downs, and the sale of excess inventory at discounted prices could significantly impair our brand image and have an adverse effect on our operating results, financial condition and cash flows. Conversely, if we underestimate consumer demand for our products or if our manufacturers fail to supply products we require at the time we need them, we may experience inventory shortages. Inventory shortages could delay shipments to customers, negatively impact retailer, distributor and consumer relationships and diminish brand loyalty. The difficulty in forecasting demand also makes it difficult to estimate our future results of operations, financial condition and cash flows from period to period. A failure to accurately predict the level of demand for our products could adversely affect our net revenues and net income, and we are unlikely to forecast such effects with any certainty in advance. +Our NIKE Direct operations have required and will continue to require a substantial investment and commitment of resources and are subject to numerous risks and uncertainties. +Our NIKE Direct operations, including our retail stores and digital platforms, have required and will continue to require significant investment. Our NIKE Direct stores have required and will continue to require substantial fixed investment in equipment and leasehold improvements and personnel. We have entered into substantial operating lease commitments for retail space. Certain stores have been designed and built to serve as high-profile venues to promote brand awareness and marketing activities and to integrate with our digital platforms. Because of their unique design and technological elements, locations and size, these stores require substantially more investment than other stores. Due to the high fixed-cost structure associated with our NIKE Direct retail stores, a decline in sales, a shift in consumer behavior away from brick-and-mortar retail, or the closure, temporary or otherwise, or poor performance of individual or multiple stores could result in significant lease termination costs, write-offs of equipment and leasehold improvements and employee-related costs. +Many factors unique to retail operations, some of which are beyond our control, pose risks and uncertainties. Risks include, but are not limited to: credit card fraud; mismanagement of existing retail channel partners; inability to manage costs associated with store construction and operation; and theft. +In addition, we have made significant investments in digital technologies and information systems for the digital aspect of our NIKE Direct operations, and our digital offerings will require co ntinued investment in the development and upgrading of our technology platforms. In order to deliver high-quality digital experiences, our digital platforms must be designed effectively and work well with a range of other technologies, systems, networks, and standards that we do not control. We may not be successful in developing platforms that operate effectively with these technologies, systems, networks or standards. A growing portion of consumers access our NIKE Direct digital platforms, but in the event that it is more difficult for consumers to access and use our digital platforms, consumers find that our digital platforms do not effectively meet their needs or expectations or consumers choose not to access or use our digital platforms or use devices that do not offer access to our platforms, the success of our NIKE Direct operations could be adversely impacted. Our competitors may develop, or have already developed, digital experiences, features, content, services or technologies that are similar to ours or that achieve greater acceptance. +We may not realize a satisfactory return on our investment in our NIKE Direct operations and management's attention from our other business opportunities could be diverted, which could have an adverse effect on our business, financial condition or results of operations. +If the technology-based systems that give our consumers the ability to shop or interact with us online do not function effectively, our operating results, as well as our ability to grow our digital commerce business globally or to retain our customer base, could be materially adversely affected. +Many of our consumers shop with us through our digital platforms. Increasingly, consumers are using mobile-based devices and applications to shop online with us and with our competitors, and to do comparison shopping, as well as to engage with us and our competitors through digital services and experiences that are offered on mobile platforms. We use social media and proprietary mobile applications to interact with our consumers and as a means to enhance their shopping experience. Any failure on our part to provide attractive, effective, reliable, secure and user-friendly digital commerce platforms that offer a wide assortment of merchandise with rapid delivery options and that continually meet the changing expectations of online shoppers or any failure to provide attractive digital experiences to our customers could place us at a competitive disadvantage, result in the loss of digital commerce and other sales, harm our reputation with consumers, have a material adverse impact on the growth of our digital commerce business globally and have a material adverse impact on our business and results of operations. In +2023 FORM 10-K 15 +Table of Contents +addition, as use of our digital platforms continues to grow, we will need an increasing amount of technical infrastructure to continue to satisfy our consumers' needs. If we fail to continue to effectively scale and adapt our digital platforms to accommodate increased consumer demand, our business may be subject to interruptions, delays or failures and consumer demand for our products and digital experiences could decline. +Risks specific to our digital commerce business also include diversion of sales from our and our retailers' brick and mortar stores, difficulty in recreating the in-store experience through direct channels and liability for online content. Our failure to successfully respond to these risks might adversely affect sales in our digital commerce business, as well as damage our reputation and brands. +We rely significantly on information technology to operate our business, including our supply chain and retail operations, and any failure, inadequacy or interruption of that technology could harm our ability to effectively operate our business. +We are heavily dependent on Information Technology Systems, across our supply chain, including product design, production, forecasting, ordering, manufacturing, transportation, sales and distribution, as well as for processing financial information for external and internal reporting purposes, retail operations and other business activities. Information Technology Systems are critical to many of our operating activities and our business processes and may be negatively impacted by any service interruption or shutdown. For example, our ability to effectively manage and maintain our inventory and to ship products to customers on a timely basis depends significantly on the reliability of these Information Technology Systems. Over a number of years, we have implemented Information Technology Systems in all of the geographical regions in which we operate. Our work to integrate, secure and enhance these systems and related processes in our global operations is ongoing and NIKE will continue to invest in these efforts. We cannot provide assurance, however, that the measures we take to secure and enhance these systems will be sufficient to protect our Information Technology Systems and prevent cyber-attacks, system failures or data or information loss. The failure of these systems to operate effectively, including as a result of security breaches, viruses, hackers, malware, natural disasters, vendor business interruptions or other causes, failure to properly maintain, protect, repair or upgrade systems, or problems with transitioning to upgraded or replacement systems could cause delays in product fulfillment and reduced efficiency of our operations, could require significant capital investments to remediate the problem which may not be sufficient to cover all eventualities, and may have an adverse effect on our reputation, results of operations and financial condition. In addition, the use of employee-owned devices for communications as well as hybrid work arrangements, present additional operational risks to our Information Technology Systems, including, but not limited to, increased risks of cyber-attacks. Further, like other companies in the retail industry, we have in the past experienced, and we expect to continue to experience, cyber-attacks, including phishing, and other attempts to breach, or gain unauthorized access to, our systems. To date, these attacks have not had a material impact on our operations, but we cannot provide assurance that they will not have an impact in the future. +We also use Information Technology Systems to process financial information and results of operations for internal reporting purposes and to comply with regulatory financial reporting, legal and tax requirements. From time to time, we have expended, and expect to continue to expend, significant resources to modify, update and enhance our Information Technology Systems and to investigate and remediate vulnerabilities or other exposures. These modifications, updates and enhancements may cost more than initially expected and may not be effective in preventing issues and disruptions. Moreover, due to the complexity of our Information Technology Systems, the process of implementing modifications or enhancements can itself create a risk of systems disruptions and security issues. If Information Technology Systems suffer severe damage, disruption or shutdown and our business continuity plans, or those of our vendors, do not effectively resolve the issues in a timely manner, we could experience delays in reporting our financial results, which could result in lost revenues and profits, as well as reputational damage. Furthermore, we depend on Information Technology Systems and personal data collection for digital marketing, digital commerce, consumer engagement and the marketing and use of our digital products and services. We also rely on our ability to engage in electronic communications throughout the world between and among our employees as well as with other third parties, including customers, suppliers, vendors and consumers. Any interruption in Information Technology Systems may impede our ability to engage in the digital space and result in lost revenues, damage to our reputation, and loss of users. +We are subject to the risk our licensees may not generate expected sales or maintain the value of our brands. +We currently license, and expect to continue licensing, certain of our proprietary rights, such as trademarks or copyrighted material, to third parties. If our licensees fail to successfully market and sell licensed products, or fail to obtain sufficient capital or effectively manage their business operations, customer relationships, labor relationships, supplier relationships or credit risks, it could adversely affect our revenues, both directly from reduced royalties received and indirectly from reduced sales of our other products. +We also rely on our licensees to help preserve the value of our brands. Although we attempt to protect our brands through approval rights over the design, production processes, quality, packaging, merchandising, distribution, advertising and promotion of our licensed products, we cannot completely control the use of our licensed brands by our licensees. The misuse of a brand by or negative publicity involving a licensee could have a material adverse effect on that brand and on us. +2023 FORM 10-K 16 +Table of Contents +Consolidation of retailers or concentration of retail market share among a few retailers may increase and concentrate our credit risk and impair our ability to sell products. +The athletic footwear, apparel and equipment retail markets in some countries are dominated by a few large athletic footwear, apparel and equipment retailers with many stores and accelerating digital commerce capabilities. The market shares of these retailers may increase through acquisitions and construction of additional stores and investments in digital capacity, and as a result of attrition as struggling retailers exit the market. Consolidation of our retailers will concentrate our credit risk with a smaller set of retailers, any of whom may experience declining sales or a shortage of liquidity. In addition, increasing market share concentration among a few retailers in a particular country or region increases the risk that if any one of them substantially reduces their purchases of our products, we may be unable to find sufficient retail outlets for our products to sustain the same level of sales and revenues. +If one or more of our counterparty financial institutions default on their obligations to us or fail, we may incur significant losses. +As part of our hedging activities, we enter into transactions involving derivative financial instruments, which may include forward contracts, commodity futures contracts, option contracts, collars and swaps with various financial institutions. In addition, we have significant amounts of cash, cash equivalents and other investments on deposit or in accounts with banks or other financial institutions in the United States and abroad. As a result, we are exposed to the risk of default by or failure of counterparty financial institutions. The risk of counterparty default or failure may be heightened during economic downturns and periods of uncertainty in the financial markets. If one of our counterparties were to become insolvent or file for bankruptcy, our ability to recover losses incurred as a result of default, or our assets deposited or held in accounts with such counterparty, may be limited by the counterparty's liquidity or the applicable laws governing the insolvency or bankruptcy proceedings. In the event of default or failure of one or more of our counterparties, we could incur significant losses, which could negatively impact our results of operations and financial condition. +We rely on a concentrated source base of contract manufacturers to supply a significant portion of our footwear products. +As of May 31, 2023, our contract manufacturers operated 123 finished goods footwear factories located in 11 countries. We rely upon contract manufacturers, which we do not own or operate, to manufacture all of the footwear products we sell. For fiscal 2023, four footwear contract manufacturers each accounted for greater than 10% of footwear production and in the aggregate accounted for approximately 58% of NIKE Brand footwear production. Our ability to meet our customers' needs depends on our ability to maintain a steady supply of products from our contract manufacturers. If one or more of our significant suppliers were to sever their relationship with us or significantly alter the terms of our relationship, including due to changes in applicable trade policies, or be unable to perform, we may not be able to obtain replacement products in a timely manner, which could have a material adverse effect on our business operations, sales, financial condition or results of operations. Additionally, if any of our primary footwear contract manufacturers fail to make timely shipments, do not meet our quality standards or otherwise fail to deliver us product in accordance with our plans, there could be a material adverse effect on our results of operations. +Certain of our footwear contract manufacturers are highly specialized and only produce a specific type of product. Such contract manufacturers may go out of business if consumer preferences or market conditions change such that there is no longer sufficient demand for the types of products they produce. If, in the future, the relevant products are again in demand and the specialized contract manufacturers no longer exist, we may not be able to locate replacement facilities to manufacture certain footwear products in a timely manner or at all, which could have a material adverse effect on our sales, financial condition or results of operations. +The market for prime real estate is competitive. +Our ability to effectively obtain real estate to open new retail stores and otherwise conduct our operations, both domestically and internationally, depends on the availability of real estate that meets our criteria for traffic, square footage, co-tenancies, lease economics, demographics and other factors. We also must be able to effectively renew our existing real estate leases. In addition, from time to time, we seek to downsize, consolidate, reposition or close some of our real estate locations, which may require modification of an existing lease. Failure to secure adequate new locations or successfully modify leases for existing locations, or failure to effectively manage the profitability of our existing fleet of retail stores, could have an adverse effect on our operating results and financial condition. +Additionally, the economic environment may make it difficult to determine the fair market rent of real estate properties domestically and internationally. This could impact the quality of our decisions to exercise lease options at previously negotiated rents and to renew expiring leases at negotiated rents. Any adverse effect on the quality of these decisions could impact our ability to retain real estate locations adequate to meet our targets or efficiently manage the profitability of our existing fleet of stores, which could have an adverse effect on our operating results and financial condition. +2023 FORM 10-K 17 +Table of Contents +The success of our business depends, in part, on high-quality employees, including key personnel as well as our ability to maintain our workplace culture and values. +Our success depends in part on the continued service of high-quality employees, including key executive officers and personnel. The loss of the services of key individuals, or any negative perception with respect to these individuals, or our workplace culture or values, could harm our business. Our success also depends on our ability to recruit, retain and engage our personnel sufficiently, both to maintain our current business and to execute our strategic initiatives. Competition for employees in our industry is intense and we may not be successful in attracting and retaining such personnel. Changes to our current and future work models may not meet the needs or expectations of our employees or may not be perceived as favorable compared to other companies' policies, which could negatively impact our ability to attract, hire and retain our employees. In addition, shifts in U.S. immigration policy could negatively impact our ability to attract, hire and retain highly skilled employees who are from outside the United States. W e also believe that our corporate culture has been a key driver of our success, and we have invested substantial time and resources in building, maintaining and evolving our culture. Any failure to preserve and evolve our culture could negatively affect our future success, including our ability to retain and recruit employees. +Our business operations and financial performance could be adversely affected by changes in our relationship with our workforce or changes to United States or foreign employment regulations. +We have significant exposure to changes in domestic and foreign laws governing our relationships with our workforce, including wage and hour laws and regulations, fair labor standards, minimum wage requirements, overtime pay, unemployment tax rates, workers' compensation rates, citizenship requirements and payroll taxes, which could have a direct impact on our operating costs. A significant increase in minimum wage or overtime rates in countries where we have workforce could have a significant impact on our operating costs and may require that we relocate those operations or take other steps to mitigate such increases, all of which may cause us to incur additional costs. There is also a risk of potential claims that we have violated laws related to discrimination and harassment, health and safety, wage and hour laws, criminal activity, personal injury and other claims. In addition, if there were a significant increase in the number of members of our workforce who are members of labor organizations or become parties to collective bargaining agreements, we could be vulnerable to a strike, work stoppage or other labor action, which could have an adverse effect on our business. +Risks Related to Operating a Global Business +Our international operations involve inherent risks which could result in harm to our business. +Nearly all of our athletic footwear and apparel is manufactured outside of the United States, and the majority of our products are sold outside of the United States. Accordingly, we are subject to the risks generally associated with global trade and doing business abroad, which include foreign laws and regulations, varying consumer preferences across geographic regions, political tensions, unrest, disruptions or delays in cross-border shipments and changes in economic conditions in countries in which our products are manufactured or where we sell products. Changes in U.S. or international social, political, regulatory and economic conditions could impact our business, reputation, financial condition and results of operations. In particular, political and economic instability, geopolitical conflicts, political unrest, civil strife, terrorist activity, acts of war, public corruption, expropriation, nationalism and other economic or political uncertainties in the United States or internationally could interrupt and negatively affect the sale of our products or other business operations. Any negative sentiment toward the United States as a result of any such changes could also adversely affect our business. +In addition, disease outbreaks, terrorist acts and military conflict have increased the risks of doing business abroad. These factors, among others, could affect our ability to manufacture products or procure materials, or our costs for manufacturing and procuring materials, our ability to import products, our ability to sell products in international markets and our cost of doing business. If any of these or other factors make the conduct of business in a particular country undesirable or impractical, our business could be adversely affected. +Our products are subject to risks associated with overseas sourcing, manufacturing and financing. +The principal materials used in our footwear products — natural and synthetic rubber, plastic compounds, foam cushioning materials, natural and synthetic leather, nylon, polyester and natural fiber textiles and polyurethane films — are locally available to manufacturers. The principal materials used in our apparel products — natural and synthetic fabrics, yarns and threads (both virgin and recycled), specialized performance fabrics designed to efficiently wick moisture away from the body, retain heat and repel rain and/or snow as well as plastic and metal hardware — are also available in countries where our manufacturing takes place. Both our apparel and footwear products are dependent upon the ability of our contract manufacturers to locate, train, employ and retain adequate personnel. NIKE contract manufacturers and materials suppliers buy raw materials and are subject to wage rates and other labor standards that are oftentimes regulated by the governments of the countries in which our products are manufactured. +There could be a significant disruption in the supply of fabrics or raw materials from current sources or, in the event of a disruption or heightened competition for such materials, our contract manufacturers might not be able to locate alternative suppliers of materials of comparable quality at an acceptable price or at all. Further, our contract manufacturers have experienced and may continue to experience in the future, unexpected closures, unexpected increases in work wages or other +2023 FORM 10-K 18 +Table of Contents +changes in labor standards, whether government mandated or otherwise, and increases in compliance costs due to governmental regulation concerning certain metals, fabrics or raw materials used in the manufacturing of our products. In addition, we cannot be certain that manufacturers that we do not contract and that we refer to as "unaffiliated manufacturers" will be able to fill our orders in a timely manner. If we experience significant increases in demand, or reductions in the availability of materials, or need to replace an existing contract manufacturer or materials supplier, there can be no assurance additional supplies of fabrics or raw materials or additional manufacturing capacity will be available when required on terms acceptable to us, or at all, or that any contract manufacturer, unaffiliated manufacturer, or any materials supplier would allocate sufficient capacity to us in order to meet our requirements. In addition, even if we are able to expand existing or find new manufacturing capacity or sources of materials, we may encounter delays in production and added costs as a result of the time it takes to train suppliers and manufacturers in our methods, products, quality control standards and labor, health and safety standards. Any delays, interruption or increased costs in labor or wages, in the supply of materials or in the manufacturing of our products could have an adverse effect on our ability to meet retail customer and consumer demand for our products and result in lower revenues and net income both in the short- and long-term. +Because contract manufacturers make a majority of our products outside of our principal sales markets, our products must be transported by third parties over large geographic distances. Delays in the shipment or delivery of our products due to the availability of transportation, container shortages, labor shortages, including work stoppages or port strikes, infrastructure and port congestion or other factors, and costs and delays associated with consolidating or transitioning between manufacturers, have adversely impacted, and could in the future adversely impact the availability of our products and, in turn, our financial performance. In addition, delays in the shipment or delivery of our products, manufacturing delays or unexpected demand for our products have required us, and may in the future require us to use faster, but more expensive, transportation methods such as air freight, which could adversely affect our profit margins. The cost of oil is a significant component in manufacturing and transportation costs, so increases in the price of petroleum products can adversely affect our profit margins. Changes in U.S. trade policies, including modifications to import tariffs and existing trade policies and agreements, have also had, and could continue to have a significant impact on our activities in foreign jurisdictions, and could adversely affect our reputation or results of operations. +Our success depends on our global distribution facilities. +We distribute our products to customers directly from the factory and through distribution centers located throughout the world. Our ability to meet customer expectations, manage inventory, complete sales and achieve objectives for operating efficiencies and growth, particularly in emerging markets, depends on the proper operation of our distribution facilities, the development or expansion of additional distribution capabilities and the timely performance of services by third parties (including those involved in shipping product to and from our distribution facilities). Our distribution facilities have in the past and could in the future be interrupted by information technology problems, disasters such as earthquakes or fires or outbreaks of disease or government actions taken to mitigate their spread. Any significant failure in our distribution facilities could result in an adverse effect on our business. We maintain business interruption insurance, but it may not adequately protect us from adverse effects caused by significant disruptions in our distribution facilities. +Legal, Regulatory, and Compliance Risks +We are subject to a complex array of laws and regulations and litigation and other legal and regulatory proceedings, which could have an adverse effect on our business, financial condition and results of operations. +As a multinational corporation with operations and distribution channels throughout the world, we are subject to and must comply with extensive laws and regulations in the United States and other jurisdictions in which we have operations and distribution channels. If we or our employees, agents, suppliers, and other partners fail to comply with any of these laws or regulations, such failure could subject us to fines, sanctions or other penalties that could negatively affect our reputation, business, financial condition and results of operations. Furthermore, laws, regulations and policies and the interpretation of such, can conflict among jurisdictions and compliance in one jurisdiction may result in legal or reputational risks in another jurisdiction. We are involved in various types of claims, lawsuits, regulatory proceedings and government investigations relating to our business, our products and the actions of our employees and representatives, including contractual and employment relationships, product liability, antitrust, trademark rights and a variety of other matters. It is not possible to predict with certainty the outcome of any such legal or regulatory proceedings or investigations, and we could in the future incur judgments, fines or penalties, or enter into settlements of lawsuits and claims that could have a material adverse effect on our business, financial condition and results of operations and negatively impact our reputation. The global nature of our business means legal and compliance risks, such as anti-bribery, anti-corruption, fraud, trade, environmental, competition, privacy and other regulatory matters, will continue to exist and additional legal proceedings and other contingencies have and will continue to arise from time to time, which could adversely affect us. In addition, the adoption of new laws or regulations, or changes in the interpretation of existing laws or regulations, may result in significant unanticipated legal and reputational risks. Moreover, the regulation of certain transactions we engage in, including those involving virtual goods and cryptocurrencies, remains in an early stage and subject to significant uncertainty. As a result, we are required to exercise our judgment as to whether or how certain laws or regulations apply, or may in the future +2023 FORM 10-K 19 +Table of Contents +apply, and it is possible that legislators, regulators and courts may disagree with our conclusions. Any current or future legal or regulatory proceedings could divert management's attention from our operations and result in substantial legal fees. +Changes to U.S. or other countries' trade policies and tariff and import/export regulations or our failure to comply with such regulations may have a material adverse effect on our reputation, business, financial condition and results of operations. +Changes in the U.S. government's import and export policies, including trade restrictions, sanctions and countersanctions, increased tariffs or quotas, embargoes, safeguards or customs restrictions, could require us to change the way we conduct business and adversely affect our results of operations. +In addition, changes in laws and policies governing foreign trade, manufacturing, development and investment in the territories or countries where we currently sell our products or conduct our business could adversely affect our business. U.S. presidential administrations have instituted or proposed changes in trade policies that include the negotiation or termination of trade agreements, the imposition of higher tariffs on imports into the U.S., economic sanctions on individuals, corporations or countries, and other government regulations affecting trade between the U.S. and other countries where we conduct our business. It may be time-consuming and expensive for us to alter our business operations in order to adapt to or comply with any such changes. +Changes or proposed changes in U.S. or other countries' trade policies may result in restrictions and economic disincentives on international trade. Tariffs and other changes in U.S. trade policy have in the past and could in the future trigger retaliatory actions by affected countries, and certain foreign governments have instituted or are considering imposing retaliatory measures on certain U.S. goods. Further, any emerging protectionist or nationalist trends either in the United States or in other countries could affect the trade environment. The Company, similar to many other multinational corporations, does a significant amount of business that would be impacted by changes to the trade policies of the United States and foreign countries (including governmental action related to tariffs, international trade agreements, or economic sanctions). Such changes have the potential to adversely impact the U.S. economy or certain sectors thereof or the economy of another country in which we conduct operations, our industry and the global demand for our products, and as a result, could have a material adverse effect on our business, financial condition and results of operations. +In addition, many of our imported products are subject to duties, tariffs or quotas that affect the cost and quantity of various types of goods imported into the United States and other countries. Any country in which our products are produced or sold may eliminate, adjust or impose new quotas, duties, tariffs, safeguard measures, anti-dumping duties, cargo restrictions to prevent terrorism, restrictions on the transfer of currency, climate change legislation, product safety regulations or other charges or restrictions, any of which could have an adverse effect on our results of operations and financial condition. +Furthermore, we are subject to the FCPA as well as the anti-corruption laws of other countries in which we operate. Although we implement policies and procedures designed to promote compliance with these laws, our employees, independent contractors, contract manufacturers, suppliers and agents, as well as those companies to which we outsource certain of our business operations, may take actions in violation of our policies. Any such violation could result in sanctions or other penalties and have an adverse effect on our business, reputation and operating results. +Failure to adequately protect or enforce our intellectual property rights could adversely affect our business. +We periodically discover counterfeit reproductions of our products or products that otherwise infringe our intellectual property rights. If we are unsuccessful in enforcing our intellectual property rights, continued sales of these products could adversely affect our sales and our brand and could result in a shift of consumer preference away from our products. +The actions we take to establish and protect our intellectual property rights may not be adequate to prevent imitation of our products by others. We also may be unable to prevent others from seeking to block sales of our products as violations of proprietary rights. +We may be subject to liability if third parties successfully claim we infringe their intellectual property rights. Defending infringement claims could be expensive and time-consuming and might result in our entering into costly license agreements. We also may be subject to significant damages or injunctions against development, manufacturing, use, importation and/or sale of certain products. +We take various actions to prevent the unauthorized use and/or disclosure of our confidential information and intellectual property rights. These actions include contractual measures such as entering into non-disclosure and non-compete agreements and agreements relating to our collaborations with third parties and providing confidential information awareness training. Our controls and efforts to prevent unauthorized use and/or disclosure of confidential information and intellectual property rights might not always be effective. For example, confidential information related to business strategy, innovations, new technologies, mergers and acquisitions, unpublished financial results or personal data could be prematurely, inadvertently, or improperly used and/or disclosed, resulting in a loss of reputation, loss of intellectual property rights, a decline in our stock price and/or a negative impact on our market position, and could lead to damages, fines, penalties or injunctions. In addition, new products we offer, such as virtual goods, may raise various novel intellectual property law considerations, including adequacy and scope of assignment, licensing, transfer, copyright and other right-of-use issues. +2023 FORM 10-K 20 +Table of Contents +In addition, the laws of certain countries may not protect or allow enforcement of intellectual property rights to the same extent as the laws of the United States. We may face significant expenses and liability in connection with the protection of our intellectual property rights, including outside the United States, and if we are unable to successfully protect our rights or resolve intellectual property conflicts with others, our business or financial condition may be adversely affected. +We are subject to data security and privacy risks that could negatively affect our results, operations or reputation. +In addition to our own sensitive and proprietary business information, we handle transactional and personal information about our wholesale customers and consumers and users of our digital experiences, which include online distribution channels and product engagement, adaptive products and personal fitness applications. Hackers and data thieves are increasingly sophisticated and operate social engineering, such as phishing, and large-scale, complex automated attacks that can evade detection for long periods of time. Any breach of our or our service providers' networks, or other vendor systems, may result in the loss of confidential business and financial data, misappropriation of our consumers', users' or employees' personal information or a disruption of our business. Any of these outcomes could have a material adverse effect on our business, including unwanted media attention, impairment of our consumer and customer relationships, damage to our reputation; resulting in lost sales and consumers, fines, lawsuits, or significant legal and remediation expenses. We also may need to expend significant resources to protect against, respond to and/or redress problems caused by any breach. +In addition, we must comply with increasingly complex and rigorous, and sometimes conflicting, regulatory standards enacted to protect business and personal data in the United States, Europe and elsewhere. For example, the European Union adopted the General Data Protection Regulation (the "GDPR"); the United Kingdom enacted the UK General Data Protection Regulation (which implements the GDPR into UK law); several states in the United States have passed data privacy laws; China enacted the Data Security Law and Personal Information Protection Law; and additional jurisdictions have adopted or are considering proposing or adopting similar regulations. These laws impose additional obligations on companies regarding the handling of personal data and provide certain individual privacy rights to persons whose data is stored. Compliance with existing, proposed and recently enacted laws and regulations can be costly and time consuming, and any failure to comply with these regulatory standards could subject us to legal, operational and reputational risks. Misuse of or failure to secure personal information could also result in violation of data privacy laws and regulations, proceedings against the Company by governmental entities or others, imposition of fines by governmental authorities and damage to our reputation and credibility and could have a negative impact on revenues and profits. +We could be subject to changes in tax rates, adoption of new tax laws, additional tax liabilities or increased volatility in our effective tax rate. +We earn a substantial portion of our income in foreign countries and, as such, we are subject to the tax laws in the United States and numerous foreign jurisdictions. Current economic and political conditions make tax laws and regulations, or their interpretation and application, in any jurisdiction subject to significant change. +Proposals to reform U.S. and foreign tax laws could significantly impact how U.S. multinational corporations are taxed on global earnings and could increase the U.S. corporate tax rate. For example, the Organization for Economic Co-operation and Development (OECD) and the G20 Inclusive Framework on Base Erosion and Profit Shifting (the "Inclusive Framework") has put forth two proposals—Pillar One and Pillar Two—that revise the existing profit allocation and nexus rules and ensure a minimal level of taxation, respectively. On December 12, 2022, the European Union member states agreed to implement the Inclusive Framework's global corporate minimum tax rate of 15%. Other countries are also actively considering changes to their tax laws to adopt certain parts of the Inclusive Framework's proposals. Although we cannot predict whether or in what form these proposals will be enacted into law, these changes, if enacted into law, could have an adverse impact on our effective tax rate, income tax expense and cash flows. +Portions of our operations are subject to a reduced tax rate or are under a tax holiday. We also utilize tax rulings and other agreements to obtain certainty in treatment of certain tax matters. Tax holidays and rulings can expire from time to time and may be extended when certain conditions are met, or terminated if certain conditions are not met. The impact of any changes in conditions would be the loss of certainty in treatment thus potentially impacting our effective income tax rate. For example, in January 2019, the European Commission opened a formal investigation to examine whether the Netherlands has breached State Aid rules when granting certain tax rulings to the Company. If this matter is adversely resolved, the Netherlands may be required to assess additional amounts with respect to prior periods, and the Company's income taxes related to prior periods in the Netherlands could increase. +We are also subject to the examination of our tax returns by the United States Internal Revenue Service ("IRS") and other tax authorities. We regularly assess the likelihood of an adverse outcome resulting from these examinations to determine the adequacy of our provision for income taxes. Although we believe our tax provisions are adequate, the final determination of tax audits and any related disputes could be materially different from our historical income tax provisions and accruals. The results of audits or related disputes could have an adverse effect on our financial statements for the period or periods for which the applicable final determinations are made. For example, we and our subsidiaries are also engaged in a number of intercompany transactions across multiple tax jurisdictions. Although we believe we have clearly reflected the economics of these transactions +2023 FORM 10-K 21 +Table of Contents +and the proper local transfer pricing documentation is in place, tax authorities may propose and sustain adjustments that could result in changes that may impact our mix of earnings in countries with differing statutory tax rates. +Failure of our contractors or our licensees' contractors to comply with our code of conduct, local laws and other standards could harm our business. +We have license agreements that permit independent parties to manufacture or contract for the manufacture of products using our intellectual property. We require the contractors that directly manufacture our products and our licensees that make products using our intellectual property (including, indirectly, their contract manufacturers) to comply with a code of conduct and other environmental, human rights, health and safety standards for the benefit of workers. We also require our contract manufacturers and the contractors of our licensees to comply with applicable standards for product safety. Notwithstanding their contractual obligations, from time to time contractors may not comply with such standards or applicable local law or our licensees may fail to enforce such standards or applicable local law on their contractors. If one or more of our direct or indirect contractors violates or fails to comply with, or is accused of violating or failing to comply with, such standards and laws, this could harm our reputation or result in a product recall and, as a result, could have an adverse effect on our sales and financial condition. Negative publicity regarding production methods, alleged unethical or illegal practices or workplace or related conditions of any of our suppliers, manufacturers or licensees could adversely affect our brand image and sales, force us to locate alternative suppliers, manufacturers or licenses or result in the imposition of additional regulations, including new or additional quotas, tariffs, sanctions, product safety regulations or other regulatory measures, by governmental authorities. +Risks Related to Our Securities, Investments and Liquidity +Our financial results may be adversely affected if substantial investments in businesses and operations fail to produce expected returns. +From time to time, we may invest in technology, business infrastructure, new businesses or capabilities, product offering and manufacturing innovation and expansion of existing businesses, such as our NIKE Direct operations, which require substantial cash investments and management attention. We believe cost-effective investments are essential to business growth and profitability; however, significant investments are subject to typical risks and uncertainties inherent in developing a new business or expanding an existing business. The failure of any significant investment to provide expected returns or profitability could have a material adverse effect on our financial results and divert management attention from more profitable business operations. See also " Our NIKE Direct operations have required and will continue to require a substantial investment and commitment of resources and are subject to numerous risks and uncertainties ." +The sale of a large number of shares of common stock by our principal shareholder could depress the market price of our common stock. +As of June 30, 2023, Swoosh, LLC beneficially owned approximately 77% of our Class A Common Stock. If, on June 30, 2023, all of these shares were converted into Class B Common Stock, Swoosh, LLC's commensurate ownership percentage of our Class B Common Stock would be approximately 16%. The shares are available for resale, subject to the requirements of the U.S. securities laws and the terms of the limited liability company agreement governing Swoosh, LLC. The sale or prospect of a sale of a substantial number of these shares could have an adverse effect on the market price of our common stock. Swoosh, LLC was formed by Philip H. Knight, our Chairman Emeritus, to hold the majority of his shares of Class A Common Stock. Mr. Knight does not have voting rights with respect to Swoosh, LLC, although Travis Knight, his son and a NIKE director, has a significant role in the management of the Class A Common Stock owned by Swoosh, LLC. +Changes in our credit ratings or macroeconomic conditions may affect our liquidity, increasing borrowing costs and limiting our financing options. +Our long-term debt is currently rated Investment Grade by Standard & Poor's and Moody's Investors Service. If our credit ratings are lowered, borrowing costs for our existing facilities or for future long-term debt or short-term credit facilities may increase and our financing options, including our access to credit or capital markets, could be adversely affected. We may also be subject to restrictive covenants that would reduce our flexibility to, among other things, incur additional indebtedness, make restricted payments, pledge assets as security, make investments, loans, advances, guarantees and acquisitions, undergo fundamental changes and enter into transactions with affiliates. Failure to comply with such covenants could result in a default, and as a result, the commitments of our lenders under our credit agreements may be terminated and the maturity of amounts owed may be accelerated. In addition, macroeconomic conditions, such as increased volatility or disruption in the credit or capital markets, could adversely affect our ability to refinance existing debt. +If our internal controls are ineffective, our operating results could be adversely affected. +Our internal control over financial reporting may not prevent or detect misstatements because of its inherent limitations, including the possibility of human error, the circumvention or overriding of controls or fraud. Even effective internal controls can provide only reasonable assurance with respect to the preparation and fair presentation of financial statements. If we fail to maintain the adequacy of our internal controls, including any failure to implement required new or improved controls, or if we experience +2023 FORM 10-K 22 +Table of Contents +difficulties in their implementation, our business and operating results could be harmed and we could fail to meet our financial reporting obligations. +If our estimates or judgments relating to our critical accounting estimates prove to be incorrect, our operating results could be adversely affected. +The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. We base our estimates on historical experience and on various other assumptions we believe to be reasonable under the circumstances, as provided in "Management's Discussion and Analysis of Financial Condition and Results of Operations". The results of these estimates form the basis for making judgments about the carrying values of assets, liabilities and equity, and the amount of revenues and expenses that are not readily apparent from other sources. Significant assumptions and estimates used in preparing our consolidated financial statements include those related to revenue recognition, inventory reserves, hedge accounting for derivatives, income taxes and other contingencies. Our operating results may be adversely affected if our assumptions change or if actual circumstances differ from those in our assumptions, which could cause our operating results to fall below the expectations of securities analysts and investors, resulting in a decline in the price of our Class B Common Stock. +Anti-takeover provisions may impair an acquisition of the Company or reduce the price of our common stock. +There are provisions within our articles of incorporation and Oregon law intended to protect shareholder interests by providing the Board of Directors a means to attempt to deny coercive takeover attempts or to negotiate with a potential acquirer in order to obtain more favorable terms. Such provisions include a control share acquisition statute, a freeze-out statute, two classes of stock that vote separately on certain issues, and the fact that holders of Class A Common Stock elect three-quarters of the Board of Directors rounded down to the next whole number. However, such provisions could discourage, delay or prevent an unsolicited merger, acquisition or other change in control of the Company that some shareholders might believe to be in their best interests or in which shareholders might receive a premium for their common stock over the prevailing market price. These provisions could also discourage proxy contests for control of the Company. +We may fail to meet market expectations, which could cause the price of our stock to decline. +Our Class B Common Stock is traded publicly, and at any given time various securities analysts follow our financial results and issue reports on us. These reports include information about our historical financial results as well as analysts' opinions of our future performance, which may, in part, be based upon any guidance we have provided. Analysts' estimates are often different from our estimates or expectations. If our operating results are below the estimates or expectations of public market analysts and investors, our stock price could decline. In the past, securities class action litigation has been brought against NIKE and other companies following a decline in the market price of their securities. If our stock price is volatile for any reason, we may become involved in this type of litigation in the future. Any litigation could result in reputational damage, substantial costs and a diversion of management's attention and resources needed to successfully run our business. +2023 FORM 10-K 23 +Table of Contents +ITEM 1B. UNRESOLVED STAFF COMMENTS +None. +ITEM 2. PROPERTIES +The following is a summary of principal properties owned or leased by NIKE: +The NIKE World Campus, owned by NIKE and located near Beaverton, Oregon, USA, is an approximately 400-acre site consisting of over 40 buildings which, together with adjacent leased properties, functions as our world headquarters and is occupied by approximately 11,400 employees engaged in management, research, design, development, marketing, finance and other administrative functions serving nearly all of our segments. We lease a similar, but smaller, administrative facility in Hilversum, the Netherlands, which serves as the headquarters for our Europe, Middle East & Africa geography and management of certain brand functions for our non-U.S. operations. We also lease an office complex in Shanghai, China, our headquarters for our Greater China geography, occupied by employees focused on implementing our wholesale, NIKE Direct and merchandising strategies in the region, among other functions. +In the United States, NIKE has eight significant distribution centers. Five are located in or near Memphis, Tennessee, two of which are owned and three of which are leased. Two other distribution centers, one located in Indianapolis, Indiana and one located in Dayton, Tennessee, are leased and operated by third-party logistics providers. One distribution center for Converse is located in Ontario, California, which is leased. NIKE has a number of distribution facilities outside the United States, some of which are leased and operated by third-party logistics providers. The most significant distribution facilities outside the United States are located in Laakdal, Belgium; Taicang, China; Tomisato, Japan and Icheon, Korea, all of which we own. +Air Manufacturing Innovation manufactures cushioning components used in footwear at NIKE-owned and leased facilities located near Beaverton, Oregon, and in Dong Nai Province, Vietnam, as well as at NIKE-owned facilities in St. Charles, Missouri. +Aside from the principal properties described above, we lease many offices worldwide for sales and administrative purposes. We lease approximately 1,027 retail stores worldwide, which primarily consist of factory stores. See "United States Market" and "International Markets" for additional information regarding our retail stores. Our leases expire at various dates through the fiscal year 2052. +ITEM 3. LEGAL PROCEEDINGS +We do not believe there are any material pending legal proceedings, other than ordinary routine litigation incidental to our business, to which we are a party or of which any of our property is the subject. Refer to Note 16 — Commitments and Contingencies in the accompanying Notes to the Consolidated Financial Statements for further information. +ITEM 4. MINE SAFETY DISCLOSURES +Not applicable. +2023 FORM 10-K 24 +Table of Contents +PART II +ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES +NIKE's Class B Common Stock is listed on the New York Stock Exchange and trades under the symbol NKE. At July 12, 2023, there were 21,813 holders of record of NIKE's Class B Common Stock and 15 holders of record of NIKE's Class A Common Stock. These figures do not include beneficial owners who hold shares in nominee name. The Class A Common Stock is not publicly traded, but each share is convertible upon request of the holder into one share of Class B Common Stock. Refer to our Consolidated Statements of Shareholders' Equity for dividends declared on the Class A and Class B Common Stock. +In August 2022, the Company terminated the previous four-year, $15 billion share repurchase program approved by the Board of Directors in June 2018. Prior to the program's termination, the Company purchased 6.5 million shares at an average price of $109.85 per share for a total approximate cost of $710.0 million during the first quarter of fiscal 2023 and 83.8 million shares at an average price of $111.82 per share for a total approximate cost of $9.4 billion during the term of this program. +Upon termination of the $15 billion program, the Company began purchasing shares under a new four-year, $18 billion share repurchase program authorized by the Board of Directors in June 2022. As of May 31, 2023, the Company had repurchased 43.5 million shares at an average price of $110.38 per share for a total approximate cost of $4.8 billion under the new program. +Repurchases under the Company's new program will be made in open market or privately negotiated transactions in compliance with the Securities and Exchange Commission Rule 10b-18, subject to market conditions, applicable legal requirements and other relevant factors. The new share repurchase program does not obligate the Company to acquire any particular amount of common stock, and it may be suspended at any time at the Company's discretion. +All share repurchases were made under NIKE's publicly announced program, and there are no other programs under which the Company repurchases shares. The following table presents a summary of share repurchases made during the quarter ended May 31, 2023: +PERIOD TOTAL NUMBER OF SHARES PURCHASED AVERAGE PRICE +PAID PER SHARE APPROXIMATE DOLLAR +VALUE OF SHARES THAT +MAY YET BE PURCHASED +UNDER THE PLANS +OR PROGRAMS +(IN MILLIONS) +March 1 — March 31, 2023 4,118,427 $ 120.04 $ 14,099 +April 1 — April 30, 2023 3,282,288 $ 125.01 $ 13,689 +May 1 — May 31, 2023 4,134,824 $ 118.30 $ 13,200 +11,535,539 $ 120.83 +2023 FORM 10-K 25 +Table of Contents +PERFORMANCE GRAPH +The following graph demonstrates a five-year comparison of cumulative total returns for NIKE's Class B Common Stock; the Standard & Poor's 500 Stock Index; the Dow Jones U.S. Footwear Index; and the Standard & Poor's Apparel, Accessories & Luxury Goods Index. The graph assumes an investment of $100 on May 31, 2018, in each of the indices and our Class B Common Stock. Each of the indices assumes that all dividends were reinvested on the day of issuance. +COMPARISON OF 5-YEAR CUMULATIVE TOTAL RETURN AMONG NIKE, INC.; S&P 500 INDEX; THE DOW JONES U.S. FOOTWEAR INDEX; AND S&P APPAREL, ACCESSORIES & LUXURY GOODS INDEX +The Dow Jones U.S. Footwear Index consists of NIKE, Crocs Inc., Deckers Outdoor Corporation and Skechers U.S.A., Inc. Because NIKE is part of the Dow Jones U.S. Footwear Index, the price and returns of NIKE stock have a substantial effect on this index. The Standard & Poor's Apparel, Accessories & Luxury Goods Index consists of Ralph Lauren Corporation, Tapestry, Inc. and V.F. Corporation. The Dow Jones U.S. Footwear Index and the Standard & Poor's Apparel, Accessories & Luxury Goods Index include companies in two major lines of business in which the Company competes. The indices do not encompass all of the Company's competitors, nor all product categories and lines of business in which the Company is engaged. +The stock performance shown on the performance graph above is not necessarily indicative of future performance. The Company will not make or endorse any predictions as to future stock performance. +The performance graph above is being furnished solely to accompany this Annual Report pursuant to Item 201(e) of Regulation S-K, is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing. +2023 FORM 10-K 26 +Table of Contents +ITEM 6. [RESERVED] +2023 FORM 10-K 27 +Table of Contents +ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS +OVERVIEW +NIKE designs, develops, markets and sells athletic footwear, apparel, equipment, accessories and services worldwide. We are the largest seller of athletic footwear and apparel in the world. We sell our products through NIKE Direct operations, which is comprised of both NIKE-owned retail stores and sales through our digital platforms (also referred to as "NIKE Brand Digital"), to wholesale accounts and to a mix of independent distributors, licensees and sales representatives in nearly all countries around the world. Our goal is to deliver value to our shareholders by building a profitable global portfolio of branded footwear, apparel, equipment and accessories businesses. Our strategy is to achieve long-term revenue growth by creating innovative, "must-have" products, building deep personal consumer connections with our brands and delivering compelling consumer experiences through digital platforms and at retail. +Through the Consumer Direct Acceleration strategy, we are focused on creating the marketplace of the future with more premium, consistent and seamless consumer experiences, leading with digital and our owned stores, as well as select wholesale partners. In addition, our product creation and marketing organizations are aligned to a consumer construct focused on sports dimensions through Men's, Women's and Kids', which allows us to better serve consumer needs. We continue to invest in a new Enterprise Resource Planning Platform, data and analytics, demand sensing, insight gathering, and other areas to create an end-to-end technology foundation, which we believe will further accelerate our digital transformation. We believe this unified approach will accelerate growth and unlock more efficiency for our business, while driving speed and responsiveness as we serve consumers globally. +FINANCIAL HIGHLIGHTS +• In fiscal 2023, NIKE, Inc. achieved record Revenues of $51.2 billion, which increased 10% and 16% on a reported and currency-neutral basis, respectively +• NIKE Direct revenues grew 14% from $18.7 billion in fiscal 2022 to $21.3 billion in fiscal 2023, and represented approximately 44% of total NIKE Brand revenues for fiscal 2023 +• Gross margin for the fiscal year decreased 250 basis points to 43.5% primarily driven by higher product costs, higher markdowns and unfavorable changes in foreign currency exchange rates, partially offset by strategic pricing actions +• Inventories as of May 31, 2023 were $8.5 billion, flat compared to the prior year, driven by the actions we took throughout fiscal 2023 to manage inventory levels +• We returned $7.5 billion to our shareholders in fiscal 2023 through share repurchases and dividends +• Return on Invested Capital ("ROIC") as of May 31, 2023 was 31.5% compared to 46.5% as of May 31, 2022. ROIC is considered a non-GAAP financial measure, see "Use of Non-GAAP Financial Measures" for further information. +For discussion related to the results of operations and changes in financial condition for fiscal 2022 compared to fiscal 2021 refer to Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in our fiscal 2022 Form 10-K, which was filed with the United States Securities and Exchange Commission on July 21, 2022. +CURRENT ECONOMIC CONDITIONS AND MARKET DYNAMICS +• Consumer Spending: Our fiscal 2023 growth in Revenues reflects strong demand for our products despite ongoing uncertainty in the global economy. We will continue to closely monitor macroeconomic conditions, including potential impacts of inflation and rising interest rates on consumer behavior. +• Inflationary Pressures: Inflationary pressures, including higher product input, freight and logistics costs negatively impacted gross margin for fiscal 2023. The strategic pricing actions we have taken partially offset the impacts of these higher costs. +• Supply Chain Volatility: Supply chain challenges, macroeconomic conditions and the impact of the COVID-19 pandemic on the manufacturing of our product disrupted the flow of seasonal product in fiscal 2022 and the first quarter of fiscal 2023, resulting in elevated inventory levels at the end of the first quarter of fiscal 2023. Throughout fiscal 2023, we took action to reduce excess inventory by decreasing future inventory purchases and increasing promotional activity. These actions, along with the stabilization of inventory transit times in the second and third quarters of fiscal 2023, resulted in the normalization of the seasonal flow of product in the fourth quarter of fiscal 2023. +2023 FORM 10-K 28 +Table of Contents +• COVID-19 Impacts in Greater China: During the first and second quarters of fiscal 2023, we managed through continued temporary store closures and reduced retail traffic in Greater China, primarily due to COVID-19 related local government restrictions. At the beginning of the third quarter of fiscal 2023, the government mandated restrictions were lifted and we experienced improvement in physical retail traffic. +• Foreign Currency Impacts: As a global company with significant operations outside the United States, we are exposed to risk arising from foreign currency exchange rates. For fiscal 2023, fluctuations in foreign currency exchange rates negatively impacted our reported Revenues by approximately $2,859 million, reducing our revenue growth rate to 10% on a reported basis from 16% on a currency-neutral basis. Foreign currency impacts, net of hedges, also reduced our reported Income before income taxes by approximately $1,023 million. For further information, refer to "Foreign Currency Exposures and Hedging Practices". +The operating environment could remain volatile in fiscal 2024 as the risk exists that worsening macroeconomic conditions could have a material adverse impact on our future revenue growth as well as overall profitability. For more information refer to Item 1A Risk Factors, within Part I, Item 1. Business. +RECENT DEVELOPMENTS +During the first and second quarters of fiscal 2023, we completed the sale of our entity in Chile and our entities in Argentina and Uruguay to third-party distributors, respectively. Now that we have completed the shift from a wholesale and direct to consumer operating model to a distributor model within our Central and South America ("CASA") territory, we expect consolidated NIKE, Inc. and Asia Pacific & Latin America ("APLA") revenue growth will be reduced due to different commercial terms. However, over time we expect the future operating model to have a favorable impact on our overall profitability as we reduce selling and administrative expenses, as well as reduce exposure to foreign exchange rate volatility. +USE OF NON-GAAP FINANCIAL MEASURES +Throughout this Annual Report on Form 10-K, we discuss non-GAAP financial measures, which should be considered in addition to, and not in lieu of, the financial measures calculated and presented in accordance with U.S. GAAP. References to these measures should not be considered in isolation or as a substitute for other financial measures calculated and presented in accordance with U.S. GAAP and may not be comparable to similarly titled measures used by other companies. Management uses these non-GAAP measures when evaluating the Company's performance, including when making financial and operating decisions. Additionally, management believes these non-GAAP financial measures provide investors with additional financial information that should be considered when assessing our underlying business performance and trends. +Earnings Before Interest and Taxes ("EBIT") : Calculated as Net income before Interest expense (income), net and Income tax expense in the Consolidated Statements of Income. Total NIKE, Inc. EBIT for fiscal 2023 and fiscal 2022 is as follows: +YEAR ENDED MAY 31, +(Dollars in millions) +2023 2022 +Net income $ 5,070 $ 6,046 +Add: Interest expense (income), net (6) 205 +Add: Income tax expense 1,131 605 +Earnings before interest and taxes $ 6,195 $ 6,856 +EBIT Margin : Calculated as total NIKE, Inc. EBIT divided by total NIKE, Inc. Revenues. Our EBIT Margin calculation for fiscal 2023 and fiscal 2022 is as follows: +YEAR ENDED MAY 31, +(Dollars in millions) +2023 2022 +Numerator +Earnings before interest and taxes $ 6,195 $ 6,856 +Denominator +Total NIKE, Inc. Revenues $ 51,217 $ 46,710 +EBIT Margin 12.1% 14.7% +2023 FORM 10-K 29 +Table of Contents +Return on Invested Capital ("ROIC") : Represents a performance measure that management believes is useful information in understanding the Company's ability to effectively manage invested capital. Our ROIC calculation as of May 31, 2023 and 2022 is as follows: +FOR THE TRAILING FOUR QUARTERS ENDED +(Dollars in millions) MAY 31, 2023 MAY 31, 2022 +Numerator +Net income $ 5,070 $ 6,046 +Add: Interest expense (income), net (6) 205 +Add: Income tax expense 1,131 605 +Earnings before interest and taxes 6,195 6,856 +Income tax adjustment (1) +(1,130) (624) +Earnings before interest and after taxes $ 5,065 $ 6,232 +AVERAGE FOR THE TRAILING FIVE QUARTERS ENDED +MAY 31, 2023 MAY 31, 2022 +Denominator +Total debt (2) +$ 12,491 $ 12,722 +Add: Shareholders' equity 14,982 14,425 +Less: Cash and equivalents and Short-term investments 11,394 13,748 +Total invested capital $ 16,079 $ 13,399 +RETURN ON INVESTED CAPITAL 31.5% 46.5% +(1) Equals Earnings before interest and taxes multiplied by the effective tax rate as of the respective quarter end. +(2) Total debt includes the following: 1) Current portion of long-term debt, 2) Notes Payable, 3) Current portion of operating lease liabilities, 4) Long-term debt and 5) Operating lease liabilities. +Currency-neutral revenues : Currency-neutral revenues enhance visibility to underlying business trends, excluding the impact of translation arising from foreign currency exchange rate fluctuations. Currency-neutral revenues are calculated using actual exchange rates in use during the comparative prior year period in place of the exchange rates in use during the current period. +Wholesale equivalent revenues : References to wholesale equivalent revenues are intended to provide context as to the total size of our NIKE Brand market footprint if we had no NIKE Direct operations. NIKE Brand wholesale equivalent revenues consist of (1) sales to external wholesale customers and (2) internal sales from our wholesale operations to our NIKE Direct operations, which are charged at prices comparable to those charged to external wholesale customers. +COMPARABLE STORE SALES +Comparable store sales : This key metric, which excludes NIKE Brand Digital sales, comprises revenues from NIKE-owned in-line and factory stores for which all three of the following requirements have been met: (1) the store has been open at least one year, (2) square footage has not changed by more than 15% within the past year and (3) the store has not been permanently repositioned within the past year. Comparable store sales includes revenues from stores that were temporarily closed during the period as a result of COVID-19. Comparable store sales represents a performance metric that we believe is useful information for management and investors in understanding the performance of our established NIKE-owned in-line and factory stores. Management considers this metric when making financial and operating decisions. The method of calculating comparable store sales varies across the retail industry. As a result, our calculation of this metric may not be comparable to similarly titled metrics used by other companies. +2023 FORM 10-K 30 +Table of Contents +RESULTS OF OPERATIONS +(Dollars in millions, except per share data) +FISCAL 2023 FISCAL 2022 % CHANGE FISCAL 2021 % CHANGE +Revenues $ 51,217 $ 46,710 10 % $ 44,538 5 % +Cost of sales 28,925 25,231 15 % 24,576 3 % +Gross profit 22,292 21,479 4 % 19,962 8 % +Gross margin 43.5 % 46.0 % 44.8 % +Demand creation expense 4,060 3,850 5 % 3,114 24 % +Operating overhead expense 12,317 10,954 12 % 9,911 11 % +Total selling and administrative expense 16,377 14,804 11 % 13,025 14 % +% of revenues 32.0 % 31.7 % 29.2 % +Interest expense (income), net (6) 205 — 262 — +Other (income) expense, net (280) (181) — 14 — +Income before income taxes 6,201 6,651 -7 % 6,661 0 % +Income tax expense 1,131 605 87 % 934 -35 % +Effective tax rate 18.2 % 9.1 % 14.0 % +NET INCOME $ 5,070 $ 6,046 -16 % $ 5,727 6 % +Diluted earnings per common share $ 3.23 $ 3.75 -14 % $ 3.56 5 % +2023 FORM 10-K 31 +Table of Contents +CONSOLIDATED OPERATING RESULTS +REVENUES +(Dollars in millions) +FISCAL 2023 FISCAL 2022 % CHANGE +% CHANGE EXCLUDING CURRENCY CHANGES (1) +FISCAL 2021 % CHANGE +% CHANGE EXCLUDING CURRENCY CHANGES (1) +NIKE, Inc. Revenues: +NIKE Brand Revenues by: +Footwear $ 33,135 $ 29,143 14 % 20 % $ 28,021 4 % 4 % +Apparel 13,843 13,567 2 % 8 % 12,865 5 % 6 % +Equipment 1,727 1,624 6 % 13 % 1,382 18 % 18 % +Global Brand Divisions (2) +58 102 -43 % -43 % 25 308 % 302 % +Total NIKE Brand Revenues $ 48,763 $ 44,436 10 % 16 % $ 42,293 5 % 6 % +Converse 2,427 2,346 3 % 8 % 2,205 6 % 7 % +Corporate (3) +27 (72) — — 40 — — +TOTAL NIKE, INC. REVENUES $ 51,217 $ 46,710 10 % 16 % $ 44,538 5 % 6 % +Supplemental NIKE Brand Revenues Details: +NIKE Brand Revenues by: +Sales to Wholesale Customers $ 27,397 $ 25,608 7 % 14 % $ 25,898 -1 % -1 % +Sales through NIKE Direct 21,308 18,726 14 % 20 % 16,370 14 % 15 % +Global Brand Divisions (2) +58 102 -43 % -43 % 25 308 % 302 % +TOTAL NIKE BRAND REVENUES $ 48,763 $ 44,436 10 % 16 % $ 42,293 5 % 6 % +NIKE Brand Revenues on a Wholesale Equivalent Basis (1) : +Sales to Wholesale Customers $ 27,397 $ 25,608 7 % 14 % $ 25,898 -1 % -1 % +Sales from our Wholesale Operations to NIKE Direct Operations 12,730 10,543 21 % 27 % 9,872 7 % 7 % +TOTAL NIKE BRAND WHOLESALE EQUIVALENT REVENUES $ 40,127 $ 36,151 11 % 18 % $ 35,770 1 % 1 % +NIKE Brand Wholesale Equivalent Revenues by: (1),(4) +Men's $ 20,733 $ 18,797 10 % 17 % $ 18,391 2 % 3 % +Women's 8,606 8,273 4 % 11 % 8,225 1 % 1 % +NIKE Kids' 5,038 4,874 3 % 10 % 4,882 0 % 0 % +Jordan Brand 6,589 5,122 29 % 35 % 4,780 7 % 7 % +Others (5) +(839) (915) 8 % -3 % (508) -80 % -79 % +TOTAL NIKE BRAND WHOLESALE EQUIVALENT REVENUES $ 40,127 $ 36,151 11 % 18 % $ 35,770 1 % 1 % +(1) The percent change excluding currency changes and the presentation of wholesale equivalent revenues represent non-GAAP financial measures. For further information, see "Use of Non-GAAP Financial Measures". +(2) Global Brand Divisions revenues include NIKE Brand licensing and other miscellaneous revenues that are not part of a geographic operating segment. +(3) Corporate revenues primarily consist of foreign currency hedge gains and losses related to revenues generated by entities within the NIKE Brand geographic operating segments and Converse, but managed through our central foreign exchange risk management program. +(4) As a result of the Consumer Direct Acceleration strategy, announced in fiscal 2021, the Company is now organized around a consumer construct of Men's, Women's and Kids'. Beginning in the first quarter of fiscal 2022, unisex products are classified within Men's, and Jordan Brand revenues are separately reported. Certain prior year amounts were reclassified to conform to fiscal 2022 presentation. These changes had no impact on previously reported consolidated results of operations or shareholders' equity. +(5) Others include products not allocated to Men's, Women's, NIKE Kids' and Jordan Brand, as well as certain adjustments that are not allocated to products designated by consumer. +2023 FORM 10-K 32 +Table of Contents +FISCAL 2023 NIKE BRAND REVENUE HIGHLIGHTS +The following tables present NIKE Brand revenues disaggregated by reportable operating segment, distribution channel and major product line: +FISCAL 2023 COMPARED TO FISCAL 2022 +• NIKE, Inc. Revenues were $51.2 billion in fiscal 2023, which increased 10% and 16% compared to fiscal 2022 on a reported and currency-neutral basis, respectively. The increase was due to higher revenues in North America, Europe, Middle East & Africa ("EMEA"), APLA and Greater China, which contributed approximately 7, 6, 2 and 1 percentage points to NIKE, Inc. Revenues, respectively. +• NIKE Brand revenues, which represented over 90% of NIKE, Inc. Revenues, increased 10% and 16% on a reported and currency-neutral basis, respectively. This increase was primarily due to higher revenues in Men's, the Jordan Brand, Women's and Kids' which grew 17%, 35%,11% and 10%, respectively, on a wholesale equivalent basis. +• NIKE Brand footwear revenues increased 20% on a currency-neutral basis, due to higher revenues in Men's, the Jordan Brand, Women's and Kids'. Unit sales of footwear increased 13%, while higher average selling price ("ASP") per pair contributed approximately 7 percentage points of footwear revenue growth. Higher ASP was primarily due to higher full-price ASP, net of discounts, on a wholesale equivalent basis, and growth in the size of our NIKE Direct business, partially offset by lower NIKE Direct ASP. +• NIKE Brand apparel revenues increased 8% on a currency-neutral basis, primarily due to higher revenues in Men's. Unit sales of apparel increased 4%, while higher ASP per unit contributed approximately 4 percentage points of apparel revenue growth. Higher ASP was primarily due to higher full-price ASP and growth in the size of our NIKE Direct business, partially offset by lower NIKE Direct ASP, reflecting higher promotional activity. +• NIKE Direct revenues increased 14% from $18.7 billion in fiscal 2022 to $21.3 billion in fiscal 2023. On a currency-neutral basis, NIKE Direct revenues increased 20% primarily driven by NIKE Brand Digital sales growth of 24%, comparable store sales growth of 14% and the addition of new stores. For further information regarding comparable store sales, including the definition, see "Comparable Store Sales". NIKE Brand Digital sales were $12.6 billion for fiscal 2023 compared to $10.7 billion for fiscal 2022. +2023 FORM 10-K 33 +Table of Contents +GROSS MARGIN +FISCAL 2023 COMPARED TO FISCAL 2022 +For fiscal 2023, our consolidated gross profit increased 4% to $22,292 million compared to $21,479 million for fiscal 2022. Gross margin decreased 250 basis points to 43.5% for fiscal 2023 compared to 46.0% for fiscal 2022 due to the following: +*Wholesale equivalent +The decrease in gross margin for fiscal 2023 was primarily due to: +• Higher NIKE Brand product costs, on a wholesale equivalent basis, primarily due to higher input costs and elevated inbound freight and logistics costs as well as product mix; +• Lower margin in our NIKE Direct business, driven by higher promotional activity to liquidate inventory in the current period compared to lower promotional activity in the prior period resulting from lower available inventory supply; +• Unfavorable changes in net foreign currency exchange rates, including hedges; and +• Lower off-price margin, on a wholesale equivalent basis. +This was partially offset by: +• Higher NIKE Brand full-price ASP, net of discounts, on a wholesale equivalent basis, due primarily to strategic pricing actions and product mix; and +• Lower other costs, primarily due to higher inventory obsolescence reserves recognized in Greater China in the fourth quarter of fiscal 2022. +TOTAL SELLING AND ADMINISTRATIVE EXPENSE +(Dollars in millions) +FISCAL 2023 FISCAL 2022 % CHANGE FISCAL 2021 % CHANGE +Demand creation expense (1) +$ 4,060 $ 3,850 5 % $ 3,114 24 % +Operating overhead expense 12,317 10,954 12 % 9,911 11 % +Total selling and administrative expense $ 16,377 $ 14,804 11 % $ 13,025 14 % +% of revenues 32.0 % 31.7 % 30 bps 29.2 % 250 bps +(1) Demand creation expense consists of advertising and promotion costs, including costs of endorsement contracts, complimentary product, television, digital and print advertising and media costs, brand events and retail brand presentation. +FISCAL 2023 COMPARED TO FISCAL 2022 +Demand creation expense increased 5% for fiscal 2023, primarily due to higher advertising and marketing expense and higher sports marketing expense. Changes in foreign currency exchange rates decreased Demand creation expense by approximately 4 percentage points. +Operating overhead expense increased 12%, primarily due to higher wage-related expenses, NIKE Direct variable costs, strategic technology enterprise investments and other administrative costs. Changes in foreign currency exchange rates decreased Operating overhead expense by approximately 3 percentage points. +2023 FORM 10-K 34 +Table of Contents +OTHER (INCOME) EXPENSE, NET +(Dollars in millions) +FISCAL 2023 FISCAL 2022 FISCAL 2021 +Other (income) expense, net $ (280) $ (181) $ 14 +Other (income) expense, net comprises foreign currency conversion gains and losses from the remeasurement of monetary assets and liabilities denominated in non-functional currencies and the impact of certain foreign currency derivative instruments, as well as unusual or non-operating transactions that are outside the normal course of business. +FISCAL 2023 COMPARED TO FISCAL 2022 +Other (income) expense, net increased from $181 million of other income, net in fiscal 2022 to $280 million in the current fiscal year, primarily due to a net favorable change in foreign currency conversion gains and losses, including hedges, and the one-time charge related to the deconsolidation of our Russian operations recognized in the prior year. This increase was partially offset by net unfavorable activity related to our strategic distributor partnership transition within APLA, including the loss recognized upon the completion of the sale of our entities in Argentina and Uruguay to a third-party distributor in the second quarter of fiscal 2023. +For more information related to our distributor partnership transition within APLA, see Note 18 — Acquisitions and Divestitures within the accompanying Notes to the Consolidated Financial Statements. +We estimate the combination of the translation of foreign currency-denominated profits from our international businesses, and the year-over-year change in foreign currency-related gains and losses included in Other (income) expense, net had an unfavorable impact on our Income before income taxes of $1,023 million for fiscal 2023. +INCOME TAXES +FISCAL 2023 FISCAL 2022 % CHANGE FISCAL 2021 % CHANGE +Effective tax rate 18.2 % 9.1 % 910 bps 14.0 % (490) bps +FISCAL 2023 COMPARED TO FISCAL 2022 +Our effective tax rate was 18.2% for fiscal 2023, compared to 9.1% for fiscal 2022, primarily due to decreased benefits from stock-based compensation and a non-cash, one-time benefit in the prior year related to the onshoring of certain non-U.S. intangible property ownership rights. +On August 16, 2022, the U.S. government enacted the Inflation Reduction Act of 2022 that includes, among other provisions, changes to the U.S. corporate income tax system, including a fifteen percent minimum tax based on "adjusted financial statement income," which is effective for NIKE beginning June 1, 2023. Based on our current analysis of the provisions, we do not expect these tax law changes to have a material impact on our financial statements; however, we will continue to evaluate their impact as further information becomes available. +2023 FORM 10-K 35 +Table of Contents +OPERATING SEGMENTS +As discussed in Note 15 — Operating Segments and Related Information in the accompanying Notes to the Consolidated Financial Statements, our operating segments are evidence of the structure of the Company's internal organization. The NIKE Brand segments are defined by geographic regions for operations participating in NIKE Brand sales activity. +The breakdown of Revenues is as follows: +(Dollars in millions) +FISCAL 2023 FISCAL 2022 % CHANGE +% CHANGE EXCLUDING CURRENCY CHANGES (1) +FISCAL 2021 % CHANGE +% CHANGE EXCLUDING CURRENCY CHANGES (1) +North America $ 21,608 $ 18,353 18 % 18 % $ 17,179 7 % 7 % +Europe, Middle East & Africa 13,418 12,479 8 % 21 % 11,456 9 % 12 % +Greater China 7,248 7,547 -4 % 4 % 8,290 -9 % -13 % +Asia Pacific & Latin America (2) +6,431 5,955 8 % 17 % 5,343 11 % 16 % +Global Brand Divisions (3) +58 102 -43 % -43 % 25 308 % 302 % +TOTAL NIKE BRAND $ 48,763 $ 44,436 10 % 16 % $ 42,293 5 % 6 % +Converse 2,427 2,346 3 % 8 % 2,205 6 % 7 % +Corporate (4) +27 (72) — — 40 — — +TOTAL NIKE, INC. REVENUES $ 51,217 $ 46,710 10 % 16 % $ 44,538 5 % 6 % +(1) The percent change excluding currency changes represents a non-GAAP financial measure. For further information, see "Use of Non-GAAP Financial Measures". +(2) For additional information on the transition of our NIKE Brand businesses within our CASA territory to a third-party distributor, see Note 18 — Acquisitions and Divestitures of the Notes to Consolidated Financial Statements contained in Item 8 of this Annual Report. +(3) Global Brand Divisions revenues include NIKE Brand licensing and other miscellaneous revenues that are not part of a geographic operating segment. +(4) Corporate revenues primarily consist of foreign currency hedge gains and losses related to revenues generated by entities within the NIKE Brand geographic operating segments and Converse, but managed through our central foreign exchange risk management program. +The primary financial measure used by the Company to evaluate performance is Earnings Before Interest and Taxes ("EBIT"). As discussed in Note 15 — Operating Segments and Related Information in the accompanying Notes to the Consolidated Financial Statements, certain corporate costs are not included in EBIT. +The breakdown of EBIT is as follows: +(Dollars in millions) +FISCAL 2023 FISCAL 2022 % CHANGE FISCAL 2021 % CHANGE +North America $ 5,454 $ 5,114 7 % $ 5,089 0 % +Europe, Middle East & Africa 3,531 3,293 7 % 2,435 35 % +Greater China 2,283 2,365 -3 % 3,243 -27 % +Asia Pacific & Latin America 1,932 1,896 2 % 1,530 24 % +Global Brand Divisions (4,841) (4,262) -14 % (3,656) -17 % +TOTAL NIKE BRAND (1) +$ 8,359 $ 8,406 -1 % $ 8,641 -3 % +Converse 676 669 1 % 543 23 % +Corporate +(2,840) (2,219) -28 % (2,261) 2 % +TOTAL NIKE, INC. EARNINGS BEFORE INTEREST AND TAXES (1) +$ 6,195 $ 6,856 -10 % $ 6,923 -1 % +EBIT margin (1) +12.1 % 14.7 % 15.5 % +Interest expense (income), net (6) 205 — 262 — +TOTAL NIKE, INC. INCOME BEFORE INCOME TAXES $ 6,201 $ 6,651 -7 % $ 6,661 0 % +(1) Total NIKE Brand EBIT, Total NIKE, Inc. EBIT and EBIT Margin represent non-GAAP financial measures. See "Use of Non-GAAP Financial Measures" for further information. +2023 FORM 10-K 36 +Table of Contents +NORTH AMERICA +(Dollars in millions) +FISCAL 2023 FISCAL 2022 % CHANGE % CHANGE EXCLUDING CURRENCY CHANGES FISCAL 2021 % CHANGE % CHANGE EXCLUDING CURRENCY CHANGES +Revenues by: +Footwear $ 14,897 $ 12,228 22 % 22 % $ 11,644 5 % 5 % +Apparel 5,947 5,492 8 % 9 % 5,028 9 % 9 % +Equipment 764 633 21 % 21 % 507 25 % 25 % +TOTAL REVENUES $ 21,608 $ 18,353 18 % 18 % $ 17,179 7 % 7 % +Revenues by: +Sales to Wholesale Customers $ 11,273 $ 9,621 17 % 18 % $ 10,186 -6 % -6 % +Sales through NIKE Direct 10,335 8,732 18 % 18 % 6,993 25 % 25 % +TOTAL REVENUES $ 21,608 $ 18,353 18 % 18 % $ 17,179 7 % 7 % +EARNINGS BEFORE INTEREST AND TAXES $ 5,454 $ 5,114 7 % $ 5,089 0 % +FISCAL 2023 COMPARED TO FISCAL 2022 +• North America revenues increased 18% on a currency-neutral basis, primarily due to higher revenues in Men's and the Jordan Brand. NIKE Direct revenues increased 18%, driven by strong digital sales growth of 23%, comparable store sales growth of 9% and the addition of new stores. +• Footwear revenues increased 22% on a currency-neutral basis, primarily due to higher revenues in Men's and the Jordan Brand. Unit sales of footwear increased 17%, while higher ASP per pair contributed approximately 5 percentage points of footwear revenue growth. Higher ASP per pair was primarily due to higher full-price ASP and growth in NIKE Direct, partially offset by lower NIKE Direct ASP, reflecting higher promotional activity as well as lower available inventory supply in the prior period and a lower mix of full-price sales. +• Apparel revenues increased 9% on a currency-neutral basis, primarily due to higher revenues in Men's. Unit sales of apparel increased 7%, while higher ASP per unit contributed approximately 2 percentage points of apparel revenue growth. Higher ASP per unit was primarily due to higher full-price ASP and growth in NIKE Direct, partially offset by lower NIKE Direct ASP, reflecting higher promotional activity. +Reported EBIT increased 7% due to higher revenues and the following: +• Gross margin contraction of 310 basis points primarily due to higher product costs, reflecting higher input costs and inbound freight and logistics costs and product mix, lower margins in NIKE Direct due to higher promotional activity and a lower mix of full-price sales. This was partially offset by higher full-price ASP, net of discounts, largely due to strategic pricing actions and product mix. +• Selling and administrative expense increased 15% due to higher operating overhead and demand creation expense. The increase in operating overhead expense was primarily due to higher wage-related costs and higher NIKE Direct variable costs, in part due to new store additions. Demand creation expense increased primarily due to higher sports marketing expense and an increase in digital marketing. +2023 FORM 10-K 37 +Table of Contents +EUROPE, MIDDLE EAST & AFRICA +(Dollars in millions) +FISCAL 2023 FISCAL 2022 % CHANGE % CHANGE EXCLUDING CURRENCY CHANGES FISCAL 2021 % CHANGE % CHANGE EXCLUDING CURRENCY CHANGES +Revenues by: +Footwear $ 8,260 $ 7,388 12 % 25 % $ 6,970 6 % 9 % +Apparel 4,566 4,527 1 % 14 % 3,996 13 % 16 % +Equipment 592 564 5 % 18 % 490 15 % 17 % +TOTAL REVENUES $ 13,418 $ 12,479 8 % 21 % $ 11,456 9 % 12 % +Revenues by: +Sales to Wholesale Customers $ 8,522 $ 8,377 2 % 15 % $ 7,812 7 % 10 % +Sales through NIKE Direct 4,896 4,102 19 % 33 % 3,644 13 % 15 % +TOTAL REVENUES $ 13,418 $ 12,479 8 % 21 % $ 11,456 9 % 12 % +EARNINGS BEFORE INTEREST AND TAXES $ 3,531 $ 3,293 7 % $ 2,435 35 % +FISCAL 2023 COMPARED TO FISCAL 2022 +• EMEA revenues increased 21% on a currency-neutral basis, due to higher revenues in Men's, the Jordan Brand, Women's and Kids'. NIKE Direct revenues increased 33%, driven primarily by strong digital sales growth of 43% and comparable store sales growth of 22%. +• Footwear revenues increased 25% on a currency-neutral basis, due to higher revenues in Men's, the Jordan Brand, Women's and Kids'. Unit sales of footwear increased 9%, while higher ASP per pair contributed approximately 16 percentage points of footwear revenue growth. Higher ASP per pair was primarily due to higher full-price ASP and growth in NIKE Direct. +• Apparel revenues increased 14% on a currency-neutral basis, primarily due to higher revenues in Men's. Unit sales of apparel increased 2%, while higher ASP per unit contributed approximately 12 percentage points of apparel revenue growth. Higher ASP per unit was primarily due to higher full-price ASP and growth in NIKE Direct, partially offset by lower NIKE Direct ASP, reflecting higher promotional activity. +Reported EBIT increased 7% due to higher revenues and the following: +• Gross margin contraction of 60 basis points primarily due to higher product costs reflecting higher input costs, inbound freight and logistics costs and product mix, higher other costs and unfavorable changes in standard foreign currency exchange rates. This was partially offset by higher full-price ASP, net of discounts, primarily due to strategic pricing actions and product mix. +• Selling and administrative expense increased 4% due to higher operating overhead and demand creation expense. Operating overhead expense increased primarily due to higher wage-related expenses and other administrative costs, partially offset by favorable changes in foreign currency exchange rates. Demand creation expense increased primarily due to higher advertising and marketing expense, partially offset by favorable changes in foreign currency exchange rates. +2023 FORM 10-K 38 +Table of Contents +GREATER CHINA +(Dollars in millions) +FISCAL 2023 FISCAL 2022 % CHANGE % CHANGE EXCLUDING CURRENCY CHANGES FISCAL 2021 % CHANGE % CHANGE EXCLUDING CURRENCY CHANGES +Revenues by: +Footwear $ 5,435 $ 5,416 0 % 8 % $ 5,748 -6 % -10 % +Apparel 1,666 1,938 -14 % -7 % 2,347 -17 % -21 % +Equipment 147 193 -24 % -18 % 195 -1 % -6 % +TOTAL REVENUES $ 7,248 $ 7,547 -4 % 4 % $ 8,290 -9 % -13 % +Revenues by: +Sales to Wholesale Customers $ 3,866 $ 4,081 -5 % 2 % $ 4,513 -10 % -14 % +Sales through NIKE Direct 3,382 3,466 -2 % 5 % 3,777 -8 % -12 % +TOTAL REVENUES $ 7,248 $ 7,547 -4 % 4 % $ 8,290 -9 % -13 % +EARNINGS BEFORE INTEREST AND TAXES $ 2,283 $ 2,365 -3 % $ 3,243 -27 % +FISCAL 2023 COMPARED TO FISCAL 2022 +• Greater China revenues increased 4% on a currency-neutral basis, primarily due to higher revenues in the Jordan Brand, partially offset by lower revenues in Men's and Women's. NIKE Direct revenues increased 5%, due to comparable store sales growth of 9% and the addition of new stores, partially offset by digital sales declines of 4%. +• Footwear revenues increased 8% on a currency-neutral basis, primarily due to higher revenues in the Jordan Brand and Men's. Unit sales of footwear increased 7%, while higher ASP per pair contributed approximately 1 percentage point of footwear revenue growth. Higher ASP per pair was primarily due to higher NIKE Direct ASP and a higher mix of full-price sales, largely offset by a lower mix of NIKE Direct sales. +• Apparel revenues decreased 7% on a currency-neutral basis, primarily due to lower revenues in Men's and Women's. Unit sales of apparel decreased 8%, while higher ASP per unit contributed approximately 1 percentage point of apparel revenue growth. Higher ASP per unit was primarily due to a higher mix of full price sales, partially offset by lower off-price ASP. +Reported EBIT decreased 3% due to lower revenues and the following: +• Gross margin expansion of approximately 140 basis points, primarily due to higher inventory obsolescence reserves recognized in the fourth quarter of fiscal 2022, favorable changes in standard foreign currency exchange rates and higher full-price ASP, net of discounts, in part due to product mix. This was partially offset by higher product costs reflecting higher input costs and product mix. +• Selling and administrative expense was flat due to increased operating overhead expense offset by lower demand creation expense. The increase in operating overhead expense was primarily due to higher wage-related expenses and other administrative costs, partially offset by favorable changes in foreign currency exchange rates. Demand creation expense decreased primarily due to lower retail brand presentation costs, lower digital marketing and favorable changes in foreign currency exchange rates, partially offset by higher advertising and marketing expense. +2023 FORM 10-K 39 +Table of Contents +ASIA PACIFIC & LATIN AMERICA +(Dollars in millions) +FISCAL 2023 FISCAL 2022 % CHANGE % CHANGE EXCLUDING CURRENCY CHANGES FISCAL 2021 % CHANGE % CHANGE EXCLUDING CURRENCY CHANGES +Revenues by: +Footwear $ 4,543 $ 4,111 11 % 19 % $ 3,659 12 % 17 % +Apparel 1,664 1,610 3 % 13 % 1,494 8 % 12 % +Equipment 224 234 -4 % 4 % 190 23 % 28 % +TOTAL REVENUES $ 6,431 $ 5,955 8 % 17 % $ 5,343 11 % 16 % +Revenues by: +Sales to Wholesale Customers $ 3,736 $ 3,529 6 % 14 % $ 3,387 4 % 8 % +Sales through NIKE Direct 2,695 2,426 11 % 22 % 1,956 24 % 30 % +TOTAL REVENUES $ 6,431 $ 5,955 8 % 17 % $ 5,343 11 % 16 % +EARNINGS BEFORE INTEREST AND TAXES $ 1,932 $ 1,896 2 % $ 1,530 24 % +As discussed previously, our NIKE Brand business in Brazil transitioned to a distributor operating model during fiscal 2021. We completed the sale of our entity in Chile and our entities in Argentina and Uruguay to third-party distributors in the first and second quarters of fiscal 2023, respectively. The impacts of closing these transactions are included within Corporate and are not reflected in the APLA operating segment results. This completed the transition of our NIKE Brand businesses within our CASA marketplace, which now reflects a full distributor operating model. For more information see Note 18 — Acquisitions and Divestitures within the accompanying Notes to the Consolidated Financial Statements. +FISCAL 2023 COMPARED TO FISCAL 2022 +• APLA revenues increased 17% on a currency-neutral basis due to higher revenues across nearly all territories, led by Southeast Asia and India, Korea and Japan. The increase was partially offset by a decline in our CASA territory. Within our CASA territory, the transition of our Chile, Argentina and Uruguay entities to a third-party distributor operating model reduced APLA revenue growth by approximately 5 percentage points. Revenues increased primarily due to growth in Men's, Women's and the Jordan Brand. NIKE Direct revenues increased 22%, driven by digital sales growth of 23% and comparable store sales growth of 28%. +• Footwear revenues increased 19% on a currency-neutral basis, primarily due to higher revenues in Men's, Women's and the Jordan Brand. Unit sales of footwear increased 16%, while higher ASP per pair contributed approximately 3 percentage points of footwear revenue growth. Higher ASP per pair was primarily due to higher full-price ASP and growth in NIKE Direct, partially offset by lower NIKE Direct ASP. +• Apparel revenues increased 13% on a currency-neutral basis, primarily due to higher revenues in Men's. Unit sales of apparel increased 9%, while higher ASP per unit contributed approximately 4 percentage points of apparel revenue growth. Higher ASP per unit was primarily due to higher full-price and off-price ASPs, partially offset by lower NIKE Direct ASP. +Reported EBIT increased 2% due to higher revenues and the following: +• Gross margin contraction of approximately 190 basis points primarily due to higher product costs, reflecting product mix and higher input costs, as well as unfavorable changes in standard foreign currency exchange rates. This was partially offset by higher full-price ASP, net of discounts, due to product mix and strategic pricing actions. +• Selling and administrative expense increased 8% due to higher operating overhead and demand creation expense. Operating overhead expense increased primarily due to higher wage-related expenses and an increase in NIKE Direct variable costs, partially offset by favorable changes in foreign currency exchange rates. Demand creation expense increased primarily due to higher sports marketing expense and higher advertising and marketing expense, partially offset by favorable changes in foreign currency exchange rates. +2023 FORM 10-K 40 +Table of Contents +GLOBAL BRAND DIVISIONS +(Dollars in millions) +FISCAL 2023 FISCAL 2022 % CHANGE % CHANGE EXCLUDING CURRENCY CHANGES FISCAL 2021 % CHANGE % CHANGE EXCLUDING CURRENCY CHANGES +Revenues $ 58 $ 102 -43 % -43 % $ 25 308 % 302 % +Earnings (Loss) Before Interest and Taxes $ (4,841) $ (4,262) -14 % $ (3,656) -17 % +Global Brand Divisions primarily represent demand creation and operating overhead expense, including product creation and design expenses that are centrally managed for the NIKE Brand, as well as costs associated with NIKE Direct global digital operations and enterprise technology. Global Brand Divisions revenues include NIKE Brand licensing and other miscellaneous revenues that are not part of a geographic operating segment. +FISCAL 2023 COMPARED TO FISCAL 2022 +Global Brand Divisions' loss before interest and taxes increased 14% for fiscal 2023 primarily due to a 12% increase in selling and administrative expense from higher operating overhead expense largely driven by higher wage-related costs and strategic technology enterprise investments. +CONVERSE +(Dollars in millions) +FISCAL 2023 FISCAL 2022 % CHANGE % CHANGE EXCLUDING CURRENCY CHANGES FISCAL 2021 % CHANGE % CHANGE EXCLUDING CURRENCY CHANGES +Revenues by: +Footwear $ 2,155 $ 2,094 3 % 8 % $ 1,986 5 % 6 % +Apparel 90 103 -13 % -7 % 104 -1 % -3 % +Equipment 28 26 8 % 16 % 29 -10 % -16 % +Other (1) +154 123 25 % 25 % 86 43 % 42 % +TOTAL REVENUES $ 2,427 $ 2,346 3 % 8 % $ 2,205 6 % 7 % +Revenues by: +Sales to Wholesale Customers $ 1,299 $ 1,292 1 % 7 % $ 1,353 -5 % -4 % +Sales through Direct to Consumer 974 931 5 % 8 % 766 22 % 22 % +Other (1) +154 123 25 % 25 % 86 43 % 42 % +TOTAL REVENUES $ 2,427 $ 2,346 3 % 8 % $ 2,205 6 % 7 % +EARNINGS BEFORE INTEREST AND TAXES $ 676 $ 669 1 % $ 543 23 % +(1) Other revenues consist of territories serviced by third-party licensees who pay royalties to Converse for the use of its registered trademarks and other intellectual property rights. We do not own the Converse trademarks in Japan and accordingly do not earn revenues in Japan. +FISCAL 2023 COMPARED TO FISCAL 2022 +• Converse revenues increased 8% on a currency-neutral basis for fiscal 2023 due to revenue growth in North America, Western Europe and licensee markets, partially offset by declines in Asia. Combined unit sales within the wholesale and direct to consumer channels increased 1% while ASP increased 6%, driven by strategic pricing actions in Western Europe and North America. +• Direct to consumer revenues increased 8% on a currency-neutral basis, led by strong digital sales growth in North America. +• Wholesale revenues increased 7% on a currency-neutral basis, as growth in North America and Western Europe was partially offset by declines in Asia due to marketplace dynamics in China. +Reported EBIT increased 1% due to higher revenues and the following: +• Gross margin expansion of approximately 50 basis points as higher full-price ASP, net of discounts, lower other costs, and growth in licensee revenues were partially offset by higher product costs, lower margins in direct to consumer in part reflecting increased promotional activity, and unfavorable changes in standard foreign currency exchange rates. +• Selling and administrative expense increased 7% due to higher operating overhead and demand creation expense. Operating overhead expense increased primarily as a result of higher wage-related expenses. Demand creation expense increased as a result of higher advertising and marketing costs, partially offset by lower retail brand presentation costs. +2023 FORM 10-K 41 +Table of Contents +CORPORATE +(Dollars in millions) +FISCAL 2023 FISCAL 2022 % CHANGE FISCAL 2021 % CHANGE +Revenues $ 27 $ (72) — $ 40 — +Earnings (Loss) Before Interest and Taxes $ (2,840) $ (2,219) -28 % $ (2,261) 2 % +Corporate revenues primarily consist of foreign currency hedge gains and losses related to revenues generated by entities within the NIKE Brand geographic operating segments and Converse, but managed through our central foreign exchange risk management program. +The Corporate loss before interest and taxes primarily consists of unallocated general and administrative expenses, including expenses associated with centrally managed departments; depreciation and amortization related to our corporate headquarters; unallocated insurance, benefit and compensation programs, including stock-based compensation; and certain foreign currency gains and losses. +In addition to the foreign currency gains and losses recognized in Corporate revenues, foreign currency results in Corporate include gains and losses resulting from the difference between actual foreign currency exchange rates and standard rates used to record non-functional currency denominated product purchases within the NIKE Brand geographic operating segments and Converse; related foreign currency hedge results; conversion gains and losses arising from remeasurement of monetary assets and liabilities in non-functional currencies; and certain other foreign currency derivative instruments. +FISCAL 2023 COMPARED TO FISCAL 2022 +Corporate's loss before interest and taxes increased $621 million during fiscal 2023, primarily due to the following: +• an unfavorable change of $371 million primarily related to higher wage and other professional services expenses, reported as a component of consolidated Operating overhead expense; +• an unfavorable change of $352 million related to the difference between actual foreign currency exchange rates and standard foreign currency exchange rates assigned to the NIKE Brand geographic operating segments and Converse, net of hedge gains and losses; these results are reported as a component of consolidated gross margin; +• an unfavorable change of $45 million largely due to net unfavorable activity related to our strategic distributor partnership transition within APLA, including the loss recognized upon completion of the sale our entities in Argentina and Uruguay to a third-party distributor in the second quarter of fiscal 2023. This was partially offset by the one-time charge related to the deconsolidation of our Russian operations recognized in the prior year, with the net amount of these activities reported as a component of consolidated Other (income) expense, net; and +• a favorable change in net foreign currency gains and losses of $174 million related to the remeasurement of monetary assets and liabilities denominated in non-functional currencies and the impact of certain foreign currency derivative instruments, reported as a component of consolidated Other (income) expense, net. +FOREIGN CURRENCY EXPOSURES AND HEDGING PRACTICES +OVERVIEW +As a global company with significant operations outside the United States, in the normal course of business we are exposed to risk arising from changes in currency exchange rates. Our primary foreign currency exposures arise from the recording of transactions denominated in non-functional currencies and the translation of foreign currency denominated results of operations, financial position and cash flows into U.S. Dollars. +Our foreign exchange risk management program is intended to lessen both the positive and negative effects of currency fluctuations on our consolidated results of operations, financial position and cash flows. We manage global foreign exchange risk centrally on a portfolio basis to address those risks material to NIKE, Inc. We manage these exposures by taking advantage of natural offsets and currency correlations existing within the portfolio and, where practical and material, by hedging a portion of the remaining exposures using derivative instruments such as forward contracts and options. As described below, the implementation of the NIKE Trading Company ("NTC") and our foreign currency adjustment program enhanced our ability to manage our foreign exchange risk by increasing the natural offsets and currency correlation benefits existing within our portfolio of foreign exchange exposures. Our hedging policy is designed to partially or entirely offset the impact of exchange rate changes on the underlying net exposures being hedged. Where exposures are hedged, our program has the effect of delaying the impact of exchange rate movements on our Consolidated Financial Statements; the length of the delay is dependent upon hedge horizons. We do not hold or issue derivative instruments for trading or speculative purposes. +2023 FORM 10-K 42 +Table of Contents +Refer to Note 4 — Fair Value Measurements and Note 12 — Risk Management and Derivatives in the accompanying Notes to the Consolidated Financial Statements for additional description of outstanding derivatives at each reported period end. +TRANSACTIONAL EXPOSURES +We conduct business in various currencies and have transactions which subject us to foreign currency risk. Our most significant transactional foreign currency exposures are: +• Product Costs — NIKE's product costs are exposed to fluctuations in foreign currencies in the following ways: +1. Product purchases denominated in currencies other than the functional currency of the transacting entity: +a. Certain NIKE entities purchase product from the NTC, a wholly-owned sourcing hub that buys NIKE branded products from third-party factories, predominantly in U.S. Dollars. The NTC, whose functional currency is the U.S. Dollar, then sells the products to NIKE entities in their respective functional currencies. NTC sales to a NIKE entity with a different functional currency results in a foreign currency exposure for the NTC. +b. Other NIKE entities purchase product directly from third-party factories in U.S. Dollars. These purchases generate a foreign currency exposure for those NIKE entities with a functional currency other than the U.S. Dollar. +In both purchasing scenarios, a weaker U.S. Dollar reduces inventory costs incurred by NIKE whereas a stronger U.S. Dollar increases its cost. +2. Factory input costs: NIKE operates a foreign currency adjustment program with certain factories. The program is designed to more effectively manage foreign currency risk by assuming certain of the factories' foreign currency exposures, some of which are natural offsets to our existing foreign currency exposures. Under this program, our payments to these factories are adjusted for rate fluctuations in the basket of currencies ("factory currency exposure index") in which the labor, materials and overhead costs incurred by the factories in the production of NIKE branded products ("factory input costs") are denominated. +As an offset to the impacts of the fluctuating U.S. Dollar on our non-functional currency denominated product purchases described above, a strengthening U.S. Dollar against the foreign currencies within the factory currency exposure indices reduces NIKE's U.S. Dollar inventory cost. Conversely, a weakening U.S. Dollar against the indexed foreign currencies increases our inventory cost. +• Non-Functional Currency Denominated External Sales — A portion of our NIKE Brand and Converse revenues associated with European operations are earned in currencies other than the Euro (e.g., the British Pound) but are recognized at a subsidiary that uses the Euro as its functional currency. These sales generate a foreign currency exposure. +• Other Costs — Non-functional currency denominated costs, such as endorsement contracts, also generate foreign currency risk, though to a lesser extent. +• Non-Functional Currency Denominated Monetary Assets and Liabilities — Our global subsidiaries have various assets and liabilities, primarily receivables and payables, including intercompany receivables and payables, denominated in currencies other than their functional currencies. These balance sheet items are subject to remeasurement which may create fluctuations in Other (income) expense, net within our Consolidated Statements of Income. +MANAGING TRANSACTIONAL EXPOSURES +Transactional exposures are managed on a portfolio basis within our foreign currency risk management program. We manage these exposures by taking advantage of natural offsets and currency correlations that exist within the portfolio and may also elect to use currency forward and option contracts to hedge the remaining effect of exchange rate fluctuations on probable forecasted future cash flows, including certain product cost exposures, non-functional currency denominated external sales and other costs described above. Generally, these are accounted for as cash flow hedges. +2023 FORM 10-K 43 +Table of Contents +Certain currency forward contracts used to manage the foreign exchange exposure of non-functional currency denominated monetary assets and liabilities subject to remeasurement are not formally designated as hedging instruments. Accordingly, changes in fair value of these instruments are recognized in Other (income) expense, net and are intended to offset the foreign currency impact of the remeasurement of the related non-functional currency denominated asset or liability being hedged. +TRANSLATIONAL EXPOSURES +Many of our foreign subsidiaries operate in functional currencies other than the U.S. Dollar. Fluctuations in currency exchange rates create volatility in our reported results as we are required to translate the balance sheets, operational results and cash flows of these subsidiaries into U.S. Dollars for consolidated reporting. The translation of foreign subsidiaries' non-U.S. Dollar denominated balance sheets into U.S. Dollars for consolidated reporting results in a cumulative translation adjustment to Accumulated other comprehensive income (loss) within Shareholders' equity. In the translation of our Consolidated Statements of Income, a weaker U.S. Dollar in relation to foreign functional currencies benefits our consolidated earnings whereas a stronger U.S. Dollar reduces our consolidated earnings. The impact of foreign exchange rate fluctuations on the translation of our consolidated Revenues was a detriment of approximately $2,859 million, $295 million and a benefit of approximately $893 million for the years ended May 31, 2023, 2022 and 2021, respectively. The impact of foreign exchange rate fluctuations on the translation of our Income before income taxes was a detriment of approximately $824 million, $87 million and a benefit of approximately $260 million for the years ended May 31, 2023, 2022 and 2021, respectively. +MANAGING TRANSLATIONAL EXPOSURES +To minimize the impact of translating foreign currency denominated revenues and expenses into U.S. Dollars for consolidated reporting, certain foreign subsidiaries use excess cash to purchase U.S. Dollar denominated available-for-sale investments. The variable future cash flows associated with the purchase and subsequent sale of these U.S. Dollar denominated investments at non-U.S. Dollar functional currency subsidiaries creates a foreign currency exposure that qualifies for hedge accounting under generally accepted accounting principles in the United States of America ("U.S. GAAP"). We utilize forward contracts and/or options to mitigate the variability of the forecasted future purchases and sales of these U.S. Dollar investments. The combination of the purchase and sale of the U.S. Dollar investment and the hedging instrument has the effect of partially offsetting the year-over-year foreign currency translation impact on net earnings in the period the investments are sold. Hedges of the purchase of U.S. Dollar denominated available-for-sale investments are accounted for as cash flow hedges. +We estimate the combination of translation of foreign currency-denominated profits from our international businesses and the year-over-year change in foreign currency related gains and losses included in Other (income) expense, net had an unfavorable impact of approximately $1,023 million and a favorable impact of approximately $132 million and $19 million on our Income before income taxes for the years ended May 31, 2023, 2022 and 2021, respectively. +NET INVESTMENTS IN FOREIGN SUBSIDIARIES +We are also exposed to the impact of foreign exchange fluctuations on our investments in wholly-owned foreign subsidiaries denominated in a currency other than the U.S. Dollar, which could adversely impact the U.S. Dollar value of these investments and therefore the value of future repatriated earnings. We have, in the past, hedged and may, in the future, hedge net investment positions in certain foreign subsidiaries to mitigate the effects of foreign exchange fluctuations on these net investments. These hedges are accounted for as net investment hedges in accordance with U.S. GAAP. There were no outstanding net investment hedges as of May 31, 2023 and 2022. There were no cash flows from net investment hedge settlements for the years ended May 31, 2023, 2022 and 2021. +LIQUIDITY AND CAPITAL RESOURCES +CASH FLOW ACTIVITY +Cash provided (used) by operations was an inflow of $5,841 million for fiscal 2023, compared to $5,188 million for fiscal 2022. Net income, adjusted for non-cash items, generated $6,354 million of operating cash inflow for fiscal 2023, compared to $6,848 million for fiscal 2022. The net change in working capital and other assets and liabilities resulted in a decrease to Cash provided (used) by operations of $513 million for fiscal 2023 compared to a decrease of $1,660 million for fiscal 2022. For fiscal 2023, the net change in working capital compared to the prior year was impacted by unfavorable changes in Accounts payable, offset by favorable impacts from Inventories and Accounts receivable. These changes were, in part, due to reduced inventory purchases in the current period and timing of wholesale shipments. Further impacting these changes was a lower available supply of inventory in the prior year due to supply chain constraints. +Cash provided (used) by investing activities was an inflow of $564 million for fiscal 2023, compared to an outflow of $1,524 million for fiscal 2022, primarily driven by the net change in short-term investments. For fiscal 2023, the net change in short-term +2023 FORM 10-K 44 +Table of Contents +investments (including sales, maturities and purchases) resulted in a cash inflow of $1,481 million compared to a cash outflow of $747 million for fiscal 2022. Additionally, we continue to invest in our infrastructure to support future growth, specifically focused around digital capabilities, our end-to-end technology foundation, our corporate facilities and improvements across our supply chain. +Cash provided (used) by financing activities was an outflow of $7,447 million for fiscal 2023 compared to an outflow of $4,836 million for fiscal 2022. The increased outflow in fiscal 2023 was driven by higher share repurchases of $5,480 million for fiscal 2023 compared to $4,014 million for fiscal 2022, the repayment of $500 million of senior notes that matured in fiscal 2023, as well as lower proceeds from stock option exercises, which resulted in a cash inflow of $651 million in fiscal 2023 compared to $1,151 million in fiscal 2022. +In fiscal 2023, we purchased a total of 50.0 million shares of NIKE's Class B Common Stock for $5.5 billion (an average price of $110.32 per share). In August 2022, we terminated the previous four-year, $15 billion share repurchase program approved by the Board of Directors in June 2018. Under this program, we repurchased 6.5 million shares for a total approximate cost of $710.0 million (an average price of $109.85 per share) during the first quarter of fiscal 2023 and 83.8 million shares for a total approximate cost of $9.4 billion (an average price of $111.82 per share) during the term of the program. Upon termination of the four-year, $15 billion program, we began purchasing shares under the new four-year, $18 billion share repurchase plan authorized by the Board of Directors in June 2022. As of May 31, 2023, we had repurchased 43.5 million shares at a cost of approximately $4.8 billion (an average price of $110.38 per share) under this new program. We continue to expect funding of share repurchases will come from operating cash flows. The timing and the amount of share repurchases will be dictated by our capital needs and stock market conditions. +CAPITAL RESOURCES +On July 21, 2022, we filed a shelf registration statement (the "Shelf") with the U.S. Securities and Exchange Commission (the "SEC") which permits us to issue an unlimited amount of debt securities from time to time. The Shelf expires on July 21, 2025. +On March 11, 2022, we entered into a five-year committed credit facility agreement with a syndicate of banks which provides for up to $2 billion of borrowings, with the option to increase borrowings up to $3 billion in total with lender approval. The facility matures on March 11, 2027, with options to extend the maturity date up to an additional two years. This facility replaces the prior $2 billion five-year credit facility agreement entered into on August 16, 2019, which would have matured on August 16, 2024. Refer to Note 5 — Short-Term Borrowings and Credit Lines for additional information. +On March 10, 2023, we entered into a 364-day committed credit facility agreement with a syndicate of banks which provides for up to $1 billion of borrowings, with the option to increase borrowings up to $1.5 billion in total with lender approval. The facility matures on March 8, 2024, with an option to extend the maturity date by 364 days. This facility replaces the prior $1 billion 364-day credit facility agreement entered into on March 11, 2022, which matured on March 10, 2023. Refer to Note 5 — Short-Term Borrowings and Credit Lines for additional information. +We currently have long-term debt ratings of AA- and A1 from Standard and Poor's Corporation and Moody's Investor Services, respectively. As it relates to our committed credit facilities entered into on March 11, 2022 and March 10, 2023, if our long-term debt ratings were to decline, the facility fees and interest rates would increase. Conversely, if our long-term debt ratings were to improve, the facility fees and interest rates would decrease. Changes in our long-term debt ratings would not trigger acceleration of maturity of any then-outstanding borrowings or any future borrowings under the committed credit facilities. Under these facilities, we have agreed to various covenants. These covenants include limits on the disposal of assets and the amount of debt secured by liens we may incur. In the event we were to have any borrowings outstanding under these facilities, failed to meet any covenant and were unable to obtain a waiver from a majority of the banks in the applicable syndicate, any borrowings would become immediately due and payable. As of May 31, 2023, we were in full compliance with each of these covenants, and we believe it is unlikely we will fail to meet any of these covenants in the foreseeable future. +Liquidity is also provided by our $3 billion commercial paper program. As of and for the fiscal years ended May 31, 2023 and 2022, we did not have any borrowings outstanding under our $3 billion program. +We may continue to issue commercial paper or other debt securities depending on general corporate needs. +To date, we have not experienced difficulty accessing the capital or credit markets; however, future volatility may increase costs associated with issuing commercial paper or other debt instruments or affect our ability to access those markets. +As of May 31, 2023, we had Cash and equivalents and Short-term investments totaling $10.7 billion, primarily consisting of commercial paper, corporate notes, deposits held at major banks, money market funds, U.S. Treasury obligations and other investment grade fixed-income securities. Our fixed-income investments are exposed to both credit and interest rate risk. All of our investments are investment grade to minimize our credit risk. While individual securities have varying durations, as of May 31, 2023, the weighted-average days to maturity of our cash equivalents and short-term investments portfolio was 98 days. +2023 FORM 10-K 45 +Table of Contents +We believe that existing Cash and equivalents, Short-term investments and cash generated by operations, together with access to external sources of funds as described above, will be sufficient to meet our domestic and foreign capital needs in the foreseeable future. +Our material cash requirements as of May 31, 2023, were as follows: +• Debt Obligations — Refer to Note 5 — Short-Term Borrowings and Credit Lines and Note 6 — Long-Term Debt in the accompanying Notes to the Consolidated Financial Statements for further information. +• Operating Leases — Refer to Note 17 — Leases in the accompanying Notes to the Consolidated Financial Statements for further information. +• Endorsement Contracts — As of May 31, 2023, we had endorsement contract obligations of $7.6 billion, with $1.3 billion payable within 12 months, representing approximate amounts of base compensation and minimum guaranteed royalty fees we are obligated to pay athlete, public figure, sport team and league endorsers of our products. Actual payments under some contracts may be higher than these amounts as these contracts provide for bonuses to be paid to the endorsers based upon athletic achievements and/or royalties on product sales in future periods. Actual payments under some contracts may also be lower as these contracts include provisions for reduced payments if athletic performance declines in future periods. In addition to the cash payments, we are obligated to furnish our endorsers with NIKE product for their use. It is not possible to determine how much we will spend on this product on an annual basis as the amount of product provided to the endorsers will depend on many factors and the contracts generally do not stipulate a minimum amount of cash to be spent on the product. +• Product Purchase Obligations — As of May 31, 2023, we had product purchase obligations of $6.4 billion, all of which are payable within the next 12 months. Product purchase obligations represent agreements (including open purchase orders) to purchase products in the ordinary course of business that are enforceable and legally binding and specify all significant terms. We generally order product at least four to five months in advance of sale based primarily on advanced orders received from external wholesale customers and internal orders from our direct to consumer operations. In some cases, prices are subject to change throughout the production process. +• Other Purchase Obligations — As of May 31, 2023, we had $3.3 billion of other purchase obligations, with $1.7 billion payable within the next 12 months. Other purchase obligations primarily include technology investments, construction, service and marketing commitments, including marketing commitments associated with endorsement contracts, made in the ordinary course of business. The amounts represent the minimum payments required by legally binding contracts and agreements that specify all significant terms, and may include open purchase orders for non-product purchases. +In addition to the above, we have long-term obligations for uncertain tax positions and various post-retirement benefits for which we are not able to reasonably estimate when cash payments will occur. Refer to Note 7 — Income Taxes and Note 11 — Benefit Plans in the accompanying Notes to the Consolidated Financial Statements for further information related to uncertain tax positions and post-retirement benefits, respectively. +As a part of the transition tax related to the Tax Cuts and Jobs Act, as of May 31, 2023, we had $644 million in estimated future cash payments, with $161 million payable within the next 12 months. These amounts represent the transition tax on deemed repatriation of undistributed earnings of foreign subsidiaries, which are reflected net of foreign tax credits we utilized. +Refer to Note 16 — Commitments and Contingencies in the accompanying Notes to the Consolidated Financial Statements for further information related to our off-balance sheet arrangements, bank guarantees and letters of credit. +OFF-BALANCE SHEET ARRANGEMENTS +As of May 31, 2023, we did not have any off-balance sheet arrangements that have, or are reasonably likely to have, a material effect on our current and future financial condition, results of operations, liquidity, capital expenditures or capital resources. In connection with various contracts and agreements, we routinely provide indemnification relating to the enforceability of intellectual property rights, coverage for legal issues that arise and other items where we are acting as the guarantor. Currently, we have several such agreements in place. Based on our historical experience and the estimated probability of future loss, we have determined that the fair value of such indemnification is not material to our financial position or results of operations. +NEW ACCOUNTING PRONOUNCEMENTS +Refer to Note 1 — Summary of Significant Accounting Policies within the accompanying Notes to the Consolidated Financial Statements for recently adopted and issued accounting standards. +2023 FORM 10-K 46 +Table of Contents +CRITICAL ACCOUNTING ESTIMATES +Our previous discussion and analysis of our financial condition and results of operations are based upon our Consolidated Financial Statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. Note 1 — Summary of Significant Accounting Policies in the accompanying Notes to the Consolidated Financial Statements describes the significant accounting policies and methods used in the preparation of our Consolidated Financial Statements. +We believe the assumptions and judgments involved in the accounting estimates described below have the greatest potential impact on our Consolidated Financial Statements, so we consider these to be our critical accounting estimates. Management has reviewed and discussed these critical accounting estimates with the Audit & Finance Committee of the Board of Directors. +Because of the uncertainty inherent in these matters, actual results could differ from the estimates we use in the preparation of our Consolidated Financial Statements. Within the context of these critical accounting estimates, we are not currently aware of any reasonably likely events or circumstances that would result in materially different amounts being reported. +SALES-RELATED RESERVES +Provisions for anticipated sales returns consist of both contractual return rights and discretionary authorized returns. Provisions for post-invoice sales discounts consist of both contractual programs and discretionary discounts that are expected to be granted at a later date. +Estimates of discretionary authorized returns, discounts and claims are based on (1) historical rates, (2) specific identification of outstanding returns not yet received from customers and outstanding discounts and claims and (3) estimated returns, discounts and claims expected but not yet finalized with customers. Actual returns, discounts and claims in any future period are inherently uncertain and may differ from estimates recorded. If actual or expected future returns, discounts or claims were significantly different than reserves established, a reduction or increase to net revenues would be recorded in the period in which such determination was made. +Refer to Note 14 — Revenues in the accompanying Notes to the Consolidated Financial Statements for additional information. +INVENTORY RESERVES +We make ongoing estimates relating to the net realizable value of inventories based upon our assumptions about future demand and market conditions. If we estimate the net realizable value of our inventory is less than the cost of the inventory recorded on our books, we record a reserve equal to the difference between the cost of the inventory and the estimated net realizable value. This reserve is recorded as a charge to Cost of sales. If changes in market conditions result in reductions to the estimated net realizable value of our inventory below our previous estimate, we would increase our reserve in the period in which we made such a determination. +HEDGE ACCOUNTING FOR DERIVATIVES +We use derivative contracts to hedge certain anticipated foreign currency and interest rate transactions as well as certain non-functional currency monetary assets and liabilities. When the specific criteria to qualify for hedge accounting has been met, changes in the fair value of contracts hedging probable forecasted future cash flows are recorded in Accumulated other comprehensive income (loss), rather than Net income, until the underlying hedged transaction affects Net income. In most cases, this results in gains and losses on hedge derivatives being released from Accumulated other comprehensive income (loss) into Net income sometime after the maturity of the derivative. One of the criteria for this accounting treatment is that the notional value of these derivative contracts should not be in excess of the designated amount of anticipated transactions. By their very nature, our estimates of anticipated transactions may fluctuate over time and may ultimately vary from actual transactions. When the designated amount of anticipated or actual transactions decline below hedged levels, or if it is no longer probable a forecasted transaction will occur by the end of the originally specified time period or within an additional two-month period of time thereafter, we reclassify the cumulative change in fair value of the over-hedged portion of the related hedge contract from Accumulated other comprehensive income (loss) to Other (income) expense, net during the quarter in which the decrease occurs. In rare circumstances, the additional period of time may exceed two months due to extenuating circumstances related to the nature of the forecasted transaction that are outside our control or influence. +Refer to Note 12 — Risk Management and Derivatives in the accompanying Notes to the Consolidated Financial Statements for additional information. +2023 FORM 10-K 47 +Table of Contents +INCOME TAXES +We are subject to taxation in the United States, as well as various state and foreign jurisdictions. The determination of our provision for income taxes requires significant judgment, the use of estimates and the interpretation and application of complex tax laws. On an interim basis, we estimate our effective tax rate for the full fiscal year. This estimated annual effective tax rate is then applied to the year-to-date Income before income taxes excluding infrequently occurring or unusual items, to determine the year-to-date Income tax expense. The income tax effects of infrequent or unusual items are recognized in the interim period in which they occur. As the fiscal year progresses, we continually refine our estimate based upon actual events and earnings by jurisdiction during the year. This continual estimation process periodically results in a change to our expected effective tax rate for the fiscal year. When this occurs, we adjust the income tax provision during the quarter in which the change in estimate occurs. +On a quarterly basis, we evaluate the probability a tax position will be effectively sustained and the appropriateness of the amount recognized for uncertain tax positions based on factors including changes in facts or circumstances, changes in tax law, settled audit issues and new audit activity. Changes in our assessment may result in the recognition of a tax benefit or an additional charge to the tax provision in the period our assessment changes. We recognize interest and penalties related to income tax matters in Income tax expense. +Refer to Note 7 — Income Taxes in the accompanying Notes to the Consolidated Financial Statements for additional information. +OTHER CONTINGENCIES +In the ordinary course of business, we are subject to various legal proceedings, claims and government investigations related to our business, products and actions of our employees and representatives, including contractual and employment relationships, product liability, antitrust, customs, tax, intellectual property and other matters. We record contingent liabilities resulting from claims against us when a loss is assessed to be probable and the amount of the loss is reasonably estimable. Assessing probability of loss and estimating probable losses requires analysis of multiple factors, including in some cases judgments about the potential actions of third-party claimants and courts. Recorded contingent liabilities are based on the best information available and actual losses in any future period are inherently uncertain. If future adjustments to estimated probable future losses or actual losses exceed our recorded liability for such claims, we would record additional charges during the period in which the actual loss or change in estimate occurred. In addition to contingent liabilities recorded for probable losses, we disclose contingent liabilities when there is a reasonable possibility the ultimate loss will materially exceed the recorded liability. +Refer to Note 16 — Commitments and Contingencies in the accompanying Notes to the Consolidated Financial Statements for additional information. +2023 FORM 10-K 48 +Table of Contents +ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK +In the normal course of business and consistent with established policies and procedures, we employ a variety of financial instruments to manage exposure to fluctuations in the value of foreign currencies and interest rates. It is our policy to utilize these financial instruments only where necessary to finance our business and manage such exposures; we do not enter into these transactions for trading or speculative purposes. +We are exposed to foreign currency fluctuations, primarily as a result of our international sales, product sourcing and funding activities. Our foreign exchange risk management program is intended to lessen both the positive and negative effects of currency fluctuations on our consolidated results of operations, financial position and cash flows. We use forward and option contracts to hedge certain anticipated, but not yet firmly committed, transactions as well as certain firm commitments and the related receivables and payables, including third-party and intercompany transactions. Where exposures are hedged, our program has the effect of delaying the impact of exchange rate movements on our Consolidated Financial Statements. +The timing for hedging exposures, as well as the type and duration of the hedge instruments employed, are guided by our hedging policies and determined based upon the nature of the exposure and prevailing market conditions. Typically, the Company may enter into hedge contracts starting 12 to 24 months in advance of the forecasted transaction and may place incremental hedges up to 100% of the exposure by the time the forecasted transaction occurs. The majority of derivatives outstanding as of May 31, 2023, are designated as foreign currency cash flow hedges, primarily for Euro/U.S. Dollar, British Pound/Euro, Chinese Yuan/U.S. Dollar, and Japanese Yen/U.S. Dollar currency pairs. Refer to Note 12 — Risk Management and Derivatives in the accompanying Notes to the Consolidated Financial Statements for additional information. +Our earnings are also exposed to movements in short- and long-term market interest rates. Our objective in managing this interest rate exposure is to limit the impact of interest rate changes on earnings and cash flows and to reduce overall borrowing costs. To achieve these objectives, we maintain a mix of commercial paper, bank loans, and fixed-rate debt of varying maturities. +MARKET RISK MEASUREMENT +We monitor foreign exchange risk, interest rate risk and related derivatives using a variety of techniques including a review of market value, sensitivity analysis and Value-at-Risk ("VaR"). Our market-sensitive derivative and other financial instruments are foreign currency forward contracts, foreign currency option contracts, intercompany loans denominated in non-functional currencies and fixed interest rate U.S. Dollar denominated debt. +We use VaR to monitor the foreign exchange risk of our foreign currency forward and foreign currency option derivative instruments only. The VaR determines the maximum potential one-day loss in the fair value of these foreign exchange rate-sensitive financial instruments. The VaR model estimates assume normal market conditions and a 95% confidence level. There are various modeling techniques that can be used in the VaR computation. Our computations are based on interrelationships between currencies and interest rates (a "variance/co-variance" technique). These interrelationships are a function of foreign exchange currency market changes and interest rate changes over the preceding one-year period. The value of foreign currency options does not change on a one-to-one basis with changes in the underlying currency rate. We adjust the potential loss in option value for the estimated sensitivity (the "delta" and "gamma") to changes in the underlying currency rate. This calculation reflects the impact of foreign currency rate fluctuations on the derivative instruments only and does not include the impact of such rate fluctuations on non-functional currency transactions (such as anticipated transactions, firm commitments, cash balances and accounts and loans receivable and payable), including those which are hedged by these instruments. +The VaR model is a risk analysis tool and does not purport to represent actual losses in fair value we will incur nor does it consider the potential effect of favorable changes in market rates. It also does not represent the full extent of the possible loss that may occur. Actual future gains and losses will differ from those estimated because of changes or differences in market rates and interrelationships, hedging instruments and hedge percentages, timing and other factors. +The estimated maximum one-day loss in fair value on our foreign currency sensitive derivative financial instruments, derived using the VaR model, was $111 million and $99 million as of May 31, 2023 and 2022, respectively. The VaR increased year-over-year as a result of an increase in foreign currency volatilities as of May 31, 2023. Such a hypothetical loss in the fair value of our derivatives would be offset by increases in the value of the underlying transactions being hedged. The average monthly change in the fair values of foreign currency forward and foreign currency option derivative instruments was $289 million and $170 million during fiscal 2023 and fiscal 2022, respectively. +The instruments not included in the VaR are intercompany loans denominated in non-functional currencies and fixed interest rate U.S. Dollar denominated debt. Intercompany loans and related interest amounts are eliminated in consolidation. Furthermore, our non-functional currency intercompany loans are substantially hedged against foreign exchange risk through the use of forward +2023 FORM 10-K 49 +Table of Contents +contracts, which are included in the VaR calculation above. Therefore, we consider the interest rate and foreign currency market risks associated with our non-functional currency intercompany loans to be immaterial to our consolidated financial position, results of operations and cash flows. +Details of third-party debt are provided in the table below. The table presents principal cash flows and related weighted average interest rates by expected maturity dates. +EXPECTED MATURITY DATE YEAR ENDING MAY 31, +(Dollars in millions) +2024 2025 2026 2027 2028 THEREAFTER TOTAL FAIR VALUE +Interest Rate Risk +Long-term U.S. Dollar debt — Fixed rate +Principal payments $ — $ 1,000 $ — $ 2,000 $ — $ 6,000 $ 9,000 $ 7,889 +Average interest rate 0.0 % 2.4 % 0.0 % 2.6 % 0.0 % 3.3 % 3.1 % +2023 FORM 10-K 50 +Table of Contents +ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA +Management of NIKE, Inc. is responsible for the information and representations contained in this Annual Report. The financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and include certain amounts based on our best estimates and judgments. Other financial information in this Annual Report is consistent with these financial statements. +Our accounting systems include controls designed to reasonably assure assets are safeguarded from unauthorized use or disposition and provide for the preparation of financial statements in conformity with U.S. GAAP. These systems are supplemented by the selection and training of qualified financial personnel and an organizational structure providing for appropriate segregation of duties. +An internal corporate audit department reviews the results of its work with the Audit & Finance Committee of the Board of Directors, presently comprised of four outside, independent directors. The Audit & Finance Committee is responsible for the appointment of the independent registered public accounting firm and reviews, with the independent registered public accounting firm, management and the internal corporate audit staff, the scope and the results of the annual audit, the effectiveness of the accounting control system and other matters relating to the financial affairs of NIKE as the Audit & Finance Committee deems appropriate. The independent registered public accounting firm and the internal corporate auditors have full access to the Audit & Finance Committee, with and without the presence of management, to discuss any appropriate matters. +2023 FORM 10-K 51 +Table of Contents +MANAGEMENT'S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING +Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13(a) - 15(f) and Rule 15(d) - 15(f) of the Securities Exchange Act of 1934, as amended. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the financial statements for external purposes in accordance with generally accepted accounting principles in the United States of America. Internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of assets of the Company that could have a material effect on the financial statements. +Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +Under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, our management conducted an evaluation of the effectiveness of our internal control over financial reporting based upon the framework in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on the results of our evaluation, our management concluded that our internal control over financial reporting was effective as of May 31, 2023. +PricewaterhouseCoopers LLP, an independent registered public accounting firm, has audited (1) the Consolidated Financial Statements and (2) the effectiveness of our internal control over financial reporting as of May 31, 2023, as stated in their report herein. +John J. Donahoe II Matthew Friend +President and Chief Executive Officer Executive Vice President and Chief Financial Officer +2023 FORM 10-K 52 +Table of Contents +Report of Independent Registered Public Accounting Firm +To the Board of Directors and Shareholders of NIKE, Inc. +Opinions on the Financial Statements and Internal Control over Financial Reporting +We have audited the accompanying consolidated balance sheets of NIKE, Inc. and its subsidiaries (the “Company”) as of May 31, 2023 and 2022, and the related consolidated statements of income, of comprehensive income, of shareholders' equity and of cash flows for each of the three years in the period ended May 31, 2023, including the related notes and financial statement schedule listed in the index appearing under Item 15(a)(2) (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of May 31, 2023, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). +In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of May 31, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended May 31, 2023 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of May 31, 2023, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO. +Basis for Opinions +The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. +Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. +Definition and Limitations of Internal Control over Financial Reporting +A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. +Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +2023 FORM 10-K 53 +Table of Contents +Critical Audit Matters +The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. +Accounting for Income Taxes +As described in Notes 1 and 7 to the consolidated financial statements, the Company recorded income tax expense of $1,131 million for the year ended May 31, 2023, and has net deferred tax assets of $1,799 million, including a valuation allowance of $22 million, and total gross unrecognized tax benefits, excluding related interest and penalties, of $936 million as of May 31, 2023, $651 million of which would affect the Company's effective tax rate if recognized in future periods. The realization of deferred tax assets is dependent on future taxable earnings. Management assesses the scheduled reversal of deferred tax liabilities, projected future taxable income and available tax planning strategies and considers foreign tax credit utilization in making this assessment of realization. A valuation allowance is established against the net deferred tax asset to the extent that recovery is not likely. The Company is subject to taxation in the United States, as well as various state and foreign jurisdictions. As disclosed by management, the use of significant judgment and estimates, as well as the interpretation and application of complex tax laws is required by management to determine the Company's provision for income taxes. +The principal considerations for our determination that performing procedures relating to the accounting for income taxes is a critical audit matter are a high degree of auditor judgment, subjectivity and effort in performing procedures and evaluating audit evidence relating to management's assessment of complex tax laws and regulations as it relates to determining the provision for income taxes. In addition, the audit effort involved the use of professionals with specialized skill and knowledge. +Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to income taxes, evaluating changes in and compliance with tax laws, and testing the calculation of the provision of income taxes. Professionals with specialized skill and knowledge were used to assist in evaluating changes in and compliance with the tax laws and regulations and the provision for income taxes. +/s/ PricewaterhouseCoopers LLP +Portland, Oregon +July 20, 2023 +We have served as the Company's auditor since 1974. +2023 FORM 10-K 54 +Table of Contents +NIKE, INC. +CONSOLIDATED STATEMENTS OF INCOME +YEAR ENDED MAY 31, +(In millions, except per share data) +2023 2022 2021 +Revenues $ 51,217 $ 46,710 $ 44,538 +Cost of sales 28,925 25,231 24,576 +Gross profit 22,292 21,479 19,962 +Demand creation expense 4,060 3,850 3,114 +Operating overhead expense 12,317 10,954 9,911 +Total selling and administrative expense 16,377 14,804 13,025 +Interest expense (income), net ( 6 ) 205 262 +Other (income) expense, net ( 280 ) ( 181 ) 14 +Income before income taxes 6,201 6,651 6,661 +Income tax expense 1,131 605 934 +NET INCOME $ 5,070 $ 6,046 $ 5,727 +Earnings per common share: +Basic $ 3.27 $ 3.83 $ 3.64 +Diluted $ 3.23 $ 3.75 $ 3.56 +Weighted average common shares outstanding: +Basic 1,551.6 1,578.8 1,573.0 +Diluted 1,569.8 1,610.8 1,609.4 +The accompanying Notes to the Consolidated Financial Statements are an integral part of this statement. +2023 FORM 10-K 55 +Table of Contents +NIKE, INC. +CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME +YEAR ENDED MAY 31, +(Dollars in millions) +2023 2022 2021 +Net income $ 5,070 $ 6,046 $ 5,727 +Other comprehensive income (loss), net of tax: +Change in net foreign currency translation adjustment 267 ( 522 ) 496 +Change in net gains (losses) on cash flow hedges ( 348 ) 1,214 ( 825 ) +Change in net gains (losses) on other ( 6 ) 6 5 +Total other comprehensive income (loss), net of tax ( 87 ) 698 ( 324 ) +TOTAL COMPREHENSIVE INCOME $ 4,983 $ 6,744 $ 5,403 +The accompanying Notes to the Consolidated Financial Statements are an integral part of this statement. +2023 FORM 10-K 56 +Table of Contents +NIKE, INC. +CONSOLIDATED BALANCE SHEETS +MAY 31, +(In millions) +2023 2022 +ASSETS +Current assets: +Cash and equivalents $ 7,441 $ 8,574 +Short-term investments 3,234 4,423 +Accounts receivable, net 4,131 4,667 +Inventories 8,454 8,420 +Prepaid expenses and other current assets 1,942 2,129 +Total current assets 25,202 28,213 +Property, plant and equipment, net 5,081 4,791 +Operating lease right-of-use assets, net 2,923 2,926 +Identifiable intangible assets, net 274 286 +Goodwill 281 284 +Deferred income taxes and other assets 3,770 3,821 +TOTAL ASSETS $ 37,531 $ 40,321 +LIABILITIES AND SHAREHOLDERS' EQUITY +Current liabilities: +Current portion of long-term debt $ — $ 500 +Notes payable 6 10 +Accounts payable 2,862 3,358 +Current portion of operating lease liabilities 425 420 +Accrued liabilities 5,723 6,220 +Income taxes payable 240 222 +Total current liabilities 9,256 10,730 +Long-term debt 8,927 8,920 +Operating lease liabilities 2,786 2,777 +Deferred income taxes and other liabilities 2,558 2,613 +Commitments and contingencies (Note 16) +Redeemable preferred stock — — +Shareholders' equity: +Common stock at stated value: +Class A convertible — 305 and 305 shares outstanding +— — +Class B — 1,227 and 1,266 shares outstanding +3 3 +Capital in excess of stated value 12,412 11,484 +Accumulated other comprehensive income (loss) 231 318 +Retained earnings (deficit) 1,358 3,476 +Total shareholders' equity 14,004 15,281 +TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 37,531 $ 40,321 +The accompanying Notes to the Consolidated Financial Statements are an integral part of this statement. +2023 FORM 10-K 57 +Table of Contents +NIKE, INC. +CONSOLIDATED STATEMENTS OF CASH FLOWS +YEAR ENDED MAY 31, +(Dollars in millions) +2023 2022 2021 +Cash provided (used) by operations: +Net income $ 5,070 $ 6,046 $ 5,727 +Adjustments to reconcile net income to net cash provided (used) by operations: +Depreciation 703 717 744 +Deferred income taxes ( 117 ) ( 650 ) ( 385 ) +Stock-based compensation 755 638 611 +Amortization, impairment and other 156 123 53 +Net foreign currency adjustments ( 213 ) ( 26 ) ( 138 ) +Changes in certain working capital components and other assets and liabilities: +(Increase) decrease in accounts receivable 489 ( 504 ) ( 1,606 ) +(Increase) decrease in inventories ( 133 ) ( 1,676 ) 507 +(Increase) decrease in prepaid expenses, operating lease right-of-use assets and other current and non-current assets ( 644 ) ( 845 ) ( 182 ) +Increase (decrease) in accounts payable, accrued liabilities, operating lease liabilities and other current and non-current liabilities ( 225 ) 1,365 1,326 +Cash provided (used) by operations 5,841 5,188 6,657 +Cash provided (used) by investing activities: +Purchases of short-term investments ( 6,059 ) ( 12,913 ) ( 9,961 ) +Maturities of short-term investments 3,356 8,199 4,236 +Sales of short-term investments 4,184 3,967 2,449 +Additions to property, plant and equipment ( 969 ) ( 758 ) ( 695 ) +Other investing activities 52 ( 19 ) 171 +Cash provided (used) by investing activities 564 ( 1,524 ) ( 3,800 ) +Cash provided (used) by financing activities: +Increase (decrease) in notes payable, net ( 4 ) 15 ( 52 ) +Repayment of borrowings ( 500 ) — ( 197 ) +Proceeds from exercise of stock options and other stock issuances 651 1,151 1,172 +Repurchase of common stock ( 5,480 ) ( 4,014 ) ( 608 ) +Dividends — common and preferred ( 2,012 ) ( 1,837 ) ( 1,638 ) +Other financing activities ( 102 ) ( 151 ) ( 136 ) +Cash provided (used) by financing activities ( 7,447 ) ( 4,836 ) ( 1,459 ) +Effect of exchange rate changes on cash and equivalents ( 91 ) ( 143 ) 143 +Net increase (decrease) in cash and equivalents ( 1,133 ) ( 1,315 ) 1,541 +Cash and equivalents, beginning of year 8,574 9,889 8,348 +CASH AND EQUIVALENTS, END OF YEAR $ 7,441 $ 8,574 $ 9,889 +Supplemental disclosure of cash flow information: +Cash paid during the year for: +Interest, net of capitalized interest $ 347 $ 290 $ 293 +Income taxes 1,517 1,231 1,177 +Non-cash additions to property, plant and equipment 211 160 179 +Dividends declared and not paid 524 480 438 +The accompanying Notes to the Consolidated Financial Statements are an integral part of this statement. +2023 FORM 10-K 58 +Table of Contents +NIKE, INC. +CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY +COMMON STOCK CAPITAL IN EXCESS OF STATED VALUE ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) RETAINED EARNINGS (DEFICIT) TOTAL +CLASS A CLASS B +(In millions, except per share data) +SHARES AMOUNT SHARES AMOUNT +Balance at May 31, 2020 315 $ — 1,243 $ 3 $ 8,299 $ ( 56 ) $ ( 191 ) $ 8,055 +Stock options exercised 21 954 954 +Conversion to Class B Common Stock ( 10 ) 10 — +Repurchase of Class B Common Stock ( 5 ) ( 28 ) ( 622 ) ( 650 ) +Dividends on common stock ($ 1.070 per share) and preferred stock ($ 0.10 per share) +( 1,692 ) ( 1,692 ) +Issuance of shares to employees, net of shares withheld for employee taxes 4 129 ( 43 ) 86 +Stock-based compensation 611 611 +Net income 5,727 5,727 +Other comprehensive income (loss) ( 324 ) ( 324 ) +Balance at May 31, 2021 305 $ — 1,273 $ 3 $ 9,965 $ ( 380 ) $ 3,179 $ 12,767 +Stock options exercised 17 924 924 +Repurchase of Class B Common Stock ( 27 ) ( 186 ) ( 3,808 ) ( 3,994 ) +Dividends on common stock ($ 1.190 per share) and preferred stock ($ 0.10 per share) +( 1,886 ) ( 1,886 ) +Issuance of shares to employees, net of shares withheld for employee taxes 3 143 ( 55 ) 88 +Stock-based compensation 638 638 +Net income 6,046 6,046 +Other comprehensive income (loss) 698 698 +Balance at May 31, 2022 305 $ — 1,266 $ 3 $ 11,484 $ 318 $ 3,476 $ 15,281 +Stock options exercised 8 421 421 +Repurchase of Class B Common Stock ( 51 ) ( 378 ) ( 5,131 ) ( 5,509 ) +Dividends on common stock ($ 1.325 per share) and preferred stock ($ 0.10 per share) +( 2,059 ) ( 2,059 ) +Issuance of shares to employees, net of shares withheld for employee taxes 4 130 2 132 +Stock-based compensation 755 755 +Net income 5,070 5,070 +Other comprehensive income (loss) ( 87 ) ( 87 ) +Balance at May 31, 2023 305 $ — 1,227 $ 3 $ 12,412 $ 231 $ 1,358 $ 14,004 +The accompanying Notes to the Consolidated Financial Statements are an integral part of this statement. +2023 FORM 10-K 59 +Table of Contents +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +Note 1 Summary of Significant Accounting Policies +61 +Note 2 Property, Plant and Equipment +67 +Note 3 Accrued Liabilities +67 +Note 4 Fair Value Measurements +68 +Note 5 Short-Term Borrowings and Credit Lines +70 +Note 6 Long-Term Debt +71 +Note 7 Income Taxes +72 +Note 8 Redeemable Preferred Stock +74 +Note 9 Common Stock and Stock-Based Compensation +74 +Note 10 Earnings Per Share +77 +Note 11 Benefit Plans +77 +Note 12 Risk Management and Derivatives +77 +Note 13 Accumulated Other Comprehensive Income (Loss) +81 +Note 14 Revenues +83 +Note 15 Operating Segments and Related Information +84 +Note 16 Commitments and Contingencies +88 +Note 17 Leases +88 +Note 18 Acquisitions and Divestitures +89 +Note 19 Restructuring +90 +2023 FORM 10-K 60 +Table of Contents +NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES +DESCRIPTION OF BUSINESS +NIKE, Inc. is a worldwide leader in the design, development and worldwide marketing and selling of athletic footwear, apparel, equipment, accessories and services. NIKE, Inc. portfolio brands include the NIKE Brand, Jordan Brand and Converse. The NIKE Brand is focused on performance athletic footwear, apparel, equipment, accessories and services across Men's, Women's and Kids', amplified with sport-inspired lifestyle products carrying the Swoosh trademark, as well as other NIKE Brand trademarks. The Jordan Brand is focused on athletic and casual footwear, apparel and accessories using the Jumpman trademark. Sales and operating results of Jordan Brand products are reported within the respective NIKE Brand geographic operating segments. Converse designs, distributes, licenses and sells casual sneakers, apparel and accessories under the Converse, Chuck Taylor, All Star, One Star, Star Chevron and Jack Purcell trademarks. In some markets outside the U.S., these trademarks are licensed to third parties who design, distribute, market and sell similar products. Operating results of the Converse brand are reported on a stand-alone basis. +BASIS OF CONSOLIDATION +The Consolidated Financial Statements include the accounts of NIKE, Inc. and its subsidiaries (the "Company" or "NIKE"). All significant intercompany transactions and balances have been eliminated. +REVENUE RECOGNITION +Revenue transactions associated with the sale of NIKE Brand footwear, apparel and equipment, as well as Converse products, comprise a single performance obligation, which consists of the sale of products to customers either through wholesale or direct to consumer channels. The Company satisfies the performance obligation and records revenues when transfer of control to the customer has occurred, based on the terms of sale. A customer is considered to have control once they are able to direct the use and receive substantially all of the benefits of the product. +Control is transferred to wholesale customers upon shipment or upon receipt depending on the country of the sale and the agreement with the customer. Control transfers to retail store customers at the time of sale and to substantially all digital commerce customers upon shipment. The transaction price is determined based upon the invoiced sales price, less anticipated sales returns, discounts and miscellaneous claims from customers. Payment terms for wholesale transactions depend on the country of sale or agreement with the customer and payment is generally required within 90 days or less of shipment to or receipt by the wholesale customer. Payment is due at the time of sale for retail store and digital commerce transactions. +Consideration for trademark licensing contracts is earned through sales-based or usage-based royalty arrangements, and the associated revenues are recognized over the license period. +Taxes assessed by governmental authorities that are both imposed on and concurrent with a specific revenue-producing transaction, and are collected by the Company from a customer, are excluded from Revenues and Cost of sales in the Consolidated Statements of Income. Shipping and handling costs associated with outbound freight after control over a product has transferred to a customer are accounted for as fulfillment costs and are included in Cost of sales when the related revenues are recognized. +SALES-RELATED RESERVES +Consideration promised in the Company's contracts with customers is variable due to anticipated reductions, such as sales returns, discounts and miscellaneous claims from customers. The Company estimates the most likely amount it will be entitled to receive and records an anticipated reduction against Revenues, with an offsetting increase to Accrued liabilities at the time revenues are recognized. The estimated cost of inventory for product returns is recorded in Prepaid expenses and other current assets on the Consolidated Balance Sheets. +The provision for anticipated sales returns consists of both contractual return rights and discretionary authorized returns. Provisions for post-invoice sales discounts consist of both contractual programs and discretionary discounts that are expected to be granted at a later date. +Estimates of discretionary authorized returns, discounts and claims are based on (1) historical rates, (2) specific identification of outstanding returns not yet received from customers and outstanding discounts and claims and (3) estimated returns, discounts and claims expected but not yet finalized with customers. Actual returns, discounts and claims in any future period are inherently uncertain and thus may differ from estimates recorded. If actual or expected future returns, discounts or claims are significantly greater or lower than the reserves established, a reduction or increase to net Revenues is recorded in the period in which such determination is made. +2023 FORM 10-K 61 +Table of Contents +COST OF SALES +Cost of sales consists primarily of inventory costs, as well as warehousing costs (including the cost of warehouse labor), third-party royalties, certain foreign currency hedge gains and losses and product design costs. Shipping and handling costs are expensed as incurred and included in Cost of sales. +DEMAND CREATION EXPENSE +Demand creation expense consists of advertising and promotion costs, including costs of endorsement contracts, complimentary products, television, digital and print advertising as well as media costs, brand events and retail brand presentation. Advertising production costs are expensed the first time an advertisement is run. Advertising media costs are expensed when the advertisement appears. Costs related to brand events are expensed when the event occurs. Costs related to retail brand presentation are expensed when the presentation is complete and delivered. +A significant amount of the Company's promotional expenses result from payments under endorsement contracts. In general, endorsement payments are expensed on a straight-line basis over the term of the contract. However, certain contracts contain elements that may be accounted for differently based upon the facts and circumstances of each individual contract. Prepayments made under contracts are included in Prepaid expenses and other current assets or Deferred income taxes and other assets depending on the period to which the prepayment applies. +Certain contracts provide for contingent payments to endorsers based upon specific achievements in their sport (e.g., winning a championship). The Company records Demand creation expense for these amounts when the endorser achieves the specific goal. +Certain contracts provide for variable payments based upon endorsers maintaining a level of performance in their sport over an extended period of time (e.g., maintaining a specified ranking in a sport for a year). When the Company determines payments are probable, the amounts are reported in Demand creation expense ratably over the contract period based on the Company's best estimate of the endorser's performance. In these instances, to the extent actual payments to the endorser differ from the Company's estimate due to changes in the endorser's performance, adjustments to Demand creation expense may be recorded in a future period. +Certain contracts provide for royalty payments to endorsers based upon a predetermined percent of sales of particular products, which the Company records in Cost of sales as the related sales occur. For contracts containing minimum guaranteed royalty payments, the Company records the amount of any guaranteed payment in excess of that earned through sales of product within Demand creation expense. +Through cooperative advertising programs, the Company reimburses its wholesale customers for certain costs of advertising the Company's products. To the extent the Company receives a distinct good or service in exchange for consideration paid to the customer that does not exceed the fair value of that good or service, the amounts reimbursed are recorded in Demand creation expense. +Total Demand creation expense was $ 4,060 million, $ 3,850 million and $ 3,114 million for the years ended May 31, 2023, 2022 and 2021, respectively. Prepaid advertising and promotion expenses totaled $ 755 million and $ 773 million at May 31, 2023 and 2022, respectively, of which $ 372 million and $ 329 million, respectively, were recorded in Prepaid expenses and other current assets, and $ 383 million and $ 444 million, respectively, were recorded in Deferred income taxes and other assets, depending on the period to which the prepayment applied. +OPERATING OVERHEAD EXPENSE +Operating overhead expense consists primarily of wage and benefit-related expenses, research and development costs, bad debt expense as well as other administrative expenses such as rent, depreciation and amortization, professional services, certain technology investments, meetings and travel. +CASH AND EQUIVALENTS +Cash and equivalents represent cash and short-term, highly liquid investments, that are both readily convertible to known amounts of cash and so near their maturity they present insignificant risk of changes in value because of changes in interest rates, with maturities three months or less at the date of purchase. +2023 FORM 10-K 62 +Table of Contents +SHORT-TERM INVESTMENTS +Short-term investments consist of highly liquid investments with maturities over three months at the date of purchase. At May 31, 2023 and 2022, Short-term investments consisted of available-for-sale debt securities, which are recorded at fair value with unrealized gains and losses reported, net of tax, in Accumulated other comprehensive income (loss), unless unrealized losses are determined to be unrecoverable. Realized gains and losses on the sale of securities are determined by specific identification. The Company considers all available-for-sale debt securities, including those with maturity dates beyond 12 months, as available to support current operational liquidity needs and, therefore, classifies all securities with maturity dates beyond three months at the date of purchase as current assets within Short-term investments on the Consolidated Balance Sheets. +Refer to Note 4 — Fair Value Measurements for more information on the Company's Short-term investments. +ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS RECEIVABLE +Accounts receivable, net consist primarily of amounts due from customers. The Company makes ongoing estimates relating to the collectability of its accounts receivable and maintains an allowance for expected losses resulting from the inability of its customers to make required payments. In addition to judgments about the creditworthiness of significant customers based on ongoing credit evaluations, the Company considers historical levels of credit losses, as well as macroeconomic and industry trends to determine the amount of the allowance. The allowance for uncollectible accounts receivable was $ 35 million and $ 34 million as of May 31, 2023 and 2022, respectively. +INVENTORY VALUATION +Inventories, substantially all of which are finished goods, are stated at lower of cost and net realizable value and valued on either an average or a specific identification cost basis. In some instances, the Company ships products directly from its suppliers to the customer, with the related inventory and cost of sales recognized on a specific identification basis. Inventory costs primarily consist of product cost from the Company's suppliers, as well as inbound freight, import duties, taxes, insurance, logistics and other handling fees. +PROPERTY, PLANT AND EQUIPMENT AND DEPRECIATION +Property, plant and equipment are recorded at cost. Depreciation is determined on a straight-line basis for land improvements, buildings and leasehold improvements over 2 to 40 years and for machinery and equipment over 2 to 15 years. +Depreciation and amortization of assets used in manufacturing, warehousing and product distribution are recorded in Cost of sales. Depreciation and amortization of all other assets are recorded in Operating overhead expense. +SOFTWARE DEVELOPMENT COSTS +Expenditures for major software purchases and software developed for internal use are capitalized and amortized over 2 to 12 years on a straight-line basis. The Company's policy provides for the capitalization of external direct costs associated with developing or obtaining internal use computer software. The Company also capitalizes certain payroll and payroll-related costs for employees who are directly associated with internal use computer software projects. The amount of capitalizable payroll costs with respect to these employees is limited to the time directly spent on such projects. Costs associated with preliminary project stage activities, training, maintenance and all other post-implementation stage activities are expensed as incurred. +Development costs of computer software to be sold, leased or otherwise marketed as an integral part of a product are subject to capitalization beginning when a product's technological feasibility has been established and ending when a product is available for general release to customers. In most instances, the Company's products are released soon after technological feasibility has been established; therefore, software development costs incurred subsequent to achievement of technological feasibility are usually not significant, and generally, most software development costs have been expensed as incurred. +2023 FORM 10-K 63 +Table of Contents +IMPAIRMENT OF LONG-LIVED ASSETS +The Company reviews the carrying value of long-lived assets or asset groups to be used in operations whenever events or changes in circumstances indicate the carrying amount of the assets might not be recoverable. Factors that would necessitate an impairment assessment include a significant adverse change in the extent or manner in which an asset is used, a significant adverse change in legal factors or the business climate that could affect the value of the asset or a significant decline in the observable market value of an asset, among others. If such facts indicate a potential impairment, the Company would assess the recoverability of an asset group by determining if the carrying value of the asset group exceeds the sum of the projected undiscounted cash flows expected to result from the use and eventual disposition of the assets over the remaining economic life of the primary asset in the asset group. If the recoverability test indicates that the carrying value of the asset group is not recoverable, the Company will estimate the fair value of the asset group using appropriate valuation methodologies, which would typically include an estimate of discounted cash flows. Any impairment would be measured as the difference between the asset group's carrying amount and its estimated fair value. +GOODWILL AND INDEFINITE-LIVED INTANGIBLE ASSETS +The Company performs annual impairment tests on goodwill and intangible assets with indefinite lives in the fourth quarter of each fiscal year or when events occur or circumstances change that would, more likely than not, reduce the fair value of a reporting unit or an intangible asset with an indefinite life below its carrying value. +For purposes of testing goodwill for impairment, the Company allocates goodwill across its reporting units, which are considered the Company's operating segments. For both goodwill and indefinite-lived intangible assets, which primarily consist of acquired trade names and trademarks, the Company may first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit or an intangible asset with an indefinite life is less than its carrying amount. If, after assessing the totality of events and circumstances, the Company determines it is more likely than not that the fair value of a reporting unit or indefinite-lived intangible asset is greater than its carrying amount, an impairment test is unnecessary. +If an impairment test is necessary, the Company will estimate the fair value of the related reporting unit or indefinite-lived intangible asset. If the carrying value of a reporting unit or indefinite-lived intangible asset exceeds its fair value, the goodwill of that reporting unit or indefinite-lived intangible asset is determined to be impaired and the Company will record an impairment charge equal to the excess of the carrying value over the related fair value. +There were no accumulated impairment losses as of May 31, 2023 and 2022. Additionally, the impact to Goodwill as a result of acquisitions and divestitures during fiscal 2023 and 2022, was not material. +OPERATING LEASES +The Company primarily leases retail store space, certain distribution and warehouse facilities, office space, equipment and other non-real estate assets. The Company determines if an arrangement is a lease at inception and begins recording lease activity at the commencement date, which is generally the date in which the Company takes possession of or controls the physical use of the asset. Lease components are not separated from non-lease components for real estate leases within the Company's lease portfolio. Right-of-use ("ROU") assets and lease liabilities are recognized based on the present value of lease payments over the lease term with lease expense recognized on a straight-line basis. The Company's incremental borrowing rate is used to determine the present value of future lease payments unless the implicit rate is readily determinable. +Lease agreements may contain rent escalation clauses, renewal or termination options, rent holidays or certain landlord incentives, including tenant improvement allowances. ROU assets include amounts for scheduled rent increases and are reduced by the amount of lease incentives. The lease term includes the non-cancelable period of the lease and options to extend or terminate the lease when it is reasonably certain the Company will exercise those options. The Company does not record leases with an initial term of 12 months or less on the Consolidated Balance Sheets and recognizes related lease payments in the Consolidated Statements of Income on a straight-line basis over the lease term. Certain lease agreements include variable lease payments, which are based on a percent of retail sales over specified levels or adjust periodically for inflation as a result of changes in a published index, primarily the Consumer Price Index, and are expensed as incurred. +FAIR VALUE MEASUREMENTS +The Company measures certain financial assets and liabilities at fair value on a recurring basis, including derivatives, equity securities and available-for-sale debt securities. Fair value is the price the Company would receive to sell an asset or pay to transfer a liability in an orderly transaction with a market participant at the measurement date. The Company uses a three-level hierarchy that prioritizes fair value measurements based on the types of inputs used, as follows: +2023 FORM 10-K 64 +Table of Contents +• Level 1: Quoted prices in active markets for identical assets or liabilities. +• Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly; these include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active. +• Level 3: Unobservable inputs with little or no market data available, which require the reporting entity to develop its own assumptions. +The Company's assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. Financial assets and liabilities are classified in their entirety based on the most conservative level of input that is significant to the fair value measurement. +Pricing vendors are utilized for a majority of Level 1 and Level 2 investments. These vendors either provide a quoted market price in an active market or use observable inputs without applying significant adjustments in their pricing. Observable inputs include broker quotes, interest rates and yield curves observable at commonly quoted intervals, volatilities and credit risks. The fair value of derivative contracts is determined using observable market inputs such as the daily market foreign currency rates, forward pricing curves, currency volatilities, currency correlations and interest rates and considers nonperformance risk of the Company and its counterparties. +The Company's fair value measurement process includes comparing fair values to another independent pricing vendor to ensure appropriate fair values are recorded. +Refer to Note 4 — Fair Value Measurements for additional information. +FOREIGN CURRENCY TRANSLATION AND FOREIGN CURRENCY TRANSACTIONS +Adjustments resulting from translating foreign functional currency financial statements into U.S. Dollars are included in the foreign currency translation adjustment, a component of Accumulated other comprehensive income (loss). +The Company's global subsidiaries have various monetary assets and liabilities, primarily receivables and payables, which are denominated in currencies other than their functional currency. These balance sheet items are subject to remeasurement, the impact of which is recorded in Other (income) expense, net, within the Consolidated Statements of Income. +ACCOUNTING FOR DERIVATIVES AND HEDGING ACTIVITIES +The Company uses derivative financial instruments to reduce its exposure to changes in foreign currency exchange rates and interest rates. All derivatives are recorded at fair value on the Consolidated Balance Sheets and changes in the fair value of derivative financial instruments are either recognized in Accumulated other comprehensive income (loss), Long-term debt or Net income depending on the nature of the underlying exposure, whether the derivative is formally designated as a hedge and, if designated, the extent to which the hedge is effective. The Company classifies the cash flows at settlement from derivatives in the same category as the cash flows from the related hedged items. For undesignated hedges and designated cash flow hedges, this is primarily within the Cash provided by operations component of the Consolidated Statements of Cash Flows. For designated net investment hedges, this is within the Cash provided by investing activities component of the Consolidated Statements of Cash Flows. For the Company's fair value hedges, which are interest rate swaps used to mitigate the change in fair value of its fixed-rate debt attributable to changes in interest rates, the related cash flows from periodic interest payments are reflected within the Cash provided by operations component of the Consolidated Statements of Cash Flows. +Refer to Note 12 — Risk Management and Derivatives for additional information on the Company's risk management program and derivatives. +STOCK-BASED COMPENSATION +The Company accounts for stock-based compensation by estimating the fair value, net of estimated forfeitures, of equity awards and recognizing the related expense as Cost of sales or Operating overhead expense, as applicable, in the Consolidated Statements of Income on a straight-line basis over the vesting period. Substantially all awards vest ratably over four years of continued employment, with stock options expiring 10 years from the date of grant. Performance-based restricted stock units vest based on the Company's achievement of certain performance criteria throughout the three-year performance period and continued employment through the vesting date. The fair value of options, stock appreciation rights and employees' purchase rights under the employee stock purchase plans ("ESPPs") is determined using the Black-Scholes option pricing model. The fair value of restricted stock and time-vesting restricted stock units is established by the market price on the date of grant. The fair value of performance-based restricted stock units is estimated as of the grant date using a Monte Carlo simulation. +Refer to Note 9 — Common Stock and Stock-Based Compensation for additional information on the Company's stock-based compensation programs. +2023 FORM 10-K 65 +Table of Contents +INCOME TAXES +The Company accounts for income taxes using the asset and liability method. This approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of assets and liabilities. The Company records a valuation allowance to reduce deferred tax assets to the amount management believes is more likely than not to be realized. Realization of deferred tax assets is dependent on future taxable earnings and is therefore uncertain. At least quarterly, the Company assesses taxable income in prior carryback periods, the scheduled reversal of deferred tax liabilities, projected future taxable income and available tax planning strategies. The Company uses forecasts of taxable income and considers foreign tax credit utilization in making this assessment of realization, which are inherently uncertain and can result in significant variation between estimated and actual results. To the extent the Company believes that recovery is not likely, a valuation allowance is established against the net deferred tax asset, which increases the Company's income tax expense in the period when such determination is made. +The Company recognizes a tax benefit from uncertain tax positions in the financial statements only when it is more likely than not the position will be sustained upon examination by relevant tax authorities. The Company recognizes interest and penalties related to income tax matters in Income tax expense. +Refer to Note 7 — Income Taxes for further discussion. +EARNINGS PER SHARE +Basic earnings per common share is calculated by dividing Net income by the weighted average number of common shares outstanding during the year. Diluted earnings per common share is calculated by adjusting weighted average outstanding shares, assuming conversion of all potentially dilutive stock options and awards. +Refer to Note 10 — Earnings Per Share for further discussion. +MANAGEMENT ESTIMATES +The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates, including estimates relating to assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Additionally, the macroeconomic environment could remain volatile as the risk exists that worsening macroeconomic conditions could have a material, adverse impact on future revenue growth as well as overall profitability. +RECENTLY ISSUED ACCOUNTING STANDARDS +In September 2022, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update ("ASU") ASU 2022-04, Liabilities — Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations, which enhances transparency surrounding the use of supplier finance programs. The new guidance requires qualitative and quantitative disclosure sufficient to enable users of the financial statements to understand the nature, activity during the period, changes from period to period and potential magnitude of such programs. The amendments are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal periods, except for the amendment on rollforward information, which is effective for fiscal years beginning after December 15, 2023. The Company will adopt the required guidance in the first quarter of fiscal 2024 and is currently evaluating the ASU to determine its impact on the Company's disclosures . +2023 FORM 10-K 66 +Table of Contents +NOTE 2 — PROPERTY, PLANT AND EQUIPMENT +Property, plant and equipment, net included the following: +MAY 31, +(Dollars in millions) +2023 2022 +Land and improvements $ 326 $ 330 +Buildings 3,293 3,170 +Machinery and equipment 3,083 2,870 +Internal-use software 1,612 1,616 +Leasehold improvements 1,876 1,712 +Construction in process 525 399 +Total property, plant and equipment, gross 10,715 10,097 +Less accumulated depreciation 5,634 5,306 +TOTAL PROPERTY, PLANT AND EQUIPMENT, NET $ 5,081 $ 4,791 +Capitalized interest was not material for the fiscal years ended May 31, 2023, 2022 and 2021. +NOTE 3 — ACCRUED LIABILITIES +Accrued liabilities included the following: +MAY 31, +(Dollars in millions) +2023 2022 +Compensation and benefits, excluding taxes $ 1,737 $ 1,297 +Sales-related reserves 994 1,015 +Endorsement compensation 552 496 +Dividends payable 529 485 +Allowance for expected loss on sale (1) +— 397 +Other 1,911 2,530 +Total Accrued Liabilities $ 5,723 $ 6,220 +(1) Refer to Note 18 — Acquisitions and Divestitures for additional information. +2023 FORM 10-K 67 +Table of Contents +NOTE 4 — FAIR VALUE MEASUREMENTS +The following tables present information about the Company's financial assets measured at fair value on a recurring basis as of May 31, 2023 and 2022, and indicate the level in the fair value hierarchy in which the Company classifies the fair value measurement. Refer to Note 1 — Summary of Significant Accounting Policies for additional detail regarding the Company's fair value measurement methodology. +MAY 31, 2023 +(Dollars in millions) +ASSETS AT FAIR VALUE CASH AND EQUIVALENTS SHORT-TERM INVESTMENTS +Cash $ 1,767 $ 1,767 $ — +Level 1: +U.S. Treasury securities 2,655 — 2,655 +Level 2: +Commercial paper and bonds 543 15 528 +Money market funds 5,157 5,157 — +Time deposits 507 502 5 +U.S. Agency securities 46 — 46 +Total Level 2 6,253 5,674 579 +TOTAL $ 10,675 $ 7,441 $ 3,234 +MAY 31, 2022 +(Dollars in millions) +ASSETS AT FAIR VALUE CASH AND EQUIVALENTS SHORT-TERM INVESTMENTS +Cash $ 839 $ 839 $ — +Level 1: +U.S. Treasury securities 3,801 8 3,793 +Level 2: +Commercial paper and bonds 660 37 623 +Money market funds 6,458 6,458 — +Time deposits 1,237 1,232 5 +U.S. Agency securities 2 — 2 +Total Level 2 8,357 7,727 630 +TOTAL $ 12,997 $ 8,574 $ 4,423 +As of May 31, 2023, the Company held $ 2,563 million of available-for-sale debt securities with maturity dates within one year and $ 671 million with maturity dates over one year and less than five years in Short-term investments on the Consolidated Balance Sheets. The fair value of the Company's available-for-sale debt securities approximates their amortized cost. +Included in Interest expense (income), net was interest income related to the Company's investment portfolio of $ 297 million, $ 94 million and $ 34 million for the years ended May 31, 2023, 2022 and 2021, respectively. +The Company records the assets and liabilities of its derivative financial instruments on a gross basis on the Consolidated Balance Sheets. The Company's derivative financial instruments are subject to master netting arrangements that allow for the offset of assets and liabilities in the event of default or early termination of the contract. Any amounts of cash collateral received related to these instruments associated with the Company's credit-related contingent features are recorded in Cash and equivalents and Accrued liabilities, the latter of which would further offset against the Company's derivative asset balance. Any amounts of cash collateral posted related to these instruments associated with the Company's credit-related contingent features are recorded in Prepaid expenses and other current assets, which would further offset against the Company's derivative liability balance. Cash collateral received or posted related to the Company's credit-related contingent features is presented in the Cash provided by operations component of the Consolidated Statements of Cash Flows. The Company does not recognize amounts of non-cash collateral received, such as securities, on the Consolidated Balance Sheets. For further information related to credit risk, refer to Note 12 — Risk Management and Derivatives. +2023 FORM 10-K 68 +Table of Contents +The following tables present information about the Company's derivative assets and liabilities measured at fair value on a recurring basis and indicate the level in the fair value hierarchy in which the Company classifies the fair value measurement: +MAY 31, 2023 +DERIVATIVE ASSETS DERIVATIVE LIABILITIES +(Dollars in millions) ASSETS AT FAIR VALUE OTHER CURRENT ASSETS OTHER LONG-TERM ASSETS LIABILITIES AT FAIR VALUE ACCRUED LIABILITIES OTHER LONG-TERM LIABILITIES +Level 2: +Foreign exchange forwards and options (1) +$ 557 $ 493 $ 64 $ 180 $ 128 $ 52 +(1) If the foreign exchange derivative instruments had been netted on the Consolidated Balance Sheets, the asset and liability positions each would have been reduced by $ 178 million as of May 31, 2023. As of that date, the Company received $ 36 million of cash collateral from various counterparties related to foreign exchange derivative instruments. No amount of collateral was posted on the derivative liability balance as of May 31, 2023. +MAY 31, 2022 +DERIVATIVE ASSETS DERIVATIVE LIABILITIES +(Dollars in millions) +ASSETS AT FAIR VALUE OTHER CURRENT ASSETS OTHER LONG-TERM ASSETS LIABILITIES AT FAIR VALUE ACCRUED LIABILITIES OTHER LONG-TERM LIABILITIES +Level 2: +Foreign exchange forwards and options and embedded derivatives (1) +$ 880 $ 674 $ 206 $ 77 $ 66 $ 11 +(1) If the foreign exchange derivative instruments had been netted on the Consolidated Balance Sheets, the asset and liability positions each would have been reduced by $ 76 million as of May 31, 2022. As of that date, the Company had received $ 486 million of cash collateral from various counterparties related to foreign exchange derivative instruments. No amount of collateral was posted on the Company's derivative liability balance as of May 31, 2022. +For additional information related to the Company's derivative financial instruments, refer to Note 12 — Risk Management and Derivatives. For fair value information regarding Notes payable and Long-term debt, refer to Note 5 — Short-Term Borrowings and Credit Lines and Note 6 — Long-Term Debt, respectively. +The carrying amounts of other current financial assets and other current financial liabilities approximate fair value. +NON-RECURRING FAIR VALUE MEASUREMENTS +As further discussed in Note 18 — Acquisitions and Divestitures, the Company met the criteria to recognize the related assets and liabilities of its Argentina, Chile and Uruguay entities as held-for-sale as of May 31, 2022. This required the Company to remeasure the disposal groups at fair value, less costs to sell, which is considered a Level 3 fair value measurement and was based on each transaction's estimated consideration. +All other assets or liabilities required to be measured at fair value on a non-recurring basis as of May 31, 2023 and 2022 were immaterial. +2023 FORM 10-K 69 +Table of Contents +NOTE 5 — SHORT-TERM BORROWINGS AND CREDIT LINES +The carrying amounts reflected in the Consolidated Balance Sheets for Notes payable approximate fair value. +On March 11, 2022, the Company entered into a five-year committed credit facility agreement with a syndicate of banks which provides for up to $ 2 billion of borrowings, with the option to increase borrowings up to $ 3 billion in total with lender approval. The facility matures on March 11, 2027, with options to extend the maturity date up to an additional two years . This facility replaces the prior $ 2 billion five-year credit facility agreement entered into on August 16, 2019, which would have matured on August 16, 2024. Based on the Company's current long-term senior unsecured debt ratings of AA- and A1 from Standard and Poor's Corporation and Moody's Investor Services, respectively, the interest rate charged on any outstanding borrowings would be the prevailing Term SOFR for the applicable interest period plus 0.60 %. The facility fee is 0.04 % of the total undrawn commitment. +On March 10, 2023, the Company entered into a 364 -day committed credit facility agreement with a syndicate of banks, which provides for up to $ 1 billion of borrowings, with an option to increase borrowings up to $ 1.5 billion in total with lender approval. The facility matures on March 8, 2024, with an option to extend the maturity date an additional 364 days. This facility replaces the prior $ 1 billion 364 -day credit facility agreement entered into on March 11, 2022, which matured on March 10, 2023. Based on the Company's current long-term senior unsecured debt ratings of AA- and A1 from Standard and Poor's Corporation and Moody's Investor Services, respectively, the interest rate charged on any outstanding borrowings would be the prevailing Term Secured Overnight Financing Rate ("Term SOFR") for the applicable interest period plus 0.60 %. The facility fee is 0.02 % of the total undrawn commitment. +As of and for the periods ended May 31, 2023 and 2022, no amounts were outstanding under any of the Company's committed credit facilities. +2023 FORM 10-K 70 +Table of Contents +NOTE 6 — LONG-TERM DEBT +Long-term debt, net of unamortized premiums, discounts and debt issuance costs, comprises the following: +BOOK VALUE OUTSTANDING +AS OF MAY 31, +Scheduled Maturity (Dollars in millions) +ORIGINAL PRINCIPAL INTEREST RATE INTEREST PAYMENTS 2023 2022 +Corporate Term Debt: (1)(2) +May 1, 2023 $ 500 2.25 % Semi-Annually $ — $ 500 +March 27, 2025 1,000 2.40 % Semi-Annually 998 996 +November 1, 2026 1,000 2.38 % Semi-Annually 997 997 +March 27, 2027 1,000 2.75 % Semi-Annually 997 996 +March 27, 2030 1,500 2.85 % Semi-Annually 1,492 1,491 +March 27, 2040 1,000 3.25 % Semi-Annually 987 986 +May 1, 2043 500 3.63 % Semi-Annually 496 496 +November 1, 2045 1,000 3.88 % Semi-Annually 986 985 +November 1, 2046 500 3.38 % Semi-Annually 492 492 +March 27, 2050 1,500 3.38 % Semi-Annually 1,482 1,481 +Total 8,927 9,420 +Less Current Portion of Long-Term Debt — 500 +TOTAL LONG-TERM DEBT $ 8,927 $ 8,920 +(1) These senior unsecured obligations rank equally with the Company's other unsecured and unsubordinated indebtedness. +(2) The bonds are redeemable at the Company's option at a price equal to the greater of (i) 100 % of the aggregate principal amount of the notes to be redeemed or (ii) the sum of the present values of the remaining scheduled payments, plus in each case, accrued and unpaid interest. However, the bonds also feature a par call provision, which allows for the bonds to be redeemed at a price equal to 100 % of the aggregate principal amount of the notes being redeemed, plus accrued and unpaid interest on or after the Par Call Date, as defined in the respective notes. +The scheduled maturity of Long-term debt in each of the years ending May 31, 2024 through 2028, are $ 0 million , $ 1,000 million, $ 0 million , $ 2,000 million and $ 0 million , respectively, at face value. +The Company's Long-term debt is recorded at adjusted cost, net of unamortized premiums, discounts and debt issuance costs. The fair value of long-term debt is estimated based upon quoted prices for similar instruments or quoted prices for identical instruments in inactive markets (Level 2). The fair value of the Company's Long-term debt, including the current portion, was approximately $ 7,889 million and $ 8,933 million as of May 31, 2023 and 2022, respectively. +2023 FORM 10-K 71 +Table of Contents +NOTE 7 — INCOME TAXES +Income before income taxes is as follows: +YEAR ENDED MAY 31, +(Dollars in millions) +2023 2022 2021 +Income before income taxes: +United States $ 4,663 $ 6,020 $ 5,723 +Foreign 1,538 631 938 +TOTAL INCOME BEFORE INCOME TAXES $ 6,201 $ 6,651 $ 6,661 +The provision for income taxes is as follows: +YEAR ENDED MAY 31, +(Dollars in millions) +2023 2022 2021 +Current: +United States +Federal $ 430 $ 231 $ 328 +State 184 98 134 +Foreign 634 926 857 +Total Current 1,248 1,255 1,319 +Deferred: +United States +Federal ( 162 ) ( 522 ) ( 371 ) +State ( 25 ) ( 16 ) ( 34 ) +Foreign 70 ( 112 ) 20 +Total Deferred ( 117 ) ( 650 ) ( 385 ) +TOTAL INCOME TAX EXPENSE $ 1,131 $ 605 $ 934 +A reconciliation from the U.S. statutory federal income tax rate to the effective income tax rate is as follows: +YEAR ENDED MAY 31, +2023 2022 2021 +Federal income tax rate 21.0 % 21.0 % 21.0 % +State taxes, net of federal benefit 1.5 % 1.4 % 1.3 % +Foreign earnings 1.7 % - 1.8 % 0.2 % +Subpart F deferred tax benefit 0.0 % - 4.7 % 0.0 % +Foreign-derived intangible income benefit - 6.1 % - 4.1 % - 3.7 % +Excess tax benefits from stock-based compensation - 1.1 % - 4.9 % - 4.5 % +Income tax audits and contingency reserves 1.0 % 1.5 % 1.5 % +U.S. research and development tax credit - 1.2 % - 1.0 % - 0.9 % +Other, net 1.4 % 1.7 % - 0.9 % +EFFECTIVE INCOME TAX RATE 18.2 % 9.1 % 14.0 % +On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (the "Tax Act"), which significantly changed U.S. tax law and included a provision to tax global intangible low-taxed income ("GILTI") of foreign subsidiaries. The Company recognizes taxes due under the GILTI provision as a current period expense. +The effective tax rate for the fiscal year ended May 31, 2023 was higher than the effective tax rate for the fiscal year ended May 31, 2022. The increase was primarily due to decreased benefits from stock-based compensation and the prior year recognition of a non-cash, one-time benefit related to the onshoring of the Company's non-U.S. intangible property. During the fourth quarter of fiscal 2022, the Company onshored certain non-U.S. intangible property ownership rights and implemented changes in the Company's legal entity structure. The tax restructuring increases the possibility that foreign earnings in future periods will be subject to tax in the U.S. due to Subpart F of the Internal Revenue Code. The Company recognized a deferred tax asset and corresponding non-cash deferred income tax benefit of 4.7 %, to establish the deferred tax deduction that is expected to reduce taxable income in future periods. +2023 FORM 10-K 72 +Table of Contents +The effective tax rate for the fiscal year ended May 31, 2022 was lower than the effective tax rate for the fiscal year ended May 31, 2021. The decrease was primarily due to a shift in the Company's earnings mix and recognition of a non-cash, one-time benefit related to the onshoring of the Company's non-U.S. intangible property. +Deferred tax assets and liabilities comprise the following as of: +MAY 31, +(Dollars in millions) +2023 2022 +Deferred tax assets: +Inventories (1) +$ 79 $ 136 +Sales return reserves (1) +89 109 +Deferred compensation (1) +321 313 +Stock-based compensation 261 195 +Reserves and accrued liabilities (1) +144 145 +Operating lease liabilities 511 508 +Intangibles 255 275 +Capitalized research and development expenditures 548 353 +Net operating loss carry-forwards 15 8 +Subpart F deferred tax 374 313 +Foreign tax credit carry-forward — 103 +Other (1) +183 148 +Total deferred tax assets 2,780 2,606 +Valuation allowance ( 22 ) ( 19 ) +Total deferred tax assets after valuation allowance 2,758 2,587 +Deferred tax liabilities: +Foreign withholding tax on undistributed earnings of foreign subsidiaries ( 186 ) ( 146 ) +Property, plant and equipment (1) +( 276 ) ( 247 ) +Right-of-use assets ( 441 ) ( 437 ) +Other (1) +( 56 ) ( 92 ) +Total deferred tax liabilities ( 959 ) ( 922 ) +NET DEFERRED TAX ASSET (2) +$ 1,799 $ 1,665 +(1) The above amounts exclude deferred taxes held-for-sale as of May 31, 2022. See Note 18 — Acquisitions and Divestitures for additional information. +(2) Of the total $ 1,799 million net deferred tax asset for the period ended May 31, 2023, $ 2,026 million was included within Deferred income taxes and other assets and $( 227 ) million was included within Deferred income taxes and other liabilities on the Consolidated Balance Sheets. Of the total $ 1,665 million net deferred tax asset for the period ended May 31, 2022, $ 1,891 million was included within Deferred income taxes and other assets and $( 226 ) million was included within Deferred income taxes and other liabilities on the Consolidated Balance Sheets. +The following is a reconciliation of the changes in the gross balance of unrecognized tax benefits as of: +MAY 31, +(Dollars in millions) +2023 2022 2021 +Unrecognized tax benefits, beginning of the period $ 848 $ 896 $ 771 +Gross increases related to prior period tax positions 95 71 77 +Gross decreases related to prior period tax positions ( 17 ) ( 145 ) ( 22 ) +Gross increases related to current period tax positions 50 62 59 +Settlements ( 18 ) ( 17 ) ( 5 ) +Lapse of statute of limitations ( 7 ) ( 10 ) ( 6 ) +Changes due to currency translation ( 15 ) ( 9 ) 22 +UNRECOGNIZED TAX BENEFITS, END OF THE PERIOD $ 936 $ 848 $ 896 +As of May 31, 2023, total gross unrecognized tax benefits, excluding related interest and penalties, were $ 936 million, of which $ 651 million would affect the Company's effective tax rate if recognized in future periods. The majority of the total gross unrecognized tax benefits are long-term in nature and included within Deferred income taxes and other liabilities on the Consolidated Balance Sheets. +2023 FORM 10-K 73 +Table of Contents +The Company recognizes interest and penalties related to income tax matters in Income tax expense. The liability for payment of interest and penalties increased by $ 20 million during the fiscal year ended May 31, 2023, increased by $ 45 million during the fiscal year ended May 31, 2022, and increased by $ 45 million during the fiscal year ended May 31, 2021. As of May 31, 2023 and 2022, accrued interest and penalties related to uncertain tax positions were $ 268 million and $ 248 million, respectively (excluding federal benefit) and were included within Deferred income taxes and other liabilities on the Consolidated Balance Sheets. +As of May 31, 2023 and 2022, long-term income taxes payable were $ 373 million and $ 535 million, respectively, and were included within Deferred income taxes and other liabilities on the Consolidated Balance Sheets. +The Company is subject to taxation in the U.S., as well as various state and foreign jurisdictions. The Company is currently under audit by the U.S. IRS for fiscal years 2017 through 2019. The Company has closed all U.S. federal income tax matters through fiscal 2016, with the exception of certain transfer pricing adjustments. Tax years after 2011 remain open in certain major foreign jurisdictions. Although the timing of resolution of audits is not certain, the Company evaluates all domestic and foreign audit issues in the aggregate, along with the expiration of applicable statutes of limitations, and estimates that it is reasonably possible the total gross unrecognized tax benefits could decrease by up to $ 50 million within the next 12 months. In January 2019, the European Commission opened a formal investigation to examine whether the Netherlands has breached State Aid rules when granting certain tax rulings to the Company. The Company believes the investigation is without merit. If this matter is adversely resolved, the Netherlands may be required to assess additional amounts with respect to prior periods, and the Company's income taxes related to prior periods in the Netherlands could increase. +A portion of the Company's foreign operations benefit from a tax holiday, which is set to expire in 2031. This tax holiday may be extended when certain conditions are met or may be terminated early if certain conditions are not met. The tax benefit attributable to this tax holiday, before taking into consideration other U.S. indirect tax provisions, was $ 263 million, $ 221 million and $ 238 million for the fiscal years ended May 31, 2023, 2022 and 2021, respectively. The benefit of the tax holiday on diluted earnings per common share was $ 0.17 , $ 0.14 and $ 0.15 for the fiscal years ended May 31, 2023, 2022 and 2021, respectively. +Deferred tax assets as of May 31, 2023 and 2022, were reduced by a valuation allowance. For the fiscal year ended May 31, 2023, a valuation allowance was provided for U.S. capital loss carryforwards and on tax benefits generated by certain entities with operating losses. For the fiscal year ended May 31, 2022, a valuation allowance was provided for U.S. capital loss carryforwards and on tax benefits generated by certain entities with operating losses. There was a $ 3 million net increase in the valuation allowance for the fiscal year ended May 31, 2023, compared to a $ 7 million net increase for the fiscal year ended May 31, 2022, and $ 14 million net decrease for the fiscal year ended May 31, 2021. +The Company has available domestic and foreign loss carry-forwards of $ 61 million as of May 31, 2023. If not utilized, $ 33 million of losses will expire in the periods between fiscal 2028 and 2043. +NOTE 8 — REDEEMABLE PREFERRED STOCK +Sojitz America is the sole owner of the Company's authorized redeemable preferred stock, $ 1 par value, which is redeemable at the option of Sojitz America or the Company at par value aggregating $ 0.3 million. A cumulative dividend of $ 0.10 per share is payable annually on May 31, and no dividends may be declared or paid on the common stock of the Company unless dividends on the redeemable preferred stock have been declared and paid in full. There have been no changes in the redeemable preferred stock in the fiscal years ended May 31, 2023, 2022 and 2021. As the holder of the redeemable preferred stock, Sojitz America does not have general voting rights but does have the right to vote as a separate class on the sale of all or substantially all of the assets of the Company and its subsidiaries; on merger, consolidation, liquidation or dissolution of the Company; or on the sale or assignment of the NIKE trademark for athletic footwear sold in the United States. The redeemable preferred stock has been fully issued to Sojitz America and is not blank check preferred stock. The Company's articles of incorporation do not permit the issuance of additional preferred stock. +NOTE 9 — COMMON STOCK AND STOCK-BASED COMPENSATION +COMMON STOCK +The authorized number of shares of Class A Common Stock, no par value, and Class B Common Stock, no par value, are 400 million and 2,400 million, respectively. Each share of Class A Common Stock is convertible into one share of Class B Common Stock. Voting rights of Class B Common Stock are limited in certain circumstances with respect to the election of directors. There are no differences in the dividend and liquidation preferences or participation rights of the holders of Class A and Class B Common Stock. From time to time, the Company's Board of Directors authorizes share repurchase programs for the repurchase of Class B Common Stock. The value of repurchased shares is deducted from Total shareholders' equity through allocation to Capital in excess of stated value and Retained earnings. +2023 FORM 10-K 74 +Table of Contents +STOCK-BASED COMPENSATION +The NIKE, Inc. Stock Incentive Plan (the "Stock Incentive Plan") provides for the issuance of up to 798 million previously unissued shares of Class B Common Stock in connection with equity awards granted under the Stock Incentive Plan. The Stock Incentive Plan authorizes the grant of non-statutory stock options, incentive stock options, stock appreciation rights, and stock awards, including restricted stock and restricted stock units. Restricted stock units include both time-vesting restricted stock units ("RSUs") as well as performance-based restricted stock units ("PSUs"). A committee of the Board of Directors administers the Stock Incentive Plan and has the authority to determine the employees to whom awards will be made, the amount of the awards and the other terms and conditions of the awards. The Company generally grants stock options, restricted stock and restricted stock units on an annual basis. The exercise price for stock options and stock appreciation rights may not be less than the fair market value of the underlying shares on the date of grant. Substantially all awards under the Stock Incentive Plan vest ratably over 4 years of continued employment, with stock options expiring 10 years from the date of grant. +The following table summarizes the Company's total stock-based compensation expense recognized in Cost of sales or Operating overhead expense, as applicable: +YEAR ENDED MAY 31, +(Dollars in millions) +2023 2022 2021 +Stock options (1) +$ 311 $ 297 $ 323 +ESPPs 72 60 63 +Restricted stock and restricted stock units (1)(2) +372 281 225 +TOTAL STOCK-BASED COMPENSATION EXPENSE $ 755 $ 638 $ 611 +(1) Expense for stock options includes the expense associated with stock appreciation rights. Accelerated stock option expense is primarily recorded for employees meeting certain retirement eligibility requirements and was $ 64 million, $ 57 million and $ 67 million for the fiscal years ended May 31, 2023, 2022 and 2021, respectively. During fiscal 2021, an immaterial amount of accelerated stock option and restricted stock unit expense was also recorded for certain employees impacted by the Company's organizational realignment. For more information, see Note 19 — Restructuring. +(2) For the fiscal years ended May 31, 2023 and 2022, expense for restricted stock units includes an immaterial amount of expense for PSUs. +The income tax benefit related to stock-based compensation expense was $ 71 million, $ 327 million and $ 297 million for the fiscal years ended May 31, 2023, 2022 and 2021, respectively, and reported within Income tax expense. +STOCK OPTIONS +The weighted average fair value per share of stock options granted during the years ended May 31, 2023, 2022 and 2021, computed as of the grant date using the Black-Scholes pricing model, was $ 31.31 , $ 37.53 and $ 26.75 , respectively. The weighted average assumptions used to estimate these fair values were as follows: +YEAR ENDED MAY 31, +2023 2022 2021 +Dividend yield 0.9 % 0.8 % 0.9 % +Expected volatility 27.1 % 24.9 % 27.3 % +Weighted average expected life (in years) 5.8 5.8 6.0 +Risk-free interest rate 3.3 % 0.9 % 0.4 % +Expected volatilities are based on an analysis of the historical volatility of the Company's common stock, the implied volatility in market traded options on the Company's common stock with a term greater than one year , as well as other factors. The weighted average expected life of options is based on an analysis of historical and expected future exercise patterns. The interest rate is based on the U.S. Treasury (constant maturity) risk-free rate in effect at the date of grant for periods corresponding with the expected term of the options. +2023 FORM 10-K 75 +Table of Contents +The following summarizes the stock option transactions under the plan discussed above: +SHARES (1) +WEIGHTED AVERAGE OPTION PRICE +(In millions) +Options outstanding as of May 31, 2022 68.0 $ 88.66 +Exercised ( 7.5 ) 57.11 +Forfeited ( 1.5 ) 122.93 +Granted 12.0 107.44 +Options outstanding as of May 31, 2023 71.0 $ 94.40 +(1) Includes stock appreciation rights transactions. +Options exercisable as of May 31, 2023 were 44.7 million and had a weighted average option price of $ 79.95 per share. The aggregate intrinsic value for options outstanding and exercisable as of May 31, 2023 was $ 1,380 million and $ 1,307 million, respectively. The total intrinsic value of the options exercised during the years ended May 31, 2023, 2022 and 2021 was $ 438 million, $ 1,742 million and $ 1,571 million, respectively. The intrinsic value is the amount by which the market value of the underlying stock exceeds the exercise price of the options. The weighted average contractual life remaining for options outstanding and options exercisable as of May 31, 2023 was 5.9 years and 4.5 years, respectively. As of May 31, 2023, the Company had $ 425 million of unrecognized compensation costs from stock options, net of estimated forfeitures, to be recognized in Cost of sales or Operating overhead expense, as applicable, over a weighted average remaining period of 2.5 years. +EMPLOYEE STOCK PURCHASE PLANS +In addition to the Stock Incentive Plan, the Company gives employees the right to purchase shares at a discount from the market price under ESPPs. Subject to the annual statutory limit, employees are eligible to participate through payroll deductions of up to 10 % of their compensation. At the end of each six-month offering period, shares are purchased by the participants at 85 % of the lower of the fair market value at the beginning or the end of the offering period. Employees purchased 3.0 million, 2.0 million and 2.5 million shares during each of the fiscal years ended May 31, 2023, 2022 and 2021, respectively. +RESTRICTED STOCK AND RESTRICTED STOCK UNITS +Recipients of restricted stock are entitled to cash dividends and to vote their respective shares throughout the period of restriction. Recipients of restricted stock units, which includes RSUs and PSUs, are entitled to dividend equivalent cash payments upon vesting. The number of shares of restricted stock and restricted stock units vested includes shares of common stock withheld by the Company on behalf of employees to satisfy the minimum statutory tax withholding requirements. +The following summarizes the restricted stock and restricted stock units transactions under the plan discussed above: +SHARES (1) +WEIGHTED AVERAGE GRANT DATE +FAIR VALUE +(In millions) +Nonvested as of May 31, 2022 6.7 $ 130.88 +Vested ( 2.2 ) 114.85 +Forfeited ( 0.7 ) 131.10 +Granted 4.5 115.56 +Nonvested as of May 31, 2023 8.3 $ 126.97 +(1) Includes an immaterial amount of PSU transactions +The weighted average fair value per share of restricted stock and restricted stock units granted for the fiscal years ended May 31, 2023, 2022 and 2021, computed as of the grant date, was $ 115.56 , $ 168.04 and $ 113.84 , respectively. During the fiscal years ended May 31, 2023, 2022 and 2021, the aggregate fair value of vested restricted stock and restricted stock units was $ 250 million, $ 354 million and $ 310 million, respectively, computed as of the date of vesting. +As of May 31, 2023, the Company had $ 649 million of unrecognized compensation costs from restricted stock and restricted stock units, net of estimated forfeitures, to be recognized in Cost of sales or Operating overhead expense, as applicable, over a weighted average remaining period of 2.3 years. +2023 FORM 10-K 76 +Table of Contents +NOTE 10 — EARNINGS PER SHARE +The following is a reconciliation from basic earnings per common share to diluted earnings per common share. The computations of diluted earnings per common share excluded restricted stock, restricted stock units and options, including shares under ESPPs, to purchase an estimated additional 31.7 million, 9.4 million and 11.3 million shares of common stock outstanding for the fiscal years ended May 31, 2023, 2022 and 2021, respectively, because the awards were assumed to be anti-dilutive. +YEAR ENDED MAY 31, +(In millions, except per share data) +2023 2022 2021 +Net income available to common stockholders $ 5,070 $ 6,046 $ 5,727 +Determination of shares: +Weighted average common shares outstanding 1,551.6 1,578.8 1,573.0 +Assumed conversion of dilutive stock options and awards 18.2 32.0 36.4 +DILUTED WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 1,569.8 1,610.8 1,609.4 +Earnings per common share: +Basic $ 3.27 $ 3.83 $ 3.64 +Diluted $ 3.23 $ 3.75 $ 3.56 +NOTE 11 — BENEFIT PLANS +The Company has a qualified 401(k) Savings and Profit Sharing Plan, in which all U.S. employees are able to participate. The Company matches a portion of employee contributions to the savings plan. Company contributions to the savings plan were $ 136 million, $ 126 million and $ 110 million and included in Cost of sales or Operating overhead expense, as applicable, for the fiscal years ended May 31, 2023, 2022 and 2021, respectively. +The Company also has a Long-Term Incentive Plan ("LTIP") adopted by the Board of Directors and approved by shareholders in September 1997, which has been amended from time to time. The Company recognized an immaterial amount of Operating overhead expense related to cash awards under the LTIP during the years ended May 31, 2023, 2022 and 2021. During the fiscal years ended May 31, 2023 and 2022, under the Stock Incentive Plan, the Company granted PSUs which replaced cash-based long-term incentive awards historically granted under the Company's LTIP. Refer to Note 9 — Common Stock and Stock-Based Compensation for further information related to PSUs. +The Company allows certain highly compensated employees and non-employee directors of the Company to defer compensation under a nonqualified deferred compensation plan. A rabbi trust was established to fund the Company's nonqualified deferred compensation plan obligation. The assets in the rabbi trust of approximately $ 875 million and $ 876 million as of May 31, 2023 and 2022, respectively, primarily consist of company owned life insurance policies recorded at their cash surrender value and are classified in Deferred income taxes and other assets on the Consolidated Balance Sheets. Deferred compensation plan liabilities were $ 897 million and $ 890 million as of May 31, 2023 and 2022, respectively, and primarily classified in Deferred income taxes and other liabilities on the Consolidated Balance Sheets. +The Company has pension plans in various countries worldwide. The pension plans are only available to local employees and are generally government mandated. The liability related to the unfunded pension liabilities of the plans was $ 29 million and $ 30 million as of May 31, 2023 and 2022, respectively, and primarily classified as non-current in Deferred income taxes and other liabilities on the Consolidated Balance Sheets. +NOTE 12 — RISK MANAGEMENT AND DERIVATIVES +The Company is exposed to global market risks, including the effect of changes in foreign currency exchange rates and interest rates, and uses derivatives to manage financial exposures that occur in the normal course of business. The Company does not hold or issue derivatives for trading or speculative purposes. +The Company may elect to designate certain derivatives as hedging instruments under U.S. GAAP. The Company formally documents all relationships between designated hedging instruments and hedged items, as well as its risk management objectives and strategies for undertaking hedge transactions. This process includes linking all derivatives designated as hedges to either recognized assets or liabilities or forecasted transactions and assessing, both at inception and on an ongoing basis, the effectiveness of the hedging relationships. +2023 FORM 10-K 77 +Table of Contents +The majority of derivatives outstanding as of May 31, 2023, are designated as foreign currency cash flow hedges, primarily for Euro/U.S. Dollar, British Pound/Euro, Chinese Yuan/U.S. Dollar and Japanese Yen/U.S. Dollar currency pairs. All derivatives are recognized on the Consolidated Balance Sheets at fair value and classified based on the instrument's maturity date. +The following tables present the fair values of derivative instruments included within the Consolidated Balance Sheets: +DERIVATIVE ASSETS +BALANCE SHEET LOCATION MAY 31, +(Dollars in millions) +2023 2022 +Derivatives formally designated as hedging instruments: +Foreign exchange forwards and options Prepaid expenses and other current assets $ 480 $ 639 +Foreign exchange forwards and options Deferred income taxes and other assets 64 206 +Total derivatives formally designated as hedging instruments 544 845 +Derivatives not designated as hedging instruments: +Foreign exchange forwards and options and embedded derivatives Prepaid expenses and other current assets 13 35 +Total derivatives not designated as hedging instruments 13 35 +TOTAL DERIVATIVE ASSETS $ 557 $ 880 +DERIVATIVE LIABILITIES +BALANCE SHEET LOCATION MAY 31, +(Dollars in millions) +2023 2022 +Derivatives formally designated as hedging instruments: +Foreign exchange forwards and options Accrued liabilities $ 93 $ 37 +Foreign exchange forwards and options Deferred income taxes and other liabilities 52 11 +Total derivatives formally designated as hedging instruments 145 48 +Derivatives not designated as hedging instruments: +Foreign exchange forwards and options and embedded derivatives Accrued liabilities 35 29 +Total derivatives not designated as hedging instruments 35 29 +TOTAL DERIVATIVE LIABILITIES $ 180 $ 77 +The following table presents the amounts in the Consolidated Statements of Income in which the effects of cash flow hedges are recorded and the effects of cash flow hedge activity on these line items for the fiscal years ended May 31, 2023, 2022 and 2021: +YEAR ENDED MAY 31, +2023 2022 2021 +(Dollars in millions) +TOTAL AMOUNT OF +GAIN (LOSS) +ON CASH FLOW +HEDGE ACTIVITY TOTAL AMOUNT OF +GAIN (LOSS) +ON CASH FLOW +HEDGE ACTIVITY TOTAL AMOUNT OF +GAIN (LOSS) +ON CASH FLOW +HEDGE ACTIVITY +Revenues $ 51,217 $ 26 $ 46,710 $ ( 82 ) $ 44,538 $ 45 +Cost of sales 28,925 581 25,231 ( 23 ) 24,576 51 +Demand creation expense 4,060 ( 5 ) 3,850 1 3,114 3 +Other (income) expense, net ( 280 ) 338 ( 181 ) 130 14 ( 47 ) +Interest expense (income), net ( 6 ) ( 8 ) 205 ( 7 ) 262 ( 7 ) +2023 FORM 10-K 78 +Table of Contents +The following tables present the amounts affecting the Consolidated Statements of Income for the years ended May 31, 2023, 2022 and 2021: +(Dollars in millions) +AMOUNT OF GAIN (LOSS) +RECOGNIZED IN OTHER +COMPREHENSIVE INCOME (LOSS) ON DERIVATIVES (1) +AMOUNT OF GAIN (LOSS) +RECLASSIFIED FROM ACCUMULATED +OTHER COMPREHENSIVE +INCOME (LOSS) INTO INCOME (1) +YEAR ENDED MAY 31, LOCATION OF GAIN (LOSS) +RECLASSIFIED FROM ACCUMULATED +OTHER COMPREHENSIVE INCOME +(LOSS) INTO INCOME YEAR ENDED MAY 31, +2023 2022 2021 2023 2022 2021 +Derivatives designated as +cash flow hedges: +Foreign exchange forwards +and options +$ 16 $ ( 39 ) $ ( 61 ) Revenues $ 26 $ ( 82 ) $ 45 +Foreign exchange forwards +and options +305 889 ( 563 ) Cost of sales 581 ( 23 ) 51 +Foreign exchange forwards +and options +( 1 ) ( 6 ) 5 Demand creation expense ( 5 ) 1 3 +Foreign exchange forwards +and options +207 492 ( 163 ) Other (income) expense, net 338 130 ( 47 ) +Interest rate swaps (2) +— — — Interest expense (income), net ( 8 ) ( 7 ) ( 7 ) +Total designated cash +flow hedges +$ 527 $ 1,336 $ ( 782 ) $ 932 $ 19 $ 45 +(1) For the fiscal years ended May 31, 2023, 2022, and 2021, the amounts recorded in Other (income) expense, net as a result of the discontinuance of cash flow hedges because the forecasted transactions were no longer probable of occurring were immaterial. +(2) Gains and losses associated with terminated interest rate swaps, which were previously designated as cash flow hedges and recorded in Accumulated other comprehensive income (loss), will be released through Interest expense (income), net over the term of the issued debt. +AMOUNT OF GAIN (LOSS) RECOGNIZED +IN INCOME ON DERIVATIVES +LOCATION OF GAIN (LOSS) +RECOGNIZED IN INCOME +ON DERIVATIVES +YEAR ENDED MAY 31, +(Dollars in millions) +2023 2022 2021 +Derivatives designated as hedging instruments: +Foreign exchange forwards and options and embedded derivatives $ 28 $ 38 $ ( 167 ) Other (income) expense, net +CASH FLOW HEDGES +All changes in fair value of derivatives designated as cash flow hedge instruments are recorded in Accumulated other comprehensive income (loss) until Net income is affected by the variability of cash flows of the hedged transaction. Effective hedge results are classified in the Consolidated Statements of Income in the same manner as the underlying exposure. When it is no longer probable the forecasted hedged transaction will occur in the initially identified time period, hedge accounting is discontinued and the Company accounts for the associated derivative as an undesignated instrument as discussed below. Additionally, the gains and losses associated with derivatives no longer designated as cash flow hedge instruments in Accumulated other comprehensive income (loss) are recognized immediately in Other (income) expense, net, if it is probable the forecasted hedged transaction will not occur by the end of the initially identified time period or within an additional two-month period thereafter. In rare circumstances, the additional period of time may exceed two months due to extenuating circumstances related to the nature of the forecasted transaction that are outside the control or influence of the Company. +The purpose of the Company's foreign exchange risk management program is to lessen both the positive and negative effects of currency fluctuations on the Company's consolidated results of operations, financial position and cash flows. Foreign currency exposures the Company may elect to hedge in this manner include product costs, non-functional currency denominated revenues, intercompany revenues, demand creation expenses, investments in U.S. Dollar denominated available-for-sale debt securities and certain other intercompany transactions. +Product cost foreign currency exposures are primarily generated through non-functional currency denominated product purchases. NIKE entities primarily purchase product in two ways: (1) Certain NIKE entities purchase product from the NIKE Trading Company ("NTC"), a wholly-owned sourcing hub that buys NIKE branded products from third-party factories, predominantly in U.S. Dollars. The NTC, whose functional currency is the U.S. Dollar, then sells the product to NIKE entities in their respective functional currencies. NTC sales to a NIKE entity with a different functional currency result in a foreign currency +2023 FORM 10-K 79 +Table of Contents +exposure for the NTC. (2) Other NIKE entities purchase product directly from third-party factories in U.S. Dollars. These purchases generate a foreign currency exposure for those NIKE entities with a functional currency other than the U.S. Dollar. +The Company's policy permits the utilization of derivatives to reduce its foreign currency exposures where internal netting or other strategies cannot be effectively employed. Typically, the Company may enter into hedge contracts starting up to 12 to 24 months in advance of the forecasted transaction and may place incremental hedges up to 100 % of the exposure by the time the forecasted transaction occurs. The total notional amount of outstanding foreign currency derivatives designated as cash flow hedges was $ 18.2 billion as of May 31, 2023. +As of May 31, 2023, approximately $ 419 million of deferred net gains (net of tax) on both outstanding and matured derivatives in Accumulated other comprehensive income (loss) are expected to be reclassified to Net income during the next 12 months concurrent with the underlying hedged transactions also being recorded in Net income. Actual amounts ultimately reclassified to Net income are dependent on the exchange rates in effect when derivative contracts currently outstanding mature. As of May 31, 2023, the maximum term over which the Company hedges exposures to the variability of cash flows for its forecasted transactions was 27 months. +FAIR VALUE HEDGES +The Company has, in the past, been exposed to the risk of changes in the fair value of certain fixed-rate debt attributable to changes in interest rates. Derivatives used by the Company to hedge this risk are receive-fixed, pay-variable interest rate swaps. The Company had no interest rate swaps designated as fair value hedges as of May 31, 2023. +NET INVESTMENT HEDGES +The Company has, in the past, hedged and may, in the future, hedge the risk of variability in foreign currency-denominated net investments in wholly-owned international operations. All changes in fair value of the derivatives designated as net investment hedges are reported in Accumulated other comprehensive income (loss) along with the foreign currency translation adjustments on those investments. The Company had no outstanding net investment hedges as of May 31, 2023. +UNDESIGNATED DERIVATIVE INSTRUMENTS +The Company may elect to enter into foreign exchange forwards to mitigate the change in fair value of specific assets and liabilities on the Consolidated Balance Sheets. These undesignated instruments are recorded at fair value as a derivative asset or liability on the Consolidated Balance Sheets with their corresponding change in fair value recognized in Other (income) expense, net, together with the remeasurement gain or loss from the hedged balance sheet position. The total notional amount of outstanding undesignated derivative instruments was $ 4.7 billion as of May 31, 2023. +CREDIT RISK +The Company is exposed to credit-related losses in the event of nonperformance by counterparties to hedging instruments. The counterparties to all derivative transactions are major financial institutions with investment grade credit ratings; however, this does not eliminate the Company's exposure to credit risk with these institutions. This credit risk is limited to the unrealized gains in such contracts should any of these counterparties fail to perform as contracted. To manage this risk, the Company has established strict counterparty credit guidelines that are continually monitored. +The Company's derivative contracts contain credit risk-related contingent features designed to protect against significant deterioration in counterparties' creditworthiness and their ultimate ability to settle outstanding derivative contracts in the normal course of business. The Company's bilateral credit-related contingent features generally require the owing entity, either the Company or the derivative counterparty, to post collateral for the portion of the fair value in excess of $ 50 million should the fair value of outstanding derivatives per counterparty be greater than $ 50 million. Additionally, a certain level of decline in credit rating of either the Company or the counterparty could trigger collateral requirements. As of May 31, 2023, the Company was in compliance with all credit risk-related contingent features, and derivative instruments with such features were in a net liability position of approximately $ 2 million. Accordingly, the Company posted no cash collateral as a result of these contingent features. Further, as of May 31, 2023, the Company had received $ 36 million in cash collateral from various counterparties to its derivative contracts. The Company considers the impact of the risk of counterparty default to be immaterial. +For additional information related to the Company's derivative financial instruments and collateral, refer to Note 4 — Fair Value Measurements. +2023 FORM 10-K 80 +Table of Contents +NOTE 13 — ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) +The changes in Accumulated other comprehensive income (loss), net of tax, were as follows: +(Dollars in millions) +FOREIGN CURRENCY TRANSLATION ADJUSTMENT (1) +CASH FLOW HEDGES +NET INVESTMENT HEDGES (1) +OTHER TOTAL +Balance at May 31, 2022 $ ( 520 ) $ 779 $ 115 $ ( 56 ) $ 318 +Other comprehensive income (loss): +Other comprehensive gains (losses) before reclassifications (2) +( 91 ) 487 — ( 20 ) 376 +Reclassifications to net income of previously deferred (gains) losses (3) +358 ( 835 ) — 14 ( 463 ) +Total other comprehensive income (loss) 267 ( 348 ) — ( 6 ) ( 87 ) +Balance at May 31, 2023 $ ( 253 ) $ 431 $ 115 $ ( 62 ) $ 231 +(1) The accumulated foreign currency translation adjustment and net investment hedge gains/losses related to an investment in a foreign subsidiary are reclassified to Net income upon sale or upon complete or substantially complete liquidation of the respective entity. +(2) Net of tax benefit (expense) of $ 0 million , $( 40 ) million, $ 0 million , $ 6 million and $( 34 ) million, respectively. +(3) Net of tax (benefit) expense of $( 16 ) million, $ 97 million, $ 0 million , $( 5 ) million and $ 76 million, respectively. +(Dollars in millions) +FOREIGN CURRENCY TRANSLATION ADJUSTMENT (1) +CASH FLOW HEDGES +NET INVESTMENT HEDGES (1) +OTHER TOTAL +Balance at May 31, 2021 $ 2 $ ( 435 ) $ 115 $ ( 62 ) $ ( 380 ) +Other comprehensive income (loss): +Other comprehensive gains (losses) before reclassifications (2) +( 522 ) 1,222 — 28 728 +Reclassifications to net income of previously deferred (gains) losses (3) +— ( 8 ) — ( 22 ) ( 30 ) +Total other comprehensive income (loss) ( 522 ) 1,214 — 6 698 +Balance at May 31, 2022 $ ( 520 ) $ 779 $ 115 $ ( 56 ) $ 318 +(1) The accumulated foreign currency translation adjustment and net investment hedge gains/losses related to an investment in a foreign subsidiary are reclassified to Net income upon sale or upon complete or substantially complete liquidation of the respective entity. +(2) Net of tax benefit (expense) of $ 0 million , $( 114 ) million, $ 0 million , $( 9 ) million and $( 123 ) million, respectively. +(3) Net of tax (benefit) expense of $ 0 million , $ 11 million, $ 0 million , $ 9 million and $ 20 million, respectively. +2023 FORM 10-K 81 +Table of Contents +The following table summarizes the reclassifications from Accumulated other comprehensive income (loss) to the Consolidated Statements of Income: +AMOUNT OF GAIN (LOSS) +RECLASSIFIED FROM ACCUMULATED +OTHER COMPREHENSIVE INCOME +(LOSS) INTO INCOME LOCATION OF GAIN (LOSS) +RECLASSIFIED FROM ACCUMULATED +OTHER COMPREHENSIVE INCOME +(LOSS) INTO INCOME +YEAR ENDED MAY 31, +(Dollars in millions) +2023 2022 +Gains (losses) on foreign currency translation adjustment $ ( 374 ) $ — Other (income) expense, net +Total before tax ( 374 ) — +Tax (expense) benefit 16 — +Gain (loss) net of tax ( 358 ) — +Gains (losses) on cash flow hedges: +Foreign exchange forwards and options 26 ( 82 ) Revenues +Foreign exchange forwards and options 581 ( 23 ) Cost of sales +Foreign exchange forwards and options ( 5 ) 1 Demand creation expense +Foreign exchange forwards and options 338 130 Other (income) expense, net +Interest rate swaps ( 8 ) ( 7 ) Interest expense (income), net +Total before tax 932 19 +Tax (expense) benefit ( 97 ) ( 11 ) +Gain (loss) net of tax 835 8 +Gains (losses) on other ( 19 ) 31 Other (income) expense, net +Total before tax ( 19 ) 31 +Tax (expense) benefit 5 ( 9 ) +Gain (loss) net of tax ( 14 ) 22 +Total net gain (loss) reclassified for the period $ 463 $ 30 +2023 FORM 10-K 82 +Table of Contents +NOTE 14 — REVENUES +DISAGGREGATION OF REVENUES +The following tables present the Company's Revenues disaggregated by reportable operating segment, major product line and distribution channel: +YEAR ENDED MAY 31, 2023 +(Dollars in millions) +NORTH AMERICA EUROPE, MIDDLE EAST & AFRICA GREATER CHINA +ASIA PACIFIC & LATIN AMERICA (1) +GLOBAL BRAND DIVISIONS TOTAL NIKE BRAND CONVERSE CORPORATE TOTAL NIKE, INC. +Revenues by: +Footwear $ 14,897 $ 8,260 $ 5,435 $ 4,543 $ — $ 33,135 $ 2,155 $ — $ 35,290 +Apparel 5,947 4,566 1,666 1,664 — 13,843 90 — 13,933 +Equipment 764 592 147 224 — 1,727 28 — 1,755 +Other — — — — 58 58 154 27 239 +TOTAL REVENUES $ 21,608 $ 13,418 $ 7,248 $ 6,431 $ 58 $ 48,763 $ 2,427 $ 27 $ 51,217 +Revenues by: +Sales to Wholesale Customers $ 11,273 $ 8,522 $ 3,866 $ 3,736 $ — $ 27,397 $ 1,299 $ — $ 28,696 +Sales through Direct to Consumer 10,335 4,896 3,382 2,695 — 21,308 974 — 22,282 +Other — — — — 58 58 154 27 239 +TOTAL REVENUES $ 21,608 $ 13,418 $ 7,248 $ 6,431 $ 58 $ 48,763 $ 2,427 $ 27 $ 51,217 +(1) Refer to Note 18 — Acquisitions and Divestitures for additional information on the transition of the Company's NIKE Brand businesses in its CASA territory to third-party distributors. +YEAR ENDED MAY 31, 2022 +(Dollars in millions) +NORTH AMERICA EUROPE, MIDDLE EAST & AFRICA GREATER CHINA ASIA PACIFIC & LATIN AMERICA GLOBAL BRAND DIVISIONS TOTAL NIKE BRAND CONVERSE CORPORATE TOTAL NIKE, INC. +Revenues by: +Footwear $ 12,228 $ 7,388 $ 5,416 $ 4,111 $ — $ 29,143 $ 2,094 $ — $ 31,237 +Apparel 5,492 4,527 1,938 1,610 — 13,567 103 — 13,670 +Equipment 633 564 193 234 — 1,624 26 — 1,650 +Other — — — — 102 102 123 ( 72 ) 153 +TOTAL REVENUES $ 18,353 $ 12,479 $ 7,547 $ 5,955 $ 102 $ 44,436 $ 2,346 $ ( 72 ) $ 46,710 +Revenues by: +Sales to Wholesale Customers $ 9,621 $ 8,377 $ 4,081 $ 3,529 $ — $ 25,608 $ 1,292 $ — $ 26,900 +Sales through Direct to Consumer 8,732 4,102 3,466 2,426 — 18,726 931 — 19,657 +Other — — — — 102 102 123 ( 72 ) 153 +TOTAL REVENUES $ 18,353 $ 12,479 $ 7,547 $ 5,955 $ 102 $ 44,436 $ 2,346 $ ( 72 ) $ 46,710 +2023 FORM 10-K 83 +Table of Contents +YEAR ENDED MAY 31, 2021 +(Dollars in millions) +NORTH AMERICA EUROPE, MIDDLE EAST & AFRICA GREATER CHINA +ASIA PACIFIC & LATIN AMERICA (1) +GLOBAL BRAND DIVISIONS TOTAL NIKE BRAND CONVERSE CORPORATE TOTAL NIKE, INC. +Revenues by: +Footwear $ 11,644 $ 6,970 $ 5,748 $ 3,659 $ — $ 28,021 $ 1,986 $ — $ 30,007 +Apparel 5,028 3,996 2,347 1,494 — 12,865 104 — 12,969 +Equipment 507 490 195 190 — 1,382 29 — 1,411 +Other — — — — 25 25 86 40 151 +TOTAL REVENUES $ 17,179 $ 11,456 $ 8,290 $ 5,343 $ 25 $ 42,293 $ 2,205 $ 40 $ 44,538 +Revenues by: +Sales to Wholesale Customers $ 10,186 $ 7,812 $ 4,513 $ 3,387 $ — $ 25,898 $ 1,353 $ — $ 27,251 +Sales through Direct to Consumer 6,993 3,644 3,777 1,956 — 16,370 766 — 17,136 +Other — — — — 25 25 86 40 151 +TOTAL REVENUES $ 17,179 $ 11,456 $ 8,290 $ 5,343 $ 25 $ 42,293 $ 2,205 $ 40 $ 44,538 +(1) Refer to Note 18 — Acquisitions and Divestitures for additional information on the transition of the Company's NIKE Brand business in Brazil to a third-party distributor. +For the fiscal years ended May 31, 2023, 2022 and 2021, Global Brand Divisions revenues include NIKE Brand licensing and other miscellaneous revenues that are not part of a geographic operating segment. Converse Other revenues were primarily attributable to licensing businesses. Corporate revenues primarily consisted of foreign currency hedge gains and losses related to revenues generated by entities within the NIKE Brand geographic operating segments and Converse but managed through the Company's central foreign exchange risk management program. +As of May 31, 2023 and 2022, the Company did not have any contract assets and had an immaterial amount of contract liabilities recorded in Accrued liabilities on the Consolidated Balance Sheets. +SALES-RELATED RESERVES +As of May 31, 2023 and 2022, the Company's sales-related reserve balance, which includes returns, post-invoice sales discounts and miscellaneous claims, was $ 994 million and $ 1,015 million, respectively, recorded in Accrued liabilities on the Consolidated Balance Sheets. The estimated cost of inventory for expected product returns was $ 226 million and $ 194 million as of May 31, 2023 and 2022, respectively, and was recorded in Prepaid expenses and other current assets on the Consolidated Balance Sheets. +NOTE 15 — OPERATING SEGMENTS AND RELATED INFORMATION +The Company's operating segments are evidence of the structure of the Company's internal organization. The NIKE Brand segments are defined by geographic regions for operations participating in NIKE Brand sales activity. +Each NIKE Brand geographic segment operates predominantly in one industry: the design, development, marketing and selling of athletic footwear, apparel and equipment. The Company's reportable operating segments for the NIKE Brand are: North America; Europe, Middle East & Africa ("EMEA"); Greater China; and Asia Pacific & Latin America ("APLA"), and include results for the NIKE and Jordan brands. Refer to Note 18 — Acquisitions and Divestitures for information regarding the transition of NIKE Brand businesses in certain countries within APLA to third-party distributors. +The Company's NIKE Direct operations are managed within each NIKE Brand geographic operating segment. Converse is also a reportable segment for the Company and operates in one industry: the design, marketing, licensing and selling of athletic lifestyle sneakers, apparel and accessories. +Global Brand Divisions is included within the NIKE Brand for presentation purposes to align with the way management views the Company. Global Brand Divisions revenues include NIKE Brand licensing and other miscellaneous revenues that are not part of a geographic operating segment. Global Brand Divisions costs represent demand creation and operating overhead expense that include product creation and design expenses centrally managed for the NIKE Brand, as well as costs associated with NIKE Direct global digital operations and enterprise technology. +2023 FORM 10-K 84 +Table of Contents +Corporate consists primarily of unallocated general and administrative expenses, including expenses associated with centrally managed departments; depreciation and amortization related to the Company's headquarters; unallocated insurance, benefit and compensation programs, including stock-based compensation; and certain foreign currency gains and losses, including certain hedge gains and losses. +The primary financial measure used by the Company to evaluate performance of individual operating segments is earnings before interest and taxes ("EBIT"), which represents Net income before Interest expense (income), net and Income tax expense in the Consolidated Statements of Income. +As part of the Company's centrally managed foreign exchange risk management program, standard foreign currency rates are assigned twice per year to each NIKE Brand entity in the Company's geographic operating segments and to Converse. These rates are set approximately nine and twelve months in advance of the future selling seasons to which they relate (specifically, for each currency, one standard rate applies to the fall and holiday selling seasons, and one standard rate applies to the spring and summer selling seasons) based on average market spot rates in the calendar month preceding the date they are established. Inventories and Cost of sales for geographic operating segments and Converse reflect the use of these standard rates to record non-functional currency product purchases in the entity's functional currency. Differences between assigned standard foreign currency rates and actual market rates are included in Corporate, together with foreign currency hedge gains and losses generated from the Company's centrally managed foreign exchange risk management program and other conversion gains and losses. +Accounts receivable, net, Inventories and Property, plant and equipment, net for operating segments are regularly reviewed by management and are therefore provided below. +2023 FORM 10-K 85 +Table of Contents +YEAR ENDED MAY 31, +(Dollars in millions) +2023 2022 2021 +REVENUES +North America $ 21,608 $ 18,353 $ 17,179 +Europe, Middle East & Africa 13,418 12,479 11,456 +Greater China 7,248 7,547 8,290 +Asia Pacific & Latin America 6,431 5,955 5,343 +Global Brand Divisions 58 102 25 +Total NIKE Brand 48,763 44,436 42,293 +Converse 2,427 2,346 2,205 +Corporate 27 ( 72 ) 40 +TOTAL NIKE, INC. REVENUES $ 51,217 $ 46,710 $ 44,538 +EARNINGS BEFORE INTEREST AND TAXES +North America $ 5,454 $ 5,114 $ 5,089 +Europe, Middle East & Africa 3,531 3,293 2,435 +Greater China 2,283 2,365 3,243 +Asia Pacific & Latin America 1,932 1,896 1,530 +Global Brand Divisions ( 4,841 ) ( 4,262 ) ( 3,656 ) +Converse 676 669 543 +Corporate ( 2,840 ) ( 2,219 ) ( 2,261 ) +Interest expense (income), net ( 6 ) 205 262 +TOTAL NIKE, INC. INCOME BEFORE INCOME TAXES $ 6,201 $ 6,651 $ 6,661 +ADDITIONS TO PROPERTY, PLANT AND EQUIPMENT +North America $ 283 $ 146 $ 98 +Europe, Middle East & Africa 215 197 153 +Greater China 56 78 94 +Asia Pacific & Latin America 64 56 54 +Global Brand Divisions 271 222 278 +Total NIKE Brand 889 699 677 +Converse 7 9 7 +Corporate 140 103 107 +TOTAL ADDITIONS TO PROPERTY, PLANT AND EQUIPMENT $ 1,036 $ 811 $ 791 +DEPRECIATION +North America $ 128 $ 124 $ 130 +Europe, Middle East & Africa 120 134 136 +Greater China 54 41 46 +Asia Pacific & Latin America 42 42 43 +Global Brand Divisions 211 220 222 +Total NIKE Brand 555 561 577 +Converse 17 22 26 +Corporate 131 134 141 +TOTAL DEPRECIATION $ 703 $ 717 $ 744 +2023 FORM 10-K 86 +Table of Contents +AS OF MAY 31, +(Dollars in millions) +2023 2022 +ACCOUNTS RECEIVABLE, NET +North America $ 1,653 $ 1,850 +Europe, Middle East & Africa 1,197 1,351 +Greater China 162 406 +Asia Pacific & Latin America (1) +700 664 +Global Brand Divisions 96 113 +Total NIKE Brand 3,808 4,384 +Converse 235 230 +Corporate 88 53 +TOTAL ACCOUNTS RECEIVABLE, NET $ 4,131 $ 4,667 +INVENTORIES +North America $ 3,806 $ 4,098 +Europe, Middle East & Africa 2,167 1,887 +Greater China 973 1,044 +Asia Pacific & Latin America (1) +894 686 +Global Brand Divisions 232 197 +Total NIKE Brand 8,072 7,912 +Converse 305 279 +Corporate 77 229 +TOTAL INVENTORIES $ 8,454 $ 8,420 +PROPERTY, PLANT AND EQUIPMENT, NET +North America $ 794 $ 639 +Europe, Middle East & Africa 1,009 920 +Greater China 292 303 +Asia Pacific & Latin America (1) +279 274 +Global Brand Divisions 840 789 +Total NIKE Brand 3,214 2,925 +Converse 38 49 +Corporate 1,829 1,817 +TOTAL PROPERTY, PLANT AND EQUIPMENT, NET $ 5,081 $ 4,791 +(1) Excludes assets held-for-sale as of May 31, 2022. See Note 18 — Acquisitions and Divestitures for additional information. +REVENUES AND LONG-LIVED ASSETS BY GEOGRAPHIC AREA +After allocation of revenues for Global Brand Divisions, Converse and Corporate to geographical areas based on the location where the sales originated, revenues by geographical area are essentially the same as reported above for the NIKE Brand operating segments with the exception of the United States. Revenues derived in the United States were $ 22,007 million, $ 18,749 million and $ 17,363 million for the fiscal years ended May 31, 2023, 2022 and 2021, respectively. +The Company's largest concentrations of long-lived assets primarily consist of the Company's corporate headquarters, retail locations and distribution facilities in the United States and China, as well as distribution facilities in Belgium. Long-lived assets attributable to operations in these countries, which consist of property, plant and equipment, net and operating lease ROU assets, net, were as follows: +MAY 31, +(Dollars in millions) +2023 2022 +United States $ 5,129 $ 4,916 +Belgium 702 646 +China 559 538 +2023 FORM 10-K 87 +Table of Contents +NOTE 16 — COMMITMENTS AND CONTINGENCIES +As of May 31, 2023 and 2022, the Company had bank guarantees and letters of credit outstanding totaling $ 588 million and $ 289 million, respectively, issued primarily for real estate agreements, self-insurance programs, other general business obligations and legal matters. +In connection with various contracts and agreements, the Company provides routine indemnification relating to the enforceability of intellectual property rights, coverage for legal issues that arise and other items where the Company is acting as the guarantor. Currently, the Company has several such agreements in place. However, based on the Company's historical experience and the estimated probability of future loss, the Company has determined the fair value of such indemnification is not material to the Company's financial position or results of operations. +In the ordinary course of business, the Company is subject to various legal proceedings, claims and government investigations relating to its business, products and actions of its employees and representatives, including contractual and employment relationships, product liability, antitrust, customs, tax, intellectual property and other matters. The outcome of these legal matters is inherently uncertain, and the Company cannot predict the eventual outcome of currently pending matters, the timing of their ultimate resolution or the eventual losses, fines, penalties or consequences relating to those matters. When a loss related to a legal proceeding or claim is probable and reasonably estimable, the Company accrues its best estimate for the ultimate resolution of the matter. If one or more legal matters were to be resolved against the Company in a reporting period for amounts above management's expectations, the Company's financial position, operating results and cash flows for that reporting period could be materially adversely affected. In the opinion of management, based on its current knowledge and after consultation with counsel, the Company does not believe any currently pending legal matters will have a material adverse impact on the Company's results of operations, financial position or cash flows, except as described below. +BELGIAN CUSTOMS CLAIM +The Company has received claims for certain years from the Belgian Customs Authorities for alleged underpaid duties related to products imported beginning in fiscal 2018. The Company disputes these claims and has engaged in the appellate process. The Company has issued bank guarantees in order to appeal the claims. At this time, the Company is unable to estimate the range of loss and cannot predict the final outcome as it could take several years to reach a resolution on this matter. If this matter is ultimately resolved against the Company, the amounts owed, including fines, penalties and other consequences relating to the matter, could have a material adverse effect on the Company's results of operations, financial position and cash flows. +NOTE 17 — LEASES +Lease expense is recognized in Cost of sales or Operating overhead expense within the Consolidated Statements of Income, based on the underlying nature of the leased asset. For the fiscal years ended May 31, 2023, 2022 and 2021, lease expense primarily consisted of operating lease costs of $ 585 million, $ 593 million and $ 589 million, respectively. Lease expense also consisted of $ 403 million, $ 366 million and $ 347 million for fiscal years ended May 31, 2023, 2022 and 2021, respectively, primarily related to variable lease costs, which includes an immaterial amount of short-term lease costs. As of and for the fiscal years ended May 31, 2023 and 2022 and 2021, finance leases were not a material component of the Company's lease portfolio. +The undiscounted cash flows for future maturities of the Company's operating lease liabilities and the reconciliation to the Operating lease liabilities recognized in the Company's Consolidated Balance Sheets are as follows: +(Dollars in millions) +AS OF MAY 31, 2023 (1) +Fiscal 2024 $ 506 +Fiscal 2025 562 +Fiscal 2026 490 +Fiscal 2027 436 +Fiscal 2028 369 +Thereafter 1,225 +Total undiscounted future cash flows related to lease payments $ 3,588 +Less interest 377 +Present value of lease liabilities $ 3,211 +(1) Excludes $ 278 million as of May 31, 2023, of future operating lease payments for lease agreements signed but not yet commenced. +2023 FORM 10-K 88 +Table of Contents +The following table includes supplemental information used to calculate the present value of Operating lease liabilities: +AS OF MAY 31, +2023 2022 +Weighted-average remaining lease term (in years) 7.5 7.8 +Weighted-average discount rate 2.5 % 2.3 % +The following table includes supplemental cash and non-cash information related to operating leases: +YEAR ENDED MAY 31, +(Dollars in millions) +2023 2022 2021 +Cash paid for amounts included in the measurement of lease liabilities: +Operating cash flows from operating leases $ 575 $ 589 $ 583 +Operating lease right-of-use assets obtained in exchange for new operating lease liabilities $ 602 $ 537 $ 489 +NOTE 18 — ACQUISITIONS AND DIVESTITURES +ACQUISITIONS +During fiscal 2023, 2022 and 2021, the Company made multiple acquisitions focused on gaining new capabilities to fuel its Consumer Direct Acceleration strategy, serving consumers personally at a global scale. The impact of acquisitions, individually and in aggregate, was not considered material to the Company's Consolidated Financial Statements. +DIVESTITURES +During the fourth quarter of fiscal 2022, the Company entered into separate definitive agreements to sell its entities in Argentina and Uruguay as well as its entity in Chile to third-party distributors. +The sale of the Company's entity in Chile to a third-party distributor was completed during the first quarter of fiscal 2023. The impacts from the transaction were not material to the Company's Consolidated Financial Statements. +The sale of the Company's entities in Argentina and Uruguay to a third-party distributor was completed during the second quarter of fiscal 2023 and the net loss on the sale of these entities totaled approximately $ 550 million. This loss included $ 389 million, recognized primarily in fiscal 2020, largely due to the anticipated release of the cumulative foreign currency translation losses. The remaining loss recognized in fiscal 2023 was due to the devaluation of local currency and cash equivalents included in the transferred assets. Upon completion of the sale, the foreign currency translation losses recorded in Accumulated other comprehensive income (loss) were reclassified to Net income within Other (income) expense, net, on the Company's Consolidated Statements of Comprehensive Income along with the allowance for previously recognized losses recorded in Accrued liabilities. The net loss was classified within Corporate. +The net cash proceeds received are reflected within Other investing activities on the Company's Consolidated Statements of Cash Flows. +The related assets and liabilities of these entities within the Company's APLA operating segment were classified as held-for-sale on the Consolidated Balance Sheets within Prepaid expenses and other currents and Accrued liabilities, respectively, until the transactions closed. As of May 31, 2022, held-for-sale assets were $ 182 million and held-for-sale liabilities were $ 58 million. +OTHER DIVESTITURES +During fiscal 2020, the Company entered into a definitive agreement to sell substantially all of its NIKE Brand operations in Brazil and shift to a distributor operating model. During fiscal 2021, the transaction closed and the Company recognized a loss of approximately $ 50 million within Other (income) expense, net classified within Corporate, on the Consolidated Statements of Income. Cash proceeds received were reflected within Other investing activities on the Consolidated Statements of Cash Flows. +2023 FORM 10-K 89 +Table of Contents +NOTE 19 — RESTRUCTURING +In fiscal 2021, the Company substantially completed a series of leadership and operating model changes to streamline and speed up the strategic execution of the Consumer Direct Acceleration. +For the fiscal year ended May 31, 2021 , the Company recognized employee termination costs of $ 214 million and $ 35 million within Operating overhead expense and Cost of sales, respectively, and made cash payments of $ 212 million. Additionally, the related stock-based compensation expense recorded within Operating overhead expense and Cost of sales was $ 41 million and $ 4 million, respectively. +These costs were classified within Corporate. +2023 FORM 10-K 90 +Table of Contents +ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE +There has been no change of accountants nor any disagreements with accountants on any matter of accounting principles or practices or financial statement disclosure required to be reported under this Item. +ITEM 9A. CONTROLS AND PROCEDURES +We maintain disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in our Securities Exchange Act of 1934, as amended (the "Exchange Act"), reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. +We carry out a variety of ongoing procedures, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, to evaluate the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of May 31, 2023. +"Management's Annual Report on Internal Control Over Financial Reporting" is included in Item 8 of this Annual Report. +We are continuing several transformation initiatives to centralize and simplify our business processes and systems. These are long-term initiatives, which we believe will enhance our internal control over financial reporting due to increased automation and further integration of related processes. We will continue to monitor our internal control over financial reporting for effectiveness throughout these transformation initiatives. +There have not been any changes in our internal control over financial reporting during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. +ITEM 9B. OTHER INFORMATION +No disclosure is required under this item. +ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS +Not applicable. +2023 FORM 10-K 91 +Table of Contents +PART III +ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE +The information required by Item 401 of Regulation S-K regarding directors is included under "Corporate Governance — NIKE, Inc. Board of Directors" in the definitive Proxy Statement for our 2023 Annual Meeting of Shareholders and is incorporated herein by reference. The information required by Item 401 of Regulation S-K regarding executive officers is included under "Information about our Executive Officers" in Item 1 of this Annual Report. The information required by Item 406 of Regulation S-K is included under "Corporate Governance — Code of Conduct" in the definitive Proxy Statement for our 2023 Annual Meeting of Shareholders and is incorporated herein by reference. The information required by Items 407(d)(4) and (d)(5) of Regulation S-K regarding the Audit & Finance Committee of the Board of Directors is included under "Corporate Governance — Board Structure and Responsibilities — Board Committees" in the definitive Proxy Statement for our 2023 Annual Meeting of Shareholders and is incorporated herein by reference. +ITEM 11. EXECUTIVE COMPENSATION +The information required by Items 402, 407(e)(4) and 407(e)(5) of Regulation S-K regarding executive compensation is included under "Corporate Governance — Director Compensation for Fiscal 2023," "Executive Compensation — Compensation Discussion and Analysis," "Executive Compensation — Executive Compensation Tables," and "Additional Information — Compensation Committee Interlocks and Insider Participation," in the definitive Proxy Statement for our 2023 Annual Meeting of Shareholders and is incorporated herein by reference. +ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS +The information required by Item 201(d) of Regulation S-K is included under "Executive Compensation — Executive Compensation Tables — Equity Compensation Plan Information" in the definitive Proxy Statement for our 2023 Annual Meeting of Shareholders and is incorporated herein by reference. The information required by Item 403 of Regulation S-K is included under "Stock Ownership Information — Stock Holdings of Certain Owners and Management" in the definitive Proxy Statement for our 2023 Annual Meeting of Shareholders and is incorporated herein by reference. +ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE +The information required by Items 404 and 407(a) of Regulation S-K is included under "Additional Information — Transactions with Related Persons" and "Corporate Governance — NIKE, Inc. Board of Directors — Director Independence" in the definitive Proxy Statement for our 2023 Annual Meeting of Shareholders and is incorporated herein by reference. +ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES +The information required by Item 9(e) of Schedule 14A is included under "Audit Matters — Ratification of Appointment of Independent Registered Public Accounting Firm" in the definitive Proxy Statement for our 2023 Annual Meeting of Shareholders and is incorporated herein by reference. +2023 FORM 10-K 92 +Table of Contents +PART IV +ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES +(a) The following documents are filed as part of this Annual Report: +FORM 10-K PAGE NO. +1. Financial Statements: +Report of Independent Registered Public Accounting Firm (PCAOB ID 238 ) +53 +Consolidated Statements of Income for each of the three years ended May 31, 202 3 , May 31, 202 2 and May 31, 20 21 +55 +Consolidated Statements of Comprehensive Income for each of the three years ended May 31, 202 3 , May 31, 202 2 and May 31, 20 21 +56 +Consolidated Balance Sheets at May 31, 202 3 and May 31, 202 2 +57 +Consolidated Statements of Cash Flows for each of the three years ended May 31, 202 3 , May 31, 202 2 and May 31, 20 21 +58 +Consolidated Statements of Shareholders' Equity for each of the three years ended May 31, 202 3 , May 31, 202 2 and May 31, 20 21 +59 +Notes to Consolidated Financial Statements +60 +2. Financial Statement Schedule: +II — Valuation and Qualifying Accounts for the years ended May 31, 202 3 , 202 2 and 20 21 +96 +All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. +3. Exhibits: +3.1 +Restated Articles of Incorporation, as amended (incorporated by reference to Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended November 30, 2015). +3.2 +Fifth Restated Bylaws, as amended (incorporated by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K filed June 19, 2020). +4.1 +Restated Articles of Incorporation, as amended (see Exhibit 3.1). +4.2 +Fifth Restated Bylaws, as amended (see Exhibit 3.2). +4.3 +Indenture dated as of April 26, 2013, by and between NIKE, Inc. and Deutsche Bank Trust Company Americas, as trustee (incorporated by reference to Exhibit 4.1 to the Company's Form 8-K filed April 26, 2013). +4.4 +Second Supplemental Indenture, dated as of October 29, 2015, by and between NIKE, Inc. and Deutsche Bank Trust Company Americas, as trustee, including the form of 3.875% Notes due 2045 (incorporated by reference to Exhibit 4.2 to the Company's Form 8-K filed October 29, 2015). +4.5 +Third Supplemental Indenture, dated as of October 21, 2016, by and between NIKE, Inc. and Deutsche Bank Trust Company Americas, as trustee, including the form of 2.375% Notes due 2026 and form of 3.375% Notes due 2046 (incorporated by reference to Exhibit 4.2 to the Company's Form 8-K filed October 21, 2016). +4.6 +Fourth Supplemental Indenture, dated as of March 27, 2020, by and between NIKE, Inc. and Deutsche Bank Trust Company Americas, as trustee, including the form of 2.400% Notes due 2025, form of 2.750% Notes due 2027, form of 2.850% Notes due 2030, form of 3.250% Notes due 2040 and form of 3.375% Notes due 2050 (incorporated by reference to Exhibit 4.2 to the Company's Form 8-K filed March 27, 2020). +4.7 +Description of Registrants Securities (incorporated by reference to Exhibit 4.6 to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 2019). +10.1 +Form of Non-Statutory Stock Option Agreement for options granted to non-employee directors under the 1990 Stock Incentive Plan (incorporated by reference to Exhibit 10.2 to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 2010).* +10.2 +Form of Restricted Stock Agreement for non-employee directors under the 1990 Stock Incentive Plan (incorporated by reference to Exhibit 10.4 to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 2014).* +10.3 +Form of Non-Statutory Stock Option Agreement for options granted to executives under the Stock Incentive Plan (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended February 28, 2018).* +2023 FORM 10-K 93 +Table of Contents +10.4 +Form of Indemnity Agreement entered into between the Company and each of its officers and directors (incorporated by reference to Exhibit 10.2 to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 2008).* +10.5 +NIKE, Inc. 1990 Stock Incentive Plan (incorporated by reference to Exhibit 10.7 to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 2014).* +10.6 +NIKE, Inc. Deferred Compensation Plan (Amended and Restated effective April 1, 2013) (incorporated by reference to Exhibit 10.9 to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 2013).* +10.7 +NIKE, Inc. Deferred Compensation Plan (Amended and Restated effective June 1, 2004) (applicable to amounts deferred before January 1, 2005) (incorporated by reference to Exhibit 10.6 to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 2004).* +10.8 +Amendment No. 1 effective January 1, 2008 to the NIKE, Inc. Deferred Compensation Plan (June 1, 2004 Restatement) (incorporated by reference to Exhibit 10.9 to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 2009).* +10.9 +NIKE, Inc. Foreign Subsidiary Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended November 30, 2008).* +10.10 +Amended and Restated Covenant Not to Compete and Non-Disclosure Agreement between NIKE, Inc. and Mark G. Parker dated July 24, 2008 (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed July 24, 2008).* +10.11 +Form of Restricted Stock Unit Agreement under the Stock Incentive Plan (incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended February 28, 2018).* +10.12 +Form of Covenant Not to Compete and Non-Disclosure Agreement between NIKE, Inc. and its executive officers (other than Mark G. Parker and John J. Donahoe II) (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed February 18, 2020).* +10.13 +Policy for Recoupment of Incentive Compensation (incorporated by reference to Exhibit 10.3 to the Company's Current Report on Form 8-K filed July 20, 2010).* +10.14 +NIKE, Inc. Stock Incentive Plan (incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K filed September 23, 2015).* +10.15 +Form of Discretionary Performance Award Agreement (incorporated by reference to Exhibit 10.22 to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 2018).* +10.16 +NIKE, Inc. Amended and Restated Long-Term Incentive Plan (incorporated by reference to Exhibit A to the Company's definitive Proxy Statement filed July 25, 2017).* +10.17 +Offer Letter between NIKE, Inc. and John J. Donahoe II (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed October 22, 2019).* +10.18 +Form of Covenant Not to Compete and Non-Disclosure Agreement between NIKE, Inc. and John J. Donahoe II (incorporated by reference to Exhibit 10.3 to the Company's Current Report on Form 8-K filed October 22, 2019).* +10.19 +Form of Performance-Based Stock Option Agreement (incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K filed October 22, 2019). +10.20 +Letter Agreement between NIKE, Inc. and Mark G. Parker (incorporated by reference to Exhibit 10.6 to the Company's Current Report on Form 8-K filed October 22, 2019).* +10.21 +NIKE, Inc. Executive Performance Sharing Plan (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed June 19, 2020).* +10.22 +NIKE, Inc. Amended and Restated Long-Term Incentive Plan (incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K filed June 19, 2020).* +10.23 +Form of Non-Statutory Stock Option Agreement under the NIKE, Inc. Stock Incentive Plan (incorporated by reference to Exhibit 10.3 to the Company's Current Report on Form 8-K filed June 19, 2020).* +10.24 +Form of Restricted Stock Unit Agreement under the NIKE, Inc. Stock Incentive Plan (incorporated by reference to Exhibit 10.4 to the Company's Current Report on Form 8-K filed June 19, 2020).* +10.25 +NIKE, Inc. Stock Incentive Plan (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed September 18, 202 0 ) . * +10.26 +NIKE, Inc. Performance-Based Restricted Stock Unit Agreem en t under the NIKE , Inc. Stock Incentive Plan (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on June 17, 2021) .* +10.27 +Credit Agreement, dated as of March 11, 2022, among NIKE, Inc., Bank of America, N.A., as Administrative Agent, and the other Banks named therein (incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K filed March 14, 2022). +10.28 +NIKE, Inc. Employee Stock Purchase Plan, as amended (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on September 14, 2022). +10.29 +Credit Agreement, dated as of March 10, 2023, among NIKE, Inc., Bank of America, N.A., as Administrative Agent, and the other Banks named therein (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed March 13, 2023). +21 +Subsidiaries of the Registrant. +23 +Consent of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm (included within this Annual Report on Form 10-K). +31.1 +Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer. +31.2 +Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer. +32† +Section 1350 Certifications. +2023 FORM 10-K 94 +Table of Contents +101.INS Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. +101.SCH Inline XBRL Taxonomy Extension Schema +101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase +101.DEF Inline XBRL Taxonomy Extension Definition Document +101.LAB Inline XBRL Taxonomy Extension Label Linkbase +101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase +104 Cover Page Interactive Data File - formatted in Inline XBRL and included in Exhibit 101 +* Management contract or compensatory plan or arrangement. +† Furnished herewith +The Exhibits filed herewith do not include certain instruments with respect to long-term debt of NIKE and its subsidiaries, inasmuch as the total amount of debt authorized under any such instrument does not exceed 10 percent of the total assets of NIKE and its subsidiaries on a consolidated basis. NIKE agrees, pursuant to Item 601(b)(4)(iii) of Regulation S-K, that it will furnish a copy of any such instrument to the SEC upon request. +2023 FORM 10-K 95 +Table of Contents +SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS +(Dollars in millions) BALANCE AT +BEGINNING OF +PERIOD CHARGED TO +COSTS AND +EXPENSES +CHARGED +TO OTHER +ACCOUNTS (1) +WRITE-OFFS, +NET BALANCE +AT END +OF PERIOD +Sales returns reserve +For the fiscal year ended May 31, 2021 $ 682 $ 2,617 $ 41 $ ( 2,745 ) $ 595 +For the fiscal year ended May 31, 2022 595 2,573 ( 31 ) ( 2,612 ) 525 +For the fiscal year ended May 31, 2023 525 3,344 ( 11 ) ( 3,309 ) 549 +(1) Amounts included in this column primarily relate to foreign currency translation. +2023 FORM 10-K 96 +Table of Contents +ITEM 16. FORM 10-K SUMMARY +None. +2023 FORM 10-K 97 +Table of Contents +Consent of Independent Registered Public Accounting Firm +We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (No. 333-266267) and Form S-8 (Nos. 033-63995, 333-63581, 333-63583, 333-68864, 333-68886, 333-71660, 333-104822, 333-117059, 333-133360, 333-164248, 333-171647, 333-173727, 333-208900, 333-215439 and 333-266269) of NIKE, Inc. of our report dated July 20, 2023 relating to the financial statements, financial statement schedule and the effectiveness of internal control over financial reporting, which appears in this Form 10-K. +/s/ PricewaterhouseCoopers LLP +Portland, Oregon +July 20, 2023 +2023 FORM 10-K 98 +Table of Contents +SIGNATURES +Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. +NIKE, INC. +By: +/s/ JOHN J. DONAHOE II +John J. Donahoe II +President and Chief Executive Officer +Date: July 20, 2023 +Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. +SIGNATURE TITLE DATE +PRINCIPAL EXECUTIVE OFFICER AND DIRECTOR: +/s/ JOHN J. DONAHOE II +John J. Donahoe II +President and Chief Executive Officer July 20, 2023 +PRINCIPAL FINANCIAL OFFICER: +/s/ MATTHEW FRIEND +Matthew Friend +Executive Vice President and Chief Financial Officer July 20, 2023 +PRINCIPAL ACCOUNTING OFFICER: +/s/ JOHANNA NIELSEN +Johanna Nielsen +Vice President and Corporate Controller July 20, 2023 +DIRECTORS: +/s/ MARK G. PARKER +Mark G. Parker +Director, Chairman of the Board July 20, 2023 +/s/ CATHLEEN A. BENKO +Cathleen A. Benko +Director July 20, 2023 +/s/ TIMOTHY D. COOK +Timothy D. Cook +Director July 20, 2023 +/s/ THASUNDA B. DUCKETT +Thasunda B. Duckett +Director July 20, 2023 +/s/ MÓNICA GIL +Mónica Gil +Director July 20, 2023 +/s/ ALAN B. GRAF, JR. +Alan B. Graf, Jr. +Director July 20, 2023 +/s/ MARIA HENRY +Maria Henry +Director July 20, 2023 +/s/ PETER B. HENRY +Peter B. Henry +Director July 20, 2023 +/s/ TRAVIS A. KNIGHT +Travis A. Knight +Director July 20, 2023 +/s/ MICHELLE A. PELUSO +Michelle A. Peluso +Director July 20, 2023 +/s/ JOHN W. ROGERS, JR. +John W. Rogers, Jr. +Director July 20, 2023 +/s/ ROBERT SWAN +Robert Swan +Director July 20, 2023 +2023 FORM 10-K 99 \ No newline at end of file diff --git a/raw/filings/0000320187/2022/0000320187-23-000039/filing_metadata.csv b/raw/filings/0000320187/2022/0000320187-23-000039/filing_metadata.csv new file mode 100644 index 0000000000000000000000000000000000000000..b4bdb8882a4c879c6e9956a87a76af252e874ae9 --- /dev/null +++ b/raw/filings/0000320187/2022/0000320187-23-000039/filing_metadata.csv @@ -0,0 +1,2 @@ +cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing +0000320187,NKE,"NIKE, Inc.",10-K,2023-07-20,2023-05-31,2023-07-21T00:20:36.000Z,0000320187-23-000039,nke-20230531.htm,10-K,16131523,1,1,https://www.sec.gov/Archives/edgar/data/320187/000032018723000039/nke-20230531.htm,https://www.sec.gov/Archives/edgar/data/320187/000032018723000039/,2022,2022,1 diff --git a/raw/filings/0000320187/2022/0000320187-23-000039/item1.txt b/raw/filings/0000320187/2022/0000320187-23-000039/item1.txt new file mode 100644 index 0000000000000000000000000000000000000000..f28d7f099dacb69d0df11ba18c02c70eca63ea4c --- /dev/null +++ b/raw/filings/0000320187/2022/0000320187-23-000039/item1.txt @@ -0,0 +1,128 @@ +ITEM 1. BUSINESS +GENERAL +NIKE, Inc. was incorporated in 1967 under the laws of the State of Oregon. As used in this Annual Report on Form 10-K (this "Annual Report"), the terms "we," "us," "our," "NIKE" and the "Company" refer to NIKE, Inc. and its predecessors, subsidiaries and affiliates, collectively, unless the context indicates otherwise. +Our principal business activity is the design, development and worldwide marketing and selling of athletic footwear, apparel, equipment, accessories and services. NIKE is the largest seller of athletic footwear and apparel in the world. We sell our products through NIKE Direct operations, which are comprised of both NIKE-owned retail stores and sales through our digital platforms (also referred to as "NIKE Brand Digital"), to retail accounts and to a mix of independent distributors, licensees and sales representatives in nearly all countries around the world. We also offer interactive consumer services and experiences through our digital platforms. Nearly all of our products are manufactured by independent contractors. Nearly all footwear and apparel products are manufactured outside the United States, while equipment products are manufactured both in the United States and abroad. +All references to fiscal 2023, 2022, 2021 and 2020 are to NIKE, Inc.'s fiscal years ended May 31, 2023, 2022, 2021 and 2020, respectively. Any references to other fiscal years refer to a fiscal year ending on May 31 of that year. +PRODUCTS +Our NIKE Brand product offerings are aligned around our consumer construct focused on Men's, Women's and Kids'. We also design products specifically for the Jordan Brand and Converse. We believe this approach allows us to create products that better meet individual consumer needs while accelerating our largest growth opportunities. +NIKE's athletic footwear products are designed primarily for specific athletic use, although a large percentage of the products are worn for casual or leisure purposes. We place considerable emphasis on innovation and high-quality construction in the development and manufacturing of our products. Our Men's, Women's and Jordan Brand footwear products currently lead in footwear sales and we expect them to continue to do so. +We also sell sports apparel, which features the same trademarks and are sold predominantly through the same marketing and distribution channels as athletic footwear. Our sports apparel, similar to our athletic footwear products, is designed primarily for athletic use, although many of the products are worn for casual or leisure purposes, and demonstrates our commitment to innovation and high-quality construction. Our Men's and Women's apparel products currently lead in apparel sales and we expect them to continue to do so. We often market footwear, apparel and accessories in "collections" of similar use or by category. We also market apparel with licensed college and professional team and league logos. +We sell a line of performance equipment and accessories under the NIKE Brand name, including bags, socks, sport balls, eyewear, timepieces, digital devices, bats, gloves, protective equipment and other equipment designed for sports activities. We also sell small amounts of various plastic products to other manufacturers through our wholly-owned subsidiary, NIKE IHM, Inc., doing business as Air Manufacturing Innovation. +Our Jordan Brand designs, distributes and licenses athletic and casual footwear, apparel and accessories predominantly focused on basketball performance and culture using the Jumpman trademark. Sales and operating results for Jordan Brand products are reported within the respective NIKE Brand geographic operating segments. +Our wholly-owned subsidiary brand, Converse, headquartered in Boston, Massachusetts, designs, distributes and licenses casual sneakers, apparel and accessories under the Converse, Chuck Taylor, All Star, One Star, Star Chevron and Jack Purcell trademarks. Operating results of the Converse brand are reported on a stand-alone basis. +In addition to the products we sell to our wholesale customers and directly to consumers through our NIKE Direct operations, we have also entered into license agreements that permit unaffiliated parties to manufacture and sell, using NIKE-owned trademarks, certain apparel, digital devices and applications and other equipment designed for sports activities. +2023 FORM 10-K 1 +Table of Contents +We also offer interactive consumer services and experiences as well as digital products through our digital platforms, including fitness and activity apps; sport, fitness and wellness content; and digital services and features in retail stores that enhance the consumer experience. +SALES AND MARKETING +We experience moderate fluctuations in aggregate sales volume during the year. Historically, revenues in the first and fourth fiscal quarters have slightly exceeded those in the second and third fiscal quarters. However, the mix of product sales may vary considerably as a result of changes in seasonal and geographic demand for particular types of footwear, apparel and equipment, as well as other macroeconomic, strategic, operating and logistics-related factors. +Because NIKE is a consumer products company, the relative popularity and availability of various sports and fitness activities, as well as changing design trends, affect the demand for our products. We must, therefore, respond to trends and shifts in consumer preferences by adjusting the mix of existing product offerings, developing new products, styles and categories and influencing sports and fitness preferences through extensive marketing. Failure to respond in a timely and adequate manner could have a material adverse effect on our sales and profitability. This is a continuing risk. Refer to Item 1A. Risk Factors. +OUR MARKETS +We report our NIKE Brand operations based on our internal geographic organization. Each NIKE Brand geographic segment operates predominantly in one industry: the design, development, marketing and selling of athletic footwear, apparel and equipment. The Company's reportable operating segments for the NIKE Brand are: North America; Europe, Middle East & Africa ("EMEA"); Greater China; and Asia Pacific & Latin America ("APLA"), and include results for the NIKE and Jordan brands. Sales through our NIKE Direct operations are managed within each geographic operating segment. +Converse is also a reportable operating segment and operates predominately in one industry: the design, marketing, licensing and selling of casual sneakers, apparel and accessories. Converse direct to consumer operations, including digital commerce, are reported within the Converse operating segment results. +UNITED STATES MARKET +For fiscal 2023, NIKE Brand and Converse sales in the United States accounted for approximately 43% of total revenues, compared to 40% and 39% for fiscal 2022 and fiscal 2021, respectively. We sell our products to thousands of retail accounts in the United States, including a mix of footwear stores, sporting goods stores, athletic specialty stores, department stores, skate, tennis and golf shops and other retail accounts. In the United States, we utilize NIKE sales offices to solicit such sales. During fiscal 2023, our three largest United States customers accounted for approximately 22% of sales in the United States. +Our NIKE Direct and Converse direct to consumer operations sell our products to consumers through various digital platforms. In addition, our NIKE Direct and Converse direct to consumer operations sell products through the following number of retail stores in the United States: +U.S. RETAIL STORES NUMBER +NIKE Brand factory stores 213 +NIKE Brand in-line stores (including employee-only stores) 74 +Converse stores (including factory stores) 82 +TOTAL 369 +In the United States, NIKE has eight significant distribution centers. Refer to Item 2. Properties for further information. +2023 FORM 10-K 2 +Table of Contents +INTERNATIONAL MARKETS +For fiscal 2023, non-U.S. NIKE Brand and Converse sales accounted for approximately 57% of total revenues, compared to 60% and 61% for fiscal 2022 and fiscal 2021, respectively. We sell our products to retail accounts through our own NIKE Direct operations and through a mix of independent distributors, licensees and sales representatives around the world. We sell to thousands of retail accounts and ship products from 67 distribution centers outside of the United States. Refer to Item 2. Properties for further information on distribution facilities outside of the United States. During fiscal 2023, NIKE's three largest customers outside of the United States accounted for approximately 14% of total non-U.S. sales. +In addition to NIKE-owned and Converse-owned digital commerce platforms in over 40 countries, our NIKE Direct and Converse direct to consumer businesses operate the following number of retail stores outside the United States: +NON-U.S. RETAIL STORES NUMBER +NIKE Brand factory stores 560 +NIKE Brand in-line stores (including employee-only stores) 49 +Converse stores (including factory stores) 54 +TOTAL 663 +SIGNIFICANT CUSTOMER +No customer accounted for 10% or more of our consolidated net Revenues during fiscal 2023. +PRODUCT RESEARCH, DESIGN AND DEVELOPMENT +We believe our research, design and development efforts are key factors in our success. Technical innovation in the design and manufacturing process of footwear, apparel and athletic equipment receives continued emphasis as we strive to produce products that help to enhance athletic performance, reduce injury and maximize comfort, while decreasing our environmental impact. +In addition to our own staff of specialists in the areas of biomechanics, chemistry, exercise physiology, engineering, digital technologies, industrial design, sustainability and related fields, we also utilize research committees and advisory boards made up of athletes, coaches, trainers, equipment managers, orthopedists, podiatrists, physicians and other experts who consult with us and review certain designs, materials and concepts for product and manufacturing, design and other process improvements and compliance with product safety regulations around the world. Employee athletes, athletes engaged under sports marketing contracts and other athletes wear-test and evaluate products during the design and development process. +As we continue to develop new technologies, we are simultaneously focused on the design of innovative products and experiences incorporating such technologies throughout our product categories and consumer applications. Using market intelligence and research, our various design teams identify opportunities to leverage new technologies in existing categories to respond to consumer preferences. The proliferation of Nike Air, Zoom, Free, Dri-FIT, Flyknit, FlyEase, ZoomX, Air Max, React and Forward technologies, among others, typifies our dedication to designing innovative products. +MANUFACTURING +Nearly all of our footwear and apparel products are manufactured outside the United States by independent manufacturers ("contract manufacturers"), many of which operate multiple factories. We are also supplied, primarily indirectly, by a number of materials, or "Tier 2" suppliers, who provide the principal materials used in footwear and apparel finished goods products. As of May 31, 2023, we had 146 strategic Tier 2 suppliers. +As of May 31, 2023, our contract manufacturers operated 123 finished goods footwear factories located in 11 countries. For fiscal 2023, NIKE Brand footwear finished goods were manufactured by 15 contract manufacturers, many of which operate multiple factories. The largest single finished goods footwear factory accounted for approximately 9% of total fiscal 2023 NIKE Brand footwear production. For fiscal 2023, factories in Vietnam, Indonesia and China manufactured approximately 50%, 27% and 18% of total NIKE Brand footwear, respectively. For fiscal 2023, four footwear contract manufacturers each accounted for greater than 10% of footwear production and in the aggregate accounted for approximately 58% of NIKE Brand footwear production. +As of May 31, 2023, our contract manufacturers operated 291 finished goods apparel factories located in 31 countries. For fiscal 2023, NIKE Brand apparel finished goods were manufactured by 55 contract manufacturers, many of which operate multiple factories. The largest single finished goods apparel factory accounted for approximately 8% of total fiscal 2023 NIKE Brand apparel production. For fiscal 2023, factories in Vietnam, China and Cambodia manufactured approximately 29%, 18% and 16% +2023 FORM 10-K 3 +Table of Contents +of total NIKE Brand apparel, respectively. For fiscal 2023, one apparel contract manufacturer accounted for more than 10% of apparel production, and the top five contract manufacturers in the aggregate accounted for approximately 52% of NIKE Brand apparel production. +NIKE's contract manufacturers buy raw materials for the manufacturing of our footwear, apparel and equipment products. Most raw materials are available and purchased by those contract manufacturers in the countries where manufacturing takes place. +The principal materials used in our footwear products are natural and synthetic rubber, plastic compounds, foam cushioning materials, natural and synthetic leather, nylon, polyester and natural fiber textiles, as well as polyurethane films used to make NIKE Air-Sole cushioning components. During fiscal 2023, Air Manufacturing Innovation, a wholly-owned subsidiary, with facilities near Beaverton, Oregon, in Dong Nai Province, Vietnam, and St. Charles, Missouri, as well as contract manufacturers in China and Vietnam, were our suppliers of NIKE Air-Sole cushioning components used in footwear. +The principal materials used in our apparel products are natural and synthetic fabrics, yarns and threads (both virgin and recycled); specialized performance fabrics designed to efficiently wick moisture away from the body, retain heat and repel rain and/or snow; and plastic and metal hardware. +In fiscal 2023, we experienced ongoing supply chain volatility during the first part of the year, which improved gradually during the course of the year. We also experienced higher supply chain network costs primarily due to inflationary pressures during the year. Despite competition for certain materials during fiscal 2023, contract manufacturers were able to source sufficient quantities of raw materials for use in our footwear and apparel products. Refer to Item 1A. Risk Factors, for additional discussion of the impact of sourcing risks on our business. +Since 1972, Sojitz Corporation of America ("Sojitz America"), a large Japanese trading company and the sole owner of our redeemable preferred stock, has performed import-export financing services for us. +INTERNATIONAL OPERATIONS AND TRADE +Our international operations and sources of supply are subject to the usual risks of doing business abroad, such as the implementation of, or potential changes in, foreign and domestic trade policies, increases in import duties, anti-dumping measures, quotas, safeguard measures, trade restrictions, restrictions on the transfer of funds and, in certain parts of the world, political tensions, instability, conflicts, nationalism and terrorism, and resulting sanctions and other measures imposed in response to such issues. We have not, to date, been materially affected by any such risk but cannot predict the likelihood of such material effects occurring in the future. +In recent years, uncertain global and regional economic and political conditions have affected international trade and increased protectionist actions around the world. These trends are affecting many global manufacturing and service sectors, and the footwear and apparel industries, as a whole, are not immune. Companies in our industry are facing trade protectionism in many different regions, and, in nearly all cases, we are working together with industry groups to address trade issues and reduce the impact to the industry, while observing applicable competition laws. Notwithstanding our efforts, protectionist measures have resulted in increases in the cost of our products, and additional measures, if implemented, could adversely affect sales and/or profitability for NIKE, as well as the imported footwear and apparel industry as a whole. +We monitor protectionist trends and developments throughout the world that may materially impact our industry, and we engage in administrative and judicial processes to mitigate trade restrictions. We are actively monitoring actions that may result in additional anti-dumping measures and could affect our industry. We are also monitoring for and advocating against other impediments that may limit or delay customs clearance for imports of footwear, apparel and equipment. NIKE also advocates for trade liberalization for footwear and apparel in a number of bilateral and multilateral free trade agreements. Changes in, and responses to, U.S. trade policies, including the imposition of tariffs or penalties on imported goods or retaliatory measures by other countries, have negatively affected, and could in the future negatively affect, U.S. corporations, including NIKE, with business operations and/or consumer markets in those countries, which could also make it necessary for us to change the way we conduct business, either of which may have an adverse effect on our business, financial condition or our results of operations. In addition, with respect to proposed trade restrictions, we work with a broad coalition of global businesses and trade associations representing a wide variety of sectors to help ensure that any legislation enacted and implemented (i) addresses legitimate and core concerns, (ii) is consistent with international trade rules and (iii) reflects and considers domestic economies and the important role they may play in the global economic community. +Where trade protection measures are implemented, we believe we have the ability to develop, over a period of time, adequate alternative sources of supply for the products obtained from our present suppliers. If events prevented us from acquiring products from our suppliers in a particular country, our operations could be temporarily disrupted and we could experience an adverse financial impact. However, we believe we could abate any such disruption, and that much of the adverse impact on supply would, therefore, be of a short-term nature, although alternate sources of supply might not be as cost-effective and could have an ongoing adverse impact on profitability. +2023 FORM 10-K 4 +Table of Contents +Our international operations are also subject to compliance with the U.S. Foreign Corrupt Practices Act (the "FCPA"), and other anti-bribery laws applicable to our operations. We source a significant portion of our products from, and have important consumer markets, outside of the United States. We have an ethics and compliance program to address compliance with the FCPA and similar laws by us, our employees, agents, suppliers and other partners. Refer to Item 1A. Risk Factors for additional information on risks relating to our international operations. +COMPETITION +The athletic footwear, apparel and equipment industry is highly competitive on a worldwide basis. We compete internationally with a significant number of athletic and leisure footwear companies, athletic and leisure apparel companies, sports equipment companies and large companies having diversified lines of athletic and leisure footwear, apparel and equipment, including adidas, Anta, ASICS, Li Ning, lululemon athletica, New Balance, Puma, Under Armour and V.F. Corporation, among others. The intense competition and the rapid changes in technology and consumer preferences in the markets for athletic and leisure footwear and apparel and athletic equipment constitute significant risk factors in our operations. Refer to Item 1A. Risk Factors for additional information. +NIKE is the largest seller of athletic footwear and apparel in the world. Important aspects of competition in this industry are: +• Product attributes such as quality; performance and reliability; new product style, design, innovation and development; as well as consumer price/value. +• Consumer connection, engagement and affinity for brands and products, developed through marketing, promotion and digital experiences; social media interaction; customer support and service; identification with prominent and influential athletes, influencers, public figures, coaches, teams, colleges and sports leagues who endorse our brands and use our products and active engagement through sponsored sporting events and clinics. +• Effective sourcing and distribution of products, with attractive merchandising and presentation at retail, both in-store and on digital platforms. +We believe that we are competitive in all of these areas. +TRADEMARKS AND PATENTS +We believe that our intellectual property rights are important to our brand, our success and our competitive position. We strategically pursue available protections of these rights and vigorously protect them against third-party theft and infringement. +We use trademarks on nearly all of our products and packaging, and in our marketing materials, and believe having distinctive marks that are readily identifiable is an important factor in creating a market for our goods, in identifying our brands and the Company, and in distinguishing our goods from the goods of others. We consider our NIKE and Swoosh Design trademarks to be among our most valuable assets and we have registered these trademarks in over 190 jurisdictions worldwide. In addition, we own many other trademarks that we use in marketing our products. We own common law rights in the trade dress of several distinctive shoe designs and elements. For certain trade dress, we have sought and obtained trademark registrations. +We have copyright protection in our designs, graphics, software applications, digital goods and other original works. When appropriate, we also obtain registered copyrights. +We file for, own and maintain many U.S. and foreign utility and design patents protecting components, technologies, materials, manufacturing techniques, features, functionality, and industrial designs used in and for the manufacture of various athletic, performance, and leisure footwear and apparel, including physical and digital versions thereof, athletic equipment, and digital devices, and related software applications. These patents expire at various times. +We believe our success depends upon our capabilities in areas such as design, research and development, production and marketing and is supported and protected by our intellectual property rights, such as trademarks, utility and design patents, copyrights, and trade secrets, among others. +We have followed a policy of applying for and registering intellectual property rights in the United States and select foreign countries on trademarks, inventions, innovations and designs that we deem valuable. We also continue to vigorously protect our intellectual property, including trademarks, patents and trade secrets against third-party infringement and misappropriation. +2023 FORM 10-K 5 +Table of Contents +HUMAN CAPITAL RESOURCES +At NIKE, we consider the strength and effective management of our workforce to be essential to the ongoing success of our business. We believe that it is important to attract, develop and retain a diverse and engaged workforce at all levels of our business and that such a workforce fosters creativity and accelerates innovation. We are focused on building an increasingly diverse talent pipeline that reflects our consumers, athletes and the communities we serve. +CULTURE +Each employee shapes NIKE's culture through behaviors and practices. This starts with our Maxims, which represent our core values and, along with our Code of Conduct, feature the fundamental behaviors that help anchor, inform and guide us and apply to all employees. Our mission is to bring inspiration and innovation to every athlete in the world, which includes the belief that if you have a body, you are an athlete. We aim to do this by creating groundbreaking sport innovations, making our products more sustainably, building a creative and diverse global team, supporting the well-being of our employees and making a positive impact in communities where we live and work. Our mission is aligned with our deep commitment to maintaining an environment where all NIKE employees have the opportunity to reach their full potential, to connect to our brands and to shape our workplace culture. We believe providing for growth and retention of our employees is essential in fostering such a culture and are dedicated to giving access to training programs and career development opportunities, including trainings on NIKE's values, history and business, trainings on developing leadership skills at all levels, tools and resources for managers and qualified tuition reimbursement opportunities. +As part of our commitment to empowering our employees to help shape our culture, we source employee feedback through our Engagement Survey program, including several corporate pulse surveys. The program provides every employee throughout the globe an opportunity to provide confidential feedback on key areas known to drive employee engagement, including their satisfaction with their managers, their work and the Company generally. The program also measures our employees’ emotional commitment to NIKE as well as NIKE's culture of diversity, equity and inclusion. NIKE also provides multiple points of contact for employees to speak up if they experience something that does not align with our values or otherwise violates our workplace policies, even if they are uncertain what they observed or heard is a violation of company policy. +As part of our commitment to make a positive impact on our communities, we maintain a goal of investing 2% of our prior fiscal year's pre-tax income into global communities. The focus of this investment continues to be inspiring kids to be active through play and sport as well as uniting and inspiring communities to create a better and more equitable future for all. Our community investments are an important part of our culture in that we also support employees in giving back to community organizations through donations and volunteering, which are matched by the NIKE Foundation where eligible. +EMPLOYEE BASE +As of May 31, 2023, we had approximately 83,700 employees worldwide, including retail and part-time employees. We also utilize independent contractors and temporary personnel to supplement our workforce. +None of our employees are represented by a union, except certain employees in the EMEA and APLA geographies are members of and/or represented by trade unions, as allowed or required by local law and/or collective bargaining agreements. Also, in some countries outside of the United States, local laws require employee representation by works councils (which may be entitled to information and consultation on certain subsidiary decisions) or by organizations similar to a union. In certain European countries, we are required by local law to enter into, and/or comply with, industry-wide or national collective bargaining agreements. NIKE has never experienced a material interruption of operations due to labor disagreements. +DIVERSITY, EQUITY AND INCLUSION +Diversity, equity and inclusion ("DE&I") is a strategic priority for NIKE and we are committed to having an increasingly diverse team and culture. We aim to foster an inclusive and accessible workplace through recruitment, development and retention of diverse talent with the goal of expanding representation across all dimensions of diversity over the long term. We remain committed to the targets announced in fiscal 2021 for the Company to work toward by fiscal 2025, including increasing representation of women in our global corporate workforce and leadership positions, as well as increasing representation of U.S. racial and ethnic minorities in our U.S. corporate workforce and at the Director level and above. +We continue to enhance our efforts to recruit diverse talent through our traditional channels and through initiatives, such as partnerships with athletes and sports-related organizations to create apprenticeship programs and new partnerships with organizations, colleges and universities that serve diverse populations. Additionally, we are prioritizing DE&I education so that all NIKE employees and leaders have the cultural awareness and understanding to lead inclusively and build diverse and inclusive teams. We also have Employee Networks, collectively known as NikeUNITED, representing various employee groups. +2023 FORM 10-K 6 +Table of Contents +Our DE&I focus extends beyond our workforce and includes our communities, which we support in a number of ways. We have committed to investments that aim to address racial inequality and improve diversity and representation in our communities. We also are leveraging our global scale to accelerate business diversity, including investing in business training programs for women and increasing the proportion of services supplied by minority-owned businesses. +COMPENSATION AND BENEFITS +NIKE's total rewards are intended to be competitive and equitable, meet the diverse needs of our global teammates and reinforce our values. We are committed to providing comprehensive, competitive and equitable pay and benefits to our employees, and we have invested, and aim to continue to invest, in our employees through growth and development and holistic well-being initiatives. Our initiatives in this area include: +• We are committed to competitive pay and to reviewing our pay and promotion practices annually. +• We have an annual company bonus plan and a retail-focused bonus plan applicable to all eligible employees. Both programs are focused on rewarding employees for company performance, which we believe reinforces our culture and rewards behaviors that support collaboration and teamwork. +• We provide comprehensive family care benefits in the U.S. and globally where practicable, including family planning coverage, backup care and child/elder care assistance as well as an income-based childcare subsidy for eligible employees. +• Our Military Leave benefit provides up to 12 weeks of paid time off every 12 months. +• We offer free access to our Sport Centers at our world headquarters for our full-time employees and North America store employees. +• We provide employees free access to mindfulness and meditation resources, as well as live classes through our Sport Centers. +• We provide all employees and their families globally with free and confidential visits with a mental health counselor through a third-party provider and our global Employee Assistance Program (EAP). +• We provide support to our employees in a variety of ways during times of crisis, including pay continuity under certain circumstances, our natural disaster assistance program, and ongoing support for challenges related to the COVID-19 pandemic. +• We provide a hybrid work approach for the majority of employees, as well as a Four Week Flex, which provides employees an opportunity to work from a location of their choice for up to four weeks per year. +• We offer a Well-Being Week where we close our corporate offices for a full-week in the summer and Well-Being Days for our teammates in our retail stores and distribution centers, and encourage our teammates to focus on their well-being. +• We provide inclusive family planning benefits and transgender healthcare coverage for eligible employees covered on the U.S. Health Plan, including access to both restorative services and personal care. +• We provide all U.S. employees with unlimited free financial coaching through a third-party provider. +Additional information related to our human capital strategy can be found in our FY22 NIKE, Inc. Impact Report, which is available on the Impact section of about.nike.com. Information contained on or accessible through our websites is not incorporated into, and does not form a part of, this Annual Report or any other report or document we file with the SEC, and any references to our websites are intended to be inactive textual references only. +AVAILABLE INFORMATION AND WEBSITES +Our NIKE digital commerce website is located at www.nike.com. On our NIKE corporate website, located at investors.nike.com, we post the following filings as soon as reasonably practicable after they are electronically filed with, or furnished to, the United States Securities and Exchange Commission (the "SEC"): our annual report on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities and Exchange Act of 1934, as amended. Our proxy statements are also posted on our corporate website. All such filings on our corporate website are available free of charge. Copies of these filings are also available on the SEC's website at www.sec.gov. Also available on our corporate website are the charters of the committees of our Board of Directors, as well as our corporate governance guidelines and code of ethics. Copies of any of these documents will be provided in print to any shareholder who submits a request in writing to NIKE Investor Relations, One Bowerman Drive, Beaverton, Oregon 97005-6453. Information contained on or accessible through our website is not incorporated into, and does not form a part of, this Annual Report or any other report or document we file with the SEC, and any references to our website are intended to be inactive textual references only. +2023 FORM 10-K 7 +Table of Contents +INFORMATION ABOUT OUR EXECUTIVE OFFICERS +The executive officers of NIKE, Inc. as of July 20, 2023, are as follows: +Mark G. Parker , Executive Chairman — Mr. Parker, 67, is Executive Chairman of the Board of Directors and served as President and Chief Executive Officer from 2006 - January 2020. He has been employed by NIKE since 1979 with primary responsibilities in product research, design and development, marketing and brand management. Mr. Parker was appointed divisional Vice President in charge of product development in 1987, corporate Vice President in 1989, General Manager in 1993, Vice President of Global Footwear in 1998 and President of the NIKE Brand in 2001. +John J. Donahoe II , President and Chief Executive Officer — Mr. Donahoe, 63, was appointed President and Chief Executive Officer in January 2020 and has been a director since 2014. He brings expertise in digital commerce, technology and global strategy. He previously served as President and Chief Executive Officer at ServiceNow, Inc. Prior to joining ServiceNow, Inc., he served as President and Chief Executive Officer of eBay, Inc. He also held leadership roles at Bain & Company for two decades. +Matthew Friend , Executive Vice President and Chief Financial Officer — Mr. Friend, 45, joined NIKE in 2009 and leads the Company's finance, demand & supply management, procurement and global places & services organizations. He joined NIKE as Senior Director of Corporate Strategy and Development, and was appointed Chief Financial Officer of Emerging Markets in 2011. In 2014, Mr. Friend was appointed Chief Financial Officer of Global Categories, Product and Functions, and was subsequently appointed Chief Financial Officer of the NIKE Brand in 2016. He was also appointed Vice President of Investor Relations in 2019. Mr. Friend was appointed as Executive Vice President and Chief Financial Officer of NIKE, Inc. in April 2020. Prior to joining NIKE, he worked in the financial industry including roles as VP of investment banking and mergers and acquisitions at Goldman Sachs and Morgan Stanley. +Monique S. Matheson , Executive Vice President, Chief Human Resources Officer — Ms. Matheson, 56, joined NIKE in 1998, with primary responsibilities in the human resources function. She was appointed as Vice President and Senior Business Partner in 2011 and Vice President, Chief Talent and Diversity Officer in 2012. Ms. Matheson was appointed Executive Vice President, Global Human Resources in 2017. +Ann M. Miller , Executive Vice President, Chief Legal Officer — Ms. Miller, 49, joined NIKE in 2007 and serves as EVP, Chief Legal Officer for NIKE, Inc. In her capacity as Chief Legal Officer, she oversees all legal, compliance, government & public affairs, social community impact, security, resilience and investigation matters of the Company. For the past six years, she served as Vice President, Corporate Secretary and Chief Ethics & Compliance Officer. She previously served as Converse's General Counsel, and brings more than 20 years of legal and business expertise to her role. Prior to joining NIKE, Ms. Miller worked at the law firm Sullivan & Cromwell. +Heidi O'Neill , President, Consumer, Brand & Product — Ms. O'Neill, 58, joined NIKE in 1998 and leads the integration of global Men's, Women's & Kids' consumer teams, the entire global product engine and global brand marketing and sports marketing to build deep storytelling, relationships and engagement with the brand. Since joining NIKE, she has held a variety of key roles, including leading NIKE's marketplace and four geographic operating regions, leading NIKE Direct and accelerating NIKE's retail and digital-commerce business and creating and leading NIKE's Women’s business. Prior to NIKE, Ms. O'Neill held roles at Levi Strauss & Company and Foote, Cone & Belding. +Craig Williams , President, Geographies & Marketplace — Mr. Williams, 54, joined NIKE in 2019 and leads NIKE's four geographies and marketplace across the NIKE Direct and wholesale business. In addition, he leads the Supply Chain and Logistics organization. Mr. Williams joined NIKE as President of Jordan Brand overseeing a team of designers, product developers, marketers and business leaders. Prior to NIKE, he was Senior Vice President, The Coca-Cola Co., and President of The McDonald's Division (TMD) Worldwide. Mr. Williams has also held roles at CIBA Vision and Kraft Foods Inc., and served five years in the U.S. Navy as a Naval Nuclear Power Officer. +2023 FORM 10-K 8 +Table of Contents \ No newline at end of file diff --git a/raw/filings/0000320187/2022/0000320187-23-000039/item13.txt b/raw/filings/0000320187/2022/0000320187-23-000039/item13.txt new file mode 100644 index 0000000000000000000000000000000000000000..af14c76b4302482d4c971368ee984358f5c1d6ff --- /dev/null +++ b/raw/filings/0000320187/2022/0000320187-23-000039/item13.txt @@ -0,0 +1,2 @@ +ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE +The information required by Items 404 and 407(a) of Regulation S-K is included under "Additional Information — Transactions with Related Persons" and "Corporate Governance — NIKE, Inc. Board of Directors — Director Independence" in the definitive Proxy Statement for our 2023 Annual Meeting of Shareholders and is incorporated herein by reference. \ No newline at end of file diff --git a/raw/filings/0000320187/2022/0000320187-23-000039/item9a.txt b/raw/filings/0000320187/2022/0000320187-23-000039/item9a.txt new file mode 100644 index 0000000000000000000000000000000000000000..55e7fd21c128e21977199f407199627e2db20a1a --- /dev/null +++ b/raw/filings/0000320187/2022/0000320187-23-000039/item9a.txt @@ -0,0 +1,6 @@ +ITEM 9A. CONTROLS AND PROCEDURES +We maintain disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in our Securities Exchange Act of 1934, as amended (the "Exchange Act"), reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. +We carry out a variety of ongoing procedures, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, to evaluate the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of May 31, 2023. +"Management's Annual Report on Internal Control Over Financial Reporting" is included in Item 8 of this Annual Report. +We are continuing several transformation initiatives to centralize and simplify our business processes and systems. These are long-term initiatives, which we believe will enhance our internal control over financial reporting due to increased automation and further integration of related processes. We will continue to monitor our internal control over financial reporting for effectiveness throughout these transformation initiatives. +There have not been any changes in our internal control over financial reporting during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. \ No newline at end of file diff --git a/raw/filings/0000320187/2022/0000320187-23-000039/rp_note.txt b/raw/filings/0000320187/2022/0000320187-23-000039/rp_note.txt new file mode 100644 index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391 diff --git a/raw/filings/0000320187/2022/0000320187-23-000039/rpt_disclosure.txt b/raw/filings/0000320187/2022/0000320187-23-000039/rpt_disclosure.txt new file mode 100644 index 0000000000000000000000000000000000000000..e81302e6982c9592da75aabd63f9873a67240505 --- /dev/null +++ b/raw/filings/0000320187/2022/0000320187-23-000039/rpt_disclosure.txt @@ -0,0 +1,5 @@ +TRANSACTIONS WITH RELATED PERSONS +Philip Knight, the father of NIKE director Travis Knight, serves as Chairman Emeritus, which provides a standing invitation for Philip Knight to attend meetings of the Board and its committees as a non-voting observer. In fiscal 2024, as Chairman Emeritus, Mr. Knight received salary of $519,235 (reflecting 27 bi-weekly pay periods for fiscal 2024), and medical and dental insurance coverage generally available to employees. +John Donahoe II and the Company have entered into time sharing agreements under which Mr. Donahoe reimburses the Company for limited personal use of Company aircraft, which is intended to increase his security, availability, and productivity. In fiscal 2024, Mr. Donahoe reimbursed the Company approximately $316,000 under the time sharing agreements. +Mark Parker's son, Matthew Parker, was employed by the Company in fiscal 2024 in a non-executive role for which the Company paid Matthew Parker aggregate compensation of approximately $136,000. The compensation and benefits received by Matthew Parker were consistent with compensation and benefits paid to other employees holding similar positions. +The Company's written policy requires the Corporate Responsibility, Sustainability & Governance Committee to review any transaction or proposed transaction with a related person that would be required to be reported under Item 404(a) of Regulation S-K, and to determine whether to ratify or approve the transaction, with ratification or approval to occur only if the committee determines that the transaction is fair to the Company or that approval or ratification of the transaction is in the interest of the Company. \ No newline at end of file diff --git a/raw/filings/0000320187/2023/0000320187-24-000044/filing.txt b/raw/filings/0000320187/2023/0000320187-24-000044/filing.txt new file mode 100644 index 0000000000000000000000000000000000000000..abe95f98b2fced9e2b2e333a4d7bab8248c09948 --- /dev/null +++ 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principal executive offices and zip code) +( 503 ) 671-6453 +(Registrant's telephone number, including area code) +SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: +Class B Common Stock +NKE +New York Stock Exchange +(Title of each class) +(Trading symbol) +(Name of each exchange on which registered) +SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: +NONE +Indicate by check mark: +Yes +No +• +if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. +þ +¨ +• +if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. +¨ +þ +• +whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. +þ +¨ +• +whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). +þ +¨ +• +whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. +Large accelerated filer +þ +Accelerated filer +☐ +Non-accelerated filer +☐ +Smaller reporting company +☐ +Emerging growth company +☐ +• +if an emerging growth company, if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. +¨ +• +whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. +þ +• +if securities are registered pursuant to Section 12(b) of the Act, whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. +¨ +• +whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant's executive officers during the relevant recovery period pursuant to § 240.10D-1(b). +¨ +• +whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). +☐ +þ +As of November 30, 2023, the aggregate market values of the Registrant's Common Stock held by non-affiliates were: +Class A +$ 7,404,327,478 +Class B +133,466,945,242 +$ 140,871,272,720 +Table of Contents +As of July 10, 2024, the number of shares of the Registrant's Common Stock outstanding were: +Class A +297,897,252 +Class B +1,201,461,692 +1,499,358,944 +DOCUMENTS INCORPORATED BY REFERENCE: +Parts of Registrant's Proxy Statement for the Annual Meeting of Shareholders to be held on September 10, 2024, are incorporated by reference into Part III of this report. +Table of Contents +NIKE, INC. +ANNUAL REPORT ON FORM 10-K +TABLE OF CONTENTS +PAGE +PART I +1 +ITEM 1. +Business +1 +General +1 +Products +1 +Sales and Marketing +2 +Our Markets +2 +Significant Customer +3 +Product Research, Design and Development +3 +Manufacturing +3 +International Operations and Trade +4 +Competition +5 +Trademarks and Patents +5 +Human Capital Resources +6 +Available Information and Websites +7 +Information about our Executive Officers +8 +ITEM 1A. +Risk Factors +9 +ITEM 1B. +Unresolved Staff Comments +25 +ITEM 1 C . +Cybersecurity +25 +ITEM 2. +Properties +26 +ITEM 3. +Legal Proceedings +26 +ITEM 4. +Mine Safety Disclosures +26 +PART II +27 +ITEM 5. +Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities +27 +ITEM 6. +Reserved +29 +ITEM 7. +Management's Discussion and Analysis of Financial Condition and Results of Operations +30 +ITEM 7A. +Quantitative and Qualitative Disclosures about Market Risk +51 +ITEM 8. +Financial Statements and Supplementary Data +53 +ITEM 9. +Changes in and Disagreements with Accountants on Accounting and Financial Disclosure +92 +ITEM 9A. +Controls and Procedures +92 +ITEM 9B. +Other Information +92 +ITEM 9C. +Disclosure Regarding Foreign Jurisdictions that Prevent Inspections +92 +PART III +93 +(Except for the information set forth under “Information about our Ex ecutive Officers” in Item 1 above, Part III is incorporated by reference from the Proxy Statement for the NIKE, Inc. 202 4 Annual Meeting of Shareholders.) +ITEM 10. +Directors, Executive Officers and Corporate Governance +93 +ITEM 11. +Executive Compensation +93 +ITEM 12. +Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters +93 +ITEM 13. +Certain Relationships and Related Transactions and Director Independence +93 +ITEM 14. +Principal Accountant Fees and Services +93 +PART IV +94 +ITEM 15. +Exhibits and Financial Statement Schedules +94 +ITEM 16. +Form 10-K Summary +98 +Signatures +100 +Table of Contents +PART I +ITEM 1. BUSINESS +GENERAL +NIKE, Inc. was incorporated in 1967 under the laws of the State of Oregon. As used in this Annual Report on Form 10-K (this "Annual Report"), the terms "we," "us," "our," "NIKE" and the "Company" refer to NIKE, Inc. and its predecessors, subsidiaries and affiliates, collectively, unless the context indicates otherwise. +Our principal business activity is the design, development and worldwide marketing and selling of athletic footwear, apparel, equipment, accessories and services. NIKE is the largest seller of athletic footwear and apparel in the world. We sell our products through NIKE Direct operations, which are comprised of both NIKE-owned retail stores and sales through our digital platforms (also referred to as "NIKE Brand Digital") and to wholesale accounts, which include a mix of independent distributors, licensees and sales representatives in nearly all countries around the world. We also offer interactive consumer services and experiences through our digital platforms. Nearly all of our products are manufactured by independent contractors. Nearly all footwear and apparel products are manufactured outside the United States, while equipment products are manufactured both in the United States and abroad. +All references to fiscal 2025, 2024, 2023, 2022 and 2021 are to NIKE, Inc.'s fiscal years ended May 31, 2025, 2024, 2023, 2022 and 2021, respectively. Any references to other fiscal years refer to a fiscal year ending on May 31 of that year. +PRODUCTS +Our NIKE Brand product offerings are aligned around our consumer construct focused on Men's, Women's and Kids'. We also design products specifically for the Jordan Brand and Converse. We believe this approach allows us to create products that better meet individual consumer needs while accelerating our largest growth opportunities. +NIKE's athletic footwear products are designed primarily for specific athletic use, although a large percentage of the products are worn for casual or leisure purposes. We place considerable emphasis on innovation and high-quality construction in the development and manufacturing of our products. +We also sell sports apparel, which features the same trademarks and are sold predominantly through the same marketing and distribution channels as athletic footwear. Our sports apparel, similar to our athletic footwear products, is designed primarily for athletic use, although many of the products are worn for casual or leisure purposes, and demonstrates our commitment to innovation and high-quality construction. We often market footwear, apparel and accessories in "collections" of similar use or by category. We also market apparel with licensed college and professional team and league logos. +We sell a line of performance equipment and accessories under the NIKE Brand name, including bags, socks, sport balls, eyewear, timepieces, digital devices, bats, gloves, protective equipment and other equipment designed for sports activities. We also sell small amounts of various plastic products to other manufacturers through our wholly-owned subsidiary, NIKE IHM, Inc., doing business as Air Manufacturing Innovation. +Our Jordan Brand designs, distributes and licenses athletic and casual footwear, apparel and accessories predominantly focused on basketball performance and culture using the Jumpman trademark. Sales and operating results for Jordan Brand products are reported within the respective NIKE Brand geographic operating segments. +Our wholly-owned subsidiary brand, Converse, headquartered in Boston, Massachusetts, designs, distributes and licenses casual sneakers, apparel and accessories under the Converse, Chuck Taylor, All Star, One Star, Star Chevron and Jack Purcell trademarks. Operating results of the Converse brand are reported on a stand-alone basis. +In addition to the products we sell to our wholesale customers and directly to consumers through our NIKE Direct operations, we have also entered into license agreements that permit unaffiliated parties to manufacture and sell, using NIKE-owned trademarks, certain apparel, digital devices and applications and other equipment designed for sports activities. +We also offer interactive consumer services and experiences as well as digital products through our digital platforms, including fitness and activity apps; sport, fitness and wellness content; and digital services and features in retail stores that enhance the consumer experience. +2024 FORM 10-K 1 +Table of Contents +SALES AND MARKETING +We experience moderate fluctuations in aggregate sales volume during the year. Historically, revenues in the first and fourth fiscal quarters have slightly exceeded those in the second and third fiscal quarters. However, the mix of product sales may vary considerably as a result of changes in seasonal and geographic demand for particular types of footwear, apparel and equipment, as well as other macroeconomic, strategic, operating and logistics-related factors. +Because NIKE is a consumer products company, the relative popularity and availability of various sports and fitness activities, as well as changing design trends and consumer preferences, affect the demand for our products. We must, therefore, respond to trends and shifts in consumer preferences by adjusting the mix of existing product offerings and channels, developing new products, styles and categories and influencing sports and fitness preferences through extensive marketing. Failure to respond in a timely and adequate manner could have a material adverse effect on our sales and profitability. This is a continuing risk. Refer to Item 1A. Risk Factors. +OUR MARKETS +We report our NIKE Brand operations based on our internal geographic organization. Each NIKE Brand geographic segment operates predominantly in one industry: the design, development, marketing and selling of athletic footwear, apparel and equipment. The Company's reportable operating segments for the NIKE Brand are: North America; Europe, Middle East & Africa ("EMEA"); Greater China; and Asia Pacific & Latin America ("APLA"), and include results for the NIKE and Jordan brands. Sales through our NIKE Direct operations are managed within each geographic operating segment. +Converse is also a reportable operating segment and operates predominately in one industry: the design, marketing, licensing and selling of casual sneakers, apparel and accessories. Converse direct to consumer operations, including digital commerce, are reported within the Converse operating segment results. +UNITED STATES MARKET +For fiscal 2024, NIKE Brand and Converse sales in the United States accounted for approximately 42% of total revenues, compared to 43% and 40% for fiscal 2023 and fiscal 2022, respectively. We sell our products to thousands of wholesale accounts in the United States, including a mix of footwear stores, sporting goods stores, athletic specialty stores, department stores, skate, tennis and golf shops and other wholesale accounts. In the United States, we utilize NIKE sales offices to solicit such sales. During fiscal 2024, our three largest United States customers accounted for approximately 21% of sales in the United States. +Our NIKE Direct and Converse direct to consumer operations sell our products to consumers through various digital platforms. In addition, our NIKE Direct and Converse direct to consumer operations sell products through the following number of retail stores in the United States: +U.S. RETAIL STORES NUMBER +NIKE Brand factory stores 211 +NIKE Brand in-line stores (including employee-only stores) 85 +Converse stores (including factory stores) 81 +TOTAL 377 +In the United States, NIKE has eight significant distribution centers. Refer to Item 2. Properties for additional information. +2024 FORM 10-K 2 +Table of Contents +INTERNATIONAL MARKETS +For fiscal 2024, non-U.S. NIKE Brand and Converse sales accounted for approximately 58% of total revenues, compared to 57% and 60% for fiscal 2023 and fiscal 2022, respectively. We sell our products through NIKE Direct operations and to wholesale accounts, which include a mix of independent distributors, licensees and sales representatives around the world. We sell to thousands of retail accounts and ship products from 68 distribution centers outside of the United States. Refer to Item 2. Properties for additional information on distribution facilities outside of the United States. During fiscal 2024, NIKE's three largest customers outside of the United States accounted for approximately 15% of total non-U.S. sales. +In addition to NIKE-owned and Converse-owned digital commerce platforms in over 40 countries, our NIKE Direct and Converse direct to consumer businesses operate the following number of retail stores outside the United States: +NON-U.S. RETAIL STORES NUMBER +NIKE Brand factory stores 561 +NIKE Brand in-line stores (including employee-only stores) 53 +Converse stores (including factory stores) 54 +TOTAL 668 +SIGNIFICANT CUSTOMER +No customer accounted for 10% or more of our consolidated net Revenues during fiscal 2024. +PRODUCT RESEARCH, DESIGN AND DEVELOPMENT +We believe our research, design and development efforts are key factors in our success. Technical innovation in the design and manufacturing process of footwear, apparel and athletic equipment receives continued emphasis as we strive to produce products that help to enhance athletic performance, reduce injury and maximize comfort, while decreasing our environmental impact. +In addition to our own staff of specialists in the areas of biomechanics, chemistry, exercise physiology, engineering, digital technologies, industrial design, sustainability and related fields, we also utilize research committees and advisory boards made up of athletes, coaches, trainers, equipment managers, orthopedists, podiatrists, physicians and other experts who consult with us and review certain designs, materials and concepts for product and manufacturing, design and other process improvements and compliance with product safety regulations around the world. Employee athletes, athletes engaged under sports marketing contracts and other athletes wear-test and evaluate products during the design and development process. +As we continue to develop new technologies, we are simultaneously focused on the design of innovative products and experiences incorporating such technologies throughout our product categories and consumer applications. Using market intelligence and research, our various design teams identify opportunities to leverage new technologies in existing categories to respond to consumer preferences. The proliferation of Nike Air, Zoom, Free, Dri-FIT, Flyknit, FlyEase, ZoomX, Air Max, and React technologies, among others, typifies our dedication to designing innovative products. +MANUFACTURING +Nearly all of our footwear and apparel products are manufactured outside the United States by independent contract manufacturers ("contract manufacturers"), many of which operate multiple factories. We are also supplied, primarily indirectly, by a number of materials, or "Tier 2" suppliers, who provide the principal materials used in footwear and apparel finished goods products. As of May 31, 2024, we had 169 strategic Tier 2 suppliers. +As of May 31, 2024, our contract manufacturers operated 96 finished goods footwear factories located in 11 countries. For fiscal 2024, NIKE Brand footwear finished goods were manufactured by 15 contract manufacturers, many of which operate multiple factories. The largest single finished goods footwear factory accounted for approximately 9% of total fiscal 2024 NIKE Brand footwear production. For fiscal 2024, factories in Vietnam, Indonesia and China manufactured approximately 50%, 27% and 18% of total NIKE Brand footwear, respectively. For fiscal 2024, four footwear contract manufacturers each accounted for greater than 10% of footwear production and in the aggregate accounted for approximately 57% of NIKE Brand footwear production. +As of May 31, 2024, our contract manufacturers operated 285 finished goods apparel factories located in 33 countries. For fiscal 2024, NIKE Brand apparel finished goods were manufactured by 68 contract manufacturers, many of which operate multiple factories. The largest single finished goods apparel factory accounted for approximately 9% of total fiscal 2024 NIKE Brand apparel production. For fiscal 2024, factories in Vietnam, China and Cambodia manufactured approximately 28%, 16% and 15% +2024 FORM 10-K 3 +Table of Contents +of total NIKE Brand apparel, respectively. For fiscal 2024, one apparel contract manufacturer accounted for more than 10% of apparel production, and the top five contract manufacturers in the aggregate accounted for approximately 51% of NIKE Brand apparel production. +NIKE's contract manufacturers buy raw materials for the manufacturing of our footwear, apparel and equipment products. Most raw materials are available and purchased by those contract manufacturers in the countries where manufacturing takes place. +The principal materials used in our footwear products are natural and synthetic rubber, plastic compounds, foam cushioning materials, natural and synthetic leather, nylon, polyester and natural fiber textiles, as well as polyurethane films used to make NIKE Air-Sole cushioning components. During fiscal 2024, Air Manufacturing Innovation, a wholly-owned subsidiary, with facilities near Beaverton, Oregon, in Dong Nai Province, Vietnam, and St. Charles, Missouri, as well as contract manufacturers in China and Vietnam, were our suppliers of NIKE Air-Sole and other cushioning components used in footwear. +The principal materials used in our apparel products are natural and synthetic fabrics, yarns and threads (both virgin and recycled); specialized performance fabrics designed to efficiently wick moisture away from the body, retain heat and repel rain and/or snow; and plastic and metal hardware. +From time to time, certain materials used in the production of our products experience periods of high demand, shortages and price volatility. In fiscal 2024, contract manufacturers were able to source sufficient quantities of raw materials for use in our footwear and apparel products. Refer to Item 1A. Risk Factors, for additional discussion of the impact of sourcing risks on our business. +Since 1972, Sojitz Corporation of America ("Sojitz America"), a large Japanese trading company and the sole owner of our redeemable preferred stock, has performed import-export financing services for us. +INTERNATIONAL OPERATIONS AND TRADE +Our international operations and sources of supply are subject to the usual risks of doing business abroad, such as the implementation of, or potential changes in, foreign and domestic trade policies, increases in import duties, anti-dumping measures, quotas, safeguard measures, trade restrictions, restrictions on the transfer of funds and, in certain parts of the world, political tensions, instability, conflicts, nationalism and terrorism, and resulting sanctions and other measures imposed in response to such issues. We have not, to date, been materially affected by any such risk but cannot predict the likelihood of such material effects occurring in the future. +In recent years, uncertain global and regional economic and political conditions have affected international trade and increased protectionist actions around the world. These trends are affecting many global manufacturing and service sectors, and the footwear and apparel industries, as a whole, are not immune. Companies in our industry are facing trade protectionism in many different regions, and, in nearly all cases, we are working together with industry groups to address trade issues and reduce the impact to the industry, while observing applicable competition laws. Notwithstanding our efforts, protectionist measures have resulted in increases in the cost of our products, and additional measures, if implemented, could adversely affect sales and/or profitability for NIKE, as well as the imported footwear and apparel industry as a whole. +We monitor protectionist trends and developments throughout the world that may materially impact our industry, and we engage in administrative and judicial processes to mitigate trade restrictions. We are actively monitoring actions that may result in additional anti-dumping measures and could affect our industry. We are also monitoring for and advocating against other impediments that may limit or delay customs clearance for imports of footwear, apparel and equipment. NIKE also advocates for trade liberalization for footwear and apparel in a number of bilateral and multilateral free trade agreements. Changes in, and responses to, U.S. trade policies, including the imposition of tariffs or penalties on imported goods or retaliatory measures by other countries, have negatively affected, and could in the future negatively affect, U.S. corporations, including NIKE, with business operations and/or consumer markets in those countries, which could also make it necessary for us to change the way we conduct business, either of which may have an adverse effect on our business, financial condition or our results of operations. In addition, with respect to proposed trade restrictions, we work with a broad coalition of global businesses and trade associations representing a wide variety of sectors to help ensure that any legislation enacted and implemented (i) addresses legitimate and core concerns, (ii) is consistent with international trade rules and (iii) reflects and considers domestic economies and the important role they may play in the global economic community. +Where trade protection measures are implemented, we believe we have the ability to develop, over a period of time, adequate alternative sources of supply for the products obtained from our present suppliers. If events prevented us from acquiring products from our suppliers in a particular country, our operations could be temporarily disrupted and we could experience an adverse financial impact. However, we believe we could abate any such disruption, and that much of the adverse impact on supply would, therefore, be of a short-term nature, although alternate sources of supply might not be as cost-effective and could have an ongoing adverse impact on profitability. +2024 FORM 10-K 4 +Table of Contents +Our international operations are also subject to compliance with the U.S. Foreign Corrupt Practices Act (the "FCPA"), and other anti-bribery laws applicable to our operations. We source a significant portion of our products from, and have important consumer markets, outside of the United States. We have an ethics and compliance program to address compliance with the FCPA and similar laws by us, our employees, agents, suppliers and other partners. Refer to Item 1A. Risk Factors for additional information on risks relating to our international operations. +COMPETITION +The athletic footwear, apparel and equipment industry is highly competitive on a worldwide basis. We compete internationally with a significant number of athletic and leisure footwear companies, athletic and leisure apparel companies, sports equipment companies and large companies having diversified lines of athletic and leisure footwear, apparel and equipment, including adidas, Anta, ASICS, Deckers, Li Ning, lululemon athletica, New Balance, On, Puma, Under Armour and V.F. Corporation, among others. The intense competition and the rapid changes in technology and consumer preferences in the markets for athletic and leisure footwear and apparel and athletic equipment constitute significant risk factors in our operations. Refer to Item 1A. Risk Factors for additional information. +NIKE is the largest seller of athletic footwear and apparel in the world. Important aspects of competition in this industry are: +• Product attributes such as quality; innovation and development; performance and reliability; new product style, and design; as well as consumer price/value. +• Consumer connection, engagement and affinity for brands and products, developed through marketing, promotion and digital experiences; social media interaction; customer support and service; identification with prominent and influential athletes, influencers, public figures, coaches, teams, colleges and sports leagues who endorse our brands and use our products and active engagement through sponsored sporting events and clinics. +• Effective sourcing and distribution of products, with attractive merchandising and presentation at retail, both in-store and on digital platforms. +We believe that we are competitive in all of these areas. See Item 1A. Risk Factors, including the risk factor titled "Our products, services and experiences face intense competition." +TRADEMARKS AND PATENTS +We believe that our intellectual property rights are important to our brand, our success and our competitive position. We strategically pursue available protections of these rights and vigorously protect and enforce them against third-party theft and infringement. +We use trademarks on nearly all of our products and packaging, and in our marketing materials, and believe having distinctive marks that are readily identifiable is an important factor in creating a market for our goods, in identifying our brands and the Company, and in distinguishing our goods from the goods of others. We consider our NIKE and Swoosh Design trademarks to be among our most valuable assets and we have registered these trademarks in over 190 jurisdictions worldwide. In addition, we own many other trademarks that we use in marketing our products. Throughout the world, we own common law rights in the trade dress of several distinctive shoe designs and elements. For certain trade dress, we have sought and obtained trademark registrations. +We have copyright protection in our designs, graphics, software applications, digital goods and other original works. When appropriate, we also obtain registered copyrights. +We file for, own and maintain many U.S. and foreign utility and design patents protecting components, technologies, materials, manufacturing techniques, features, functionality, and industrial designs used in and for the manufacture of various athletic, performance, and leisure footwear and apparel, including physical and digital versions thereof, athletic equipment, and digital devices, and related software applications. These patents expire at various times. +We believe our success depends upon our capabilities in areas such as design, research and development, production and marketing and is supported and protected by our intellectual property rights, such as trademarks, utility and design patents, copyrights, and trade secrets, among others. +We have followed a policy of applying for and registering intellectual property rights in the United States and select foreign countries on trademarks, inventions, innovations and designs that we deem protectable and valuable. We also continue to vigorously protect and enforce our intellectual property, including trademarks, patents and trade secrets against third-party infringement and misappropriation. +2024 FORM 10-K 5 +Table of Contents +HUMAN CAPITAL RESOURCES +At NIKE, we consider the strength and effective management of our workforce to be essential to the ongoing success of our business. We believe that it is important to attract, develop and retain a diverse and engaged workforce at all levels of our business and that such a workforce fosters creativity and accelerates innovation. We are focused on building a talent pipeline that reflects our consumers, athletes and the communities we serve. +CULTURE +Each employee shapes NIKE's culture through behaviors and practices. This starts with our Maxims, which represent our core values and, along with our Code of Conduct, feature the fundamental behaviors that help anchor, inform and guide us and apply to all employees. Our mission is to bring inspiration and innovation to every athlete in the world, which includes the belief that if you have a body, you are an athlete. We aim to do this by creating groundbreaking sport innovations, making our products more sustainably, building a creative and diverse global team, supporting the well-being of our employees and making a positive impact in communities where we live and work. Our mission is aligned with our deep commitment to maintaining an environment where all NIKE employees have the opportunity to reach their full potential, to connect to our brands and to shape our workplace culture. We believe providing for growth and retention of our employees is essential in fostering such a culture and are dedicated to providing access to training programs and career development opportunities, including trainings on NIKE's values, history and business, trainings on developing leadership skills at all levels, tools and resources for managers and qualified tuition reimbursement opportunities. +In empowering our employees to help shape our culture, we source employee feedback through a variety of survey tools: our annual Engagement Survey program, corporate pulse surveys and listening sessions. These tools provide employees throughout the globe an opportunity to provide confidential feedback on key areas known to drive employee engagement, including their satisfaction with their managers, their work and the Company generally. These tools also measure our employees' connection to NIKE's culture. NIKE also provides multiple points of contact for employees to speak up if they experience something that does not align with our values or otherwise violates our workplace policies, even if they are uncertain what they observed or heard is a violation of company policy. +As part of our commitment to making a positive impact on our communities, we maintain a goal of investing 2% of our prior fiscal year's pre-tax income into global communities. The focus of this investment continues to be inspiring youth to be active through play and sport as well as uniting and inspiring communities to create a better and more equitable future for all. Our community investments are an important part of our culture, and we support employees in giving back to community organizations through volunteering and donations, which are matched by the NIKE Foundation where eligible. +EMPLOYEE BASE +As of May 31, 2024, we had approximately 79,400 employees worldwide, including retail and part-time employees. We also utilize independent contractors and temporary personnel to supplement our workforce. +Most of our employees are not represented by unions, except for certain employees in the EMEA and APLA geographies who are members of and/or represented by trade unions, as allowed or required by local law and/or collective bargaining agreements. Also, in some countries outside of the United States, local laws require employee representation by works councils (which may be entitled to information and consultation on certain subsidiary decisions) or by organizations similar to a union. In certain European countries, we are required by local law to enter into, and/or comply with, industry-wide or national collective bargaining agreements. NIKE has never experienced a material interruption of operations due to labor disagreements. +DIVERSITY, EQUITY AND INCLUSION +Diversity, equity and inclusion ("DE&I") is a strategic priority for NIKE and we are committed to having an inclusive and diverse team and culture. We aim to foster an inclusive and accessible workplace through recruitment, development and retention of talent from diverse experiences and backgrounds with the goal of expanding representation across all dimensions of diversity over the long term. We remain committed to the targets announced in fiscal 2021 for the Company to work toward by fiscal 2025, including diverse representation in our corporate workforce and leadership positions. +We continue our efforts to recruit talent through our traditional channels and through initiatives, such as partnerships with athletes and sports-related organizations to create apprenticeship programs and new partnerships with organizations, colleges and universities that serve diverse populations. Additionally, we are prioritizing DE&I education so that all NIKE employees and leaders have the cultural knowledge and understanding to lead inclusively and build diverse and inclusive teams. We also have Employee Networks, collectively known as NikeUNITED, representing various employee groups. +2024 FORM 10-K 6 +Table of Contents +Our DE&I focus extends beyond our workforce and includes our communities, which we support in a number of ways. We have committed to investments that aim to address racial inequality and improve diversity and representation in our communities. We also are leveraging our global scale to support business diversity among the businesses with which we work. +COMPENSATION AND BENEFITS +NIKE's total rewards are intended to be competitive and equitable, meet the diverse needs of our global teammates and reinforce our values. We are committed to providing comprehensive, competitive and equitable pay and benefits to our employees, and we have invested, and aim to continue to invest, in our employees through growth and development and holistic well-being initiatives. Our initiatives in this area include: +• We are committed to competitive pay, pay equity and to reviewing our pay and promotion practices annually. +• We have an annual company bonus plan and a retail-focused bonus plan applicable to all eligible employees. Both programs are focused on rewarding employees for company performance, which we believe reinforces our culture and rewards behaviors that support collaboration and teamwork. +• We provide comprehensive family care benefits in the U.S. and globally where practicable, including family planning coverage, backup care and child/elder care assistance as well as an income-based childcare subsidy for eligible employees. +• Our Military Leave benefit provides up to 12 weeks of paid time off every 12 months. +• We offer free access to our sport centers at our World Headquarters for our full-time employees and North America store employees. +• We provide employees free access to mindfulness and meditation resources, as well as live classes through our sport centers. +• We provide all employees and their families globally with free and confidential visits with a mental health counselor through a third-party provider and our global Employee Assistance Program (EAP). +• We provide support to our employees in a variety of ways during times of crisis, including pay continuity under certain circumstances, and our natural disaster assistance program. +• We provide a hybrid work approach for the majority of employees, as well as a Four Week Flex program, which provides employees an opportunity to work remotely for up to four weeks per year. +• We offer a Well-Being Week where we close our corporate offices for a full week in the summer and Well-Being Days for our teammates in our retail stores and distribution centers, and encourage our teammates to focus on their well-being. +• We provide inclusive family planning benefits and transgender healthcare coverage for eligible employees covered on the U.S. Health Plan, including access to both restorative services and personal care. +• We provide all U.S. employees with unlimited free financial coaching through a third-party provider. +Additional information related to our human capital strategy can be found in our FY23 NIKE, Inc. Impact Report, which is available on the Impact section of about.nike.com. Information contained on or accessible through our websites is not incorporated into, and does not form a part of, this Annual Report or any other report or document we file with the SEC, and any references to our websites are intended to be inactive textual references only. +AVAILABLE INFORMATION AND WEBSITES +Our NIKE digital commerce website is located at www.nike.com. On our NIKE corporate website, located at investors.nike.com, we post the following filings as soon as reasonably practicable after they are electronically filed with, or furnished to, the United States Securities and Exchange Commission (the "SEC"): our annual report on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities and Exchange Act of 1934, as amended. Our proxy statements are also posted on our corporate website. All such filings on our corporate website are available free of charge. Copies of these filings are also available on the SEC's website at www.sec.gov. Also available on our corporate website are the charters of the committees of our Board of Directors, as well as our corporate governance guidelines and code of ethics. Copies of any of these documents will be provided in print to any shareholder who submits a request in writing to NIKE Investor Relations, One Bowerman Drive, Beaverton, Oregon 97005-6453. Information contained on or accessible through our website is not incorporated into, and does not form a part of, this Annual Report or any other report or document we file with the SEC, and any references to our website are intended to be inactive textual references only. +2024 FORM 10-K 7 +Table of Contents +INFORMATION ABOUT OUR EXECUTIVE OFFICERS +The executive officers of NIKE, Inc. as of July 25, 2024, are as follows: +Mark Parker , Executive Chairman — Mr. Parker, 68, joined NIKE in 1979, is Executive Chairman of the Board of Directors and served as President and Chief Executive Officer of NIKE, Inc. from 2006 to 2020. During his employment with NIKE, he has had primary responsibilities in product research, design and development, marketing and brand management. Mr. Parker previously served in various roles at NIKE including President of the NIKE Brand, Vice President of Global Footwear, General Manager, corporate Vice President and divisional Vice President in charge of product development. +John Donahoe II , President and Chief Executive Officer — Mr. Donahoe, 64, joined NIKE in 2014 as a member of the Board of Directors and has served as President and Chief Executive Officer of NIKE, Inc. since January 2020. He is responsible for NIKE’s global business portfolio, which includes the NIKE, Jordan and Converse brands. Prior to joining NIKE, Mr. Donahoe was the President and Chief Executive Officer of ServiceNow, Inc. from 2017 to 2020 and, prior to that, the President and Chief Executive Officer of eBay Inc. Earlier in his career, he worked for Bain & Company for nearly two decades, becoming the firm’s President and Chief Executive Officer in 1999. +Matthew Friend , Executive Vice President and Chief Financial Officer — Mr. Friend, 46, joined NIKE in 2009 and has served as Executive Vice President and Chief Financial Officer of NIKE, Inc. since 2020, and leads the Company's finance, demand and supply management, procurement and global places and services organizations. Mr. Friend previously served in various roles at NIKE including as Vice President of Investor Relations and Chief Financial Officer of the NIKE Brand. Prior to joining NIKE, Mr. Friend worked in the financial industry, including as Vice President in the investment banking and mergers and acquisitions groups at Goldman Sachs and Morgan Stanley. +Monique Matheson , Executive Vice President, Chief Human Resources Officer — Ms. Matheson, 57, joined NIKE in 1998 and has served as Executive Vice President, Chief Human Resources Officer of NIKE, Inc. since 2017, overseeing and driving the Company’s strategic global Human Resources strategy. In this role, Ms. Matheson leads through the lens of people — managing functions including recruitment, succession planning, learning and career development, diversity and inclusion, organizational effectiveness, employee engagement, pay and benefits and people solutions. Previously, Ms. Matheson has held roles including Vice President, Chief Talent and Diversity Officer and Vice President, Senior Human Resources Business Partner for North America, Global Product Creation (Footwear, Apparel and Equipment), Global Finance and NIKE, Inc. Affiliates. Prior to joining NIKE, Ms. Matheson practiced employment law. +Ann Miller , Executive Vice President, Chief Legal Officer — Ms. Miller, 50, joined NIKE in 2007 and has served as Executive Vice President, Chief Legal Officer of NIKE, Inc. since 2022. In her capacity as Chief Legal Officer, she oversees all legal, compliance, government & public affairs, social community impact, security, resilience and investigation matters of the Company. Previously, Ms. Miller served as Vice President, Corporate Secretary from 2017 to 2022. Ms. Miller has also previously held other roles in the NIKE legal department, including Chief Ethics & Compliance Officer and Converse's General Counsel. Prior to joining NIKE, Ms. Miller worked at the law firm Sullivan & Cromwell LLP. Ms. Miller brings more than 25 years of legal and business expertise to her role. +Heidi O'Neill , President, Consumer, Product & Brand — Ms. O'Neill, 59, joined NIKE in 1998 and has served as President, Consumer, Product & Brand of NIKE, Inc. since 2023. In this role, Ms. O’Neill leads the integration of the global Men's, Women's & Kids' consumer teams, the entire global product engine and global brand marketing and sports marketing to build deep storytelling, relationships and engagement with the brand. Most recently, Ms. O’Neill has also served as President, Consumer and Marketplace from 2020 to 2023 and President, Direct to Consumer from 2016 to 2020. Since joining NIKE, she has held a variety of key roles, including leading NIKE's marketplace and four geographic operating regions, leading NIKE Direct and NIKE's retail and digital-commerce business and creating and leading NIKE's Women’s business. Prior to joining NIKE, Ms. O'Neill held roles at Levi Strauss & Company and was a Vice President at Foote, Cone & Belding. +Craig Williams , President, Geographies & Marketplace — Mr. Williams, 55, joined NIKE in 2019 and has served as President, Geographies & Marketplace of NIKE, Inc. since 2023. In this role, Mr. Williams leads NIKE's four geographic operating units, the global direct to consumer business and wholesale marketplace partnerships. In addition, Mr. Williams leads the NIKE Supply Chain and Logistics organization. Mr. Williams previously served as President of Jordan Brand from 2019 to June 2023, overseeing the global business and team of designers, footwear and apparel developers, marketers and geography leaders. Prior to joining NIKE, Mr. Williams held executive leadership positions at The Coca-Cola Company as well as roles at CIBA Vision, a subsidiary of Novartis AG, and Kraft Foods Inc. Mr. Williams also served five years in the U.S. Navy as a Naval Nuclear Power Officer. +2024 FORM 10-K 8 +Table of Contents +ITEM 1A. RISK FACTORS +Special Note Regarding Forward-Looking Statements and Analyst Reports +Certain written and oral statements, other than purely historic information, including estimates, projections, statements relating to NIKE's business plans, objectives and expected operating or financial results and the assumptions upon which those statements are based, made or incorporated by reference from time to time by NIKE or its representatives in this Annual Report, other reports, filings with the SEC, press releases, conferences or otherwise, are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements include, without limitation, any statement that may predict, forecast, indicate or imply future results, performance or achievements, and may contain the words "believe," "anticipate," "expect," "estimate," "project," "will be," "will continue," "will likely result" or words or phrases of similar meaning. Forward-looking statements involve risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. The risks and uncertainties are detailed from time to time in reports filed by NIKE with the SEC, including reports filed on Forms 8-K, 10-Q and 10-K, and include, among others, the following: risks relating to our multi-year enterprise initiative, including the risk that NIKE is not able to identify opportunities to deliver anticipated cost savings, risks related to any delays in the timing for implementing the initiative or potential disruptions to NIKE's business or operations as it executes on the initiative, and other factors that may cause NIKE to be unable to achieve the expected benefits of the initiative; intense competition among designers, marketers, distributors and sellers of athletic or leisure footwear, apparel and equipment for consumers and endorsers; NIKE's ability to successfully innovate and compete in various categories; new product development and innovation; demographic changes; changes in consumer preferences and channel mix; popularity of particular designs, categories of products and sports; seasonal and geographic demand for NIKE products; difficulties in anticipating or forecasting, and responding to changes in consumer preferences, consumer demand for NIKE products, changes in channel mix and the various market factors described above; the size and growth of the overall athletic or leisure footwear, apparel and equipment markets; international, national and local political, civil, economic and market conditions, including high and increasing inflation and interest rates; our ability to execute on our sustainability strategy and achieve our sustainability-related goals and targets, including sustainable product offerings; difficulties in implementing, operating and maintaining NIKE's increasingly complex information technology systems and controls, including, without limitation, the systems related to demand and supply planning and inventory control; interruptions in data and information technology systems; consumer data security; fluctuations and difficulty in forecasting operating results, including, without limitation, the fact that advance orders may not be indicative of future revenues due to changes in shipment timing, the changing mix of orders with shorter lead times, and discounts, order cancellations and returns; the ability of NIKE to sustain, manage or forecast its growth and inventories; the size, timing and mix of purchases of NIKE's products; increases in the cost of materials, labor and energy used to manufacture products; the ability to secure and protect trademarks, patents and other intellectual property; product performance and quality; customer service; adverse publicity and an inability to maintain NIKE's reputation and brand image, including without limitation, through social media or in connection with brand damaging events; the loss of significant customers or suppliers; dependence on distributors and licensees; business disruptions; increased costs of freight and transportation to meet delivery deadlines; increases in borrowing costs due to any decline in NIKE's debt ratings; changes in business strategy or development plans; general risks associated with doing business outside of the United States, including, without limitation, exchange rate fluctuations, inflation, import duties, tariffs, quotas, sanctions, political and economic instability, conflicts and terrorism; the potential impact of new and existing laws, regulations or policy, including, without limitation, tariffs, import/export, trade, wage and hour or labor and immigration regulations or policies; changes in government regulations; the impact of, including business and legal developments relating to, climate change, extreme weather conditions and natural disasters; litigation, regulatory proceedings, sanctions or any other claims asserted against NIKE; the ability to attract and retain qualified employees, and any negative public perception with respect to key personnel or our corporate culture, values or purpose; the effects of NIKE's decision to invest in or divest of businesses or capabilities; health epidemics, pandemics and similar outbreaks; and other factors referenced or incorporated by reference in this Annual Report and other reports. +Investors should also be aware that while NIKE does, from time to time, communicate with securities analysts, it is against NIKE's policy to disclose to them any material non-public information or other confidential commercial information. Accordingly, shareholders should not assume that NIKE agrees with any statement or report issued by any analyst irrespective of the content of the statement or report. Furthermore, NIKE has a policy against confirming financial forecasts or projections issued by others. Thus, to the extent that reports issued by securities analysts contain any projections, forecasts or opinions, such reports are not the responsibility of NIKE. +Risk Factors +The risks included here are not exhaustive. Other sections of this Annual Report may include additional factors which could adversely affect NIKE's business and financial performance. Moreover, NIKE operates in a very competitive and rapidly changing environment. New risks emerge from time to time and it is not possible for management to predict all such risks, nor can it assess the impact of all such risks on NIKE's business or the extent to which any risk, or combination of risks, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results. +2024 FORM 10-K 9 +Table of Contents +Economic and Industry Risks +Global economic conditions could have a material adverse effect on our business, operating results and financial condition. +The uncertain state of the global economy, including sustained high levels of inflation and interest rates and the risk of a recession, continues to impact businesses around the world. If global economic and financial market conditions deteriorate, the following factors, among others, could have a material adverse effect on our business, operating results and financial condition: +• Our sales are impacted by discretionary spending by consumers. Declines in consumer spending have in the past resulted in and may in the future result in reduced demand for our products, increased inventories, reduced orders from retailers for our products, order cancellations, lower revenues, higher discounts and lower gross margins. +• In the future, we may be unable to access financing in the credit and capital markets at reasonable rates in the event we find it desirable to do so. +• We conduct transactions in various currencies, which creates exposure to fluctuations in foreign currency exchange rates relative to the U.S. Dollar. Continued volatility in the markets and exchange rates for foreign currencies and contracts in foreign currencies has had and could continue to have a significant impact on our reported operating results and financial condition. +• Continued volatility in the availability and prices for commodities and raw materials we use in our products and in our supply chain (such as cotton or petroleum derivatives) has had and could in the future have a material adverse effect on our costs, gross margins and profitability. In addition, supply chain issues caused by factors including geopolitical conflicts and pandemics have impacted and may in the future impact the availability, pricing and timing for obtaining commodities and raw materials. +• If retailers of our products experience declining revenues or experience difficulty obtaining financing to purchase our products, this could result in reduced orders for our products, order cancellations, late retailer payments, extended payment terms, higher accounts receivable, reduced cash flows, greater expense associated with collection efforts and increased bad debt expense. +• In the past, certain retailers of our products have experienced severe financial difficulty, become insolvent and ceased business operations, and this could occur in the future, which could negatively impact the sale of our products to consumers. +• If contract manufacturers of our products or other participants in our supply chain experience difficulty obtaining financing to purchase raw materials or to finance capital equipment and other general working capital needs, it may result in delays or non-delivery of shipments of our products. +Our products, services and experiences face intense competition. +NIKE is a consumer products company and the relative popularity of various sports and fitness activities and changing design trends affect the demand for our products, services and experiences. The athletic footwear, apparel and equipment industry is highly competitive both in the United States and worldwide. We compete with a significant number of athletic and leisure footwear companies, athletic and leisure apparel companies, sports equipment companies, private label brands offered by major retailers and various other large companies that have diversified lines of athletic and leisure footwear, apparel and equipment. New competitors frequently enter the markets we serve. We also compete with other companies for the production capacity of contract manufacturers that produce our products. In addition, we and our contract manufacturers compete with other companies and industries for raw materials used in our products. Our NIKE Direct operations, both through our digital commerce operations and retail stores, also compete with multi-brand retailers, which sell our products through their digital platforms and physical stores, and with digital commerce platforms. In addition, we compete with respect to the digital services and experiences we are able to offer our consumers, including fitness and activity apps; sport, fitness and wellness content and services; and digital services and features in retail stores that enhance the consumer experience. +Product offerings, product innovations and technologies, marketing expenditures (including expenditures for advertising and endorsements), pricing, costs of production, customer service, digital commerce platforms, digital services and experiences and social media presence are areas of intense competition. These, in addition to ongoing rapid changes in technology (including marketing and advertising technology), a reduction in barriers to starting new footwear and apparel companies and an increase in the number of such companies (some of which may be able to react more nimbly to changes in consumer preferences) and changes in consumer preferences in the markets for athletic and leisure footwear, apparel, and equipment, services and experiences, constitute significant risk factors in our operations. In addition, the competitive nature of retail, including shifts in the ways in which consumers shop, constitutes a risk factor implicating our NIKE Direct and wholesale operations. If we do not adequately and timely anticipate and respond to our competitors, our costs may increase, demand for our products may decline, possibly significantly, or we may need to reduce wholesale or suggested retail prices for our products. +2024 FORM 10-K 10 +Table of Contents +Economic factors beyond our control, and changes in the global economic environment, including fluctuations in inflation and currency exchange rates, could result in lower revenues, higher costs and decreased margins and earnings. +A majority of our products are manufactured and sold outside of the United States, and we conduct purchase and sale transactions in various currencies, which creates exposure to the volatility of global economic conditions, including fluctuations in inflation and foreign currency exchange rates. Central banks deploy various strategies to combat inflation, including increasing interest rates, which impact our borrowing costs. Government shutdowns or the risk of government shutdowns, as well as the impact or expected impact of elections, both in the United States and in other countries around the world, may also increase volatility. Additionally, there has been, and may continue to be, volatility in currency exchange rates that impact the U.S. Dollar value relative to other international currencies. Our international revenues and expenses generally are derived from sales and operations in foreign currencies, and these revenues and expenses are affected by currency fluctuations, specifically amounts recorded in foreign currencies and translated into U.S. Dollars for consolidated financial reporting, as weakening of foreign currencies relative to the U.S. Dollar adversely affects the U.S. Dollar value of the Company's foreign currency-denominated sales and earnings. Currency exchange rate fluctuations could also disrupt the business of the independent manufacturers that produce our products by making their purchases of raw materials more expensive and more difficult to finance. Foreign currency fluctuations have adversely affected and could continue to have an adverse effect on our results of operations and financial condition. +We hedge certain foreign currency exposures to lessen and delay, but not to completely eliminate, the effects of foreign currency fluctuations on our financial results. Since the hedging activities are designed to lessen volatility, they not only reduce the negative impact of a stronger U.S. Dollar or other trading currency, but they also reduce the positive impact of a weaker U.S. Dollar or other trading currency. Our future financial results have in the past been and could in the future be significantly affected by the value of the U.S. Dollar in relation to the foreign currencies in which we conduct business. The degree to which our financial results are affected for any given time period will depend in part upon our hedging activities. +We may be adversely affected by the financial health of our wholesale customers. +We extend credit to our customers based on an assessment of a customer's financial condition, generally without requiring collateral. To assist in the scheduling of production and the shipping of our products, we offer certain customers the opportunity to place orders five to six months ahead of delivery under our futures ordering program. These advance orders may be canceled under certain conditions, and the risk of cancellation increases when dealing with financially unstable retailers or retailers struggling with economic uncertainty. In the past, some customers have experienced financial difficulties up to and including bankruptcies, which have had an adverse effect on our sales, our ability to collect on receivables and our financial condition. When the retail economy weakens or as consumer behavior shifts, retailers tend to be more cautious with orders. A slowing or changing economy in our key markets, including a recession, could adversely affect the financial health of our customers, which in turn could have an adverse effect on our results of operations and financial condition. In addition, product sales are dependent in part on high quality merchandising and an appealing retail environment to attract consumers, which requires continuing investments by retailers. Retailers that experience financial difficulties may fail to make such investments or delay them, resulting in lower sales and orders for our products. +Climate change and other sustainability-related matters, or legal, regulatory or market responses thereto, may have an adverse impact on our business and results of operations. +There are concerns that increased levels of carbon dioxide and other greenhouse gases in the atmosphere have caused, and may continue to cause, potentially at a growing rate, increases in global temperatures, changes in weather patterns and increasingly frequent and/or prolonged extreme weather and climate events. Climate change may also exacerbate challenges relating to the availability and quality of water and raw materials, including those used in the production of our products, and may result in changes in regulations or consumer preferences, which could in turn affect our business, operating results and financial condition. For example, there has been increased focus by governmental and non-governmental organizations, consumers, customers, employees and other stakeholders on products that are sustainably made and other sustainability matters, including responsible sourcing and deforestation, the use of plastic, energy and water, the recyclability or recoverability of packaging and materials transparency, any of which may require us to incur increased costs for additional transparency, due diligence and reporting. In addition, federal, state or local governmental authorities in various countries are implementing, have proposed and are likely to continue to propose, legislative and regulatory initiatives to reduce or mitigate the impacts of climate change on the environment. Various countries and regions are following different approaches to the regulation of climate change, which could increase the complexity of, and potential cost related to complying with, such regulations. Any of the foregoing may require us to make additional investments in facilities and equipment, may impact the availability and cost of key raw materials used in the production of our products or the demand for our products, and, in turn, may adversely impact our business, operating results and financial condition. +Investors, regulators and other stakeholders are also increasingly scrutinizing companies’ environmental, social and governance (“ESG”) commitments, performance and disclosures, including related to climate change, and in recent years have placed increasing importance on social costs and related implications of their investments. Additionally, organizations that provide +2024 FORM 10-K 11 +Table of Contents +information to investors on corporate governance and related matters have developed ratings processes for evaluating companies on their respective approaches to ESG matters, which are increasingly being employed by investors, lenders, and customers to inform their investment, financing or purchasing decisions. Although we have announced sustainability-related goals and targets, there can be no assurance that our stakeholders will agree with our strategies, and any perception, whether or not valid, that we have failed to achieve, or to act responsibly with respect to, such matters or to effectively respond to new or additional legal or regulatory requirements regarding climate change, could result in adverse publicity and adversely affect our business and reputation. Execution of these strategies and achievement of our goals is subject to risks and uncertainties, many of which are outside of our control. These risks and uncertainties include, but are not limited to, our ability to execute our strategies and achieve our goals within the currently projected costs and the expected timeframes; the availability and cost of raw materials and renewable energy; unforeseen production, design, operational and technological difficulties; the outcome of research efforts and future technology developments, including the ability to scale projects and technologies on a commercially competitive basis such as carbon sequestration and/or other related processes; compliance with, and changes or additions to, global and regional regulations, taxes, charges, mandates or requirements relating to greenhouse gas emissions, carbon costs or climate-related goals; adapting products to customer preferences and customer acceptance of sustainable supply chain solutions; and the actions of competitors and competitive pressures. As a result, there is no assurance that we will be able to adequately meet stakeholder expectations, successfully execute our strategies or achieve our sustainability-related goals, which could damage our reputation and customer and other stakeholder relationships and have an adverse effect on our business, results of operations and financial condition. +Extreme weather conditions and natural disasters could negatively impact our operating results and financial condition. +Given the broad and global scope of our operations, we are particularly vulnerable to the physical risks of climate change, such as shifts in weather patterns. Extreme weather conditions in the areas in which our retail stores, suppliers, manufacturers, customers, distribution centers, offices, headquarters and vendors are located could adversely affect our operating results and financial condition. Moreover, natural disasters such as earthquakes, hurricanes, wildfires, tsunamis, floods or droughts, whether occurring in the United States or abroad, and their related consequences and effects, including energy shortages and public health issues, have in the past temporarily disrupted, and could in the future disrupt, our operations, the operations of our vendors, manufacturers and other suppliers or have in the past resulted in, and in the future could result in, economic instability that may negatively impact our operating results and financial condition. In particular, if a natural disaster or severe weather event were to occur in an area in which we or our suppliers, manufacturers, employees, customers, distribution centers or vendors are located, our continued success would depend, in part, on the safety and availability of the relevant personnel and facilities and proper functioning of our or third parties' computer, network, telecommunication and other systems and operations. In addition, a natural disaster or severe weather event could negatively impact retail traffic to our stores or stores that carry our products and could have an adverse impact on consumer spending, any of which could in turn result in negative point-of-sale trends for our merchandise. Further, climate change may increase both the frequency and severity of extreme weather conditions and natural disasters, which may affect our business operations, either in a particular region or globally, as well as the activities of our third-party vendors and other suppliers, manufacturers and customers. The diversity of locations in which we operate, our operational size, disaster recovery and business continuity planning and our information technology systems and networks, including the Internet and third-party services ("Information Technology Systems"), may not be sufficient for all or for concurrent eventualities. If we were to experience a local or regional disaster or other business continuity event or concurrent events, we could experience operational challenges, in particular depending upon how a local or regional event may affect our human capital across our operations or with regard to particular aspects of our operations, such as key executive officers or personnel. For example, our World Headquarters is located in a seismic zone, which is at a higher risk for earthquakes and the related consequences or effects. Further, if we are unable to find alternative suppliers, replace capacity at key manufacturing or distribution locations or quickly repair damage to our Information Technology Systems or supply systems, we could be late in delivering, or be unable to deliver, products to our customers. These events could result in reputational damage, lost sales, cancellation charges or markdowns, all of which could have an adverse effect on our business, results of operations and financial condition. +Our financial condition and results of operations have been, and could in the future be, adversely affected by a pandemic, epidemic or other public health emergency. +Pandemics, including the COVID-19 pandemic, and other public health emergencies, and preventative measures taken to contain or mitigate such crises have caused, and may in the future cause, business slowdown or shutdown in affected areas and significant disruption in the financial markets, both globally and in the United States. These events have led to and could again lead to adverse impacts to our global supply chain, factory cancellation costs, store closures, and a decline in retail traffic and discretionary spending by consumers and, in turn, materially impact our business, sales, financial condition and results of operations as well as cause a volatile effective tax rate driven by changes in the mix of earnings across our jurisdictions. We cannot predict whether, and to what degree, our sales, operations and financial results could in the future be affected by the pandemic and preventative measures. Risks presented by pandemics and other public health emergencies include, but are not limited to: +• Deterioration in economic conditions in the United States and globally, including the effect of prolonged periods of inflation on our consumers and vendors; +2024 FORM 10-K 12 +Table of Contents +• Disruption to our distribution centers, contract manufacturers, finished goods factories and other vendors, through the effects of facility closures, increased operating costs, reductions in operating hours, labor shortages, and real time changes in operating procedures, such as additional cleaning and disinfection procedures, which have had, and could in the future again have, a significant impact on our planned inventory production and distribution, including higher inventory levels or inventory shortages in various markets; +• Impacts to our distribution and logistics providers' ability to operate, including labor and container shortages, and increases in their operating costs. These supply chain effects have had, and could in the future have, an adverse effect on our ability to meet consumer demand, including digital demand, and have in the past resulted in and could in the future result in extended inventory transit times and an increase in our costs of production and distribution, including increased freight and logistics costs and other expenses; +• Decreased retail traffic as a result of store closures, reduced operating hours, social distancing restrictions and/or changes in consumer behavior; +• Reduced consumer demand for our products, including as a result of a rise in unemployment rates, higher costs of borrowing, inflation and diminished consumer confidence; +• Cancellation or postponement of sports seasons and sporting events in multiple countries, and bans on large public gatherings, which have reduced and in the future could reduce consumer spending on our products and could impact the effectiveness of our arrangements with key endorsers; +• The risk that any safety protocols in NIKE-owned or affiliated facilities, including our offices, will not be effective or not be perceived as effective, or that any virus-related illnesses will be linked or alleged to be linked to such facilities, whether accurate or not; +• Incremental costs resulting from the adoption of preventative measures and compliance with regulatory requirements, including providing facial coverings and hand sanitizer, rearranging operations to follow social distancing protocols, conducting temperature checks, testing and undertaking regular and thorough disinfecting of surfaces; +• Bankruptcies or other financial difficulties facing our wholesale customers, which could cause them to be unable to make or delay making payments to us, or result in revised payment terms, cancellation or reduction of their orders; and +• Significant disruption of and volatility in global financial markets, which could have a negative impact on our ability to access capital in the future. +We cannot reasonably predict the ultimate impact of any pandemic or public health emergency, including the extent of any adverse impact on our business, results of operations and financial condition, which will depend on, among other things, the duration and spread of the pandemic or public health emergency, the impact of governmental regulations that have been, and may continue to be, imposed in response, the effectiveness of actions taken to contain or mitigate the outbreak, the availability, safety and efficacy of vaccines, including against emerging variants of the infectious disease, and global economic conditions. Additionally, disruptions have in the past made it more challenging to compare our performance, including our revenue growth and overall profitability, across quarters and fiscal years, and could have this effect in the future. Any pandemic or public health emergency may also affect our business, results of operations or financial condition in a manner that is not presently known to us or that we currently do not consider to present significant risks and may also exacerbate, or occur concurrently with, other risks discussed in this Item 1A. Risk Factors, any of which could have a material effect on us. +Business and Operational Risks +Failure to maintain our reputation, brand image and culture could negatively impact our business. +Our iconic brands have worldwide recognition, and our success depends on our ability to maintain and enhance our brand image and reputation. Maintaining, promoting and growing our brands will depend on our design and marketing efforts, including product innovation, product quality and advertising and consumer campaigns. Our commitment to product innovation, quality and sustainability, and our continuing investment in design (including materials), marketing and sustainability measures may not have the desired impact on our brand image and reputation. In addition, our success in maintaining, extending and expanding our brand image depends on our ability to adapt to a rapidly changing media and digital environment, including our reliance on social media, digital advertising networks, digital and advertising technology, and digital dissemination of advertising campaigns on our digital platforms and through our digital experiences and products. We could be adversely impacted if we fail to achieve any of these objectives. +Our brand value also depends on our ability to maintain a positive consumer perception of our corporate integrity, purpose and brand culture. Negative claims or publicity involving us, our culture and values, our products, services and experiences, consumer data, or any of our key employees, endorsers, sponsors, suppliers or partners could seriously damage our reputation and brand image, regardless of whether such claims are accurate. For example, while we require our suppliers of our products to operate their business in compliance with applicable laws and regulations, we do not control their practices. Negative publicity +2024 FORM 10-K 13 +Table of Contents +relating to a violation or an alleged violation of policies or laws by such suppliers could damage our brand image and diminish consumer trust in our brand. Further, our reputation and brand image could be damaged as a result of our support of, association with or lack of support or disapproval of certain social causes and public personalities, as well as any decisions we make to continue to conduct, or change, certain of our activities in response to such considerations. Social media, which accelerates and potentially amplifies the scope of negative publicity, can increase the challenges of responding to negative claims. Adverse publicity about regulatory or legal action against us, or by us, could also damage our reputation and brand image, undermine consumer confidence in us and reduce long-term demand for our products, even if the regulatory or legal action is unfounded or not material to our operations. If the reputation, culture or image of any of our brands is tarnished or if we receive negative publicity, then our sales, financial condition and results of operations could be materially and adversely affected. +If we are unable to anticipate consumer preferences and develop new products, we may not be able to maintain or increase our revenues and profits. +Our success depends on our ability to identify, originate and define product trends as well as to anticipate, gauge and react to changing consumer demands in a timely manner so that our product offerings evolve and are responsive to consumer demands. However, lead times for many of our products make it more difficult for us to respond rapidly to new or changing product trends or consumer preferences. All of our products are subject to changing consumer preferences that cannot be predicted with certainty. Our new products may not receive consumer acceptance as consumer preferences could shift rapidly to different types of products or away from these types of products altogether, and our future success depends in part on our ability to anticipate and respond to these changes. If we fail to anticipate accurately and respond to trends and shifts in consumer preferences by adjusting the mix of existing product offerings, developing new products, designs, styles and categories, and influencing sports and fitness preferences through extensive marketing, we could experience lower sales, excess inventories or lower profit margins, any of which could have an adverse effect on our results of operations and financial condition. In addition, we market our products globally through a diverse spectrum of advertising and promotional programs and campaigns, including social media and other digital advertising networks. If we do not successfully market our products, if advertising and promotional costs increase or if certain advertising networks are no longer available, these factors could have an adverse effect on our business, financial condition and results of operations. +We rely on technical innovation and high-quality products to compete. +Technical innovation and quality control in the design and manufacturing processes of footwear, apparel, equipment and other products and services are essential to the commercial success of our products and development of new products. Research and development play a key role in technical innovation. We rely upon specialists in the fields of biomechanics, chemistry, exercise physiology, engineering, digital technologies, industrial design, sustainability and related fields, as well as research committees and advisory boards made up of athletes, coaches, trainers, equipment managers, orthopedists, podiatrists and other experts to develop and test cutting-edge performance products. While we strive to produce products that help to enhance athletic performance and reduce injury and maximize comfort, if we fail to introduce technical innovation in our products, consumer demand for our products could decline, and if we experience problems with the quality of our products (including the introduction of bias or inaccuracies in our products), we may incur substantial expense to remedy the problems and loss of consumer confidence. +Our enterprise initiative may not generate the intended benefits or projected cost savings we anticipate. +In December 2023, we announced a multi-year enterprise initiative aimed at delivering cost savings and investing in future growth, accelerating innovation and driving profitability. Areas of potential savings include simplifying our product assortment, increasing automation and use of technology, streamlining our organization and leveraging our scale to drive greater efficiency. Our ability to achieve the intended cost savings and goals associated with the enterprise initiative are subject to many estimates and assumptions, which may change during implementation and execution. For example, we may not be able to identify opportunities to deliver anticipated cost savings. Additionally, the timing of the cost savings associated with the enterprise initiative may be delayed. Further, we may also face disruptions to our business or operations as we execute on the initiative. +Our business is affected by seasonality, which could result in fluctuations in our operating results. +We experience moderate fluctuations in aggregate sales volume during the year. Historically, revenues in the first and fourth fiscal quarters have slightly exceeded those in the second and third fiscal quarters. However, the mix of product sales may vary considerably from time to time or in the future as a result of strategic shifts in our business and seasonal or geographic demand for particular types of footwear, apparel and equipment and in connection with the timing of significant sporting events, such as the NBA Finals, Olympics or the World Cup, among others. In addition, our customers may, and from time to time do, cancel orders, change delivery schedules or change the mix of products ordered with minimal notice. As a result, we may not be able to accurately predict our quarterly sales. Accordingly, our results of operations are likely to fluctuate significantly from period to period. This seasonality, along with other factors that are beyond our control, including economic conditions, changes in consumer preferences, weather conditions, outbreaks of disease, social or political unrest, availability of import quotas, transportation disruptions and currency exchange rate fluctuations, has in the past adversely affected and could in the future adversely affect our business and cause our results of operations to fluctuate. Our operating margins are also sensitive to a number of additional factors that are beyond our control, including manufacturing and transportation costs, shifts in product sales +2024 FORM 10-K 14 +Table of Contents +mix and geographic sales trends, all of which we expect to continue. Results of operations in any period should not be considered indicative of the results to be expected for any future period. +Failure to continue to obtain or maintain high-quality endorsers of our products could harm our business. +We establish relationships with professional athletes, sports teams and leagues, as well as other public figures, including artists, designers and influencers, to develop, evaluate and promote our products, as well as establish product authenticity with consumers. However, as competition in our industry has increased, the costs associated with establishing and retaining such sponsorships and other relationships have increased, and competition to attract and retain high-quality endorsers has increased. If we are unable to negotiate new, or maintain our current, associations with professional athletes, sports teams and leagues, or other public figures, or to do so at a reasonable cost, we could lose the high visibility or on-field authenticity associated with our products, and we may be required to modify and substantially increase our marketing investments. As a result, our brands, net revenues, expenses and profitability could be harmed. +Furthermore, if certain endorsers were to stop using our products contrary to their endorsement agreements, our business could be adversely affected. In addition, actions taken or statements made by athletes, teams or leagues, or other endorsers, associated with our products or brand that harm the reputations of those athletes, teams or leagues, or endorsers, or our decisions to cease collaborating with certain endorsers in light of actions taken or statements made by them, have in the past harmed and could in the future seriously harm our brand image with consumers and, as a result, could have an adverse effect on our sales and financial condition. Poor or non-performance by our endorsers, a failure to continue to correctly identify promising athletes, public figures or sports organizations, to use and endorse our products and brand or a failure to enter into cost-effective endorsement arrangements with prominent athletes, public figures and sports organizations could adversely affect our brand, sales and profitability. +Failure to accurately forecast consumer demand could lead to excess inventories or inventory shortages, which could result in decreased operating margins, reduced cash flows and harm to our business. +To meet anticipated demand for our products, we purchase products from manufacturers outside of our futures ordering program and in advance of customer orders, which we hold in inventory and resell to customers. There is a risk we may be unable to sell excess products ordered from manufacturers. Inventory levels in excess of customer demand may result in inventory write-downs, and the sale of excess inventory at discounted prices could significantly impair our brand image and have an adverse effect on our operating results, financial condition and cash flows. Conversely, if we underestimate consumer demand for our products or if our manufacturers fail to supply products we require at the time we need them, we may experience inventory shortages. Inventory shortages could delay shipments to customers, negatively impact retailer, distributor and consumer relationships and diminish brand loyalty. The difficulty in forecasting demand also makes it difficult to estimate our future results of operations, financial condition and cash flows from period to period. A failure to accurately predict the level of demand for our products could adversely affect our net revenues and net income, and we are unlikely to forecast such effects with any certainty in advance. +Our NIKE Direct operations have required and will continue to require a substantial investment and commitment of resources and are subject to numerous risks and uncertainties. +Our NIKE Direct operations, including our retail stores and digital platforms, have required and will continue to require significant investment. Our NIKE Direct stores have required and will continue to require substantial fixed investment in equipment and leasehold improvements and personnel. We have entered into substantial operating lease commitments for retail space. Certain stores have been designed and built to serve as high-profile venues to promote brand awareness and marketing activities and to integrate with our digital platforms. Because of their unique design and technological elements, locations and size, these stores require substantially more investment than other stores. Due to the high fixed-cost structure associated with our NIKE Direct retail stores, a decline in sales, a shift in consumer behavior away from brick-and-mortar retail, or the closure, temporary or otherwise, or poor performance of individual or multiple stores could result in significant lease termination costs, write-offs of equipment and leasehold improvements and employee-related costs. +Many factors unique to retail operations, some of which are beyond our control, pose risks and uncertainties. Risks include, but are not limited to: credit card fraud and theft in both our retail stores and on digital platforms; mismanagement of existing retail channel partners; inability to manage costs associated with store construction and operation; and supply chain and inventory management. +In addition, we have made significant investments in digital technologies and information systems for the digital aspect of our NIKE Direct operations, and our digital offerings will require co ntinued investment in the development and upgrading of our technology platforms. In order to deliver high-quality digital experiences, our digital platforms must be designed effectively and work well with a range of other technologies, systems, networks, and standards that we do not control. We may not be successful in developing platforms that operate effectively with these technologies, systems, networks or standards. A growing portion of consumers access our NIKE Direct digital platforms, but in the event that it is more difficult for consumers to access and use our digital platforms, consumers find that our digital platforms do not effectively meet their needs or expectations or consumers choose not to access or use our digital platforms or use devices that do not offer access to our platforms, the success of our +2024 FORM 10-K 15 +Table of Contents +NIKE Direct operations could be adversely impacted. Our competitors may develop, or have already developed, digital experiences, features, content, services or technologies that are similar to ours or that achieve greater acceptance. +We may not realize a satisfactory return on our investment in our NIKE Direct operations and management's attention from our other business opportunities could be diverted, which could have an adverse effect on our business, financial condition or results of operations. +If the technology-based systems, applications and platforms that give our consumers the ability to shop or interact with us online do not function effectively, our operating results, as well as our ability to grow our digital commerce business globally or to retain our customer base, could be materially adversely affected. +Many of our consumers shop with us through our digital platforms. Consumers frequently use mobile-based devices and applications to shop online with us and with our competitors, and to do comparison shopping, as well as to engage with us and our competitors through digital services and experiences that are offered on mobile platforms. We use social media and proprietary mobile applications to interact with our consumers and as a means to enhance their shopping experience. Any failure on our part to provide attractive, effective, reliable, secure and user-friendly digital commerce platforms that offer a wide assortment of merchandise with rapid delivery options and that continually meet the changing expectations of online shoppers or any failure to provide attractive digital experiences to our customers could place us at a competitive disadvantage, result in the loss of digital commerce and other sales, harm our reputation with consumers, have a material adverse impact on the growth of our digital commerce business globally and have a material adverse impact on our business and results of operations. In addition, as use of our digital platforms continues to grow, we will need an increasing amount of technical infrastructure to continue to satisfy our consumers' needs. If we fail to continue to effectively scale and adapt our digital platforms to accommodate increased consumer demand, our business may be subject to interruptions, delays or failures and consumer demand for our products and digital experiences could decline. +Risks specific to our digital commerce business also include diversion of sales from our and our retailers' brick and mortar stores, pricing pressure on our products, difficulty in recreating the in-store experience through direct channels and liability for online content. Our failure to successfully respond to these risks might adversely affect sales in our digital commerce business, as well as damage our reputation and brands. +We rely significantly on information technology to operate our business, including our supply chain and retail operations, and any failure, inadequacy or interruption of that technology could harm our ability to effectively operate our business. +We are heavily dependent on Information Technology Systems, across our supply chain, including product design, production, forecasting, ordering, manufacturing, transportation, sales and distribution, as well as for processing financial information for external and internal reporting purposes, retail operations and other business activities. Information Technology Systems are critical to many of our operating activities and our business processes and may be negatively impacted by any service interruption or shutdown. For example, our ability to effectively manage and maintain our inventory and to ship products to customers on a timely basis depends significantly on the reliability of these Information Technology Systems. Over a number of years, we have implemented Information Technology Systems in all of the geographical regions in which we operate. Our work to integrate, secure and enhance these systems and related processes in our global operations is ongoing and NIKE will continue to invest in these efforts. We cannot provide assurance, however, that the measures we take to secure and enhance these systems will be sufficient to protect our Information Technology Systems and prevent cyber-attacks, system failures or data or information loss. The failure of these systems to operate effectively, including as a result of security breaches, viruses, hackers, malware, ransomware, denial of service attacks, natural disasters, vendor business interruptions or other causes, failure to properly maintain, protect, repair or upgrade systems, or problems with transitioning to upgraded or replacement systems could cause delays in product fulfillment and reduced efficiency of our operations, could require significant time and capital investments to remediate the problem which may not be sufficient to cover all eventualities, and may have an adverse effect on our reputation, results of operations and financial condition. In addition, the use of employee-owned devices for communications as well as hybrid work arrangements, present additional operational risks to our Information Technology Systems, including, but not limited to, increased risks of cyber-attacks. Further, like other companies in the retail industry, we have in the past experienced, and we expect to continue to experience, cyber-attacks, including phishing, and other attempts to breach, or gain unauthorized access to, our systems. To date, these attacks have not had a material impact on our operations, but we cannot provide assurance that they will not have an impact in the future. +We also use Information Technology Systems to process financial information and results of operations for internal reporting purposes and to comply with regulatory financial reporting, legal and tax requirements. From time to time, we have expended, and expect to continue to expend, significant resources to modify, update and enhance our Information Technology Systems and to investigate and remediate vulnerabilities or other exposures. These modifications, updates and enhancements may cost more than initially expected and may not be effective in preventing issues and disruptions. Moreover, due to the complexity of our Information Technology Systems, the process of implementing modifications or enhancements can itself create a risk of systems disruptions and security issues. If Information Technology Systems suffer severe damage, disruption or shutdown and our +2024 FORM 10-K 16 +Table of Contents +business continuity plans, or those of our vendors, do not effectively resolve the issues in a timely manner, we could experience delays in reporting our financial results, which could result in lost revenues and profits, as well as reputational damage. +Furthermore, we depend on Information Technology Systems and personal data collection for digital marketing, digital commerce, consumer engagement and the marketing and use of our digital products and services. We also rely on our ability to engage in electronic communications throughout the world between and among our employees as well as with other third parties, including customers, suppliers, vendors and consumers. Any interruption in Information Technology Systems may impede our ability to engage in the digital space and result in lost revenues, damage to our reputation, and loss of users. +Given the increasing complexity and sophistication of techniques used by bad actors to obtain unauthorized access to or disable information technology systems, and the fact that cyber-attacks are being made by groups and individuals with a wide range of expertise and motives, it is increasingly difficult to anticipate and defend against cyber-attacks, and a cyberattack could occur and persist for an extended period of time before being detected. Moreover, the extent of a particular cyber incident and the steps that we may need to take to investigate the incident may not be immediately clear, and it may take a significant amount of time before such investigation can be finalized and completed and reliable information about the incident is known. During the pendency of any such investigation, we may not necessarily know the extent of the harm or how best to remediate it and we may be required to disclose incidents before their full extent is known. +Moreover, to the extent we integrate artificial intelligence ("AI") into our operations, this may increase the cybersecurity and privacy risks, including the risk of unauthorized or misuse of AI tools, we are exposed to, and threat actors may leverage AI to engage in automated, targeted and coordinated attacks of our systems. +We are subject to the risk our licensees may not generate expected sales or maintain the value of our brands. +We currently license, and expect to continue licensing, certain of our proprietary rights, such as trademarks or copyrighted material, to third parties. If our licensees fail to successfully market and sell licensed products, or fail to obtain sufficient capital or effectively manage their business operations, customer relationships, labor relationships, supplier relationships or credit risks, it could adversely affect our revenues, both directly from reduced royalties received and indirectly from reduced sales of our other products. +We also rely on our licensees to help preserve the value of our brands. Although we attempt to protect our brands through approval rights over the design, production processes, quality, packaging, merchandising, distribution, advertising and promotion of our licensed products, we cannot completely control the use of our licensed brands by our licensees. The misuse of a brand by or negative publicity involving a licensee could have a material adverse effect on that brand and on us. +Consolidation of retailers or concentration of retail market share among a few retailers may increase and concentrate our credit risk and impair our ability to sell products. +The athletic footwear, apparel and equipment retail markets in some countries are dominated by a few large athletic footwear, apparel and equipment retailers with many stores and accelerating digital commerce capabilities. The market shares of these retailers may increase through acquisitions and construction of additional stores and investments in digital capacity, and as a result of attrition as struggling retailers exit the market. Consolidation of our retailers will concentrate our credit risk with a smaller set of retailers, any of whom may experience declining sales or a shortage of liquidity. In addition, increasing market share concentration among a few retailers in a particular country or region increases the risk that if any one of them substantially reduces their purchases of our products, we may be unable to find sufficient retail outlets for our products to sustain the same level of sales and revenues. +If one or more of our counterparty financial institutions default on their obligations to us or fail, we may incur significant losses. +As part of our hedging activities, we enter into transactions involving derivative financial instruments, which may include forward contracts, commodity futures contracts, option contracts, collars and swaps with various financial institutions. In addition, we have significant amounts of cash, cash equivalents and other investments on deposit or in accounts with banks or other financial institutions in the United States and abroad. As a result, we are exposed to the risk of default by or failure of counterparty financial institutions. The risk of counterparty default or failure may be heightened during periods of sustained high interest rates and uncertainty in the financial markets as well as economic downturns. If one of our counterparties were to become insolvent or file for bankruptcy, our ability to recover losses incurred as a result of default, or our assets deposited or held in accounts with such counterparty, may be limited by the counterparty's liquidity or the applicable laws governing the insolvency or bankruptcy proceedings. In the event of default or failure of one or more of our counterparties, we could incur significant losses, which could negatively impact our results of operations and financial condition. +We rely on a concentrated source base of contract manufacturers to supply a significant portion of our footwear products. +We rely upon a concentrated amount of contract manufacturers, which we do not own or operate, to manufacture all of the footwear products we sell, see "Manufacturing" for additional information. Our ability to meet our customers' needs depends on our ability to maintain a steady supply of products from our contract manufacturers. If one or more of our significant suppliers +2024 FORM 10-K 17 +Table of Contents +were to sever their relationship with us or significantly alter the terms of our relationship, including due to changes in applicable trade policies, or be unable to perform, we may not be able to obtain replacement products in a timely manner, which could have a material adverse effect on our business operations, sales, financial condition or results of operations. Additionally, if any of our primary footwear contract manufacturers fail to make timely shipments, do not meet our quality standards or otherwise fail to deliver us product in accordance with our plans, there could be a material adverse effect on our results of operations. +Certain of our footwear contract manufacturers are highly specialized and only produce a specific type of product. Such contract manufacturers may go out of business if consumer preferences or market conditions change such that there is no longer sufficient demand for the types of products they produce. If, in the future, the relevant products are again in demand and the specialized contract manufacturers no longer exist, we may not be able to locate replacement facilities to manufacture certain footwear products in a timely manner or at all, which could have a material adverse effect on our sales, financial condition or results of operations. +The market for prime real estate is competitive. +Our ability to effectively obtain real estate to open new retail stores and otherwise conduct our operations, both domestically and internationally, depends on the availability of real estate that meets our criteria for traffic, square footage, co-tenancies, lease economics, demographics and other factors. We also must be able to effectively renew our existing real estate leases. In addition, from time to time, we seek to downsize, consolidate, reposition or close some of our real estate locations, which may require modification of an existing lease. Failure to secure adequate new locations or successfully modify leases for existing locations, or failure to effectively manage the profitability of our existing fleet of retail stores, could have an adverse effect on our operating results and financial condition. +Additionally, the economic environment may make it difficult to determine the fair market rent of real estate properties domestically and internationally. This could impact the quality of our decisions to exercise lease options at previously negotiated rents and to renew expiring leases at negotiated rents. Any adverse effect on the quality of these decisions could impact our ability to retain real estate locations adequate to meet our targets or efficiently manage the profitability of our existing fleet of stores, which could have an adverse effect on our operating results and financial condition. +The success of our business depends, in part, on high-quality employees, including key personnel as well as our ability to maintain our workplace culture and values. +Our success depends in part on the continued service of high-quality employees, including key executive officers and personnel. The loss of the services of key individuals, or any negative perception with respect to these individuals, or our workplace culture or values, could harm our business. Our success also depends on our ability to recruit, retain and engage our personnel sufficiently, both to maintain our current business and to execute our strategic initiatives. Competition for employees in our industry is intense and we may not be successful in attracting and retaining such personnel. Changes to our current and future work models may not meet the needs or expectations of our employees or may not be perceived as favorable compared to other companies' policies, which could negatively impact our ability to attract, hire and retain our employees. In addition, shifts in U.S. immigration policy could negatively impact our ability to attract, hire and retain highly skilled employees who are from outside the United States. W e also believe that our corporate culture has been a key driver of our success, and we have invested substantial time and resources in building, maintaining and evolving our culture. Any failure to preserve and evolve our culture could negatively affect our future success, including our ability to retain and recruit employees. +Our business operations and financial performance could be adversely affected by changes in our relationship with our workforce or changes to United States or foreign employment regulations. +We have significant exposure to changes in domestic and foreign laws governing our relationships with our workforce, including wage and hour laws and regulations, fair labor standards, minimum wage requirements, overtime pay, unemployment tax rates, workers' compensation rates, citizenship requirements and payroll taxes, which could have a direct impact on our operating costs. A significant increase in minimum wage or overtime rates in countries where we have workforce could have a significant impact on our operating costs and may require that we relocate those operations or take other steps to mitigate such increases, all of which may cause us to incur additional costs. There is also a risk of potential claims that we have violated laws related to discrimination and harassment, health and safety, wage and hour laws, criminal activity, personal injury and other claims. In addition, if there were a significant increase in the number of members of our workforce who are members of labor organizations or become parties to collective bargaining agreements, we could be vulnerable to a strike, work stoppage or other labor action, as well as additional expenses, expectations or requirements, which could have an adverse effect on our business. +Risks Related to Operating a Global Business +Our international operations involve inherent risks which could result in harm to our business. +Nearly all of our athletic footwear and apparel is manufactured outside of the United States, and the majority of our products are sold outside of the United States. Accordingly, we are subject to the risks generally associated with global trade and doing business abroad, which include foreign laws and regulations, varying consumer preferences across geographic regions, political tensions, unrest, disruptions or delays in cross-border shipments and changes in economic conditions in countries in which our +2024 FORM 10-K 18 +Table of Contents +products are manufactured or where we sell products. Changes in U.S. or international social, political, regulatory and economic conditions could impact our business, reputation, financial condition and results of operations. In particular, political and economic instability, geopolitical conflicts, political unrest, civil strife, terrorist activity, acts of war, public corruption, expropriation, nationalism and other economic or political uncertainties in the United States or internationally could interrupt and negatively affect the sale of our products or other business operations. Any negative sentiment toward the United States as a result of any such changes could also adversely affect our business. +In addition, terrorist acts, military conflict and disease outbreaks have increased the risks of doing business abroad. These factors, among others, could affect our ability to manufacture products or procure materials, or our costs for manufacturing and procuring materials, our ability to import products, our ability to sell products in international markets and our cost of doing business. If any of these or other factors make the conduct of business in a particular country undesirable or impractical, our business could be adversely affected. +Our products are subject to risks associated with overseas sourcing, manufacturing and financing. +The principal materials used in our footwear products — natural and synthetic rubber, plastic compounds, foam cushioning materials, natural and synthetic leather, nylon, polyester and natural fiber textiles and polyurethane films — are locally available to manufacturers. The principal materials used in our apparel products — natural and synthetic fabrics, yarns and threads (both virgin and recycled), specialized performance fabrics designed to efficiently wick moisture away from the body, retain heat and repel rain and/or snow as well as plastic and metal hardware — are also available in countries where our manufacturing takes place. Both our apparel and footwear products are dependent upon the ability of our contract manufacturers to locate, train, employ and retain adequate personnel. NIKE contract manufacturers and materials suppliers buy raw materials and are subject to wage rates and other labor standards that are oftentimes regulated by the governments of the countries in which our products are manufactured. +There could be a significant disruption in the supply of fabrics or raw materials from current sources or, in the event of a disruption or heightened competition for such materials, our contract manufacturers might not be able to locate alternative suppliers of materials of comparable quality at an acceptable price or at all. Further, our contract manufacturers have experienced and may continue to experience in the future, unexpected closures, unexpected increases in work wages or other changes in labor standards, whether government mandated or otherwise, and increases in compliance costs due to governmental regulation concerning certain metals, fabrics or raw materials used in the manufacturing of our products. In addition, we cannot be certain that manufacturers that we do not contract and that we refer to as "unaffiliated manufacturers" will be able to fill our orders in a timely manner. If we experience significant increases in demand, or reductions in the availability of materials, or need to replace an existing contract manufacturer or materials supplier, there can be no assurance additional supplies of fabrics or raw materials or additional manufacturing capacity will be available when required on terms acceptable to us, or at all, or that any contract manufacturer, unaffiliated manufacturer, or any materials supplier would allocate sufficient capacity to us in order to meet our requirements. Even if we are able to expand existing or find new manufacturing capacity or sources of materials, we may encounter delays in production and added costs as a result of the time it takes to train suppliers and manufacturers in our methods, products, quality control standards and labor, health and safety standards. In addition, changes we make in managing the supply of our products, such as changes to decrease the supply of certain products, pose the risk that we may not be able to meet demand for, or ramp up production of, certain products timely or without additional cost. Any delays, interruption or increased costs in labor or wages, in the supply of materials or in the manufacturing of our products could have an adverse effect on our ability to meet retail customer and consumer demand for our products and result in lower revenues and net income both in the short- and long-term. +Because contract manufacturers make a majority of our products outside of our principal sales markets, our products must be transported by third parties over large geographic distances. Delays in the shipment or delivery of our products due to the availability of transportation, container shortages, labor shortages, including work stoppages or port strikes, infrastructure and port congestion or other factors, and costs and delays associated with consolidating or transitioning between manufacturers, have adversely impacted, and could in the future adversely impact the availability of our products and, in turn, our financial performance. In addition, delays in the shipment or delivery of our products, manufacturing delays or unexpected demand for our products have required us, and may in the future require us to use faster, but more expensive, transportation methods such as air freight, which could adversely affect our profit margins. The cost of oil is a significant component in manufacturing and transportation costs, so increases in the price of petroleum products can adversely affect our profit margins. Changes in U.S. trade policies, including modifications to import tariffs and existing trade policies and agreements, have also had, and could continue to have a significant impact on our activities in foreign jurisdictions, and could adversely affect our reputation or results of operations. +In addition, we have become, and expect to continue to be, subject to a number of regulations that require us to develop new policies and procedures for, strive to mitigate, and report, certain supply chain risks related to sourcing internationally. These regulations have resulted and may continue to result in increased operating costs and affect how and where we source materials for our products. +2024 FORM 10-K 19 +Table of Contents +Our success depends on our global distribution facilities. +We distribute our products to customers directly from the factory and through distribution centers located throughout the world. Our ability to meet customer expectations, manage inventory, complete sales and achieve objectives for operating efficiencies and growth, particularly in emerging markets, depends on the proper operation of our distribution facilities, the development or expansion of additional distribution capabilities and the timely performance of services by third parties (including those involved in shipping product to and from our distribution facilities). Our distribution facilities have in the past and could in the future be interrupted by information technology problems, disasters such as earthquakes or fires or outbreaks of disease or government actions taken to mitigate their spread. Any significant failure in our distribution facilities could result in an adverse effect on our business. We maintain business interruption insurance, but it may not adequately protect us from adverse effects caused by significant disruptions in our distribution facilities. +Legal, Regulatory, and Compliance Risks +We are subject to a complex array of laws and regulations and litigation and other legal and regulatory proceedings, which could have an adverse effect on our business, financial condition and results of operations. +As a multinational corporation with operations and distribution channels throughout the world, we are subject to and must comply with extensive laws and regulations in the United States and other jurisdictions in which we have operations and distribution channels. If we or our employees, agents, suppliers, and other partners fail to comply with any of these laws or regulations, such failure could subject us to fines, sanctions or other penalties that could negatively affect our reputation, business, financial condition and results of operations. Furthermore, laws, regulations and policies and the interpretation of such, can conflict among jurisdictions and compliance in one jurisdiction may result in legal or reputational risks in another jurisdiction. We are involved in various types of claims, lawsuits, regulatory proceedings and government investigations relating to our business, our products and the actions of our employees and representatives, including contractual and employment relationships, product liability, antitrust, trademark rights and a variety of other matters. It is not possible to predict with certainty the outcome of any such legal or regulatory proceedings or investigations, and we could in the future incur judgments, fines or penalties, or enter into settlements of lawsuits and claims that could have a material adverse effect on our business, financial condition and results of operations and negatively impact our reputation. The global nature of our business means legal and compliance risks, such as anti-bribery, anti-corruption, fraud, trade, environmental, competition, privacy and other regulatory matters, will continue to exist and additional legal proceedings and other contingencies have and will continue to arise from time to time, which could adversely affect us. In addition, the adoption of new laws or regulations, or changes in the interpretation of existing laws or regulations, may result in significant unanticipated legal and reputational risks. Moreover, the regulation of certain transactions we engage in, including those involving virtual goods and cryptocurrencies, remains in an early stage and subject to significant uncertainty. As a result, we are required to exercise our judgment as to whether or how certain laws or regulations apply, or may in the future apply, and it is possible that legislators, regulators and courts may disagree with our conclusions. Any current or future legal or regulatory proceedings could divert management's attention from our operations and result in substantial legal fees. +Changes to U.S. or other countries' trade policies and tariff and import/export regulations or our failure to comply with such regulations may have a material adverse effect on our reputation, business, financial condition and results of operations. +Changes in the U.S. government's import and export policies, including trade restrictions, sanctions and countersanctions, increased tariffs or quotas, embargoes, safeguards or customs restrictions, could require us to change the way we conduct business and adversely affect our results of operations. +In addition, changes in laws and policies governing foreign trade, manufacturing, development and investment in the territories or countries where we currently sell our products or conduct our business could adversely affect our business. U.S. presidential administrations have instituted or proposed changes in trade policies that include the negotiation or termination of trade agreements, the imposition of higher tariffs on imports into the U.S., economic sanctions on individuals, corporations or countries, and other government regulations affecting trade between the U.S. and other countries where we conduct our business. It may be time-consuming and expensive for us to alter our business operations in order to adapt to or comply with any such changes. +Changes or proposed changes in U.S. or other countries' trade policies may result in restrictions and economic disincentives on international trade. Tariffs and other changes in U.S. trade policy have in the past and could in the future trigger retaliatory actions by affected countries, and certain foreign governments have instituted or are considering imposing retaliatory measures on certain U.S. goods. Further, any emerging protectionist or nationalist trends either in the United States or in other countries could affect the trade environment. The Company, similar to many other multinational corporations, does a significant amount of business that would be impacted by changes to the trade policies of the United States and foreign countries (including governmental action related to tariffs, international trade agreements, or economic sanctions). Such changes have the potential to adversely impact the U.S. economy or certain sectors thereof or the economy of another country in which we conduct operations, our industry and the global demand for our products, and as a result, could have a material adverse effect on our business, financial condition and results of operations. +In addition, many of our imported products are subject to duties, tariffs or quotas that affect the cost and quantity of various types of goods imported into the United States and other countries. Any country in which our products are produced or sold may +2024 FORM 10-K 20 +Table of Contents +eliminate, adjust or impose new quotas, duties, tariffs, safeguard measures, anti-dumping duties, cargo restrictions to prevent terrorism, restrictions on the transfer of currency, climate change legislation, product safety regulations or other charges or restrictions, any of which could have an adverse effect on our results of operations and financial condition. +Furthermore, we are subject to the FCPA as well as the anti-corruption laws of other countries in which we operate. Although we implement policies and procedures designed to promote compliance with these laws, our employees, independent contractors, contract manufacturers, suppliers and agents, as well as those companies to which we outsource certain of our business operations, may take actions in violation of our policies. Any such violation could result in sanctions or other penalties and have an adverse effect on our business, reputation and operating results. +Failure to adequately protect or enforce our intellectual property rights could adversely affect our business. +We periodically discover counterfeit reproductions of our products or products that otherwise infringe our intellectual property rights. If we are unsuccessful in enforcing our intellectual property rights, continued sales of these products could adversely affect our sales and our brand and could result in a shift of consumer preference away from our products. +The actions we take to establish and protect our intellectual property rights may not be adequate to prevent imitation of our products by others. We also may be unable to prevent others from seeking to block sales of our products as violations of proprietary rights. +We may be subject to liability if third parties successfully claim we infringe their intellectual property rights. Defending infringement claims could be expensive and time-consuming and might result in our entering into costly license agreements. We also may be subject to significant damages or injunctions against development, manufacturing, use, importation and/or sale of certain products. +We take various actions to prevent the unauthorized use and/or disclosure of our confidential information and intellectual property rights. These actions include contractual measures such as entering into non-disclosure and non-compete agreements and agreements relating to our collaborations with third parties and providing confidential information awareness training. Our controls and efforts to prevent unauthorized use and/or disclosure of confidential information and intellectual property rights might not always be effective. For example, confidential information related to business strategy, innovations, new technologies, mergers and acquisitions, unpublished financial results or personal data could be prematurely, inadvertently, or improperly used and/or disclosed, resulting in a loss of reputation, loss of intellectual property rights, a decline in our stock price and/or a negative impact on our market position, and could lead to damages, fines, penalties or injunctions. In addition, new products we offer, such as virtual goods, may raise various novel intellectual property law considerations, including adequacy and scope of assignment, licensing, transfer, copyright and other right-of-use issues. +In addition, the laws of certain countries may not protect or allow enforcement of intellectual property rights to the same extent as the laws of the United States. We may face significant expenses and liability in connection with the protection of our intellectual property rights, including outside the United States, and if we are unable to successfully protect our rights or resolve intellectual property conflicts with others, our business or financial condition may be adversely affected. +Regulations and best practices with respect to new technological developments, including generative AI, are in the process of being developed globally. These developments may affect aspects of our business that leverage these tools, and give rise to risks related to intellectual property infringement claims or harm to our reputation or brand image. +We are subject to data security and privacy risks that could negatively affect our results, operations or reputation. +In addition to our own sensitive and proprietary business information, we handle transactional and personal information about our wholesale customers and consumers and users of our digital experiences, which include online distribution channels and product engagement, adaptive products and personal fitness applications. Hackers and data thieves are increasingly sophisticated and operate social engineering, such as phishing, and large-scale, complex automated attacks that can evade detection for long periods of time. Any breach of our or our service providers' networks, or other vendor systems, may result in the loss of confidential business and financial data, misappropriation of our consumers', users' or employees' personal information or a disruption of our business. Any of these outcomes could have a material adverse effect on our business, including unwanted media attention, impairment of our consumer and customer relationships, damage to our reputation; resulting in lost sales and consumers, fines, lawsuits, or significant legal and remediation expenses. We also may need to expend significant resources to protect against, respond to and/or redress problems caused by any breach. +In addition, we must comply with increasingly complex and rigorous, and sometimes conflicting, regulatory standards enacted to protect business and personal data in the United States, Europe and elsewhere. For example, the European Union adopted the General Data Protection Regulation (the "GDPR"); the United Kingdom enacted the UK General Data Protection Regulation (which implements the GDPR into UK law); several states in the United States have passed data privacy laws; China enacted the Data Security Law and Personal Information Protection Law; and additional jurisdictions have adopted or are considering proposing or adopting similar regulations. These laws impose additional obligations on companies regarding the handling of personal data and provide certain individual privacy rights to persons whose data is stored. Compliance with existing, proposed and recently enacted laws and regulations is costly and time consuming, and any failure to comply with these regulatory +2024 FORM 10-K 21 +Table of Contents +standards could subject us to legal, operational and reputational risks. Misuse of or failure to secure personal information could also result in violation of data privacy laws and regulations, proceedings against the Company by governmental entities or others, imposition of fines by governmental authorities and damage to our reputation and credibility and could have a negative impact on revenues and profits. +We could be subject to changes in tax rates, adoption of new tax laws or regulations, or changes in the interpretations thereof, additional tax liabilities or increased volatility in our effective tax rate. +We earn a substantial portion of our income in foreign countries and, as such, we are subject to the tax laws in the United States and numerous foreign jurisdictions. Current economic and political conditions make tax laws and regulations, or their interpretation and application, in any jurisdiction subject to significant change. +Proposals to reform U.S. and foreign tax laws could significantly impact how U.S. multinational corporations are taxed on global earnings and could increase the U.S. corporate tax rate. For example, the Organization for Economic Co-operation and Development (the "OECD") and the G20 Inclusive Framework on Base Erosion and Profit Shifting (the "Inclusive Framework") has put forth two proposals—Pillar One and Pillar Two—that revise the existing profit allocation and nexus rules and ensure a minimal level of taxation, respectively. Several countries in which we operate, including several European Union member states' have adopted domestic legislation to implement the Inclusive Framework's global corporate minimum tax rate of 15% which will be effective beginning fiscal 2025. Other countries are also actively considering changes to their tax laws to adopt certain parts of the Inclusive Framework's proposals. Although we cannot predict whether or in what form these proposals, or any other changes in the U.S. or foreign tax laws or regulations, will be enacted into law, these changes, if enacted into law, could have an adverse impact on our effective tax rate, income tax expense and cash flows. +Portions of our operations are subject to a reduced tax rate or are under a tax holiday. We also utilize tax rulings and other agreements to obtain certainty in treatment of certain tax matters. Tax holidays and rulings can expire from time to time and may be extended when certain conditions are met, or terminated if certain conditions are not met. The impact of any changes in conditions would be the loss of certainty in treatment thus potentially impacting our effective income tax rate. For example, in January 2019, the European Commission opened a formal investigation to examine whether the Netherlands has breached State Aid rules when granting certain tax rulings to the Company. If this matter is adversely resolved, the Netherlands may be required to assess additional amounts with respect to prior periods, and the Company's income taxes related to prior periods in the Netherlands could increase. +We are also subject to the examination of our tax returns by the United States Internal Revenue Service ("IRS") and other tax authorities. We regularly assess the likelihood of an adverse outcome resulting from these examinations to determine the adequacy of our provision for income taxes. Although we believe our tax provisions are adequate, the final determination of tax audits and any related disputes could be materially different from our historical income tax provisions and accruals. The results of audits or related disputes could have an adverse effect on our financial statements for the period or periods for which the applicable final determinations are made. For example, we and our subsidiaries are also engaged in a number of intercompany transactions across multiple tax jurisdictions. Although we believe we have clearly reflected the economics of these transactions and the proper local transfer pricing documentation is in place, tax authorities may propose and sustain adjustments that could result in changes that may impact our mix of earnings in countries with differing statutory tax rates. +Failure of our contractors or our licensees' contractors to comply with our code of conduct, local laws and other standards could harm our business. +We have license agreements that permit independent parties to manufacture or contract for the manufacture of products using our intellectual property. We require the contractors that directly manufacture our products and our licensees that make products using our intellectual property (including, indirectly, their contract manufacturers) to comply with a code of conduct and other environmental, human rights, health and safety standards for the benefit of workers. We also require our contract manufacturers and the contractors of our licensees to comply with applicable standards for product safety. Notwithstanding their contractual obligations, from time to time contractors may not comply with such standards or applicable local law or our licensees may fail to enforce such standards or applicable local law on their contractors. If one or more of our direct or indirect contractors violates or fails to comply with, or is accused of violating or failing to comply with, such standards and laws, this could harm our reputation or result in a product recall and, as a result, could have an adverse effect on our sales and financial condition. Negative publicity regarding production methods, alleged unethical or illegal practices or workplace or related conditions of any of our suppliers, manufacturers or licensees could adversely affect our brand image and sales, force us to locate alternative suppliers, manufacturers or licenses or result in the imposition of additional regulations, including new or additional quotas, tariffs, sanctions, product safety regulations or other regulatory measures, by governmental authorities. +2024 FORM 10-K 22 +Table of Contents +Risks Related to Our Securities, Investments and Liquidity +Our financial results may be adversely affected if substantial investments in businesses and operations fail to produce expected returns. +From time to time, we may invest in product offering and manufacturing innovation and expansion of existing businesses, such as our NIKE Direct operations, technology, business infrastructure, new businesses or capabilities, which require substantial cash investments and management attention. We believe cost-effective investments are essential to business growth and profitability; however, significant investments are subject to typical risks and uncertainties inherent in developing a new business or expanding an existing business. The failure of any significant investment to provide expected returns or profitability could have a material adverse effect on our financial results and divert management attention from more profitable business operations. See also " Our NIKE Direct operations have required and will continue to require a substantial investment and commitment of resources and are subject to numerous risks and uncertainties ." +The sale of a large number of shares of common stock by our principal shareholder could depress the market price of our common stock. +As of June 28, 2024, Swoosh, LLC beneficially owned approximately 77% of our Class A Common Stock. If, on June 28, 2024, all of these shares were converted into Class B Common Stock, Swoosh, LLC's commensurate ownership percentage of our Class B Common Stock would be approximately 16%. The shares are available for resale, subject to the requirements of the U.S. securities laws and the terms of the limited liability company agreement governing Swoosh, LLC. The sale or prospect of a sale of a substantial number of these shares could have an adverse effect on the market price of our common stock. Swoosh, LLC was formed by Philip H. Knight, our Chairman Emeritus, to hold the majority of his shares of Class A Common Stock. Mr. Knight does not have voting rights with respect to Swoosh, LLC, although Travis Knight, his son and a NIKE director, has a significant role in the management of the Class A Common Stock owned by Swoosh, LLC. +Changes in our credit ratings or macroeconomic conditions may affect our liquidity, increasing borrowing costs and limiting our financing options. +Our long-term debt is currently rated Investment Grade by Standard & Poor's and Moody's Investors Service. If our credit ratings are lowered, borrowing costs for our existing facilities or for future long-term debt or short-term credit facilities may increase and our financing options, including our access to credit or capital markets, could be adversely affected. We may also be subject to restrictive covenants that would reduce our flexibility to, among other things, incur additional indebtedness, make restricted payments, pledge assets as security, make investments, loans, advances, guarantees and acquisitions, undergo fundamental changes and enter into transactions with affiliates. Failure to comply with such covenants could result in a default, and as a result, the commitments of our lenders under our credit agreements may be terminated and the maturity of amounts owed may be accelerated. In addition, macroeconomic conditions, such as increased volatility or disruption in the credit or capital markets, could adversely affect our ability to refinance existing debt. +If our internal controls are ineffective, our operating results could be adversely affected. +Our internal control over financial reporting may not prevent or detect misstatements because of its inherent limitations, including the possibility of human error, the circumvention or overriding of controls or fraud. Even effective internal controls can provide only reasonable assurance with respect to the preparation and fair presentation of financial statements. If we fail to maintain the adequacy of our internal controls, including any failure to implement required new or improved controls, or if we experience difficulties in their implementation, our business and operating results could be harmed and we could fail to meet our financial reporting obligations. +If our estimates or judgments relating to our critical accounting estimates prove to be incorrect, our operating results could be adversely affected. +The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. We base our estimates on historical experience and on various other assumptions we believe to be reasonable under the circumstances, as provided in "Management's Discussion and Analysis of Financial Condition and Results of Operations". The results of these estimates form the basis for making judgments about the carrying values of assets, liabilities and equity, and the amount of revenues and expenses that are not readily apparent from other sources. Significant assumptions and estimates used in preparing our consolidated financial statements include those related to sales-related reserves, inventory reserves, hedge accounting for derivatives, income taxes and other contingencies. Our operating results may be adversely affected if our assumptions change or if actual circumstances differ from those in our assumptions, which could cause our operating results to fall below the expectations of securities analysts and investors, resulting in a decline in the price of our Class B Common Stock. +2024 FORM 10-K 23 +Table of Contents +Anti-takeover provisions may impair an acquisition of the Company or reduce the price of our common stock. +There are provisions within our articles of incorporation and Oregon law intended to protect shareholder interests by providing the Board of Directors a means to attempt to deny coercive takeover attempts or to negotiate with a potential acquirer in order to obtain more favorable terms. Such provisions include a control share acquisition statute, a freeze-out statute, two classes of stock that vote separately on certain issues, and the fact that holders of Class A Common Stock elect three-quarters of the Board of Directors rounded down to the next whole number. However, such provisions could discourage, delay or prevent an unsolicited merger, acquisition or other change in control of the Company that some shareholders might believe to be in their best interests or in which shareholders might receive a premium for their common stock over the prevailing market price. These provisions could also discourage proxy contests for control of the Company. +We have in the past failed and may in the future fail to meet market expectations, which has caused and could in the future cause the price of our stock to decline. +Our Class B Common Stock is traded publicly, and at any given time various securities analysts follow our financial results and issue reports on us. These reports include information about our historical financial results as well as analysts' opinions of our future performance, which may, in part, be based upon any guidance we have provided. Analysts' estimates are often different from our estimates or expectations. If our operating results are below the estimates or expectations of public market analysts and investors, our stock price could decline (which has recently happened in the past and could happen in the future). We are currently subject to multiple securities class action and shareholder derivative lawsuits relating to a drop in our stock price and could become involved in additional litigation of this type in the future if our stock price is volatile for any reason. Any litigation could result in reputational damage, substantial costs and a diversion of management's attention and resources needed to successfully run our business. +2024 FORM 10-K 24 +Table of Contents +ITEM 1B. UNRESOLVED STAFF COMMENTS +None. +ITEM 1C. CYBERSECURITY +At NIKE, cybersecurity risk management is an important part of our overall risk management efforts. We have cybersecurity processes, technologies and controls in place to aid in our efforts to assess, identify and manage material risks associated with cybersecurity threats. We assess cybersecurity risk at both the board and management levels. +Management’s Role in Managing Risk +At the management level, primary responsibility for assessing and managing material risks from cybersecurity threats rests with our Vice President, Corporate Information Security, Risk & Compliance ("VP, CIS"). Our VP, CIS has over two decades of experience in information technology and cybersecurity. The VP, CIS reports to our Chief Information Officer (“CIO”) who has significant experience leading technology teams at large public companies and our CIO reports to our Chief Technology Officer. +Our approach to managing cybersecurity risk is informed by the industry-standard National Institute for Standards and Technology Cybersecurity Framework. The VP, CIS has primary responsibility for implementing and overseeing our enterprise-wide cybersecurity strategy, policy, architecture and processes. We use various tools and methodologies to identify and manage cybersecurity risk, including risk assessments and a vulnerability management program that includes periodic penetration testing. We have a third-party cyber risk management program that conducts assessments on third parties who integrate with our data, network, systems and applications. These tools and methodologies inform our remediation activities, which are tracked and reported to senior management. +In addition, our internal audit function periodically conducts independent testing of the overall operations of our cybersecurity program and supporting control frameworks, and reports the results to the Audit & Finance Committee. We also engage third parties to assess our cybersecurity program maturity and to perform audits of portions of our cybersecurity control environment based on risk or where necessary to ensure regulatory compliance. +Our cybersecurity team meets frequently to monitor the prevention, detection, mitigation and remediation of cybersecurity threats and incidents. In the event of a cybersecurity incident, we have an incident response plan that governs our immediate response including detection, escalation, assessment, management and remediation. As part of incident response, the cybersecurity team will also coordinate with external advisors and other key stakeholders as needed. The cybersecurity team routinely tests this plan across the organization to validate the procedures for appropriately escalating potentially material cybersecurity risks and incidents. Also, we provide an annual, mandatory cybersecurity training program for employees that is intended to help them understand cybersecurity risks and comply with our cybersecurity policies. +Board Oversight +Our Board of Directors has ultimate oversight of cybersecurity risk as part of its risk management oversight responsibilities, including with respect to cybersecurity risk priorities, resource allocation and oversight structures. The Board of Directors receives an update on our cybersecurity program on an annual basis, or more frequently as determined to be necessary or advisable. The Board of Directors has delegated risk management oversight responsibility for information security and data protection to the Audit & Finance Committee, which regularly reviews our cybersecurity program and related matters with management and reports to the Board of Directors. Topics discussed at the board level include our approach to cybersecurity risk management, key initiatives, the threat landscape and recent developments and trends. The Board of Directors is aware of the critical nature of managing risks associated with cybersecurity threats and is actively engaged in our cybersecurity risk management strategy. +Risks from Cybersecurity Threats +Even though, to date, cybersecurity risks have not materially affected our business or our results of operations, we face numerous and evolving cybersecurity threats. There can be no assurance that we, or the third parties with which we interact, will not face a cybersecurity incident in the future that will materially affect us. For more information about the cybersecurity risks we face, see the risk factor entitled “We rely significantly on information technology to operate our business, including our supply chain and retail operations, and any failure, inadequacy or interruption of that technology could harm our ability to effectively operate our business” in Item 1A. Risk Factors. +2024 FORM 10-K 25 +Table of Contents +ITEM 2. PROPERTIES +The following is a summary of principal properties owned or leased by NIKE: +The NIKE World Headquarters, owned by NIKE and located near Beaverton, Oregon, USA, is an approximately 400-acre site consisting of over 40 buildings which, together with adjacent leased properties, functions as our global headquarters and is occupied by approximately 10,700 employees engaged in management, research, design, development, marketing, finance and other administrative functions serving nearly all of our segments. We lease a similar, but smaller, administrative facility in Hilversum, the Netherlands, which serves as the headquarters for our Europe, Middle East & Africa geography and management of certain brand functions for our non-U.S. operations. We also lease an office complex in Shanghai, China, our headquarters for our Greater China geography, occupied by employees focused on implementing our wholesale, NIKE Direct and merchandising strategies in the region, among other functions. +In the United States, NIKE has eight significant distribution centers. Five are located in or near Memphis, Tennessee, two of which are owned and three of which are leased. Two other distribution centers, one located in Indianapolis, Indiana and one located in Dayton, Tennessee, are leased and operated by third-party logistics providers. One distribution center for Converse is located in Ontario, California, which is leased. NIKE has a number of distribution facilities outside the United States, some of which are leased and operated by third-party logistics providers. The most significant distribution facilities outside the United States are located in Laakdal, Belgium; Taicang, China; Tomisato, Japan and Icheon, Korea, all of which we own. +Air Manufacturing Innovation manufactures cushioning components used in footwear at NIKE-owned and leased facilities located near Beaverton, Oregon, and in Dong Nai Province, Vietnam, as well as at NIKE-owned facilities in St. Charles, Missouri. +Aside from the principal properties described above, we lease many offices worldwide for sales and administrative purposes. We lease approximately 1,040 retail stores worldwide, which primarily consist of factory stores. See "United States Market" and "International Markets" for additional information regarding our retail stores. Our leases expire at various dates through the fiscal year 2058. +ITEM 3. LEGAL PROCEEDINGS +We do not believe there are any material pending legal proceedings, other than ordinary routine litigation incidental to our business, to which we are a party or of which any of our property is the subject. Refer to Note 16 — Commitments and Contingencies in the accompanying Notes to the Consolidated Financial Statements for additional information. +ITEM 4. MINE SAFETY DISCLOSURES +Not applicable. +2024 FORM 10-K 26 +Table of Contents +PART II +ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES +NIKE's Class B Common Stock is listed on the New York Stock Exchange and trades under the symbol NKE. At July 10, 2024, there were 21,354 holders of record of NIKE's Class B Common Stock and 16 holders of record of NIKE's Class A Common Stock. These figures do not include beneficial owners who hold shares in nominee name. The Class A Common Stock is not publicly traded, but each share is convertible upon request of the holder into one share of Class B Common Stock. Refer to our Consolidated Statements of Shareholders' Equity for dividends declared on the Class A and Class B Common Stock. +In June 2022, the Board of Directors approved a four-year, $18 billion share repurchase program. As of May 31, 2024, the Company had repurchased 84.9 million shares at an average price of $106.65 per share for a total approximate cost of $9.1 billion under this program. +All share repurchases were made under NIKE's publicly announced program, and there are no other programs under which the Company repurchases shares. The following table presents a summary of share repurchases made during the quarter ended May 31, 2024: +PERIOD TOTAL NUMBER OF SHARES PURCHASED AVERAGE PRICE +PAID PER SHARE APPROXIMATE DOLLAR +VALUE OF SHARES THAT +MAY YET BE PURCHASED +UNDER THE PLANS +OR PROGRAMS +(IN MILLIONS) +March 1 — March 31, 2024 2,583,730 $ 98.42 $ 9,739 +April 1 — April 30, 2024 3,606,667 $ 93.73 $ 9,401 +May 1 — May 31, 2024 4,895,400 $ 93.16 $ 8,945 +11,085,797 $ 94.57 +2024 FORM 10-K 27 +Table of Contents +PERFORMANCE GRAPH +The following graph demonstrates a five-year comparison of cumulative total returns for NIKE's Class B Common Stock; the Standard & Poor's 500 Stock Index; the Dow Jones U.S. Footwear Index; and the Standard & Poor's Apparel, Accessories & Luxury Goods Index. The graph assumes an investment of $100 on May 31, 2019, in each of the indices and our Class B Common Stock. Each of the indices assumes that all dividends were reinvested on the day of issuance. +The Dow Jones U.S. Footwear Index consists of NIKE, Crocs Inc., Deckers Outdoor Corporation and Skechers U.S.A., Inc. Because NIKE is part of the Dow Jones U.S. Footwear Index, the price and returns of NIKE stock have a substantial effect on this index. The Standard & Poor's Apparel, Accessories & Luxury Goods Index consists of Ralph Lauren Corporation, Tapestry, Inc. and lululemon athletica. The Dow Jones U.S. Footwear Index and the Standard & Poor's Apparel, Accessories & Luxury Goods Index include companies in two major lines of business in which the Company competes. The indices do not encompass all of the Company's competitors, nor all product categories and lines of business in which the Company is engaged. +The stock performance shown on the performance graph above is not necessarily indicative of future performance. The Company will not make or endorse any predictions as to future stock performance. +The performance graph above is being furnished solely to accompany this Annual Report pursuant to Item 201(e) of Regulation S-K, is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing. +2024 FORM 10-K 28 +Table of Contents +ITEM 6. [RESERVED] +2024 FORM 10-K 29 +Table of Contents +ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS +OVERVIEW +NIKE designs, develops, markets and sells athletic footwear, apparel, equipment, accessories and services worldwide. We are the largest seller of athletic footwear and apparel in the world. We sell our products through NIKE Direct operations, which are comprised of both NIKE-owned retail stores and sales through our digital platforms (also referred to as "NIKE Brand Digital") and to wholesale accounts, which include a mix of independent distributors, licensees and sales representatives in nearly all countries around the world. Our goal is to deliver value to our shareholders by building a profitable global portfolio of branded footwear, apparel, equipment and accessories businesses. +Our strategy is to achieve sustainable profitable long-term revenue growth by creating innovative, "must-have" products, building deep personal consumer connections with our brands and delivering compelling consumer experiences through digital platforms and at retail. We are focused on growing the entire marketplace by continuing to invest in our NIKE Direct operations while also increasing investment to elevate and differentiate our brand experience within our wholesale partners. +In addition, in the third quarter of fiscal 2024, we announced an enterprise-wide initiative to prioritize investment to fuel future growth including taking steps to streamline the organization. This resulted in a net reduction of our global workforce and we expect to reinvest a majority of the future annual wage savings from these actions to support this initiative. +We also continue to invest in a global Enterprise Resource Planning Platform, data and analytics, demand sensing, insight gathering and other areas to create an end-to end technology foundation to serve our consumer with speed and scale. +FISCAL 2024 FINANCIAL HIGHLIGHTS +• NIKE, Inc. Revenues for fiscal 2024 were $51.4 billion compared to $51.2 billion for fiscal 2023 +• NIKE Direct revenues grew 1% from $21.3 billion in fiscal 2023 to $21.5 billion in fiscal 2024, and represented approximately 44% of total NIKE Brand revenues for fiscal 2024 +• NIKE Brand wholesale revenues increased 1% on a reported basis and 2% on a currency-neutral basis +• Gross margin increased 110 basis points to 44.6%, primarily due to strategic pricing actions and lower ocean freight rates and logistics costs, partially offset by higher product input costs, lower margin in NIKE Direct and unfavorable changes in net foreign currency exchange rates +• Income before income taxes included a restructuring charge of $443 million related to the streamlining of our organization, primarily associated with employee severance costs and accelerated stock-based compensation expense. For more information, refer to Note 19 — Restructuring within the accompanying Notes to the Consolidated Financial Statements. +• Inventories as of May 31, 2024 were $7.5 billion, a decrease of 11% compared to the prior year, primarily due to a decrease in units +• We returned $6.4 billion to our shareholders in fiscal 2024 through share repurchases and dividends +• Return on Invested Capital ("ROIC") was 34.9% as of May 31, 2024, compared to 31.5% as of May 31, 2023. ROIC is considered a non-GAAP financial measure, see "Use of Non-GAAP Financial Measures" for additional information. +For discussion related to the results of operations and changes in financial condition for fiscal 2023 compared to fiscal 2022 refer to Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in our fiscal 2023 Form 10-K, which was filed with the United States Securities and Exchange Commission on July 20, 2023. +2024 FORM 10-K 30 +Table of Contents +CURRENT ECONOMIC CONDITIONS AND OTHER FACTORS IMPACTING OUR BUSINESS +The operating environment could remain volatile in fiscal 2025 as the risk remains that these factors, among others, could have a material adverse impact on our future revenue growth as well as overall profitability. +• Consumer Spending: In fiscal 2024, consumers continued to spend more cautiously as the global economy remains uncertain and promotional activity remained high across our industry. We will continue to closely monitor macroeconomic and geopolitical conditions, including potential impacts of inflation and higher interest rates on consumer spending behavior. +• Cost Inflationary Pressures: Inflationary pressures, including higher product input costs, continued to negatively impact our gross margin with more pronounced impacts in the first nine months of fiscal 2024. These negative impacts were more than offset by the strategic pricing actions we have taken through fiscal 2024, as well as improvements in ocean freight rates and logistics costs we started to realize at the beginning of the second quarter of fiscal 2024. +• Supply Chain Conditions: During fiscal 2024 and as of May 31, 2024, our inventory levels were healthy, reflecting our proactive actions taken to manage our inventory supply. +• Foreign Currency Impacts: As a global company with significant operations outside the United States, we are exposed to risk arising from changes in foreign currency exchange rates. For additional information, refer to "Foreign Currency Exposures and Hedging Practices". +• Product Lifecycle Management: We are currently reducing the supply of certain footwear products as we scale new and innovative products across the marketplace. This had a negative impact on our revenues, specifically NIKE Brand Digital revenues in the fourth quarter of fiscal 2024. +For more information refer to Item 1A Risk Factors, within Part 1, Item 1, Business. +USE OF NON-GAAP FINANCIAL MEASURES +Throughout this Annual Report on Form 10-K, we discuss non-GAAP financial measures, which should be considered in addition to, and not in lieu of, the financial measures calculated and presented in accordance with generally accepted accounting principles in the United States of America ("U.S. GAAP"). References to these measures should not be considered in isolation or as a substitute for other financial measures calculated and presented in accordance with U.S. GAAP and may not be comparable to similarly titled measures used by other companies. Management uses these non-GAAP measures when evaluating the Company's performance, including when making financial and operating decisions. Additionally, management believes these non-GAAP financial measures provide investors with additional financial information that should be considered when assessing our underlying business performance and trends. +Earnings Before Interest and Taxes ("EBIT") : Calculated as Net income before Interest expense (income), net and Income tax expense in the Consolidated Statements of Income. Total NIKE, Inc. EBIT for fiscal 2024, 2023 and 2022 are as follows: +YEAR ENDED MAY 31, +(Dollars in millions) +2024 2023 2022 +Net income $ 5,700 $ 5,070 $ 6,046 +Add: Interest expense (income), net (161) (6) 205 +Add: Income tax expense 1,000 1,131 605 +Earnings before interest and taxes $ 6,539 $ 6,195 $ 6,856 +EBIT Margin : Calculated as total NIKE, Inc. EBIT divided by total NIKE, Inc. Revenues. Our EBIT Margin calculation for fiscal 2024, 2023 and 2022 are as follows: +YEAR ENDED MAY 31, +(Dollars in millions) +2024 2023 2022 +Numerator +Earnings before interest and taxes $ 6,539 $ 6,195 $ 6,856 +Denominator +Total NIKE, Inc. Revenues $ 51,362 $ 51,217 $ 46,710 +EBIT Margin 12.7% 12.1% 14.7% +2024 FORM 10-K 31 +Table of Contents +Return on Invested Capital ("ROIC") : Represents a performance measure that management believes is useful information in understanding the Company's ability to effectively manage invested capital. Our ROIC calculation as of May 31, 2024 and 2023 is as follows: +FOR THE TRAILING FOUR QUARTERS ENDED +(Dollars in millions) MAY 31, 2024 MAY 31, 2023 +Numerator +Net income $ 5,700 $ 5,070 +Add: Interest expense (income), net (161) (6) +Add: Income tax expense 1,000 1,131 +Earnings before interest and taxes 6,539 6,195 +Income tax adjustment (1) +(976) (1,130) +Earnings before interest and after taxes $ 5,563 $ 5,065 +AVERAGE FOR THE TRAILING FIVE QUARTERS ENDED +MAY 31, 2024 MAY 31, 2023 +Denominator +Total debt (2) +$ 12,110 $ 12,491 +Add: Shareholders' equity 14,155 14,982 +Less: Cash and equivalents and Short-term investments 10,309 11,394 +Total invested capital $ 15,956 $ 16,079 +RETURN ON INVESTED CAPITAL 34.9% 31.5% +(1) Equals Earnings before interest and taxes multiplied by the effective tax rate as of each of the respective quarter ends. +(2) Total debt includes the following: 1) Current portion of long-term debt, 2) Notes Payable, 3) Current portion of operating lease liabilities, 4) Long-term debt and 5) Operating lease liabilities. +Currency-neutral revenues : Currency-neutral revenues enhance visibility to underlying business trends, excluding the impact of translation arising from foreign currency exchange rate fluctuations. Currency-neutral revenues are calculated using actual exchange rates in use during the comparative prior year period in place of the exchange rates in use during the current period. +Wholesale equivalent revenues : References to wholesale equivalent revenues are intended to provide context as to the total size of our NIKE Brand market footprint if we had no NIKE Direct operations. NIKE Brand wholesale equivalent revenues consist of (1) sales to external wholesale customers and (2) internal sales from our wholesale operations to our NIKE Direct operations, which are charged at prices comparable to those charged to external wholesale customers. Beginning in fiscal 2025, with the continued rollout of a new Enterprise Resource Planning Platform, the Company will replace wholesale equivalent revenues and gross margin drivers with a comparable U.S. GAAP metric. +COMPARABLE STORE SALES +Comparable store sales : This key metric, which excludes NIKE Brand Digital sales, comprises revenues from NIKE-owned in-line and factory stores for which all three of the following requirements have been met: (1) the store has been open at least one year, (2) square footage has not changed by more than 15% within the past year and (3) the store has not been permanently repositioned within the past year. Comparable store sales represents a performance metric that we believe is useful information for management and investors in understanding the performance of our established NIKE-owned in-line and factory stores. Management considers this metric when making financial and operating decisions. The method of calculating comparable store sales varies across the retail industry. As a result, our calculation of this metric may not be comparable to similarly titled metrics used by other companies. +2024 FORM 10-K 32 +Table of Contents +RESULTS OF OPERATIONS +(Dollars in millions, except per share data) +FISCAL 2024 FISCAL 2023 % CHANGE FISCAL 2022 % CHANGE +Revenues $ 51,362 $ 51,217 0 % $ 46,710 10 % +Cost of sales 28,475 28,925 -2 % 25,231 15 % +Gross profit 22,887 22,292 3 % 21,479 4 % +Gross margin 44.6 % 43.5 % 46.0 % +Demand creation expense 4,285 4,060 6 % 3,850 5 % +Operating overhead expense 12,291 12,317 0 % 10,954 12 % +Total selling and administrative expense 16,576 16,377 1 % 14,804 11 % +% of revenues 32.3 % 32.0 % 31.7 % +Interest expense (income), net (161) (6) — 205 — +Other (income) expense, net (228) (280) — (181) — +Income before income taxes 6,700 6,201 8 % 6,651 -7 % +Income tax expense 1,000 1,131 -12 % 605 87 % +Effective tax rate 14.9 % 18.2 % 9.1 % +NET INCOME $ 5,700 $ 5,070 12 % $ 6,046 -16 % +Diluted earnings per common share $ 3.73 $ 3.23 15 % $ 3.75 -14 % +2024 FORM 10-K 33 +Table of Contents +CONSOLIDATED OPERATING RESULTS +REVENUES +(Dollars in millions) +FISCAL 2024 FISCAL 2023 % CHANGE +% CHANGE EXCLUDING CURRENCY CHANGES (1) +FISCAL 2022 % CHANGE +% CHANGE EXCLUDING CURRENCY CHANGES (1) +NIKE, Inc. Revenues: +NIKE Brand Revenues by: +Footwear $ 33,427 $ 33,135 1 % 1 % $ 29,143 14 % 20 % +Apparel 13,775 13,843 0 % 0 % 13,567 2 % 8 % +Equipment 2,075 1,727 20 % 20 % 1,624 6 % 13 % +Global Brand Divisions (2) +45 58 -22 % -25 % 102 -43 % -43 % +Total NIKE Brand Revenues $ 49,322 $ 48,763 1 % 1 % $ 44,436 10 % 16 % +Converse 2,082 2,427 -14 % -15 % 2,346 3 % 8 % +Corporate (3) +(42) 27 — — (72) — — +TOTAL NIKE, INC. REVENUES $ 51,362 $ 51,217 0 % 1 % $ 46,710 10 % 16 % +Supplemental NIKE Brand Revenues Details: +NIKE Brand Revenues by: +Sales to Wholesale Customers $ 27,758 $ 27,397 1 % 2 % $ 25,608 7 % 14 % +Sales through NIKE Direct 21,519 21,308 1 % 1 % 18,726 14 % 20 % +Global Brand Divisions (2) +45 58 -22 % -25 % 102 -43 % -43 % +TOTAL NIKE BRAND REVENUES $ 49,322 $ 48,763 1 % 1 % $ 44,436 10 % 16 % +NIKE Brand Revenues on a Wholesale Equivalent Basis (1) : +Sales to Wholesale Customers $ 27,758 $ 27,397 1 % 2 % $ 25,608 7 % 14 % +Sales from our Wholesale Operations to NIKE Direct Operations 13,009 12,730 2 % 2 % 10,543 21 % 27 % +TOTAL NIKE BRAND WHOLESALE EQUIVALENT REVENUES $ 40,767 $ 40,127 2 % 2 % $ 36,151 11 % 18 % +NIKE Brand Wholesale Equivalent Revenues by: (1) +Men's $ 20,868 $ 20,733 1 % 1 % $ 18,797 10 % 17 % +Women's 8,586 8,606 0 % 1 % 8,273 4 % 11 % +Kids' +5,111 5,038 1 % 1 % 4,874 3 % 10 % +Jordan Brand 6,988 6,589 6 % 7 % 5,122 29 % 35 % +Others (4) +(786) (839) 6 % 6 % (915) 8 % -3 % +TOTAL NIKE BRAND WHOLESALE EQUIVALENT REVENUES $ 40,767 $ 40,127 2 % 2 % $ 36,151 11 % 18 % +(1) The percent change excluding currency changes and the presentation of wholesale equivalent revenues represent non-GAAP financial measures. For additional information, see "Use of Non-GAAP Financial Measures". +(2) Global Brand Divisions revenues include NIKE Brand licensing and other miscellaneous revenues that are not part of a geographic operating segment. +(3) Corporate revenues primarily consist of foreign currency hedge gains and losses related to revenues generated by entities within the NIKE Brand geographic operating segments and Converse, but managed through our central foreign exchange risk management program. +(4) Others include products not allocated to Men's, Women's, Kids' and Jordan Brand, as well as certain adjustments that are not allocated to products designated by consumer. +2024 FORM 10-K 34 +Table of Contents +FISCAL 2024 NIKE BRAND REVENUE HIGHLIGHTS +The following tables present NIKE Brand revenues disaggregated by reportable operating segment, distribution channel and major product line: +FISCAL 2024 COMPARED TO FISCAL 2023 +• NIKE, Inc. Revenues for fiscal 2024 were $51.4 billion compared to $51.2 billion for fiscal 2023. On a currency-neutral basis, NIKE, Inc. Revenues increased 1%, as higher revenues in Greater China and Asia Pacific & Latin America ("APLA"), which each increased NIKE, Inc. Revenues by 1 percentage point, were partially offset by lower revenues in Converse, which reduced NIKE, Inc. Revenues by approximately 1 percentage point. +• NIKE Brand revenues, which represented over 90% of NIKE, Inc. Revenues, increased 1% on both a reported and currency-neutral basis. The increase, on a currency-neutral basis, was primarily due to higher revenues in the Jordan Brand and Men's. +• NIKE Brand footwear revenues increased 1% on a currency-neutral basis, primarily due to higher revenues in the Jordan Brand, Men's and Women's. Unit sales of footwear decreased 2%, while higher average selling price ("ASP") per pair contributed approximately 3 percentage points of footwear revenue growth. Higher ASP per pair was primarily due to higher full-price ASP, net of discounts, on a wholesale equivalent basis, and a higher mix of NIKE Direct sales, partially offset by lower NIKE Direct ASP. +• NIKE Brand apparel revenues were flat on a currency-neutral basis, primarily due to lower revenues in Men's and Women's, offset by higher revenues in Kids'. Unit sales of apparel decreased 9%, while higher ASP per unit contributed approximately 9 percentage points of apparel revenue growth. Higher ASP per unit was primarily due to higher full-price, off-price and NIKE Direct ASPs. +• NIKE Brand wholesale revenues increased 1% on a reported basis and 2% on a currency-neutral basis, compared to fiscal 2023. Higher revenues in Greater China and APLA were partially offset by lower revenues in North America. +• NIKE Direct revenues increased 1% to $21.5 billion in fiscal 2024 compared to $21.3 billion in fiscal 2023. On a currency-neutral basis, NIKE Direct revenues increased 1%, primarily driven by comparable store sales growth of 3% and the addition of new stores, partially offset by declines in NIKE Brand Digital sales of 3%, reflecting reduced digital traffic. For additional information regarding comparable store sales, including the definition, see "Comparable Store Sales". NIKE Brand Digital sales were $12.1 billion for fiscal 2024 compared to $12.4 billion for fiscal 2023. Within NIKE Direct revenues, there were certain reclassifications made between NIKE-owned retail stores and NIKE Brand Digital in the prior period to conform to current period presentation. The reclassifications did not have a material impact on our Consolidated Financial Statements. +2024 FORM 10-K 35 +Table of Contents +GROSS MARGIN +FISCAL 2024 COMPARED TO FISCAL 2023 +For fiscal 2024, our consolidated gross profit increased 3% to $22,887 million compared to $22,292 million for fiscal 2023. Gross margin increased 110 basis points to 44.6% for fiscal 2024 compared to 43.5% for fiscal 2023 due to the following: +The increase in gross margin for fiscal 2024 was primarily due to: +• Higher NIKE Brand full-price ASP, net of discounts, on a wholesale equivalent basis (increasing gross margin approximately 200 basis points), primarily due to strategic pricing actions; +• Lower NIKE Brand product costs, on a wholesale equivalent basis (increasing gross margin approximately 10 basis points), primarily due to lower ocean freight rates and logistics costs largely offset by higher product input costs; and +• Lower other costs (increasing gross margin approximately 10 basis points). +This was partially offset by: +• Unfavorable changes in net foreign currency exchange rates, including hedges (decreasing gross margin approximately 40 basis points); +• Lower margin in our NIKE Direct business (decreasing gross margin approximately 40 basis points); +• Lower off-price margin, on a wholesale equivalent basis (decreasing gross margin approximately 20 basis points); and +• Restructuring charges (decreasing gross margin approximately 10 basis points). +TOTAL SELLING AND ADMINISTRATIVE EXPENSE +(Dollars in millions) +FISCAL 2024 FISCAL 2023 % CHANGE FISCAL 2022 % CHANGE +Demand creation expense (1) +$ 4,285 $ 4,060 6 % $ 3,850 5 % +Operating overhead expense 12,291 12,317 0 % 10,954 12 % +Total selling and administrative expense $ 16,576 $ 16,377 1 % $ 14,804 11 % +% of revenues 32.3 % 32.0 % 30 bps 31.7 % 30 bps +(1) Demand creation expense consists of advertising and promotion costs, including costs of endorsement contracts, complimentary product, television, digital and print advertising and media costs, brand events and retail brand presentation. +FISCAL 2024 COMPARED TO FISCAL 2023 +Demand creation expense increased 6% for fiscal 2024, primarily due to higher advertising and marketing expense, digital marketing and sports marketing expense. Changes in foreign currency exchange rates did not have a material impact on Demand creation expense. +Operating overhead expense was flat, as lower wage-related expenses and lower technology spend were offset by restructuring charges. Changes in foreign currency exchange rates did not have a material impact on Operating overhead expense. +For more information related to our organizational realignment and related costs, refer to Note 19 — Restructuring within the accompanying Notes to the Consolidated Financial Statements. +2024 FORM 10-K 36 +Table of Contents +OTHER (INCOME) EXPENSE, NET +(Dollars in millions) +FISCAL 2024 FISCAL 2023 FISCAL 2022 +Other (income) expense, net $ (228) $ (280) $ (181) +Other (income) expense, net comprises foreign currency conversion gains and losses from the remeasurement of monetary assets and liabilities denominated in non-functional currencies and the impact of certain foreign currency derivative instruments, as well as unusual or non-operating transactions that are outside the normal course of business. +FISCAL 2024 COMPARED TO FISCAL 2023 +Other (income) expense, net decreased from $280 million of other income, net in fiscal 2023 to $228 million in the current fiscal year, primarily due to a net unfavorable change in foreign currency conversion gains and losses, including hedges, as well as net favorable settlements of legal matters in the prior year. These items were partially offset by the loss recognized in the prior year upon completion of the sale of our entities in Argentina and Uruguay to a third-party distributor. +For more information related to the sale of our entities in Argentina and Uruguay to a third-party distributor, see Note 18 — Divestitures within the accompanying Notes to the Consolidated Financial Statements. +We estimate the combination of the translation of foreign currency-denominated profits from our international businesses, and the year-over-year change in foreign currency-related gains and losses included in Other (income) expense, net had an unfavorable impact on our Income before income taxes of $68 million for fiscal 2024. +INCOME TAXES +FISCAL 2024 FISCAL 2023 % CHANGE FISCAL 2022 % CHANGE +Effective tax rate 14.9 % 18.2 % (330) bps 9.1 % 910 bps +FISCAL 2024 COMPARED TO FISCAL 2023 +Our effective tax rate was 14.9% for fiscal 2024, compared to 18.2% for fiscal 2023, primarily due to changes in earnings mix and one-time items including the benefit provided by the delay of the effective date of certain U.S. foreign tax credit regulations in the first quarter of fiscal 2024. +The OECD and the Inclusive Framework has put forth Pillar Two proposals that ensure a minimal level of taxation. Several countries in which we operate, including several European Union member states, have adopted domestic legislation to implement the Inclusive Framework's global corporate minimum tax rate of fifteen percent which will be effective for NIKE beginning June 1, 2024. Other countries are also actively considering changes to their tax laws to adopt certain parts of the Inclusive Framework's proposals. Based on our current analysis of Pillar Two provisions, we do not expect these tax law changes to have a material impact on our Consolidated Financial Statements; however, we will continue to evaluate their impact as additional information becomes available. +2024 FORM 10-K 37 +Table of Contents +OPERATING SEGMENTS +As discussed in Note 15 — Operating Segments and Related Information in the accompanying Notes to the Consolidated Financial Statements, our operating segments are evidence of the structure of the Company's internal organization. The NIKE Brand segments are defined by geographic regions for operations participating in NIKE Brand sales activity. +The breakdown of Revenues is as follows: +(Dollars in millions) +FISCAL 2024 FISCAL 2023 % CHANGE +% CHANGE EXCLUDING CURRENCY CHANGES (1) +FISCAL 2022 % CHANGE +% CHANGE EXCLUDING CURRENCY CHANGES (1) +North America $ 21,396 $ 21,608 -1 % -1 % $ 18,353 18 % 18 % +Europe, Middle East & Africa 13,607 13,418 1 % 0 % 12,479 8 % 21 % +Greater China 7,545 7,248 4 % 8 % 7,547 -4 % 4 % +Asia Pacific & Latin America (2) +6,729 6,431 5 % 5 % 5,955 8 % 17 % +Global Brand Divisions (3) +45 58 -22 % -25 % 102 -43 % -43 % +TOTAL NIKE BRAND $ 49,322 $ 48,763 1 % 1 % $ 44,436 10 % 16 % +Converse 2,082 2,427 -14 % -15 % 2,346 3 % 8 % +Corporate (4) +(42) 27 — — (72) — — +TOTAL NIKE, INC. REVENUES $ 51,362 $ 51,217 0 % 1 % $ 46,710 10 % 16 % +(1) The percent change excluding currency changes represents a non-GAAP financial measure. For additional information, see "Use of Non-GAAP Financial Measures". +(2) For additional information on the transition of our NIKE Brand businesses within our Central and South America ("CASA") territory to a third-party distributor, see Note 18 — Divestitures of the Notes to Consolidated Financial Statements. +(3) Global Brand Divisions revenues include NIKE Brand licensing and other miscellaneous revenues that are not part of a geographic operating segment. +(4) Corporate revenues primarily consist of foreign currency hedge gains and losses related to revenues generated by entities within the NIKE Brand geographic operating segments and Converse, but managed through our central foreign exchange risk management program. +The primary financial measure used by the Company to evaluate performance is Earnings Before Interest and Taxes ("EBIT"). As discussed in Note 15 — Operating Segments and Related Information in the accompanying Notes to the Consolidated Financial Statements, certain corporate costs are not included in EBIT. +The breakdown of EBIT is as follows: +(Dollars in millions) +FISCAL 2024 FISCAL 2023 % CHANGE FISCAL 2022 % CHANGE +North America $ 5,822 $ 5,454 7 % $ 5,114 7 % +Europe, Middle East & Africa 3,388 3,531 -4 % 3,293 7 % +Greater China 2,309 2,283 1 % 2,365 -3 % +Asia Pacific & Latin America 1,885 1,932 -2 % 1,896 2 % +Global Brand Divisions (4,720) (4,841) 2 % (4,262) -14 % +TOTAL NIKE BRAND (1) +$ 8,684 $ 8,359 4 % $ 8,406 -1 % +Converse 474 676 -30 % 669 1 % +Corporate +(2,619) (2,840) 8 % (2,219) -28 % +TOTAL NIKE, INC. EARNINGS BEFORE INTEREST AND TAXES (1) +$ 6,539 $ 6,195 6 % $ 6,856 -10 % +EBIT margin (1) +12.7 % 12.1 % 14.7 % +Interest expense (income), net (161) (6) — 205 — +TOTAL NIKE, INC. INCOME BEFORE INCOME TAXES $ 6,700 $ 6,201 8 % $ 6,651 -7 % +(1) Total NIKE Brand EBIT, Total NIKE, Inc. EBIT and EBIT Margin represent non-GAAP financial measures. See "Use of Non-GAAP Financial Measures" for additional information. +2024 FORM 10-K 38 +Table of Contents +NORTH AMERICA +(Dollars in millions) +FISCAL 2024 FISCAL 2023 % CHANGE % CHANGE EXCLUDING CURRENCY CHANGES FISCAL 2022 % CHANGE % CHANGE EXCLUDING CURRENCY CHANGES +Revenues by: +Footwear $ 14,537 $ 14,897 -2 % -2 % $ 12,228 22 % 22 % +Apparel 5,953 5,947 0 % 0 % 5,492 8 % 9 % +Equipment 906 764 19 % 19 % 633 21 % 21 % +TOTAL REVENUES $ 21,396 $ 21,608 -1 % -1 % $ 18,353 18 % 18 % +Revenues by: +Sales to Wholesale Customers $ 11,004 $ 11,273 -2 % -2 % $ 9,621 17 % 18 % +Sales through NIKE Direct 10,392 10,335 1 % 1 % 8,732 18 % 18 % +TOTAL REVENUES $ 21,396 $ 21,608 -1 % -1 % $ 18,353 18 % 18 % +EARNINGS BEFORE INTEREST AND TAXES $ 5,822 $ 5,454 7 % $ 5,114 7 % +FISCAL 2024 COMPARED TO FISCAL 2023 +• North America revenues decreased 1% on a currency-neutral basis, primarily due to lower revenues in Men's and Women's, partially offset by higher revenues in the Jordan Brand. Wholesale revenues decreased 2%, primarily reflecting liquidation of excess inventory in the prior year. NIKE Direct revenues increased 1%, primarily driven by the addition of new stores, partially offset by a decline in digital sales of 1%. Comparable store sales for fiscal 2024 were flat. +• Footwear revenues decreased 2% on a currency-neutral basis due to lower revenues in Men's, Kids' and Women's, partially offset by higher revenues in the Jordan Brand. Unit sales of footwear decreased 7%, while higher ASP per pair contributed approximately 5 percentage points of footwear revenue growth. Higher ASP per pair was primarily due to higher full-price ASP and a higher mix of NIKE Direct sales, partially offset by lower NIKE Direct ASP. +• Apparel revenues were flat on a currency-neutral basis due to lower revenues in Men's, Women's and the Jordan Brand, offset by higher revenues in Kids'. Unit sales of apparel decreased 6%, while higher ASP per unit contributed approximately 6 percentage points of apparel revenue growth. Higher ASP per unit was primarily due to higher full-price ASP. +Reported EBIT increased 7% reflecting lower revenues and the following: +• Gross margin expansion of 220 basis points primarily due to higher full-price ASP, net of discounts, largely due to strategic pricing actions and lower discounts, as well as lower product costs. Lower product costs were primarily due to lower ocean freight rates and logistics costs, partially offset by higher product input costs. +• Selling and administrative expense increase of 1% due to higher demand creation expense, partially offset by lower operating overhead expense. The increase in demand creation expense was primarily due to higher digital marketing and sports marketing expense. Operating overhead expense decreased primarily due to lower wage-related expenses, partially offset by higher other administrative costs. +2024 FORM 10-K 39 +Table of Contents +EUROPE, MIDDLE EAST & AFRICA +(Dollars in millions) +FISCAL 2024 FISCAL 2023 % CHANGE % CHANGE EXCLUDING CURRENCY CHANGES FISCAL 2022 % CHANGE % CHANGE EXCLUDING CURRENCY CHANGES +Revenues by: +Footwear $ 8,473 $ 8,260 3 % 1 % $ 7,388 12 % 25 % +Apparel 4,380 4,566 -4 % -6 % 4,527 1 % 14 % +Equipment 754 592 27 % 24 % 564 5 % 18 % +TOTAL REVENUES $ 13,607 $ 13,418 1 % 0 % $ 12,479 8 % 21 % +Revenues by: +Sales to Wholesale Customers $ 8,562 $ 8,522 0 % 0 % $ 8,377 2 % 15 % +Sales through NIKE Direct 5,045 4,896 3 % 0 % 4,102 19 % 33 % +TOTAL REVENUES $ 13,607 $ 13,418 1 % 0 % $ 12,479 8 % 21 % +EARNINGS BEFORE INTEREST AND TAXES $ 3,388 $ 3,531 -4 % $ 3,293 7 % +FISCAL 2024 COMPARED TO FISCAL 2023 +• EMEA revenues were flat on a currency-neutral basis, primarily due to lower revenues in Women's and Kids', offset by higher revenues in Men's. Wholesale revenues were flat. NIKE Direct revenues were flat as a decline in digital sales of 5% was offset by comparable store sales growth of 7% and the addition of new stores. +• Footwear revenues increased 1% on a currency-neutral basis, primarily due to higher revenues in Men's, partially offset by lower revenues in Kids'. Unit sales of footwear decreased 4%, while higher ASP per pair contributed approximately 5 percentage points of footwear revenue growth. Higher ASP per pair was primarily due to higher full-price ASP and a higher mix of NIKE Direct sales, partially offset by lower NIKE Direct ASP. +• Apparel revenues decreased 6% on a currency-neutral basis, primarily due to lower revenues in Men's and Women's. Unit sales of apparel decreased 17%, while higher ASP per unit contributed approximately 11 percentage points of apparel revenue growth. Higher ASP per unit was primarily due to higher full-price and NIKE Direct ASPs. +Reported EBIT decreased 4% reflecting higher revenues and the following: +• Gross margin contraction of 110 basis points largely due to unfavorable changes in standard foreign currency exchange rates, partially offset by higher full-price ASP, net of discounts, primarily due to strategic pricing actions, as well as lower other costs and lower product costs, reflecting lower ocean freight rates and logistics costs. +• Selling and administrative expense increase of 3% due to higher demand creation and operating overhead expense. Demand creation expense increased primarily due to higher advertising and marketing expense, unfavorable changes in foreign exchange rates and higher sports marketing expense. Operating overhead expense increased primarily due to unfavorable changes in foreign currency exchange rates. +2024 FORM 10-K 40 +Table of Contents +GREATER CHINA +(Dollars in millions) +FISCAL 2024 FISCAL 2023 % CHANGE % CHANGE EXCLUDING CURRENCY CHANGES FISCAL 2022 % CHANGE % CHANGE EXCLUDING CURRENCY CHANGES +Revenues by: +Footwear $ 5,552 $ 5,435 2 % 6 % $ 5,416 0 % 8 % +Apparel 1,828 1,666 10 % 14 % 1,938 -14 % -7 % +Equipment 165 147 12 % 17 % 193 -24 % -18 % +TOTAL REVENUES $ 7,545 $ 7,248 4 % 8 % $ 7,547 -4 % 4 % +Revenues by: +Sales to Wholesale Customers $ 4,262 $ 3,866 10 % 15 % $ 4,081 -5 % 2 % +Sales through NIKE Direct 3,283 3,382 -3 % 1 % 3,466 -2 % 5 % +TOTAL REVENUES $ 7,545 $ 7,248 4 % 8 % $ 7,547 -4 % 4 % +EARNINGS BEFORE INTEREST AND TAXES $ 2,309 $ 2,283 1 % $ 2,365 -3 % +FISCAL 2024 COMPARED TO FISCAL 2023 +• Greater China revenues increased 8% on a currency-neutral basis due to higher revenues in Men's, Women's, the Jordan Brand and Kids'. Wholesale revenues increased 15%. NIKE Direct revenues increased 1%, driven by comparable store sales growth of 1% and the addition of new stores, partially offset by a decline in digital sales of 8%. +• Footwear revenues increased 6% on a currency-neutral basis due to higher revenues in Men's, Women's, the Jordan Brand and Kids'. Unit sales of footwear increased 8%, while lower ASP per pair reduced footwear revenues by approximately 2 percentage points. Lower ASP per pair was primarily due to lower NIKE Direct ASP, partially offset by higher full-price ASP. +• Apparel revenues increased 14% on a currency-neutral basis, primarily due to higher revenues in Men's and Women's. Unit sales of apparel increased 7%, while higher ASP per unit contributed approximately 7 percentage points of apparel revenue growth. Higher ASP per unit was primarily due to higher NIKE Direct, full-price and off-price ASPs as well as a higher mix of full-price sales. +Reported EBIT increased 1% reflecting higher revenues and the following: +• Gross margin contraction of approximately 80 basis points, primarily due to unfavorable changes in standard foreign currency exchange rates, partially offset by higher full-price ASP, net of discounts, and lower other costs. The higher full-price ASP, net of discounts, was largely due to strategic pricing actions, partially offset by product mix. +• Selling and administrative expense increase of 2% due to higher demand creation and operating overhead expense. Demand creation expense increased primarily due to higher advertising and marketing expense and retail brand presentation expense, partially offset by favorable changes in foreign currency exchange rates. Operating overhead expense increased primarily due to higher other administrative costs, partially offset by favorable changes in foreign currency exchange rates. +2024 FORM 10-K 41 +Table of Contents +ASIA PACIFIC & LATIN AMERICA +(Dollars in millions) +FISCAL 2024 FISCAL 2023 % CHANGE % CHANGE EXCLUDING CURRENCY CHANGES FISCAL 2022 % CHANGE % CHANGE EXCLUDING CURRENCY CHANGES +Revenues by: +Footwear $ 4,865 $ 4,543 7 % 7 % $ 4,111 11 % 19 % +Apparel 1,614 1,664 -3 % -2 % 1,610 3 % 13 % +Equipment 250 224 12 % 12 % 234 -4 % 4 % +TOTAL REVENUES $ 6,729 $ 6,431 5 % 5 % $ 5,955 8 % 17 % +Revenues by: +Sales to Wholesale Customers $ 3,930 $ 3,736 5 % 6 % $ 3,529 6 % 14 % +Sales through NIKE Direct 2,799 2,695 4 % 4 % 2,426 11 % 22 % +TOTAL REVENUES $ 6,729 $ 6,431 5 % 5 % $ 5,955 8 % 17 % +EARNINGS BEFORE INTEREST AND TAXES $ 1,885 $ 1,932 -2 % $ 1,896 2 % +We completed the sale of our entity in Chile and our entities in Argentina and Uruguay to third-party distributors in the first and second quarters of fiscal 2023, respectively. The impacts of closing these transactions are included within Corporate and are not reflected in the APLA operating segment results. This completed the transition of our NIKE Brand businesses within our CASA marketplace, which now reflects a full distributor operating model. For more information see Note 18 — Divestitures within the accompanying Notes to the Consolidated Financial Statements. +FISCAL 2024 COMPARED TO FISCAL 2023 +• APLA revenues increased 5% on a currency-neutral basis primarily due to higher revenues in Southeast Asia & India, Mexico and Japan. Within our CASA territory, the transition of our Chile, Argentina and Uruguay entities to a third-party distributor operating model did not have a material impact on APLA revenues. Revenues increased due to overall growth in Men's, Women's, the Jordan Brand and Kids'. Wholesale revenues increased 6%. NIKE Direct revenues increased 4%, driven by comparable store sales growth of 10% and the addition of new stores, partially offset by a decline in digital sales of 2%. +• Footwear revenues increased 7% on a currency-neutral basis due to higher revenues in Men's, Women's, the Jordan Brand and Kids'. Unit sales of footwear increased 6%, while higher ASP per pair contributed approximately 1 percentage point of footwear revenue growth. Higher ASP per pair was primarily due to higher full-price ASP, off-price ASP and a higher mix of NIKE Direct sales, partially offset by lower NIKE Direct ASP. +• Apparel revenues decreased 2% on a currency-neutral basis, primarily due to lower revenues in Men's and Women's, partially offset by higher revenues in the Jordan Brand. Unit sales of apparel decreased 9%, while higher ASP per unit contributed approximately 7 percentage points of apparel revenue growth. Higher ASP per unit was primarily due to higher full-price ASP, off-price ASP and a higher mix of NIKE Direct sales, partially offset by lower NIKE Direct ASP. +Reported EBIT decreased 2% reflecting higher revenues and the following: +• Gross margin contraction of approximately 220 basis points primarily due to unfavorable changes in standard foreign currency exchange rates, lower margin in NIKE Direct and higher product costs, reflecting higher product input costs and product mix. This was partially offset by higher full-price ASP, net of discounts, primarily due to product mix and strategic pricing actions. +• Selling and administrative expense increase of 4% due to higher demand creation and operating overhead expense. Demand creation expense increased primarily due to higher digital marketing and sports marketing expense. Operating overhead expense increased primarily due to higher other administrative costs. +2024 FORM 10-K 42 +Table of Contents +GLOBAL BRAND DIVISIONS +(Dollars in millions) +FISCAL 2024 FISCAL 2023 % CHANGE % CHANGE EXCLUDING CURRENCY CHANGES FISCAL 2022 % CHANGE % CHANGE EXCLUDING CURRENCY CHANGES +Revenues $ 45 $ 58 -22 % -25 % $ 102 -43 % -43 % +Earnings (Loss) Before Interest and Taxes $ (4,720) $ (4,841) 2 % $ (4,262) -14 % +Global Brand Divisions primarily represent demand creation and operating overhead expense, including product creation and design expenses that are centrally managed for the NIKE Brand, as well as costs associated with NIKE Direct global digital operations and enterprise technology. Global Brand Divisions revenues include NIKE Brand licensing and other miscellaneous revenues that are not part of a geographic operating segment. +FISCAL 2024 COMPARED TO FISCAL 2023 +Global Brand Divisions' loss before interest and taxes decreased 2% primarily due to lower operating overhead expense, partially offset by higher demand creation expense. Lower operating overhead expense was primarily due to lower wage-related expenses, technology spend and other administrative costs. The increase in demand creation expense was primarily due to higher advertising and marketing expense as well as digital marketing. +CONVERSE +(Dollars in millions) +FISCAL 2024 FISCAL 2023 % CHANGE % CHANGE EXCLUDING CURRENCY CHANGES FISCAL 2022 % CHANGE % CHANGE EXCLUDING CURRENCY CHANGES +Revenues by: +Footwear $ 1,800 $ 2,155 -16 % -17 % $ 2,094 3 % 8 % +Apparel 93 90 3 % 4 % 103 -13 % -7 % +Equipment 37 28 32 % 34 % 26 8 % 16 % +Other (1) +152 154 -1 % -2 % 123 25 % 25 % +TOTAL REVENUES $ 2,082 $ 2,427 -14 % -15 % $ 2,346 3 % 8 % +Revenues by: +Sales to Wholesale Customers $ 1,098 $ 1,299 -15 % -16 % $ 1,292 1 % 7 % +Sales through Direct to Consumer 832 974 -15 % -14 % 931 5 % 8 % +Other (1) +152 154 -1 % -2 % 123 25 % 25 % +TOTAL REVENUES $ 2,082 $ 2,427 -14 % -15 % $ 2,346 3 % 8 % +EARNINGS BEFORE INTEREST AND TAXES $ 474 $ 676 -30 % $ 669 1 % +(1) Other revenues consist of territories serviced by third-party licensees who pay royalties to Converse for the use of its registered trademarks and other intellectual property rights. We do not own the Converse trademarks in Japan and accordingly do not earn revenues in Japan. +FISCAL 2024 COMPARED TO FISCAL 2023 +• Converse revenues decreased 15% on a currency-neutral basis primarily due to declines in North America and Western Europe. Combined unit sales within the wholesale and direct to consumer channels decreased 12%, driven primarily by a decrease in wholesale, while ASP decreased 3%, primarily driven by increased promotional activity in direct to consumer. +• Wholesale revenues decreased 16% on a currency-neutral basis, driven by declines in all geographies. +• Direct to consumer revenues decreased 14% on a currency-neutral basis as declines in North America and Western Europe, driven by reduced traffic, were partially offset by growth in Asia. +Reported EBIT decreased 30% reflecting lower revenues and the following: +• Gross margin contraction of approximately 130 basis points due to unfavorable changes in standard foreign currency exchange rates, lower full-price ASP, net of discounts, higher other costs and lower margin in direct to consumer, partially offset by lower ocean freight rates. +• Selling and administrative expense decrease of 2% due to lower operating overhead expense, primarily as a result of lower wage-related expenses. +2024 FORM 10-K 43 +Table of Contents +CORPORATE +(Dollars in millions) +FISCAL 2024 FISCAL 2023 % CHANGE FISCAL 2022 % CHANGE +Revenues $ (42) $ 27 — $ (72) — +Earnings (Loss) Before Interest and Taxes $ (2,619) $ (2,840) 8 % $ (2,219) -28 % +Corporate revenues primarily consist of foreign currency hedge gains and losses related to revenues generated by entities within the NIKE Brand geographic operating segments and Converse, but managed through our central foreign exchange risk management program. +The Corporate loss before interest and taxes primarily consists of unallocated general and administrative expenses, including expenses associated with centrally managed departments; depreciation and amortization related to our corporate headquarters; unallocated insurance, benefit and compensation programs, including stock-based compensation; and certain foreign currency gains and losses. +In addition to the foreign currency gains and losses recognized in Corporate revenues, foreign currency results in Corporate include gains and losses resulting from the difference between actual foreign currency exchange rates and standard rates used to record non-functional currency denominated product purchases within the NIKE Brand geographic operating segments and Converse; related foreign currency hedge results; conversion gains and losses arising from remeasurement of monetary assets and liabilities in non-functional currencies; and certain other foreign currency derivative instruments. +FISCAL 2024 COMPARED TO FISCAL 2023 +Corporate's loss before interest and taxes decreased $221 million during fiscal 2024, primarily due to the following: +• a favorable change in net foreign currency gains and losses of $588 million related to the difference between actual foreign currency exchange rates and standard foreign currency exchange rates assigned to the NIKE Brand geographic operating segments and Converse, net of hedge gains and losses; these results are reported as a component of consolidated Gross profit; +• a favorable change of $80 million primarily related to lower wage-related expenses, partially offset by higher professional services, reported as a component of consolidated Operating overhead expense; +• a favorable change of $27 million primarily related to the loss recognized in the prior year upon completion of the sale of our entities in Argentina and Uruguay to a third-party distributor, partially offset by the remeasurement of monetary assets and liabilities denominated in non-functional currencies and the impact of certain foreign currency derivative instruments, as well as net favorable settlements of legal matters in the prior year, reported as a component of consolidated Other (income) expense, net; and +• an unfavorable change of $443 million related to restructuring charges, $379 million reported as a component of consolidated Operating overhead expense and $64 million reported as a component of consolidated Cost of sales. +FOREIGN CURRENCY EXPOSURES AND HEDGING PRACTICES +OVERVIEW +As a global company with significant operations outside the United States, in the normal course of business we are exposed to risk arising from changes in currency exchange rates. Our primary foreign currency exposures arise from the recording of transactions denominated in non-functional currencies and the translation of foreign currency denominated results of operations, financial position and cash flows into U.S. Dollars. +Our foreign exchange risk management program is intended to lessen both the positive and negative effects of currency fluctuations on our consolidated results of operations, financial position and cash flows. We manage global foreign exchange risk centrally on a portfolio basis to address those risks material to NIKE, Inc. We manage these exposures by taking advantage of natural offsets and currency correlations existing within the portfolio and, where practical and material, by hedging a portion of the remaining exposures using derivative instruments such as forward contracts and options. As described below, the implementation of the NIKE Trading Company ("NTC") and our foreign currency adjustment program enhanced our ability to manage our foreign exchange risk by increasing the natural offsets and currency correlation benefits existing within our portfolio of foreign exchange exposures. Our hedging policy is designed to partially or entirely offset the impact of exchange rate changes on the underlying net exposures being hedged. Where exposures are hedged, our program has the effect of delaying the impact of exchange rate movements on our Consolidated Financial Statements; the length of the delay is dependent upon hedge horizons. We do not hold or issue derivative instruments for trading or speculative purposes. +2024 FORM 10-K 44 +Table of Contents +Refer to Note 4 — Fair Value Measurements and Note 12 — Risk Management and Derivatives in the accompanying Notes to the Consolidated Financial Statements for additional description of outstanding derivatives at each reported period end. +TRANSACTIONAL EXPOSURES +We conduct business in various currencies and have transactions which subject us to foreign currency risk. Our most significant transactional foreign currency exposures are: +• Product Costs — NIKE's product costs are exposed to fluctuations in foreign currencies in the following ways: +1. Product purchases denominated in currencies other than the functional currency of the transacting entity: +a. Certain NIKE entities purchase product from the NTC, a wholly-owned sourcing hub that buys NIKE branded products from third-party factories, predominantly in U.S. Dollars. The NTC, whose functional currency is the U.S. Dollar, then sells the products to NIKE entities in their respective functional currencies. NTC sales to a NIKE entity with a different functional currency results in a foreign currency exposure for the NTC. +b. Other NIKE entities purchase product directly from third-party factories predominantly in U.S. Dollars. These purchases generate a foreign currency exposure for those NIKE entities with a functional currency other than the U.S. Dollar. +In both purchasing scenarios, a weaker U.S. Dollar reduces inventory costs incurred by NIKE whereas a stronger U.S. Dollar increases its cost. +2. Factory input costs: NIKE operates a foreign currency adjustment program with certain factories. The program is designed to more effectively manage foreign currency risk by assuming certain of the factories' foreign currency exposures, some of which are natural offsets to our existing foreign currency exposures. Under this program, our payments to these factories are adjusted for rate fluctuations in the basket of currencies ("factory currency exposure index") in which the labor, materials and overhead costs incurred by the factories in the production of NIKE branded products ("factory input costs") are denominated. +As an offset to the impacts of the fluctuating U.S. Dollar on our non-functional currency denominated product purchases described above, a strengthening U.S. Dollar against the foreign currencies within the factory currency exposure indices reduces NIKE's U.S. Dollar inventory cost. Conversely, a weakening U.S. Dollar against the indexed foreign currencies increases our inventory cost. +• Non-Functional Currency Denominated External Sales — A portion of our NIKE Brand and Converse revenues associated with European operations are earned in currencies other than the Euro (e.g., the British Pound) but are recognized at a subsidiary that uses the Euro as its functional currency. These sales generate a foreign currency exposure. +• Other Costs — Non-functional currency denominated costs, such as endorsement contracts, also generate foreign currency risk, though to a lesser extent. +• Non-Functional Currency Denominated Monetary Assets and Liabilities — Our global subsidiaries have various assets and liabilities, primarily receivables and payables, including intercompany receivables and payables, denominated in currencies other than their functional currencies. These balance sheet items are subject to remeasurement which may create fluctuations in Other (income) expense, net within our Consolidated Statements of Income. +MANAGING TRANSACTIONAL EXPOSURES +Transactional exposures are managed on a portfolio basis within our foreign currency risk management program. We manage these exposures by taking advantage of natural offsets and currency correlations that exist within the portfolio and may also elect to use currency forward and option contracts to hedge the remaining effect of exchange rate fluctuations on probable forecasted future cash flows, including certain product cost exposures, non-functional currency denominated external sales and other costs described above. Generally, these are accounted for as cash flow hedges. +Certain currency forward contracts used to manage the foreign exchange exposure of non-functional currency denominated monetary assets and liabilities subject to remeasurement are not formally designated as hedging instruments. Accordingly, changes in fair value of these instruments are recognized in Other (income) expense, net and are intended to offset the foreign currency impact of the remeasurement of the related non-functional currency denominated asset or liability being hedged. +2024 FORM 10-K 45 +Table of Contents +TRANSLATIONAL EXPOSURES +Many of our foreign subsidiaries operate in functional currencies other than the U.S. Dollar. Fluctuations in currency exchange rates create volatility in our reported results as we are required to translate the balance sheets, operational results and cash flows of these subsidiaries into U.S. Dollars for consolidated reporting. The translation of foreign subsidiaries' non-U.S. Dollar denominated balance sheets into U.S. Dollars for consolidated reporting results in a cumulative translation adjustment to Accumulated other comprehensive income (loss) within Shareholders' equity. In the translation of our Consolidated Statements of Income, a weaker U.S. Dollar in relation to foreign functional currencies benefits our consolidated earnings whereas a stronger U.S. Dollar reduces our consolidated earnings. The impact of foreign exchange rate fluctuations on the translation of our consolidated Revenues was a detriment of approximately $141 million for the year ended May 31, 2024. The impact of foreign exchange rate fluctuations on the translation of our Income before income taxes was a benefit of approximately $48 million for the year ended May 31, 2024. +MANAGING TRANSLATIONAL EXPOSURES +To minimize the impact of translating foreign currency denominated revenues and expenses into U.S. Dollars for consolidated reporting, certain foreign subsidiaries use excess cash to purchase U.S. Dollar denominated available-for-sale investments. The variable future cash flows associated with the purchase and subsequent sale of these U.S. Dollar denominated investments at non-U.S. Dollar functional currency subsidiaries creates a foreign currency exposure that qualifies for hedge accounting under U.S. GAAP. We utilize forward contracts and/or options to mitigate the variability of the forecasted future purchases and sales of these U.S. Dollar investments. The combination of the purchase and sale of the U.S. Dollar investment and the hedging instrument has the effect of partially offsetting the year-over-year foreign currency translation impact on net earnings in the period the investments are sold. Hedges of the purchase of U.S. Dollar denominated available-for-sale investments are accounted for as cash flow hedges. +We estimate the combination of translation of foreign currency-denominated profits from our international businesses and the year-over-year change in foreign currency related gains and losses included in Other (income) expense, net had an unfavorable impact of approximately $68 million on our Income before income taxes for the year ended May 31, 2024. +NET INVESTMENTS IN FOREIGN SUBSIDIARIES +We are also exposed to the impact of foreign exchange fluctuations on our investments in wholly-owned foreign subsidiaries denominated in a currency other than the U.S. Dollar, which could adversely impact the U.S. Dollar value of these investments and therefore the value of future repatriated earnings. We have, in the past, hedged and may, in the future, hedge net investment positions in certain foreign subsidiaries to mitigate the effects of foreign exchange fluctuations on these net investments. These hedges are accounted for as net investment hedges in accordance with U.S. GAAP. There were no outstanding net investment hedges as of May 31, 2024 and 2023. There were no cash flows from net investment hedge settlements for the years ended May 31, 2024, 2023 and 2022. +LIQUIDITY AND CAPITAL RESOURCES +CASH FLOW ACTIVITY +Cash provided (used) by operations was an inflow of $7,429 million for fiscal 2024, compared to $5,841 million for fiscal 2023. Net income, adjusted for non-cash items, generated $6,713 million of operating cash inflow for fiscal 2024, compared to $6,354 million for fiscal 2023. The net change in working capital and other assets and liabilities resulted in an increase to Cash provided (used) by operations of $716 million for fiscal 2024 compared to a decrease of $513 million for fiscal 2023. For fiscal 2024, the favorable net change in working capital compared to the prior year was primarily impacted by favorable changes to Inventories due to reduced inventory purchases and improved lead times, partially offset by unfavorable changes to Accounts receivable due to the timing of wholesale shipments. +Cash provided (used) by investing activities was an inflow of $894 million for fiscal 2024, compared to an inflow of $564 million for fiscal 2023, primarily driven by the net change in short-term investments (including sales, maturities and purchases). For fiscal 2024, the net change in short-term investments resulted in a cash inflow of $1,721 million compared to a cash inflow of $1,481 million for fiscal 2023. +Cash provided (used) by financing activities was an outflow of $5,888 million for fiscal 2024 compared to an outflow of $7,447 million for fiscal 2023. The decreased outflow in fiscal 2024 was driven by lower share repurchases of $4,250 million for fiscal 2024 compared to $5,480 million for fiscal 2023, partially offset by higher dividend payments of $2,169 million for fiscal 2024 compared to $2,012 million for fiscal 2023. +2024 FORM 10-K 46 +Table of Contents +In fiscal 2024, we purchased a total of 41.4 million shares of NIKE's Class B Common Stock for $4.3 billion (an average price of $102.72 per share) under the four-year, $18 billion share repurchase plan authorized by the Board of Directors in June 2022. As of May 31, 2024, we had repurchased 84.9 million shares at a cost of approximately $9.1 billion (an average price of $106.65 per share) under this program. We continue to expect funding of share repurchases will come from operating cash flows. The timing and the amount of share repurchases will be dictated by our capital needs and stock market conditions. +CAPITAL RESOURCES +On July 21, 2022, we filed a shelf registration statement (the "Shelf") with the U.S. Securities and Exchange Commission (the "SEC") which permits us to issue an unlimited amount of debt securities from time to time. The Shelf expires on July 21, 2025. +On March 11, 2022, we entered into a five-year committed credit facility agreement with a syndicate of banks which provides for up to $2 billion of borrowings, with the option to increase borrowings up to $3 billion in total with lender approval. The facility matures on March 11, 2027, with options to extend the maturity date up to an additional two years. Refer to Note 5 — Short-Term Borrowings and Credit Lines for additional information. +On March 8, 2024, we entered into a 364-day committed credit facility agreement with a syndicate of banks which provides for up to $1 billion of borrowings, with the option to increase borrowings up to $1.5 billion in total with lender approval. The facility matures on March 7, 2025, with an option to extend the maturity date an additional 364 days. This facility replaces the prior $1 billion 364-day credit facility agreement entered into on March 10, 2023, which matured on March 8, 2024. Refer to Note 5 — Short-Term Borrowings and Credit Lines for additional information. +We currently have long-term debt ratings of AA- and A1 from Standard and Poor's Corporation and Moody's Investor Services, respectively. As it relates to our committed credit facilities entered into on March 11, 2022 and March 8, 2024, if our long-term debt ratings were to decline, the facility fees and interest rates would increase. Conversely, if our long-term debt ratings were to improve, the facility fees and interest rates would decrease. Changes in our long-term debt ratings would not trigger acceleration of maturity of any then-outstanding borrowings or any future borrowings under the committed credit facilities. Under these facilities, we have agreed to various covenants. These covenants include limits on the disposal of assets and the amount of debt secured by liens we may incur. In the event we were to have any borrowings outstanding under these facilities, failed to meet any covenant and were unable to obtain a waiver from a majority of the banks in the applicable syndicate, any borrowings would become immediately due and payable. As of May 31, 2024, we were in full compliance with each of these covenants, and we believe it is unlikely we will fail to meet any of these covenants in the foreseeable future. +Liquidity is also provided by our $3 billion commercial paper program. As of and for the fiscal years ended May 31, 2024 and 2023, we did not have any borrowings outstanding under our $3 billion program. We may issue commercial paper or other debt securities depending on general corporate needs. +To date, we have not experienced difficulty accessing the capital or credit markets; however, future volatility may increase costs associated with issuing commercial paper or other debt instruments or affect our ability to access those markets. +As of May 31, 2024, we had Cash and equivalents and Short-term investments totaling $11.6 billion, primarily consisting of commercial paper, corporate notes, deposits held at major banks, money market funds, U.S. Treasury obligations and other investment grade fixed-income securities. Our fixed-income investments are exposed to both credit and interest rate risk. All of our investments are investment grade to minimize our credit risk. While individual securities have varying durations, as of May 31, 2024, the weighted-average days to maturity of our cash equivalents and short-term investments portfolio was 65 days. +We believe that existing Cash and equivalents, Short-term investments and cash generated by operations, together with access to external sources of funds as described above, will be sufficient to meet our domestic and foreign capital needs in the foreseeable future. +Our material cash requirements as of May 31, 2024, were as follows: +• Debt Obligations — Refer to Note 5 — Short-Term Borrowings and Credit Lines and Note 6 — Long-Term Debt in the accompanying Notes to the Consolidated Financial Statements for additional information. +• Operating Leases — Refer to Note 17 — Leases in the accompanying Notes to the Consolidated Financial Statements for additional information. +2024 FORM 10-K 47 +Table of Contents +• Endorsement Contracts — As of May 31, 2024, we had endorsement contract obligations of $10.6 billion, with $1.7 billion payable within 12 months, representing approximate amounts of base compensation and minimum guaranteed royalty fees we are obligated to pay athlete, public figure, sport team and league endorsers of our products. Actual payments under some contracts may be higher than these amounts as these contracts provide for bonuses to be paid to the endorsers based upon athletic achievements and/or royalties on product sales in future periods. Actual payments under some contracts may also be lower as these contracts include provisions for reduced payments if athletic performance declines in future periods. In addition to the cash payments, we are obligated to furnish our endorsers with NIKE product for their use. It is not possible to determine how much we will spend on this product on an annual basis as the amount of product provided to the endorsers will depend on many factors and the contracts generally do not stipulate a minimum amount of cash to be spent on the product. +• Product Purchase Obligations — As of May 31, 2024, we had product purchase obligations of $5.7 billion, all of which are payable within the next 12 months. Product purchase obligations represent agreements (including open purchase orders) to purchase products in the ordinary course of business that are enforceable and legally binding and specify all significant terms. We generally order product at least four to five months in advance of sale based primarily on advanced orders received from external wholesale customers and internal orders from our direct to consumer operations. In some cases, prices are subject to change throughout the production process. +• Other Purchase Obligations — As of May 31, 2024, we had $3.5 billion of other purchase obligations, with $1.9 billion payable within the next 12 months. Other purchase obligations primarily include technology investments, construction, service and marketing commitments, including marketing commitments associated with endorsement contracts, made in the ordinary course of business. The amounts represent the minimum payments required by legally binding contracts and agreements that specify all significant terms, and may include open purchase orders for non-product purchases. +In addition to the above, we have long-term obligations for uncertain tax positions and various post-retirement benefits for which we are not able to reasonably estimate when cash payments will occur. Refer to Note 7 — Income Taxes and Note 11 — Benefit Plans in the accompanying Notes to the Consolidated Financial Statements for additional information related to uncertain tax positions and post-retirement benefits, respectively. +As a part of the transition tax related to the Tax Cuts and Jobs Act, as of May 31, 2024, we had $483 million in estimated future cash payments, with $215 million payable within the next 12 months. These amounts represent the transition tax on deemed repatriation of undistributed earnings of foreign subsidiaries, which are reflected net of foreign tax credits we utilized. +Refer to Note 16 — Commitments and Contingencies in the accompanying Notes to the Consolidated Financial Statements for additional information related to our off-balance sheet arrangements, bank guarantees and letters of credit. +OFF-BALANCE SHEET ARRANGEMENTS +As of May 31, 2024, we did not have any off-balance sheet arrangements that have, or are reasonably likely to have, a material effect on our current and future financial condition, results of operations, liquidity, capital expenditures or capital resources. In connection with various contracts and agreements, we routinely provide indemnification relating to the enforceability of intellectual property rights, coverage for legal issues that arise and other items where we are acting as the guarantor. Currently, we have several such agreements in place. Based on our historical experience and the estimated probability of future loss, we have determined that the fair value of such indemnification is not material to our financial position or results of operations. +NEW ACCOUNTING PRONOUNCEMENTS +Refer to Note 1 — Summary of Significant Accounting Policies within the accompanying Notes to the Consolidated Financial Statements for recently adopted and issued accounting standards. +CRITICAL ACCOUNTING ESTIMATES +Our previous discussion and analysis of our financial condition and results of operations are based upon our Consolidated Financial Statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. Note 1 — Summary of Significant Accounting Policies in the accompanying Notes to the Consolidated Financial Statements describes the significant accounting policies and methods used in the preparation of our Consolidated Financial Statements. +We believe the assumptions and judgments involved in the accounting estimates described below have the greatest potential impact on our Consolidated Financial Statements, so we consider these to be our critical accounting estimates. Management has reviewed and discussed these critical accounting estimates with the Audit & Finance Committee of the Board of Directors. +2024 FORM 10-K 48 +Table of Contents +Because of the uncertainty inherent in these matters, actual results could differ from the estimates we use in the preparation of our Consolidated Financial Statements. Within the context of these critical accounting estimates, we are not currently aware of any reasonably likely events or circumstances that would result in materially different amounts being reported. +SALES-RELATED RESERVES +Provisions for anticipated sales returns consist of both contractual return rights and discretionary authorized returns. Provisions for post-invoice sales discounts consist of both contractual programs and discretionary discounts that are expected to be granted at a later date. +Estimates of discretionary authorized returns, discounts and claims are based on (1) historical rates, (2) specific identification of outstanding returns not yet received from customers and outstanding discounts and claims and (3) estimated returns, discounts and claims expected but not yet finalized with customers. Actual returns, discounts and claims in any future period are inherently uncertain and may differ from estimates recorded. If actual or expected future returns, discounts or claims were significantly different than reserves established, a reduction or increase to net revenues would be recorded in the period in which such determination was made. +Refer to Note 14 — Revenues in the accompanying Notes to the Consolidated Financial Statements for additional information. +INVENTORY RESERVES +We make ongoing estimates relating to the net realizable value of inventories based upon our assumptions about future demand and market conditions. If we estimate the net realizable value of our inventory is less than the cost of the inventory, we record a reserve equal to the difference between the cost of the inventory and the estimated net realizable value. This reserve is recorded as a charge to Cost of sales. If changes in market conditions result in reductions to the estimated net realizable value of our inventory below our previous estimate, we would increase our reserve in the period in which we made such a determination. +HEDGE ACCOUNTING FOR DERIVATIVES +We use derivative contracts to hedge certain anticipated foreign currency and interest rate transactions as well as certain non-functional currency monetary assets and liabilities. When the specific criteria to qualify for hedge accounting has been met, changes in the fair value of contracts hedging probable forecasted future cash flows are recorded in Accumulated other comprehensive income (loss), rather than Net income, until the underlying hedged transaction affects Net income. In most cases, this results in gains and losses on hedge derivatives being released from Accumulated other comprehensive income (loss) into Net income sometime after the maturity of the derivative. One of the criteria for this accounting treatment is that the notional value of these derivative contracts should not be in excess of the designated amount of anticipated transactions. By their very nature, our estimates of anticipated transactions may fluctuate over time and may ultimately vary from actual transactions. When the designated amount of anticipated or actual transactions decline below hedged levels, or if it is no longer probable a forecasted transaction will occur by the end of the originally specified time period or within an additional two-month period of time thereafter, we reclassify the cumulative change in fair value of the over-hedged portion of the related hedge contract from Accumulated other comprehensive income (loss) to Other (income) expense, net during the quarter in which the decrease occurs. In rare circumstances, the additional period of time may exceed two months due to extenuating circumstances related to the nature of the forecasted transaction that are outside our control or influence. +Refer to Note 12 — Risk Management and Derivatives in the accompanying Notes to the Consolidated Financial Statements for additional information. +INCOME TAXES +We are subject to taxation in the United States, as well as various state and foreign jurisdictions. The determination of our provision for income taxes requires significant judgment, the use of estimates and the interpretation and application of complex tax laws. On an interim basis, we estimate our effective tax rate for the full fiscal year. This estimated annual effective tax rate is then applied to the year-to-date Income before income taxes excluding infrequently occurring or unusual items, to determine the year-to-date Income tax expense. The income tax effects of infrequent or unusual items are recognized in the interim period in which they occur. As the fiscal year progresses, we continually refine our estimate based upon actual events and earnings by jurisdiction during the year. This continual estimation process periodically results in a change to our expected effective tax rate for the fiscal year. When this occurs, we adjust the income tax provision during the quarter in which the change in estimate occurs. +On a quarterly basis, we evaluate the probability a tax position will be effectively sustained and the appropriateness of the amount recognized for uncertain tax positions based on factors including changes in facts or circumstances, changes in tax law, settled audit issues and new audit activity. Changes in our assessment may result in the recognition of a tax benefit or an +2024 FORM 10-K 49 +Table of Contents +additional charge to the tax provision in the period our assessment changes. We recognize interest and penalties related to income tax matters in Income tax expense. +Refer to Note 7 — Income Taxes in the accompanying Notes to the Consolidated Financial Statements for additional information. +OTHER CONTINGENCIES +In the ordinary course of business, we are subject to various legal proceedings, claims and government investigations related to our business, products and actions of our employees and representatives, including contractual and employment relationships, product liability, antitrust, customs, tax, intellectual property and other matters. We record contingent liabilities resulting from claims against us when a loss is assessed to be probable and the amount of the loss is reasonably estimable. Assessing probability of loss and estimating probable losses requires analysis of multiple factors, including in some cases judgments about the potential actions of third-party claimants and courts. Recorded contingent liabilities are based on the best information available and actual losses in any future period are inherently uncertain. If future adjustments to estimated probable future losses or actual losses exceed our recorded liability for such claims, we would record additional charges during the period in which the actual loss or change in estimate occurred. In addition to contingent liabilities recorded for probable losses, we disclose contingent liabilities when there is a reasonable possibility the ultimate loss will materially exceed the recorded liability. +Refer to Note 16 — Commitments and Contingencies in the accompanying Notes to the Consolidated Financial Statements for additional information. +2024 FORM 10-K 50 +Table of Contents +ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK +In the normal course of business and consistent with established policies and procedures, we employ a variety of financial instruments to manage exposure to fluctuations in the value of foreign currencies and interest rates. It is our policy to utilize these financial instruments only where necessary to finance our business and manage such exposures; we do not enter into these transactions for trading or speculative purposes. +We are exposed to foreign currency fluctuations, primarily as a result of our international sales, product sourcing and funding activities. Our foreign exchange risk management program is intended to lessen both the positive and negative effects of currency fluctuations on our consolidated results of operations, financial position and cash flows. We use forward and option contracts to hedge certain anticipated, but not yet firmly committed, transactions as well as certain firm commitments and the related receivables and payables, including third-party and intercompany transactions. Where exposures are hedged, our program has the effect of delaying the impact of exchange rate movements on our Consolidated Financial Statements. +The timing for hedging exposures, as well as the type and duration of the hedge instruments employed, are guided by our hedging policies and determined based upon the nature of the exposure and prevailing market conditions. Typically, the Company may enter into hedge contracts starting 12 to 24 months in advance of the forecasted transaction and may place incremental hedges up to 100% of the exposure by the time the forecasted transaction occurs. The majority of derivatives outstanding as of May 31, 2024, are designated as foreign currency cash flow hedges, primarily for Euro/U.S. Dollar, British Pound/Euro, Chinese Yuan/U.S. Dollar, and Japanese Yen/U.S. Dollar currency pairs. Refer to Note 12 — Risk Management and Derivatives in the accompanying Notes to the Consolidated Financial Statements for additional information. +Our earnings are also exposed to movements in short- and long-term market interest rates. Our objective in managing this interest rate exposure is to limit the impact of interest rate changes on earnings and cash flows and to reduce overall borrowing costs. To achieve these objectives, we maintain a mix of commercial paper, bank loans, and fixed-rate debt of varying maturities and have entered into receive-fixed, pay-variable interest rate swaps for a portion of our fixed-rate debt. +MARKET RISK MEASUREMENT +We monitor foreign exchange risk, interest rate risk and related derivatives using a variety of techniques including a review of market value, sensitivity analysis and Value-at-Risk ("VaR"). Our market-sensitive derivative and other financial instruments are foreign currency forward contracts, foreign currency option contracts, interest rate swaps, intercompany loans denominated in non-functional currencies and fixed interest rate U.S. Dollar denominated debt. +We use VaR to monitor the foreign exchange risk of our foreign currency forward and foreign currency option derivative instruments only. The VaR determines the maximum potential one-day loss in the fair value of these foreign exchange rate-sensitive financial instruments. The VaR model estimates assume normal market conditions and a 95% confidence level. There are various modeling techniques that can be used in the VaR computation. Our computations are based on interrelationships between currencies and interest rates (a "variance/co-variance" technique). These interrelationships are a function of foreign exchange currency market changes and interest rate changes over the preceding one-year period. The value of foreign currency options does not change on a one-to-one basis with changes in the underlying currency rate. We adjust the potential loss in option value for the estimated sensitivity (the "delta" and "gamma") to changes in the underlying currency rate. This calculation reflects the impact of foreign currency rate fluctuations on the derivative instruments only and does not include the impact of such rate fluctuations on non-functional currency transactions (such as anticipated transactions, firm commitments, cash balances and accounts and loans receivable and payable), including those which are hedged by these instruments. +The VaR model is a risk analysis tool and does not purport to represent actual losses in fair value we will incur nor does it consider the potential effect of favorable changes in market rates. It also does not represent the full extent of the possible loss that may occur. Actual future gains and losses will differ from those estimated because of changes or differences in market rates and interrelationships, hedging instruments and hedge percentages, timing and other factors. +The estimated maximum one-day loss in fair value on our foreign currency sensitive derivative financial instruments, derived using the VaR model, was $57 million and $111 million as of May 31, 2024 and 2023, respectively. The VaR decreased year-over-year as a result of a decrease in foreign currency volatilities as of May 31, 2024. Such a hypothetical loss in the fair value of our derivatives would be offset by increases in the value of the underlying transactions being hedged. The average monthly change in the fair values of foreign currency forward and foreign currency option derivative instruments was $180 million and $289 million during fiscal 2024 and fiscal 2023, respectively. +The instruments not included in the VaR are intercompany loans denominated in non-functional currencies, fixed interest rate U.S. Dollar denominated debt, and interest rate swaps. Intercompany loans and related interest amounts are eliminated in +2024 FORM 10-K 51 +Table of Contents +consolidation. Furthermore, our non-functional currency intercompany loans are substantially hedged against foreign exchange risk through the use of forward contracts, which are included in the VaR calculation above. Therefore, we consider the interest rate and foreign currency market risks associated with our non-functional currency intercompany loans to be immaterial to our consolidated financial position, results of operations and cash flows. +Details of third-party debt and interest rate swaps are provided in the table below. The table presents principal cash flows and related weighted average interest rates by expected maturity dates. The weighted average variable interest rates for the fixed rate swapped to variable rate swaps reflect the effective interest rates at May 31, 2024. +EXPECTED MATURITY DATE YEAR ENDING MAY 31, +(Dollars in millions) +2025 2026 2027 2028 2029 THEREAFTER TOTAL FAIR VALUE +Interest Rate Risk +Long-term U.S. Dollar debt — Fixed rate +Principal payments $ 1,000 $ — $ 2,000 $ — $ — $ 6,000 $ 9,000 $ 7,631 +Average interest rate 2.4 % 0.0 % 2.6 % 0.0 % 0.0 % 3.3 % 3.1 % +Interest Rate Swaps — Fixed rate swapped to variable rate +Notional amount +$ — $ — $ — $ — $ — $ 1,800 $ 1,800 $ (31) +Average fixed interest rate +0.0 % 0.0 % 0.0 % 0.0 % 0.0 % 3.5 % 3.5 % +Average variable interest rate +0.0 % 0.0 % 0.0 % 0.0 % 0.0 % 3.7 % 3.7 % +2024 FORM 10-K 52 +Table of Contents +ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA +Management of NIKE, Inc. is responsible for the information and representations contained in this Annual Report. The financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and include certain amounts based on our best estimates and judgments. Other financial information in this Annual Report is consistent with these financial statements. +Our accounting systems include controls designed to reasonably assure assets are safeguarded from unauthorized use or disposition and provide for the preparation of financial statements in conformity with U.S. GAAP. These systems are supplemented by the selection and training of qualified financial personnel and an organizational structure providing for appropriate segregation of duties. +An internal corporate audit department reviews the results of its work with the Audit & Finance Committee of the Board of Directors, presently comprised of four outside, independent directors. The Audit & Finance Committee is responsible for the appointment of the independent registered public accounting firm and reviews, with the independent registered public accounting firm, management and the internal corporate audit staff, the scope and the results of the annual audit, the effectiveness of the accounting control system and other matters relating to the financial affairs of NIKE as the Audit & Finance Committee deems appropriate. The independent registered public accounting firm and the internal corporate auditors have full access to the Audit & Finance Committee, with and without the presence of management, to discuss any appropriate matters. +2024 FORM 10-K 53 +Table of Contents +MANAGEMENT'S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING +Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13(a) - 15(f) and Rule 15(d) - 15(f) of the Securities Exchange Act of 1934, as amended. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the financial statements for external purposes in accordance with generally accepted accounting principles in the United States of America. Internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of assets of the Company that could have a material effect on the financial statements. +Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +Under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, our management conducted an evaluation of the effectiveness of our internal control over financial reporting based upon the framework in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on the results of our evaluation, our management concluded that our internal control over financial reporting was effective as of May 31, 2024. +PricewaterhouseCoopers LLP, an independent registered public accounting firm, has audited (1) the Consolidated Financial Statements and (2) the effectiveness of our internal control over financial reporting as of May 31, 2024, as stated in their report herein. +John J. Donahoe II Matthew Friend +President and Chief Executive Officer Executive Vice President and Chief Financial Officer +2024 FORM 10-K 54 +Table of Contents +Report of Independent Registered Public Accounting Firm +To the Board of Directors and Shareholders of NIKE, Inc. +Opinions on the Financial Statements and Internal Control over Financial Reporting +We have audited the accompanying consolidated balance sheets of NIKE, Inc. and its subsidiaries (the "Company") as of May 31, 2024 and 2023, and the related consolidated statements of income, of comprehensive income, of shareholders' equity and of cash flows for each of the three years in the period ended May 31, 2024, including the related notes and financial statement schedule listed in the index appearing under Item 15(a)(2) (collectively referred to as the "consolidated financial statements"). We also have audited the Company's internal control over financial reporting as of May 31, 2024, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). +In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of May 31, 2024 and 2023, and the results of its operations and its cash flows for each of the three years in the period ended May 31, 2024 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of May 31, 2024, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO. +Basis for Opinions +The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. +Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. +Definition and Limitations of Internal Control over Financial Reporting +A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. +Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +2024 FORM 10-K 55 +Table of Contents +Critical Audit Matters +The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. +Accounting for Income Taxes +As described in Notes 1 and 7 to the consolidated financial statements, the Company is subject to taxation in the United States, as well as various state and foreign jurisdictions. The Company accounts for income taxes using the asset and liability method. This approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of assets and liabilities. As disclosed by management, the determination of the provision for income taxes by management requires significant judgment, the use of estimates, and the interpretation and application of complex tax laws. Furthermore, as part of determining its provision for income taxes, management evaluates the probability a tax position will be effectively sustained and the appropriateness of the amount recognized for uncertain tax positions based on factors including changes in facts or circumstances, changes in tax law, settled audit issues and new audit activity. The Company recognizes a tax benefit from uncertain tax positions in the financial statements only when it is more likely than not the position will be sustained upon examination by relevant tax authorities. The majority of the total gross unrecognized tax benefits are long-term in nature and included within deferred income taxes and other liabilities on the consolidated balance sheets. The Company recorded income tax expense of $1,000 million for the year ended May 31, 2024. As of May 31, 2024, total gross unrecognized tax benefits, excluding related interest and penalties, were $990 million, of which $699 million would affect the Company's effective tax rate if recognized in future periods. +The principal considerations for our determination that performing procedures relating to the accounting for income taxes is a critical audit matter are (i) the significant judgment by management when determining the provision for income taxes and interpreting and applying complex tax laws as it relates to determining the provision for income taxes and uncertain tax positions; (ii) a high degree of auditor judgment and effort in performing procedures and evaluating audit evidence related to management’s interpretation and application of complex tax laws as it relates to the determination of the provision for income taxes and the assessment of whether tax positions are more likely than not to be sustained; and (iii) the audit effort involved the use of professionals with specialized skill and knowledge. +Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to income taxes. These procedures also included, among others (i) testing the provision for income taxes, which included the effective tax rate reconciliation and assessing management’s interpretation and application of complex tax laws; (ii) evaluating the completeness of management’s identification of uncertain tax positions by considering changes in facts or circumstances, changes in and compliance with tax laws, settled audit issues, new authoritative cases, or new audit activity, where applicable; and (iii) for certain tax positions, evaluating management’s assessment of the technical merits of the tax positions by obtaining and inspecting third party income tax documentation. Professionals with specialized skill and knowledge were used to assist in evaluating (i) changes in and compliance with the tax laws; (ii) management’s interpretation and application of certain complex tax laws as it relates to the determination of the provision for income taxes; and (iii) the reasonableness of management's assessment of whether certain tax positions are more likely than not of being sustained. +/s/ PricewaterhouseCoopers LLP +Portland, Oregon +July 25, 2024 +We have served as the Company's auditor since 1974. +2024 FORM 10-K 56 +Table of Contents +NIKE, INC. +CONSOLIDATED STATEMENTS OF INCOME +YEAR ENDED MAY 31, +(In millions, except per share data) +2024 2023 2022 +Revenues $ 51,362 $ 51,217 $ 46,710 +Cost of sales 28,475 28,925 25,231 +Gross profit 22,887 22,292 21,479 +Demand creation expense 4,285 4,060 3,850 +Operating overhead expense 12,291 12,317 10,954 +Total selling and administrative expense 16,576 16,377 14,804 +Interest expense (income), net ( 161 ) ( 6 ) 205 +Other (income) expense, net ( 228 ) ( 280 ) ( 181 ) +Income before income taxes 6,700 6,201 6,651 +Income tax expense 1,000 1,131 605 +NET INCOME $ 5,700 $ 5,070 $ 6,046 +Earnings per common share: +Basic $ 3.76 $ 3.27 $ 3.83 +Diluted $ 3.73 $ 3.23 $ 3.75 +Weighted average common shares outstanding: +Basic 1,517.6 1,551.6 1,578.8 +Diluted 1,529.7 1,569.8 1,610.8 +The accompanying Notes to the Consolidated Financial Statements are an integral part of this statement. +2024 FORM 10-K 57 +Table of Contents +NIKE, INC. +CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME +YEAR ENDED MAY 31, +(Dollars in millions) +2024 2023 2022 +Net income $ 5,700 $ 5,070 $ 6,046 +Other comprehensive income (loss), net of tax: +Change in net foreign currency translation adjustment ( 3 ) 267 ( 522 ) +Change in net gains (losses) on cash flow hedges ( 184 ) ( 348 ) 1,214 +Change in net gains (losses) on other 9 ( 6 ) 6 +Total other comprehensive income (loss), net of tax ( 178 ) ( 87 ) 698 +TOTAL COMPREHENSIVE INCOME $ 5,522 $ 4,983 $ 6,744 +The accompanying Notes to the Consolidated Financial Statements are an integral part of this statement. +2024 FORM 10-K 58 +Table of Contents +NIKE, INC. +CONSOLIDATED BALANCE SHEETS +MAY 31, +(In millions) +2024 2023 +ASSETS +Current assets: +Cash and equivalents $ 9,860 $ 7,441 +Short-term investments 1,722 3,234 +Accounts receivable, net 4,427 4,131 +Inventories 7,519 8,454 +Prepaid expenses and other current assets 1,854 1,942 +Total current assets 25,382 25,202 +Property, plant and equipment, net 5,000 5,081 +Operating lease right-of-use assets, net 2,718 2,923 +Identifiable intangible assets, net 259 274 +Goodwill 240 281 +Deferred income taxes and other assets 4,511 3,770 +TOTAL ASSETS $ 38,110 $ 37,531 +LIABILITIES AND SHAREHOLDERS' EQUITY +Current liabilities: +Current portion of long-term debt $ 1,000 $ — +Notes payable 6 6 +Accounts payable 2,851 2,862 +Current portion of operating lease liabilities 477 425 +Accrued liabilities 5,725 5,723 +Income taxes payable 534 240 +Total current liabilities 10,593 9,256 +Long-term debt 7,903 8,927 +Operating lease liabilities 2,566 2,786 +Deferred income taxes and other liabilities 2,618 2,558 +Commitments and contingencies (Note 16) +Redeemable preferred stock — — +Shareholders' equity: +Common stock at stated value: +Class A convertible — 298 and 305 shares outstanding +— — +Class B — 1,205 and 1,227 shares outstanding +3 3 +Capital in excess of stated value 13,409 12,412 +Accumulated other comprehensive income (loss) 53 231 +Retained earnings (deficit) 965 1,358 +Total shareholders' equity 14,430 14,004 +TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 38,110 $ 37,531 +The accompanying Notes to the Consolidated Financial Statements are an integral part of this statement. +2024 FORM 10-K 59 +Table of Contents +NIKE, INC. +CONSOLIDATED STATEMENTS OF CASH FLOWS +YEAR ENDED MAY 31, +(Dollars in millions) +2024 2023 2022 +Cash provided (used) by operations: +Net income $ 5,700 $ 5,070 $ 6,046 +Adjustments to reconcile net income to net cash provided (used) by operations: +Depreciation 796 703 717 +Deferred income taxes ( 497 ) ( 117 ) ( 650 ) +Stock-based compensation 804 755 638 +Amortization, impairment and other 48 156 123 +Net foreign currency adjustments ( 138 ) ( 213 ) ( 26 ) +Changes in certain working capital components and other assets and liabilities: +(Increase) decrease in accounts receivable ( 329 ) 489 ( 504 ) +(Increase) decrease in inventories 908 ( 133 ) ( 1,676 ) +(Increase) decrease in prepaid expenses, operating lease right-of-use assets and other current and non-current assets ( 260 ) ( 644 ) ( 845 ) +Increase (decrease) in accounts payable, accrued liabilities, operating lease liabilities and other current and non-current liabilities 397 ( 225 ) 1,365 +Cash provided (used) by operations 7,429 5,841 5,188 +Cash provided (used) by investing activities: +Purchases of short-term investments ( 4,767 ) ( 6,059 ) ( 12,913 ) +Maturities of short-term investments 2,269 3,356 8,199 +Sales of short-term investments 4,219 4,184 3,967 +Additions to property, plant and equipment ( 812 ) ( 969 ) ( 758 ) +Other investing activities ( 15 ) 52 ( 19 ) +Cash provided (used) by investing activities 894 564 ( 1,524 ) +Cash provided (used) by financing activities: +Increase (decrease) in notes payable, net — ( 4 ) 15 +Repayment of borrowings — ( 500 ) — +Proceeds from exercise of stock options and other stock issuances 667 651 1,151 +Repurchase of common stock ( 4,250 ) ( 5,480 ) ( 4,014 ) +Dividends — common and preferred ( 2,169 ) ( 2,012 ) ( 1,837 ) +Other financing activities ( 136 ) ( 102 ) ( 151 ) +Cash provided (used) by financing activities ( 5,888 ) ( 7,447 ) ( 4,836 ) +Effect of exchange rate changes on cash and equivalents ( 16 ) ( 91 ) ( 143 ) +Net increase (decrease) in cash and equivalents 2,419 ( 1,133 ) ( 1,315 ) +Cash and equivalents, beginning of year 7,441 8,574 9,889 +CASH AND EQUIVALENTS, END OF YEAR $ 9,860 $ 7,441 $ 8,574 +Supplemental disclosure of cash flow information: +Cash paid during the year for: +Interest, net of capitalized interest $ 381 $ 347 $ 290 +Income taxes 1,299 1,517 1,231 +Non-cash additions to property, plant and equipment 160 211 160 +Dividends declared and not paid 558 524 480 +The accompanying Notes to the Consolidated Financial Statements are an integral part of this statement. +2024 FORM 10-K 60 +Table of Contents +NIKE, INC. +CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY +COMMON STOCK CAPITAL IN EXCESS OF STATED VALUE ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) RETAINED EARNINGS (DEFICIT) TOTAL +CLASS A CLASS B +(In millions, except per share data) +SHARES AMOUNT SHARES AMOUNT +Balance at May 31, 2021 305 $ — 1,273 $ 3 $ 9,965 $ ( 380 ) $ 3,179 $ 12,767 +Stock options exercised 17 924 924 +Conversion to Class B Common Stock — +Repurchase of Class B Common Stock ( 27 ) ( 186 ) ( 3,808 ) ( 3,994 ) +Dividends on common stock ($ 1.190 per share) and preferred stock ($ 0.10 per share) +( 1,886 ) ( 1,886 ) +Issuance of shares to employees, net of shares withheld for employee taxes 3 143 ( 55 ) 88 +Stock-based compensation 638 638 +Net income 6,046 6,046 +Other comprehensive income (loss) 698 698 +Balance at May 31, 2022 305 $ — 1,266 $ 3 $ 11,484 $ 318 $ 3,476 $ 15,281 +Stock options exercised 8 421 421 +Repurchase of Class B Common Stock ( 51 ) ( 378 ) ( 5,131 ) ( 5,509 ) +Dividends on common stock ($ 1.325 per share) and preferred stock ($ 0.10 per share) +( 2,059 ) ( 2,059 ) +Issuance of shares to employees, net of shares withheld for employee taxes 4 130 2 132 +Stock-based compensation 755 755 +Net income 5,070 5,070 +Other comprehensive income (loss) ( 87 ) ( 87 ) +Balance at May 31, 2023 305 $ — 1,227 $ 3 $ 12,412 $ 231 $ 1,358 $ 14,004 +Stock options exercised 7 432 432 +Conversion to Class B Common Stock ( 7 ) 7 — +Repurchase of Class B Common Stock ( 41 ) ( 347 ) ( 3,907 ) ( 4,254 ) +Dividends on common stock ($ 1.450 per share) and preferred stock ($ 0.10 per share) +( 2,203 ) ( 2,203 ) +Issuance of shares to employees, net of shares withheld for employee taxes 5 108 17 125 +Stock-based compensation 804 804 +Net income 5,700 5,700 +Other comprehensive income (loss) ( 178 ) ( 178 ) +Balance at May 31, 2024 298 $ — 1,205 $ 3 $ 13,409 $ 53 $ 965 $ 14,430 +The accompanying Notes to the Consolidated Financial Statements are an integral part of this statement. +2024 FORM 10-K 61 +Table of Contents +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +Note 1 Summary of Significant Accounting Policies +63 +Note 2 Property, Plant and Equipment +69 +Note 3 Accrued Liabilities +69 +Note 4 Fair Value Measurements +70 +Note 5 Short-Term Borrowings and Credit Lines +72 +Note 6 Long-Term Debt +73 +Note 7 Income Taxes +74 +Note 8 Redeemable Preferred Stock +76 +Note 9 Common Stock and Stock-Based Compensation +77 +Note 10 Earnings Per Share +79 +Note 11 Benefit Plans +79 +Note 12 Risk Management and Derivatives +79 +Note 13 Accumulated Other Comprehensive Income (Loss) +83 +Note 14 Revenues +84 +Note 15 Operating Segments and Related Information +86 +Note 16 Commitments and Contingencies +89 +Note 17 Leases +89 +Note 18 Divestitures +90 +Note 19 Restructuring +91 +2024 FORM 10-K 62 +Table of Contents +NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES +DESCRIPTION OF BUSINESS +NIKE, Inc. is a worldwide leader in the design, development and worldwide marketing and selling of athletic footwear, apparel, equipment, accessories and services. NIKE, Inc. portfolio brands include the NIKE Brand, Jordan Brand and Converse. The NIKE Brand is focused on performance athletic footwear, apparel, equipment, accessories and services across Men's, Women's and Kids', amplified with sport-inspired lifestyle products carrying the Swoosh trademark, as well as other NIKE Brand trademarks. The Jordan Brand is focused on athletic and casual footwear, apparel and accessories using the Jumpman trademark. Sales and operating results of Jordan Brand products are reported within the respective NIKE Brand geographic operating segments. Converse designs, distributes, licenses and sells casual sneakers, apparel and accessories under the Converse, Chuck Taylor, All Star, One Star, Star Chevron and Jack Purcell trademarks. In some markets outside the U.S., these trademarks are licensed to third parties who design, distribute, market and sell similar products. Operating results of the Converse brand are reported on a stand-alone basis. +BASIS OF CONSOLIDATION +The Consolidated Financial Statements include the accounts of NIKE, Inc. and its subsidiaries (the "Company" or "NIKE"). All significant intercompany transactions and balances have been eliminated. +MANAGEMENT ESTIMATES +The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates, including estimates relating to assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. +REVENUE RECOGNITION +Revenue transactions associated with the sale of NIKE Brand footwear, apparel and equipment, as well as Converse products, comprise a single performance obligation, which consists of the sale of products to customers either through wholesale or direct to consumer channels. The Company satisfies the performance obligation and records revenues when transfer of control to the customer has occurred, based on the terms of sale. A customer is considered to have control once they are able to direct the use and receive substantially all of the benefits of the product. +Control is transferred to wholesale customers upon shipment or upon receipt depending on the country of the sale and the agreement with the customer. Control transfers to retail store customers at the time of sale and to substantially all digital commerce customers upon shipment. The transaction price is determined based upon the invoiced sales price, less anticipated sales returns, discounts and miscellaneous claims from customers. Payment terms for wholesale transactions depend on the country of sale or agreement with the customer and payment is generally required within 90 days or less of shipment to or receipt by the wholesale customer. Payment is due at the time of sale for retail store and digital commerce transactions. +Consideration for trademark licensing contracts is earned through sales-based or usage-based royalty arrangements, and the associated revenues are recognized over the license period. +Taxes assessed by governmental authorities that are both imposed on and concurrent with a specific revenue-producing transaction, and are collected by the Company from a customer, are excluded from Revenues and Cost of sales in the Consolidated Statements of Income. Shipping and handling costs associated with outbound freight after control over a product has transferred to a customer are accounted for as fulfillment costs and are included in Cost of sales when the related revenues are recognized. +SALES-RELATED RESERVES +Consideration promised in the Company's contracts with customers is variable due to anticipated reductions, such as sales returns, discounts and miscellaneous claims from customers. The Company estimates the most likely amount it will be entitled to receive and records an anticipated reduction against Revenues, with an offsetting increase to Accrued liabilities at the time revenues are recognized. The estimated cost of inventory for product returns is recorded in Prepaid expenses and other current assets on the Consolidated Balance Sheets. +The provision for anticipated sales returns consists of both contractual return rights and discretionary authorized returns. Provisions for post-invoice sales discounts consist of both contractual programs and discretionary discounts that are expected to be granted at a later date. +2024 FORM 10-K 63 +Table of Contents +Estimates of discretionary authorized returns, discounts and claims are based on (1) historical rates, (2) specific identification of outstanding returns not yet received from customers and outstanding discounts and claims and (3) estimated returns, discounts and claims expected but not yet finalized with customers. Actual returns, discounts and claims in any future period are inherently uncertain and thus may differ from estimates recorded. If actual or expected future returns, discounts or claims are significantly greater or lower than the reserves established, a reduction or increase to net Revenues is recorded in the period in which such determination is made. +COST OF SALES +Cost of sales consists primarily of inventory costs, as well as warehousing costs (including the cost of warehouse labor), third-party royalties, certain foreign currency hedge gains and losses and product design costs. Shipping and handling costs are expensed as incurred and included in Cost of sales. +DEMAND CREATION EXPENSE +Demand creation expense consists of advertising and promotion costs, including costs of endorsement contracts, complimentary products, television, digital and print advertising as well as media costs, brand events and retail brand presentation. Advertising production costs are expensed the first time an advertisement is run. Advertising media costs are expensed when the advertisement appears. Costs related to brand events are expensed when the event occurs. Costs related to retail brand presentation are expensed when the presentation is complete and delivered. +A significant amount of the Company's promotional expenses result from payments under endorsement contracts. In general, endorsement payments are expensed on a straight-line basis over the term of the contract. However, certain contracts contain elements that may be accounted for differently based upon the facts and circumstances of each individual contract. Prepayments made under contracts are included in Prepaid expenses and other current assets or Deferred income taxes and other assets depending on the period to which the prepayment applies. +Certain contracts provide for contingent payments to endorsers based upon specific achievements in their sport (e.g., winning a championship). The Company records Demand creation expense for these amounts when the endorser achieves the specific goal. +Certain contracts provide for variable payments based upon endorsers maintaining a level of performance in their sport over an extended period of time (e.g., maintaining a specified ranking in a sport for a year). When the Company determines payments are probable, the amounts are reported in Demand creation expense ratably over the contract period based on the Company's best estimate of the endorser's performance. In these instances, to the extent actual payments to the endorser differ from the Company's estimate due to changes in the endorser's performance, adjustments to Demand creation expense may be recorded in a future period. +Certain contracts provide for royalty payments to endorsers based upon a predetermined percent of sales of particular products, which the Company records in Cost of sales as the related sales occur. For contracts containing minimum guaranteed royalty payments, the Company records the amount of any guaranteed payment in excess of that earned through sales of product within Demand creation expense. +Through cooperative advertising programs, the Company reimburses its wholesale customers for certain costs of advertising the Company's products. To the extent the Company receives a distinct good or service in exchange for consideration paid to the customer that does not exceed the fair value of that good or service, the amounts reimbursed are recorded in Demand creation expense. +Total Demand creation expense was $ 4,285 million, $ 4,060 million and $ 3,850 million for the years ended May 31, 2024, 2023 and 2022, respectively. Prepaid advertising and promotion expenses totaled $ 814 million and $ 755 million at May 31, 2024 and 2023, respectively, of which $ 420 million and $ 372 million, respectively, were recorded in Prepaid expenses and other current assets, and $ 394 million and $ 383 million, respectively, were recorded in Deferred income taxes and other assets, depending on the period to which the prepayment applied. +OPERATING OVERHEAD EXPENSE +Operating overhead expense consists primarily of wage and benefit-related expenses, research and development costs, bad debt expense as well as other administrative expenses such as rent, depreciation and amortization, professional services, certain technology investments, meetings and travel. +2024 FORM 10-K 64 +Table of Contents +CASH AND EQUIVALENTS +Cash and equivalents represent cash and short-term, highly liquid investments, that are both readily convertible to known amounts of cash and so near their maturity they present insignificant risk of changes in value because of changes in interest rates, with maturities three months or less at the date of purchase. +SHORT-TERM INVESTMENTS +Short-term investments consist of highly liquid investments with maturities over three months at the date of purchase. At May 31, 2024 and 2023, Short-term investments consisted of available-for-sale debt securities, which are recorded at fair value with unrealized gains and losses reported, net of tax, in Accumulated other comprehensive income (loss), unless unrealized losses are determined to be unrecoverable. Realized gains and losses on the sale of securities are determined by specific identification. The Company considers all available-for-sale debt securities, including those with maturity dates beyond 12 months, as available to support current operational liquidity needs and, therefore, classifies all securities with maturity dates beyond three months at the date of purchase as current assets within Short-term investments on the Consolidated Balance Sheets. +Refer to Note 4 — Fair Value Measurements for more information on the Company's Short-term investments. +ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS RECEIVABLE +Accounts receivable, net consist primarily of amounts due from customers. The Company makes ongoing estimates relating to the collectability of its accounts receivable and maintains an allowance for expected losses resulting from the inability of its customers to make required payments. In addition to judgments about the creditworthiness of significant customers based on ongoing credit evaluations, the Company considers historical levels of credit losses, as well as macroeconomic and industry trends to determine the amount of the allowance. The allowance for uncollectible accounts receivable was $ 35 million as of May 31, 2024 and 2023. +INVENTORY VALUATION +Inventories, substantially all of which are finished goods, are stated at lower of cost and net realizable value and valued on either an average or a specific identification cost basis. In some instances, the Company ships products directly from its suppliers to the customer, with the related inventory and cost of sales recognized on a specific identification basis. Inventory costs primarily consist of product cost from the Company's suppliers, as well as inbound freight, import duties, taxes, insurance, logistics and other handling fees. +PROPERTY, PLANT AND EQUIPMENT AND DEPRECIATION +Property, plant and equipment are recorded at cost. Depreciation is determined on a straight-line basis for land improvements, buildings and leasehold improvements over 2 to 40 years and for machinery and equipment over 2 to 15 years. +Depreciation and amortization of assets used in manufacturing, warehousing and product distribution are recorded in Cost of sales. Depreciation and amortization of all other assets are recorded in Operating overhead expense. +SOFTWARE DEVELOPMENT COSTS +Expenditures for major software purchases and software developed for internal use are capitalized and amortized over 2 to 12 years on a straight-line basis. The Company's policy provides for the capitalization of external direct costs associated with developing or obtaining internal use computer software. The Company also capitalizes certain payroll and payroll-related costs for employees who are directly associated with internal use computer software projects. The amount of capitalizable payroll costs with respect to these employees is limited to the time directly spent on such projects. Costs associated with preliminary project stage activities, training, maintenance and all other post-implementation stage activities are expensed as incurred. +Development costs of computer software to be sold, leased or otherwise marketed as an integral part of a product are subject to capitalization beginning when a product's technological feasibility has been established and ending when a product is available for general release to customers. In most instances, the Company's products are released soon after technological feasibility has been established; therefore, software development costs incurred subsequent to achievement of technological feasibility are usually not significant, and generally, most software development costs have been expensed as incurred. +2024 FORM 10-K 65 +Table of Contents +IMPAIRMENT OF LONG-LIVED ASSETS +The Company reviews the carrying value of long-lived assets or asset groups to be used in operations whenever events or changes in circumstances indicate the carrying amount of the assets might not be recoverable. Factors that would necessitate an impairment assessment include a significant adverse change in the extent or manner in which an asset is used, a significant adverse change in legal factors or the business climate that could affect the value of the asset or a significant decline in the observable market value of an asset, among others. If such facts indicate a potential impairment, the Company would assess the recoverability of an asset group by determining if the carrying value of the asset group exceeds the sum of the projected undiscounted cash flows expected to result from the use and eventual disposition of the assets over the remaining economic life of the primary asset in the asset group. If the recoverability test indicates that the carrying value of the asset group is not recoverable, the Company will estimate the fair value of the asset group using appropriate valuation methodologies, which would typically include an estimate of discounted cash flows. Any impairment would be measured as the difference between the asset group's carrying amount and its estimated fair value. +GOODWILL AND INDEFINITE-LIVED INTANGIBLE ASSETS +The Company performs annual impairment tests on goodwill and intangible assets with indefinite lives in the fourth quarter of each fiscal year or when events occur or circumstances change that would, more likely than not, reduce the fair value of a reporting unit or an intangible asset with an indefinite life below its carrying value. +For purposes of testing goodwill for impairment, the Company allocates goodwill across its reporting units, which are considered the Company's operating segments. For both goodwill and indefinite-lived intangible assets, which primarily consist of acquired trade names and trademarks, the Company may first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit or an intangible asset with an indefinite life is less than its carrying amount. If, after assessing the totality of events and circumstances, the Company determines it is more likely than not that the fair value of a reporting unit or indefinite-lived intangible asset is greater than its carrying amount, an impairment test is unnecessary. +If an impairment test is necessary, the Company will estimate the fair value of the related reporting unit or indefinite-lived intangible asset. If the carrying value of a reporting unit or indefinite-lived intangible asset exceeds its fair value, the goodwill of that reporting unit or indefinite-lived intangible asset is determined to be impaired and the Company will record an impairment charge equal to the excess of the carrying value over the related fair value. +There were immaterial impairment losses as of May 31, 2024, and no accumulated impairment losses as of May 31, 2023. Additionally, the impact to Goodwill as a result of acquisitions and divestitures during fiscal 2024 and 2023, was immaterial. +OPERATING LEASES +The Company primarily leases retail store space, certain distribution and warehouse facilities, office space, equipment and other non-real estate assets. The Company determines if an arrangement is a lease at inception and begins recording lease activity at the commencement date, which is generally the date in which the Company takes possession of or controls the physical use of the asset. Lease components are not separated from non-lease components for real estate leases within the Company's lease portfolio. Right-of-use ("ROU") assets and lease liabilities are recognized based on the present value of lease payments over the lease term with lease expense recognized on a straight-line basis. The Company's incremental borrowing rate is used to determine the present value of future lease payments unless the implicit rate is readily determinable. +Lease agreements may contain rent escalation clauses, renewal or termination options, rent holidays or certain landlord incentives, including tenant improvement allowances. ROU assets include amounts for scheduled rent increases and are reduced by the amount of lease incentives. The lease term includes the non-cancelable period of the lease and options to extend or terminate the lease when it is reasonably certain the Company will exercise those options. The Company does not record leases with an initial term of 12 months or less on the Consolidated Balance Sheets and recognizes related lease payments in the Consolidated Statements of Income on a straight-line basis over the lease term. Certain lease agreements include variable lease payments, which are based on a percent of retail sales over specified levels or adjust periodically for inflation as a result of changes in a published index, primarily the Consumer Price Index, and are expensed as incurred. +FAIR VALUE MEASUREMENTS +The Company measures certain financial assets and liabilities at fair value on a recurring basis, including derivatives, equity securities and available-for-sale debt securities. Fair value is the price the Company would receive to sell an asset or pay to transfer a liability in an orderly transaction with a market participant at the measurement date. The Company uses a three-level hierarchy that prioritizes fair value measurements based on the types of inputs used, as follows: +2024 FORM 10-K 66 +Table of Contents +• Level 1: Quoted prices in active markets for identical assets or liabilities. +• Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly; these include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active. +• Level 3: Unobservable inputs with little or no market data available, which require the reporting entity to develop its own assumptions. +The Company's assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. Financial assets and liabilities are classified in their entirety based on the most conservative level of input that is significant to the fair value measurement. +Pricing vendors are utilized for a majority of Level 1 and Level 2 investments. These vendors either provide a quoted market price in an active market or use observable inputs without applying significant adjustments in their pricing. Observable inputs include broker quotes, interest rates and yield curves observable at commonly quoted intervals, volatilities and credit risks. The fair value of derivative contracts is determined using observable market inputs such as the daily market foreign currency rates, forward pricing curves, currency volatilities, currency correlations and interest rates and considers nonperformance risk of the Company and its counterparties. +The Company's fair value measurement process includes comparing fair values to another independent pricing vendor to ensure appropriate fair values are recorded. +Refer to Note 4 — Fair Value Measurements for additional information. +FOREIGN CURRENCY TRANSLATION AND FOREIGN CURRENCY TRANSACTIONS +Adjustments resulting from translating foreign functional currency financial statements into U.S. Dollars are included in the foreign currency translation adjustment, a component of Accumulated other comprehensive income (loss). +The Company's global subsidiaries have various monetary assets and liabilities, primarily receivables and payables, which are denominated in currencies other than their functional currency. These balance sheet items are subject to remeasurement, the impact of which is recorded in Other (income) expense, net, within the Consolidated Statements of Income. +ACCOUNTING FOR DERIVATIVES AND HEDGING ACTIVITIES +The Company uses derivative financial instruments to reduce its exposure to changes in foreign currency exchange rates and interest rates. All derivatives are recorded at fair value on the Consolidated Balance Sheets and changes in the fair value of derivative financial instruments are either recognized in Accumulated other comprehensive income (loss), Long-term debt or Net income depending on the nature of the underlying exposure, whether the derivative is formally designated as a hedge and, if designated, the extent to which the hedge is effective. The Company classifies the cash flows at settlement from derivatives in the same category as the cash flows from the related hedged items. For undesignated hedges and designated cash flow hedges, this is primarily within the Cash provided by operations component of the Consolidated Statements of Cash Flows. For designated net investment hedges, this is within the Cash provided by investing activities component of the Consolidated Statements of Cash Flows. For the Company's fair value hedges, which are interest rate swaps used to mitigate the change in fair value of its fixed-rate debt attributable to changes in interest rates, the related cash flows from periodic interest payments are reflected within the Cash provided by operations component of the Consolidated Statements of Cash Flows. +Refer to Note 12 — Risk Management and Derivatives for additional information on the Company's risk management program and derivatives. +STOCK-BASED COMPENSATION +The Company accounts for stock-based compensation by estimating the fair value, net of estimated forfeitures, of equity awards and recognizing the related expense as Cost of sales or Operating overhead expense, as applicable, in the Consolidated Statements of Income on a straight-line basis over the vesting period. Substantially all awards vest ratably over four years of continued employment, with stock options expiring 10 years from the date of grant. Performance-based restricted stock units vest based on the Company's achievement of certain performance criteria throughout the three-year performance period and continued employment through the vesting date. The fair value of options, stock appreciation rights and employees' purchase rights under the employee stock purchase plans ("ESPPs") is determined using the Black-Scholes option pricing model. The fair value of restricted stock and time-vesting restricted stock units is established by the market price on the date of grant. The fair value of performance-based restricted stock units is estimated as of the grant date using a Monte Carlo simulation. +Refer to Note 9 — Common Stock and Stock-Based Compensation for additional information on the Company's stock-based compensation programs. +2024 FORM 10-K 67 +Table of Contents +INCOME TAXES +The Company accounts for income taxes using the asset and liability method. This approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of assets and liabilities. The Company records a valuation allowance to reduce deferred tax assets to the amount management believes is more likely than not to be realized. Realization of deferred tax assets is dependent on future taxable earnings and is therefore uncertain. At least quarterly, the Company assesses taxable income in prior carryback periods, the scheduled reversal of deferred tax liabilities, projected future taxable income and available tax planning strategies. The Company uses forecasts of taxable income and considers foreign tax credit utilization in making this assessment of realization, which are inherently uncertain and can result in variation between estimated and actual results. To the extent the Company believes that recovery is not likely, a valuation allowance is established against the net deferred tax asset, which increases the Company's income tax expense in the period when such determination is made. +The Company recognizes a tax benefit from uncertain tax positions in the consolidated financial statements only when it is more likely than not the position will be sustained upon examination by relevant tax authorities. The Company recognizes interest and penalties related to income tax matters in Income tax expense. +Refer to Note 7 — Income Taxes for further discussion. +EARNINGS PER SHARE +Basic earnings per common share is calculated by dividing Net income by the weighted average number of common shares outstanding during the year. Diluted earnings per common share is calculated by adjusting weighted average outstanding shares, assuming conversion of all potentially dilutive stock options and awards. +Refer to Note 10 — Earnings Per Share for further discussion. +RECENTLY ISSUED ACCOUNTING STANDARDS AND DISCLOSURE RULES +In November 2023, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update ("ASU") 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, which is intended to improve reportable segment disclosure requirements, primarily through enhanced disclosures about significant expenses. The amendments will require public entities to disclose significant segment expenses that are regularly provided to the chief operating decision maker and included within segment profit and loss. The amendments are effective for the Company's annual periods beginning June 1, 2024, and interim periods beginning June 1, 2025, with early adoption permitted, and will be applied retrospectively to all prior periods presented in the financial statements. The Company is currently evaluating the ASU to determine its impact on the Company's disclosures. +In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, which includes amendments that further enhance income tax disclosures, primarily through standardization and disaggregation of rate reconciliation categories and income taxes paid by jurisdiction. The amendments are effective for the Company's annual periods beginning June 1, 2025, with early adoption permitted, and should be applied either prospectively or retrospectively. The Company is currently evaluating the ASU to determine its impact on the Company's disclosures. +In March 2024, the U.S. Securities and Exchange Commission ("SEC") adopted the final rule under SEC Release No. 33-11275, The Enhancement and Standardization of Climate-Related Disclosures for Investors. This rule will require registrants to disclose certain climate-related information in registration statements and annual reports. In April 2024, the SEC voluntarily stayed the final rule as a result of pending legal challenges. The disclosure requirements will apply to the Company's fiscal year beginning June 1, 2025, pending resolution of the stay. The Company is currently evaluating the final rule to determine its impact on the Company's disclosures. +RECENTLY ADOPTED ACCOUNTING STANDARDS +In September 2022, the FASB issued ASU 2022-04, Liabilities — Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations. The new guidance requires qualitative and quantitative disclosure sufficient to enable users of the financial statements to understand the nature, activity during the period, changes from period to period and potential magnitude of such programs. The Company adopted the required guidance in the first quarter of fiscal 2024. +Certain financial institutions offer voluntary supplier finance programs facilitated through a third-party platform that provide participating suppliers the option to finance valid payment obligations from the Company. The Company is not a party to agreements negotiated between participating suppliers and third-party financial institutions. The Company's obligations to its suppliers, including amounts due and payment terms, are not affected by a supplier's decision to participate in these programs and the Company does not provide guarantees to third parties in connection with these programs. As of May 31, 2024 and May 31, 2023, the Company had $ 840 million and $ 834 million, respectively, of outstanding supplier obligations confirmed as +2024 FORM 10-K 68 +Table of Contents +valid under these programs. These amounts are included within Accounts payable on the Consolidated Balance Sheets. +NOTE 2 — PROPERTY, PLANT AND EQUIPMENT +Property, plant and equipment, net included the following: +MAY 31, +(Dollars in millions) +2024 2023 +Land and improvements $ 329 $ 326 +Buildings 3,439 3,293 +Machinery and equipment 3,123 3,083 +Internal-use software 1,807 1,612 +Leasehold improvements 2,023 1,876 +Construction in process 193 525 +Total property, plant and equipment, gross 10,914 10,715 +Less accumulated depreciation 5,914 5,634 +TOTAL PROPERTY, PLANT AND EQUIPMENT, NET $ 5,000 $ 5,081 +Capitalized interest was not material for the fiscal years ended May 31, 2024, 2023 and 2022. +NOTE 3 — ACCRUED LIABILITIES +Accrued liabilities included the following: +MAY 31, +(Dollars in millions) +2024 2023 +Compensation and benefits, excluding taxes $ 1,291 $ 1,737 +Sales-related reserves 1,282 994 +Endorsement compensation 578 552 +Dividends payable 563 529 +Other 2,011 1,911 +Total Accrued Liabilities $ 5,725 $ 5,723 +2024 FORM 10-K 69 +Table of Contents +NOTE 4 — FAIR VALUE MEASUREMENTS +The following tables present information about the Company's financial assets measured at fair value on a recurring basis as of May 31, 2024 and 2023, and indicate the level in the fair value hierarchy in which the Company classifies the fair value measurement. +MAY 31, 2024 +(Dollars in millions) +ASSETS AT FAIR VALUE CASH AND EQUIVALENTS SHORT-TERM INVESTMENTS +Cash $ 1,222 $ 1,222 $ — +Level 1: +U.S. Treasury securities 1,175 155 1,020 +Level 2: +Commercial paper and bonds 591 17 574 +Money market funds 8,119 8,119 — +Time deposits 440 347 93 +U.S. Agency securities 35 — 35 +Total Level 2 9,185 8,483 702 +TOTAL $ 11,582 $ 9,860 $ 1,722 +MAY 31, 2023 +(Dollars in millions) +ASSETS AT FAIR VALUE CASH AND EQUIVALENTS SHORT-TERM INVESTMENTS +Cash $ 1,767 $ 1,767 $ — +Level 1: +U.S. Treasury securities 2,655 — 2,655 +Level 2: +Commercial paper and bonds 543 15 528 +Money market funds 5,157 5,157 — +Time deposits 507 502 5 +U.S. Agency securities 46 — 46 +Total Level 2 6,253 5,674 579 +TOTAL $ 10,675 $ 7,441 $ 3,234 +As of May 31, 2024, the Company held $ 1,002 million of available-for-sale debt securities with maturity dates within one year and $ 720 million with maturity dates over one year and less than five years in Short-term investments on the Consolidated Balance Sheets. The fair value of the Company's available-for-sale debt securities approximates their amortized cost. +Included in Interest expense (income), net was interest income related to the Company's investment portfolio of $ 430 million, $ 297 million and $ 94 million for the years ended May 31, 2024, 2023 and 2022, respectively. +The Company records the assets and liabilities of its derivative financial instruments on a gross basis on the Consolidated Balance Sheets. The Company's derivative financial instruments are subject to master netting arrangements that allow for the offset of assets and liabilities in the event of default or early termination of the contract. Any amounts of cash collateral received related to these instruments associated with the Company's credit-related contingent features are recorded in Cash and equivalents and Accrued liabilities, the latter of which would further offset against the Company's derivative asset balance. Any amounts of cash collateral posted related to these instruments associated with the Company's credit-related contingent features are recorded in Prepaid expenses and other current assets, which would further offset against the Company's derivative liability balance. Cash collateral received or posted related to the Company's credit-related contingent features is presented in the Cash provided by operations component of the Consolidated Statements of Cash Flows. The Company does not recognize amounts of non-cash collateral received, such as securities, on the Consolidated Balance Sheets. For additional information related to credit risk, refer to Note 12 — Risk Management and Derivatives. +2024 FORM 10-K 70 +Table of Contents +The following tables present information about the Company's derivative assets and liabilities measured at fair value on a recurring basis and indicate the level in the fair value hierarchy in which the Company classifies the fair value measurement: +MAY 31, 2024 +DERIVATIVE ASSETS DERIVATIVE LIABILITIES +(Dollars in millions) ASSETS AT FAIR VALUE OTHER CURRENT ASSETS OTHER LONG-TERM ASSETS LIABILITIES AT FAIR VALUE ACCRUED LIABILITIES OTHER LONG-TERM LIABILITIES +Level 2: +Foreign exchange forwards and options (1) +$ 343 $ 299 $ 44 $ 120 $ 115 $ 5 +Interest rate swaps (1) +— — — 31 — 31 +TOTAL +$ 343 $ 299 $ 44 $ 151 $ 115 $ 36 +(1) If the foreign exchange and interest rate swap derivative instruments had been netted on the Consolidated Balance Sheets, the asset and liability positions each would have been reduced by $ 142 million as of May 31, 2024. As of that date, the Company received $ 112 million of cash collateral from various counterparties on the derivative asset balance and posted $ 10 million cash collateral on the derivative liability balance. +MAY 31, 2023 +DERIVATIVE ASSETS DERIVATIVE LIABILITIES +(Dollars in millions) +ASSETS AT FAIR VALUE OTHER CURRENT ASSETS OTHER LONG-TERM ASSETS LIABILITIES AT FAIR VALUE ACCRUED LIABILITIES OTHER LONG-TERM LIABILITIES +Level 2: +Foreign exchange forwards and options (1) +$ 557 $ 493 $ 64 $ 180 $ 128 $ 52 +(1) If the foreign exchange derivative instruments had been netted on the Consolidated Balance Sheets, the asset and liability positions each would have been reduced by $ 178 million as of May 31, 2023. As of that date, the Company had received $ 36 million of cash collateral from various counterparties related to foreign exchange derivative instruments. No amount of collateral was posted on the Company's derivative liability balance as of May 31, 2023. +For additional information related to the Company's derivative financial instruments, refer to Note 12 — Risk Management and Derivatives. For fair value information regarding Notes payable and Long-term debt, refer to Note 5 — Short-Term Borrowings and Credit Lines and Note 6 — Long-Term Debt, respectively. +The carrying amounts of other current financial assets and other current financial liabilities approximate fair value. +2024 FORM 10-K 71 +Table of Contents +NOTE 5 — SHORT-TERM BORROWINGS AND CREDIT LINES +The carrying amounts reflected on the Consolidated Balance Sheets for Notes payable approximate fair value. +On March 11, 2022, the Company entered into a five-year committed credit facility agreement with a syndicate of banks which provides for up to $ 2 billion of borrowings, with the option to increase borrowings up to $ 3 billion in total with lender approval. The facility matures on March 11, 2027, with options to extend the maturity date up to an additional two years . Based on the Company's current long-term senior unsecured debt ratings of AA- and A1 from Standard and Poor's Corporation and Moody's Investor Services, respectively, the interest rate charged on any outstanding borrowings would be the prevailing Term Secured Overnight Financing Rate ("Term SOFR") for the applicable interest period plus 0.60 %. The facility fee is 0.04 % of the total undrawn commitment. +On March 8, 2024, the Company entered into a 364 -day committed credit facility agreement with a syndicate of banks, which provides for up to $ 1 billion of borrowings, with an option to increase borrowings up to $ 1.5 billion in total with lender approval. The facility matures on March 7, 2025, with an option to extend the maturity date an additional 364 days. This facility replaces the prior $ 1 billion 364 -day credit facility agreement entered into on March 10, 2023, which matured on March 8, 2024. Based on the Company's current long-term senior unsecured debt ratings of AA- and A1 from Standard and Poor's Corporation and Moody's Investor Services, respectively, the interest rate charged on any outstanding borrowings would be the prevailing Term SOFR for the applicable interest period plus 0.60 %. The facility fee is 0.02 % of the total undrawn commitment. +As of and for the periods ended May 31, 2024 and 2023, no amounts were outstanding under any of the Company's committed credit facilities. +2024 FORM 10-K 72 +Table of Contents +NOTE 6 — LONG-TERM DEBT +Long-term debt, net of unamortized premiums, discounts, and debt issuance costs, and swap fair value adjustments comprises the following: +BOOK VALUE OUTSTANDING +AS OF MAY 31, +Scheduled Maturity (Dollars in millions) +ORIGINAL PRINCIPAL INTEREST RATE INTEREST PAYMENTS 2024 2023 +Corporate Term Debt: (1)(2) +March 27, 2025 1,000 2.40 % Semi-Annually $ 999 $ 998 +November 1, 2026 1,000 2.38 % Semi-Annually 998 997 +March 27, 2027 1,000 2.75 % Semi-Annually 998 997 +March 27, 2030 1,500 2.85 % Semi-Annually 1,494 1,492 +March 27, 2040 (3) +1,000 3.25 % Semi-Annually 966 987 +May 1, 2043 (3) +500 3.63 % Semi-Annually 488 496 +November 1, 2045 (3) +1,000 3.88 % Semi-Annually 986 986 +November 1, 2046 500 3.38 % Semi-Annually 492 492 +March 27, 2050 1,500 3.38 % Semi-Annually 1,482 1,482 +Total 8,903 8,927 +Less Current Portion of Long-Term Debt 1,000 — +TOTAL LONG-TERM DEBT $ 7,903 $ 8,927 +(1) These senior unsecured obligations rank equally with the Company's other unsecured and unsubordinated indebtedness. +(2) The bonds are redeemable at the Company's option at a price equal to the greater of (i) 100 % of the aggregate principal amount of the notes to be redeemed or (ii) the sum of the present values of the remaining scheduled payments, plus in each case, accrued and unpaid interest. However, the bonds also feature a par call provision, which allows for the bonds to be redeemed at a price equal to 100 % of the aggregate principal amount of the notes being redeemed, plus accrued and unpaid interest on or after the Par Call Date, which can range from one to six months prior to the scheduled maturity, as defined in the respective notes. +(3) The Company entered into interest rate swap agreements pursuant to which the Company receives fixed interest payments at the same rate as the term debt and pays variable interest payments based on SOFR plus a fixed spread. At May 31, 2024, the notional amount outstanding of these swaps was $ 1.8 billion and had interest rates payable that ranged from 4.6 % to 5.1 %. These swaps mature during fiscal 2034. +The scheduled maturity of Long-term debt in each of the years ending May 31, 2025 through 2029, are $ 1,000 million, $ 0 million, $ 2,000 million, $ 0 million and $ 0 million, respectively, at face value. +The Company's Long-term debt is recorded at adjusted cost, net of unamortized premiums, discounts, and debt issuance costs, and swap fair value adjustments. The fair value of long-term debt is estimated based upon quoted prices for similar instruments or quoted prices for identical instruments in inactive markets (Level 2). The fair value of the Company's Long-term debt, including the current portion, was approximately $ 7,631 million and $ 7,889 million as of May 31, 2024 and 2023, respectively. +2024 FORM 10-K 73 +Table of Contents +NOTE 7 — INCOME TAXES +Income before income taxes is as follows: +YEAR ENDED MAY 31, +(Dollars in millions) +2024 2023 2022 +Income before income taxes: +United States $ 5,588 $ 4,663 $ 6,020 +Foreign 1,112 1,538 631 +TOTAL INCOME BEFORE INCOME TAXES $ 6,700 $ 6,201 $ 6,651 +The provision for income taxes is as follows: +YEAR ENDED MAY 31, +(Dollars in millions) +2024 2023 2022 +Current: +United States +Federal $ 782 $ 430 $ 231 +State 201 184 98 +Foreign 514 634 926 +Total Current 1,497 1,248 1,255 +Deferred: +United States +Federal ( 422 ) ( 162 ) ( 522 ) +State ( 61 ) ( 25 ) ( 16 ) +Foreign ( 14 ) 70 ( 112 ) +Total Deferred ( 497 ) ( 117 ) ( 650 ) +TOTAL INCOME TAX EXPENSE $ 1,000 $ 1,131 $ 605 +A reconciliation from the U.S. statutory federal income tax rate to the effective income tax rate is as follows: +YEAR ENDED MAY 31, +2024 2023 2022 +Federal income tax rate 21.0 % 21.0 % 21.0 % +State taxes, net of federal benefit 1.4 % 1.5 % 1.4 % +Foreign earnings - 2.5 % 1.7 % - 1.8 % +Subpart F deferred tax benefit 0.0 % 0.0 % - 4.7 % +Foreign-derived intangible income benefit - 4.8 % - 6.1 % - 4.1 % +Excess tax benefits from stock-based compensation - 0.5 % - 1.1 % - 4.9 % +Income tax audits and contingency reserves 1.8 % 1.0 % 1.5 % +U.S. research and development tax credit - 2.1 % - 1.2 % - 1.0 % +Other, net 0.6 % 1.4 % 1.7 % +EFFECTIVE INCOME TAX RATE 14.9 % 18.2 % 9.1 % +The effective tax rate for the fiscal year ended May 31, 2024 was lower than the effective tax rate for the fiscal year ended May 31, 2023. The decrease in the Company's effective tax rate was primarily due to changes in the Company's earning mix and one-time benefits including the impact of temporary relief provided by the Internal Revenue Service ("IRS") relating to U.S. foreign tax credit regulations. On July 21, 2023, the IRS issued Notice 2023-55 which specifically delayed the application of certain U.S. foreign tax credit regulations that had previously limited the Company's ability to claim credits on certain foreign taxes for the fiscal year ended May 31, 2023. As a result of this new guidance, the Company recognized a one-time tax benefit related to prior year tax positions in the first three months of fiscal 2024. +The effective tax rate for the fiscal year ended May 31, 2023 was higher than the effective tax rate for the fiscal year ended May 31, 2022. The increase was primarily due to decreased benefits from stock-based compensation and the recognition of a non-cash, one-time benefit related to the onshoring of the Company's non-U.S. intangible property in fiscal 2022. During the fourth quarter of fiscal 2022, the Company onshored certain non-U.S. intangible property ownership rights and implemented +2024 FORM 10-K 74 +Table of Contents +changes in the Company's legal entity structure. The tax restructuring increases the possibility that foreign earnings in future periods will be subject to tax in the U.S. due to Subpart F of the Internal Revenue Code. The Company recognized a deferred tax asset and corresponding non-cash deferred income tax benefit of 4.7 %, to establish the deferred tax deduction that is expected to reduce taxable income in future periods. +On August 16, 2022, the U.S. government enacted the Inflation Reduction Act of 2022 that included, among other provisions, changes to the U.S. corporate income tax system, including a fifteen percent minimum tax based on "adjusted financial statement income," which was effective for the Company beginning June 1, 2023. Based on the Company's current analysis of the provisions, these tax law changes did not have a material impact on the Company's Consolidated Financial Statements for fiscal 2024. +Deferred income tax assets and liabilities comprise the following as of: +MAY 31, +(Dollars in millions) +2024 2023 +Deferred tax assets: +Inventories +$ 69 $ 79 +Sales return reserves +125 89 +Deferred compensation +347 321 +Stock-based compensation 290 261 +Reserves and accrued liabilities +113 144 +Operating lease liabilities 474 511 +Intangibles 236 255 +Capitalized research and development expenditures 878 548 +Net operating loss carry-forwards 21 15 +Subpart F deferred tax 409 374 +Other +214 183 +Total deferred tax assets 3,176 2,780 +Valuation allowance ( 29 ) ( 22 ) +Total deferred tax assets after valuation allowance 3,147 2,758 +Deferred tax liabilities: +Foreign withholding tax on undistributed earnings of foreign subsidiaries ( 131 ) ( 186 ) +Property, plant and equipment +( 290 ) ( 276 ) +Right-of-use assets ( 397 ) ( 441 ) +Other +( 9 ) ( 56 ) +Total deferred tax liabilities ( 827 ) ( 959 ) +NET DEFERRED TAX ASSET (1) +$ 2,320 $ 1,799 +(1) Of the total $ 2,320 million net deferred tax asset for the period ended May 31, 2024, $ 2,465 million was included within Deferred income taxes and other assets and $( 145 ) million was included within Deferred income taxes and other liabilities on the Consolidated Balance Sheets. Of the total $ 1,799 million net deferred tax asset for the period ended May 31, 2023, $ 2,026 million was included within Deferred income taxes and other assets and $( 227 ) million was included within Deferred income taxes and other liabilities on the Consolidated Balance Sheets. +Deferred tax assets as of May 31, 2024 and 2023, were reduced by a valuation allowance. For the fiscal years ended May 31, 2024 and 2023, a valuation allowance was provided for U.S. capital loss carryforwards and on tax benefits generated by certain entities with operating losses. +2024 FORM 10-K 75 +Table of Contents +The following is a reconciliation of the changes in the gross balance of unrecognized tax benefits as of: +MAY 31, +(Dollars in millions) +2024 2023 2022 +Unrecognized tax benefits, beginning of the period $ 936 $ 848 $ 896 +Gross increases related to prior period tax positions 35 95 71 +Gross decreases related to prior period tax positions ( 13 ) ( 17 ) ( 145 ) +Gross increases related to current period tax positions 77 50 62 +Settlements ( 22 ) ( 18 ) ( 17 ) +Lapse of statute of limitations ( 24 ) ( 7 ) ( 10 ) +Changes due to currency translation 1 ( 15 ) ( 9 ) +UNRECOGNIZED TAX BENEFITS, END OF THE PERIOD $ 990 $ 936 $ 848 +As of May 31, 2024, total gross unrecognized tax benefits, excluding related interest and penalties, were $ 990 million, of which $ 699 million would affect the Company's effective tax rate if recognized in future periods. The majority of the total gross unrecognized tax benefits are long-term in nature and included within Deferred income taxes and other liabilities on the Consolidated Balance Sheets. +The Company recognizes interest and penalties related to income tax matters in Income tax expense. As of May 31, 2024 and 2023, accrued interest and penalties related to uncertain tax positions were $ 332 million and $ 268 million, respectively (excluding federal benefit) and were included within Deferred income taxes and other liabilities on the Consolidated Balance Sheets. +As of May 31, 2024 and 2023, long-term income taxes payable unrelated to unrecognized tax benefits were $ 266 million and $ 373 million, respectively, and were included within Deferred income taxes and other liabilities on the Consolidated Balance Sheets. +The Company is subject to taxation in the U.S., as well as various state and foreign jurisdictions. The Company is currently under audit by the U.S. IRS for fiscal years 2017 through 2019. The Company has closed all U.S. federal income tax matters through fiscal 2016, with the exception of certain transfer pricing adjustments. Tax years after 2011 remain open in certain major foreign jurisdictions. Although the timing of resolution of audits is not certain, the Company evaluates all domestic and foreign audit issues in the aggregate, along with the expiration of applicable statutes of limitations, and estimates that it is reasonably possible the total gross unrecognized tax benefits could decrease by up to $ 35 million within the next 12 months. +In January 2019, the European Commission opened a formal investigation to examine whether the Netherlands has breached State Aid rules when granting certain tax rulings to the Company. The Company believes the investigation is without merit. If this matter is adversely resolved, the Netherlands may be required to assess additional amounts with respect to prior periods, and the Company's income taxes related to prior periods in the Netherlands could increase. +A portion of the Company's foreign operations benefit from a tax holiday, which is set to expire in 2031. This tax holiday may be extended when certain conditions are met or may be terminated early if certain conditions are not met. The tax benefit attributable to this tax holiday, before taking into consideration other U.S. indirect tax provisions, was $ 338 million, $ 263 million and $ 221 million for the fiscal years ended May 31, 2024, 2023 and 2022, respectively. The benefit of the tax holiday on diluted earnings per common share, before taking into consideration other U.S. indirect tax provisions, was $ 0.22 , $ 0.17 and $ 0.14 for the fiscal years ended May 31, 2024, 2023 and 2022, respectively. +NOTE 8 — REDEEMABLE PREFERRED STOCK +Sojitz America is the sole owner of the Company's authorized redeemable preferred stock, $ 1 par value, which is redeemable at the option of Sojitz America or the Company at par value aggregating $ 0.3 million. A cumulative dividend of $ 0.10 per share is payable annually on May 31, and no dividends may be declared or paid on the common stock of the Company unless dividends on the redeemable preferred stock have been declared and paid in full. There have been no changes in the redeemable preferred stock in the fiscal years ended May 31, 2024, 2023 and 2022. As the holder of the redeemable preferred stock, Sojitz America does not have general voting rights but does have the right to vote as a separate class on the sale of all or substantially all of the assets of the Company and its subsidiaries; on merger, consolidation, liquidation or dissolution of the Company; or on the sale or assignment of the NIKE trademark for athletic footwear sold in the United States. The redeemable preferred stock has been fully issued to Sojitz America and is not blank check preferred stock. The Company's articles of incorporation do not permit the issuance of additional preferred stock. +2024 FORM 10-K 76 +Table of Contents +NOTE 9 — COMMON STOCK AND STOCK-BASED COMPENSATION +COMMON STOCK +The authorized number of shares of Class A Common Stock, no par value, and Class B Common Stock, no par value, are 400 million and 2,400 million, respectively. Each share of Class A Common Stock is convertible into one share of Class B Common Stock. Voting rights of Class B Common Stock are limited in certain circumstances with respect to the election of directors. There are no differences in the dividend and liquidation preferences or participation rights of the holders of Class A and Class B Common Stock. From time to time, the Company's Board of Directors authorizes share repurchase programs for the repurchase of Class B Common Stock. The value of repurchased shares is deducted from Total shareholders' equity through allocation to Capital in excess of stated value and Retained earnings. +STOCK-BASED COMPENSATION +The NIKE, Inc. Stock Incentive Plan (the "Stock Incentive Plan") provides for the issuance of up to 798 million previously unissued shares of Class B Common Stock in connection with equity awards granted under the Stock Incentive Plan. The Stock Incentive Plan authorizes the grant of non-statutory stock options, incentive stock options, stock appreciation rights, and stock awards, including restricted stock and restricted stock units. Restricted stock units include both time-vesting restricted stock units ("RSUs") as well as performance-based restricted stock units ("PSUs"). A committee of the Board of Directors administers the Stock Incentive Plan and has the authority to determine the employees to whom awards will be made, the amount of the awards and the other terms and conditions of the awards. The Company generally grants stock options, restricted stock and restricted stock units on an annual basis. The exercise price for stock options and stock appreciation rights may not be less than the fair market value of the underlying shares on the date of grant. Substantially all awards under the Stock Incentive Plan vest ratably over 4 years of continued employment, with stock options expiring 10 years from the date of grant. +The following table summarizes the Company's total stock-based compensation expense recognized in Cost of sales or Operating overhead expense, as applicable: +YEAR ENDED MAY 31, +(Dollars in millions) +2024 2023 2022 +Stock options (1) +$ 336 $ 311 $ 297 +ESPPs 69 72 60 +Restricted stock and restricted stock units (1)(2) +399 372 281 +TOTAL STOCK-BASED COMPENSATION EXPENSE $ 804 $ 755 $ 638 +(1) Expense for stock options includes the expense associated with stock appreciation rights. +(2) For the fiscal years ended May 31, 2024, 2023 and 2022, expense for restricted stock units includes an immaterial amount of expense for PSUs. +The income tax benefit related to stock-based compensation expense was $ 35 million, $ 71 million and $ 327 million for the fiscal years ended May 31, 2024, 2023 and 2022, respectively, and reported within Income tax expense. +STOCK OPTIONS +The weighted average fair value per share of stock options granted during the fiscal years ended May 31, 2024, 2023 and 2022, computed as of the grant date using the Black-Scholes pricing model, was $ 32.78 , $ 31.31 and $ 37.53 , respectively. The weighted average assumptions used to estimate these fair values were as follows: +YEAR ENDED MAY 31, +2024 2023 2022 +Dividend yield 1.2 % 0.9 % 0.8 % +Expected volatility 29.3 % 27.1 % 24.9 % +Weighted average expected life (in years) 5.8 5.8 5.8 +Risk-free interest rate 4.3 % 3.3 % 0.9 % +Expected volatilities are based on an analysis of the historical volatility of the Company's common stock, the implied volatility in market traded options on the Company's common stock with a term greater than one year , as well as other factors. The weighted average expected life of options is based on an analysis of historical and expected future exercise patterns. The interest rate is based on the U.S. Treasury (constant maturity) risk-free rate in effect at the date of grant for periods corresponding with the expected term of the options. +2024 FORM 10-K 77 +Table of Contents +The following summarizes the stock option transactions under the plan discussed above: +SHARES (1) +WEIGHTED AVERAGE OPTION PRICE +(In millions) +Options outstanding as of May 31, 2023 71.0 $ 94.40 +Exercised ( 7.0 ) 62.46 +Forfeited ( 2.5 ) 117.20 +Granted 12.2 103.08 +Options outstanding as of May 31, 2024 73.7 $ 98.10 +(1) Includes stock appreciation rights transactions. +Options exercisable as of May 31, 2024 were 48.9 million and had a weighted average option price of $ 89.88 per share. The aggregate intrinsic value for options outstanding and exercisable as of May 31, 2024 was $ 732 million and $ 732 million, respectively. The total intrinsic value of the options exercised during the years ended May 31, 2024, 2023 and 2022 was $ 305 million, $ 438 million and $ 1,742 million, respectively. The intrinsic value is the amount by which the market value of the underlying stock exceeds the exercise price of the options. The weighted average contractual life remaining for options outstanding and options exercisable as of May 31, 2024 was 5.5 years and 4.1 years, respectively. As of May 31, 2024, the Company had $ 389 million of unrecognized compensation costs from stock options, net of estimated forfeitures, to be recognized in Cost of sales or Operating overhead expense, as applicable, over a weighted average remaining period of 2.5 years. +EMPLOYEE STOCK PURCHASE PLANS +In addition to the Stock Incentive Plan, the Company gives employees the right to purchase shares at a discount from the market price under ESPPs. Subject to the annual statutory limit, employees are eligible to participate through payroll deductions of up to 10 % of their compensation. At the end of each six-month offering period, shares are purchased by the participants at 85 % of the lower of the fair market value at the beginning or the end of the offering period. Employees purchased 3.1 million, 3.0 million and 2.0 million shares during each of the fiscal years ended May 31, 2024, 2023 and 2022, respectively. +RESTRICTED STOCK AND RESTRICTED STOCK UNITS +Recipients of restricted stock are entitled to cash dividends and to vote their respective shares throughout the period of restriction. Recipients of restricted stock units, which includes RSUs and PSUs, are entitled to dividend equivalent cash payments upon vesting. The number of shares of restricted stock and restricted stock units vested includes shares of common stock withheld by the Company on behalf of employees to satisfy the minimum statutory tax withholding requirements. +The following summarizes the restricted stock and restricted stock units transactions under the plan discussed above: +SHARES (1) +WEIGHTED AVERAGE GRANT DATE +FAIR VALUE +(In millions) +Nonvested as of May 31, 2023 8.3 $ 126.97 +Vested ( 3.3 ) 116.78 +Forfeited ( 1.2 ) 121.79 +Granted 5.3 103.13 +Nonvested as of May 31, 2024 9.1 $ 117.52 +(1) Includes an immaterial amount of PSU transactions +The weighted average fair value per share of restricted stock and restricted stock units granted for the fiscal years ended May 31, 2024, 2023 and 2022, computed as of the grant date, was $ 103.13 , $ 115.56 and $ 168.04 , respectively. During the fiscal years ended May 31, 2024, 2023 and 2022, the aggregate fair value of vested restricted stock and restricted stock units was $ 340 million, $ 250 million and $ 354 million, respectively, computed as of the date of vesting. +As of May 31, 2024, the Company had $ 594 million of unrecognized compensation costs from restricted stock and restricted stock units, net of estimated forfeitures, to be recognized in Cost of sales or Operating overhead expense, as applicable, over a weighted average remaining period of 2.4 years. +2024 FORM 10-K 78 +Table of Contents +NOTE 10 — EARNINGS PER SHARE +The following is a reconciliation from basic earnings per common share to diluted earnings per common share. The computations of diluted earnings per common share exclude restricted stock, restricted stock units and options, including shares under ESPPs, to purchase an estimated additional 41.0 million, 31.7 million and 9.4 million shares of common stock outstanding for the fiscal years ended May 31, 2024, 2023 and 2022, respectively, because the awards were assumed to be anti-dilutive. +YEAR ENDED MAY 31, +(In millions, except per share data) +2024 2023 2022 +Net income available to common stockholders $ 5,700 $ 5,070 $ 6,046 +Determination of shares: +Weighted average common shares outstanding 1,517.6 1,551.6 1,578.8 +Assumed conversion of dilutive stock options and awards 12.1 18.2 32.0 +DILUTED WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 1,529.7 1,569.8 1,610.8 +Earnings per common share: +Basic $ 3.76 $ 3.27 $ 3.83 +Diluted $ 3.73 $ 3.23 $ 3.75 +NOTE 11 — BENEFIT PLANS +The Company has a qualified 401(k) Savings and Profit Sharing Plan, in which all U.S. employees are able to participate. The Company matches a portion of employee contributions to the savings plan. Company contributions to the savings plan were $ 153 million, $ 136 million and $ 126 million and included in Cost of sales or Operating overhead expense, as applicable, for the fiscal years ended May 31, 2024, 2023 and 2022, respectively. +The Company allows certain highly compensated employees and non-employee directors of the Company to defer compensation under a nonqualified deferred compensation plan. A rabbi trust was established to fund the Company's nonqualified deferred compensation plan obligation. The assets in the rabbi trust of approximately $ 1,037 million and $ 875 million as of May 31, 2024 and 2023, respectively, primarily consist of company owned life insurance policies recorded at their cash surrender value and are classified in Deferred income taxes and other assets on the Consolidated Balance Sheets. Deferred compensation plan liabilities were $ 1,063 million and $ 897 million as of May 31, 2024 and 2023, respectively, and primarily classified in Deferred income taxes and other liabilities on the Consolidated Balance Sheets. +NOTE 12 — RISK MANAGEMENT AND DERIVATIVES +The Company is exposed to global market risks, including the effect of changes in foreign currency exchange rates and interest rates, and uses derivatives to manage financial exposures that occur in the normal course of business. The Company does not hold or issue derivatives for trading or speculative purposes. +The Company may elect to designate certain derivatives as hedging instruments under U.S. GAAP. The Company formally documents all relationships between designated hedging instruments and hedged items, as well as its risk management objectives and strategies for undertaking hedge transactions. This process includes linking all derivatives designated as hedges to either recognized assets or liabilities or forecasted transactions and assessing, both at inception and on an ongoing basis, the effectiveness of the hedging relationships. +The majority of derivatives outstanding as of May 31, 2024, are designated as foreign currency cash flow hedges, primarily for Euro/U.S. Dollar, British Pound/Euro, Chinese Yuan/U.S. Dollar and Japanese Yen/U.S. Dollar currency pairs. All derivatives are recognized on the Consolidated Balance Sheets at fair value and classified based on the instrument's maturity date. +The following tables present the fair values of derivative instruments included within the Consolidated Balance Sheets: +2024 FORM 10-K 79 +Table of Contents +DERIVATIVE ASSETS +BALANCE SHEET LOCATION MAY 31, +(Dollars in millions) +2024 2023 +Derivatives formally designated as hedging instruments: +Foreign exchange forwards and options Prepaid expenses and other current assets $ 269 $ 480 +Foreign exchange forwards and options Deferred income taxes and other assets $ 44 $ 64 +Total derivatives formally designated as hedging instruments 313 544 +Derivatives not designated as hedging instruments: +Foreign exchange forwards and options +Prepaid expenses and other current assets 30 13 +Total derivatives not designated as hedging instruments 30 13 +TOTAL DERIVATIVE ASSETS $ 343 $ 557 +DERIVATIVE LIABILITIES +BALANCE SHEET LOCATION MAY 31, +(Dollars in millions) +2024 2023 +Derivatives formally designated as hedging instruments: +Foreign exchange forwards and options Accrued liabilities $ 110 $ 93 +Foreign exchange forwards and options Deferred income taxes and other liabilities 5 52 +Interest rate swaps Deferred income taxes and other liabilities 31 — +Total derivatives formally designated as hedging instruments 146 145 +Derivatives not designated as hedging instruments: +Foreign exchange forwards and options +Accrued liabilities 5 35 +Total derivatives not designated as hedging instruments 5 35 +TOTAL DERIVATIVE LIABILITIES $ 151 $ 180 +2024 FORM 10-K 80 +Table of Contents +The following tables present the amounts affecting the Consolidated Statements of Income for the years ended May 31, 2024, 2023 and 2022: +(Dollars in millions) +AMOUNT OF GAIN (LOSS) +RECOGNIZED IN OTHER +COMPREHENSIVE INCOME (LOSS) ON DERIVATIVES (1) +AMOUNT OF GAIN (LOSS) +RECLASSIFIED FROM ACCUMULATED +OTHER COMPREHENSIVE +INCOME (LOSS) INTO INCOME (1) +YEAR ENDED MAY 31, LOCATION OF GAIN (LOSS) +RECLASSIFIED FROM ACCUMULATED +OTHER COMPREHENSIVE INCOME +(LOSS) INTO INCOME YEAR ENDED MAY 31, +2024 2023 2022 2024 2023 2022 +Derivatives designated as +cash flow hedges: +Foreign exchange forwards +and options +$ ( 66 ) $ 16 $ ( 39 ) Revenues $ ( 24 ) $ 26 $ ( 82 ) +Foreign exchange forwards +and options +231 305 889 Cost of sales 294 581 ( 23 ) +Foreign exchange forwards +and options +3 ( 1 ) ( 6 ) Demand creation expense 2 ( 5 ) 1 +Foreign exchange forwards +and options +102 207 492 Other (income) expense, net 204 338 130 +Interest rate swaps (2) +— — — Interest expense (income), net ( 8 ) ( 8 ) ( 7 ) +Total designated cash +flow hedges +$ 270 $ 527 $ 1,336 $ 468 $ 932 $ 19 +(1) For the fiscal years ended May 31, 2024, 2023, and 2022, the amounts recorded in Other (income) expense, net as a result of the discontinuance of cash flow hedges because the forecasted transactions were no longer probable of occurring were immaterial. +(2) Gains and losses associated with terminated interest rate swaps, which were previously designated as cash flow hedges and recorded in Accumulated other comprehensive income (loss), will be released through Interest expense (income), net over the term of the issued debt. +AMOUNT OF GAIN (LOSS) RECOGNIZED +IN INCOME ON DERIVATIVES +LOCATION OF GAIN (LOSS) +RECOGNIZED IN INCOME +ON DERIVATIVES +YEAR ENDED MAY 31, +(Dollars in millions) +2024 2023 2022 +Derivatives not designated as hedging instruments: +Foreign exchange forwards and options and embedded derivatives $ 24 $ 28 $ 38 Other (income) expense, net +CASH FLOW HEDGES +All changes in fair value of derivatives designated as cash flow hedge instruments are recorded in Accumulated other comprehensive income (loss) until Net income is affected by the variability of cash flows of the hedged transaction. Effective hedge results are classified in the Consolidated Statements of Income in the same manner as the underlying exposure. When it is no longer probable the forecasted hedged transaction will occur in the initially identified time period, hedge accounting is discontinued and the Company accounts for the associated derivative as an undesignated instrument as discussed below. Additionally, the gains and losses associated with derivatives no longer designated as cash flow hedge instruments in Accumulated other comprehensive income (loss) are recognized immediately in Other (income) expense, net, if it is probable the forecasted hedged transaction will not occur by the end of the initially identified time period or within an additional two-month period thereafter. In rare circumstances, the additional period of time may exceed two months due to extenuating circumstances related to the nature of the forecasted transaction that are outside the control or influence of the Company. +The purpose of the Company's foreign exchange risk management program is to lessen both the positive and negative effects of currency fluctuations on the Company's consolidated results of operations, financial position and cash flows. Foreign currency exposures the Company may elect to hedge in this manner include product costs, non-functional currency denominated revenues, intercompany revenues, demand creation expenses, investments in U.S. Dollar denominated available-for-sale debt securities and certain other intercompany transactions. +Product cost foreign currency exposures are primarily generated through non-functional currency denominated product purchases. NIKE entities primarily purchase product in two ways: (1) Certain NIKE entities purchase product from the NIKE Trading Company ("NTC"), a wholly-owned sourcing hub that buys NIKE branded products from third-party factories, predominantly in U.S. Dollars. The NTC, whose functional currency is the U.S. Dollar, then sells the product to NIKE entities in their respective functional currencies. NTC sales to a NIKE entity with a different functional currency result in a foreign currency +2024 FORM 10-K 81 +Table of Contents +exposure for the NTC. (2) Other NIKE entities purchase product directly from third-party factories in U.S. Dollars. These purchases generate a foreign currency exposure for those NIKE entities with a functional currency other than the U.S. Dollar. +The Company's policy permits the utilization of derivatives to reduce its foreign currency exposures where internal netting or other strategies cannot be effectively employed. Typically, the Company may enter into hedge contracts starting up to 12 to 24 months in advance of the forecasted transaction and may place incremental hedges up to 100 % of the exposure by the time the forecasted transaction occurs. The total notional amount of outstanding foreign currency derivatives designated as cash flow hedges was $ 16.2 billion and $ 18.2 billion as of May 31, 2024 and 2023, respectively. +As of May 31, 2024, approximately $ 231 million of deferred net gains (net of tax) on both outstanding and matured derivatives in Accumulated other comprehensive income (loss) are expected to be reclassified to Net income during the next 12 months concurrent with the underlying hedged transactions also being recorded in Net income. Actual amounts ultimately reclassified to Net income are dependent on the exchange rates in effect when derivative contracts currently outstanding mature. As of May 31, 2024, the maximum term over which the Company hedges exposures to the variability of cash flows for its forecasted transactions was 24 months. +FAIR VALUE HEDGES +The Company is exposed to the risk of changes in the fair value of certain fixed-rate debt attributable to changes in interest rates. Derivatives used by the Company to hedge this risk are receive-fixed, pay-variable interest rate swaps which are designated as fair value hedges of the related long-term debt. Changes in the fair values of the interest rate swaps are recorded in Long-term debt or Current portion of long-term debt. The total notional amount of outstanding interest rate swaps designated as fair value hedges was $ 1.8 billion as of May 31, 2024. The Company had no outstanding fair value hedges as of May 31, 2023. +NET INVESTMENT HEDGES +The Company has, in the past, hedged and may, in the future, hedge the risk of variability in foreign currency-denominated net investments in wholly-owned international operations. All changes in fair value of the derivatives designated as net investment hedges are reported in Accumulated other comprehensive income (loss) along with the foreign currency translation adjustments on those investments. The Company had no outstanding net investment hedges as of May 31, 2024 and 2023. +UNDESIGNATED DERIVATIVE INSTRUMENTS +The Company may elect to enter into foreign exchange forwards to mitigate the change in fair value of specific assets and liabilities on the Consolidated Balance Sheets. These undesignated instruments are recorded at fair value as a derivative asset or liability on the Consolidated Balance Sheets with their corresponding change in fair value recognized in Other (income) expense, net, together with the remeasurement gain or loss from the hedged balance sheet position. The total notional amount of outstanding undesignated derivative instruments was $ 4.4 billion and $ 4.7 billion as of May 31, 2024 and 2023, respectively. +CREDIT RISK +The Company is exposed to credit-related losses in the event of nonperformance by counterparties to hedging instruments. The counterparties to all derivative transactions are major financial institutions with investment grade credit ratings; however, this does not eliminate the Company's exposure to credit risk with these institutions. This credit risk is limited to the unrealized gains in such contracts should any of these counterparties fail to perform as contracted. To manage this risk, the Company has established strict counterparty credit guidelines that are continually monitored. +The Company's derivative contracts contain credit risk-related contingent features designed to protect against significant deterioration in counterparties' creditworthiness and their ultimate ability to settle outstanding derivative contracts in the normal course of business. The Company's bilateral credit-related contingent features generally require the owing entity, either the Company or the derivative counterparty, to post collateral for the fair value of outstanding derivatives per counterparty. For certain counterparties, collateral would only be posted for the fair value of outstanding derivatives per counterparty greater than $ 50 million. Additionally, for those counterparties, a certain level of decline in credit rating of either the Company or the counterparty could trigger collateral requirements. As of May 31, 2024, the Company was in compliance with all credit risk-related contingent features. The Company considers the impact of the risk of counterparty default to be immaterial. +For additional information related to the Company's derivative financial instruments and collateral, refer to Note 4 — Fair Value Measurements. +2024 FORM 10-K 82 +Table of Contents +NOTE 13 — ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) +The changes in Accumulated other comprehensive income (loss), net of tax, were as follows: +(Dollars in millions) +FOREIGN CURRENCY TRANSLATION ADJUSTMENT (1) +CASH FLOW HEDGES +NET INVESTMENT HEDGES (1) +OTHER TOTAL +Balance at May 31, 2023 $ ( 253 ) $ 431 $ 115 $ ( 62 ) $ 231 +Other comprehensive income (loss): +Other comprehensive gains (losses) before reclassifications (2) +( 4 ) 239 — 15 250 +Reclassifications to net income of previously deferred (gains) losses (2)(3) +1 ( 423 ) — ( 6 ) ( 428 ) +Total other comprehensive income (loss) ( 3 ) ( 184 ) — 9 ( 178 ) +Balance at May 31, 2024 $ ( 256 ) $ 247 $ 115 $ ( 53 ) $ 53 +(1) The accumulated foreign currency translation adjustment and net investment hedge gains/losses related to an investment in a foreign subsidiary are reclassified to Net income upon sale or upon complete or substantially complete liquidation of the respective entity. +(2) Net of immaterial tax impact. +(3) Reclassifications to net income of previously deferred (gains) losses are recorded within Other (income) expense, net for foreign currency translation adjustment, net investment hedges, and other. +(Dollars in millions) +FOREIGN CURRENCY TRANSLATION ADJUSTMENT (1) +CASH FLOW HEDGES +NET INVESTMENT HEDGES (1) +OTHER TOTAL +Balance at May 31, 2022 $ ( 520 ) $ 779 $ 115 $ ( 56 ) $ 318 +Other comprehensive income (loss): +Other comprehensive gains (losses) before reclassifications (2) +( 91 ) 487 — ( 20 ) 376 +Reclassifications to net income of previously deferred (gains) losses (2)(3) +358 ( 835 ) — 14 ( 463 ) +Total other comprehensive income (loss) 267 ( 348 ) — ( 6 ) ( 87 ) +Balance at May 31, 2023 $ ( 253 ) $ 431 $ 115 $ ( 62 ) $ 231 +(1) The accumulated foreign currency translation adjustment and net investment hedge gains/losses related to an investment in a foreign subsidiary are reclassified to Net income upon sale or upon complete or substantially complete liquidation of the respective entity. +(2) Net of immaterial tax impact. +(3) Reclassifications to net income of previously deferred (gains) losses are recorded within Other (income) expense, net for foreign currency translation adjustment, net investment hedges, and other. +For additional information related to the Company's cash flow hedges refer to Note 12 — Risk Management and Derivatives. +2024 FORM 10-K 83 +Table of Contents +NOTE 14 — REVENUES +DISAGGREGATION OF REVENUES +The following tables present the Company's Revenues disaggregated by reportable operating segment, major product line and distribution channel: +YEAR ENDED MAY 31, 2024 +(Dollars in millions) +NORTH AMERICA EUROPE, MIDDLE EAST & AFRICA GREATER CHINA +ASIA PACIFIC & LATIN AMERICA +GLOBAL BRAND DIVISIONS TOTAL NIKE BRAND CONVERSE CORPORATE TOTAL NIKE, INC. +Revenues by: +Footwear $ 14,537 $ 8,473 $ 5,552 $ 4,865 $ — $ 33,427 $ 1,800 $ — $ 35,227 +Apparel 5,953 4,380 1,828 1,614 — 13,775 93 — 13,868 +Equipment 906 754 165 250 — 2,075 37 — 2,112 +Other — — — — 45 45 152 ( 42 ) 155 +TOTAL REVENUES $ 21,396 $ 13,607 $ 7,545 $ 6,729 $ 45 $ 49,322 $ 2,082 $ ( 42 ) $ 51,362 +Revenues by: +Sales to Wholesale Customers $ 11,004 $ 8,562 $ 4,262 $ 3,930 $ — $ 27,758 $ 1,098 $ — $ 28,856 +Sales through Direct to Consumer 10,392 5,045 3,283 2,799 — 21,519 832 — 22,351 +Other — — — — 45 45 152 ( 42 ) 155 +TOTAL REVENUES $ 21,396 $ 13,607 $ 7,545 $ 6,729 $ 45 $ 49,322 $ 2,082 $ ( 42 ) $ 51,362 +YEAR ENDED MAY 31, 2023 +(Dollars in millions) +NORTH AMERICA EUROPE, MIDDLE EAST & AFRICA GREATER CHINA +ASIA PACIFIC & LATIN AMERICA (1) +GLOBAL BRAND DIVISIONS TOTAL NIKE BRAND CONVERSE CORPORATE TOTAL NIKE, INC. +Revenues by: +Footwear $ 14,897 $ 8,260 $ 5,435 $ 4,543 $ — $ 33,135 $ 2,155 $ — $ 35,290 +Apparel 5,947 4,566 1,666 1,664 — 13,843 90 — 13,933 +Equipment 764 592 147 224 — 1,727 28 — 1,755 +Other — — — — 58 58 154 27 239 +TOTAL REVENUES $ 21,608 $ 13,418 $ 7,248 $ 6,431 $ 58 $ 48,763 $ 2,427 $ 27 $ 51,217 +Revenues by: +Sales to Wholesale Customers $ 11,273 $ 8,522 $ 3,866 $ 3,736 $ — $ 27,397 $ 1,299 $ — $ 28,696 +Sales through Direct to Consumer 10,335 4,896 3,382 2,695 — 21,308 974 — 22,282 +Other — — — — 58 58 154 27 239 +TOTAL REVENUES $ 21,608 $ 13,418 $ 7,248 $ 6,431 $ 58 $ 48,763 $ 2,427 $ 27 $ 51,217 +(1) Refer to Note 18 — Divestitures for additional information on the transition of the Company's NIKE Brand businesses in its CASA territory to third-party distributors. +2024 FORM 10-K 84 +Table of Contents +YEAR ENDED MAY 31, 2022 +(Dollars in millions) +NORTH AMERICA EUROPE, MIDDLE EAST & AFRICA GREATER CHINA +ASIA PACIFIC & LATIN AMERICA +GLOBAL BRAND DIVISIONS TOTAL NIKE BRAND CONVERSE CORPORATE TOTAL NIKE, INC. +Revenues by: +Footwear $ 12,228 $ 7,388 $ 5,416 $ 4,111 $ — $ 29,143 $ 2,094 $ — $ 31,237 +Apparel 5,492 4,527 1,938 1,610 — 13,567 103 — 13,670 +Equipment 633 564 193 234 — 1,624 26 — 1,650 +Other — — — — 102 102 123 ( 72 ) 153 +TOTAL REVENUES $ 18,353 $ 12,479 $ 7,547 $ 5,955 $ 102 $ 44,436 $ 2,346 $ ( 72 ) $ 46,710 +Revenues by: +Sales to Wholesale Customers $ 9,621 $ 8,377 $ 4,081 $ 3,529 $ — $ 25,608 $ 1,292 $ — $ 26,900 +Sales through Direct to Consumer 8,732 4,102 3,466 2,426 — 18,726 931 — 19,657 +Other — — — — 102 102 123 ( 72 ) 153 +TOTAL REVENUES $ 18,353 $ 12,479 $ 7,547 $ 5,955 $ 102 $ 44,436 $ 2,346 $ ( 72 ) $ 46,710 +Global Brand Divisions revenues included NIKE Brand licensing and other miscellaneous revenues that are not part of a geographic operating segment. Converse Other revenues were primarily attributable to licensing businesses. Corporate revenues primarily consisted of foreign currency hedge gains and losses related to revenues generated by entities within the NIKE Brand geographic operating segments and Converse but managed through the Company's central foreign exchange risk management program. +As of May 31, 2024 and 2023, the Company did not have any contract assets and had an immaterial amount of contract liabilities recorded in Accrued liabilities on the Consolidated Balance Sheets. +SALES-RELATED RESERVES +As of May 31, 2024 and 2023, the Company's sales-related reserve balance, which includes returns, post-invoice sales discounts and miscellaneous claims, was $ 1,282 million and $ 994 million, respectively, recorded in Accrued liabilities on the Consolidated Balance Sheets. The estimated cost of inventory for expected product returns was $ 331 million and $ 226 million as of May 31, 2024 and 2023, respectively, and was recorded in Prepaid expenses and other current assets on the Consolidated Balance Sheets. +2024 FORM 10-K 85 +Table of Contents +NOTE 15 — OPERATING SEGMENTS AND RELATED INFORMATION +The Company's operating segments reflect the structure of the Company's internal organization. The NIKE Brand segments are defined by geographic regions for operations participating in NIKE Brand sales activity. +Each NIKE Brand geographic segment operates predominantly in one industry: the design, development, marketing and selling of athletic footwear, apparel and equipment. The Company's reportable operating segments for the NIKE Brand are: North America; Europe, Middle East & Africa ("EMEA"); Greater China; and Asia Pacific & Latin America ("APLA"), and include results for the NIKE and Jordan brands. Refer to Note 18 — Divestitures for information regarding the transition of NIKE Brand businesses in certain countries within APLA to third-party distributors. +The Company's NIKE Direct operations are managed within each NIKE Brand geographic operating segment. Converse is also a reportable segment for the Company and operates in one industry: the design, marketing, licensing and selling of athletic lifestyle sneakers, apparel and accessories. +Global Brand Divisions is included within the NIKE Brand for presentation purposes to align with the way management views the Company. Global Brand Divisions revenues include NIKE Brand licensing and other miscellaneous revenues that are not part of a geographic operating segment. Global Brand Divisions costs represent demand creation and operating overhead expense that include product creation and design expenses centrally managed for the NIKE Brand, as well as costs associated with NIKE Direct global digital operations and enterprise technology. +Corporate consists primarily of unallocated general and administrative expenses, including expenses associated with centrally managed departments; depreciation and amortization related to the Company's headquarters; unallocated insurance, benefit and compensation programs, including stock-based compensation; and certain foreign currency gains and losses, including certain hedge gains and losses. +The primary financial measure used by the Company to evaluate performance of individual operating segments is earnings before interest and taxes ("EBIT"), which represents Net income before Interest expense (income), net and Income tax expense in the Consolidated Statements of Income. +As part of the Company's centrally managed foreign exchange risk management program, standard foreign currency rates are assigned twice per year to each NIKE Brand entity in the Company's geographic operating segments and to Converse. These rates are set approximately nine and twelve months in advance of the future selling seasons to which they relate (specifically, for each currency, one standard rate applies to the fall and holiday selling seasons, and one standard rate applies to the spring and summer selling seasons) based on average market spot rates in the calendar month preceding the date they are established. Inventories and Cost of sales for geographic operating segments and Converse reflect the use of these standard rates to record non-functional currency product purchases in the entity's functional currency. Differences between assigned standard foreign currency rates and actual market rates are included in Corporate, together with foreign currency hedge gains and losses generated from the Company's centrally managed foreign exchange risk management program and other conversion gains and losses. +Accounts receivable, net, Inventories and Property, plant and equipment, net for operating segments are regularly reviewed by management and are therefore provided below. +2024 FORM 10-K 86 +Table of Contents +YEAR ENDED MAY 31, +(Dollars in millions) +2024 2023 2022 +REVENUES +North America $ 21,396 $ 21,608 $ 18,353 +Europe, Middle East & Africa 13,607 13,418 12,479 +Greater China 7,545 7,248 7,547 +Asia Pacific & Latin America 6,729 6,431 5,955 +Global Brand Divisions 45 58 102 +Total NIKE Brand 49,322 48,763 44,436 +Converse 2,082 2,427 2,346 +Corporate ( 42 ) 27 ( 72 ) +TOTAL NIKE, INC. REVENUES $ 51,362 $ 51,217 $ 46,710 +EARNINGS BEFORE INTEREST AND TAXES +North America $ 5,822 $ 5,454 $ 5,114 +Europe, Middle East & Africa 3,388 3,531 3,293 +Greater China 2,309 2,283 2,365 +Asia Pacific & Latin America 1,885 1,932 1,896 +Global Brand Divisions ( 4,720 ) ( 4,841 ) ( 4,262 ) +Converse 474 676 669 +Corporate ( 2,619 ) ( 2,840 ) ( 2,219 ) +Interest expense (income), net ( 161 ) ( 6 ) 205 +TOTAL NIKE, INC. INCOME BEFORE INCOME TAXES $ 6,700 $ 6,201 $ 6,651 +ADDITIONS TO PROPERTY, PLANT AND EQUIPMENT +North America $ 102 $ 283 $ 146 +Europe, Middle East & Africa 206 215 197 +Greater China 27 56 78 +Asia Pacific & Latin America 75 64 56 +Global Brand Divisions 233 271 222 +Total NIKE Brand 643 889 699 +Converse 7 7 9 +Corporate 72 140 103 +TOTAL ADDITIONS TO PROPERTY, PLANT AND EQUIPMENT $ 722 $ 1,036 $ 811 +DEPRECIATION +North America $ 152 $ 128 $ 124 +Europe, Middle East & Africa 146 120 134 +Greater China 56 54 41 +Asia Pacific & Latin America 51 42 42 +Global Brand Divisions 236 211 220 +Total NIKE Brand 641 555 561 +Converse 17 17 22 +Corporate 138 131 134 +TOTAL DEPRECIATION $ 796 $ 703 $ 717 +2024 FORM 10-K 87 +Table of Contents +AS OF MAY 31, +(Dollars in millions) +2024 2023 +ACCOUNTS RECEIVABLE, NET +North America $ 1,723 $ 1,653 +Europe, Middle East & Africa 1,239 1,197 +Greater China 327 162 +Asia Pacific & Latin America +792 700 +Global Brand Divisions 103 96 +Total NIKE Brand 4,184 3,808 +Converse 201 235 +Corporate 42 88 +TOTAL ACCOUNTS RECEIVABLE, NET $ 4,427 $ 4,131 +INVENTORIES +North America $ 3,134 $ 3,806 +Europe, Middle East & Africa 2,028 2,167 +Greater China 1,070 973 +Asia Pacific & Latin America +810 894 +Global Brand Divisions 166 232 +Total NIKE Brand 7,208 8,072 +Converse 296 305 +Corporate 15 77 +TOTAL INVENTORIES $ 7,519 $ 8,454 +PROPERTY, PLANT AND EQUIPMENT, NET +North America $ 744 $ 794 +Europe, Middle East & Africa 1,089 1,009 +Greater China 258 292 +Asia Pacific & Latin America +282 279 +Global Brand Divisions 842 840 +Total NIKE Brand 3,215 3,214 +Converse 27 38 +Corporate 1,758 1,829 +TOTAL PROPERTY, PLANT AND EQUIPMENT, NET $ 5,000 $ 5,081 +REVENUES AND LONG-LIVED ASSETS BY GEOGRAPHIC AREA +After allocation of revenues for Global Brand Divisions, Converse and Corporate to geographical areas based on the location where the sales originated, revenues by geographical area are similar to that as reported above for the NIKE Brand operating segments with the exception of the United States. Revenues derived in the United States were $ 21,551 million, $ 22,007 million and $ 18,749 million for the fiscal years ended May 31, 2024, 2023 and 2022, respectively. +The Company's largest concentrations of long-lived assets primarily consist of the Company's corporate headquarters, retail locations and distribution facilities in the United States and China, as well as distribution facilities in Belgium. Long-lived assets attributable to operations in these countries, which consist of property, plant and equipment, net and operating lease ROU assets, net, were as follows: +MAY 31, +(Dollars in millions) +2024 2023 +United States $ 4,837 $ 5,129 +Belgium 757 702 +China 501 559 +Other +1,623 1,614 +TOTAL LONG-LIVED ASSETS +$ 7,718 $ 8,004 +2024 FORM 10-K 88 +Table of Contents +NOTE 16 — COMMITMENTS AND CONTINGENCIES +As of May 31, 2024 and 2023, the Company had bank guarantees and letters of credit outstanding totaling $ 768 million and $ 588 million, respectively, issued primarily for real estate agreements, self-insurance programs, other general business obligations and legal matters. +In connection with various contracts and agreements, the Company provides routine indemnification relating to the enforceability of intellectual property rights, coverage for legal issues that arise and other items where the Company is acting as the guarantor. Currently, the Company has several such agreements in place. However, based on the Company's historical experience and the estimated probability of future loss, the Company has determined the fair value of such indemnification is not material to the Company's financial position or results of operations. +In the ordinary course of business, the Company is subject to various legal proceedings, claims and government investigations relating to its business, products and actions of its employees and representatives, including contractual and employment relationships, product liability, antitrust, customs, tax, intellectual property and other matters. The outcome of these legal matters is inherently uncertain, and the Company cannot predict the eventual outcome of currently pending matters, the timing of their ultimate resolution or the eventual losses, fines, penalties or consequences relating to those matters. When a loss related to a legal proceeding or claim is probable and reasonably estimable, the Company accrues its best estimate for the ultimate resolution of the matter. If one or more legal matters were to be resolved against the Company in a reporting period for amounts above management's expectations, the Company's financial position, operating results and cash flows for that reporting period could be materially adversely affected. In the opinion of management, based on its current knowledge and after consultation with counsel, the Company does not believe any currently pending legal matters will have a material adverse impact on the Company's results of operations, financial position or cash flows, except as described below. +BELGIAN CUSTOMS CLAIM +The Company has received claims for certain years from Belgian Customs and other government authorities for alleged underpaid duties related to products imported beginning in fiscal 2018. The Company disputes these claims and has engaged in the appellate process. The Company has issued bank guarantees in order to appeal the claims. At this time, the Company is unable to estimate the range of loss and cannot predict the final outcome as it could take several years to reach a resolution on this matter. If this matter is ultimately resolved against the Company, the amounts owed, including fines, penalties and other consequences relating to the matter, could have a material adverse effect on the Company's results of operations, financial position and cash flows. +NOTE 17 — LEASES +Lease expense is recognized in Cost of sales or Operating overhead expense within the Consolidated Statements of Income, based on the underlying nature of the leased asset. For the fiscal years ended May 31, 2024, 2023 and 2022, lease expense primarily consisted of operating lease costs of $ 618 million, $ 585 million and $ 593 million, respectively, as well as $ 433 million, $ 403 million and $ 366 million, respectively, primarily related to variable lease costs. As of and for the fiscal years ended May 31, 2024 and 2023 and 2022, finance leases were not a material component of the Company's lease portfolio. +The undiscounted cash flows for future maturities of the Company's operating lease liabilities and the reconciliation to the Operating lease liabilities recognized in the Company's Consolidated Balance Sheets are as follows: +(Dollars in millions) +AS OF MAY 31, 2024 (1) +Fiscal 2025 $ 572 +Fiscal 2026 554 +Fiscal 2027 485 +Fiscal 2028 403 +Fiscal 2029 362 +Thereafter 991 +Total undiscounted future cash flows related to lease payments $ 3,367 +Less interest 324 +Present value of lease liabilities $ 3,043 +(1) Excludes $ 614 million as of May 31, 2024, of future operating lease payments for lease agreements signed but not yet commenced. +2024 FORM 10-K 89 +Table of Contents +The following table includes supplemental information used to calculate the present value of Operating lease liabilities: +AS OF MAY 31, +2024 2023 +Weighted-average remaining lease term (in years) 6.9 7.5 +Weighted-average discount rate 2.9 % 2.5 % +The following table includes supplemental cash and non-cash information related to operating leases: +YEAR ENDED MAY 31, +(Dollars in millions) +2024 2023 2022 +Cash paid for amounts included in the measurement of lease liabilities: +Operating cash flows from operating leases $ 613 $ 575 $ 589 +Operating lease right-of-use assets obtained in exchange for new operating lease liabilities $ 458 $ 602 $ 537 +NOTE 18 — DIVESTITURES +During the second quarter of fiscal 2023, the sale of the Company's entities in Argentina and Uruguay to a third-party distributor was completed and the net loss on the sale of these entities totaled approximately $ 550 million. This loss included $ 389 million, recognized primarily in fiscal 2020, largely due to the anticipated release of the cumulative foreign currency translation losses. The remaining loss recognized in fiscal 2023 was due to the devaluation of local currency and cash equivalents included in the transferred assets. Upon completion of the sale, the foreign currency translation losses recorded in Accumulated other comprehensive income (loss) were reclassified to Net income within Other (income) expense, net, on the Company's Consolidated Statements of Comprehensive Income along with the allowance for previously recognized losses recorded in Accrued liabilities. The net loss was classified within Corporate. +The net cash proceeds received are reflected within Other investing activities on the Company's Consolidated Statements of Cash Flows. +2024 FORM 10-K 90 +Table of Contents +NOTE 19 — RESTRUCTURING +During the third quarter of fiscal 2024, the Company announced a multi-year enterprise initiative designed to accelerate its future growth. As part of this initiative, management has taken steps to streamline the organization which resulted in a net reduction in the Company's global workforce. As of May 31, 2024, the Company expects to recognize pre-tax restructuring charges of approximately $ 450 million, primarily associated with employee severance costs and accelerated stock-based compensation expense, the majority of which were recognized in fiscal 2024. The related cash payments are expected to be substantially complete by the end of the first half of fiscal 2025. The expected pre-tax charges are estimates and are subject to a number of assumptions and actual results may vary from the estimates provided. +Pre-tax restructuring charges were classified within Corporate as follows: +TWELVE MONTHS ENDED MAY 31, 2024 +(Dollars in millions) +OPERATING OVERHEAD EXPENSE +COST OF SALES +TOTAL +Employee severance and related costs (1) +$ 336 $ 56 $ 392 +Stock-based compensation expense (2) +43 8 51 +Total pre-tax restructuring charges $ 379 $ 64 $ 443 +(1) Employee severance costs are recognized when a future related expense is considered probable and reasonably estimable. +(2) Non-cash restructuring related stock-based compensation expense is accelerated over the requisite service period, which for certain impacted employees will extend through the first half of fiscal 2025. +As of May 31, 2024, the majority of the remaining employee severance and related costs are reflected within Accrued liabilities on the Consolidated Balance Sheets, classified within Other in Note 3 — Accrued Liabilities. The related activity is as follows: +(Dollars in millions) +Balance at May 31, 2023 $ — +Employee severance and related costs +392 +Cash payments ( 123 ) +Foreign currency translation and other ( 2 ) +Balance at May 31, 2024 $ 267 +2024 FORM 10-K 91 +Table of Contents +ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE +There has been no change of accountants nor any disagreements with accountants on any matter of accounting principles or practices or financial statement disclosure required to be reported under this Item. +ITEM 9A. CONTROLS AND PROCEDURES +We maintain disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in our Securities Exchange Act of 1934, as amended (the "Exchange Act"), reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. +We carry out a variety of ongoing procedures, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, to evaluate the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of May 31, 2024. +"Management's Annual Report on Internal Control Over Financial Reporting" is included in Item 8 of this Annual Report. +We are continuing several transformation initiatives to centralize and simplify our business processes and systems. These are long-term initiatives, which we believe will enhance our internal control over financial reporting due to increased automation and further integration of related processes. We will continue to monitor our internal control over financial reporting for effectiveness throughout these transformation initiatives. +There have not been any changes in our internal control over financial reporting during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. +ITEM 9B. OTHER INFORMATION +Rule 10b5-1 Trading Plans +During the fiscal quarter ended May 31, 2024, none of our directors or officers (as defined in Rule 16a-1 under the Exchange Act) adopted or terminated a "Rule 10b5-1 trading arrangement" or "non-Rule 10b5-1 trading arrangement" (as those terms are defined in Item 408 of Regulation S-K). +ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS +Not applicable. +2024 FORM 10-K 92 +Table of Contents +PART III +ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE +The information required by Item 401 of Regulation S-K regarding directors is included under "Corporate Governance — NIKE, Inc. Board of Directors" in the definitive Proxy Statement for our 2024 Annual Meeting of Shareholders and is incorporated herein by reference. The information required by Item 401 of Regulation S-K regarding executive officers is included under "Information about our Executive Officers" in Item 1 of this Annual Report. The information required by Item 406 of Regulation S-K is included under "Corporate Governance — Code of Conduct" in the definitive Proxy Statement for our 2024 Annual Meeting of Shareholders and is incorporated herein by reference. The information required by Items 407(d)(4) and (d)(5) of Regulation S-K regarding the Audit & Finance Committee of the Board of Directors is included under "Corporate Governance — Board Structure and Responsibilities — Board Committees" in the definitive Proxy Statement for our 2024 Annual Meeting of Shareholders and is incorporated herein by reference. The information required by Item 408(b)(1) of Regulation S-K regarding our insider trading policies is included under "Additional Information — Insider Trading Arrangements and Policies" in the definitive Proxy Statement for our 2024 Annual Meeting of Shareholders and is incorporated herein by reference. +ITEM 11. EXECUTIVE COMPENSATION +The information required by Items 402, 407(e)(4) and 407(e)(5) of Regulation S-K regarding executive compensation is included under "Corporate Governance — Director Compensation for Fiscal 2024," "Executive Compensation — Compensation Discussion and Analysis," "Executive Compensation — Executive Compensation Tables," and "Additional Information — Compensation Committee Interlocks and Insider Participation," in the definitive Proxy Statement for our 2024 Annual Meeting of Shareholders and is incorporated herein by reference. +ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS +The information required by Item 201(d) of Regulation S-K is included under "Executive Compensation — Executive Compensation Tables — Equity Compensation Plan Information" in the definitive Proxy Statement for our 2024 Annual Meeting of Shareholders and is incorporated herein by reference. The information required by Item 403 of Regulation S-K is included under "Stock Ownership Information — Stock Holdings of Certain Owners and Management" in the definitive Proxy Statement for our 2024 Annual Meeting of Shareholders and is incorporated herein by reference. +ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE +The information required by Items 404 and 407(a) of Regulation S-K is included under "Additional Information — Transactions with Related Persons" and "Corporate Governance — NIKE, Inc. Board of Directors — Director Independence" in the definitive Proxy Statement for our 2024 Annual Meeting of Shareholders and is incorporated herein by reference. +ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES +The information required by Item 9(e) of Schedule 14A is included under "Audit Matters — Ratification of Appointment of Independent Registered Public Accounting Firm" in the definitive Proxy Statement for our 2024 Annual Meeting of Shareholders and is incorporated herein by reference. +2024 FORM 10-K 93 +Table of Contents +PART IV +ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES +(a) The following documents are filed as part of this Annual Report: +FORM 10-K PAGE NO. +1. Financial Statements: +Report of Independent Registered Public Accounting Firm (PCAOB ID 238 ) +55 +Consolidated Statements of Income for each of the three years ended May 31, 2024 , May 31, 2023, and May 31, 2022 +57 +Consolidated Statements of Comprehensive Income for each of the three years ended May 31, 2024 , May 31, 2023, and May 31, 2022 +58 +Consolidated Balance Sheets at May 31, 2024 and May 31, 2023 +59 +Consolidated Statements of Cash Flows for each of the three years ended May 31, 2024 , May 31, 2023, and May 31, 2022 +60 +Consolidated Statements of Shareholders' Equity for each of the three years ended May 31, 2024 , May 31, 2023, and May 31, 2022 +61 +Notes to Consolidated Financial Statements +62 +2. Financial Statement Schedule: +II — Valuation and Qualifying Accounts for the years ended May 31, 2024, 2023 and 2022 +97 +All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. +3. Exhibits: +3.1 +Restated Articles of Incorporation, as amended (incorporated by reference to Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended November 30, 2015). +3.2 +Fifth Restated Bylaws, as amended (incorporated by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K filed June 19, 2020). +4.1 +Restated Articles of Incorporation, as amended (see Exhibit 3.1). +4.2 +Fifth Restated Bylaws, as amended (see Exhibit 3.2). +4.3 +Indenture dated as of April 26, 2013, by and between NIKE, Inc. and Deutsche Bank Trust Company Americas, as trustee (incorporated by reference to Exhibit 4.1 to the Company's Form 8-K filed April 26, 2013). +4.4 +Second Supplemental Indenture, dated as of October 29, 2015, by and between NIKE, Inc. and Deutsche Bank Trust Company Americas, as trustee, including the form of 3.875% Notes due 2045 (incorporated by reference to Exhibit 4.2 to the Company's Form 8-K filed October 29, 2015). +4.5 +Third Supplemental Indenture, dated as of October 21, 2016, by and between NIKE, Inc. and Deutsche Bank Trust Company Americas, as trustee, including the form of 2.375% Notes due 2026 and form of 3.375% Notes due 2046 (incorporated by reference to Exhibit 4.2 to the Company's Form 8-K filed October 21, 2016). +4.6 +Fourth Supplemental Indenture, dated as of March 27, 2020, by and between NIKE, Inc. and Deutsche Bank Trust Company Americas, as trustee, including the form of 2.400% Notes due 2025, form of 2.750% Notes due 2027, form of 2.850% Notes due 2030, form of 3.250% Notes due 2040 and form of 3.375% Notes due 2050 (incorporated by reference to Exhibit 4.2 to the Company's Form 8-K filed March 27, 2020). +4.7 +Description of Registrants Securities (incorporated by reference to Exhibit 4.6 to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 2019). +10.1 +Form of Restricted Stock Agreement for non-employee directors under the Stock Incentive Plan (incorporated by reference to Exhibit 10.4 to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 2014).* +10.2 +Form of Non-Statutory Stock Option Agreement for options granted to executives under the Stock Incentive Plan (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended February 28, 2018).* +10.3 +Form of Indemnity Agreement entered into between the Company and each of its officers and directors (incorporated by reference to Exhibit 10.2 to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 2008).* +10.4 +NIKE, Inc. Deferred Compensation Plan (Amended and Restated effective April 1, 2013) (incorporated by reference to Exhibit 10.9 to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 2013).* +2024 FORM 10-K 94 +Table of Contents +10.5 +NIKE, Inc. Foreign Subsidiary Employee Stock Purchase Plan (incorporated by reference to Exhibit 10. 2 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended November 30, 20 23 ).* +10.6 +Amended and Restated Covenant Not to Compete and Non-Disclosure Agreement between NIKE, Inc. and Mark G. Parker dated July 24, 2008 (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed July 24, 2008).* +10.7 +Form of Restricted Stock Unit Agreement under the Stock Incentive Plan (incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended February 28, 2018).* +10.8 +Form of Covenant Not to Compete and Non-Disclosure Agreement between NIKE, Inc. and its executive officers (other than Mark G. Parker and John J. Donahoe II) (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed February 18, 2020).* +10.9 +NIKE, Inc. Stock Incentive Plan (incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K filed September 23, 2015).* +10.10 +Form of Discretionary Performance Award Agreement (incorporated by reference to Exhibit 10.22 to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 2018).* +10.11 +NIKE, Inc. Amended and Restated Long-Term Incentive Plan (incorporated by reference to Exhibit A to the Company's definitive Proxy Statement filed July 25, 2017).* +10.12 +Offer Letter between NIKE, Inc. and John J. Donahoe II (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed October 22, 2019).* +10.13 +Form of Covenant Not to Compete and Non-Disclosure Agreement between NIKE, Inc. and John J. Donahoe II (incorporated by reference to Exhibit 10.3 to the Company's Current Report on Form 8-K filed October 22, 2019).* +10.14 +Form of Performance-Based Stock Option Agreement (incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K filed October 22, 2019). +10.15 +Letter Agreement between NIKE, Inc. and Mark G. Parker (incorporated by reference to Exhibit 10.6 to the Company's Current Report on Form 8-K filed October 22, 2019).* +10.16 +NIKE, Inc. Executive Performance Sharing Plan (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed June 19, 2020).* +10.17 +NIKE, Inc. Amended and Restated Long-Term Incentive Plan (incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K filed June 19, 2020).* +10.18 +Form of Non-Statutory Stock Option Agreement under the NIKE, Inc. Stock Incentive Plan (incorporated by reference to Exhibit 10.3 to the Company's Current Report on Form 8-K filed June 19, 2020).* +10.19 +Form of Restricted Stock Unit Agreement under the NIKE, Inc. Stock Incentive Plan (incorporated by reference to Exhibit 10.4 to the Company's Current Report on Form 8-K filed June 19, 2020).* +10.20 +NIKE, Inc. Stock Incentive Plan (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed September 18, 2020).* +10.21 +NIKE, Inc. Performance-Based Restricted Stock Unit Agreement under the NIKE, Inc. Stock Incentive Plan (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on June 17, 2021) .* +10.22 +Credit Agreement, dated as of March 11, 2022, among NIKE, Inc., Bank of America, N.A., as Administrative Agent, and the other Banks named therein (incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K filed March 14, 2022). +10.23 +NIKE, Inc. Employee Stock Purchase Plan, as amended (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended November 30, 2023 ). * +10.24 +Cre dit Agreement, dated as of March 8 , 202 4 , among NIKE, Inc., Bank of America, N.A., as Administrative Agent, and the other Banks named therein (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed March 1 1 , 202 4 ). +10.25 +Separation and Release Agreement between NIKE, Inc. and Andrew Campion dated January 3, 2024 (incorporated by reference to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended November 30, 2023).* +10.26 +F orm of Stock Option Agreement under the NIKE, Inc. Stock In centive Plan .* +10.27 +F orm of Restricted Stock Unit A greement un der the NIKE, Inc. Stock Incentive Plan .* +10.28 +F o rm of Performance-Based R estricted Stock Unit Agreement under the NIKE , I nc. Stock Incentive Plan.* +19.1 +NIKE, Inc. Insider Trading Policy . +19.2 +NIKE, Inc. Blackout and Pre-clearance Policy . +21 +Subsidiaries of the Registrant. +23 +Consent of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm (included within this Annual Report on Form 10-K). +31.1 +Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer. +31.2 +Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer. +32† +Section 1350 Certifications. +97 +NIKE, Inc . Policy for Recoupment o f Incen tive Compensation.* +101.INS Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. +101.SCH Inline XBRL Taxonomy Extension Schema +2024 FORM 10-K 95 +Table of Contents +101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase +101.DEF Inline XBRL Taxonomy Extension Definition Document +101.LAB Inline XBRL Taxonomy Extension Label Linkbase +101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase +104 Cover Page Interactive Data File - formatted in Inline XBRL and included in Exhibit 101 +* Management contract or compensatory plan or arrangement. +† Furnished herewith +The Exhibits filed herewith do not include certain instruments with respect to long-term debt of NIKE and its subsidiaries, inasmuch as the total amount of debt authorized under any such instrument does not exceed 10 percent of the total assets of NIKE and its subsidiaries on a consolidated basis. NIKE agrees, pursuant to Item 601(b)(4)(iii) of Regulation S-K, that it will furnish a copy of any such instrument to the SEC upon request. +2024 FORM 10-K 96 +Table of Contents +SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS +(Dollars in millions) BALANCE AT +BEGINNING OF +PERIOD CHARGED TO +COSTS AND +EXPENSES +CHARGED +TO OTHER +ACCOUNTS (1) +WRITE-OFFS, +NET BALANCE +AT END +OF PERIOD +Sales returns reserve +For the fiscal year ended May 31, 2022 $ 595 $ 2,573 $ ( 31 ) $ ( 2,612 ) $ 525 +For the fiscal year ended May 31, 2023 525 3,344 ( 11 ) ( 3,309 ) 549 +For the fiscal year ended May 31, 2024 549 3,583 ( 8 ) ( 3,325 ) 799 +(1) Amounts included in this column primarily relate to foreign currency translation. +2024 FORM 10-K 97 +Table of Contents +ITEM 16. FORM 10-K SUMMARY +None. +2024 FORM 10-K 98 +Table of Contents +Consent of Independent Registered Public Accounting Firm +We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (No. 333-266267) and Form S-8 (Nos. 033-63995, 333-63581, 333-63583, 333-68864, 333-68886, 333-71660, 333-104822, 333-117059, 333-133360, 333-164248, 333-171647, 333-173727, 333-208900, 333-215439, 333-266269 and 333-273358) of NIKE, Inc. of our report dated July 25, 2024 relating to the financial statements, financial statement schedule and the effectiveness of internal control over financial reporting, which appears in this Form 10-K. +/s/ PricewaterhouseCoopers LLP +Portland, Oregon +July 25, 2024 +2024 FORM 10-K 99 +Table of Contents +SIGNATURES +Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. +NIKE, INC. +By: +/s/ JOHN J. DONAHOE II +John J. Donahoe II +President and Chief Executive Officer +Date: July 25, 2024 +Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. +SIGNATURE TITLE DATE +PRINCIPAL EXECUTIVE OFFICER AND DIRECTOR: +/s/ JOHN J. DONAHOE II +John J. Donahoe II +President and Chief Executive Officer July 25, 2024 +PRINCIPAL FINANCIAL OFFICER: +/s/ MATTHEW FRIEND +Matthew Friend +Executive Vice President and Chief Financial Officer July 25, 2024 +PRINCIPAL ACCOUNTING OFFICER: +/s/ JOHANNA NIELSEN +Johanna Nielsen +Vice President and Corporate Controller July 25, 2024 +DIRECTORS: +/s/ MARK G. PARKER +Mark G. Parker +Director, Chairman of the Board July 25, 2024 +/s/ CATHLEEN A. BENKO +Cathleen A. Benko +Director July 25, 2024 +/s/ TIMOTHY D. COOK +Timothy D. Cook +Director July 25, 2024 +/s/ THASUNDA B. DUCKETT +Thasunda B. Duckett +Director July 25, 2024 +/s/ MÓNICA GIL +Mónica Gil +Director July 25, 2024 +/s/ ALAN B. GRAF, JR. +Alan B. Graf, Jr. +Director July 25, 2024 +/s/ MARIA HENRY +Maria Henry +Director July 25, 2024 +/s/ PETER B. HENRY +Peter B. Henry +Director July 25, 2024 +/s/ TRAVIS A. KNIGHT +Travis A. Knight +Director July 25, 2024 +/s/ MICHELLE A. PELUSO +Michelle A. Peluso +Director July 25, 2024 +/s/ JOHN W. ROGERS, JR. +John W. Rogers, Jr. +Director July 25, 2024 +/s/ ROBERT SWAN +Robert Swan +Director July 25, 2024 +2024 FORM 10-K 100 \ No newline at end of file diff --git a/raw/filings/0000320187/2023/0000320187-24-000044/filing_metadata.csv b/raw/filings/0000320187/2023/0000320187-24-000044/filing_metadata.csv new file mode 100644 index 0000000000000000000000000000000000000000..801383badcd75064db294930a96b0c960e24ede7 --- /dev/null +++ b/raw/filings/0000320187/2023/0000320187-24-000044/filing_metadata.csv @@ -0,0 +1,2 @@ +cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing +0000320187,NKE,"NIKE, Inc.",10-K,2024-07-25,2024-05-31,2024-07-26T00:16:58.000Z,0000320187-24-000044,nke-20240531.htm,10-K,16260134,1,1,https://www.sec.gov/Archives/edgar/data/320187/000032018724000044/nke-20240531.htm,https://www.sec.gov/Archives/edgar/data/320187/000032018724000044/,2023,2023,1 diff --git a/raw/filings/0000320187/2023/0000320187-24-000044/item1.txt b/raw/filings/0000320187/2023/0000320187-24-000044/item1.txt new file mode 100644 index 0000000000000000000000000000000000000000..a41b00f138620c8eef83dd05e7df7d0b22867d93 --- /dev/null +++ b/raw/filings/0000320187/2023/0000320187-24-000044/item1.txt @@ -0,0 +1,128 @@ +ITEM 1. BUSINESS +GENERAL +NIKE, Inc. was incorporated in 1967 under the laws of the State of Oregon. As used in this Annual Report on Form 10-K (this "Annual Report"), the terms "we," "us," "our," "NIKE" and the "Company" refer to NIKE, Inc. and its predecessors, subsidiaries and affiliates, collectively, unless the context indicates otherwise. +Our principal business activity is the design, development and worldwide marketing and selling of athletic footwear, apparel, equipment, accessories and services. NIKE is the largest seller of athletic footwear and apparel in the world. We sell our products through NIKE Direct operations, which are comprised of both NIKE-owned retail stores and sales through our digital platforms (also referred to as "NIKE Brand Digital") and to wholesale accounts, which include a mix of independent distributors, licensees and sales representatives in nearly all countries around the world. We also offer interactive consumer services and experiences through our digital platforms. Nearly all of our products are manufactured by independent contractors. Nearly all footwear and apparel products are manufactured outside the United States, while equipment products are manufactured both in the United States and abroad. +All references to fiscal 2025, 2024, 2023, 2022 and 2021 are to NIKE, Inc.'s fiscal years ended May 31, 2025, 2024, 2023, 2022 and 2021, respectively. Any references to other fiscal years refer to a fiscal year ending on May 31 of that year. +PRODUCTS +Our NIKE Brand product offerings are aligned around our consumer construct focused on Men's, Women's and Kids'. We also design products specifically for the Jordan Brand and Converse. We believe this approach allows us to create products that better meet individual consumer needs while accelerating our largest growth opportunities. +NIKE's athletic footwear products are designed primarily for specific athletic use, although a large percentage of the products are worn for casual or leisure purposes. We place considerable emphasis on innovation and high-quality construction in the development and manufacturing of our products. +We also sell sports apparel, which features the same trademarks and are sold predominantly through the same marketing and distribution channels as athletic footwear. Our sports apparel, similar to our athletic footwear products, is designed primarily for athletic use, although many of the products are worn for casual or leisure purposes, and demonstrates our commitment to innovation and high-quality construction. We often market footwear, apparel and accessories in "collections" of similar use or by category. We also market apparel with licensed college and professional team and league logos. +We sell a line of performance equipment and accessories under the NIKE Brand name, including bags, socks, sport balls, eyewear, timepieces, digital devices, bats, gloves, protective equipment and other equipment designed for sports activities. We also sell small amounts of various plastic products to other manufacturers through our wholly-owned subsidiary, NIKE IHM, Inc., doing business as Air Manufacturing Innovation. +Our Jordan Brand designs, distributes and licenses athletic and casual footwear, apparel and accessories predominantly focused on basketball performance and culture using the Jumpman trademark. Sales and operating results for Jordan Brand products are reported within the respective NIKE Brand geographic operating segments. +Our wholly-owned subsidiary brand, Converse, headquartered in Boston, Massachusetts, designs, distributes and licenses casual sneakers, apparel and accessories under the Converse, Chuck Taylor, All Star, One Star, Star Chevron and Jack Purcell trademarks. Operating results of the Converse brand are reported on a stand-alone basis. +In addition to the products we sell to our wholesale customers and directly to consumers through our NIKE Direct operations, we have also entered into license agreements that permit unaffiliated parties to manufacture and sell, using NIKE-owned trademarks, certain apparel, digital devices and applications and other equipment designed for sports activities. +We also offer interactive consumer services and experiences as well as digital products through our digital platforms, including fitness and activity apps; sport, fitness and wellness content; and digital services and features in retail stores that enhance the consumer experience. +2024 FORM 10-K 1 +Table of Contents +SALES AND MARKETING +We experience moderate fluctuations in aggregate sales volume during the year. Historically, revenues in the first and fourth fiscal quarters have slightly exceeded those in the second and third fiscal quarters. However, the mix of product sales may vary considerably as a result of changes in seasonal and geographic demand for particular types of footwear, apparel and equipment, as well as other macroeconomic, strategic, operating and logistics-related factors. +Because NIKE is a consumer products company, the relative popularity and availability of various sports and fitness activities, as well as changing design trends and consumer preferences, affect the demand for our products. We must, therefore, respond to trends and shifts in consumer preferences by adjusting the mix of existing product offerings and channels, developing new products, styles and categories and influencing sports and fitness preferences through extensive marketing. Failure to respond in a timely and adequate manner could have a material adverse effect on our sales and profitability. This is a continuing risk. Refer to Item 1A. Risk Factors. +OUR MARKETS +We report our NIKE Brand operations based on our internal geographic organization. Each NIKE Brand geographic segment operates predominantly in one industry: the design, development, marketing and selling of athletic footwear, apparel and equipment. The Company's reportable operating segments for the NIKE Brand are: North America; Europe, Middle East & Africa ("EMEA"); Greater China; and Asia Pacific & Latin America ("APLA"), and include results for the NIKE and Jordan brands. Sales through our NIKE Direct operations are managed within each geographic operating segment. +Converse is also a reportable operating segment and operates predominately in one industry: the design, marketing, licensing and selling of casual sneakers, apparel and accessories. Converse direct to consumer operations, including digital commerce, are reported within the Converse operating segment results. +UNITED STATES MARKET +For fiscal 2024, NIKE Brand and Converse sales in the United States accounted for approximately 42% of total revenues, compared to 43% and 40% for fiscal 2023 and fiscal 2022, respectively. We sell our products to thousands of wholesale accounts in the United States, including a mix of footwear stores, sporting goods stores, athletic specialty stores, department stores, skate, tennis and golf shops and other wholesale accounts. In the United States, we utilize NIKE sales offices to solicit such sales. During fiscal 2024, our three largest United States customers accounted for approximately 21% of sales in the United States. +Our NIKE Direct and Converse direct to consumer operations sell our products to consumers through various digital platforms. In addition, our NIKE Direct and Converse direct to consumer operations sell products through the following number of retail stores in the United States: +U.S. RETAIL STORES NUMBER +NIKE Brand factory stores 211 +NIKE Brand in-line stores (including employee-only stores) 85 +Converse stores (including factory stores) 81 +TOTAL 377 +In the United States, NIKE has eight significant distribution centers. Refer to Item 2. Properties for additional information. +2024 FORM 10-K 2 +Table of Contents +INTERNATIONAL MARKETS +For fiscal 2024, non-U.S. NIKE Brand and Converse sales accounted for approximately 58% of total revenues, compared to 57% and 60% for fiscal 2023 and fiscal 2022, respectively. We sell our products through NIKE Direct operations and to wholesale accounts, which include a mix of independent distributors, licensees and sales representatives around the world. We sell to thousands of retail accounts and ship products from 68 distribution centers outside of the United States. Refer to Item 2. Properties for additional information on distribution facilities outside of the United States. During fiscal 2024, NIKE's three largest customers outside of the United States accounted for approximately 15% of total non-U.S. sales. +In addition to NIKE-owned and Converse-owned digital commerce platforms in over 40 countries, our NIKE Direct and Converse direct to consumer businesses operate the following number of retail stores outside the United States: +NON-U.S. RETAIL STORES NUMBER +NIKE Brand factory stores 561 +NIKE Brand in-line stores (including employee-only stores) 53 +Converse stores (including factory stores) 54 +TOTAL 668 +SIGNIFICANT CUSTOMER +No customer accounted for 10% or more of our consolidated net Revenues during fiscal 2024. +PRODUCT RESEARCH, DESIGN AND DEVELOPMENT +We believe our research, design and development efforts are key factors in our success. Technical innovation in the design and manufacturing process of footwear, apparel and athletic equipment receives continued emphasis as we strive to produce products that help to enhance athletic performance, reduce injury and maximize comfort, while decreasing our environmental impact. +In addition to our own staff of specialists in the areas of biomechanics, chemistry, exercise physiology, engineering, digital technologies, industrial design, sustainability and related fields, we also utilize research committees and advisory boards made up of athletes, coaches, trainers, equipment managers, orthopedists, podiatrists, physicians and other experts who consult with us and review certain designs, materials and concepts for product and manufacturing, design and other process improvements and compliance with product safety regulations around the world. Employee athletes, athletes engaged under sports marketing contracts and other athletes wear-test and evaluate products during the design and development process. +As we continue to develop new technologies, we are simultaneously focused on the design of innovative products and experiences incorporating such technologies throughout our product categories and consumer applications. Using market intelligence and research, our various design teams identify opportunities to leverage new technologies in existing categories to respond to consumer preferences. The proliferation of Nike Air, Zoom, Free, Dri-FIT, Flyknit, FlyEase, ZoomX, Air Max, and React technologies, among others, typifies our dedication to designing innovative products. +MANUFACTURING +Nearly all of our footwear and apparel products are manufactured outside the United States by independent contract manufacturers ("contract manufacturers"), many of which operate multiple factories. We are also supplied, primarily indirectly, by a number of materials, or "Tier 2" suppliers, who provide the principal materials used in footwear and apparel finished goods products. As of May 31, 2024, we had 169 strategic Tier 2 suppliers. +As of May 31, 2024, our contract manufacturers operated 96 finished goods footwear factories located in 11 countries. For fiscal 2024, NIKE Brand footwear finished goods were manufactured by 15 contract manufacturers, many of which operate multiple factories. The largest single finished goods footwear factory accounted for approximately 9% of total fiscal 2024 NIKE Brand footwear production. For fiscal 2024, factories in Vietnam, Indonesia and China manufactured approximately 50%, 27% and 18% of total NIKE Brand footwear, respectively. For fiscal 2024, four footwear contract manufacturers each accounted for greater than 10% of footwear production and in the aggregate accounted for approximately 57% of NIKE Brand footwear production. +As of May 31, 2024, our contract manufacturers operated 285 finished goods apparel factories located in 33 countries. For fiscal 2024, NIKE Brand apparel finished goods were manufactured by 68 contract manufacturers, many of which operate multiple factories. The largest single finished goods apparel factory accounted for approximately 9% of total fiscal 2024 NIKE Brand apparel production. For fiscal 2024, factories in Vietnam, China and Cambodia manufactured approximately 28%, 16% and 15% +2024 FORM 10-K 3 +Table of Contents +of total NIKE Brand apparel, respectively. For fiscal 2024, one apparel contract manufacturer accounted for more than 10% of apparel production, and the top five contract manufacturers in the aggregate accounted for approximately 51% of NIKE Brand apparel production. +NIKE's contract manufacturers buy raw materials for the manufacturing of our footwear, apparel and equipment products. Most raw materials are available and purchased by those contract manufacturers in the countries where manufacturing takes place. +The principal materials used in our footwear products are natural and synthetic rubber, plastic compounds, foam cushioning materials, natural and synthetic leather, nylon, polyester and natural fiber textiles, as well as polyurethane films used to make NIKE Air-Sole cushioning components. During fiscal 2024, Air Manufacturing Innovation, a wholly-owned subsidiary, with facilities near Beaverton, Oregon, in Dong Nai Province, Vietnam, and St. Charles, Missouri, as well as contract manufacturers in China and Vietnam, were our suppliers of NIKE Air-Sole and other cushioning components used in footwear. +The principal materials used in our apparel products are natural and synthetic fabrics, yarns and threads (both virgin and recycled); specialized performance fabrics designed to efficiently wick moisture away from the body, retain heat and repel rain and/or snow; and plastic and metal hardware. +From time to time, certain materials used in the production of our products experience periods of high demand, shortages and price volatility. In fiscal 2024, contract manufacturers were able to source sufficient quantities of raw materials for use in our footwear and apparel products. Refer to Item 1A. Risk Factors, for additional discussion of the impact of sourcing risks on our business. +Since 1972, Sojitz Corporation of America ("Sojitz America"), a large Japanese trading company and the sole owner of our redeemable preferred stock, has performed import-export financing services for us. +INTERNATIONAL OPERATIONS AND TRADE +Our international operations and sources of supply are subject to the usual risks of doing business abroad, such as the implementation of, or potential changes in, foreign and domestic trade policies, increases in import duties, anti-dumping measures, quotas, safeguard measures, trade restrictions, restrictions on the transfer of funds and, in certain parts of the world, political tensions, instability, conflicts, nationalism and terrorism, and resulting sanctions and other measures imposed in response to such issues. We have not, to date, been materially affected by any such risk but cannot predict the likelihood of such material effects occurring in the future. +In recent years, uncertain global and regional economic and political conditions have affected international trade and increased protectionist actions around the world. These trends are affecting many global manufacturing and service sectors, and the footwear and apparel industries, as a whole, are not immune. Companies in our industry are facing trade protectionism in many different regions, and, in nearly all cases, we are working together with industry groups to address trade issues and reduce the impact to the industry, while observing applicable competition laws. Notwithstanding our efforts, protectionist measures have resulted in increases in the cost of our products, and additional measures, if implemented, could adversely affect sales and/or profitability for NIKE, as well as the imported footwear and apparel industry as a whole. +We monitor protectionist trends and developments throughout the world that may materially impact our industry, and we engage in administrative and judicial processes to mitigate trade restrictions. We are actively monitoring actions that may result in additional anti-dumping measures and could affect our industry. We are also monitoring for and advocating against other impediments that may limit or delay customs clearance for imports of footwear, apparel and equipment. NIKE also advocates for trade liberalization for footwear and apparel in a number of bilateral and multilateral free trade agreements. Changes in, and responses to, U.S. trade policies, including the imposition of tariffs or penalties on imported goods or retaliatory measures by other countries, have negatively affected, and could in the future negatively affect, U.S. corporations, including NIKE, with business operations and/or consumer markets in those countries, which could also make it necessary for us to change the way we conduct business, either of which may have an adverse effect on our business, financial condition or our results of operations. In addition, with respect to proposed trade restrictions, we work with a broad coalition of global businesses and trade associations representing a wide variety of sectors to help ensure that any legislation enacted and implemented (i) addresses legitimate and core concerns, (ii) is consistent with international trade rules and (iii) reflects and considers domestic economies and the important role they may play in the global economic community. +Where trade protection measures are implemented, we believe we have the ability to develop, over a period of time, adequate alternative sources of supply for the products obtained from our present suppliers. If events prevented us from acquiring products from our suppliers in a particular country, our operations could be temporarily disrupted and we could experience an adverse financial impact. However, we believe we could abate any such disruption, and that much of the adverse impact on supply would, therefore, be of a short-term nature, although alternate sources of supply might not be as cost-effective and could have an ongoing adverse impact on profitability. +2024 FORM 10-K 4 +Table of Contents +Our international operations are also subject to compliance with the U.S. Foreign Corrupt Practices Act (the "FCPA"), and other anti-bribery laws applicable to our operations. We source a significant portion of our products from, and have important consumer markets, outside of the United States. We have an ethics and compliance program to address compliance with the FCPA and similar laws by us, our employees, agents, suppliers and other partners. Refer to Item 1A. Risk Factors for additional information on risks relating to our international operations. +COMPETITION +The athletic footwear, apparel and equipment industry is highly competitive on a worldwide basis. We compete internationally with a significant number of athletic and leisure footwear companies, athletic and leisure apparel companies, sports equipment companies and large companies having diversified lines of athletic and leisure footwear, apparel and equipment, including adidas, Anta, ASICS, Deckers, Li Ning, lululemon athletica, New Balance, On, Puma, Under Armour and V.F. Corporation, among others. The intense competition and the rapid changes in technology and consumer preferences in the markets for athletic and leisure footwear and apparel and athletic equipment constitute significant risk factors in our operations. Refer to Item 1A. Risk Factors for additional information. +NIKE is the largest seller of athletic footwear and apparel in the world. Important aspects of competition in this industry are: +• Product attributes such as quality; innovation and development; performance and reliability; new product style, and design; as well as consumer price/value. +• Consumer connection, engagement and affinity for brands and products, developed through marketing, promotion and digital experiences; social media interaction; customer support and service; identification with prominent and influential athletes, influencers, public figures, coaches, teams, colleges and sports leagues who endorse our brands and use our products and active engagement through sponsored sporting events and clinics. +• Effective sourcing and distribution of products, with attractive merchandising and presentation at retail, both in-store and on digital platforms. +We believe that we are competitive in all of these areas. See Item 1A. Risk Factors, including the risk factor titled "Our products, services and experiences face intense competition." +TRADEMARKS AND PATENTS +We believe that our intellectual property rights are important to our brand, our success and our competitive position. We strategically pursue available protections of these rights and vigorously protect and enforce them against third-party theft and infringement. +We use trademarks on nearly all of our products and packaging, and in our marketing materials, and believe having distinctive marks that are readily identifiable is an important factor in creating a market for our goods, in identifying our brands and the Company, and in distinguishing our goods from the goods of others. We consider our NIKE and Swoosh Design trademarks to be among our most valuable assets and we have registered these trademarks in over 190 jurisdictions worldwide. In addition, we own many other trademarks that we use in marketing our products. Throughout the world, we own common law rights in the trade dress of several distinctive shoe designs and elements. For certain trade dress, we have sought and obtained trademark registrations. +We have copyright protection in our designs, graphics, software applications, digital goods and other original works. When appropriate, we also obtain registered copyrights. +We file for, own and maintain many U.S. and foreign utility and design patents protecting components, technologies, materials, manufacturing techniques, features, functionality, and industrial designs used in and for the manufacture of various athletic, performance, and leisure footwear and apparel, including physical and digital versions thereof, athletic equipment, and digital devices, and related software applications. These patents expire at various times. +We believe our success depends upon our capabilities in areas such as design, research and development, production and marketing and is supported and protected by our intellectual property rights, such as trademarks, utility and design patents, copyrights, and trade secrets, among others. +We have followed a policy of applying for and registering intellectual property rights in the United States and select foreign countries on trademarks, inventions, innovations and designs that we deem protectable and valuable. We also continue to vigorously protect and enforce our intellectual property, including trademarks, patents and trade secrets against third-party infringement and misappropriation. +2024 FORM 10-K 5 +Table of Contents +HUMAN CAPITAL RESOURCES +At NIKE, we consider the strength and effective management of our workforce to be essential to the ongoing success of our business. We believe that it is important to attract, develop and retain a diverse and engaged workforce at all levels of our business and that such a workforce fosters creativity and accelerates innovation. We are focused on building a talent pipeline that reflects our consumers, athletes and the communities we serve. +CULTURE +Each employee shapes NIKE's culture through behaviors and practices. This starts with our Maxims, which represent our core values and, along with our Code of Conduct, feature the fundamental behaviors that help anchor, inform and guide us and apply to all employees. Our mission is to bring inspiration and innovation to every athlete in the world, which includes the belief that if you have a body, you are an athlete. We aim to do this by creating groundbreaking sport innovations, making our products more sustainably, building a creative and diverse global team, supporting the well-being of our employees and making a positive impact in communities where we live and work. Our mission is aligned with our deep commitment to maintaining an environment where all NIKE employees have the opportunity to reach their full potential, to connect to our brands and to shape our workplace culture. We believe providing for growth and retention of our employees is essential in fostering such a culture and are dedicated to providing access to training programs and career development opportunities, including trainings on NIKE's values, history and business, trainings on developing leadership skills at all levels, tools and resources for managers and qualified tuition reimbursement opportunities. +In empowering our employees to help shape our culture, we source employee feedback through a variety of survey tools: our annual Engagement Survey program, corporate pulse surveys and listening sessions. These tools provide employees throughout the globe an opportunity to provide confidential feedback on key areas known to drive employee engagement, including their satisfaction with their managers, their work and the Company generally. These tools also measure our employees' connection to NIKE's culture. NIKE also provides multiple points of contact for employees to speak up if they experience something that does not align with our values or otherwise violates our workplace policies, even if they are uncertain what they observed or heard is a violation of company policy. +As part of our commitment to making a positive impact on our communities, we maintain a goal of investing 2% of our prior fiscal year's pre-tax income into global communities. The focus of this investment continues to be inspiring youth to be active through play and sport as well as uniting and inspiring communities to create a better and more equitable future for all. Our community investments are an important part of our culture, and we support employees in giving back to community organizations through volunteering and donations, which are matched by the NIKE Foundation where eligible. +EMPLOYEE BASE +As of May 31, 2024, we had approximately 79,400 employees worldwide, including retail and part-time employees. We also utilize independent contractors and temporary personnel to supplement our workforce. +Most of our employees are not represented by unions, except for certain employees in the EMEA and APLA geographies who are members of and/or represented by trade unions, as allowed or required by local law and/or collective bargaining agreements. Also, in some countries outside of the United States, local laws require employee representation by works councils (which may be entitled to information and consultation on certain subsidiary decisions) or by organizations similar to a union. In certain European countries, we are required by local law to enter into, and/or comply with, industry-wide or national collective bargaining agreements. NIKE has never experienced a material interruption of operations due to labor disagreements. +DIVERSITY, EQUITY AND INCLUSION +Diversity, equity and inclusion ("DE&I") is a strategic priority for NIKE and we are committed to having an inclusive and diverse team and culture. We aim to foster an inclusive and accessible workplace through recruitment, development and retention of talent from diverse experiences and backgrounds with the goal of expanding representation across all dimensions of diversity over the long term. We remain committed to the targets announced in fiscal 2021 for the Company to work toward by fiscal 2025, including diverse representation in our corporate workforce and leadership positions. +We continue our efforts to recruit talent through our traditional channels and through initiatives, such as partnerships with athletes and sports-related organizations to create apprenticeship programs and new partnerships with organizations, colleges and universities that serve diverse populations. Additionally, we are prioritizing DE&I education so that all NIKE employees and leaders have the cultural knowledge and understanding to lead inclusively and build diverse and inclusive teams. We also have Employee Networks, collectively known as NikeUNITED, representing various employee groups. +2024 FORM 10-K 6 +Table of Contents +Our DE&I focus extends beyond our workforce and includes our communities, which we support in a number of ways. We have committed to investments that aim to address racial inequality and improve diversity and representation in our communities. We also are leveraging our global scale to support business diversity among the businesses with which we work. +COMPENSATION AND BENEFITS +NIKE's total rewards are intended to be competitive and equitable, meet the diverse needs of our global teammates and reinforce our values. We are committed to providing comprehensive, competitive and equitable pay and benefits to our employees, and we have invested, and aim to continue to invest, in our employees through growth and development and holistic well-being initiatives. Our initiatives in this area include: +• We are committed to competitive pay, pay equity and to reviewing our pay and promotion practices annually. +• We have an annual company bonus plan and a retail-focused bonus plan applicable to all eligible employees. Both programs are focused on rewarding employees for company performance, which we believe reinforces our culture and rewards behaviors that support collaboration and teamwork. +• We provide comprehensive family care benefits in the U.S. and globally where practicable, including family planning coverage, backup care and child/elder care assistance as well as an income-based childcare subsidy for eligible employees. +• Our Military Leave benefit provides up to 12 weeks of paid time off every 12 months. +• We offer free access to our sport centers at our World Headquarters for our full-time employees and North America store employees. +• We provide employees free access to mindfulness and meditation resources, as well as live classes through our sport centers. +• We provide all employees and their families globally with free and confidential visits with a mental health counselor through a third-party provider and our global Employee Assistance Program (EAP). +• We provide support to our employees in a variety of ways during times of crisis, including pay continuity under certain circumstances, and our natural disaster assistance program. +• We provide a hybrid work approach for the majority of employees, as well as a Four Week Flex program, which provides employees an opportunity to work remotely for up to four weeks per year. +• We offer a Well-Being Week where we close our corporate offices for a full week in the summer and Well-Being Days for our teammates in our retail stores and distribution centers, and encourage our teammates to focus on their well-being. +• We provide inclusive family planning benefits and transgender healthcare coverage for eligible employees covered on the U.S. Health Plan, including access to both restorative services and personal care. +• We provide all U.S. employees with unlimited free financial coaching through a third-party provider. +Additional information related to our human capital strategy can be found in our FY23 NIKE, Inc. Impact Report, which is available on the Impact section of about.nike.com. Information contained on or accessible through our websites is not incorporated into, and does not form a part of, this Annual Report or any other report or document we file with the SEC, and any references to our websites are intended to be inactive textual references only. +AVAILABLE INFORMATION AND WEBSITES +Our NIKE digital commerce website is located at www.nike.com. On our NIKE corporate website, located at investors.nike.com, we post the following filings as soon as reasonably practicable after they are electronically filed with, or furnished to, the United States Securities and Exchange Commission (the "SEC"): our annual report on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities and Exchange Act of 1934, as amended. Our proxy statements are also posted on our corporate website. All such filings on our corporate website are available free of charge. Copies of these filings are also available on the SEC's website at www.sec.gov. Also available on our corporate website are the charters of the committees of our Board of Directors, as well as our corporate governance guidelines and code of ethics. Copies of any of these documents will be provided in print to any shareholder who submits a request in writing to NIKE Investor Relations, One Bowerman Drive, Beaverton, Oregon 97005-6453. Information contained on or accessible through our website is not incorporated into, and does not form a part of, this Annual Report or any other report or document we file with the SEC, and any references to our website are intended to be inactive textual references only. +2024 FORM 10-K 7 +Table of Contents +INFORMATION ABOUT OUR EXECUTIVE OFFICERS +The executive officers of NIKE, Inc. as of July 25, 2024, are as follows: +Mark Parker , Executive Chairman — Mr. Parker, 68, joined NIKE in 1979, is Executive Chairman of the Board of Directors and served as President and Chief Executive Officer of NIKE, Inc. from 2006 to 2020. During his employment with NIKE, he has had primary responsibilities in product research, design and development, marketing and brand management. Mr. Parker previously served in various roles at NIKE including President of the NIKE Brand, Vice President of Global Footwear, General Manager, corporate Vice President and divisional Vice President in charge of product development. +John Donahoe II , President and Chief Executive Officer — Mr. Donahoe, 64, joined NIKE in 2014 as a member of the Board of Directors and has served as President and Chief Executive Officer of NIKE, Inc. since January 2020. He is responsible for NIKE’s global business portfolio, which includes the NIKE, Jordan and Converse brands. Prior to joining NIKE, Mr. Donahoe was the President and Chief Executive Officer of ServiceNow, Inc. from 2017 to 2020 and, prior to that, the President and Chief Executive Officer of eBay Inc. Earlier in his career, he worked for Bain & Company for nearly two decades, becoming the firm’s President and Chief Executive Officer in 1999. +Matthew Friend , Executive Vice President and Chief Financial Officer — Mr. Friend, 46, joined NIKE in 2009 and has served as Executive Vice President and Chief Financial Officer of NIKE, Inc. since 2020, and leads the Company's finance, demand and supply management, procurement and global places and services organizations. Mr. Friend previously served in various roles at NIKE including as Vice President of Investor Relations and Chief Financial Officer of the NIKE Brand. Prior to joining NIKE, Mr. Friend worked in the financial industry, including as Vice President in the investment banking and mergers and acquisitions groups at Goldman Sachs and Morgan Stanley. +Monique Matheson , Executive Vice President, Chief Human Resources Officer — Ms. Matheson, 57, joined NIKE in 1998 and has served as Executive Vice President, Chief Human Resources Officer of NIKE, Inc. since 2017, overseeing and driving the Company’s strategic global Human Resources strategy. In this role, Ms. Matheson leads through the lens of people — managing functions including recruitment, succession planning, learning and career development, diversity and inclusion, organizational effectiveness, employee engagement, pay and benefits and people solutions. Previously, Ms. Matheson has held roles including Vice President, Chief Talent and Diversity Officer and Vice President, Senior Human Resources Business Partner for North America, Global Product Creation (Footwear, Apparel and Equipment), Global Finance and NIKE, Inc. Affiliates. Prior to joining NIKE, Ms. Matheson practiced employment law. +Ann Miller , Executive Vice President, Chief Legal Officer — Ms. Miller, 50, joined NIKE in 2007 and has served as Executive Vice President, Chief Legal Officer of NIKE, Inc. since 2022. In her capacity as Chief Legal Officer, she oversees all legal, compliance, government & public affairs, social community impact, security, resilience and investigation matters of the Company. Previously, Ms. Miller served as Vice President, Corporate Secretary from 2017 to 2022. Ms. Miller has also previously held other roles in the NIKE legal department, including Chief Ethics & Compliance Officer and Converse's General Counsel. Prior to joining NIKE, Ms. Miller worked at the law firm Sullivan & Cromwell LLP. Ms. Miller brings more than 25 years of legal and business expertise to her role. +Heidi O'Neill , President, Consumer, Product & Brand — Ms. O'Neill, 59, joined NIKE in 1998 and has served as President, Consumer, Product & Brand of NIKE, Inc. since 2023. In this role, Ms. O’Neill leads the integration of the global Men's, Women's & Kids' consumer teams, the entire global product engine and global brand marketing and sports marketing to build deep storytelling, relationships and engagement with the brand. Most recently, Ms. O’Neill has also served as President, Consumer and Marketplace from 2020 to 2023 and President, Direct to Consumer from 2016 to 2020. Since joining NIKE, she has held a variety of key roles, including leading NIKE's marketplace and four geographic operating regions, leading NIKE Direct and NIKE's retail and digital-commerce business and creating and leading NIKE's Women’s business. Prior to joining NIKE, Ms. O'Neill held roles at Levi Strauss & Company and was a Vice President at Foote, Cone & Belding. +Craig Williams , President, Geographies & Marketplace — Mr. Williams, 55, joined NIKE in 2019 and has served as President, Geographies & Marketplace of NIKE, Inc. since 2023. In this role, Mr. Williams leads NIKE's four geographic operating units, the global direct to consumer business and wholesale marketplace partnerships. In addition, Mr. Williams leads the NIKE Supply Chain and Logistics organization. Mr. Williams previously served as President of Jordan Brand from 2019 to June 2023, overseeing the global business and team of designers, footwear and apparel developers, marketers and geography leaders. Prior to joining NIKE, Mr. Williams held executive leadership positions at The Coca-Cola Company as well as roles at CIBA Vision, a subsidiary of Novartis AG, and Kraft Foods Inc. Mr. Williams also served five years in the U.S. Navy as a Naval Nuclear Power Officer. +2024 FORM 10-K 8 +Table of Contents \ No newline at end of file diff --git a/raw/filings/0000320187/2023/0000320187-24-000044/item13.txt b/raw/filings/0000320187/2023/0000320187-24-000044/item13.txt new file mode 100644 index 0000000000000000000000000000000000000000..b67c538ead24c6faa18998e6e39e2eff982f53bc --- /dev/null +++ b/raw/filings/0000320187/2023/0000320187-24-000044/item13.txt @@ -0,0 +1,2 @@ +ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE +The information required by Items 404 and 407(a) of Regulation S-K is included under "Additional Information — Transactions with Related Persons" and "Corporate Governance — NIKE, Inc. Board of Directors — Director Independence" in the definitive Proxy Statement for our 2024 Annual Meeting of Shareholders and is incorporated herein by reference. \ No newline at end of file diff --git a/raw/filings/0000320187/2023/0000320187-24-000044/item9a.txt b/raw/filings/0000320187/2023/0000320187-24-000044/item9a.txt new file mode 100644 index 0000000000000000000000000000000000000000..440161c569a8f47fd4eee657aa948606277be05f --- /dev/null +++ b/raw/filings/0000320187/2023/0000320187-24-000044/item9a.txt @@ -0,0 +1,6 @@ +ITEM 9A. CONTROLS AND PROCEDURES +We maintain disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in our Securities Exchange Act of 1934, as amended (the "Exchange Act"), reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. +We carry out a variety of ongoing procedures, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, to evaluate the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of May 31, 2024. +"Management's Annual Report on Internal Control Over Financial Reporting" is included in Item 8 of this Annual Report. +We are continuing several transformation initiatives to centralize and simplify our business processes and systems. These are long-term initiatives, which we believe will enhance our internal control over financial reporting due to increased automation and further integration of related processes. We will continue to monitor our internal control over financial reporting for effectiveness throughout these transformation initiatives. +There have not been any changes in our internal control over financial reporting during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. \ No newline at end of file diff --git a/raw/filings/0000320187/2023/0000320187-24-000044/rp_note.txt b/raw/filings/0000320187/2023/0000320187-24-000044/rp_note.txt new file mode 100644 index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391 diff --git a/raw/filings/0000320187/2023/0000320187-24-000044/rpt_disclosure.txt b/raw/filings/0000320187/2023/0000320187-24-000044/rpt_disclosure.txt new file mode 100644 index 0000000000000000000000000000000000000000..e81302e6982c9592da75aabd63f9873a67240505 --- /dev/null +++ b/raw/filings/0000320187/2023/0000320187-24-000044/rpt_disclosure.txt @@ -0,0 +1,5 @@ +TRANSACTIONS WITH RELATED PERSONS +Philip Knight, the father of NIKE director Travis Knight, serves as Chairman Emeritus, which provides a standing invitation for Philip Knight to attend meetings of the Board and its committees as a non-voting observer. In fiscal 2024, as Chairman Emeritus, Mr. Knight received salary of $519,235 (reflecting 27 bi-weekly pay periods for fiscal 2024), and medical and dental insurance coverage generally available to employees. +John Donahoe II and the Company have entered into time sharing agreements under which Mr. Donahoe reimburses the Company for limited personal use of Company aircraft, which is intended to increase his security, availability, and productivity. In fiscal 2024, Mr. Donahoe reimbursed the Company approximately $316,000 under the time sharing agreements. +Mark Parker's son, Matthew Parker, was employed by the Company in fiscal 2024 in a non-executive role for which the Company paid Matthew Parker aggregate compensation of approximately $136,000. The compensation and benefits received by Matthew Parker were consistent with compensation and benefits paid to other employees holding similar positions. +The Company's written policy requires the Corporate Responsibility, Sustainability & Governance Committee to review any transaction or proposed transaction with a related person that would be required to be reported under Item 404(a) of Regulation S-K, and to determine whether to ratify or approve the transaction, with ratification or approval to occur only if the committee determines that the transaction is fair to the Company or that approval or ratification of the transaction is in the interest of the Company. \ No newline at end of file diff --git a/raw/filings/0000320187/2024/0000320187-25-000047/filing.txt b/raw/filings/0000320187/2024/0000320187-25-000047/filing.txt new file mode 100644 index 0000000000000000000000000000000000000000..d2a7b317d0b2a893951d9bd41a40bc8983e78328 --- /dev/null +++ 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country:CN 2024-05-31 0000320187 country:GB 2025-05-31 0000320187 country:GB 2024-05-31 0000320187 nke:OtherCountriesMember 2025-05-31 0000320187 nke:OtherCountriesMember 2024-05-31 0000320187 us-gaap:EmployeeSeveranceMember 2023-06-01 2024-05-31 0000320187 nke:StockBasedCompensationExpenseMember 2023-06-01 2024-05-31 0000320187 us-gaap:GeneralAndAdministrativeExpenseMember 2023-06-01 2024-05-31 0000320187 us-gaap:CostOfSalesMember 2023-06-01 2024-05-31 0000320187 2025-03-01 2025-05-31 +Table of Contents +UNITED STATES +SECURITIES AND EXCHANGE COMMISSION +Washington, D.C. 20549 +FORM 10-K +(Mark One) +☑ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 +FOR THE FISCAL YEAR ENDED MAY 31 , 2025 +OR +☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 +FOR THE TRANSITION PERIOD FROM TO . +Commission File No. 1-10635 +NIKE, Inc. +(Exact name of Registrant as specified in its charter) +Oregon +93-0584541 +(State or other jurisdiction of incorporation) +(IRS Employer Identification No.) +One Bowerman Drive , Beaverton , Oregon 97005-6453 +(Address of principal executive offices and zip code) +( 503 ) 671-6453 +(Registrant's telephone number, including area code) +SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: +Class B Common Stock +NKE +New York Stock Exchange +(Title of each class) +(Trading symbol) +(Name of each exchange on which registered) +SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: +NONE +Indicate by check mark: +Yes +No +• +if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. +þ +¨ +• +if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. +¨ +þ +• +whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. +þ +¨ +• +whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). +þ +¨ +• +whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. +Large accelerated filer +þ +Accelerated filer +☐ +Non-accelerated filer +☐ +Smaller reporting company +☐ +Emerging growth company +☐ +• +if an emerging growth company, if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. +¨ +• +whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. +þ +• +if securities are registered pursuant to Section 12(b) of the Act, whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. +¨ +• +whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant's executive officers during the relevant recovery period pursuant to § 240.10D-1(b). +¨ +• +whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). +☐ +þ +As of November 30, 2024, the aggregate market values of the Registrant's Common Stock held by non-affiliates were: +Class A +$ 5,603,520,725 +Class B +92,655,504,471 +$ 98,259,025,196 +Table of Contents +As of July 9, 2025, the number of shares of the Registrant's Common Stock outstanding were: +Class A +288,887,752 +Class B +1,188,015,740 +1,476,903,492 +DOCUMENTS INCORPORATED BY REFERENCE: +Parts of Registrant's Proxy Statement for the Annual Meeting of Shareholders to be held on September 9, 2025, are incorporated by reference into Part III of this report. +Table of Contents +NIKE, INC. +ANNUAL REPORT ON FORM 10-K +TABLE OF CONTENTS +PAGE +PART I +1 +ITEM 1. +Business +1 +General +1 +Products +1 +Sales and Marketing +2 +Our Markets +2 +Significant Customer +3 +Product Research, Design and Development +3 +Manufacturing +3 +International Operations and Trade +4 +Competition +5 +Trademarks and Patents +5 +Human Capital Resources +6 +Available Information and Websites +7 +Information about our Executive Officers +8 +ITEM 1A. +Risk Factors +9 +ITEM 1B. +Unresolved Staff Comments +24 +ITEM 1C. +Cybersecurity +24 +ITEM 2. +Properties +25 +ITEM 3. +Legal Proceedings +25 +ITEM 4. +Mine Safety Disclosures +25 +PART II +26 +ITEM 5. +Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities +26 +ITEM 6. +Reserved +28 +ITEM 7. +Management's Discussion and Analysis of Financial Condition and Results of Operations +29 +ITEM 7A. +Quantitative and Qualitative Disclosures about Market Risk +50 +ITEM 8. +Financial Statements and Supplementary Data +52 +ITEM 9. +Changes in and Disagreements with Accountants on Accounting and Financial Disclosure +89 +ITEM 9A. +Controls and Procedures +89 +ITEM 9B. +Other Information +89 +ITEM 9C. +Disclosure Regarding Foreign Jurisdictions that Prevent Inspections +89 +PART III +90 +(Except for the information set forth under “Information about our Executive Officers” in Item 1 above, Part III is incorporated by reference from the Proxy Statement for the NIKE, Inc. 202 5 Annual Meeting of Shareholders.) +ITEM 10. +Directors, Executive Officers and Corporate Governance +90 +ITEM 11. +Executive Compensation +90 +ITEM 12. +Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters +90 +ITEM 13. +Certain Relationships and Related Transactions and Director Independence +90 +ITEM 14. +Principal Accountant Fees and Services +90 +PART IV +91 +ITEM 15. +Exhibits and Financial Statement Schedules +91 +ITEM 16. +Form 10-K Summary +94 +Signatures +96 +Table of Contents +PART I +ITEM 1. BUSINESS +GENERAL +NIKE, Inc. was incorporated in 1967 under the laws of the State of Oregon. As used in this Annual Report on Form 10-K (this "Annual Report"), the terms "we," "us," "our," "NIKE" and the "Company" refer to NIKE, Inc. and its predecessors, subsidiaries and affiliates, collectively, unless the context indicates otherwise. +Our principal business activity is the design, development and worldwide marketing and selling of athletic footwear, apparel, equipment, accessories and services. NIKE is the largest seller of athletic footwear and apparel in the world. We sell our products through NIKE Direct operations, which are comprised of both NIKE-owned retail stores and sales through our digital platforms (also referred to as "NIKE Brand Digital") and to wholesale accounts, which include a mix of independent distributors, licensees and sales representatives in nearly all countries around the world. We also offer interactive consumer services and experiences. Nearly all of our products are manufactured by independent contractors. Nearly all footwear and apparel products are manufactured outside the United States, while equipment products are manufactured both in the United States and abroad. +All references to fiscal 2025, 2024 and 2023 are to NIKE, Inc.'s fiscal years ended May 31, 2025, 2024 and 2023, respectively. Any references to other fiscal years refer to a fiscal year ending on May 31 of that year. +PRODUCTS +We offer our products under the NIKE, Jordan and Converse brands. Our strategy is to achieve sustainable, profitable long-term growth by leading with sport, creating innovative, “must-have” products, building deep personal consumer connections with our brands and delivering compelling consumer experiences through digital platforms and at retail. We believe this approach will allow us to create products that better meet individual consumer needs while accelerating our largest growth opportunities. +NIKE's athletic footwear products are designed primarily for specific athletic use, although a large percentage of the products are worn for casual or leisure purposes. We place considerable emphasis on innovation and high-quality construction in the development and manufacturing of our products. +We also sell sports apparel, which features the same trademarks and are sold predominantly through the same marketing and distribution channels as athletic footwear. Our sports apparel, similar to our athletic footwear products, is designed primarily for athletic use, although many of the products are worn for casual or leisure purposes, and demonstrates our commitment to innovation and high-quality construction. We often market footwear, apparel and accessories in "collections" of similar use. We also market apparel with licensed college and professional team and league logos. +We sell a line of performance equipment and accessories under the NIKE Brand name, including bags, socks, sport balls, eyewear, timepieces, digital devices, bats, gloves, protective equipment and other equipment designed for sports activities. We also sell small amounts of various plastic products to other manufacturers through our wholly-owned subsidiary, doing business as Air Manufacturing Innovation. +Our Jordan Brand designs, distributes and licenses athletic and casual footwear, apparel and accessories predominantly focused on sport performance and streetwear using the Jumpman trademark. Sales and operating results for Jordan Brand products are reported within the respective NIKE Brand geographic operating segments. +Our wholly-owned subsidiary brand, Converse, headquartered in Boston, Massachusetts, designs, distributes and licenses casual sneakers, apparel and accessories under the Converse, Chuck Taylor, All Star, One Star, Star Chevron and Jack Purcell trademarks. Operating results of the Converse brand are reported on a stand-alone basis. +In addition to the products we sell to our wholesale customers and directly to consumers through our NIKE Direct operations, we have also entered into license agreements that permit unaffiliated parties to manufacture and sell, using NIKE-owned trademarks, certain apparel, digital devices and applications and other equipment designed for sports activities. +We also offer interactive consumer services and experiences, including sport focused events and activations; fitness and activity apps; sport, fitness and wellness content; and digital services and features in retail stores that enhance the consumer experience. +2025 FORM 10-K 1 +Table of Contents +SALES AND MARKETING +We experience moderate fluctuations in aggregate sales volume during the year. Historically, revenues in the first and fourth fiscal quarters have slightly exceeded those in the second and third fiscal quarters. However, the mix of product sales may vary considerably as a result of changes in seasonal and geographic demand for particular types of footwear, apparel and equipment, as well as other macroeconomic, strategic, operating and logistics-related factors. +Because NIKE is a consumer products company, the relative popularity and availability of various sports and fitness activities, as well as changing design trends and consumer preferences, affect the demand for our products. We must, therefore, respond to trends and shifts in consumer preferences by adjusting the mix of existing product offerings and channels, developing new products, styles and categories and influencing sports and fitness preferences through extensive marketing. Failure to respond in a timely and adequate manner could have a material adverse effect on our sales and profitability. This is a continuing risk. Refer to Item 1A. Risk Factors. +OUR MARKETS +We report our NIKE Brand operations based on our internal geographic organization. Each NIKE Brand geographic segment operates predominantly in one industry: the design, development, marketing and selling of athletic footwear, apparel and equipment. The Company's reportable operating segments for the NIKE Brand are: North America; Europe, Middle East & Africa ("EMEA"); Greater China; and Asia Pacific & Latin America ("APLA"), and include results for the NIKE and Jordan brands. +Converse is also a reportable operating segment and operates predominately in one industry: the design, marketing, licensing and selling of casual sneakers, apparel and accessories. Converse direct to consumer operations, including digital commerce, are reported within the Converse operating segment results. +UNITED STATES MARKET +For fiscal 2025, NIKE Brand and Converse sales in the United States accounted for approximately 43% of total revenues, compared to 42% and 43% for fiscal 2024 and fiscal 2023, respectively. We sell our products to wholesale accounts in the United States, including a mix of footwear stores, sporting goods stores, athletic specialty stores, department stores, skate, tennis and golf shops and other wholesale accounts. In the United States, we utilize NIKE sales offices to solicit such sales. During fiscal 2025, our three largest United States customers accounted for approximately 25% of sales in the United States. +Our NIKE Direct and Converse direct to consumer operations sell our products to consumers through various digital platforms, as well as through the following number of retail stores in the United States: +U.S. RETAIL STORES NUMBER +NIKE Brand factory stores 213 +NIKE Brand in-line stores (including employee-only stores) 85 +Converse stores (including factory stores) 78 +TOTAL 376 +In the United States, NIKE has eight significant distribution centers. Refer to Item 2. Properties for additional information. +2025 FORM 10-K 2 +Table of Contents +INTERNATIONAL MARKETS +For fiscal 2025, non-U.S. NIKE Brand and Converse sales accounted for approximately 57% of total revenues, compared to 58% and 57% for fiscal 2024 and fiscal 2023, respectively. We sell our products to wholesale accounts, which include a mix of independent distributors, licensees and sales representatives around the world. We also ship products from 72 distribution centers outside of the United States. Refer to Item 2. Properties for additional information on distribution facilities outside of the United States. During fiscal 2025, NIKE's three largest customers outside of the United States accounted for approximately 16% of total non-U.S. sales. +In addition to NIKE-owned and Converse-owned digital commerce platforms in over 40 countries, our NIKE Direct and Converse direct to consumer businesses operate the following number of retail stores outside the United States: +NON-U.S. RETAIL STORES NUMBER +NIKE Brand factory stores 543 +NIKE Brand in-line stores (including employee-only stores) 61 +Converse stores (including factory stores) 54 +TOTAL 658 +SIGNIFICANT CUSTOMER +No customer accounted for 10% or more of our consolidated net Revenues during fiscal 2025. +PRODUCT RESEARCH, DESIGN AND DEVELOPMENT +We believe our research, design and development efforts are key factors in our success. Technical innovation in the design and manufacturing process of footwear, apparel and athletic equipment receives continued emphasis as we strive to produce products that help to enhance athletic performance, reduce injury and maximize comfort, while decreasing our environmental impact. +In addition to our own staff of specialists in the areas of biomechanics, chemistry, exercise physiology, engineering, digital technologies, industrial design, sustainability and related fields, we also utilize research committees and advisory boards made up of athletes, coaches, trainers, equipment managers, orthopedists, podiatrists, physicians and other experts who consult with us and review certain designs, materials and concepts for product and manufacturing, design and other process improvements and compliance with product safety regulations around the world. Employee athletes, athletes engaged under sports marketing contracts and other athletes wear-test and evaluate products during the design and development process. +As we continue to develop new technologies, we are simultaneously focused on the design of innovative products and experiences incorporating such technologies throughout our products and consumer applications. Using market intelligence and research, our various design teams identify opportunities to leverage new technologies in existing categories to respond to consumer preferences. The proliferation of Nike Air, Zoom, Free, Dri-FIT, Flyknit, FlyEase, ZoomX, Air Max, and React technologies, among others, typifies our dedication to designing innovative products. +MANUFACTURING +Nearly all of our footwear and apparel products are manufactured outside the United States by independent contract manufacturers ("contract manufacturers"), many of which operate multiple factories. We are also supplied, primarily indirectly, by a number of materials, or "Tier 2", suppliers who provide the principal materials used in footwear and apparel finished goods products. As of May 31, 2025, we had 184 strategic Tier 2 suppliers. +As of May 31, 2025, contract manufacturers operated 97 finished goods footwear factories located in 11 countries. For fiscal 2025, NIKE Brand footwear finished goods were manufactured by 15 contract manufacturers, many of which operate multiple factories. The largest single finished goods footwear factory accounted for approximately 11% of total fiscal 2025 NIKE Brand footwear production. For fiscal 2025, factories in Vietnam, Indonesia and China manufactured approximately 51%, 28% and 17% of total NIKE Brand footwear, respectively. For fiscal 2025, four footwear contract manufacturers each accounted for greater than 10% of footwear production and in the aggregate accounted for approximately 59% of NIKE Brand footwear production. +As of May 31, 2025, contract manufacturers operated 303 finished goods apparel factories located in 34 countries. For fiscal 2025, NIKE Brand apparel finished goods were manufactured by 67 contract manufacturers, many of which operate multiple factories. The largest single finished goods apparel factory accounted for approximately 8% of total fiscal 2025 NIKE Brand apparel production. For fiscal 2025, factories in Vietnam, China and Cambodia manufactured approximately 31%, 15% and 15% +2025 FORM 10-K 3 +Table of Contents +of total NIKE Brand apparel, respectively. For fiscal 2025, two apparel contract manufacturers accounted for more than 10% of apparel production, and the top five contract manufacturers in the aggregate accounted for approximately 51% of NIKE Brand apparel production. +NIKE's contract manufacturers buy raw materials for the manufacturing of our footwear, apparel and equipment products from Tier 2 suppliers. Most raw materials are available and purchased by those contract manufacturers in the countries where manufacturing takes place. +The principal materials used in our footwear products are natural and synthetic rubber, plastic compounds, foam cushioning materials, natural and synthetic leather, nylon, polyester and natural fiber textiles, as well as polyurethane films used to make NIKE Air-Sole cushioning components. During fiscal 2025, Air Manufacturing Innovation, a wholly-owned subsidiary, with facilities near Beaverton, Oregon, in Dong Nai Province, Vietnam, and St. Charles, Missouri, as well as contract manufacturers in China and Vietnam, were our suppliers of NIKE Air-Sole and other cushioning components used in footwear. +The principal materials used in our apparel products are natural and synthetic fabrics, yarns, trims and threads (both virgin and recycled); specialized performance fabrics designed to efficiently wick moisture away from the body, retain heat and repel rain and/or snow; and plastic and metal hardware. +From time to time, certain materials used in the production of our products experience periods of high demand, shortages and price volatility. In fiscal 2025, contract manufacturers were able to source sufficient quantities of raw materials for use in our footwear and apparel products. Refer to Item 1A. Risk Factors, for additional discussion of the impact of sourcing risks on our business. +Since 1972, Sojitz Corporation of America ("Sojitz America"), a large Japanese trading company and the sole owner of our redeemable preferred stock, has performed import-export financing services for us. +INTERNATIONAL OPERATIONS AND TRADE +Our international operations and sources of supply are subject to the usual risks of doing business abroad, such as the implementation of, or potential changes in, foreign and domestic trade policies, increases in import duties, anti-dumping measures, quotas, trade agreement enforcement practices, safeguard measures, trade restrictions, restrictions on the transfer of funds and, in certain parts of the world, political tensions, instability, conflicts, nationalism and terrorism, and resulting sanctions and other measures imposed in response to such issues. +In 2025 and in other recent years, uncertain global and regional economic and political conditions have affected international trade and increased protectionist actions around the world. These trends are affecting many global manufacturing and service sectors, and the footwear and apparel industries, as a whole, are not immune. Companies in our industry are facing trade protectionism in many different regions, and, in nearly all cases, we are working together with industry groups to address trade issues and reduce the impact to the industry, while observing applicable competition laws. Notwithstanding our efforts, protectionist measures have resulted in increases in the cost of our products, and additional measures, if implemented, will adversely affect sales and/or profitability for NIKE, as well as the imported footwear and apparel industry as a whole, possibly materially. +We monitor protectionist trends and developments throughout the world that may materially impact our industry, and we engage in administrative and judicial processes to mitigate trade restrictions. We are actively monitoring actions that may result in additional anti-dumping measures and could affect our industry. We are also monitoring for other impediments that may limit or delay customs clearance for imports of footwear, apparel and equipment and advocating for trade facilitation. NIKE also advocates for trade liberalization for footwear and apparel in a number of bilateral and multilateral free trade agreements. Changes in, and responses to, U.S. trade policies, including the imposition of tariffs or penalties on imported goods or retaliatory measures by other countries, have negatively affected, and could in the future materially negatively affect, U.S. corporations, including NIKE, with business operations and/or consumer markets in those countries, which could also make it necessary for us to change the way we conduct business, either of which may have an adverse effect on our business, financial condition or our results of operations. In addition, we work with a broad coalition of global businesses and trade associations representing a wide variety of sectors to help support the development and implementation of legislation that (i) addresses legitimate and core concerns, (ii) is consistent with international trade rules and (iii) reflects and considers domestic economies and the important role they may play in the global economic community. +Where trade protection measures are implemented, we believe we have the ability to develop, over a period of time, adequate alternative sources of supply for the products obtained from our present suppliers. If events prevented us from acquiring products from our suppliers in a particular country, our operations could be temporarily disrupted and we could experience an adverse financial impact. However, we believe we could abate any such disruption, and that much of the adverse impact on supply would, therefore, be of a short-term nature, although alternate sources of supply might not be as cost-effective and could have an ongoing adverse impact on profitability. +2025 FORM 10-K 4 +Table of Contents +Our international operations are also subject to compliance with the U.S. Foreign Corrupt Practices Act (the "FCPA"), and other anti-bribery laws applicable to our operations. We source a significant portion of our products from, and have important consumer markets, outside of the United States. We have an ethics and compliance program to address compliance with the FCPA and similar laws by us, our employees, agents, suppliers and other partners. Refer to Item 1A. Risk Factors for additional information on risks relating to our international operations. +COMPETITION +The athletic footwear, apparel and equipment industry is highly competitive on a worldwide basis. We compete internationally with a significant number of athletic and leisure footwear companies, athletic and leisure apparel companies, sports equipment companies and large companies having diversified lines of athletic and leisure footwear, apparel and equipment, including adidas, Anta, ASICS, Deckers, Li Ning, lululemon athletica, New Balance, On, Puma, Under Armour and V.F. Corporation, among others. The intense competition and the rapid changes in technology and consumer preferences in the markets for athletic and leisure footwear and apparel and athletic equipment constitute significant risk factors in our operations. Refer to Item 1A. Risk Factors for additional information. +NIKE is the largest seller of athletic footwear and apparel in the world. Important aspects of competition in this industry are: +• Product attributes such as quality; innovation and development; performance and reliability; new product style, and design; as well as consumer price/value. +• Consumer connection, engagement and affinity for brands and products, developed through marketing, promotion and digital experiences; social media interaction; customer support and service; identification with prominent and influential athletes, influencers, public figures, coaches, teams, colleges and sports leagues who endorse our brands and use our products and active engagement through sponsored sporting events and clinics. +• Effective sourcing and distribution of products, with attractive merchandising and presentation at retail, both in-store and on digital platforms. +We believe that we are competitive in all of these areas. See Item 1A. Risk Factors, including the risk factor titled "Our products, services and experiences face intense competition." +TRADEMARKS AND PATENTS +We believe that our intellectual property rights are important to our brand, our success and our competitive position. We strategically pursue available protections of these rights and vigorously protect and enforce them against third-party theft and infringement. +We use trademarks on nearly all of our products and packaging, and in our marketing materials, and believe having distinctive marks that are readily identifiable is an important factor in creating a market for our goods, in identifying our brands and the Company, and in distinguishing our goods from the goods of others. We consider our NIKE and Swoosh Design trademarks to be among our most valuable assets and we have registered these trademarks in over 190 jurisdictions worldwide. In addition, we own many other trademarks that we use in marketing our products. Throughout the world, we own common law rights in the trade dress of several distinctive shoe designs and elements. For certain trade dress, we have sought and obtained trademark registrations. +We have copyright protection in our designs, graphics, software applications, digital goods and other original works. When appropriate, we also obtain registered copyrights. +We file for, own and maintain many U.S. and foreign utility and design patents protecting components, technologies, materials, manufacturing techniques, features, functionality, and industrial designs used in and for the manufacture of various athletic, performance, and leisure footwear and apparel, including physical and digital versions thereof, athletic equipment, and digital devices, and related software applications. These patents expire at various times. +We believe our success depends upon our capabilities in areas such as design, research and development, production and marketing and is supported and protected by our intellectual property rights, such as trademarks, utility and design patents, copyrights, and trade secrets, among others. +We have followed a policy of applying for and registering intellectual property rights in the United States and select foreign countries on trademarks, inventions, innovations and designs that we deem protectable and valuable. We also continue to vigorously protect and enforce our intellectual property, including trademarks, patents and trade secrets against third-party infringement and misappropriation. +2025 FORM 10-K 5 +Table of Contents +HUMAN CAPITAL RESOURCES +At NIKE, we consider the strength and effective management of our workforce to be essential to the ongoing success of our business. We believe that it is important to attract, develop and retain an engaged workforce with diverse experiences, backgrounds and perspectives at all levels of our business and that such a workforce fosters creativity and accelerates innovation. +CULTURE +Each employee shapes NIKE's culture through behaviors and practices. This starts with our Maxims, which represent our core values and, along with our Code of Conduct, feature the fundamental behaviors that help anchor, inform and guide us and apply to all employees. Our mission is to bring inspiration and innovation to every athlete in the world, which includes the belief that if you have a body, you are an athlete. We aim to do this by creating groundbreaking sport innovations, making our products more sustainably, building a creative global team with diverse experiences, backgrounds and perspectives, supporting the well-being of our employees and making a positive impact in communities where we live and work. Our mission is aligned with our deep commitment to maintaining an environment where all NIKE employees have the opportunity to reach their full potential, to connect to our brands and to shape our workplace culture. We believe providing for growth and retention of our employees is essential in fostering such a culture and are dedicated to providing access to training programs and career development opportunities, including trainings on NIKE's values, history and business, trainings on developing leadership skills at all levels, tools and resources for managers and qualified tuition reimbursement opportunities. +We are committed to having an inclusive and diverse team and culture, and accessible workplace. We achieve this through recruitment, development and retention of qualified talent with diverse experiences, backgrounds and perspectives through traditional channels, initiatives and partnerships, including those that serve colleges and universities. Additionally, we provide access to education so that all NIKE employees and leaders have the cultural knowledge and understanding to lead inclusively and build diverse and inclusive teams. We also have employee resource groups, collectively known as NikeUNITED, that promote NIKE cultural awareness and are open to all. +In empowering our employees to help shape our culture, we source employee feedback through a variety of survey tools: our annual Engagement Survey program, corporate pulse surveys and listening sessions. These tools provide employees throughout the globe an opportunity to provide confidential feedback on key areas known to drive employee engagement, including their satisfaction with their managers, their work and the Company generally. These tools also measure our employees' connection to NIKE's culture. NIKE also provides multiple points of contact for employees to speak up if they experience something that does not align with our values or otherwise violates our workplace policies, even if they are uncertain what they observed or heard is a violation of company policy. +As part of our commitment to making a positive impact on our communities, we maintain a goal of investing 2% of our prior fiscal year's pre-tax income into global communities. The focus of this investment continues to be inspiring youth to be active through play and sport as well as uniting and inspiring communities. Through our investments we bring the power of sport into our communities, with the goal of making play and sport more accessible. Our community investments are an important part of our culture, and we support employees in giving back to community organizations through volunteering and donations, which are matched by the NIKE Foundation where eligible. +EMPLOYEE BASE +As of May 31, 2025, we had approximately 77,800 employees worldwide, including retail and part-time employees. We also utilize independent contractors and temporary personnel to supplement our workforce. +Most of our employees are not represented by unions, except for certain employees in the EMEA and APLA geographies who are members of and/or are represented by trade unions, as allowed or required by local law and/or collective bargaining agreements. Also, in some countries outside of the United States, local laws require employee representation by works councils (which may be entitled to information and consultation on certain subsidiary decisions) or by organizations similar to a union. In certain European countries, we are required by local law to enter into, and/or comply with, industry-wide or national collective bargaining agreements. NIKE has never experienced a material interruption of operations due to labor disagreements. +COMPENSATION AND BENEFITS +NIKE's total rewards are intended to be competitive and equitable, meet the varied needs of our global teammates and reinforce our values. We are committed to providing comprehensive, competitive and equitable pay and benefits to our employees, and we have invested, and aim to continue to invest, in our employees through growth and development and holistic well-being initiatives. Our initiatives in this area include: +2025 FORM 10-K 6 +Table of Contents +• We are committed to competitive pay, pay equity and to reviewing our pay and promotion practices annually. +• We have an annual company bonus plan and a retail-focused bonus plan applicable to all eligible employees. Both programs are focused on rewarding employees for company performance, which we believe reinforces our culture and rewards behaviors that support collaboration and teamwork. +• We provide comprehensive family care benefits in the U.S. and globally where practicable, including family planning coverage, backup care and child/elder care assistance as well as an income-based childcare subsidy for eligible employees. +• Our Military Leave benefit provides up to 12 weeks of paid time off every 12 months. +• We offer free access to our sport centers at our World Headquarters for our full-time employees and North America store employees. +• We provide employees free access to mindfulness and meditation resources, as well as live classes through our sport centers. +• We provide all employees and their families globally with free and confidential visits with a mental health counselor through a third-party provider and our global Employee Assistance Program (EAP). +• We provide support to our employees in a variety of ways during times of crisis, including pay continuity under certain circumstances, and our natural disaster assistance program. +• We provide a hybrid work approach for the majority of employees, as well as a Four Week Flex program, which provides employees an opportunity to work remotely for up to four weeks per year. +• We offer a Well-Being Week where we close our corporate offices for a full week in the summer and Well-Being Days for our teammates in our retail stores and distribution centers, and encourage our teammates to focus on their well-being. +• We provide inclusive healthcare coverage and family planning benefits for eligible employees covered on the U.S. Health Plan, including access to both restorative services and personal care. +• We provide all U.S. employees with unlimited free financial coaching through a third-party provider. +Additional information related to our human capital strategy can be found on the Mission section of about.nike.com. Information contained on or accessible through our websites is not incorporated into, and does not form a part of, this Annual Report or any other report or document we file with the United States Securities and Exchange Commission (the "SEC"), and any references to our websites are intended to be inactive textual references only. +AVAILABLE INFORMATION AND WEBSITES +Our NIKE digital commerce website is located at www.nike.com. On our NIKE corporate website, located at investors.nike.com, we post the following filings as soon as reasonably practicable after they are electronically filed with, or furnished to, the SEC: our annual report on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities and Exchange Act of 1934, as amended. Our proxy statements are also posted on our corporate website. All such filings on our corporate website are available free of charge. Copies of these filings are also available on the SEC's website at www.sec.gov. Also available on our corporate website are the charters of the committees of our Board of Directors, as well as our corporate governance guidelines and code of ethics. Copies of any of these documents will be provided in print to any shareholder who submits a request in writing to NIKE Investor Relations, One Bowerman Drive, Beaverton, Oregon 97005-6453. Information contained on or accessible through our website is not incorporated into, and does not form a part of, this Annual Report or any other report or document we file with the SEC, and any references to our website are intended to be inactive textual references only. +2025 FORM 10-K 7 +Table of Contents +INFORMATION ABOUT OUR EXECUTIVE OFFICERS +The executive officers of NIKE, Inc. as of July 17, 2025, are as follows: +Mark Parker , Executive Chairman — Mr. Parker, 69, joined NIKE in 1979 and has served as Executive Chairman of the Board of Directors since 2020. Prior to his current role, Mr. Parker served as President and Chief Executive Officer of NIKE, Inc. from 2006 to 2020. During his employment with NIKE, he has had primary responsibilities in product research, design and development, marketing and brand management. Mr. Parker previously served in various roles at NIKE including President of the NIKE Brand, Vice President of Global Footwear, General Manager, corporate Vice President and divisional Vice President in charge of product development. +Elliott Hill , President and Chief Executive Officer — Mr. Hill, 61, joined NIKE in 1988 and has served as President and Chief Executive Officer of NIKE, Inc. since October 2024. Previously, Mr. Hill served as President – Consumer and Marketplace from 2018 until his retirement in 2020, in which role he led all commercial and marketing operations for the NIKE and Jordan brands. During his employment with NIKE, he has served in various roles, including Apparel Sales Director in Europe, Retail Development Director in Europe, Vice President of Sales and Retail in EMEA, General Manager of U.S. Retail, Vice President of U.S. Sales, Retail and NIKE.com, Vice President of Global Retail, President of Geographies and Sales and Vice President and General Manager of North America. +Matthew Friend , Executive Vice President and Chief Financial Officer — Mr. Friend, 47, joined NIKE in 2009 and has served as Executive Vice President and Chief Financial Officer of NIKE, Inc. since 2020. In this role, Mr. Friend leads the Company's strategy, finance and business services organizations. Mr. Friend previously served in various roles at NIKE including as Vice President of Investor Relations and Chief Financial Officer of the NIKE Brand. Prior to joining NIKE, Mr. Friend worked in the financial industry, including as Vice President in the investment banking and mergers and acquisitions groups at Goldman Sachs and Morgan Stanley. +Treasure Heinle , Executive Vice President, Chief People Officer — Ms. Heinle, 55, joined NIKE in 2012 and has served as Executive Vice President, Chief People Officer of NIKE, Inc. since January 2025. She leads the Company’s global Human Resources function and its People vision and strategy. Ms. Heinle was previously Vice President, Chief Talent Officer and Vice President, HR Business Partner for the Global Operations & Technology and Global Consumer & Marketplace teams, inclusive of Jordan Brand and Converse. Prior to joining NIKE as Vice President, HR Business Partner for North America, Ms. Heinle held Human Resources leadership positions at Danaher Corporation, Tektronix, Inc. and InFocus Corporation. +Rob Leinwand , Executive Vice President, Chief Legal Officer — Mr. Leinwand, 57, joined NIKE in 2004 and has served as Executive Vice President, Chief Legal Officer of NIKE, Inc. since 2024. In this role, Mr. Leinwand leads the strategic vision for the Company's Legal, Social and Community Impact, Government and Public Affairs and Resilience teams. Mr. Leinwand previously served as Vice President, Deputy General Counsel, Enterprise which included oversight of the Company's Global Litigation, Employment Law/Employee Relations, Brand Protection, Supply Chain and Corporate Governance functions. Prior to joining NIKE, Mr. Leinwand was a shareholder at the law firm of Littler Mendelson. +Phil McCartney , Executive Vice President, Chief Innovation, Design & Product Officer — Mr. McCartney, 50, joined NIKE in 1998 and has served as Executive Vice President, Chief Innovation, Design & Product Officer of NIKE, Inc. since May 2025. In this role, Mr. McCartney is responsible for the creation of innovative product and oversees how NIKE, Jordan and Converse innovate, design and create products for athletes around the world. Previously, Mr. McCartney was Vice President and General Manager of Global Footwear, a position held since 2016. He also previously served in various roles, including Vice President of Sport, Vice President of Running, Vice President of Football Footwear and started at NIKE as a brand ambassador and product expert, known as an EKIN. Prior to joining NIKE, Mr. McCartney was a professional athlete. +Amy Montagne , President, Nike — Ms. M ontagne, 53, joined NIKE in 2005 and has served as President, Nike of NIKE, Inc. since May 2025. In this role, Ms. Montagne is responsible for serving consumers across all sports and driving future growth for the NIKE Brand. Previously, Ms. Montagne served in various Vice President and General Manager roles at NIKE, including APLA, Global Men’s, Global Categories, Global Women’s and Global Merchandising, as well as in other leadership positions in North America, Running, Women’s Training, and Sportswear. Prior to joining NIKE, Ms. Montagne worked in allocation, planning and merchandising at Gap Inc., Mervyn’s and Walmart Inc. +Craig Williams , Executive Vice President, Chief Commercial Officer — Mr. Williams, 56, joined NIKE in 2019 and has served as Executive Vice President, Chief Commercial Officer of NIKE, Inc. since June 2025. In this role, Mr. Williams leads NIKE's four geographic operating units, the global direct to consumer business and wholesale marketplace partnerships. Mr. Williams previously served as President of Geographies & Marketplace of NIKE, Inc. and President of Jordan Brand, overseeing the global business and team of designers, footwear and apparel developers, marketers and geography leaders. Prior to joining NIKE, Mr. Williams held executive leadership positions at The Coca-Cola Company as well as roles at CIBA Vision, a subsidiary of Novartis AG, and Kraft Foods Inc. Mr. Williams also served five years in the U.S. Navy as a Naval Nuclear Power Officer. +2025 FORM 10-K 8 +Table of Contents +ITEM 1A. RISK FACTORS +Special Note Regarding Forward-Looking Statements and Analyst Reports +Certain written and oral statements, other than purely historic information, including estimates, projections, statements relating to NIKE's business plans, objectives and expected operating or financial results and the assumptions upon which those statements are based, made or incorporated by reference from time to time by NIKE or its representatives in this Annual Report, other reports, filings with the SEC, press releases, conferences or otherwise, are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements include, without limitation, any statement that may predict, forecast, indicate or imply future results, performance or achievements, and may contain the words "believe," "anticipate," "expect," "estimate," "project," "will be," "will continue," "will likely result" or words or phrases of similar meaning. Forward-looking statements involve risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. The risks and uncertainties are detailed from time to time in reports filed by NIKE with the SEC, including reports filed on Forms 8-K, 10-Q and 10-K, and include, among others, the following: risks relating to our business strategy, including, but not limited to, risks related to an increased focus on sport and rebalancing of our channel mix; intense competition among designers, marketers, distributors and sellers of athletic or leisure footwear, apparel and equipment for consumers and endorsers; NIKE's ability to successfully innovate and compete in various categories; new product development and innovation; demographic changes; changes in consumer preferences and channel mix; popularity of particular designs, categories of products and sports; seasonal and geographic demand for NIKE products; difficulties in anticipating or forecasting, and responding to changes in consumer preferences, consumer demand for NIKE products, changes in channel mix and the various market factors described above; the size and growth of the overall athletic or leisure footwear, apparel and equipment markets; general risks associated with operating a global business, including, without limitation, exchange rate fluctuations, inflation, import duties, quotas, sanctions, political and economic instability, conflicts and terrorism; the potential impact of new and existing laws, regulations or policies, including, without limitation, those relating to tariffs, import/export, trade, taxes, wages, labor and immigration; international, national and local political, civil, economic and market conditions, including volatility and uncertainty regarding inflation and interest rates; difficulties in implementing, operating and maintaining NIKE's increasingly complex information technology systems and controls, including, without limitation, the systems related to demand and supply planning and inventory control; interruptions in data and information technology systems; consumer data security; risks related to our sustainability strategy; fluctuations and difficulty in forecasting operating results, including, without limitation, the fact that advance orders may not be indicative of future revenues due to changes in shipment timing, the changing mix of orders with shorter lead times, and discounts, order cancellations and returns; the ability of NIKE to sustain, manage or forecast its growth and inventories; the size, timing and mix of purchases of NIKE's products; increases in the cost of materials, labor and energy used to manufacture products; the ability to secure and protect trademarks, patents and other intellectual property; product performance and quality; customer service; adverse publicity and an inability to maintain NIKE's reputation and brand image, including without limitation, through social media or in connection with brand damaging events; the loss of significant customers or suppliers; dependence on distributors and licensees; business disruptions; increased costs of freight and transportation to meet delivery deadlines; increases in borrowing costs due to any decline in NIKE's debt ratings; changes in business strategy or development plans; the impact of, including business and legal developments relating to, climate change, extreme weather conditions and natural disasters; litigation, regulatory proceedings, sanctions or any other claims asserted against NIKE; the ability to attract and retain qualified employees, and any negative public perception with respect to key personnel or our corporate culture, values or purpose; the effects of NIKE's decision to invest in or divest of businesses or capabilities; health epidemics, pandemics and similar outbreaks; and other factors referenced or incorporated by reference in this Annual Report and other reports. +Investors should also be aware that while NIKE does, from time to time, communicate with securities analysts, it is against NIKE's policy to disclose to them any material non-public information or other confidential commercial information. Accordingly, shareholders should not assume that NIKE agrees with any statement or report issued by any analyst irrespective of the content of the statement or report. Furthermore, NIKE has a policy against confirming financial forecasts or projections issued by others. Thus, to the extent that reports issued by securities analysts contain any projections, forecasts or opinions, such reports are not the responsibility of NIKE. +Risk Factors +The risks included here are not exhaustive. Other sections of this Annual Report may include additional factors which could adversely affect NIKE's business and financial performance. Moreover, NIKE operates in a very competitive and rapidly changing environment. New risks emerge from time to time and it is not possible for management to predict all such risks, nor can it assess the impact of all such risks on NIKE's business or the extent to which any risk, or combination of risks, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results. +2025 FORM 10-K 9 +Table of Contents +Economic and Industry Risks +Global economic conditions have in the past had and could in the future have a material adverse effect on our business, operating results and financial condition. +The uncertain state of the global economy, including volatility in, and uncertainty regarding, inflation and interest rates and the risk of a recession, continues to impact businesses around the world. If global economic and financial market conditions continue to be volatile or deteriorate, the following factors, among others, could have a material adverse effect on our business, operating results and financial condition: +• Our sales are impacted by discretionary spending by consumers. Declines in consumer spending have in the past resulted in and may in the future result in reduced demand for our products, increased inventories, reduced orders from retailers for our products, order cancellations or returns, lower revenues, higher discounts and lower gross margins. +• In the future, we may be unable to access financing in the credit and capital markets at reasonable rates in the event we find it desirable to do so. +• We conduct transactions in various currencies, which creates exposure to fluctuations in foreign currency exchange rates relative to the U.S. Dollar. Continued volatility in the markets and exchange rates for foreign currencies and contracts in foreign currencies has had and could continue to have a significant impact on our reported operating results and financial condition. +• Continued volatility in the availability and prices for commodities and raw materials we use in our products and in our supply chain (such as cotton or petroleum derivatives) has had and could in the future have a material adverse effect on our costs, gross margins and profitability. In addition, supply chain issues caused by factors, including geopolitical conflicts, tariffs and trade policies and pandemics, have impacted and may in the future impact the availability, pricing and timing for obtaining commodities and raw materials. +• If retailers of our products experience declining revenues or experience difficulty obtaining financing to purchase our products, this could result in reduced orders for our products, order cancellations, late retailer payments, extended payment terms, higher accounts receivable, reduced cash flows, greater expense associated with collection efforts and increased bad debt expense. +• In the past, certain retailers of our products have experienced severe financial difficulty, become insolvent and ceased business operations, and this could occur in the future, which could negatively impact the sale of our products to consumers. +• If contract manufacturers of our products or other participants in our supply chain experience difficulty obtaining financing to purchase raw materials or to finance capital equipment and other general working capital needs, it may result in delays or non-delivery of shipments of our products. +Our products, services and experiences face intense competition. +NIKE is a consumer products company and the relative popularity of various sports and fitness activities and changing design trends affect the demand for our products, services and experiences. The athletic footwear, apparel and equipment industry is highly competitive both in the United States and worldwide. We compete with a significant number of athletic and leisure footwear companies, athletic and leisure apparel companies, sports equipment companies, private label brands offered by major retailers and various other large companies that have diversified lines of athletic and leisure footwear, apparel and equipment. New competitors frequently enter the markets we serve. We also compete with other companies for the production capacity of contract manufacturers that produce our products. In addition, we and our contract manufacturers compete with other companies and industries for raw materials used in our products. Our NIKE Direct operations, both through our digital commerce operations and retail stores, also compete with multi-brand retailers, which sell our products through their digital platforms and physical stores, and with digital commerce platforms. In addition, we compete with respect to the digital services and experiences we are able to offer our consumers, including fitness and activity apps; sport, fitness and wellness content and services; and digital services and features in retail stores that enhance the consumer experience. +Product offerings, product innovations and technologies, marketing expenditures (including expenditures for advertising and endorsements), pricing, costs of production, customer service, digital commerce platforms, digital services and experiences and social media presence are areas of intense competition. These, in addition to ongoing rapid changes in technology (including marketing and advertising technology) and artificial intelligence ("AI"), a reduction in barriers to starting new footwear and apparel companies and an increase in the number of such companies (some of which may be able to react more nimbly to changes in consumer preferences) and changes in consumer preferences in the markets for athletic and leisure footwear, apparel, and equipment, services and experiences, constitute significant risk factors in our operations. In addition, the competitive nature of retail, including shifts in the ways in which consumers shop, constitutes a risk factor implicating our NIKE Direct and wholesale operations. If we do not adequately and timely anticipate and respond to our competitors, our costs may increase, demand for our products may decline, possibly significantly, or we may need to reduce wholesale or suggested retail prices for our products. +2025 FORM 10-K 10 +Table of Contents +Economic factors beyond our control, and changes in the global economic environment, including fluctuations in and uncertainty regarding inflation and currency exchange rates, could result in lower revenues, higher costs and decreased margins and earnings. +A majority of our products are manufactured and sold outside of the United States, and we conduct purchase and sale transactions in various currencies, which creates exposure to the volatility of global economic conditions, including fluctuations in and uncertainty regarding inflation and foreign currency exchange rates. Central banks deploy various strategies to combat inflation, including increasing interest rates, which impact our borrowing costs. Government shutdowns or the risk of government shutdowns, as well as the impact or expected impact of elections, both in the United States and in other countries around the world, may also increase volatility. Additionally, there has been, and may continue to be, volatility in currency exchange rates that impact the U.S. Dollar value relative to other international currencies. Our international revenues and expenses generally are derived from sales and operations in foreign currencies, and these revenues and expenses are affected by currency fluctuations, specifically amounts recorded in foreign currencies and translated into U.S. Dollars for consolidated financial reporting, as weakening of foreign currencies relative to the U.S. Dollar adversely affects the U.S. Dollar value of the Company's foreign currency-denominated sales and earnings. Currency exchange rate fluctuations could also disrupt the business of the independent manufacturers that produce our products by making their purchases of raw materials more expensive and more difficult to finance. Foreign currency fluctuations have adversely affected and could continue to have an adverse effect on our results of operations and financial condition. +We hedge certain foreign currency exposures to lessen and delay, but not to completely eliminate, the effects of foreign currency fluctuations on our financial results. Since the hedging activities are designed to lessen volatility, they not only reduce the negative impact of a stronger U.S. Dollar or other trading currency, but they also reduce the positive impact of a weaker U.S. Dollar or other trading currency. Our future financial results have in the past been and could in the future be significantly affected by the value of the U.S. Dollar in relation to the foreign currencies in which we conduct business. The degree to which our financial results are affected for any given time period will depend in part upon our hedging activities. +We may be adversely affected by the financial health of our wholesale customers. +We extend credit to our customers based on an assessment of a customer's financial condition, generally without requiring collateral. To assist in the scheduling of production and the shipping of our products, we offer certain customers the opportunity to place orders five to six months ahead of delivery under our futures ordering program. These advance orders may be canceled under certain conditions, and the risk of cancellation increases when dealing with financially unstable retailers or retailers struggling with economic uncertainty. In the past, some customers have experienced financial difficulties up to and including bankruptcies, which have had an adverse effect on our sales, our ability to collect on receivables and our financial condition. When the retail economy weakens or as consumer behavior shifts, retailers tend to be more cautious with orders. A slowing or changing economy in our key markets, including a recession, could adversely affect the financial health of our customers, which in turn could have an adverse effect on our results of operations and financial condition. In addition, product sales are dependent in part on high quality merchandising and an appealing retail environment to attract consumers, which requires continuing investments by retailers. Retailers that experience financial difficulties may fail to make such investments or delay them, resulting in lower sales and orders for our products. +Climate change, extreme weather conditions and natural disasters may have an adverse impact on our business and results of operations. +There are concerns that increased levels of carbon dioxide and other greenhouse gases in the atmosphere have caused, and may continue to cause, potentially at a growing rate, increases in global temperatures, changes in weather patterns and increasingly frequent and/or prolonged extreme weather and climate events. Climate change may also exacerbate challenges relating to the availability and quality of water and raw materials, including those used in the production of our products. +Given the broad and global scope of our operations, we are particularly vulnerable to the physical risks of climate change, such as shifts in weather patterns. Extreme weather conditions in the areas in which our retail stores, suppliers, manufacturers, customers, distribution centers, offices, headquarters and vendors are located could adversely affect our operating results and financial condition. Moreover, natural disasters such as earthquakes, hurricanes, wildfires, tsunamis, floods or droughts, whether occurring in the United States or abroad, and their related consequences and effects, including energy shortages and public health issues, have in the past temporarily disrupted, and could in the future disrupt, our operations, the operations of our vendors, manufacturers and other suppliers or have in the past resulted in, and in the future could result in, economic instability that may negatively impact our operating results and financial condition. In particular, if a natural disaster or severe weather event were to occur in an area in which we or our suppliers, manufacturers, employees, customers, distribution centers or vendors are located, our continued success would depend, in part, on the safety and availability of the relevant personnel and facilities and proper functioning of our or third parties' computer, network, telecommunication and other systems and operations. In addition, a natural disaster or severe weather event could negatively impact retail traffic to our stores or stores that carry our products and could have an adverse impact on consumer spending, any of which could in turn result in negative point-of-sale trends for our merchandise. Further, climate change may increase both the frequency and severity of extreme weather conditions and natural disasters, which may affect our business operations, either in a particular region or globally, as well as the activities of our third-party vendors and other suppliers, manufacturers and customers. The diversity of locations in which we operate, our operational +2025 FORM 10-K 11 +Table of Contents +size, disaster recovery and business continuity planning and our information technology systems and networks, including the Internet and third-party services ("Information Technology Systems"), may not be sufficient for all or for concurrent eventualities. If we were to experience a local or regional disaster or other business continuity event or concurrent events, we could experience operational challenges, in particular depending upon how a local or regional event may affect our human capital across our operations or with regard to particular aspects of our operations, such as key executive officers or personnel. For example, our World Headquarters is located in a seismic zone, which is at a higher risk for earthquakes and the related consequences or effects. Further, if we are unable to find alternative suppliers, replace capacity at key manufacturing or distribution locations or quickly repair damage to our Information Technology Systems or supply systems, we could be late in delivering, or be unable to deliver, products to our customers. These events could result in reputational damage, lost sales, cancellation charges or markdowns, all of which could have an adverse effect on our business, results of operations and financial condition. +Globally, the expectations of regulators and other key stakeholders on corporate responsibility and sustainability-related topics continue to evolve and diverge, and our ability to meet these requirements and expectations could negatively impact our operating results and financial condition. +Corporate responsibility and sustainability-related topics, including climate change and diversity, as well as companies’ actions and initiatives on such issues, have received significant attention from a wide range of stakeholders. Our ability to meet the expectations and requirements of key stakeholders, particularly in light of rapid changes in regulations, interpretations of existing regulations or consumer preferences, could affect our business, operating results and financial condition, as well as our policies and procedures relating to corporate responsibility and sustainability-related matters. For example, federal, state or local governmental authorities in various countries are implementing, have proposed and are likely to continue to propose, legislative and regulatory initiatives regarding corporate responsibility and sustainability-related matters, ranging from the disclosure of corporate greenhouse gas emissions to limitations on corporate diversity programs, among others. Compliance with such laws, regulations or policies, including any that may be adopted in the future, could increase the costs of operating our businesses, reduce the demand for our products and impact the prices we charge our customers, any or all of which could adversely affect our results of operations. in addition, various countries and regions have adopted or proposed laws, regulations and policies that diverge from, or potentially conflict with, those in other jurisdictions, which could increase the complexity of, and potential cost related to complying with, such regulations. Failure to comply with any legislation, regulation or policy, including as a result of making good faith interpretations that may differ from those taken by authorities in relevant jurisdictions, could potentially result in legal, reputational and operational risks. +Moreover, our consumers, customers, employees and other stakeholders on products have diverse expectations, demands and perspectives on sustainability matters, which are subject to continued evolution. In order to meet their expectations, we may need to incur increased costs, including to conduct additional due diligence or make additional investments in facilities and equipment. These efforts may in turn impact the availability and cost of key raw materials used in the production of our products or the demand for our products, and could adversely impact our business, operating results and financial condition. +We may not be able to meet the diverse expectations and demands of all of our stakeholders, which could harm our reputation, reduce customer demand for our products and services, and subject us to legal, reputational and operational risks. Although we have announced corporate responsibility and sustainability-related goals and targets, there can be no assurance that our stakeholders will agree with our goals, targets or strategies, or be satisfied with our efforts to implement them. Any perception, whether or not valid, that we have failed to achieve, or to act responsibly with respect to, such matters or to effectively respond to new or additional legal or regulatory requirements, could result in adverse publicity and adversely affect our business and reputation. Execution of these strategies and achievement of our goals and targets is subject to risks and uncertainties, many of which are outside of our control. In particular, with respect to our sustainability efforts, these risks and uncertainties include, but are not limited to, our ability to execute our strategies and achieve our goals within the currently projected costs and the expected timeframes; the availability and cost of raw materials and renewable energy; unforeseen production, design, operational and technological difficulties; the outcome of research efforts and future technology developments, including the ability to scale projects and technologies on a commercially competitive basis; compliance with, changes or additions to, and divergence in, global and regional regulations, taxes, charges, mandates or requirements relating to greenhouse gas emissions, carbon costs or climate-related goals; adapting products to customer preferences and customer acceptance of sustainable supply chain solutions; diverging and evolving expectations and demands from key stakeholders, including as a result of changing regulations in their jurisdictions; and the actions of competitors and competitive pressures. As a result, there is no assurance that we will be able to adequately meet stakeholder expectations, successfully execute our strategies or achieve our corporate responsibility and sustainability-related goals, which could damage our reputation and customer and other stakeholder relationships and have an adverse effect on our business, results of operations and financial condition. +Our financial condition and results of operations have been, and could in the future be, adversely affected by a pandemic, epidemic or other public health emergency. +Pandemics and other public health emergencies, and preventative measures taken to contain or mitigate such crises have caused, and may in the future cause, business slowdown or shutdown in affected areas and significant disruption in the financial markets, both globally and in the United States. These events have led to and could again lead to adverse impacts to our global supply chain, factory cancellation costs, store closures, and a decline in retail traffic and discretionary spending by consumers +2025 FORM 10-K 12 +Table of Contents +and, in turn, materially impact our business, sales, financial condition and results of operations as well as cause a volatile effective tax rate driven by changes in the mix of earnings across our jurisdictions. We cannot predict whether, and to what degree, our sales, operations and financial results could in the future be affected by a pandemic and preventative measures. Risks presented by pandemics and other public health emergencies include, but are not limited to: +• Deterioration in economic conditions in the United States and globally; +• Disruptions to our distribution centers, contract manufacturers, finished goods factories and other vendors impacting our planned inventory production and distribution, including higher inventory levels or inventory shortages in various markets; +• Supply chain impacts; +• Decreased retail traffic; +• Reduced consumer demand for, or spend on, our products; +• Cancellation or postponement of sports seasons and sporting events; +• Bankruptcies or other financial difficulties facing our wholesale customers; and +• Significant disruption of and volatility in global financial markets. +We cannot reasonably predict the ultimate impact of any pandemic or public health emergency, including the extent of any adverse impact on our business, results of operations and financial condition, which will depend on, among other things, the duration and spread of the pandemic or public health emergency, the impact of governmental regulations that have been, and may continue to be, imposed in response, the effectiveness of actions taken to contain or mitigate the outbreak, the availability, safety and efficacy of vaccines, including against emerging variants of the infectious disease, and global economic conditions. Any pandemic or public health emergency may also affect our business, results of operations or financial condition in a manner that is not presently known to us or that we currently do not consider to present significant risks and may also exacerbate, or occur concurrently with, other risks discussed in this Item 1A. Risk Factors, any of which could have a material effect on us. +Business and Operational Risks +Failure to maintain our reputation, brand image and culture could negatively impact our business. +Our iconic brands have worldwide recognition, and our success depends on our ability to maintain and enhance our brand image and reputation. Maintaining, promoting and growing our brands will depend on our design and marketing efforts, including product innovation, product quality and advertising and consumer campaigns. Our commitment to product innovation, quality and sustainability, and our continuing investment in design (including materials), marketing and sustainability measures may not have the desired impact on our brand image and reputation. In addition, our success in maintaining, extending and expanding our brand image depends on our ability to adapt to a rapidly changing media and digital environment, including our reliance on social media, digital advertising networks, digital and advertising technology, and digital dissemination of advertising campaigns on our digital platforms and through our digital experiences and products. We could be adversely impacted if we fail to achieve any of these objectives. +Our brand value also depends on our ability to maintain a positive consumer perception of our corporate integrity, purpose and brand culture. Negative claims or publicity involving us, our culture and values, our products, services and experiences, consumer data, or any of our key employees, endorsers, sponsors, suppliers or partners could seriously damage our reputation and brand image, regardless of whether such claims are accurate. For example, while we require our suppliers of our products to operate their business in compliance with applicable laws and regulations, we do not control their practices. Negative publicity relating to a violation or an alleged violation of policies or laws by such suppliers could damage our brand image and diminish consumer trust in our brand. Further, our reputation and brand image could be damaged as a result of our support of, association with or lack of support or disapproval of certain social causes and public personalities, including those related to political and social issues, catastrophic events, human capital practices, climate change and sustainability-related matters, as well as any decisions we make to continue to conduct, or change, certain of our activities in response to such considerations. Social media, which accelerates and potentially amplifies the scope of negative publicity or fictitious information, can increase the challenges of responding to negative claims. Adverse publicity about regulatory or legal action against us, or by us, could also damage our reputation and brand image, undermine consumer confidence in us and reduce long-term demand for our products, even if the regulatory or legal action is unfounded or not material to our operations. If the reputation, culture or image of any of our brands is tarnished or if we receive negative publicity, then our sales, financial condition and results of operations could be materially and adversely affected. +If we are unable to anticipate consumer preferences and develop new products, we may not be able to maintain or increase our revenues and profits. +Our success depends on our ability to identify, originate and define product trends as well as to anticipate, gauge and react to changing consumer demands in a timely manner so that our product offerings evolve and are responsive to consumer demands. However, lead times for many of our products make it more difficult for us to respond rapidly to new or changing product trends or +2025 FORM 10-K 13 +Table of Contents +consumer preferences. All of our products are subject to changing consumer preferences that cannot be predicted with certainty. Our new products may not receive consumer acceptance as consumer preferences could shift rapidly to different types of products or away from these types of products altogether, and our future success depends in part on our ability to anticipate and respond to these changes. If we fail to anticipate accurately and respond to trends and shifts in consumer preferences by adjusting the mix of existing product offerings, developing new products, designs, styles and categories, and influencing sports and fitness preferences through extensive marketing, we could experience lower sales, excess inventories or lower profit margins, any of which could have an adverse effect on our results of operations and financial condition. In addition, we market our products globally through a diverse spectrum of advertising and promotional programs and campaigns, including social media and other digital advertising networks. If we do not successfully market our products, if advertising and promotional costs increase or if certain advertising networks are no longer available, these factors could have an adverse effect on our business, financial condition and results of operations. +We rely on technical innovation and high-quality products to compete. +Technical innovation and quality control in the design and manufacturing processes of footwear, apparel, equipment and other products and services are essential to the commercial success of our products and development of new products. Research and development play a key role in technical innovation. We rely upon specialists in the fields of biomechanics, chemistry, exercise physiology, engineering, digital technologies, industrial design, sustainability and related fields, as well as research committees and advisory boards made up of athletes, coaches, trainers, equipment managers, orthopedists, podiatrists and other experts to develop and test cutting-edge performance products. While we strive to produce products that help to enhance athletic performance and reduce injury and maximize comfort, if we fail to introduce technical innovation in our products, consumer demand for our products could decline, and if we experience problems with the quality of our products (including the introduction of bias or inaccuracies in our products), we may incur substantial expense to remedy the problems and loss of consumer confidence. +Our business is affected by seasonality, which could result in fluctuations in our operating results. +We experience moderate fluctuations in aggregate sales volume during the year. Historically, revenues in the first and fourth fiscal quarters have slightly exceeded those in the second and third fiscal quarters. However, the mix of product sales may vary considerably from time to time or in the future as a result of strategic shifts in our business and seasonal or geographic demand for particular types of footwear, apparel and equipment and in connection with the timing of significant sporting events, such as the NBA Finals, Olympics or the World Cup, among others. In addition, our customers may, and from time to time do, cancel orders, change delivery schedules or change the mix of products ordered with minimal notice. As a result, we may not be able to accurately predict our quarterly sales. Accordingly, our results of operations are likely to fluctuate significantly from period to period. This seasonality, along with other factors that are beyond our control, including economic conditions, changes in consumer preferences, weather conditions, outbreaks of disease, social or political unrest, availability of import quotas, transportation disruptions and currency exchange rate fluctuations, has in the past adversely affected and could in the future adversely affect our business and cause our results of operations to fluctuate. Our operating margins are also sensitive to a number of additional factors that are beyond our control, including manufacturing and transportation costs, shifts in product sales mix and geographic sales trends, all of which we expect to continue. Results of operations in any period should not be considered indicative of the results to be expected for any future period. +Failure to continue to obtain or maintain high-quality endorsers of our products could harm our business. +We establish relationships with professional athletes, sports teams and leagues, as well as other public figures, including artists, designers and influencers, to develop, evaluate and promote our products, as well as establish product authenticity with consumers. However, as competition in our industry has increased, the costs associated with establishing and retaining such sponsorships and other relationships have increased, and competition to attract and retain high-quality endorsers has increased. If we are unable to negotiate new, or maintain our current, associations with professional athletes, sports teams and leagues, or other public figures, or to do so at a reasonable cost, we could lose the high visibility or on-field authenticity associated with our products, and we may be required to modify and substantially increase our marketing investments. As a result, our brands, net revenues, expenses and profitability could be harmed. +Furthermore, if certain endorsers were to stop using our products contrary to their endorsement agreements, our business could be adversely affected. Poor or non-performance by our endorsers, a failure to continue to correctly identify promising athletes, public figures or sports organizations, to use and endorse our products and brand or a failure to enter into cost-effective endorsement arrangements with prominent athletes, public figures and sports organizations could adversely affect our brand, sales and profitability. In addition, actions taken or statements made by athletes, teams or leagues, or other endorsers, associated with our products or brand that harm their reputations, or our decisions to cease collaborating with certain endorsers in light of actions taken or statements made by them, have in the past harmed and could in the future seriously harm our brand image with consumers and, as a result, could have an adverse effect on our sales and financial condition. +2025 FORM 10-K 14 +Table of Contents +Failure to accurately forecast consumer demand has in the past led and could in the future lead to excess inventories or inventory shortages, which has in the past resulted and could in the future result in decreased operating margins, reduced cash flows and harm to our business. +To meet anticipated demand for our products, we purchase products from manufacturers outside of our futures ordering program and in advance of customer orders, which we hold in inventory and resell to customers. There is a risk we may be unable to sell excess products ordered from manufacturers. Inventory levels in excess of customer demand have in the past resulted and may in the future result in inventory write-downs, and the sale of excess inventory at discounted prices could significantly impair our brand image and have an adverse effect on our operating results, financial condition and cash flows. Conversely, if we underestimate consumer demand for our products or if our manufacturers fail to supply products we require at the time we need them, we may experience inventory shortages. Inventory shortages could delay shipments to customers, negatively impact retailer, distributor and consumer relationships and diminish brand loyalty. The difficulty in forecasting demand also makes it difficult to estimate our future results of operations, financial condition and cash flows from period to period. A failure to accurately predict the level of demand for our products could adversely affect our net revenues and net income, and we are unlikely to forecast such effects with any certainty in advance. +Our NIKE Direct operations have required and will continue to require a substantial investment and commitment of resources and are subject to numerous risks and uncertainties. +Our NIKE Direct operations, including our retail stores and digital platforms, have required and will continue to require significant investment. Our NIKE Direct stores have required and will continue to require substantial fixed investment in equipment and leasehold improvements and personnel. We have entered into substantial operating lease commitments for retail space. Certain stores have been designed and built to serve as high-profile venues to promote brand awareness and marketing activities and to integrate with our digital platforms. Because of their unique design and technological elements, locations and size, these stores require substantially more investment than other stores. Due to the high fixed-cost structure associated with our NIKE Direct retail stores, a decline in sales, a shift in consumer behavior away from brick-and-mortar retail, or the closure, temporary or otherwise, or poor performance of individual or multiple stores could result in significant lease termination costs, write-offs of equipment and leasehold improvements and employee-related costs. +Many factors unique to retail operations, some of which are beyond our control, pose risks and uncertainties. Risks include, but are not limited to: credit card fraud and theft in both our retail stores and on digital platforms; mismanagement of existing retail channel partners; inability to manage costs associated with store construction and operation; and supply chain and inventory management, including difficulty in forecasting consumer demand. +In addition, we have made significant investments in digital technologies and information systems for the digital aspect of our NIKE Direct operations, and our digital offerings will require co ntinued investment in the development and upgrading of our technology platforms. In order to deliver high-quality digital experiences, our digital platforms must be designed effectively and work well with a range of other technologies, systems, networks, and standards that we do not control. We may not be successful in developing platforms that operate effectively with these technologies, systems, networks or standards. A growing portion of consumers access our NIKE Direct digital platforms, but in the event that it is more difficult for consumers to access and use our digital platforms, consumers find that our digital platforms do not effectively meet their needs or expectations or consumers choose not to access or use our digital platforms or use devices that do not offer access to our platforms, the success of our NIKE Direct operations could be adversely impacted. Our competitors may develop, or have already developed, digital experiences, features, content, services or technologies that are similar to ours or that achieve greater acceptance. +We may not realize a satisfactory return on our investment in our NIKE Direct operations and management's attention from our other business opportunities could be diverted, which could have an adverse effect on our business, financial condition or results of operations. +If the technology-based systems, applications and platforms that give our consumers the ability to shop or interact with us online do not function effectively, our operating results, as well as our ability to grow our digital commerce business globally or to retain our customer base, could be materially adversely affected. +Many of our consumers shop with us through our digital platforms. Consumers frequently use mobile-based devices and applications to shop online with us and with our competitors, and to do comparison shopping, as well as to engage with us and our competitors through digital services and experiences that are offered on mobile platforms. We use social media and proprietary mobile applications to interact with our consumers and as a means to enhance their shopping experience. Any failure on our part to provide attractive, effective, reliable, secure and user-friendly digital commerce platforms that offer a wide assortment of merchandise with rapid delivery options and that continually meet the changing expectations of online shoppers or any failure to provide attractive digital experiences to our customers could place us at a competitive disadvantage, result in the loss of digital commerce and other sales, harm our reputation with consumers, have a material adverse impact on the growth of our digital commerce business globally and have a material adverse impact on our business and results of operations. In addition, if use of our digital platforms continues to grow, we will need an increasing amount of technical infrastructure to continue to satisfy our consumers' needs. If we fail to continue to effectively scale and adapt our digital platforms to accommodate increased consumer demand, our business may be subject to interruptions, delays or failures and consumer demand for our products and digital experiences could decline. +2025 FORM 10-K 15 +Table of Contents +Risks specific to our digital commerce business also include diversion of sales from our and our retailers' brick and mortar stores, pricing pressure on our products, difficulty in recreating the in-store experience through our digital commerce business and liability for online content. Our failure to successfully respond to these risks might adversely affect sales in our digital commerce business, as well as damage our reputation and brands. +We rely significantly on information technology to operate our business, including our supply chain and retail operations, and any failure, inadequacy or interruption of that technology could harm our ability to effectively operate our business. +We are heavily dependent on Information Technology Systems, across our supply chain, including product design, production, forecasting, ordering, manufacturing, transportation, sales and distribution, as well as for processing financial information for external and internal reporting purposes, retail operations and other business activities. Information Technology Systems are critical to many of our operating activities and our business processes and may be negatively impacted by any service interruption or shutdown. For example, our ability to effectively manage and maintain our inventory and to ship products to customers on a timely basis depends significantly on the reliability of these Information Technology Systems. Over a number of years, we have implemented Information Technology Systems in all of the geographical regions in which we operate. Our work to integrate, secure and enhance these systems and related processes in our global operations is ongoing and NIKE will continue to invest in these efforts. We cannot provide assurance, however, that the measures we take to secure and enhance these systems will be sufficient to protect our Information Technology Systems and prevent cyberattacks, system failures or data or information loss. The failure of these systems to operate effectively, including as a result of security breaches, viruses, hackers, malware, ransomware, denial of service attacks, natural disasters, vendor business interruptions or other causes, failure to properly maintain, protect, repair or upgrade systems, or problems with transitioning to upgraded or replacement systems could cause delays in product fulfillment and reduced efficiency of our operations, could require significant time and capital investments to remediate the problem which may not be sufficient to cover all eventualities, and may have an adverse effect on our reputation, results of operations and financial condition. In addition, the use of employee-owned devices for communications as well as hybrid work arrangements, present additional operational risks to our Information Technology Systems, including, but not limited to, increased risks of cyberattacks. Further, like other companies in the retail industry, we have in the past experienced, and we expect to continue to experience, cyberattacks, including phishing, and other attempts to breach, or gain unauthorized access to, our systems. To date, these attacks have not had a material impact on our operations, but we cannot provide assurance that they will not have an impact in the future. +We also use Information Technology Systems to process financial information and results of operations for internal reporting purposes and to comply with regulatory financial reporting, legal and tax requirements. From time to time, we have expended, and expect to continue to expend, significant resources to modify, update and enhance our Information Technology Systems and to investigate and remediate vulnerabilities or other exposures. These modifications, updates and enhancements may cost more than initially expected and may not be effective in preventing issues and disruptions. Moreover, due to the complexity of our Information Technology Systems, the process of implementing modifications or enhancements can itself create a risk of systems disruptions and security issues. If Information Technology Systems suffer severe damage, disruption or shutdown and our business continuity plans, or those of our vendors, do not effectively resolve the issues in a timely manner, we could experience delays in reporting our financial results, which could result in lost revenues and profits, as well as reputational damage. +Furthermore, we depend on Information Technology Systems and personal data collection for digital marketing, digital commerce, consumer engagement and the marketing and use of our digital products and services. We also rely on our ability to engage in electronic communications throughout the world between and among our employees as well as with other third parties, including customers, suppliers, vendors and consumers. Any interruption in Information Technology Systems may impede our ability to engage in the digital space and result in lost revenues, damage to our reputation, and loss of users. +Given the increasing complexity and sophistication of techniques used by bad actors to obtain unauthorized access to or disable information technology systems, and the fact that cyberattacks are being made by groups and individuals with a wide range of expertise and motives, it is increasingly difficult to anticipate and defend against cyberattacks, and a cyberattack could occur and persist for an extended period of time before being detected. Moreover, the extent of a particular cyber incident and the steps that we may need to take to investigate the incident may not be immediately clear, and it may take a significant amount of time before such investigation can be finalized and completed and reliable information about the incident is known. During the pendency of any such investigation, we may not necessarily know the extent of the harm or how best to remediate it and we may be required to disclose incidents before their full extent is known. +Moreover, as we integrate AI into our operations, there may be increased cybersecurity and privacy risks, including the risk of unauthorized or misuse of AI tools, and threat actors may leverage AI to engage in automated, targeted and coordinated attacks against our systems. +We are subject to the risk our licensees may not generate expected sales or maintain the value of our brands. +We currently license, and expect to continue licensing, certain of our proprietary rights, such as trademarks or copyrighted material, to third parties. If our licensees fail to successfully market and sell licensed products, or fail to obtain sufficient capital or effectively manage their business operations, customer relationships, labor relationships, supplier relationships or credit risks, it +2025 FORM 10-K 16 +Table of Contents +could adversely affect our revenues, both directly from reduced royalties received and indirectly from reduced sales of our other products. +We also rely on our licensees to help preserve the value of our brands. Although we attempt to protect our brands through approval rights over the design, production processes, quality, packaging, merchandising, distribution, advertising and promotion of our licensed products, we cannot completely control the use of our licensed brands by our licensees. The misuse of a brand by or negative publicity involving a licensee could have a material adverse effect on that brand and on us. +Consolidation of retailers or concentration of retail market share among a few retailers may increase and concentrate our credit risk and impair our ability to sell products. +The athletic footwear, apparel and equipment retail markets in some countries are dominated by a few large athletic footwear, apparel and equipment retailers with many stores and accelerating digital commerce capabilities. The market shares of these retailers may increase through acquisitions and construction of additional stores and investments in digital capacity, and as a result of attrition as struggling retailers exit the market. Consolidation of our retailers will concentrate our credit risk with a smaller set of retailers, any of whom may experience declining sales or a shortage of liquidity. In addition, increasing market share concentration among a few retailers in a particular country or region increases the risk that if any one of them substantially reduces their purchases of our products, we may be unable to find sufficient retail outlets for our products to sustain the same level of sales and revenues. +If one or more of our counterparty financial institutions default on their obligations to us or fail, we may incur significant losses. +As part of our hedging activities, we enter into transactions involving derivative financial instruments, which may include forward contracts, commodity futures contracts, option contracts, collars and swaps with various financial institutions. In addition, we have significant amounts of cash, cash equivalents and other investments on deposit or in accounts with banks or other financial institutions in the United States and abroad. As a result, we are exposed to the risk of default by or failure of counterparty financial institutions. The risk of counterparty default or failure may be heightened during periods of sustained high interest rates and uncertainty in the financial markets as well as economic downturns. If one of our counterparties were to become insolvent or file for bankruptcy, our ability to recover losses incurred as a result of default, or our assets deposited or held in accounts with such counterparty, may be limited by the counterparty's liquidity or the applicable laws governing the insolvency or bankruptcy proceedings. In the event of default or failure of one or more of our counterparties, we could incur significant losses, which could negatively impact our results of operations and financial condition. +We rely on a concentrated source base of contract manufacturers to supply a significant portion of our footwear products. +We rely upon a concentrated amount of contract manufacturers, which we do not own or operate, to manufacture all of the footwear products we sell, see "Manufacturing" for additional information. Our ability to meet our customers' needs depends on our ability to maintain a steady supply of products from our contract manufacturers. If one or more of our significant suppliers were to sever their relationship with us or significantly alter the terms of our relationship, including due to changes in applicable trade policies, or be unable to perform, we may not be able to obtain replacement products in a timely manner, which could have a material adverse effect on our business operations, sales, financial condition or results of operations. Additionally, if any of our primary footwear contract manufacturers fail to make timely shipments, do not meet our quality standards or otherwise fail to deliver us product in accordance with our plans, there could be a material adverse effect on our results of operations. +Certain of our contract manufacturers are highly specialized and only produce a specific type of product. Such contract manufacturers may go out of business if consumer preferences or market conditions change such that there is no longer sufficient demand for the types of products they produce. If, in the future, the relevant products are again in demand and the specialized contract manufacturers no longer exist, we may not be able to locate replacement facilities to manufacture certain footwear products in a timely manner or at all, which could have a material adverse effect on our sales, financial condition or results of operations. +The success of our business depends, in part, on high-quality employees, including key personnel as well as our ability to maintain our workplace culture and values. +Our success depends in part on the continued service of high-quality employees, including key executive officers and personnel. The loss of the services of key individuals, or any negative perception with respect to these individuals, or our workplace culture or values, could harm our business. Our success also depends on our ability to recruit, retain and engage our personnel sufficiently, both to maintain our current business and to execute our strategic initiatives. Competition for employees in our industry is intense and we may not be successful in attracting and retaining such personnel. Changes to our current and future work models may not meet the needs or expectations of our employees or may not be perceived as favorable compared to other companies' policies, which could negatively impact our ability to attract, hire and retain our employees. In addition, shifts in U.S. immigration and work permit policies or other changes in the legal and regulatory environment could negatively impact our ability to attract, hire and retain highly skilled employees who are from outside the United States. Our policies and practices have been, and may further be, affected by legal and regulatory scrutiny of, as well as changes in regulations (or changes in the interpretation of existing regulations) relating to, policies related to inclusion and belonging, employee engagement and climate +2025 FORM 10-K 17 +Table of Contents +change, which may further impact our ability to attract, hire and retain employees. W e also believe that our corporate culture has been a key driver of our success, and we have invested substantial time and resources in building, maintaining and evolving our culture. Any failure to preserve and evolve our culture could negatively affect our future success, including our ability to retain and recruit employees. +The market for prime real estate is competitive. +Our ability to effectively obtain real estate to open new retail stores and otherwise conduct our operations, both domestically and internationally, depends on the availability of real estate that meets our criteria for traffic, square footage, co-tenancies, lease economics, demographics and other factors. We also must be able to effectively renew our existing real estate leases. In addition, from time to time, we seek to downsize, consolidate, reposition or close some of our real estate locations, which may require modification of an existing lease. Failure to secure adequate new locations or successfully modify leases for existing locations, or failure to effectively manage the profitability of our existing fleet of retail stores, could have an adverse effect on our operating results and financial condition. +Additionally, the economic environment may make it difficult to determine the fair market rent of real estate properties domestically and internationally. This could impact the quality of our decisions to exercise lease options at previously negotiated rents and to renew expiring leases at negotiated rents. Any adverse effect on the quality of these decisions could impact our ability to retain real estate locations adequate to meet our targets or efficiently manage the profitability of our existing fleet of stores, which could have an adverse effect on our operating results and financial condition. +Our business operations and financial performance could be adversely affected by changes in our relationship with our workforce or changes to United States or foreign employment regulations. +We have significant exposure to changes in domestic and foreign laws governing our relationships with our workforce, including wage and hour laws and regulations, fair labor standards, minimum wage requirements, overtime pay, unemployment tax rates, workers' compensation rates, citizenship requirements and payroll taxes, which could have a direct impact on our operating costs. A significant increase in minimum wage or overtime rates in countries where we have workforce could have a significant impact on our operating costs and may require that we relocate those operations or take other steps to mitigate such increases, all of which may cause us to incur additional costs. There is also a risk of potential claims that we have violated laws related to discrimination and harassment, health and safety, wage and hour laws, criminal activity, personal injury and other claims. In addition, if there were a significant increase in the number of members of our workforce who are members of labor organizations or become parties to collective bargaining agreements, we could be vulnerable to a strike, work stoppage or other labor action, as well as additional expenses, expectations or requirements, which could have an adverse effect on our business. +Risks Related to Operating a Global Business +Our international operations involve inherent risks which could result in harm to our business. +Nearly all of our athletic footwear and apparel is manufactured outside of the United States, and the majority of our products are sold outside of the United States. Accordingly, we are subject to the risks generally associated with global trade and doing business abroad, which include foreign laws and regulations, varying consumer preferences across geographic regions, political tensions, unrest, disruptions or delays in cross-border shipments and changes in economic conditions in countries in which our products are manufactured or where we sell products. Changes in U.S. or international social, political, regulatory and economic conditions could impact our business, reputation, financial condition and results of operations. In particular, political and economic instability, geopolitical conflicts, political unrest, civil strife, terrorist activity, acts of war, public corruption, expropriation, nationalism and other economic or political uncertainties in the United States or internationally could interrupt and negatively affect the sale of our products or other business operations. Any negative sentiment toward the United States as a result of any such changes could also adversely affect our business. +In addition, terrorist acts, military conflict and disease outbreaks have increased the risks of doing business abroad. These factors, among others, could affect our ability to manufacture products or procure materials, or our costs for manufacturing and procuring materials, our ability to import products, our ability to sell products in international markets and our cost of doing business. If any of these or other factors make the conduct of business in a particular country undesirable or impractical, our business could be adversely affected. +Our products are subject to risks associated with overseas sourcing, manufacturing and financing. +The principal materials used in our footwear products — natural and synthetic rubber, plastic compounds, foam cushioning materials, natural and synthetic leather, nylon, polyester and natural fiber textiles and polyurethane films — are locally available to manufacturers. The principal materials used in our apparel products — natural and synthetic fabrics, yarns and threads (both virgin and recycled), specialized performance fabrics designed to efficiently wick moisture away from the body, retain heat and repel rain and/or snow as well as plastic and metal hardware — are also available in countries where our manufacturing takes place. Both our apparel and footwear products are dependent upon the ability of our contract manufacturers to locate, train, employ and retain adequate personnel. NIKE contract manufacturers and materials suppliers buy raw materials and are subject +2025 FORM 10-K 18 +Table of Contents +to wage rates and other labor standards that are oftentimes regulated by the governments of the countries in which our products are manufactured. +There could be a significant disruption in the supply of fabrics or raw materials from current sources or, in the event of a disruption or heightened competition for such materials, our contract manufacturers might not be able to locate alternative suppliers of materials of comparable quality at an acceptable price or at all. Further, our contract manufacturers have experienced and may continue to experience in the future, unexpected closures, unexpected increases in work wages or other changes in labor standards, whether government mandated or otherwise, and increases in compliance costs due to governmental regulation concerning certain metals, fabrics or raw materials used in the manufacturing of our products. In addition, we cannot be certain that manufacturers that we do not contract and that we refer to as "unaffiliated manufacturers" will be able to fill our orders in a timely manner. If we experience significant increases in demand, or reductions in the availability of materials, or need to replace an existing contract manufacturer or materials supplier, there can be no assurance additional supplies of fabrics or raw materials or additional manufacturing capacity will be available when required on terms acceptable to us, or at all, or that any contract manufacturer, unaffiliated manufacturer, or any materials supplier would allocate sufficient capacity to us in order to meet our requirements. Even if we are able to expand existing or find new manufacturing capacity or sources of materials, we may encounter delays in production and added costs as a result of the time it takes to train suppliers and manufacturers in our methods, products, quality control standards and labor, health and safety standards. In addition, changes we make in managing the supply of our products, such as changes to decrease the supply of certain products, pose the risk that we may not be able to meet demand for, or ramp up production of, certain products timely or without additional cost. Any delays, interruption or increased costs in labor or wages, in the supply of materials or in the manufacturing of our products could have an adverse effect on our ability to meet retail customer and consumer demand for our products and result in lower revenues and net income both in the short- and long-term. +Because contract manufacturers make a majority of our products outside of our principal sales markets, our products must be transported by third parties over large geographic distances. Delays in the shipment or delivery of our products due to the availability of transportation, container shortages, labor shortages, including work stoppages or port strikes, infrastructure and port congestion or other factors, and costs and delays associated with consolidating or transitioning between manufacturers, have adversely impacted, and could in the future adversely impact the availability of our products and, in turn, our financial performance. In addition, delays in the shipment or delivery of our products, manufacturing delays or unexpected demand for our products have required us, and may in the future require us to use faster, but more expensive, transportation methods such as air freight, which could adversely affect our profit margins. The cost of oil is a significant component in manufacturing and transportation costs, so increases in the price of petroleum products can adversely affect our profit margins. Changes in U.S. trade policies, including modifications to import tariffs and existing trade policies and agreements, have also had, and could continue to have a significant impact on our activities in domestic and foreign jurisdictions, and could adversely affect our reputation or results of operations. +In addition, we have become, and expect to continue to be, subject to a number of regulations that require us to develop new policies and procedures for, strive to mitigate, and report, certain supply chain risks related to sourcing internationally. These regulations have resulted and may continue to result in increased operating costs and affect how and where we source materials for our products. +Changes to U.S. or other countries' trade policies and tariff and import/export regulations or our failure to comply with such regulations may have a material adverse effect on our reputation, business, financial condition and results of operations. +Changes in the import and export policies of the U.S. government or other countries, including trade restrictions, sanctions and countersanctions, increased tariffs or quotas, trade agreement enforcement practices, embargoes or safeguards, could require us to change the way we conduct business and adversely affect our results of operations. +In addition, changes in (or announcements regarding proposed changes in) laws and policies governing foreign trade, manufacturing, development and investment in the territories or countries where we currently sell our products or conduct our business could adversely affect our business, including increased cost of sales. U.S. presidential administrations have instituted or proposed changes in trade policies that include the negotiation of new trade agreements, negotiation or termination of existing trade agreements, the imposition of higher tariffs on imports into the U.S., economic sanctions on individuals, corporations or countries, and other government regulations affecting trade between the U.S. and other countries where we conduct our business. It may be time-consuming and expensive for us to alter our business operations in order to adapt to or comply with any such changes. +Changes or proposed changes in U.S. or other countries' trade policies have resulted and may further result in restrictions and economic disincentives on international trade. Tariffs and other changes in U.S. trade policy have in the past and could in the future trigger retaliatory actions by affected countries, and certain foreign governments have instituted or are considering imposing retaliatory measures on certain U.S. goods. Further, protectionist or nationalist trends in the United States or in other countries affect the trade environment. The Company, similar to many other multinational corporations, does a significant amount of business that is impacted by changes to the trade policies of the United States and foreign countries (including governmental +2025 FORM 10-K 19 +Table of Contents +action related to tariffs, international trade agreements, or economic sanctions). Such changes have adversely impacted, and may continue to adversely impact, the U.S. economy or certain sectors thereof or the economy of another country in which we conduct operations, our industry and the global demand for our products, and as a result, could have a material adverse effect on our business, financial condition and results of operations. +In addition, many of our imported products are subject to duties, tariffs or quotas that affect the cost and quantity of various types of goods imported into the United States and other countries. Any country in which our products are produced or sold may eliminate, adjust or impose new quotas, duties, tariffs, safeguard measures, anti-dumping duties, cargo restrictions to prevent terrorism, restrictions on the transfer of currency, climate change legislation, product safety regulations or other charges or restrictions, any of which could have an adverse effect on our results of operations and financial condition. +Furthermore, we are subject to the FCPA as well as the anti-corruption laws of other countries in which we operate. Although we implement policies and procedures designed to promote compliance with these laws, our employees, independent contractors, contract manufacturers, suppliers and agents, as well as those companies to which we outsource certain of our business operations, may take actions in violation of our policies. Any such violation could result in sanctions or other penalties and have an adverse effect on our business, reputation and operating results. +Our success depends on our global distribution facilities. +We distribute our products to customers directly from the factory and through distribution centers located throughout the world. Our ability to meet customer expectations, manage inventory, complete sales and achieve objectives for operating efficiencies and growth, particularly in emerging markets, depends on the proper operation of our distribution facilities, the development or expansion of additional distribution capabilities and the timely performance of services by third parties (including those involved in shipping product to and from our distribution facilities). Our distribution facilities have in the past and could in the future be interrupted by information technology problems, disasters such as earthquakes or fires or outbreaks of disease or government actions taken to mitigate their spread. Any significant failure in our distribution facilities could result in an adverse effect on our business. We maintain business interruption insurance, but it may not adequately protect us from adverse effects caused by significant disruptions in our distribution facilities. +Legal, Regulatory, and Compliance Risks +We are subject to a complex array of laws and regulations and litigation and other legal and regulatory proceedings, which could have an adverse effect on our business, financial condition and results of operations. +As a multinational corporation with operations and distribution channels throughout the world, we are subject to and must comply with extensive laws and regulations in the United States and other jurisdictions in which we have operations and distribution channels. If we or our employees, agents, suppliers, and other partners fail to comply with any of these laws or regulations, such failure could subject us to fines, sanctions or other penalties that could negatively affect our reputation, business, financial condition and results of operations. Furthermore, laws, regulations and policies, as well as the evolving interpretation of such, can conflict among jurisdictions and compliance in one jurisdiction may result in legal or reputational risks in another jurisdiction. We are involved in various types of claims, lawsuits, regulatory proceedings and government investigations relating to our business, our products and the actions of our employees and representatives, including contractual and employment relationships, product liability, antitrust, trademark rights and a variety of other matters. It is not possible to predict with certainty the outcome of any such legal or regulatory proceedings or investigations, and we could in the future incur judgments, fines or penalties, or enter into settlements of lawsuits and claims that could have a material adverse effect on our business, financial condition and results of operations and negatively impact our reputation. The global nature of our business means legal and compliance risks, such as anti-bribery, anti-corruption, fraud, trade, environmental, competition, privacy and other regulatory matters, will continue to exist or might increase and additional legal proceedings and other contingencies have and will continue to arise from time to time, which could adversely affect us. In addition, the adoption of new laws or regulations, or changes in the interpretation of existing laws or regulations, may result in significant unanticipated legal and reputational risks. Moreover, the regulation of certain transactions we engage in, including those involving virtual goods and cryptocurrencies, remains in an early stage and subject to significant uncertainty. As a result, we are required to exercise our judgment as to whether or how certain laws or regulations apply, or may in the future apply, and it is possible that legislators, regulators and courts may disagree with our conclusions. Any current or future legal or regulatory proceedings could divert management's attention from our operations and result in substantial legal fees. +Failure to adequately protect or enforce our intellectual property rights could adversely affect our business. +We periodically discover counterfeit reproductions of our products or products that otherwise infringe our intellectual property rights. If we are unsuccessful in enforcing our intellectual property rights, continued sales of these products could adversely affect our sales and our brand and could result in a shift of consumer preference away from our products. +The actions we take to establish and protect our intellectual property rights may not be adequate to prevent imitation of our products by others. We also may be unable to prevent others from seeking to block sales of our products as violations of proprietary rights. +2025 FORM 10-K 20 +Table of Contents +We may be subject to liability if third parties successfully claim we infringe their intellectual property rights. Defending infringement claims could be expensive and time-consuming and might result in our entering into costly license agreements. We also may be subject to significant damages or injunctions against development, manufacturing, use, importation and/or sale of certain products. +We take various actions to prevent the unauthorized use and/or disclosure of our confidential information and intellectual property rights. These actions include contractual measures such as entering into non-disclosure and non-compete agreements and agreements relating to our collaborations with third parties and providing confidential information awareness training. Our controls and efforts to prevent unauthorized use and/or disclosure of confidential information and intellectual property rights might not always be effective. For example, confidential information related to business strategy, innovations, new technologies, mergers and acquisitions, unpublished financial results or personal data could be prematurely, inadvertently, or improperly used and/or disclosed, resulting in a loss of reputation, loss of intellectual property rights, a decline in our stock price and/or a negative impact on our market position, and could lead to damages, fines, penalties or injunctions. In addition, new products we offer, such as virtual goods, may raise various novel intellectual property law considerations, including adequacy and scope of assignment, licensing, transfer, copyright and other right-of-use issues. +In addition, the laws of certain countries may not protect or allow enforcement of intellectual property rights to the same extent as the laws of the United States. We may face significant expenses and liability in connection with the protection of our intellectual property rights, including outside the United States, and if we are unable to successfully protect our rights or resolve intellectual property conflicts with others, our business or financial condition may be adversely affected. +Regulations and best practices with respect to new technological developments, including generative AI, are in the process of being developed globally. These developments may affect aspects of our business that leverage these tools, and give rise to risks related to intellectual property infringement claims or harm to our reputation or brand image. +We are subject to data security and privacy risks that could negatively affect our results, operations or reputation. +In addition to our own sensitive and proprietary business information, we handle transactional and personal information about our wholesale customers and consumers and users of our digital experiences, which include online distribution channels and product engagement, adaptive products and personal fitness applications. Hackers and data thieves are increasingly sophisticated and operate social engineering, such as phishing, and large-scale, complex automated attacks that can evade detection for long periods of time. Any breach of our or our service providers' networks, or other vendor systems, may result in the loss of confidential business and financial data, misappropriation of our consumers', users' or employees' personal information or a disruption of our business. Any of these outcomes could have a material adverse effect on our business, including unwanted media attention, impairment of our consumer and customer relationships, damage to our reputation; resulting in lost sales and consumers, fines, lawsuits, or significant legal and remediation expenses. We also may need to expend significant resources to protect against, respond to and/or redress problems caused by any breach. +In addition, we must comply with increasingly complex and rigorous, and sometimes conflicting, regulatory standards enacted to protect business and personal data in the United States, Europe and elsewhere. For example, the European Union adopted the General Data Protection Regulation (the "GDPR"); the United Kingdom enacted the UK General Data Protection Regulation (which implements the GDPR into UK law); several states in the United States have passed data privacy laws; China enacted the Data Security Law and Personal Information Protection Law; and additional jurisdictions have adopted or are considering proposing or adopting similar regulations. These laws impose additional obligations on companies regarding the handling of personal data and provide certain individual privacy rights to persons whose data is stored. Compliance with existing, proposed and recently enacted laws and regulations is costly and time consuming, and any failure to comply with these regulatory standards could subject us to legal, operational and reputational risks. Misuse of or failure to secure personal information could also result in violation of data privacy laws and regulations, proceedings against the Company by governmental entities or others, imposition of fines by governmental authorities and damage to our reputation and credibility and could have a negative impact on revenues and profits. +We could be subject to changes in tax rates, adoption of new tax laws or regulations, or changes in the interpretations thereof, additional tax liabilities or increased volatility in our effective tax rate. +We earn a substantial portion of our income in foreign countries and, as such, we are subject to the tax laws in the United States and numerous foreign jurisdictions. Current economic and political conditions make tax laws and regulations, or their interpretation and application, in any jurisdiction subject to significant change. +Proposals to reform U.S. and foreign tax laws could significantly impact how U.S. multinational corporations are taxed on global earnings and could increase the U.S. corporate tax rate. For example, the Organization for Economic Co-operation and Development (the "OECD") and the G20 Inclusive Framework on Base Erosion and Profit Shifting (the "Inclusive Framework") has put forth two proposals—Pillar One and Pillar Two—that revise the existing profit allocation and nexus rules and ensure a minimal level of taxation, respectively. Several countries in which we operate, including several European Union member states' have adopted domestic legislation to implement the Inclusive Framework's global corporate minimum tax rate of 15% which became effective for the Company beginning fiscal 2025. Other countries are also actively considering changes to their tax laws +2025 FORM 10-K 21 +Table of Contents +to adopt certain parts of the Inclusive Framework's proposals. Although we cannot predict whether or in what form these proposals, or any other changes in the U.S. or foreign tax laws or regulations, will be enacted into law, these changes, if enacted into law, could have an adverse impact on our effective tax rate, income tax expense and cash flows. +Portions of our operations are subject to a reduced tax rate or are under a tax holiday. We also utilize tax rulings and other agreements to obtain certainty in treatment of certain tax matters. Tax holidays and rulings can expire from time to time and may be extended when certain conditions are met, or terminated if certain conditions are not met. The impact of any changes in conditions would be the loss of certainty in treatment thus potentially impacting our effective income tax rate. For example, in January 2019, the European Commission opened a formal investigation to examine whether the Netherlands has breached State Aid rules when granting certain tax rulings to the Company. If this matter is adversely resolved, the Netherlands may be required to assess additional amounts with respect to prior periods, and the Company's income taxes related to prior periods in the Netherlands could increase. +We are also subject to the examination of our tax returns by the United States Internal Revenue Service ("IRS") and other tax authorities. We regularly assess the likelihood of an adverse outcome resulting from these examinations to determine the adequacy of our provision for income taxes. Although we believe our tax provisions are adequate, the final determination of tax audits and any related disputes could be materially different from our historical income tax provisions and accruals. The results of audits or related disputes could have an adverse effect on our financial statements for the period or periods for which the applicable final determinations are made. For example, we and our subsidiaries are also engaged in a number of intercompany transactions across multiple tax jurisdictions. Although we believe we have clearly reflected the economics of these transactions and the proper local transfer pricing documentation is in place, tax authorities may propose and sustain adjustments that could result in changes that may impact our mix of earnings in countries with differing statutory tax rates. +Failure of our contractors or our licensees' contractors to comply with our code of conduct, local laws and other standards could harm our business. +We have license agreements that permit independent parties to manufacture or contract for the manufacture of products using our intellectual property. We require the contractors that directly manufacture our products and our licensees that make products using our intellectual property (including, indirectly, their contract manufacturers) to comply with a code of conduct and other environmental, human rights, health and safety standards for the benefit of workers. We also require our contract manufacturers and the contractors of our licensees to comply with applicable standards for product safety. Notwithstanding their contractual obligations, from time to time contractors may not comply with such standards or applicable local law or our licensees may fail to enforce such standards or applicable local law on their contractors. If one or more of our direct or indirect contractors violates or fails to comply with, or is accused of violating or failing to comply with, such standards and laws, this could harm our reputation or result in a product recall and, as a result, could have an adverse effect on our sales and financial condition. Negative publicity regarding production methods, alleged unethical or illegal practices or workplace or related conditions of any of our suppliers, manufacturers or licensees could adversely affect our brand image and sales, force us to locate alternative suppliers, manufacturers or licenses or result in the imposition of additional regulations, including new or additional quotas, tariffs, sanctions, product safety regulations or other regulatory measures, by governmental authorities. +Risks Related to Our Securities, Investments and Liquidity +Our financial results may be adversely affected if substantial investments in businesses and operations fail to produce expected returns. +From time to time, we may invest in product offering and manufacturing innovation and expansion of existing businesses, such as our NIKE Direct operations, technology, business infrastructure, new businesses or capabilities, which require substantial cash investments and management attention. We believe cost-effective investments are essential to business growth and profitability; however, significant investments are subject to typical risks and uncertainties inherent in developing a new business or expanding an existing business. The failure of any significant investment to provide expected returns or profitability could have a material adverse effect on our financial results and divert management attention from more profitable business operations. See also " Our NIKE Direct operations have required and will continue to require a substantial investment and commitment of resources and are subject to numerous risks and uncertainties ." +The sale of a large number of shares of common stock by our principal shareholder could depress the market price of our common stock. +As of June 30, 2025, Swoosh, LLC beneficially owned approximately 78% of our Class A Common Stock. If, on June 30, 2025, all of these shares were converted into Class B Common Stock, Swoosh, LLC's commensurate ownership percentage of our Class B Common Stock would be approximately 16%. The shares are available for resale, subject to the requirements of the U.S. securities laws and the terms of the limited liability company agreement governing Swoosh, LLC. The sale or prospect of a sale of a substantial number of these shares could have an adverse effect on the market price of our common stock. Swoosh, LLC was formed by Mr. Philip Knight, our Chairman Emeritus, to hold the majority of his shares of Class A Common Stock. Mr. Knight does not have voting rights with respect to Swoosh, LLC, although Travis Knight, his son and a NIKE director, has a significant role in the management of the Class A Common Stock owned by Swoosh, LLC. +2025 FORM 10-K 22 +Table of Contents +Changes in our credit ratings or macroeconomic conditions may affect our liquidity, increasing borrowing costs and limiting our financing options. +Our long-term debt is currently rated Investment Grade by Standard & Poor's and Moody's Investors Service. While we have maintained our Investment Grade rating, in July 2025, our rating was downgraded by Standard & Poor's. Any negative change to our credit rating will increase borrowing costs for our existing facilities and may increase our borrowing costs for future long-term debt or short-term credit facilities. In addition, our financing options, including our access to credit or capital markets, could be adversely affected. We may also be subject to restrictive covenants that would reduce our flexibility to, among other things, incur additional indebtedness, make restricted payments, pledge assets as security, make investments, loans, advances, guarantees and acquisitions, undergo fundamental changes and enter into transactions with affiliates. Failure to comply with such covenants could result in a default, and as a result, the commitments of our lenders under our credit agreements may be terminated and the maturity of amounts owed may be accelerated. In addition, macroeconomic conditions, such as increased volatility or disruption in the credit or capital markets, could adversely affect our ability to refinance existing debt. +If our internal controls are ineffective, our operating results could be adversely affected. +Our internal control over financial reporting may not prevent or detect misstatements because of its inherent limitations, including the possibility of human error, the circumvention or overriding of controls or fraud. Even effective internal controls can provide only reasonable assurance with respect to the preparation and fair presentation of financial statements. If we fail to maintain the adequacy of our internal controls, including any failure to implement required new or improved controls, or if we experience difficulties in their implementation, our business and operating results could be harmed and we could fail to meet our financial reporting obligations. +If our estimates or judgments relating to our critical accounting estimates prove to be incorrect, our operating results could be adversely affected. +The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. We base our estimates on historical experience and on various other assumptions we believe to be reasonable under the circumstances, as provided in "Management's Discussion and Analysis of Financial Condition and Results of Operations". The results of these estimates form the basis for making judgments about the carrying values of assets, liabilities and equity, and the amount of revenues and expenses that are not readily apparent from other sources. Significant assumptions and estimates used in preparing our consolidated financial statements include those related to sales-related reserves, inventory reserves, hedge accounting for derivatives, income taxes and other contingencies. Our operating results may be adversely affected if our assumptions change or if actual circumstances differ from those in our assumptions, which could cause our operating results to fall below the expectations of securities analysts and investors, resulting in a decline in the price of our Class B Common Stock. +Anti-takeover provisions may impair an acquisition of the Company or reduce the price of our common stock. +There are provisions within our articles of incorporation and Oregon law intended to protect shareholder interests by providing the Board of Directors a means to attempt to deny coercive takeover attempts or to negotiate with a potential acquirer in order to obtain more favorable terms. Such provisions include a control share acquisition statute, a freeze-out statute, two classes of stock that vote separately on certain issues, and the fact that holders of Class A Common Stock elect three-quarters of the Board of Directors rounded down to the next whole number. However, such provisions could discourage, delay or prevent an unsolicited merger, acquisition or other change in control of the Company that some shareholders might believe to be in their best interests or in which shareholders might receive a premium for their common stock over the prevailing market price. These provisions could also discourage proxy contests for control of the Company. +We have in the past failed and may in the future fail to meet market expectations, which has caused and could in the future cause the price of our stock to decline. +Our Class B Common Stock is traded publicly, and at any given time various securities analysts follow our financial results and issue reports on us. These reports include information about our historical financial results as well as analysts' opinions of our future performance, which may, in part, be based upon any guidance we have provided. Analysts' estimates are often different from our estimates or expectations. If our operating results are below the estimates or expectations of public market analysts and investors, our stock price could decline (which has happened in the past and could happen in the future). We are currently subject to multiple securities class action and shareholder derivative lawsuits relating to a drop in our stock price and could become involved in additional litigation of this type in the future if our stock price is volatile for any reason. Any litigation could result in reputational damage, substantial costs and a diversion of management's attention and resources needed to successfully run our business. +2025 FORM 10-K 23 +Table of Contents +ITEM 1B. UNRESOLVED STAFF COMMENTS +None. +ITEM 1C. CYBERSECURITY +At NIKE, cybersecurity risk management is an important part of our overall risk management efforts. We have cybersecurity processes, technologies and controls in place to aid in our efforts to assess, identify and manage material risks associated with cybersecurity threats. We assess cybersecurity risk at both the board and management levels. +Management’s Role in Managing Risk +At the management level, primary responsibility for assessing and managing material risks from cybersecurity threats rests with our Vice President, Corporate Information Security, Risk & Compliance ("VP, CIS"). Our VP, CIS has over two decades of experience in information technology and cybersecurity. The VP, CIS reports to our Chief Information Officer (“CIO”) who has significant experience leading technology teams at large public companies and our CIO reports to our Chief Technology Officer. +Our approach to managing cybersecurity risk is informed by the industry-standard National Institute for Standards and Technology Cybersecurity Framework. The VP, CIS has primary responsibility for implementing and overseeing our enterprise-wide cybersecurity strategy, policy, architecture and processes. We use various tools and methodologies to identify and manage cybersecurity risk, including risk assessments and a vulnerability management program that includes periodic penetration testing. We have a third-party cyber risk management program that conducts assessments on third parties who integrate with our data, network, systems and applications. These tools and methodologies inform our remediation activities, which are tracked and reported to senior management. +In addition, our internal audit function periodically conducts independent testing of the overall operations of our cybersecurity program and supporting control frameworks, and reports the results to the Audit & Finance Committee. We also engage third parties to assess our cybersecurity program maturity and to perform audits of portions of our cybersecurity control environment based on risk or where necessary to ensure regulatory compliance . +Our cybersecurity team meets frequently to monitor the prevention, detection, mitigation and remediation of cybersecurity threats and incidents. In the event of a cybersecurity incident, we have an incident response plan that governs our immediate response including detection, escalation, assessment, management and remediation. As part of incident response, the cybersecurity team will also coordinate with external advisors and other key stakeholders as needed. The cybersecurity team routinely tests this plan across the organization to validate the procedures for appropriately escalating potentially material cybersecurity risks and incidents. Also, we provide an annual, mandatory cybersecurity training program for employees that is intended to help them understand cybersecurity risks and comply with our cybersecurity policies . +Board Oversight +Our Board of Directors has ultimate oversight of cybersecurity risk as part of its risk management oversight responsibilities, including with respect to cybersecurity risk priorities, resource allocation and oversight structures. The Board of Directors receives an update on our cybersecurity program on a quarterly basis, or more frequently as determined to be necessary or advisable. The Board of Directors has delegated risk management oversight responsibility for information security and data protection to the Audit & Finance Committee , which regularly reviews our cybersecurity program and related matters with management and reports to the Board of Directors . Topics discussed at the board level include our approach to cybersecurity risk management, key initiatives, the threat landscape and recent developments and trends. The Board of Directors is aware of the critical nature of managing risks associated with cybersecurity threats and is actively engaged in our cybersecurity risk management strategy. +Risks from Cybersecurity Threats +Even though, to date, cybersecurity risks have not materially affected our business or our results of operations, we face numerous and evolving cybersecurity threats. There can be no assurance that we, or the third parties with which we interact, will not face a cybersecurity incident in the future that will materially affect us. For more information about the cybersecurity risks we face, see the risk factor entitled “We rely significantly on information technology to operate our business, including our supply chain and retail operations, and any failure, inadequacy or interruption of that technology could harm our ability to effectively operate our business” in Item 1A. Risk Factors. +2025 FORM 10-K 24 +Table of Contents +ITEM 2. PROPERTIES +The following is a summary of principal properties owned or leased by NIKE: +The NIKE World Headquarters, owned by NIKE and located near Beaverton, Oregon, USA, is an approximately 400-acre site consisting of over 40 buildings which, together with adjacent leased properties, functions as our global headquarters and is occupied by approximately 10,500 employees engaged in management, research, design, development, marketing, finance and other administrative functions serving nearly all of our segments. We lease a similar, but smaller, administrative facility in Hilversum, the Netherlands, which serves as the headquarters for our Europe, Middle East & Africa geography and management of certain brand functions for our non-U.S. operations. We also lease an office complex in Shanghai, China, our headquarters for our Greater China geography, occupied by employees focused on implementing our wholesale, NIKE Direct and merchandising strategies in the region, among other functions. +In the United States, NIKE has eight significant distribution centers. Five are located in or near Memphis, Tennessee, two of which are owned and three of which are leased. Two other distribution centers, one located near Indianapolis, Indiana and one located in Dayton, Tennessee, are leased and operated by third-party logistics providers. One distribution center for Converse is located in Ontario, California, which is leased. NIKE has a number of distribution facilities outside the United States, some of which are leased and operated by third-party logistics providers. The most significant distribution facilities outside the United States are located in Laakdal, Belgium; Taicang, China; Tomisato, Japan and Icheon, Korea, all of which we own. +Air Manufacturing Innovation manufactures cushioning components used in footwear at NIKE-owned and leased facilities located near Beaverton, Oregon, and in Dong Nai Province, Vietnam, as well as at NIKE-owned facilities in St. Charles, Missouri. +Aside from the principal properties described above, we lease many offices worldwide for sales and administrative purposes. We lease approximately 1,029 retail stores worldwide, which primarily consist of factory stores. See "United States Market" and "International Markets" for additional information regarding our retail stores. Our leases expire at various dates through the fiscal year 2058. +ITEM 3. LEGAL PROCEEDINGS +We do not believe there are any material pending legal proceedings, other than ordinary routine litigation incidental to our business, to which we are a party or of which any of our property is the subject. Refer to Note 16 — Commitments and Contingencies in the accompanying Notes to the Consolidated Financial Statements for additional information. +ITEM 4. MINE SAFETY DISCLOSURES +Not applicable. +2025 FORM 10-K 25 +Table of Contents +PART II +ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES +NIKE's Class B Common Stock is listed on the New York Stock Exchange and trades under the symbol NKE. At July 9, 2025, there were 20,485 holders of record of NIKE's Class B Common Stock and 16 holders of record of NIKE's Class A Common Stock. These figures do not include beneficial owners who hold shares in nominee name. The Class A Common Stock is not publicly traded, but each share is convertible upon request of the holder into one share of Class B Common Stock. Refer to our Consolidated Statements of Shareholders' Equity for dividends declared on the Class A and Class B Common Stock. +In June 2022, the Board of Directors approved a four-year, $18 billion share repurchase program. As of May 31, 2025, the Company had repurchased 122.6 million shares at an average price of $98.00 per share for a total approximate cost of $12.0 billion under this program. +All share repurchases were made under NIKE's publicly announced program, and there are no other programs under which the Company repurchases shares. The following table presents a summary of share repurchases made during the quarter ended May 31, 2025: +PERIOD TOTAL NUMBER OF SHARES PURCHASED AVERAGE PRICE +PAID PER SHARE APPROXIMATE DOLLAR +VALUE OF SHARES THAT +MAY YET BE PURCHASED +UNDER THE PLANS +OR PROGRAMS +(IN MILLIONS) +March 1 — March 31, 2025 936,074 $ 72.39 $ 6,124 +April 1 — April 30, 2025 1,189,613 $ 56.01 $ 6,058 +May 1 — May 31, 2025 1,116,872 $ 60.77 $ 5,990 +3,242,559 $ 62.38 +2025 FORM 10-K 26 +Table of Contents +PERFORMANCE GRAPH +The following graph demonstrates a five-year comparison of cumulative total returns for NIKE's Class B Common Stock; the Standard & Poor's 500 Stock Index; the Dow Jones U.S. Footwear Index; and the Standard & Poor's Apparel, Accessories & Luxury Goods Index. The graph assumes an investment of $100 on May 31, 2020, in each of the indices and our Class B Common Stock. Each of the indices assumes that all dividends were reinvested on the day of issuance. +The Dow Jones U.S. Footwear Index and the Standard & Poor's Apparel, Accessories & Luxury Goods Index include companies in two major lines of business in which the Company competes. The indices do not encompass all of the Company's competitors, nor all product categories and lines of business in which the Company is engaged. Because NIKE is part of the Dow Jones U.S. Footwear Index, the price and returns of NIKE stock have a substantial effect on this index. +The stock performance shown on the performance graph above is not necessarily indicative of future performance. The Company will not make or endorse any predictions as to future stock performance. +The performance graph above is being furnished solely to accompany this Annual Report pursuant to Item 201(e) of Regulation S-K, is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing. +2025 FORM 10-K 27 +Table of Contents +ITEM 6. [RESERVED] +2025 FORM 10-K 28 +Table of Contents +ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS +OVERVIEW +NIKE designs, develops, markets and sells athletic footwear, apparel, equipment, accessories and services worldwide. We are the largest seller of athletic footwear and apparel in the world. We sell our products through two distribution channels: NIKE Direct operations, which are comprised of both NIKE-owned retail stores and sales through our digital platforms (also referred to as "NIKE Brand Digital"), and to wholesale accounts, which include a mix of independent distributors, licensees and sales representatives in nearly all countries around the world. Our goal is to deliver value to our shareholders by building a profitable global portfolio of branded footwear, apparel, equipment and accessories. +Our strategy is to achieve sustainable, profitable long-term revenue growth by leading with sport, creating innovative, "must-have" products, building deep personal consumer connections with our brands and delivering compelling consumer experiences through digital platforms and at retail. +FISCAL 2025 FINANCIAL HIGHLIGHTS +• NIKE, Inc. Revenues for fiscal 2025 were $46.3 billion compared to $51.4 billion for fiscal 2024 +• NIKE Direct revenues declined 13% from $21.5 billion in fiscal 2024 to $18.8 billion in fiscal 2025, and represented approximately 42% of total NIKE Brand revenues for fiscal 2025 +• NIKE Brand wholesale revenues decreased 7% on a reported basis and 6% on a currency-neutral basis +• Gross margin decreased 190 basis points to 42.7%, primarily due to higher discounts, changes in channel mix and higher inventory obsolescence reserves, partially offset by lower product costs +• Inventories as of May 31, 2025 were $7.5 billion, flat compared to the prior year +• We returned $5.3 billion to our shareholders in fiscal 2025 through share repurchases and dividends +• Return on Invested Capital ("ROIC") was 20.2% as of May 31, 2025, compared to 34.9% as of May 31, 2024. ROIC is considered a non-GAAP financial measure, see "Use of Non-GAAP Financial Measures" for additional information. +Our results for fiscal 2025 reflected a decrease in traffic across NIKE Direct and our actions to reduce supply of certain footwear products in the marketplace through increased markdowns across NIKE Direct and discounts and higher sales returns with our wholesale partners, which negatively impacted our Revenues and gross margin. +For discussion related to the results of operations and changes in financial condition for fiscal 2024 compared to fiscal 2023 refer to Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in our fiscal 2024 Form 10-K, which was filed with the United States Securities and Exchange Commission on July 25, 2024. +2025 FORM 10-K 29 +Table of Contents +FACTORS IMPACTING OUR BUSINESS +We are navigating through several external factors that create uncertainty and volatility in the operating environment including, but not limited to, geopolitical dynamics, tax regulation, fluctuating foreign exchange rates and new tariffs. As a result of the new tariffs, we expect to incur a material gross incremental increase to Cost of sales. Over the next several quarters, we are taking actions to mitigate the impact of the new tariffs, however for fiscal 2026, we expect a negative impact on gross margin. We will continue to monitor changes to the import and export policies of the U.S. and other countries that could require us to change the way in which we do business. These factors, and any changes to these factors, among others, could have a material adverse impact on consumer behavior and on our future Revenues and overall profitability. +Despite these factors, we are focused on driving distinction within key sports, building a complete product portfolio, creating stories to inspire and emotionally connect with consumers, and elevating and growing the entire marketplace as we continue to take actions across the following areas: +• Product Management: Reducing the supply of certain footwear products in the marketplace as we shift to new and innovative products and rebalance the mix of our footwear portfolio. +• Marketplace Management: Repositioning NIKE Brand Digital as a full-price platform and reinvesting in wholesale distribution. This includes liquidating inventory through increased markdowns across NIKE Direct, and higher sales returns and discounts with our wholesale partners to reduce inventory and create capacity for new product. +• Brand Management: Increasing investment in demand creation including brand marketing and sports marketing to support key product launches and sports moments. +These actions have had, and in the future could have, a negative impact on our Revenues and gross margin as well as higher Demand creation expense. However, we believe these actions will reignite brand momentum and reposition our business to drive long-term shareholder value. +For more information refer to Item 1A Risk Factors, within Part 1, Item 1, Business. +USE OF NON-GAAP FINANCIAL MEASURES +Throughout this Annual Report on Form 10-K, we discuss non-GAAP financial measures, which should be considered in addition to, and not in lieu of, the financial measures calculated and presented in accordance with generally accepted accounting principles in the United States of America ("U.S. GAAP"). References to these measures should not be considered in isolation or as a substitute for other financial measures calculated and presented in accordance with U.S. GAAP and may not be comparable to similarly titled measures used by other companies. Management uses these non-GAAP measures when evaluating the Company's performance, including when making financial and operating decisions. Additionally, management believes these non-GAAP financial measures provide investors with additional financial information that should be considered when assessing our underlying business performance and trends. +Earnings Before Interest and Taxes ("EBIT") : Calculated as Net income before Interest expense (income), net and Income tax expense in the Consolidated Statements of Income. Total NIKE, Inc. EBIT for fiscal 2025, 2024 and 2023 are as follows: +YEAR ENDED MAY 31, +(Dollars in millions) +2025 2024 2023 +Net income $ 3,219 $ 5,700 $ 5,070 +Add: Interest expense (income), net (107) (161) (6) +Add: Income tax expense 666 1,000 1,131 +EARNINGS BEFORE INTEREST AND TAXES +$ 3,778 $ 6,539 $ 6,195 +EBIT Margin : Calculated as total NIKE, Inc. EBIT divided by total NIKE, Inc. Revenues. Our EBIT Margin calculation for fiscal 2025, 2024 and 2023 are as follows: +YEAR ENDED MAY 31, +(Dollars in millions) +2025 2024 2023 +Numerator +Earnings before interest and taxes $ 3,778 $ 6,539 $ 6,195 +Denominator +Total NIKE, Inc. Revenues $ 46,309 $ 51,362 $ 51,217 +EBIT MARGIN +8.2% 12.7% 12.1% +2025 FORM 10-K 30 +Table of Contents +Return on Invested Capital ("ROIC") : Represents a performance measure that management believes is useful information in understanding the Company's ability to effectively manage invested capital. Our ROIC calculation as of May 31, 2025 and 2024 is as follows: +FOR THE TRAILING FOUR QUARTERS ENDED +(Dollars in millions) MAY 31, 2025 MAY 31, 2024 +Numerator +Net income $ 3,219 $ 5,700 +Add: Interest expense (income), net (107) (161) +Add: Income tax expense 666 1,000 +Earnings before interest and taxes 3,778 6,539 +Income tax adjustment (1) +(645) (976) +Earnings before interest and after taxes $ 3,133 $ 5,563 +AVERAGE FOR THE TRAILING FIVE QUARTERS ENDED +MAY 31, 2025 MAY 31, 2024 +Denominator +Total debt (2) +$ 11,814 $ 12,110 +Add: Shareholders' equity 13,926 14,155 +Less: Cash and equivalents and Short-term investments 10,236 10,309 +Total invested capital $ 15,504 $ 15,956 +RETURN ON INVESTED CAPITAL 20.2% 34.9% +(1) Equals Earnings before interest and taxes multiplied by the effective tax rate as of each of the respective quarter ends. +(2) Total debt includes the following: 1) Current portion of long-term debt, 2) Notes Payable, 3) Current portion of operating lease liabilities, 4) Long-term debt and 5) Operating lease liabilities. +Currency-neutral revenues : Currency-neutral revenues enhance visibility to underlying business trends, excluding the impact of translation arising from foreign currency exchange rate fluctuations. Currency-neutral revenues are calculated using actual exchange rates in use during the comparative prior year period in place of the exchange rates in use during the current period. +COMPARABLE STORE SALES +Comparable store sales : This key metric, which excludes NIKE Brand Digital sales, comprises revenues from NIKE-owned in-line and factory stores for which all three of the following requirements have been met: (1) the store has been open at least one year, (2) square footage has not changed by more than 15% within the past year and (3) the store has not been permanently repositioned within the past year. Comparable store sales represents a performance metric that we believe is useful information for management and investors in understanding the performance of our established NIKE-owned in-line and factory stores. Management considers this metric when making financial and operating decisions. The method of calculating comparable store sales varies across the retail industry. As a result, our calculation of this metric may not be comparable to similarly titled metrics used by other companies. +2025 FORM 10-K 31 +Table of Contents +RESULTS OF OPERATIONS +(Dollars in millions, except per share data) +FISCAL 2025 FISCAL 2024 % CHANGE FISCAL 2023 % CHANGE +Revenues $ 46,309 $ 51,362 -10 % $ 51,217 0 % +Cost of sales 26,519 28,475 -7 % 28,925 -2 % +Gross profit 19,790 22,887 -14 % 22,292 3 % +Gross margin 42.7 % 44.6 % 43.5 % +Demand creation expense 4,689 4,285 9 % 4,060 6 % +Operating overhead expense 11,399 12,291 -7 % 12,317 0 % +Total selling and administrative expense 16,088 16,576 -3 % 16,377 1 % +% of revenues 34.7 % 32.3 % 32.0 % +Interest expense (income), net (107) (161) — (6) — +Other (income) expense, net (76) (228) — (280) — +Income before income taxes 3,885 6,700 -42 % 6,201 8 % +Income tax expense 666 1,000 -33 % 1,131 -12 % +Effective tax rate 17.1 % 14.9 % 18.2 % +NET INCOME $ 3,219 $ 5,700 -44 % $ 5,070 12 % +Diluted earnings per common share $ 2.16 $ 3.73 -42 % $ 3.23 15 % +2025 FORM 10-K 32 +Table of Contents +CONSOLIDATED OPERATING RESULTS +REVENUES +(Dollars in millions) +FISCAL 2025 FISCAL 2024 % CHANGE +% CHANGE EXCLUDING CURRENCY CHANGES (1) +FISCAL 2023 % CHANGE +% CHANGE EXCLUDING CURRENCY CHANGES (1) +NIKE, Inc. Revenues: +NIKE Brand Revenues by: +Footwear $ 29,510 $ 33,427 -12 % -11 % $ 33,135 1 % 1 % +Apparel 12,965 13,775 -6 % -5 % 13,843 0 % 0 % +Equipment 2,191 2,075 6 % 6 % 1,727 20 % 20 % +Global Brand Divisions (2) +48 45 7 % 10 % 58 -22 % -25 % +TOTAL NIKE BRAND REVENUES +$ 44,714 $ 49,322 -9 % -9 % $ 48,763 1 % 1 % +Converse 1,692 2,082 -19 % -18 % 2,427 -14 % -15 % +Corporate (3) +(97) (42) — — 27 — — +TOTAL NIKE, INC. REVENUES $ 46,309 $ 51,362 -10 % -9 % $ 51,217 0 % 1 % +Supplemental NIKE Brand Revenues Details: +NIKE Brand Revenues by: +Sales to Wholesale Customers $ 25,883 $ 27,758 -7 % -6 % $ 27,397 1 % 2 % +Sales through NIKE Direct 18,783 21,519 -13 % -12 % 21,308 1 % 1 % +Global Brand Divisions (2) +48 45 7 % 10 % 58 -22 % -25 % +TOTAL NIKE BRAND REVENUES $ 44,714 $ 49,322 -9 % -9 % $ 48,763 1 % 1 % +Supplemental NIKE Brand Revenue Details: +NIKE Brand Revenues by: (4) +Men's $ 23,216 $ 24,785 -6 % -6 % $ 24,445 1 % 2 % +Women's 9,719 10,366 -6 % -5 % 10,274 1 % 2 % +Kids' +5,695 6,019 -5 % -5 % 5,889 2 % 2 % +Jordan Brand 7,270 8,701 -16 % -16 % 8,460 3 % 3 % +Others (5) +(1,234) (594) -108 % -106 % (363) -64 % -67 % +Global Brand Divisions (2) +48 45 7 % 10 % 58 -22 % -25 % +TOTAL NIKE BRAND REVENUES +$ 44,714 $ 49,322 -9 % -9 % $ 48,763 1 % 1 % +(1) The percent change excluding currency changes represents a non-GAAP financial measure. For additional information, see "Use of Non-GAAP Financial Measures". +(2) Global Brand Divisions revenues include NIKE Brand licensing and other miscellaneous revenues that are not part of a geographic operating segment. +(3) Corporate revenues primarily consist of foreign currency hedge gains and losses related to revenues generated by entities within the NIKE Brand geographic operating segments and Converse, but managed through our central foreign exchange risk management program. +(4) Beginning in fiscal 2025, with the continued rollout of a new Enterprise Resource Planning Platform, we have removed the non-GAAP financial measure of wholesale equivalent revenues. There is no change to our reported revenues or gross margin. Prior year amounts have been recast to conform to fiscal 2025 presentation. +(5) Others include products not allocated to Men's, Women's, Kids' and Jordan Brand, as well as certain adjustments that are not allocated to products designated by consumer. +2025 FORM 10-K 33 +Table of Contents +FISCAL 2025 NIKE BRAND REVENUE HIGHLIGHTS +The following tables present NIKE Brand revenues disaggregated by reportable operating segment, distribution channel and major product line: +FISCAL 2025 COMPARED TO FISCAL 2024 +• NIKE, Inc. Revenues were $46.3 billion in fiscal 2025 compared to $51.4 billion for fiscal 2024, which decreased 10% and 9% on a reported and currency-neutral basis, respectively. On a currency-neutral basis, the decrease was primarily due to lower revenues in North America, Europe, Middle East & Africa ("EMEA") and Greater China which each decreased NIKE, Inc. Revenues by 4, 3 and 2 percentage points, respectively. +• NIKE Brand revenues, which represented over 90% of NIKE, Inc. Revenues, decreased 9% on both a reported and currency-neutral basis. The decrease, on a currency-neutral basis, was due to lower revenues in Men's, the Jordan Brand, Women's and Kids'. +• NIKE Brand footwear revenues decreased 11% on a currency-neutral basis. Unit sales of footwear decreased 8%, while lower average selling price ("ASP") per pair reduced footwear revenues by approximately 3 percentage points. Lower ASP per pair was primarily due to higher discounts and changes in channel mix, partially offset by strategic pricing actions. +• NIKE Brand apparel revenues decreased 5% on a currency-neutral basis. Unit sales of apparel decreased 5%, while ASP per unit was flat as strategic pricing actions were offset by changes in channel mix and higher discounts. +• NIKE Brand wholesale revenues decreased 7% on a reported basis and 6% on a currency-neutral basis, compared to fiscal 2024. The decrease, on a currency-neutral basis, was driven by lower revenues across all geographies. +• NIKE Direct revenues were $18.8 billion in fiscal 2025 compared to $21.5 billion in fiscal 2024. On a currency-neutral basis, NIKE Direct revenues decreased 12% due to declines in NIKE Brand Digital sales of 20% from $12.1 billion in fiscal 2024 to $9.6 billion in fiscal 2025, while NIKE store sales were flat. Comparable store sales decreased 1%. For additional information regarding comparable store sales, including the definition, see "Comparable Store Sales". +2025 FORM 10-K 34 +Table of Contents +GROSS MARGIN +FISCAL 2025 COMPARED TO FISCAL 2024 +For fiscal 2025, our consolidated gross profit decreased 14% to $19,790 million compared to $22,887 million for fiscal 2024. Gross margin decreased 190 basis points to 42.7% for fiscal 2025 compared to 44.6% for fiscal 2024 due to the following: +• Lower NIKE Brand ASP (decreasing gross margin approximately 180 basis points), primarily due to higher discounts and changes in channel mix, partially offset by strategic pricing actions; +• Higher other costs (decreasing gross margin approximately 90 basis points), including higher inventory obsolescence reserves; +• Lower gross margin from Converse (decreasing gross margin approximately 20 basis points); and +• Unfavorable changes in net foreign currency exchange rates, including hedges (decreasing gross margin approximately 10 basis points). +This was partially offset by: +• Lower NIKE Brand product costs (increasing gross margin approximately 80 basis points); +• Lower warehousing and logistics costs (increasing gross margin approximately 20 basis points); and +• Restructuring charges in the prior year (increasing gross margin approximately 10 basis points). +TOTAL SELLING AND ADMINISTRATIVE EXPENSE +(Dollars in millions) +FISCAL 2025 FISCAL 2024 % CHANGE FISCAL 2023 % CHANGE +Demand creation expense (1) +$ 4,689 $ 4,285 9 % $ 4,060 6 % +Operating overhead expense (2) +11,399 12,291 -7 % 12,317 0 % +Total selling and administrative expense $ 16,088 $ 16,576 -3 % $ 16,377 1 % +% of revenues 34.7 % 32.3 % 240 bps 32.0 % 30 bps +(1) Demand creation expense consists of brand marketing expense and sports marketing expense. Brand marketing expense includes advertising and promotion costs such as production and media costs, digital marketing expense, brand events and retail brand presentation costs. Sports marketing expense includes expenses related to endorsement contracts, complimentary product and sports marketing events. +(2) Operating overhead expense consists primarily of wage and benefit-related expenses and other administrative expenses, such as research and development costs, bad debt expense, rent, depreciation and amortization and costs related to professional services, certain technology investments, meetings and travel. +FISCAL 2025 COMPARED TO FISCAL 2024 +Demand creation expense increased 9%, due to higher brand marketing expense, reflecting investment in key sports events, and higher sports marketing expense. Changes in foreign currency exchange rates did not have a material impact on Demand creation expense. +Operating overhead expense decreased 7%, due to restructuring charges in the prior year, lower wage-related expenses and lower other administrative costs. Changes in foreign currency exchange rates did not have a material impact on Operating overhead expense. +2025 FORM 10-K 35 +Table of Contents +OTHER (INCOME) EXPENSE, NET +(Dollars in millions) +FISCAL 2025 FISCAL 2024 FISCAL 2023 +Other (income) expense, net $ (76) $ (228) $ (280) +Other (income) expense, net comprises foreign currency conversion gains and losses from the remeasurement of monetary assets and liabilities denominated in non-functional currencies and the impact of certain foreign currency derivative instruments, as well as unusual or non-operating transactions that are outside the normal course of business. +FISCAL 2025 COMPARED TO FISCAL 2024 +Other (income) expense, net decreased from $228 million of other income, net, to $76 million of other income, net, primarily due to a net unfavorable change in foreign currency conversion gains and losses, including hedges. +INCOME TAXES +FISCAL 2025 FISCAL 2024 % CHANGE FISCAL 2023 % CHANGE +Effective tax rate 17.1 % 14.9 % 220 bps 18.2 % (330) bps +FISCAL 2025 COMPARED TO FISCAL 2024 +Our effective tax rate was 17.1% for fiscal 2025, compared to 14.9% for fiscal 2024, primarily due to changes in earnings mix, decreased benefits from stock-based compensation and non-recurring one-time benefits in fiscal 2024 including the impact of the delay of the effective date of certain U.S. foreign tax credit regulations. These impacts were partially offset by a one-time, non-cash deferred tax benefit in fiscal 2025 provided by US tax regulations related to foreign currency gains and losses. +On July 4, 2025, the U.S. government enacted The One Big Beautiful Bill Act of 2025 which includes, among other provisions, changes to the U.S. corporate income tax system including the allowance of immediate expensing of qualifying research and development expenses and permanent extensions of certain provisions within the Tax Cuts and Jobs Act. Certain provisions are effective for NIKE beginning fiscal 2026. We are evaluating the future impact of these tax law changes on our financial statements. +2025 FORM 10-K 36 +Table of Contents +SEGMENT INFORMATION +See Note 15 — Segment Information in the accompanying Notes to the Consolidated Financial Statements for a description of our segments and related information. +The breakdown of Revenues is as follows: +(Dollars in millions) +FISCAL 2025 FISCAL 2024 % CHANGE +% CHANGE EXCLUDING CURRENCY CHANGES (1) +FISCAL 2023 % CHANGE +% CHANGE EXCLUDING CURRENCY CHANGES (1) +North America $ 19,572 $ 21,396 -9 % -8 % $ 21,608 -1 % -1 % +Europe, Middle East & Africa 12,257 13,607 -10 % -10 % 13,418 1 % 0 % +Greater China 6,586 7,545 -13 % -12 % 7,248 4 % 8 % +Asia Pacific & Latin America +6,251 6,729 -7 % -3 % 6,431 5 % 5 % +Global Brand Divisions (2) +48 45 7 % 10 % 58 -22 % -25 % +TOTAL NIKE BRAND $ 44,714 $ 49,322 -9 % -9 % $ 48,763 1 % 1 % +Converse 1,692 2,082 -19 % -18 % 2,427 -14 % -15 % +Corporate (3) +(97) (42) — — 27 — — +TOTAL NIKE, INC. REVENUES $ 46,309 $ 51,362 -10 % -9 % $ 51,217 0 % 1 % +(1) The percent change excluding currency changes represents a non-GAAP financial measure. For additional information, see "Use of Non-GAAP Financial Measures". +(2) Global Brand Divisions revenues include NIKE Brand licensing and other miscellaneous revenues that are not part of a geographic operating segment. +(3) Corporate revenues primarily consist of foreign currency hedge gains and losses related to revenues generated by entities within the NIKE Brand geographic operating segments and Converse, but managed through our central foreign exchange risk management program. +The primary financial measure used by the Company to evaluate performance of its segments is EBIT. For additional information on our segments, refer to Note 15 — Segment Information in the accompanying Notes to the Consolidated Financial Statements. +The breakdown of EBIT is as follows: +(Dollars in millions) +FISCAL 2025 FISCAL 2024 % CHANGE FISCAL 2023 % CHANGE +North America $ 4,735 $ 5,822 -19 % $ 5,454 7 % +Europe, Middle East & Africa 2,575 3,388 -24 % 3,531 -4 % +Greater China 1,602 2,309 -31 % 2,283 1 % +Asia Pacific & Latin America 1,527 1,885 -19 % 1,932 -2 % +Global Brand Divisions (4,699) (4,720) 0 % (4,841) 2 % +TOTAL NIKE BRAND (1) +$ 5,740 $ 8,684 -34 % $ 8,359 4 % +Converse 240 474 -49 % 676 -30 % +Corporate +(2,202) (2,619) 16 % (2,840) 8 % +TOTAL NIKE, INC. EARNINGS BEFORE INTEREST AND TAXES (1) +$ 3,778 $ 6,539 -42 % $ 6,195 6 % +EBIT margin (1) +8.2 % 12.7 % 12.1 % +Interest expense (income), net (107) (161) — (6) — +TOTAL NIKE, INC. INCOME BEFORE INCOME TAXES $ 3,885 $ 6,700 -42 % $ 6,201 8 % +(1) Total NIKE Brand EBIT, Total NIKE, Inc. EBIT and EBIT Margin represent non-GAAP financial measures. See "Use of Non-GAAP Financial Measures" for additional information. +2025 FORM 10-K 37 +Table of Contents +NORTH AMERICA +(Dollars in millions) +FISCAL 2025 FISCAL 2024 % CHANGE % CHANGE EXCLUDING CURRENCY CHANGES FISCAL 2023 % CHANGE % CHANGE EXCLUDING CURRENCY CHANGES +Revenues by: +Footwear $ 12,684 $ 14,537 -13 % -13 % $ 14,897 -2 % -2 % +Apparel 5,837 5,953 -2 % -2 % 5,947 0 % 0 % +Equipment 1,051 906 16 % 16 % 764 19 % 19 % +TOTAL REVENUES $ 19,572 $ 21,396 -9 % -8 % $ 21,608 -1 % -1 % +Revenues by: +Sales to Wholesale Customers $ 10,484 $ 11,004 -5 % -5 % $ 11,273 -2 % -2 % +Sales through NIKE Direct 9,088 10,392 -13 % -12 % 10,335 1 % 1 % +TOTAL REVENUES $ 19,572 $ 21,396 -9 % -8 % $ 21,608 -1 % -1 % +Cost of Sales +11,056 11,899 -7 % 12,497 -5 % +Gross profit +8,516 9,497 -10 % 9,111 4 % +Gross margin +43.5% 44.4% -90 bps 42.2% 220 bps +Demand creation expense +1,633 1,495 9 % 1,455 3 % +Operating overhead expense +2,150 2,189 -2 % 2,207 -1 % +Total selling and administrative expense +3,783 3,684 3 % 3,662 1 % +Other segment items +(2) (9) — (5) — +EARNINGS BEFORE INTEREST AND TAXES $ 4,735 $ 5,822 -19 % $ 5,454 7 % +FISCAL 2025 COMPARED TO FISCAL 2024 +• North America revenues decreased 8% on a currency-neutral basis primarily due to lower revenues in the Jordan Brand, Men's and Women's. Wholesale revenues decreased 5%. NIKE Direct revenues decreased 12% due to declines in digital sales of 19% and store sales of 1%. Comparable store sales decreased 1%. +• Footwear revenues decreased 13% on a currency-neutral basis. Unit sales of footwear decreased 10%, while lower ASP per pair reduced footwear revenues by approximately 3 percentage points. Lower ASP per pair was primarily due to higher discounts and changes in channel mix, partially offset by product mix. +• Apparel revenues decreased 2% on a currency-neutral basis. Unit sales of apparel decreased 1%, while lower ASP per unit reduced apparel revenues by approximately 1 percentage point. Lower ASP per unit was primarily due to higher discounts and changes in channel mix, partially offset by product mix. +Reported EBIT decreased 19% reflecting lower revenues and the following: +• Gross margin contraction of 90 basis points primarily due to lower ASP and higher inventory obsolescence reserves, partially offset by lower product costs. Lower ASP primarily reflects higher discounts and changes in channel mix. +• Demand creation expense increased 9% primarily due to higher brand marketing expense, reflecting investment in key sports events. +• Operating overhead expense decreased 2% due to lower wage-related expenses and lower other administrative costs. +2025 FORM 10-K 38 +Table of Contents +EUROPE, MIDDLE EAST & AFRICA +(Dollars in millions) +FISCAL 2025 FISCAL 2024 % CHANGE % CHANGE EXCLUDING CURRENCY CHANGES FISCAL 2023 % CHANGE % CHANGE EXCLUDING CURRENCY CHANGES +Revenues by: +Footwear $ 7,569 $ 8,473 -11 % -10 % $ 8,260 3 % 1 % +Apparel 3,971 4,380 -9 % -9 % 4,566 -4 % -6 % +Equipment 717 754 -5 % -5 % 592 27 % 24 % +TOTAL REVENUES $ 12,257 $ 13,607 -10 % -10 % $ 13,418 1 % 0 % +Revenues by: +Sales to Wholesale Customers $ 8,022 $ 8,562 -6 % -6 % $ 8,522 0 % 0 % +Sales through NIKE Direct 4,235 5,045 -16 % -16 % 4,896 3 % 0 % +TOTAL REVENUES $ 12,257 $ 13,607 -10 % -10 % $ 13,418 1 % 0 % +Cost of Sales 6,967 7,589 -8 % 7,340 3 % +Gross profit +5,290 6,018 -12 % 6,078 -1 % +Gross margin 43.2% 44.2% -100 bps 45.3% -110 bps +Demand creation expense 1,222 1,114 10 % 1,050 6 % +Operating overhead expense 1,479 1,517 -3 % 1,500 1 % +Total selling and administrative expense 2,701 2,631 3 % 2,550 3 % +Other segment items +14 (1) — (3) — +EARNINGS BEFORE INTEREST AND TAXES $ 2,575 $ 3,388 -24 % $ 3,531 -4 % +FISCAL 2025 COMPARED TO FISCAL 2024 +• EMEA revenues decreased 10% on a currency-neutral basis due to lower revenues in Men's, the Jordan Brand, Kids' and Women's. Wholesale revenues decreased 6%. NIKE Direct revenues decreased 16% due to a decline in digital sales of 30%, partially offset by an increase in store sales of 5%. Comparable store sales increased 5%. +• Footwear revenues decreased 10% on a currency-neutral basis. Unit sales of footwear decreased 8%, while lower ASP per pair reduced footwear revenues by approximately 2 percentage points. Lower ASP per pair was primarily due to changes in channel mix and higher discounts, partially offset by strategic pricing actions and product mix. +• Apparel revenues decreased 9% on a currency-neutral basis. Unit sales of apparel decreased 6%, while lower ASP per unit reduced apparel revenues by approximately 3 percentage points. Lower ASP per unit was primarily due to changes in channel mix, product mix and higher discounts. +Reported EBIT decreased 24% reflecting lower revenues and the following: +• Gross margin contraction of 100 basis points primarily due to lower ASP, partially offset by lower warehousing, logistics and product costs. Lower ASP primarily reflects changes in channel mix and higher discounts, partially offset by strategic pricing actions. +• Demand creation expense increased 10% primarily due to higher brand marketing expense, reflecting investment in key sports events, and higher sports marketing expense. +• Operating overhead expense decreased 3% primarily due to lower wage-related expenses. +2025 FORM 10-K 39 +Table of Contents +GREATER CHINA +(Dollars in millions) +FISCAL 2025 FISCAL 2024 % CHANGE % CHANGE EXCLUDING CURRENCY CHANGES FISCAL 2023 % CHANGE % CHANGE EXCLUDING CURRENCY CHANGES +Revenues by: +Footwear $ 4,805 $ 5,552 -13 % -13 % $ 5,435 2 % 6 % +Apparel 1,616 1,828 -12 % -12 % 1,666 10 % 14 % +Equipment 165 165 0 % 1 % 147 12 % 17 % +TOTAL REVENUES $ 6,586 $ 7,545 -13 % -12 % $ 7,248 4 % 8 % +Revenues by: +Sales to Wholesale Customers $ 3,699 $ 4,262 -13 % -13 % $ 3,866 10 % 15 % +Sales through NIKE Direct 2,887 3,283 -12 % -12 % 3,382 -3 % 1 % +TOTAL REVENUES $ 6,586 $ 7,545 -13 % -12 % $ 7,248 4 % 8 % +Cost of Sales 3,558 3,761 -5 % 3,552 6 % +Gross profit +3,028 3,784 -20 % 3,696 2 % +Gross margin 46.0% 50.2% -420 bps 51.0% -80 bps +Demand creation expense 529 519 2 % 499 4 % +Operating overhead expense 973 1,019 -5 % 1,012 1 % +Total selling and administrative expense 1,502 1,538 -2 % 1,511 2 % +Other segment items +(76) (63) — (98) — +EARNINGS BEFORE INTEREST AND TAXES $ 1,602 $ 2,309 -31 % $ 2,283 1 % +FISCAL 2025 COMPARED TO FISCAL 2024 +• Greater China revenues decreased 12% on a currency-neutral basis due to lower revenues in Men's, the Jordan Brand, Women's and Kids'. Wholesale revenues decreased 13%. NIKE Direct revenues decreased 12% due to declines in digital sales of 22% and store sales of 6%. Comparable store sales decreased 7%. +• Footwear revenues decreased 13% on a currency-neutral basis. Unit sales of footwear decreased 11%, while lower ASP per pair reduced footwear revenues by approximately 2 percentage points. Lower ASP per pair was primarily due to higher discounts and changes in channel mix, partially offset by strategic pricing actions. +• Apparel revenues decreased 12% on a currency-neutral basis. Unit sales of apparel decreased 17%, while higher ASP per unit contributed approximately 5 percentage points of apparel revenue growth. Higher ASP per unit was primarily due to strategic pricing actions, partially offset by higher discounts. +Reported EBIT decreased 31% reflecting lower revenues and the following: +• Gross margin contraction of approximately 420 basis points, primarily due to unfavorable changes in standard foreign currency exchange rates and higher inventory obsolescence reserves, partially offset by higher ASP. Higher ASP primarily reflects strategic pricing actions, partially offset by higher discounts. +• Demand creation expense increased 2% primarily due to higher sports marketing expense and higher brand marketing expense. +• Operating overhead expense decreased 5% primarily due to lower wage-related expenses and lower other administrative costs. +2025 FORM 10-K 40 +Table of Contents +ASIA PACIFIC & LATIN AMERICA +(Dollars in millions) +FISCAL 2025 FISCAL 2024 % CHANGE % CHANGE EXCLUDING CURRENCY CHANGES FISCAL 2023 % CHANGE % CHANGE EXCLUDING CURRENCY CHANGES +Revenues by: +Footwear $ 4,452 $ 4,865 -8 % -4 % $ 4,543 7 % 7 % +Apparel 1,541 1,614 -5 % -1 % 1,664 -3 % -2 % +Equipment 258 250 3 % 7 % 224 12 % 12 % +TOTAL REVENUES $ 6,251 $ 6,729 -7 % -3 % $ 6,431 5 % 5 % +Revenues by: +Sales to Wholesale Customers $ 3,678 $ 3,930 -6 % -3 % $ 3,736 5 % 6 % +Sales through NIKE Direct 2,573 2,799 -8 % -3 % 2,695 4 % 4 % +TOTAL REVENUES $ 6,251 $ 6,729 -7 % -3 % $ 6,431 5 % 5 % +Cost of Sales 3,502 3,639 -4 % 3,337 9 % +Gross profit +2,749 3,090 -11 % 3,094 0 % +Gross margin 44.0% 45.9% -190 bps 48.1% -220 bps +Demand creation expense 421 407 3 % 373 9 % +Operating overhead expense 804 801 0 % 789 2 % +Total selling and administrative expense 1,225 1,208 1 % 1,162 4 % +Other segment items +(3) (3) — — — +EARNINGS BEFORE INTEREST AND TAXES $ 1,527 $ 1,885 -19 % $ 1,932 -2 % +FISCAL 2025 COMPARED TO FISCAL 2024 +• Asia Pacific & Latin America ("APLA") revenues decreased 3% on a currency-neutral basis primarily due to lower revenues in Southeast Asia & India and Korea, partially offset by higher revenues in Mexico. Revenues decreased primarily due to lower revenues in the Jordan Brand and Men's. Wholesale revenues decreased 3%. NIKE Direct revenues decreased 3% due to a decline in digital sales of 9%, partially offset by an increase in store sales of 4%. Comparable store sales increased 1%. +• Footwear revenues decreased 4% on a currency-neutral basis. Unit sales of footwear decreased 2%, while lower ASP per pair reduced footwear revenues by approximately 2 percentage points. Lower ASP per pair was primarily due to higher discounts and changes in channel mix. +• Apparel revenues decreased 1% on a currency-neutral basis. Unit sales of apparel decreased 3%, while higher ASP per unit contributed approximately 2 percentage points of apparel revenue growth. Higher ASP per unit was primarily due to strategic pricing actions, partially offset by higher discounts. +Reported EBIT decreased 19% reflecting lower revenues and the following: +• Gross margin contraction of approximately 190 basis points primarily due to unfavorable changes in standard foreign currency exchange rates, lower ASP and higher warehousing and logistics costs. Lower ASP reflects product mix, higher discounts and changes in channel mix, partially offset by strategic pricing actions. +• Demand creation expense increased 3%, due to higher brand marketing expense and higher sports marketing expense, partially offset by favorable changes in foreign currency exchange rates. +• Operating overhead expense was flat due to higher wage-related expenses and higher other administrative costs, offset by favorable changes in foreign currency exchange rates. +2025 FORM 10-K 41 +Table of Contents +GLOBAL BRAND DIVISIONS +(Dollars in millions) +FISCAL 2025 FISCAL 2024 % CHANGE FISCAL 2023 % CHANGE +Revenues +$ 48 $ 45 7 % $ 58 -22 % +Cost of Sales 634 602 5 % 516 17 % +Gross profit +(586) (557) -5 % (458) -22 % +Demand creation expense 716 596 20 % 511 17 % +Operating overhead expense 3,401 3,534 -4 % 3,881 -9 % +Total selling and administrative expense 4,117 4,130 0 % 4,392 -6 % +Other segment items +(4) 33 — (9) — +EARNINGS (LOSS) BEFORE INTEREST AND TAXES +$ (4,699) $ (4,720) 0 % $ (4,841) 2 % +Global Brand Divisions primarily represents costs, including product creation and design expenses, that are centrally managed for the NIKE Brand, as well as costs associated with NIKE Direct global digital operations and enterprise technology. Global Brand Divisions revenues include NIKE Brand licensing and other miscellaneous revenues that are not part of a geographic operating segment. +FISCAL 2025 COMPARED TO FISCAL 2024 +Global Brand Divisions' loss before interest and taxes was flat primarily due to lower Operating overhead expense, offset by higher Demand creation expense. Lower Operating overhead expense was primarily due to lower wage-related expenses. Higher Demand creation expense was primarily due to higher brand marketing expense and higher sports marketing expense. +CONVERSE +(Dollars in millions) FISCAL 2025 FISCAL 2024 % CHANGE % CHANGE EXCLUDING CURRENCY CHANGES FISCAL 2023 % CHANGE % CHANGE EXCLUDING CURRENCY CHANGES +Revenues by: +Footwear $ 1,457 $ 1,800 -19 % -19 % $ 2,155 -16 % -17 % +Apparel 80 93 -14 % -14 % 90 3 % 4 % +Equipment 32 37 -14 % -14 % 28 32 % 34 % +Other +123 152 -19 % -20 % 154 -1 % -2 % +TOTAL REVENUES +$ 1,692 $ 2,082 -19 % -18 % $ 2,427 -14 % -15 % +Revenues by: +Sales to Wholesale Customers +$ 875 $ 1,098 -20 % -20 % $ 1,299 -15 % -16 % +Sales through Direct to Consumer 694 832 -17 % -17 % 974 -15 % -14 % +Other (1) +123 152 -19 % -19 % 154 -1 % -2 % +TOTAL REVENUES +$ 1,692 $ 2,082 -19 % -18 % $ 2,427 -14 % -15 % +Cost of sales +868 989 -12 % 1,121 -12 % +Gross profit +824 1,093 -25 % 1,306 -16 % +Gross margin +48.7% 52.5% -380 bps 53.8% -130 bps +Demand Creation Expense +156 140 11 % 138 1 % +Operating overhead expense +430 485 -11 % 499 -3 % +Total selling and administrative expense +586 625 -6 % 637 -2 % +Other segment items +(2) (6) — (7) — +EARNINGS BEFORE INTEREST AND TAXES $ 240 $ 474 -49 % $ 676 -30 % +(1) Other revenues consist of territories serviced by third-party licensees who pay royalties to Converse for the use of its registered trademarks and other intellectual property rights. We do not own the Converse trademarks in Japan and accordingly do not earn revenues in Japan. +2025 FORM 10-K 42 +Table of Contents +FISCAL 2025 COMPARED TO FISCAL 2024 +• Converse revenues decreased 18% on a currency-neutral basis driven by revenue declines across all territories. Unit sales decreased 12%, while lower ASP reduced revenues by approximately 6 percentage points. Lower ASP per unit primarily reflects higher discounts in direct to consumer. +• Wholesale revenues decreased 20% on a currency-neutral basis, as declines in Western Europe and Asia were partially offset by growth in North America. +• Direct to consumer revenues decreased 17% on a currency-neutral basis due to reduced traffic in all territories and lower ASP due to higher discounts. +Reported EBIT decreased 49% reflecting lower revenues and the following: +• Gross margin contraction of approximately 380 basis points due to lower ASP and higher warehousing and logistics costs, partially offset by lower product costs. Lower ASP primarily reflects higher discounts. +• Demand creation expense increased 11% primarily due to higher brand marketing expense. +• Operating overhead expense decreased 11% primarily due to lower wage-related expenses and lower other administrative costs. +CORPORATE +(Dollars in millions) +FISCAL 2025 FISCAL 2024 % CHANGE FISCAL 2023 % CHANGE +Revenues +$ (97) $ (42) — $ 27 — +Cost of Sales (66) (4) — 562 — +Gross profit +(31) (38) — (535) — +Demand creation expense 12 14 -14 % 34 -59 % +Operating overhead expense 2,162 2,746 -21 % 2,429 13 % +Total selling and administrative expense 2,174 2,760 -21 % 2,463 12 % +Other segment items +(3) (179) — (158) — +EARNINGS (LOSS) BEFORE INTEREST AND TAXES +$ (2,202) $ (2,619) 16 % $ (2,840) 8 % +Corporate primarily consists of unallocated general and administrative expenses, including expenses associated with centrally managed departments; depreciation and amortization related to our corporate headquarters; unallocated insurance, benefit and compensation programs, including stock-based compensation; and certain foreign currency gains and losses. +Corporate revenues primarily consist of foreign currency hedge gains and losses related to revenues generated by entities within the NIKE Brand geographic operating segments and Converse, but managed through our central foreign exchange risk management program. +In addition to the foreign currency gains and losses recognized in Corporate revenues, foreign currency results in Corporate include gains and losses resulting from the difference between actual foreign currency exchange rates and standard rates used to record non-functional currency denominated product purchases within the NIKE Brand geographic operating segments and Converse; related foreign currency hedge results; conversion gains and losses arising from remeasurement of monetary assets and liabilities in non-functional currencies; and certain other foreign currency derivative instruments. +FISCAL 2025 COMPARED TO FISCAL 2024 +Corporate's loss before interest and taxes decreased $417 million, primarily due to the following: +• a favorable change of $443 million related to restructuring charges in the prior year, $379 million reported as a component of consolidated Operating overhead expense and $64 million reported as a component of consolidated Gross profit; +• a favorable change of $205 million primarily related to lower wage-related expenses and lower other administrative costs, reported as a component of consolidated Operating overhead expense; +• an unfavorable change of $92 million related to the remeasurement of monetary assets and liabilities denominated in non-functional currencies and the impact of certain foreign currency derivative instruments, reported as a component of consolidated Other (income) expense, net; and +• an unfavorable change in net foreign currency gains and losses of $88 million related to the difference between actual foreign currency exchange rates and standard foreign currency exchange rates assigned to the NIKE Brand geographic operating segments and Converse, net of hedge gains and losses; these results are reported as a component of consolidated Gross profit. +2025 FORM 10-K 43 +Table of Contents +FOREIGN CURRENCY EXPOSURES AND HEDGING PRACTICES +OVERVIEW +As a global company with significant operations outside the United States, in the normal course of business we are exposed to risk arising from changes in currency exchange rates. Our primary foreign currency exposures arise from the recording of transactions denominated in non-functional currencies and the translation of foreign currency denominated results of operations, financial position and cash flows into U.S. Dollars. +Our foreign exchange risk management program is intended to lessen both the positive and negative effects of currency fluctuations on our consolidated results of operations, financial position and cash flows. We manage global foreign exchange risk centrally on a portfolio basis to address those risks material to NIKE, Inc. We manage these exposures by taking advantage of natural offsets and currency correlations existing within the portfolio and, where practical and material, by hedging a portion of the remaining exposures using derivative instruments such as forward contracts and options. As described below, the implementation of the NIKE Trading Company ("NTC") and our foreign currency adjustment program enhanced our ability to manage our foreign exchange risk by increasing the natural offsets and currency correlation benefits existing within our portfolio of foreign exchange exposures. Our hedging policy is designed to partially or entirely offset the impact of exchange rate changes on the underlying net exposures being hedged. Where exposures are hedged, our program has the effect of delaying the impact of exchange rate movements on our Consolidated Financial Statements; the length of the delay is dependent upon hedge horizons. We do not hold or issue derivative instruments for trading or speculative purposes. +Refer to Note 4 — Fair Value Measurements and Note 12 — Risk Management and Derivatives in the accompanying Notes to the Consolidated Financial Statements for additional description of outstanding derivatives at each reported period end. +TRANSACTIONAL EXPOSURES +We conduct business in various currencies and have transactions which subject us to foreign currency risk. Our most significant transactional foreign currency exposures are: +• Product Costs — NIKE's product costs are exposed to fluctuations in foreign currencies in the following ways: +1. Product purchases denominated in currencies other than the functional currency of the transacting entity: +a. Certain NIKE entities purchase product from the NTC, a wholly-owned sourcing hub that buys NIKE branded products from third-party factories, predominantly in U.S. Dollars. The NTC, whose functional currency is the U.S. Dollar, then sells the products to NIKE entities in their respective functional currencies. NTC sales to a NIKE entity with a different functional currency results in a foreign currency exposure for the NTC. +b. Other NIKE entities purchase product directly from third-party factories predominantly in U.S. Dollars. These purchases generate a foreign currency exposure for those NIKE entities with a functional currency other than the U.S. Dollar. +In both purchasing scenarios, a weaker U.S. Dollar reduces inventory costs incurred by NIKE whereas a stronger U.S. Dollar increases its cost. +2. Factory input costs: NIKE operates a foreign currency adjustment program with certain factories. The program is designed to more effectively manage foreign currency risk by assuming certain of the factories' foreign currency exposures, some of which are natural offsets to our existing foreign currency exposures. Under this program, our payments to these factories are adjusted for rate fluctuations in the basket of currencies ("factory currency exposure index") in which the labor, materials and overhead costs incurred by the factories in the production of NIKE branded products ("factory input costs") are denominated. +As an offset to the impacts of the fluctuating U.S. Dollar on our non-functional currency denominated product purchases described above, a strengthening U.S. Dollar against the foreign currencies within the factory currency exposure indices reduces NIKE's U.S. Dollar inventory cost. Conversely, a weakening U.S. Dollar against the indexed foreign currencies increases our inventory cost. +• Non-Functional Currency Denominated External Sales — A portion of our NIKE Brand and Converse revenues associated with European operations are earned in currencies other than the Euro (e.g., the British Pound) but are recognized at a subsidiary that uses the Euro as its functional currency. These sales generate a foreign currency exposure. +• Other Costs — Non-functional currency denominated costs, such as endorsement contracts, also generate foreign currency risk, though to a lesser extent. +2025 FORM 10-K 44 +Table of Contents +• Non-Functional Currency Denominated Monetary Assets and Liabilities — Our global subsidiaries have various assets and liabilities, primarily receivables and payables, including intercompany receivables and payables, denominated in currencies other than their functional currencies. These balance sheet items are subject to remeasurement which may create fluctuations in Other (income) expense, net within our Consolidated Statements of Income. +MANAGING TRANSACTIONAL EXPOSURES +Transactional exposures are managed on a portfolio basis within our foreign currency risk management program. We manage these exposures by taking advantage of natural offsets and currency correlations that exist within the portfolio and may also elect to use currency forward and option contracts to hedge the remaining effect of exchange rate fluctuations on probable forecasted future cash flows, including certain product cost exposures, non-functional currency denominated external sales and other costs described above. Generally, these are accounted for as cash flow hedges. +Certain currency forward contracts used to manage the foreign exchange exposure of non-functional currency denominated monetary assets and liabilities subject to remeasurement are not formally designated as hedging instruments. Accordingly, changes in fair value of these instruments are recognized in Other (income) expense, net and are intended to offset the foreign currency impact of the remeasurement of the related non-functional currency denominated asset or liability being hedged. +TRANSLATIONAL EXPOSURES +Many of our foreign subsidiaries operate in functional currencies other than the U.S. Dollar. Fluctuations in currency exchange rates create volatility in our reported results as we are required to translate the balance sheets, operational results and cash flows of these subsidiaries into U.S. Dollars for consolidated reporting. The translation of foreign subsidiaries' non-U.S. Dollar denominated balance sheets into U.S. Dollars for consolidated reporting results in a cumulative translation adjustment to Accumulated other comprehensive income (loss) within Shareholders' equity. In the translation of our Consolidated Statements of Income, a weaker U.S. Dollar in relation to foreign functional currencies benefits our consolidated earnings whereas a stronger U.S. Dollar reduces our consolidated earnings. The impact of foreign exchange rate fluctuations on the translation of our consolidated Revenues was a detriment of approximately $419 million for the year ended May 31, 2025. The impact of foreign exchange rate fluctuations on the translation of our Income before income taxes was a detriment of approximately $97 million for the year ended May 31, 2025. +MANAGING TRANSLATIONAL EXPOSURES +To minimize the impact of translating foreign currency denominated revenues and expenses into U.S. Dollars for consolidated reporting, certain foreign subsidiaries use excess cash to purchase U.S. Dollar denominated available-for-sale investments. The variable future cash flows associated with the purchase and subsequent sale of these U.S. Dollar denominated investments at non-U.S. Dollar functional currency subsidiaries creates a foreign currency exposure that qualifies for hedge accounting under U.S. GAAP. We utilize forward contracts and/or options to mitigate the variability of the forecasted future purchases and sales of these U.S. Dollar investments. The combination of the purchase and sale of the U.S. Dollar investment and the hedging instrument has the effect of partially offsetting the year-over-year foreign currency translation impact on net earnings in the period the investments are sold. Hedges of the purchase of U.S. Dollar denominated available-for-sale investments are accounted for as cash flow hedges. +We estimate the combination of translation of foreign currency-denominated profits from our international businesses and the year-over-year change in foreign currency related gains and losses included in Other (income) expense, net had an unfavorable impact of approximately $188 million on our Income before income taxes for the year ended May 31, 2025. +NET INVESTMENTS IN FOREIGN SUBSIDIARIES +We are also exposed to the impact of foreign exchange fluctuations on our investments in wholly-owned foreign subsidiaries denominated in a currency other than the U.S. Dollar, which could adversely impact the U.S. Dollar value of these investments and therefore the value of future repatriated earnings. We have, in the past, hedged and may, in the future, hedge net investment positions in certain foreign subsidiaries to mitigate the effects of foreign exchange fluctuations on these net investments. These hedges are accounted for as net investment hedges in accordance with U.S. GAAP. There were no outstanding net investment hedges as of May 31, 2025 and 2024. There were no cash flows from net investment hedge settlements for the years ended May 31, 2025, 2024 and 2023. +2025 FORM 10-K 45 +Table of Contents +LIQUIDITY AND CAPITAL RESOURCES +CASH FLOW ACTIVITY +(Dollars in millions) +FISCAL 2025 FISCAL 2024 +$ CHANGE +Cash provided (used by): +Operating activities +$ 3,698 $ 7,429 $ (3,731) +Investing activities +(275) 894 (1,169) +Financing activities +(5,820) (5,888) 68 +Effect of exchange rate changes on cash and equivalents +1 (16) 17 +NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS +$ (2,396) $ 2,419 $ (4,815) +Cash provided by operating activities decreased $3,731 million. This was driven by a decrease of $2,228 million in Net income, adjusted for non-cash items, and changes in certain working capital components and other assets and liabilities, which decreased $1,503 million. The change in working capital was impacted by changes to Inventories, primarily due to reduced inventory purchases in the prior year as well as unfavorable changes in standard foreign currency exchange rates in the current year. +Cash used by investing activities increased $1,169 million, from an inflow in fiscal 2024 to an outflow in fiscal 2025, primarily driven by the net change in short-term investments (including sales, maturities and purchases). +Cash used by financing activities decreased $68 million, primarily driven by lower share repurchases, largely offset by a $1.0 billion bond repayment and slightly higher dividend payments. +In fiscal 2025, we purchased a total of 37.6 million shares of NIKE's Class B Common Stock for $3.0 billion (an average price of $78.50 per share) under the four-year, $18 billion share repurchase plan authorized by the Board of Directors in June 2022. As of May 31, 2025, we had repurchased 122.6 million shares at a cost of approximately $12.0 billion (an average price of $98.00 per share) under this program. We have moderated, and intend to continue moderating, share repurchases. The timing and the amount of share repurchases will be dictated by our liquidity, capital needs and operating cash flows. We continue to expect funding of share repurchases from operating cash flows and excess cash. +CAPITAL RESOURCES +On July 21, 2022, we filed a shelf registration statement (the "Shelf") with the U.S. Securities and Exchange Commission (the "SEC") which permits us to issue an unlimited amount of debt securities from time to time. The Shelf expires on July 21, 2025, and we plan to file a new shelf registration with the SEC in July 2025. +On March 7, 2025, we entered into a 364-day committed credit facility agreement with a syndicate of banks which provides for up to $1 billion of borrowings, with the option to increase borrowings up to $1.5 billion in total with lender approval. The facility matures on March 6, 2026, with an option to extend the maturity date an additional 364 days. This facility replaces the prior $1 billion 364-day credit facility agreement entered into on March 8, 2024, which matured on March 7, 2025. Refer to Note 5 — Short-Term Borrowings and Credit Lines for additional information. +On March 7, 2025, we entered into a five-year committed credit facility agreement with a syndicate of banks which provides for up to $2 billion of borrowings, with the option to increase borrowings up to $3 billion in total with lender approval. The facility matures on March 7, 2030, with options to extend the maturity date up to an additional two years. This facility replaces the prior $2 billion five-year credit facility agreement entered into on March 11, 2022, which would have matured on March 11, 2027. Refer to Note 5 — Short-Term Borrowings and Credit Lines for additional information. +We currently have long-term debt ratings of A+ and A1 from Standard and Poor's Corporation and Moody's Investor Services, respectively. As it relates to our committed credit facilities entered into on March 7, 2025, if our long-term debt ratings were to decline, the facility fees and interest rates would increase. Conversely, if our long-term debt ratings were to improve, the facility fees and interest rates would decrease. In July 2025, Standard and Poor's Corporation downgraded our debt rating from AA- to A+, and, as a result, our facility fees and interest rates will increase compared to what they were prior to the downgrade. Refer to Note 5 — Short-Term Borrowings and Credit Lines for additional information. Changes in our long-term debt ratings would not trigger acceleration of maturity of any then-outstanding borrowings or any future borrowings under the committed credit facilities. Under these facilities, we have agreed to various covenants. These covenants include limits on the disposal of assets and the amount of debt secured by liens we may incur. In the event we were to have any borrowings outstanding under these facilities, failed to meet any covenant and were unable to obtain a waiver from a majority of the banks in the applicable syndicate, any borrowings would become immediately due and payable. As of May 31, 2025, we were in full compliance with each of these covenants, and we believe it is unlikely we will fail to meet any of these covenants in the foreseeable future. +2025 FORM 10-K 46 +Table of Contents +Liquidity is also provided by our $3 billion commercial paper program. As of and for the fiscal years ended May 31, 2025 and 2024, we did not have any borrowings outstanding under our $3 billion program. We may issue commercial paper or other debt securities depending on general corporate needs. +To date, we have not experienced difficulty accessing the capital or credit markets; however, future volatility may increase costs associated with issuing commercial paper or other debt instruments or affect our ability to access those markets. +As of May 31, 2025, we had Cash and equivalents and Short-term investments totaling $9.2 billion, primarily consisting of commercial paper, corporate notes, deposits held at major banks, money market funds, U.S. Treasury obligations and other investment grade fixed-income securities. Our fixed-income investments are exposed to both credit and interest rate risk. All of our investments are investment grade to minimize our credit risk. While individual securities have varying durations, as of May 31, 2025, the weighted-average days to maturity of our cash equivalents and short-term investments portfolio was 96 days. +We believe that existing Cash and equivalents, Short-term investments and cash generated by operations, together with access to external sources of funds as described above, will be sufficient to meet our domestic and foreign capital needs for the next twelve months and beyond. +Our material cash requirements as of May 31, 2025, were as follows: +• Debt Obligations — Refer to Note 5 — Short-Term Borrowings and Credit Lines and Note 6 — Long-Term Debt in the accompanying Notes to the Consolidated Financial Statements for additional information. +• Operating Leases — Refer to Note 17 — Leases in the accompanying Notes to the Consolidated Financial Statements for additional information. +• Endorsement Contracts — As of May 31, 2025, we had endorsement contract obligations, including associated marketing commitments, of $16.2 billion, with $1.6 billion payable within 12 months, primarily representing approximate amounts of base compensation and minimum guaranteed royalty fees we are obligated to pay athlete, public figure, sport team and league endorsers of our products. Actual payments under some contracts may be higher than these amounts as these contracts provide for bonuses to be paid to the endorsers based upon athletic achievements and/or royalties on product sales in future periods. Actual payments under some contracts may also be lower as these contracts include provisions for reduced payments if athletic performance declines in future periods. In addition to the cash payments, we are obligated to furnish our endorsers with NIKE product for their use. It is not possible to determine how much we will spend on this product on an annual basis as the amount of product provided to the endorsers will depend on many factors and the contracts generally do not stipulate a minimum amount of cash to be spent on the product. +• Product Purchase Obligations — As of May 31, 2025, we had product purchase obligations of $7.9 billion, all of which are payable within the next 12 months. Product purchase obligations represent agreements (including open purchase orders) to purchase products in the ordinary course of business that are enforceable and legally binding and specify all significant terms. We generally order product at least four to five months in advance of sale based primarily on advanced orders received from external wholesale customers and internal orders from our direct to consumer operations. In some cases, prices are subject to change throughout the production process. +• Other Purchase Obligations — As of May 31, 2025, we had $3.1 billion of other purchase obligations, with $1.9 billion payable within the next 12 months. Other purchase obligations primarily include technology investments, construction, service and marketing commitments made in the ordinary course of business. The amounts represent the minimum payments required by legally binding contracts and agreements that specify all significant terms, and may include open purchase orders for non-product purchases. +As of May 31, 2025, we had approximately $260 million in estimated future income tax obligations payable within 12 months related to expected resolution with the Internal Revenue Service of certain U.S. federal income tax matters for fiscal years 2017 through 2019 related to transfer pricing adjustments, research and development credits and other items. +As a part of the transition tax related to the Tax Cuts and Jobs Act, as of May 31, 2025, we had $268 million in estimated future cash payments payable within the next 12 months. These amounts represent the transition tax on deemed repatriation of undistributed earnings of foreign subsidiaries, which are reflected net of foreign tax credits we utilized. +In addition to the above, we have long-term obligations for uncertain tax positions and various post-retirement benefits for which we are not able to reasonably estimate when cash payments will occur. Refer to Note 7 — Income Taxes and Note 11 — Benefit Plans in the accompanying Notes to the Consolidated Financial Statements for additional information related to uncertain tax positions and post-retirement benefits, respectively. +Refer to Note 16 — Commitments and Contingencies in the accompanying Notes to the Consolidated Financial Statements for additional information related to our off-balance sheet arrangements, bank guarantees and letters of credit. +2025 FORM 10-K 47 +Table of Contents +OFF-BALANCE SHEET ARRANGEMENTS +As of May 31, 2025, we did not have any off-balance sheet arrangements that have, or are reasonably likely to have, a material effect on our current and future financial condition, results of operations, liquidity, capital expenditures or capital resources. In connection with various contracts and agreements, we routinely provide indemnification relating to the enforceability of intellectual property rights, coverage for legal issues that arise and other items where we are acting as the guarantor. Currently, we have several such agreements in place. Based on our historical experience and the estimated probability of future loss, we have determined that the fair value of such indemnification is not material to our financial position or results of operations. +RECENT ACCOUNTING PRONOUNCEMENTS +Refer to Note 1 — Summary of Significant Accounting Policies within the accompanying Notes to the Consolidated Financial Statements for recently adopted and issued accounting pronouncements. +CRITICAL ACCOUNTING ESTIMATES +The preparation of our Consolidated Financial Statements in accordance with U.S. GAAP requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. We believe the assumptions and judgments involved in the accounting estimates described below have the greatest potential impact on our Consolidated Financial Statements, so we consider these to be our critical accounting estimates. Management has reviewed and discussed these critical accounting estimates with the Audit & Finance Committee of the Board of Directors. +Because of the uncertainty inherent in these matters, actual results could differ from the estimates we use in the preparation of our Consolidated Financial Statements. Within the context of these critical accounting estimates, we are not currently aware of any reasonably likely events or circumstances that would result in materially different amounts being reported. During fiscal 2025, we have not made any material changes to the accounting methodologies used to develop the estimates discussed below. +For a description of our significant accounting policies and methods used in the preparation of our Consolidated Financial Statements, refer to Note 1 — Summary of Significant Accounting Policies in the accompanying Notes to the Consolidated Financial Statements. +SALES-RELATED RESERVES +Provisions for anticipated sales returns consist of both contractual return rights and discretionary authorized returns. Provisions for post-invoice sales discounts consist of both contractual programs and discretionary discounts that are expected to be granted at a later date. +Estimates of discretionary authorized returns, discounts and claims are based on (1) historical rates, (2) specific identification of outstanding returns not yet received from customers and outstanding discounts and claims and (3) estimated returns, discounts and claims expected but not yet finalized with customers based on current marketplace needs. Actual returns, discounts and claims in any future period are inherently uncertain and may differ from estimates recorded. If actual or expected future returns, discounts or claims were significantly different than reserves established, a reduction or increase to net revenues would be recorded in the period in which such determination was made. For fiscal 2025, any variances between actual and expected sales-related reserves were not material to reported Revenues. +Refer to Note 14 — Revenues in the accompanying Notes to the Consolidated Financial Statements for additional information. +INVENTORY RESERVES +We make ongoing estimates relating to the net realizable value of inventories based upon our assumptions about future demand, market conditions, existing inventory levels, sales trends and historical experience with similar products. If we estimate the net realizable value of our inventory is less than the cost of the inventory, we record a reserve equal to the difference between the cost of the inventory and the estimated net realizable value. If changes in market conditions result in reductions to the estimated net realizable value of our inventory below our previous estimate, we would increase our reserve in the period in which such a determination is made. +Refer to Inventory Valuation within Note 1 — Summary of Significant Accounting Policies in the accompanying Notes to the Consolidated Financial Statements for additional information. +2025 FORM 10-K 48 +Table of Contents +HEDGE ACCOUNTING FOR DERIVATIVES +We use derivative contracts to hedge certain anticipated foreign currency and interest rate transactions as well as certain non-functional currency monetary assets and liabilities. When the specific criteria to qualify for hedge accounting has been met, changes in the fair value of contracts hedging probable forecasted future cash flows are recorded in Accumulated other comprehensive income (loss), rather than Net income, until the underlying hedged transaction affects Net income. In most cases, this results in gains and losses on hedge derivatives being released from Accumulated other comprehensive income (loss) into Net income sometime after the maturity of the derivative. One of the criteria for this accounting treatment is that the designated notional value of these derivative contracts should not be in excess of the amount of anticipated transactions. By their very nature, our estimates of anticipated transactions may fluctuate over time and may ultimately vary from actual transactions. When the amount of anticipated or actual transactions decline below designated hedged levels and it is no longer probable the forecasted transaction will occur by the end of the originally specified time period or within an additional two-month period of time thereafter, we reclassify the cumulative change in fair value of the over-hedged portion of the related hedge contract from Accumulated other comprehensive income (loss) to Other (income) expense, net during the quarter in which the decrease occurs. In rare circumstances, the additional period of time may exceed two months due to extenuating circumstances related to the nature of the forecasted transaction that are outside our control or influence. +Refer to Note 12 — Risk Management and Derivatives in the accompanying Notes to the Consolidated Financial Statements for additional information. +INCOME TAXES +We are subject to taxation in the United States, as well as various state and foreign jurisdictions. The determination of our provision for income taxes requires significant judgment, the use of estimates and the interpretation and application of complex tax laws. On an interim basis, we estimate our effective tax rate for the full fiscal year. This estimated annual effective tax rate is then applied to the year-to-date Income before income taxes excluding infrequently occurring or unusual items, to determine the year-to-date Income tax expense. The income tax effects of infrequent or unusual items are recognized in the interim period in which they occur. As the fiscal year progresses, we continually refine our estimate based upon actual events and earnings by jurisdiction during the year. This continual estimation process periodically results in a change to our expected effective tax rate for the fiscal year. When this occurs, we adjust the income tax provision during the quarter in which the change in estimate occurs. +On a quarterly basis, we evaluate the probability a tax position will be effectively sustained and the appropriateness of the amount recognized for uncertain tax positions based on factors including changes in facts or circumstances, changes in tax law, settled audit issues and new audit activity. Changes in our assessment may result in the recognition of a tax benefit or an additional charge to the tax provision in the period our assessment changes. We recognize interest and penalties related to income tax matters in Income tax expense. +Refer to Note 7 — Income Taxes in the accompanying Notes to the Consolidated Financial Statements for additional information. +OTHER CONTINGENCIES +In the ordinary course of business, we are subject to various legal proceedings, claims and government investigations related to our business, products and actions of our employees and representatives, including contractual and employment relationships, product liability, antitrust, customs, tax, intellectual property and other matters. We record contingent liabilities resulting from claims against us when a loss is assessed to be probable and the amount of the loss is reasonably estimable. Assessing probability of loss and estimating probable losses requires analysis of multiple factors, including in some cases judgments about the potential actions of third-party claimants and courts. Recorded contingent liabilities are based on the best information available and actual losses in any future period are inherently uncertain. If future adjustments to estimated probable future losses or actual losses exceed our recorded liability for such claims, we would record additional charges during the period in which the actual loss or change in estimate occurred. In addition to contingent liabilities recorded for probable losses, we disclose contingent liabilities when there is a reasonable possibility the ultimate loss will materially exceed the recorded liability. +Refer to Note 16 — Commitments and Contingencies in the accompanying Notes to the Consolidated Financial Statements for additional information. +2025 FORM 10-K 49 +Table of Contents +ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK +In the normal course of business and consistent with established policies and procedures, we employ a variety of financial instruments to manage exposure to fluctuations in the value of foreign currencies and interest rates. It is our policy to utilize these financial instruments only where necessary to finance our business and manage such exposures; we do not enter into these transactions for trading or speculative purposes. +We are exposed to foreign currency fluctuations, primarily as a result of our international sales, product sourcing and funding activities. Our foreign exchange risk management program is intended to lessen both the positive and negative effects of currency fluctuations on our consolidated results of operations, financial position and cash flows. We use forward and option contracts to hedge certain anticipated, but not yet firmly committed, transactions as well as certain firm commitments and the related receivables and payables, including third-party and intercompany transactions. Where exposures are hedged, our program has the effect of delaying the impact of exchange rate movements on our Consolidated Financial Statements. +The timing for hedging exposures, as well as the type and duration of the hedge instruments employed, are guided by our hedging policies and determined based upon the nature of the exposure and prevailing market conditions. Typically, the Company may enter into hedge contracts starting 12 to 24 months in advance of the forecasted transaction and may place incremental hedges up to 100% of the exposure by the time the forecasted transaction occurs. The majority of derivatives outstanding as of May 31, 2025, are designated as foreign currency cash flow hedges, primarily for Euro/U.S. Dollar, Chinese Yuan/U.S. Dollar, British Pound/Euro, and Japanese Yen/U.S. Dollar currency pairs. Refer to Note 12 — Risk Management and Derivatives in the accompanying Notes to the Consolidated Financial Statements for additional information. +Our earnings are also exposed to movements in short- and long-term market interest rates. Our objective in managing this interest rate exposure is to limit the impact of interest rate changes on earnings and cash flows and to reduce overall borrowing costs. To achieve these objectives, we maintain a mix of commercial paper, bank loans, and fixed-rate debt of varying maturities and have entered into receive-fixed, pay-variable interest rate swaps for a portion of our fixed-rate debt. +MARKET RISK MEASUREMENT +We monitor foreign exchange risk, interest rate risk and related derivatives using a variety of techniques including a review of market value, sensitivity analysis and Value-at-Risk ("VaR"). Our market-sensitive derivative and other financial instruments are foreign currency forward contracts, foreign currency option contracts, interest rate swaps, intercompany loans denominated in non-functional currencies and fixed interest rate U.S. Dollar denominated debt. +We use VaR to monitor the foreign exchange risk of our foreign currency forward and foreign currency option derivative instruments only. The VaR determines the maximum potential one-day loss in the fair value of these foreign exchange rate-sensitive financial instruments. The VaR model estimates assume normal market conditions and a 95% confidence level. There are various modeling techniques that can be used in the VaR computation. Our computations are based on interrelationships between currencies and interest rates (a "variance/co-variance" technique). These interrelationships are a function of foreign exchange currency market changes and interest rate changes over the preceding one-year period. The value of foreign currency options does not change on a one-to-one basis with changes in the underlying currency rate. We adjust the potential loss in option value for the estimated sensitivity (the "delta" and "gamma") to changes in the underlying currency rate. This calculation reflects the impact of foreign currency rate fluctuations on the derivative instruments only and does not include the impact of such rate fluctuations on non-functional currency transactions (such as anticipated transactions, firm commitments, cash balances and accounts and loans receivable and payable), including those which are hedged by these instruments. +The VaR model is a risk analysis tool and does not purport to represent actual losses in fair value we will incur nor does it consider the potential effect of favorable changes in market rates. It also does not represent the full extent of the possible loss that may occur. Actual future gains and losses will differ from those estimated because of changes or differences in market rates and interrelationships, hedging instruments and hedge percentages, timing and other factors. +The estimated maximum one-day loss in fair value on our foreign currency sensitive derivative financial instruments, derived using the VaR model, was $107 million and $57 million as of May 31, 2025 and 2024, respectively. The VaR increased year-over-year as a result of an increase in foreign currency volatilities as well as increased trade volumes as of May 31, 2025. Such a hypothetical loss in the fair value of our derivatives would be offset by increases in the value of the underlying transactions being hedged. The average monthly change in the fair values of foreign currency forward and foreign currency option derivative instruments was $200 million and $180 million during fiscal 2025 and fiscal 2024, respectively. +2025 FORM 10-K 50 +Table of Contents +The instruments not included in the VaR are intercompany loans denominated in non-functional currencies, fixed interest rate U.S. Dollar denominated debt, and interest rate swaps. Intercompany loans and related interest amounts are eliminated in consolidation. Furthermore, our non-functional currency intercompany loans are substantially hedged against foreign exchange risk through the use of forward contracts, which are included in the VaR calculation above. Therefore, we consider the interest rate and foreign currency market risks associated with our non-functional currency intercompany loans to be immaterial to our consolidated financial position, results of operations and cash flows. +Details of third-party debt and interest rate swaps are provided in the table below. The table presents principal cash flows and related weighted average interest rates by expected maturity dates. The weighted average variable interest rates for the fixed rate swapped to variable rate swaps reflect the effective interest rates at May 31, 2025. +EXPECTED MATURITY DATE YEAR ENDING MAY 31, +(Dollars in millions) +2026 2027 2028 2029 2030 THEREAFTER TOTAL FAIR VALUE +Interest Rate Risk +Long-term U.S. Dollar debt — Fixed rate +Principal payments $ — $ 2,000 $ — $ — $ 1,500 $ 4,500 $ 8,000 $ 6,673 +Average interest rate 0.0 % 2.6 % 0.0 % 0.0 % 2.9 % 3.5 % 3.1 % +Interest Rate Swaps — Fixed rate swapped to variable rate +Notional amount $ — $ — $ — $ — $ — $ 2,400 $ 2,400 $ 21 +Average fixed interest rate 0.0 % 0.0 % 0.0 % 0.0 % 0.0 % 3.6 % 3.6 % +Average variable interest rate 0.0 % 0.0 % 0.0 % 0.0 % 0.0 % 3.8 % 3.8 % +2025 FORM 10-K 51 +Table of Contents +ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA +Management of NIKE, Inc. is responsible for the information and representations contained in this Annual Report. The financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and include certain amounts based on our best estimates and judgments. Other financial information in this Annual Report is consistent with these financial statements. +Our accounting systems include controls designed to reasonably assure assets are safeguarded from unauthorized use or disposition and provide for the preparation of financial statements in conformity with U.S. GAAP. These systems are supplemented by the selection and training of qualified financial personnel and an organizational structure providing for appropriate segregation of duties. +An internal corporate audit department reviews the results of its work with the Audit & Finance Committee of the Board of Directors, presently comprised of three outside, independent directors. The Audit & Finance Committee is responsible for the appointment of the independent registered public accounting firm and reviews, with the independent registered public accounting firm, management and the internal corporate audit staff, the scope and the results of the annual audit, the effectiveness of the accounting control system and other matters relating to the financial affairs of NIKE as the Audit & Finance Committee deems appropriate. The independent registered public accounting firm and the internal corporate auditors have full access to the Audit & Finance Committee, with and without the presence of management, to discuss any appropriate matters. +2025 FORM 10-K 52 +Table of Contents +MANAGEMENT'S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING +Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13(a) - 15(f) and Rule 15(d) - 15(f) of the Securities Exchange Act of 1934, as amended. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the financial statements for external purposes in accordance with generally accepted accounting principles in the United States of America. Internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of assets of the Company that could have a material effect on the financial statements. +Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +Under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, our management conducted an evaluation of the effectiveness of our internal control over financial reporting based upon the framework in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on the results of our evaluation, our management concluded that our internal control over financial reporting was effective as of May 31, 2025. +PricewaterhouseCoopers LLP, an independent registered public accounting firm, has audited (1) the Consolidated Financial Statements and (2) the effectiveness of our internal control over financial reporting as of May 31, 2025, as stated in their report herein. +Elliott Hill +Matthew Friend +President and Chief Executive Officer Executive Vice President and Chief Financial Officer +2025 FORM 10-K 53 +Table of Contents +Report of Independent Registered Public Accounting Firm +To the Board of Directors and Shareholders of NIKE, Inc. +Opinions on the Financial Statements and Internal Control over Financial Reporting +We have audited the accompanying consolidated balance sheets of NIKE, Inc. and its subsidiaries (the "Company") as of May 31, 2025 and 2024, and the related consolidated statements of income, of comprehensive income, of shareholders' equity and of cash flows for each of the three years in the period ended May 31, 2025, including the related notes (collectively referred to as the "consolidated financial statements"). We also have audited the Company's internal control over financial reporting as of May 31, 2025, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). +In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of May 31, 2025 and 2024, and the results of its operations and its cash flows for each of the three years in the period ended May 31, 2025 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of May 31, 2025, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO. +Basis for Opinions +The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. +Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. +Definition and Limitations of Internal Control over Financial Reporting +A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. +Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate . +2025 FORM 10-K 54 +Table of Contents +Critical Audit Matters +The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. +Accounting for Income Taxes +As described in Notes 1 and 7 to the consolidated financial statements, the Company is subject to taxation in the United States, as well as various state and foreign jurisdictions. The Company accounts for income taxes using the asset and liability method. This approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of assets and liabilities. As disclosed by management, the determination of the provision for income taxes by management requires significant judgment, the use of estimates, and the interpretation and application of complex tax laws. Furthermore, as part of determining its provision for income taxes, management evaluates the probability a tax position will be effectively sustained and the appropriateness of the amount recognized for uncertain tax positions based on factors including changes in facts or circumstances, changes in tax law, settled audit issues and new audit activity. The Company recognizes a tax benefit from uncertain tax positions in the consolidated financial statements only when it is more likely than not the position will be sustained upon examination by relevant tax authorities. The majority of the total gross unrecognized tax benefits are long-term in nature and included within deferred income taxes and other liabilities on the consolidated balance sheets. The Company recorded income tax expense of $666 million for the year ended May 31, 2025. As of May 31, 2025, total gross unrecognized tax benefits, excluding related interest and penalties, were $1,026 million, of which $738 million would affect the Company's effective tax rate if recognized in future periods. +The principal considerations for our determination that performing procedures relating to the accounting for income taxes is a critical audit matter are (i) the significant judgment by management when determining the provision for income taxes and interpreting and applying complex tax laws as it relates to determining the provision for income taxes and uncertain tax positions; (ii) a high degree of auditor judgment and effort in performing procedures and evaluating audit evidence related to management’s interpretation and application of complex tax laws as it relates to the determination of the provision for income taxes and the assessment of whether tax positions are more likely than not to be sustained; and (iii) the audit effort involved the use of professionals with specialized skill and knowledge. +Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to income taxes. These procedures also included, among others (i) testing the provision for income taxes, which included the effective tax rate reconciliation and assessing management’s interpretation and application of complex tax laws; (ii) evaluating the completeness of management’s identification of uncertain tax positions by considering changes in facts or circumstances, changes in and compliance with tax laws, settled audit issues, new authoritative cases, or new audit activity, where applicable; and (iii) for certain tax positions, evaluating management’s assessment of the technical merits of the tax positions by obtaining and inspecting third party income tax documentation. Professionals with specialized skill and knowledge were used to assist in evaluating (i) changes in and compliance with the tax laws; (ii) management’s interpretation and application of certain complex tax laws as it relates to the determination of the provision for income taxes; and (iii) the reasonableness of management's assessment of whether certain tax positions are more likely than not of being sustained. +/s/ PricewaterhouseCoopers LLP +Portland, Oregon +July 17, 2025 +We have served as the Company's auditor since 1974. +2025 FORM 10-K 55 +Table of Contents +NIKE, INC. +CONSOLIDATED STATEMENTS OF INCOME +YEAR ENDED MAY 31, +(In millions, except per share data) +2025 2024 2023 +Revenues $ 46,309 $ 51,362 $ 51,217 +Cost of sales 26,519 28,475 28,925 +Gross profit 19,790 22,887 22,292 +Demand creation expense 4,689 4,285 4,060 +Operating overhead expense 11,399 12,291 12,317 +Total selling and administrative expense 16,088 16,576 16,377 +Interest expense (income), net ( 107 ) ( 161 ) ( 6 ) +Other (income) expense, net ( 76 ) ( 228 ) ( 280 ) +Income before income taxes 3,885 6,700 6,201 +Income tax expense 666 1,000 1,131 +NET INCOME $ 3,219 $ 5,700 $ 5,070 +Earnings per common share: +Basic $ 2.17 $ 3.76 $ 3.27 +Diluted $ 2.16 $ 3.73 $ 3.23 +Weighted average common shares outstanding: +Basic 1,484.9 1,517.6 1,551.6 +Diluted 1,487.6 1,529.7 1,569.8 +The accompanying Notes to the Consolidated Financial Statements are an integral part of this statement. +2025 FORM 10-K 56 +Table of Contents +NIKE, INC. +CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME +YEAR ENDED MAY 31, +(Dollars in millions) +2025 2024 2023 +Net income $ 3,219 $ 5,700 $ 5,070 +Other comprehensive income (loss), net of tax: +Change in net foreign currency translation adjustment 142 ( 3 ) 267 +Change in net gains (losses) on cash flow hedges ( 454 ) ( 184 ) ( 348 ) +Change in net gains (losses) on other 1 9 ( 6 ) +Total other comprehensive income (loss), net of tax ( 311 ) ( 178 ) ( 87 ) +TOTAL COMPREHENSIVE INCOME $ 2,908 $ 5,522 $ 4,983 +The accompanying Notes to the Consolidated Financial Statements are an integral part of this statement. +2025 FORM 10-K 57 +Table of Contents +NIKE, INC. +CONSOLIDATED BALANCE SHEETS +MAY 31, +(In millions) +2025 2024 +ASSETS +Current assets: +Cash and equivalents $ 7,464 $ 9,860 +Short-term investments 1,687 1,722 +Accounts receivable, net 4,717 4,427 +Inventories 7,489 7,519 +Prepaid expenses and other current assets 2,005 1,854 +Total current assets 23,362 25,382 +Property, plant and equipment, net 4,828 5,000 +Operating lease right-of-use assets, net 2,712 2,718 +Identifiable intangible assets, net 259 259 +Goodwill 240 240 +Deferred income taxes and other assets 5,178 4,511 +TOTAL ASSETS $ 36,579 $ 38,110 +LIABILITIES AND SHAREHOLDERS' EQUITY +Current liabilities: +Current portion of long-term debt $ — $ 1,000 +Notes payable 5 6 +Accounts payable 3,479 2,851 +Current portion of operating lease liabilities 502 477 +Accrued liabilities 5,911 5,725 +Income taxes payable 669 534 +Total current liabilities 10,566 10,593 +Long-term debt 7,961 7,903 +Operating lease liabilities 2,550 2,566 +Deferred income taxes and other liabilities 2,289 2,618 +Commitments and contingencies (Note 16) +Redeemable preferred stock — — +Shareholders' equity: +Common stock at stated value: +Class A convertible — 290 and 298 shares outstanding +— — +Class B — 1,186 and 1,205 shares outstanding +3 3 +Capital in excess of stated value 14,195 13,409 +Accumulated other comprehensive income (loss) ( 258 ) 53 +Retained earnings (deficit) ( 727 ) 965 +Total shareholders' equity 13,213 14,430 +TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 36,579 $ 38,110 +The accompanying Notes to the Consolidated Financial Statements are an integral part of this statement. +2025 FORM 10-K 58 +Table of Contents +NIKE, INC. +CONSOLIDATED STATEMENTS OF CASH FLOWS +YEAR ENDED MAY 31, +(Dollars in millions) +2025 2024 2023 +Cash provided (used) by operations: +Net income $ 3,219 $ 5,700 $ 5,070 +Adjustments to reconcile net income to net cash provided (used) by operations: +Depreciation and amortization +775 796 703 +Deferred income taxes ( 288 ) ( 497 ) ( 117 ) +Stock-based compensation 709 804 755 +Impairment and other +33 48 156 +Net foreign currency adjustments 37 ( 138 ) ( 213 ) +Changes in certain working capital components and other assets and liabilities: +(Increase) decrease in accounts receivable ( 257 ) ( 329 ) 489 +(Increase) decrease in inventories 120 908 ( 133 ) +(Increase) decrease in prepaid expenses, operating lease right-of-use assets and other current and non-current assets ( 224 ) ( 260 ) ( 644 ) +Increase (decrease) in accounts payable, accrued liabilities, operating lease liabilities and other current and non-current liabilities ( 426 ) 397 ( 225 ) +Cash provided (used) by operations 3,698 7,429 5,841 +Cash provided (used) by investing activities: +Purchases of short-term investments ( 3,234 ) ( 4,767 ) ( 6,059 ) +Maturities of short-term investments 319 2,269 3,356 +Sales of short-term investments 3,062 4,219 4,184 +Additions to property, plant and equipment ( 430 ) ( 812 ) ( 969 ) +Other investing activities 8 ( 15 ) 52 +Cash provided (used) by investing activities ( 275 ) 894 564 +Cash provided (used) by financing activities: +Increase (decrease) in notes payable, net ( 1 ) — ( 4 ) +Repayment of borrowings ( 1,000 ) — ( 500 ) +Proceeds from exercise of stock options and other stock issuances 551 667 651 +Repurchase of common stock ( 2,985 ) ( 4,250 ) ( 5,480 ) +Dividends — common and preferred ( 2,300 ) ( 2,169 ) ( 2,012 ) +Other financing activities ( 85 ) ( 136 ) ( 102 ) +Cash provided (used) by financing activities ( 5,820 ) ( 5,888 ) ( 7,447 ) +Effect of exchange rate changes on cash and equivalents 1 ( 16 ) ( 91 ) +Net increase (decrease) in cash and equivalents ( 2,396 ) 2,419 ( 1,133 ) +Cash and equivalents, beginning of year 9,860 7,441 8,574 +CASH AND EQUIVALENTS, END OF YEAR $ 7,464 $ 9,860 $ 7,441 +Supplemental disclosure of cash flow information: +Cash paid during the year for: +Interest, net of capitalized interest $ 389 $ 381 $ 347 +Income taxes 1,226 1,299 1,517 +Non-cash additions to property, plant and equipment 184 160 211 +Dividends declared and not paid 593 558 524 +The accompanying Notes to the Consolidated Financial Statements are an integral part of this statement. +2025 FORM 10-K 59 +Table of Contents +NIKE, INC. +CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY +COMMON STOCK CAPITAL IN EXCESS OF STATED VALUE ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) RETAINED EARNINGS (DEFICIT) TOTAL +CLASS A CLASS B +(In millions, except per share data) +SHARES AMOUNT SHARES AMOUNT +Balance at May 31, 2022 305 $ — 1,266 $ 3 $ 11,484 $ 318 $ 3,476 $ 15,281 +Stock options exercised 8 421 421 +Conversion to Class B Common Stock — — — +Repurchase of Class B Common Stock ( 51 ) ( 378 ) ( 5,131 ) ( 5,509 ) +Dividends on common stock ($ 1.325 per share) and preferred stock ($ 0.10 per share) +( 2,059 ) ( 2,059 ) +Issuance of shares to employees, net of shares withheld for employee taxes 4 130 2 132 +Stock-based compensation 755 755 +Net income 5,070 5,070 +Other comprehensive income (loss) ( 87 ) ( 87 ) +Balance at May 31, 2023 305 $ — 1,227 $ 3 $ 12,412 $ 231 $ 1,358 $ 14,004 +Stock options exercised 7 432 432 +Conversion to Class B Common Stock ( 7 ) 7 — +Repurchase of Class B Common Stock ( 41 ) ( 347 ) ( 3,907 ) ( 4,254 ) +Dividends on common stock ($ 1.450 per share) and preferred stock ($ 0.10 per share) +( 2,203 ) ( 2,203 ) +Issuance of shares to employees, net of shares withheld for employee taxes 5 108 17 125 +Stock-based compensation 804 804 +Net income 5,700 5,700 +Other comprehensive income (loss) ( 178 ) ( 178 ) +Balance at May 31, 2024 298 $ — 1,205 $ 3 $ 13,409 $ 53 $ 965 $ 14,430 +Stock options exercised 6 315 315 +Conversion to Class B Common Stock ( 8 ) 8 — +Repurchase of Class B Common Stock ( 38 ) ( 342 ) ( 2,613 ) ( 2,955 ) +Dividends on common stock ($ 1.570 per share) and preferred stock ($ 0.10 per share) +( 2,337 ) ( 2,337 ) +Issuance of shares to employees, net of shares withheld for employee taxes 5 104 39 143 +Stock-based compensation 709 709 +Net income 3,219 3,219 +Other comprehensive income (loss) ( 311 ) ( 311 ) +Balance at May 31, 2025 290 $ — 1,186 $ 3 $ 14,195 $ ( 258 ) $ ( 727 ) $ 13,213 +The accompanying Notes to the Consolidated Financial Statements are an integral part of this statement. +2025 FORM 10-K 60 +Table of Contents +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +Note 1 +Summary of Significant Accounting Policies +62 +Note 2 +Property, Plant and Equipment +68 +Note 3 +Accrued Liabilities +68 +Note 4 +Fair Value Measurements +69 +Note 5 +Short-Term Borrowings and Credit Lines +70 +Note 6 +Long-Term Debt +71 +Note 7 +Income Taxes +72 +Note 8 +Redeemable Preferred Stock +75 +Note 9 +Common Stock and Stock-Based Compensation +75 +Note 10 +Earnings Per Share +77 +Note 11 +Benefit Plans +77 +Note 12 +Risk Management and Derivatives +78 +Note 13 +Accumulated Other Comprehensive Income (Loss) +81 +Note 14 +Revenues +82 +Note 15 +Segment Information +84 +Note 16 +Commitments and Contingencies +87 +Note 17 +Leases +87 +Note 18 +Restructuring +88 +Note 19 +Supplier Finance Pr ograms +88 +2025 FORM 10-K 61 +Table of Contents +NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES +DESCRIPTION OF BUSINESS +NIKE, Inc. is a worldwide leader in the design, development and worldwide marketing and selling of athletic footwear, apparel, equipment, accessories and services. NIKE, Inc. portfolio brands include the NIKE Brand, Jordan Brand and Converse. The NIKE Brand is focused on performance athletic footwear, apparel, equipment, accessories and services across Men's, Women's and Kids', amplified with sport-inspired lifestyle products carrying the Swoosh trademark, as well as other NIKE Brand trademarks. The Jordan Brand is focused on athletic and casual footwear, apparel and accessories using the Jumpman trademark. Sales and operating results of Jordan Brand products are reported within the respective NIKE Brand geographic operating segments. Converse designs, distributes, licenses and sells casual sneakers, apparel and accessories under the Converse, Chuck Taylor, All Star, One Star, Star Chevron and Jack Purcell trademarks. In some markets outside the U.S., these trademarks are licensed to third parties who design, distribute, market and sell similar products. Operating results of the Converse brand are reported on a stand-alone basis. +BASIS OF CONSOLIDATION +The Consolidated Financial Statements include the accounts of NIKE, Inc. and its subsidiaries (the "Company" or "NIKE"). All significant intercompany transactions and balances have been eliminated. +MANAGEMENT ESTIMATES +The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates, including estimates relating to assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. +REVENUE RECOGNITION +Revenue transactions associated with the sale of NIKE Brand footwear, apparel and equipment, as well as Converse products, comprise a single performance obligation, which consists of the sale of products to customers either through wholesale or direct to consumer channels. The Company satisfies the performance obligation and records revenues when transfer of control to the customer has occurred, based on the terms of sale. A customer is considered to have control once they are able to direct the use and receive substantially all of the benefits of the product. +Control is transferred to wholesale customers upon shipment or upon receipt depending on the country of the sale and the arrangement with the customer. Control transfers to retail store customers at the time of sale and to substantially all digital commerce customers upon shipment. The transaction price is determined based upon the invoiced sales price, less anticipated sales returns, discounts and claims from customers. Payment terms for wholesale transactions depend on the agreement with the customer, which may be governed by the country of sale, and payment is generally required within 90 days or less of shipment to or receipt by the wholesale customer. Payment is due at the time of sale for retail store and digital commerce transactions. +Consideration for trademark licensing contracts is earned through sales-based or usage-based royalty arrangements, and the associated revenues are recognized over the license period as earned. +Taxes assessed by governmental authorities that are both imposed on and concurrent with a specific revenue-producing transaction, and are collected by the Company from a customer, are excluded from Revenues and Cost of sales in the Consolidated Statements of Income. Shipping and handling costs associated with outbound freight after control over a product has transferred to a customer are accounted for as fulfillment costs and are included in Cost of sales when the related revenues are recognized. +SALES-RELATED RESERVES +Consideration promised in the Company's contracts with customers is variable due to anticipated reductions, such as sales returns, discounts and claims from customers. The Company estimates the most likely amount it will be entitled to receive and records an anticipated reduction against Revenues, with an offsetting increase to Accrued liabilities at the time revenues are recognized. The related estimated cost of inventory for product returns is recorded as a reduction to Cost of sales with an offsetting increase to Prepaid expenses and other current assets. +The provision for anticipated sales returns consists of both contractual return rights and discretionary authorized returns. Provisions for post-invoice sales discounts consist of both contractual programs and discretionary discounts that are expected to be granted at a later date. +2025 FORM 10-K 62 +Table of Contents +Estimates of discretionary authorized returns, discounts and claims are based on (1) historical rates, (2) specific identification of outstanding returns not yet received from customers and outstanding discounts and claims and (3) estimated returns, discounts and claims expected but not yet finalized with customers. Actual returns, discounts and claims in any future period are inherently uncertain and thus may differ from estimates recorded. If actual or expected future returns, discounts or claims are significantly greater or lower than the reserves established, a reduction or increase to net Revenues is recorded in the period in which such determination is made. +COST OF SALES +Cost of sales consists primarily of inventory costs, as well as warehousing costs (including the cost of warehouse labor), shipping and handling costs, third-party royalties, certain foreign currency hedge gains and losses and product design costs. +DEMAND CREATION EXPENSE +Demand creation expense consists of brand marketing expense and sports marketing expense. +Brand marketing expense includes advertising and promotion costs such as production and media costs, digital marketing expense, brand events and retail brand presentation costs. Advertising production costs are expensed the first time an advertisement is run. Advertising media costs are expensed when the advertisement appears. Costs related to brand events are expensed when the event occurs. Costs related to retail brand presentation are expensed when the presentation is complete and delivered. +Sports marketing expense includes expenses related to endorsement contracts, complimentary product and sports marketing events. A significant amount of the Company's promotional expenses result from payments under endorsement contracts. In general, endorsement payments are expensed on a straight-line basis over the term of the contract. However, certain contracts contain elements that may be accounted for differently based upon the facts and circumstances of each individual contract. Prepayments made under contracts are included in Prepaid expenses and other current assets or Deferred income taxes and other assets depending on the period to which the prepayment applies. +Certain contracts provide for contingent payments to endorsers based upon specific achievements in their sport (e.g., winning a championship). The Company records Demand creation expense for these amounts when the endorser achieves the specific goal. +Certain contracts provide for variable payments based upon endorsers maintaining a level of performance in their sport over an extended period of time (e.g., maintaining a specified ranking in a sport for a year). When the Company determines payments are probable, the amounts are reported in Demand creation expense ratably over the contract period based on the Company's best estimate of the endorser's performance. In these instances, to the extent actual payments to the endorser differ from the Company's estimate due to changes in the endorser's performance, adjustments to Demand creation expense may be recorded in a future period. +Certain contracts provide for royalty payments to endorsers based upon a predetermined percent of sales of particular products, which the Company records in Cost of sales as the related sales occur. For contracts containing minimum guaranteed royalty payments, the Company records the amount of any guaranteed payment in excess of that earned through sales of product within Demand creation expense. +Through cooperative advertising programs, the Company reimburses its wholesale customers for certain costs of advertising the Company's products. To the extent the Company receives a distinct good or service in exchange for consideration paid to the customer that does not exceed the fair value of that good or service, the amounts reimbursed are recorded in Demand creation expense. +Total Demand creation expense was $ 4,689 million, $ 4,285 million and $ 4,060 million for the years ended May 31, 2025, 2024 and 2023, respectively. Prepaid demand creation expenses totaled $ 1,333 million and $ 814 million at May 31, 2025 and 2024, respectively, of which $ 498 million and $ 420 million, respectively, were recorded in Prepaid expenses and other current assets, and $ 835 million and $ 394 million, respectively, were recorded in Deferred income taxes and other assets. +OPERATING OVERHEAD EXPENSE +Operating overhead expense consists primarily of wage and benefit-related expenses and other administrative expenses, such as research and development costs, bad debt expense, rent, depreciation and amortization and costs related to professional services, certain technology investments, meetings and travel. +2025 FORM 10-K 63 +Table of Contents +CASH AND EQUIVALENTS +Cash and equivalents represent cash and short-term, highly liquid investments, that are both readily convertible to known amounts of cash and so near their maturity they present insignificant risk of changes in value because of changes in interest rates, with maturities three months or less at the date of purchase. +SHORT-TERM INVESTMENTS +Short-term investments consist of highly liquid investments with maturities over three months at the date of purchase. At May 31, 2025 and 2024, Short-term investments consisted of available-for-sale debt securities, which are recorded at fair value with unrealized gains and losses reported, net of tax, in Accumulated other comprehensive income (loss), unless unrealized losses are determined to be unrecoverable. Realized gains and losses on the sale of securities are determined by specific identification. The Company considers all available-for-sale debt securities, including those with maturity dates beyond 12 months, as available to support current operational liquidity needs and, therefore, classifies all securities with maturity dates beyond three months at the date of purchase as current assets within Short-term investments on the Consolidated Balance Sheets. +Refer to Note 4 — Fair Value Measurements for more information on the Company's Short-term investments. +ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS RECEIVABLE +Accounts receivable, net consist primarily of amounts due from customers. The Company makes ongoing estimates relating to the collectability of its accounts receivable and maintains an allowance for expected losses resulting from the inability of its customers to make required payments. In addition to judgments about the creditworthiness of significant customers based on ongoing credit evaluations, the Company considers historical levels of credit losses, as well as macroeconomic and industry trends to determine the amount of the allowance. The allowance for uncollectible accounts receivable was $ 27 million and $ 35 million as of May 31, 2025 and 2024, respectively. +INVENTORY VALUATION +Inventory costs primarily consist of product cost from the Company's suppliers, as well as inbound freight, import duties, taxes, insurance, logistics and other handling fees. Inventories, substantially all of which are finished goods, are stated at lower of cost and net realizable value and valued on either an average or a specific identification cost basis. In some instances, the Company ships products directly from its suppliers to the customer, with the related inventory and cost of sales recognized on a specific identification basis. +If the net realizable value of inventory is estimated to be less than the cost of the inventory, a reserve is recorded equal to the difference between the cost of the inventory and the estimated net realizable value. This reserve is recorded as a charge to Cost of sales. As of May 31, 2025, the Company's inventory reserve was $ 233 million compared to $ 155 million as of May 31, 2024. +PROPERTY, PLANT AND EQUIPMENT AND DEPRECIATION +Property, plant and equipment are recorded at cost. Depreciation is determined on a straight-line basis for land improvements, buildings and leasehold improvements over 2 to 40 years and for machinery and equipment over 2 to 15 years. +Depreciation of assets used in manufacturing, warehousing and product distribution are recorded in Cost of sales. Depreciation of all other assets are recorded in Operating overhead expense. +SOFTWARE DEVELOPMENT COSTS +Expenditures for major software purchases and software developed for internal use are capitalized and amortized over 2 to 12 years on a straight-line basis, once ready for their intended use. The Company's policy provides for the capitalization of external direct costs associated with developing or obtaining internal use computer software. The Company also capitalizes certain payroll and payroll-related costs for employees who are directly associated with internal use computer software projects. The amount of capitalizable payroll costs with respect to these employees is limited to the time directly spent on such projects. Costs associated with preliminary project stage activities, training, maintenance and all other post-implementation stage activities are expensed as incurred. +2025 FORM 10-K 64 +Table of Contents +IMPAIRMENT OF LONG-LIVED ASSETS +The Company reviews the carrying value of long-lived assets or asset groups to be used in operations whenever events or changes in circumstances indicate the carrying amount of the assets might not be recoverable. Factors that would necessitate an impairment assessment include a significant adverse change in the extent or manner in which an asset is used, a significant adverse change in legal factors or the business climate that could affect the value of the asset or a significant decline in the observable market value of an asset, among others. If such facts indicate a potential impairment, the Company would assess the recoverability of an asset group by determining if the carrying value of the asset group exceeds the sum of the projected undiscounted cash flows expected to result from the use and eventual disposition of the assets over the remaining economic life of the primary asset in the asset group. If the recoverability test indicates that the carrying value of the asset group is not recoverable, the Company will estimate the fair value of the asset group using appropriate valuation methodologies, which would typically include an estimate of discounted cash flows. Any impairment would be measured as the difference between the asset group's carrying amount and its estimated fair value. +GOODWILL AND INDEFINITE-LIVED INTANGIBLE ASSETS +The Company performs annual impairment tests on goodwill and intangible assets with indefinite lives in the fourth quarter of each fiscal year or when events occur or circumstances change that would, more likely than not, reduce the fair value of a reporting unit or an intangible asset with an indefinite life below its carrying value. +For purposes of testing goodwill for impairment, the Company allocates goodwill across its reporting units, which are considered the Company's operating segments. For both goodwill and indefinite-lived intangible assets, which primarily consist of acquired trade names and trademarks, the Company may first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit or an intangible asset with an indefinite life is less than its carrying amount. If, after assessing the totality of events and circumstances, the Company determines it is more likely than not that the fair value of a reporting unit or indefinite-lived intangible asset is greater than its carrying amount, an impairment test is unnecessary. +If an impairment test is necessary, the Company will estimate the fair value of the related reporting unit or indefinite-lived intangible asset. If the carrying value of a reporting unit or indefinite-lived intangible asset exceeds its fair value, the goodwill of that reporting unit or indefinite-lived intangible asset is determined to be impaired and the Company will record an impairment charge equal to the excess of the carrying value over the related fair value. +There were no impairment losses for the year ended May 31, 2025, and an immaterial amount of accumulated impairment losses as of May 31, 2024. +OPERATING LEASES +The Company primarily leases retail store space, certain distribution and warehouse facilities, office space, equipment and other non-real estate assets. The Company determines if an arrangement is a lease at inception and begins recording lease activity at the commencement date, which is generally the date in which the Company takes possession of or controls the physical use of the asset. Lease components are not separated from non-lease components for real estate leases within the Company's lease portfolio. Right-of-use ("ROU") assets and lease liabilities are recognized based on the present value of lease payments over the lease term with lease expense recognized on a straight-line basis. The Company's incremental borrowing rate is used to determine the present value of future lease payments unless the implicit rate is readily determinable. +Lease agreements may contain rent escalation clauses, renewal or termination options, rent holidays or certain landlord incentives, including tenant improvement allowances. ROU assets include amounts for scheduled rent increases and are reduced by the amount of lease incentives. The lease term includes the non-cancelable period of the lease and options to extend or terminate the lease when it is reasonably certain the Company will exercise those options. The Company does not record leases with an initial term of 12 months or less on the Consolidated Balance Sheets and recognizes related lease payments in the Consolidated Statements of Income on a straight-line basis over the lease term. Certain lease agreements include variable lease payments, which are based on a percent of retail sales over specified levels or adjust periodically for inflation as a result of changes in a published index, primarily the Consumer Price Index, and are expensed as incurred. +FAIR VALUE MEASUREMENTS +The Company measures certain financial assets and liabilities at fair value on a recurring basis, including derivatives, equity securities and available-for-sale debt securities. Fair value is the price the Company would receive to sell an asset or pay to transfer a liability in an orderly transaction with a market participant at the measurement date. The Company uses a three-level hierarchy that prioritizes fair value measurements based on the types of inputs used, as follows: +2025 FORM 10-K 65 +Table of Contents +• Level 1: Quoted prices in active markets for identical assets or liabilities. +• Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly; these include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active. +• Level 3: Unobservable inputs with little or no market data available, which require the reporting entity to develop its own assumptions. +The Company's assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. Financial assets and liabilities are classified in their entirety based on the most conservative level of input that is significant to the fair value measurement. +Pricing vendors are utilized for a majority of Level 1 and Level 2 investments. These vendors either provide a quoted market price in an active market or use observable inputs without applying significant adjustments in their pricing. Observable inputs include broker quotes, interest rates and yield curves observable at commonly quoted intervals, volatilities and credit risks. The fair value of derivative contracts is determined using observable market inputs such as the daily market foreign currency rates, forward pricing curves, currency volatilities, currency correlations and interest rates and considers nonperformance risk of the Company and its counterparties. +The Company's fair value measurement process includes comparing fair values to another independent pricing vendor to ensure appropriate fair values are recorded. +Refer to Note 4 — Fair Value Measurements for additional information. +FOREIGN CURRENCY TRANSLATION AND FOREIGN CURRENCY TRANSACTIONS +Adjustments resulting from translating foreign functional currency financial statements into U.S. Dollars are included in the foreign currency translation adjustment, a component of Accumulated other comprehensive income (loss). +The Company's global subsidiaries have various monetary assets and liabilities, primarily receivables and payables, which are denominated in currencies other than their functional currency. These balance sheet items are subject to remeasurement, the impact of which is recorded in Other (income) expense, net, within the Consolidated Statements of Income. +ACCOUNTING FOR DERIVATIVES AND HEDGING ACTIVITIES +The Company uses derivative financial instruments to reduce its exposure to changes in foreign currency exchange rates and interest rates. All derivatives are recorded at fair value on the Consolidated Balance Sheets and changes in the fair value of derivative financial instruments are either recognized in Accumulated other comprehensive income (loss), Long-term debt or Net income depending on the nature of the underlying exposure, whether the derivative is formally designated as a hedge and, if designated, the extent to which the hedge is effective. The Company classifies the cash flows at settlement from derivatives in the same category as the cash flows from the related hedged items. For undesignated hedges, designated cash flow hedges and fair value hedges, this is primarily within the Cash provided (used) by operations component of the Consolidated Statements of Cash Flows. For designated net investment hedges, this is within the Cash provided (used) by investing activities component of the Consolidated Statements of Cash Flows. +Refer to Note 12 — Risk Management and Derivatives for additional information on the Company's risk management program and derivatives. +STOCK-BASED COMPENSATION +The Company accounts for stock-based compensation by estimating the fair value, net of estimated forfeitures, of equity awards and recognizing the related expense as Cost of sales or Operating overhead expense, as applicable, in the Consolidated Statements of Income on a straight-line basis over the vesting period. Substantially all awards vest ratably over four years of continued employment, with stock options expiring 10 years from the date of grant. Performance-based restricted stock units vest based on the Company's achievement of certain performance criteria throughout the three-year performance period and continued employment through the vesting date. The fair value of options, stock appreciation rights and employees' purchase rights under the employee stock purchase plans ("ESPPs") is determined using the Black-Scholes option pricing model. The fair value of restricted stock and time-vesting restricted stock units is established by the market price on the date of grant. The fair value of performance-based restricted stock units is estimated as of the grant date using a Monte Carlo simulation. +Refer to Note 9 — Common Stock and Stock-Based Compensation for additional information on the Company's stock-based compensation programs. +2025 FORM 10-K 66 +Table of Contents +INCOME TAXES +The Company accounts for income taxes using the asset and liability method. This approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of assets and liabilities. The Company records a valuation allowance to reduce deferred tax assets to the amount management believes is more likely than not to be realized. Realization of deferred tax assets is dependent on future taxable earnings and is therefore uncertain. At least quarterly, the Company assesses taxable income in prior carryback periods, the scheduled reversal of deferred tax liabilities, projected future taxable income and available tax planning strategies. The Company uses forecasts of taxable income and considers foreign tax credit utilization in making this assessment of realization, which are inherently uncertain and can result in variation between estimated and actual results. To the extent the Company believes that recovery is not likely, a valuation allowance is established against the net deferred tax asset, which increases the Company's income tax expense in the period when such determination is made. +The Company recognizes a tax benefit from uncertain tax positions in the consolidated financial statements only when it is more likely than not the position will be sustained upon examination by relevant tax authorities. The Company recognizes interest and penalties related to income tax matters in Income tax expense. +Refer to Note 7 — Income Taxes for further discussion. +EARNINGS PER SHARE +Basic earnings per common share is calculated by dividing Net income by the weighted average number of common shares outstanding during the year. Diluted earnings per common share is calculated by adjusting weighted average outstanding shares, assuming conversion of all potentially dilutive stock options and awards. +Refer to Note 10 — Earnings Per Share for further discussion. +RECENT ACCOUNTING PRONOUNCEMENTS +In November 2023, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update ("ASU") 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, which is intended to improve reportable segment disclosure requirements, primarily through enhanced disclosures about significant expenses. The amendments will require public entities to disclose significant segment expenses that are regularly provided to the chief operating decision maker and included within segment profit and loss. The Company adopted this ASU for fiscal 2025 and the related disclosures are included in Note 15 — Segment Information. The amendments were effective for the Company's annual periods beginning June 1, 2024, and interim periods beginning June 1, 2025 and have been applied retrospectively to all prior periods presented in the financial statements. +In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, which includes amendments that further enhance income tax disclosures, primarily through standardization and disaggregation of rate reconciliation categories and income taxes paid by jurisdiction. The amendments are effective for the Company's annual periods beginning June 1, 2025, with early adoption permitted, and should be applied either prospectively or retrospectively. The Company is currently evaluating the ASU to determine its impact on the Company's disclosures. +In November 2024, the FASB issued ASU 2024-03, Income Statement—Reporting Comprehensive Income—Expense Disaggregation Disclosures (Subtopic 220-40): Disaggregation of Income Statement Expenses, which requires disclosure about the types of costs and expenses included in certain expense captions presented on the income statement. The new disclosure requirements are effective for the Company's annual periods beginning June 1, 2027, and interim periods beginning June 1, 2028, with early adoption permitted, and may be applied either prospectively or retrospectively. The Company is currently evaluating the ASU to determine its impact on the Company's disclosures. +2025 FORM 10-K 67 +Table of Contents +NOTE 2 — PROPERTY, PLANT AND EQUIPMENT +Property, plant and equipment, net included the following: +MAY 31, +(Dollars in millions) +2025 2024 +Land and improvements $ 334 $ 329 +Buildings 3,510 3,439 +Machinery and equipment 2,954 3,123 +Internal-use software 1,693 1,807 +Leasehold improvements 2,037 2,023 +Construction in process 404 193 +Total property, plant and equipment, gross 10,932 10,914 +Less accumulated depreciation and amortization +6,104 5,914 +TOTAL PROPERTY, PLANT AND EQUIPMENT, NET $ 4,828 $ 5,000 +Capitalized interest was not material for the fiscal years ended May 31, 2025, 2024 and 2023. +NOTE 3 — ACCRUED LIABILITIES +Accrued liabilities included the following: +MAY 31, +(Dollars in millions) +2025 2024 +Sales-related reserves $ 1,834 $ 1,282 +Compensation and benefits, excluding taxes 1,245 1,291 +Dividends payable 598 563 +Endorsement compensation 481 578 +Other 1,753 2,011 +TOTAL ACCRUED LIABILITIES $ 5,911 $ 5,725 +2025 FORM 10-K 68 +Table of Contents +NOTE 4 — FAIR VALUE MEASUREMENTS +The following tables present information about the Company's financial assets measured at fair value on a recurring basis as of May 31, 2025 and 2024, and indicate the level in the fair value hierarchy in which the Company classifies the fair value measurement. +MAY 31, 2025 +(Dollars in millions) +ASSETS AT FAIR VALUE CASH AND EQUIVALENTS SHORT-TERM INVESTMENTS +Cash $ 1,221 $ 1,221 $ — +Level 1: +U.S. Treasury securities 1,046 — 1,046 +Level 2: +Commercial paper and bonds 675 45 630 +Money market funds 5,902 5,902 — +Time deposits 297 295 2 +U.S. Agency securities 10 1 9 +Total Level 2 6,884 6,243 641 +TOTAL $ 9,151 $ 7,464 $ 1,687 +MAY 31, 2024 +(Dollars in millions) +ASSETS AT FAIR VALUE CASH AND EQUIVALENTS SHORT-TERM INVESTMENTS +Cash $ 1,222 $ 1,222 $ — +Level 1: +U.S. Treasury securities 1,175 155 1,020 +Level 2: +Commercial paper and bonds 591 17 574 +Money market funds 8,119 8,119 — +Time deposits 440 347 93 +U.S. Agency securities 35 — 35 +Total Level 2 9,185 8,483 702 +TOTAL $ 11,582 $ 9,860 $ 1,722 +As of May 31, 2025, the Company held $ 776 million of available-for-sale debt securities with maturity dates within one year and $ 911 million with maturity dates over one year and less than five years in Short-term investments on the Consolidated Balance Sheets. The fair value of the Company's available-for-sale debt securities approximates their amortized cost. +Included in Interest expense (income), net was interest income related to the Company's investment portfolio of $ 404 million, $ 430 million and $ 297 million for the years ended May 31, 2025, 2024 and 2023, respectively. +The Company records the assets and liabilities of its derivative financial instruments on a gross basis on the Consolidated Balance Sheets. The Company's derivative financial instruments are subject to master netting arrangements that allow for the offset of assets and liabilities in the event of default or early termination of the contract. Any amounts of cash collateral received related to these instruments associated with the Company's credit-related contingent features are recorded in Cash and equivalents and Accrued liabilities, the latter of which would further offset against the Company's derivative asset balance. Any amounts of cash collateral posted related to these instruments associated with the Company's credit-related contingent features are recorded in Prepaid expenses and other current assets, which would further offset against the Company's derivative liability balance. Cash collateral received or posted related to the Company's credit-related contingent features is presented in the Cash provided (used) by operations component of the Consolidated Statements of Cash Flows. The Company does not recognize amounts of non-cash collateral received, such as securities, on the Consolidated Balance Sheets. For additional information related to credit risk, refer to Note 12 — Risk Management and Derivatives. +The following tables present information about the Company's derivative assets and liabilities measured at fair value on a recurring basis and indicate the level in the fair value hierarchy in which the Company classifies the fair value measurement: +2025 FORM 10-K 69 +Table of Contents +MAY 31, 2025 +DERIVATIVE ASSETS DERIVATIVE LIABILITIES +(Dollars in millions) ASSETS AT FAIR VALUE OTHER CURRENT ASSETS OTHER LONG-TERM ASSETS LIABILITIES AT FAIR VALUE ACCRUED LIABILITIES OTHER LONG-TERM LIABILITIES +Level 2: +Foreign exchange forwards and options (1) +$ 107 $ 85 $ 22 $ 368 $ 226 $ 142 +Interest rate swaps (1) +24 — 24 3 — 3 +TOTAL +$ 131 $ 85 $ 46 $ 371 $ 226 $ 145 +(1) If the foreign exchange and interest rate swap derivative instruments had been netted on the Consolidated Balance Sheets, the asset and liability positions each would have been reduced by $ 131 million as of May 31, 2025. As of that date, the Company posted $ 166 million cash collateral to various counterparties on the derivative liability balance and no amount of collateral was received from counterparties on the derivative asset balance. +MAY 31, 2024 +DERIVATIVE ASSETS DERIVATIVE LIABILITIES +(Dollars in millions) +ASSETS AT FAIR VALUE OTHER CURRENT ASSETS OTHER LONG-TERM ASSETS LIABILITIES AT FAIR VALUE ACCRUED LIABILITIES OTHER LONG-TERM LIABILITIES +Level 2: +Foreign exchange forwards and options (1) +$ 343 $ 299 $ 44 $ 120 $ 115 $ 5 +Interest rate swaps (1) +— — — 31 — 31 +TOTAL +$ 343 $ 299 $ 44 $ 151 $ 115 $ 36 +(1) If the foreign exchange and interest rate swap derivative instruments had been netted on the Consolidated Balance Sheets, the asset and liability positions each would have been reduced by $ 142 million as of May 31, 2024. As of that date, the Company received $ 112 million of cash collateral from various counterparties on the derivative asset balance and posted $ 10 million cash collateral on the derivative liability balance. +For additional information related to the Company's derivative financial instruments, refer to Note 12 — Risk Management and Derivatives. For fair value information regarding Notes payable and Long-term debt, refer to Note 5 — Short-Term Borrowings and Credit Lines and Note 6 — Long-Term Debt, respectively. +The carrying amounts of other current financial assets and other current financial liabilities approximate fair value. +NOTE 5 — SHORT-TERM BORROWINGS AND CREDIT LINES +The carrying amounts reflected on the Consolidated Balance Sheets for Notes payable approximate fair value. +On March 7, 2025, the Company entered into a 364-day committed credit facility agreement with a syndicate of banks, which provides for up to $ 1 billion of borrowings, with an option to increase borrowings up to $ 1.5 billion in total with lender approval. The facility matures on March 6, 2026, with an option to extend the maturity date an additional 364 days. This facility replaces the prior $ 1 billion 364-day credit facility agreement entered into on March 8, 2024, which matured on March 7, 2025. In July 2025, Standard and Poor's Corporation downgraded the Company's senior unsecured debt rating from AA- to A+. Based on the Company's current long-term senior unsecured debt ratings of A+ and A1 from Standard and Poor's Corporation and Moody's Investor Services, respectively, the interest rate charged on any outstanding borrowings would be the prevailing Term Secured Overnight Financing Rate ("Term SOFR") for the applicable interest period plus 0.725 %. The facility fee is 0.04 % of the total undrawn commitment. +On March 7, 2025, the Company entered into a five-year committed credit facility agreement with a syndicate of banks which provides for up to $ 2 billion of borrowings, with the option to increase borrowings up to $ 3 billion in total with lender approval. The facility matures on March 7, 2030, with options to extend the maturity date up to an additional two years . This facility replaces the prior $ 2 billion five-year credit facility agreement entered into on March 11, 2022, which would have matured on March 11, 2027. In July 2025, Standard and Poor's Corporation downgraded the Company's senior unsecured debt rating from AA- to A+. Based on the Company's current long-term senior unsecured debt ratings of A+ and A1 from Standard and Poor's Corporation and Moody's Investor Services, respectively, the interest rate charged on any outstanding borrowings would be the prevailing Term SOFR for the applicable interest period plus 0.725 %. The facility fee is 0.05 % of the total undrawn commitment. +As of and for the periods ended May 31, 2025 and 2024, no amounts were outstanding under any of the Company's committed credit facilities. +2025 FORM 10-K 70 +Table of Contents +NOTE 6 — LONG-TERM DEBT +Long-term debt, net of unamortized premiums, discounts, debt issuance costs, and interest rate swap fair value adjustments comprises the following: +BOOK VALUE OUTSTANDING +AS OF MAY 31, +Scheduled Maturity (Dollars in millions) +ORIGINAL PRINCIPAL INTEREST RATE INTEREST PAYMENTS 2025 2024 +Corporate Term Debt: (1)(2) +March 27, 2025 1,000 2.40 % Semi-Annually $ — $ 999 +November 1, 2026 1,000 2.38 % Semi-Annually 999 998 +March 27, 2027 1,000 2.75 % Semi-Annually 999 998 +March 27, 2030 1,500 2.85 % Semi-Annually 1,495 1,494 +March 27, 2040 (3) +1,000 3.25 % Semi-Annually 993 966 +May 1, 2043 (3) +500 3.63 % Semi-Annually 502 488 +November 1, 2045 (3) +1,000 3.88 % Semi-Annually 997 986 +November 1, 2046 500 3.38 % Semi-Annually 493 492 +March 27, 2050 1,500 3.38 % Semi-Annually 1,483 1,482 +Total 7,961 8,903 +Less Current Portion of Long-Term Debt — 1,000 +TOTAL LONG-TERM DEBT $ 7,961 $ 7,903 +(1) These senior unsecured obligations rank equally with the Company's other unsecured and unsubordinated indebtedness. +(2) The bonds are redeemable at the Company's option at a price equal to the greater of (i) 100 % of the aggregate principal amount of the notes to be redeemed or (ii) the sum of the present values of the remaining scheduled payments, plus in each case, accrued and unpaid interest. However, the bonds also feature a par call provision, which allows for the bonds to be redeemed at a price equal to 100 % of the aggregate principal amount of the notes being redeemed, plus accrued and unpaid interest on or after the Par Call Date, which can range from one to six months prior to the scheduled maturity, as defined in the respective notes. +(3) The Company entered into interest rate swap agreements pursuant to which the Company receives fixed interest payments at the same rate as the term debt and pays variable interest payments based on SOFR plus a fixed spread. At May 31, 2025, the notional amount outstanding of these swaps was $ 2.4 billion and had interest rates payable that ranged from 3.6 % to 4.5 %. These swaps mature during fiscal 2034 and 2035. +The scheduled maturity of Long-term debt in each of the years ending May 31, 2026 through 2030, is $ 0 million, $ 2,000 million, $ 0 million, $ 0 million and $ 1,500 million, respectively, at face value. +The Company's Long-term debt is recorded at adjusted cost, net of unamortized premiums, discounts, debt issuance costs, and interest rate swap fair value adjustments. The fair value of long-term debt is estimated based upon quoted prices for similar instruments or quoted prices for identical instruments in inactive markets (Level 2). The fair value of the Company's Long-term debt, including the current portion but excluding interest rate swap fair value adjustments, was approximately $ 6,673 million and $ 7,631 million as of May 31, 2025 and 2024, respectively. +2025 FORM 10-K 71 +Table of Contents +NOTE 7 — INCOME TAXES +Income before income taxes is as follows: +YEAR ENDED MAY 31, +(Dollars in millions) +2025 2024 2023 +Income before income taxes: +United States $ 3,220 $ 5,588 $ 4,663 +Foreign 665 1,112 1,538 +TOTAL INCOME BEFORE INCOME TAXES $ 3,885 $ 6,700 $ 6,201 +The provision for income taxes is as follows: +YEAR ENDED MAY 31, +(Dollars in millions) +2025 2024 2023 +Current: +United States +Federal $ 358 $ 782 $ 430 +State 121 201 184 +Foreign 475 514 634 +Total Current 954 1,497 1,248 +Deferred: +United States +Federal ( 135 ) ( 422 ) ( 162 ) +State ( 12 ) ( 61 ) ( 25 ) +Foreign ( 141 ) ( 14 ) 70 +Total Deferred ( 288 ) ( 497 ) ( 117 ) +TOTAL INCOME TAX EXPENSE $ 666 $ 1,000 $ 1,131 +A reconciliation from the U.S. statutory federal income tax rate to the effective income tax rate is as follows: +YEAR ENDED MAY 31, +2025 2024 2023 +Federal income tax rate 21.0 % 21.0 % 21.0 % +State taxes, net of federal benefit 2.0 % 1.4 % 1.5 % +Foreign earnings 1.1 % - 2.5 % 1.7 % +U.S. tax regulations - foreign currency losses +- 3.4 % 0.0 % 0.0 % +Foreign-derived intangible income benefit - 5.3 % - 4.8 % - 6.1 % +Stock-based compensation +1.5 % - 0.5 % - 1.1 % +Income tax audits and contingency reserves 2.7 % 1.8 % 1.0 % +U.S. research and development tax credit - 2.1 % - 2.1 % - 1.2 % +Other, net - 0.4 % 0.6 % 1.4 % +EFFECTIVE INCOME TAX RATE 17.1 % 14.9 % 18.2 % +The increase in the Company's effective tax rate for the fiscal year ended May 31, 2025 compared to the fiscal year ended May 31, 2024 was primarily due to changes in the Company's earnings mix, decreased benefits from stock-based compensation and one-time benefits recognized in fiscal 2024 including the impact of temporary relief provided by the Internal Revenue Service ("IRS") relating to U.S. foreign tax credit regulations. These impacts were partially offset by a one-time, non-cash deferred tax benefit recognized in the third quarter of fiscal 2025 provided by U.S. tax regulations. On December 10, 2024, the U.S. Department of Treasury published final regulations related to Internal Revenue Code (IRC) Section 987 foreign currency gains and losses derived from translation of the operations, assets and liabilities of non-US qualified business units. While these regulations are effective for the Company beginning June 1, 2025, they require computation of a pre-transition foreign currency gain or loss to be included in the determination of future taxable income or loss. Based on the Company’s analysis of the regulations and recognition of temporary differences impacting U.S. taxation of foreign earnings under Subpart F of the Internal +2025 FORM 10-K 72 +Table of Contents +Revenue Code, the Company recognized a non-cash deferred income tax benefit of $ 133 million in the third quarter of fiscal 2025 related to pre-transition foreign currency losses. +The decrease in the Company's effective tax rate for the fiscal year ended May 31, 2024 compared to the fiscal year ended May 31, 2023 was primarily due to changes in the Company's earning mix and one-time benefits including the impact of temporary relief provided by the IRS relating to U.S. foreign tax credit regulations. On July 21, 2023, the IRS issued Notice 2023-55 which specifically delayed the application of certain U.S. foreign tax credit regulations that had previously limited the Company's ability to claim credits on certain foreign taxes for the fiscal year ended May 31, 2023. As a result of this new guidance, the Company recognized a one-time tax benefit related to fiscal 2023 tax positions in the first three months of fiscal 2024. +The Organization for Economic Co-operation and Development (OECD) and the G20 Inclusive Framework on Base Erosion and Profit Shifting (the "Inclusive Framework") have put forth Pillar Two proposals that ensure a minimal level of taxation. Several countries in which the Company operates, including several European Union member states, have adopted domestic legislation to implement the Inclusive Framework's global corporate minimum tax rate of fifteen percent. This legislation became effective for the Company beginning June 1, 2024. Based on the Company's analysis of Pillar Two provisions, these tax law changes did not have a material impact on the Company's financial statements for fiscal 2025. +Deferred income tax assets and liabilities comprise the following as of: +MAY 31, +(Dollars in millions) +2025 2024 +Deferred tax assets: +Inventories +$ 98 $ 69 +Sales return reserves +205 125 +Deferred compensation +387 347 +Stock-based compensation 285 290 +Reserves and accrued liabilities +143 113 +Operating lease liabilities 458 474 +Intangibles 217 236 +Capitalized research and development expenditures 923 878 +Net operating loss carry-forwards 75 21 +Subpart F deferred tax 315 409 +Other +212 214 +Total deferred tax assets 3,318 3,176 +Valuation allowance ( 51 ) ( 29 ) +Total deferred tax assets after valuation allowance 3,267 3,147 +Deferred tax liabilities: +Foreign withholding tax on undistributed earnings of foreign subsidiaries ( 119 ) ( 131 ) +Property, plant and equipment +( 225 ) ( 290 ) +Right-of-use assets ( 377 ) ( 397 ) +Other +( 4 ) ( 9 ) +Total deferred tax liabilities ( 725 ) ( 827 ) +NET DEFERRED TAX ASSET (1) +$ 2,542 $ 2,320 +(1) Of the total $ 2,542 million net deferred tax asset for the period ended May 31, 2025, $ 2,668 million was included within Deferred income taxes and other assets and $( 126 ) million was included within Deferred income taxes and other liabilities on the Consolidated Balance Sheets. Of the total $ 2,320 million net deferred tax asset for the period ended May 31, 2024, $ 2,465 million was included within Deferred income taxes and other assets and $( 145 ) million was included within Deferred income taxes and other liabilities on the Consolidated Balance Sheets. +Deferred tax assets as of May 31, 2025 and 2024, were reduced by a valuation allowance provided for U.S. capital loss carryforwards and on tax benefits generated by certain entities with operating losses. +The Company has available pre-tax effected domestic and foreign loss carry-forwards of $ 261 million as of May 31, 2025. If not utilized, $ 135 million of losses will expire in the periods between fiscal 2028 and 2044. Approximately $ 126 million of losses do not expire. +2025 FORM 10-K 73 +Table of Contents +On July 4, 2025, the U.S. government enacted The One Big Beautiful Bill Act of 2025 which includes, among other provisions, changes to the U.S. corporate income tax system including the allowance of immediate expensing of qualifying research and development expenses and permanent extensions of certain provisions within the Tax Cuts and Jobs Act. Certain provisions are effective for the Company beginning fiscal 2026. The Company is evaluating the future impact of these tax law changes on its financial statements. +The following is a reconciliation of the changes in the gross balance of unrecognized tax benefits as of: +MAY 31, +(Dollars in millions) +2025 2024 2023 +Unrecognized tax benefits, beginning of the period $ 990 $ 936 $ 848 +Gross increases related to prior period tax positions 11 35 95 +Gross decreases related to prior period tax positions +( 10 ) ( 13 ) ( 17 ) +Gross increases related to current period tax positions +81 77 50 +Settlements ( 5 ) ( 22 ) ( 18 ) +Lapse of statute of limitations ( 45 ) ( 24 ) ( 7 ) +Changes due to currency translation 4 1 ( 15 ) +UNRECOGNIZED TAX BENEFITS, END OF THE PERIOD $ 1,026 $ 990 $ 936 +As of May 31, 2025, total gross unrecognized tax benefits, excluding related interest and penalties, were $ 1,026 million, of which $ 738 million would affect the Company's effective tax rate if recognized in future periods. The majority of the total gross unrecognized tax benefits were long-term in nature and were included within Deferred income taxes and other liabilities on the Consolidated Balance Sheets. +The Company recognizes interest and penalties related to income tax matters in Income tax expense. As of May 31, 2025 and 2024, accrued interest and penalties related to uncertain tax positions were $ 376 million and $ 332 million, respectively (excluding federal benefit) and were included within Deferred income taxes and other liabilities on the Consolidated Balance Sheets. +As of May 31, 2024, long-term income taxes payable unrelated to unrecognized tax benefits were $ 266 million and were included within Deferred income taxes and other liabilities on the Consolidated Balance Sheets. As of May 31, 2025 these amounts were included within Income taxes payable on the Consolidated Balance Sheets. +The Company is subject to taxation in the U.S., as well as various state and foreign jurisdictions. The Company is currently under audit by the U.S. IRS for fiscal years 2017 through 2019. The Company has closed all U.S. federal income tax matters through fiscal 2016, with the exception of certain transfer pricing adjustments. In certain major foreign jurisdictions, tax years after 2011 remain subject to examination. +Although the timing of resolution of audits is not certain, the Company evaluates all domestic and foreign audit issues in the aggregate, along with the expiration of applicable statutes of limitations, and estimates that it is reasonably possible the total gross unrecognized tax benefits could decrease by up to $ 249 million within the next 12 months primarily as a result of the expected resolution with the IRS of certain U.S. federal income tax matters for fiscal years 2017 through 2019 related to transfer pricing adjustments, research and development credits and other items. +In January 2019, the European Commission opened a formal investigation to examine whether the Netherlands has breached State Aid rules when granting certain tax rulings to the Company. The Company believes the investigation is without merit. If this matter is adversely resolved, the Netherlands may be required to assess additional amounts with respect to prior periods, and the Company's income taxes related to prior periods in the Netherlands could increase. +A portion of the Company's foreign operations benefit from a tax holiday, which is set to expire in 2031. This tax holiday may be extended when certain conditions are met or may be terminated early if certain conditions are not met. The tax benefit attributable to this tax holiday, before taking into consideration other U.S. indirect tax provisions, was $ 271 million, $ 338 million and $ 263 million for the fiscal years ended May 31, 2025, 2024 and 2023, respectively. The benefit of the tax holiday on diluted earnings per common share, before taking into consideration other U.S. indirect tax provisions, was $ 0.18 , $ 0.22 and $ 0.17 for the fiscal years ended May 31, 2025, 2024 and 2023, respectively. +2025 FORM 10-K 74 +Table of Contents +NOTE 8 — REDEEMABLE PREFERRED STOCK +Sojitz America is the sole owner of the Company's authorized redeemable preferred stock, $ 1 par value, which is redeemable at the option of Sojitz America or the Company at par value aggregating $ 0.3 million. A cumulative dividend of $ 0.10 per share is payable annually on May 31, and no dividends may be declared or paid on the common stock of the Company unless dividends on the redeemable preferred stock have been declared and paid in full. There have been no changes in the redeemable preferred stock in the fiscal years ended May 31, 2025, 2024 and 2023. As the holder of the redeemable preferred stock, Sojitz America does not have general voting rights but does have the right to vote as a separate class on the sale of all or substantially all of the assets of the Company and its subsidiaries; on merger, consolidation, liquidation or dissolution of the Company; or on the sale or assignment of the NIKE trademark for athletic footwear sold in the United States. The redeemable preferred stock has been fully issued to Sojitz America and is not blank check preferred stock. The Company's articles of incorporation do not permit the issuance of additional preferred stock. +NOTE 9 — COMMON STOCK AND STOCK-BASED COMPENSATION +COMMON STOCK +The authorized number of shares of Class A Common Stock, no par value, and Class B Common Stock, no par value, are 400 million and 2,400 million, respectively. Each share of Class A Common Stock is convertible into one share of Class B Common Stock. Voting rights of Class B Common Stock are limited in certain circumstances with respect to the election of directors. There are no differences in the dividend and liquidation preferences or participation rights of the holders of Class A and Class B Common Stock. From time to time, the Company's Board of Directors authorizes share repurchase programs for the repurchase of Class B Common Stock. The value of repurchased shares is deducted from Total shareholders' equity through allocation to Capital in excess of stated value and Retained earnings (deficit). +STOCK-BASED COMPENSATION +The NIKE, Inc. Stock Incentive Plan (the "Stock Incentive Plan") provides for the issuance of up to 798 million previously unissued shares of Class B Common Stock in connection with equity awards granted under the Stock Incentive Plan. The Stock Incentive Plan authorizes the grant of non-statutory stock options, incentive stock options, stock appreciation rights, and stock awards, including restricted stock and restricted stock units. Restricted stock units include both time-vesting restricted stock units ("RSUs") as well as performance-based restricted stock units ("PSUs"). A committee of the Board of Directors administers the Stock Incentive Plan and has the authority to determine the employees to whom awards will be made, the amount of the awards and the other terms and conditions of the awards. The Company generally grants stock options, restricted stock and restricted stock units on an annual basis. The exercise price for stock options and stock appreciation rights may not be less than the fair market value of the underlying shares on the date of grant. Substantially all awards under the Stock Incentive Plan vest ratably over 4 years of continued employment, with stock options expiring 10 years from the date of grant. +The following table summarizes the Company's total stock-based compensation expense recognized in Cost of sales or Operating overhead expense, as applicable: +YEAR ENDED MAY 31, +(Dollars in millions) +2025 2024 2023 +Stock options (1) +$ 292 $ 336 $ 311 +ESPPs 69 69 72 +Restricted stock and restricted stock units (1)(2) +348 399 372 +TOTAL STOCK-BASED COMPENSATION EXPENSE $ 709 $ 804 $ 755 +(1) Expense for stock options includes the expense associated with stock appreciation rights. +(2) For the fiscal years ended May 31, 2025, 2024 and 2023, expense for restricted stock units includes an immaterial amount of expense for PSUs. +2025 FORM 10-K 75 +Table of Contents +STOCK OPTIONS +The weighted average fair value per share of stock options granted during the fiscal years ended May 31, 2025, 2024 and 2023, computed as of the grant date using the Black-Scholes pricing model, was $ 25.90 , $ 32.78 and $ 31.31 , respectively. The weighted average assumptions used to estimate these fair values were as follows: +YEAR ENDED MAY 31, +2025 2024 2023 +Dividend yield 1.6 % 1.2 % 0.9 % +Expected volatility 31.1 % 29.3 % 27.1 % +Weighted average expected life (in years) 6.0 5.8 5.8 +Risk-free interest rate 3.8 % 4.3 % 3.3 % +Expected volatilities are based on an analysis of the historical volatility of the Company's common stock, the implied volatility in market traded options on the Company's common stock with a term greater than one year , as well as other factors. The weighted average expected life of options is based on an analysis of historical and expected future exercise patterns. The interest rate is based on the U.S. Treasury (constant maturity) risk-free rate in effect at the date of grant for periods corresponding with the expected term of the options. +The following summarizes the stock option transactions under the plan discussed above: +SHARES (1) +WEIGHTED AVERAGE OPTION PRICE +(In millions) +Options outstanding as of May 31, 2024 73.7 $ 98.10 +Exercised ( 5.4 ) 58.50 +Forfeited ( 6.5 ) 101.93 +Granted 13.3 83.20 +Options outstanding as of May 31, 2025 75.1 $ 97.99 +(1) Includes stock appreciation rights transactions. +Options exercisable as of May 31, 2025 were 49.8 million and had a weighted average option price of $ 98.00 per share. The aggregate intrinsic value for options outstanding and exercisable as of May 31, 2025 was $ 20 million and $ 20 million, respectively. The total intrinsic value of the options exercised during the years ended May 31, 2025, 2024 and 2023 was $ 120 million, $ 305 million and $ 438 million, respectively. The intrinsic value is the amount by which the market value of the underlying stock exceeds the exercise price of the options. The weighted average contractual life remaining for options outstanding and options exercisable as of May 31, 2025 was 5.4 years and 3.9 years, respectively. As of May 31, 2025, the Company had $ 400 million of unrecognized compensation costs from stock options, net of estimated forfeitures, to be recognized in Cost of sales or Operating overhead expense, as applicable, over a weighted average remaining period of 2.4 years. +EMPLOYEE STOCK PURCHASE PLANS +In addition to the Stock Incentive Plan, the Company gives employees the right to purchase shares at a discount from the market price under ESPPs. Subject to the annual statutory limit, employees are eligible to participate through payroll deductions of up to 10 % of their compensation. At the end of each six-month offering period, shares are purchased by the participants at 85 % of the lower of the fair market value at the beginning or the end of the offering period. Employees purchased 3.6 million, 3.1 million and 3.0 million shares during each of the fiscal years ended May 31, 2025, 2024 and 2023, respectively. +RESTRICTED STOCK AND RESTRICTED STOCK UNITS +Recipients of restricted stock are entitled to cash dividends and to vote their respective shares throughout the period of restriction. Recipients of restricted stock units, which includes RSUs and PSUs, are entitled to dividend equivalent cash payments upon vesting. The number of shares of restricted stock and restricted stock units vested includes shares of common stock withheld by the Company on behalf of employees to satisfy the minimum statutory tax withholding requirements. +The following summarizes the restricted stock and restricted stock units transactions under the plan discussed above: +2025 FORM 10-K 76 +Table of Contents +SHARES (1) +WEIGHTED AVERAGE GRANT DATE +FAIR VALUE +(In millions) +Nonvested as of May 31, 2024 9.1 $ 117.52 +Vested ( 3.3 ) 116.76 +Forfeited ( 1.7 ) 105.68 +Granted 6.6 82.32 +Nonvested as of May 31, 2025 10.7 $ 94.29 +(1) Includes an immaterial amount of PSU transactions +The weighted average fair value per share of restricted stock and restricted stock units granted for the fiscal years ended May 31, 2025, 2024 and 2023, computed as of the grant date, was $ 82.32 , $ 103.13 and $ 115.56 , respectively. During the fiscal years ended May 31, 2025, 2024 and 2023, the aggregate fair value of vested restricted stock and restricted stock units was $ 221 million, $ 340 million and $ 250 million, respectively, computed as of the date of vesting. +As of May 31, 2025, the Company had $ 631 million of unrecognized compensation costs from restricted stock and restricted stock units, net of estimated forfeitures, to be recognized in Cost of sales or Operating overhead expense, as applicable, over a weighted average remaining period of 2.5 years. +NOTE 10 — EARNINGS PER SHARE +The following is a reconciliation from basic earnings per common share to diluted earnings per common share. The computations of diluted earnings per common share exclude restricted stock, restricted stock units and options, including shares under ESPPs, to purchase an estimated additional 75.5 million, 41.0 million and 31.7 million shares of common stock outstanding for the fiscal years ended May 31, 2025, 2024 and 2023, respectively, because the awards were assumed to be anti-dilutive. +YEAR ENDED MAY 31, +(In millions, except per share data) +2025 2024 2023 +Net income available to common stockholders $ 3,219 $ 5,700 $ 5,070 +Determination of shares: +Weighted average common shares outstanding 1,484.9 1,517.6 1,551.6 +Assumed conversion of dilutive stock options and awards 2.7 12.1 18.2 +DILUTED WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 1,487.6 1,529.7 1,569.8 +Earnings per common share: +Basic $ 2.17 $ 3.76 $ 3.27 +Diluted $ 2.16 $ 3.73 $ 3.23 +NOTE 11 — BENEFIT PLANS +The Company has a qualified 401(k) Savings and Profit Sharing Plan, in which all U.S. employees are able to participate. The Company matches a portion of employee contributions to the savings plan. Company contributions to the savings plan were $ 151 million, $ 153 million and $ 136 million and included in Cost of sales or Operating overhead expense, as applicable, for the fiscal years ended May 31, 2025, 2024 and 2023, respectively. +The Company allows certain highly compensated employees and non-employee directors of the Company to defer compensation under a nonqualified deferred compensation plan. A rabbi trust was established to fund the Company's nonqualified deferred compensation plan obligation. The assets in the rabbi trust of approximately $ 1,123 million and $ 1,037 million as of May 31, 2025 and 2024, respectively, primarily consist of company owned life insurance policies recorded at their cash surrender value and are classified in Deferred income taxes and other assets on the Consolidated Balance Sheets. Deferred compensation plan liabilities were $ 1,102 million and $ 1,063 million as of May 31, 2025 and 2024, respectively, and primarily classified in Deferred income taxes and other liabilities on the Consolidated Balance Sheets. +2025 FORM 10-K 77 +Table of Contents +NOTE 12 — RISK MANAGEMENT AND DERIVATIVES +The Company is exposed to global market risks, including the effect of changes in foreign currency exchange rates and interest rates, and uses derivatives to manage financial exposures that occur in the normal course of business. The Company does not hold or issue derivatives for trading or speculative purposes. +The Company may elect to designate certain derivatives as hedging instruments under U.S. GAAP. The Company formally documents all relationships between designated hedging instruments and hedged items, as well as its risk management objectives and strategies for undertaking hedge transactions. This process includes linking all derivatives designated as hedges to either recognized assets or liabilities or forecasted transactions and assessing, both at inception and on an ongoing basis, the effectiveness of the hedging relationships. +The majority of derivatives outstanding as of May 31, 2025, are designated as foreign currency cash flow hedges, primarily for Euro/U.S. Dollar, Chinese Yuan/U.S. Dollar, British Pound/Euro, and Japanese Yen/U.S. Dollar currency pairs. All derivatives are recognized on the Consolidated Balance Sheets at fair value and classified based on the instrument's maturity date. +The following tables present the fair values of derivative instruments included within the Consolidated Balance Sheets: +DERIVATIVE ASSETS +BALANCE SHEET LOCATION MAY 31, +(Dollars in millions) +2025 2024 +Derivatives formally designated as hedging instruments: +Foreign exchange forwards and options Prepaid expenses and other current assets $ 75 $ 269 +Foreign exchange forwards and options Deferred income taxes and other assets 22 44 +Interest rate swaps +Deferred income taxes and other assets +24 — +Total derivatives formally designated as hedging instruments 121 313 +Derivatives not designated as hedging instruments: +Foreign exchange forwards and options +Prepaid expenses and other current assets 10 30 +Total derivatives not designated as hedging instruments 10 30 +TOTAL DERIVATIVE ASSETS $ 131 $ 343 +DERIVATIVE LIABILITIES +BALANCE SHEET LOCATION MAY 31, +(Dollars in millions) +2025 2024 +Derivatives formally designated as hedging instruments: +Foreign exchange forwards and options Accrued liabilities $ 216 $ 110 +Foreign exchange forwards and options Deferred income taxes and other liabilities 142 5 +Interest rate swaps Deferred income taxes and other liabilities 3 31 +Total derivatives formally designated as hedging instruments 361 146 +Derivatives not designated as hedging instruments: +Foreign exchange forwards and options +Accrued liabilities 10 5 +Total derivatives not designated as hedging instruments 10 5 +TOTAL DERIVATIVE LIABILITIES $ 371 $ 151 +2025 FORM 10-K 78 +Table of Contents +The following tables present the amounts affecting the Consolidated Statements of Income for the years ended May 31, 2025, 2024 and 2023: +(Dollars in millions) +AMOUNT OF GAIN (LOSS) +RECOGNIZED IN OTHER +COMPREHENSIVE INCOME (LOSS) ON DERIVATIVES (1) +AMOUNT OF GAIN (LOSS) +RECLASSIFIED FROM ACCUMULATED +OTHER COMPREHENSIVE +INCOME (LOSS) INTO INCOME (1) +YEAR ENDED MAY 31, LOCATION OF GAIN (LOSS) +RECLASSIFIED FROM ACCUMULATED +OTHER COMPREHENSIVE INCOME +(LOSS) INTO INCOME YEAR ENDED MAY 31, +2025 2024 2023 2025 2024 2023 +Derivatives designated as +cash flow hedges: +Foreign exchange forwards +and options +$ ( 67 ) $ ( 66 ) $ 16 Revenues $ ( 93 ) $ ( 24 ) $ 26 +Foreign exchange forwards +and options +( 55 ) 231 305 Cost of sales 295 294 581 +Foreign exchange forwards +and options +1 3 ( 1 ) Demand creation expense 1 2 ( 5 ) +Foreign exchange forwards +and options +( 6 ) 102 207 Other (income) expense, net 145 204 338 +Interest rate swaps (2) +— — — Interest expense (income), net ( 8 ) ( 8 ) ( 8 ) +TOTAL DESIGNATED CASH FLOW HEDGES +$ ( 127 ) $ 270 $ 527 $ 340 $ 468 $ 932 +(1) For the fiscal years ended May 31, 2025, 2024, and 2023, the amounts recorded in Other (income) expense, net as a result of the discontinuance of cash flow hedges because the forecasted transactions were no longer probable of occurring were immaterial. +(2) Gains and losses associated with terminated interest rate swaps, which were previously designated as cash flow hedges and recorded in Accumulated other comprehensive income (loss), will be released through Interest expense (income), net over the term of the issued debt. +AMOUNT OF GAIN (LOSS) RECOGNIZED +IN INCOME ON DERIVATIVES +LOCATION OF GAIN (LOSS) +RECOGNIZED IN INCOME +ON DERIVATIVES +YEAR ENDED MAY 31, +(Dollars in millions) +2025 2024 2023 +Derivatives not designated as hedging instruments: +Foreign exchange forwards and options and embedded derivatives $ 2 $ 24 $ 28 Other (income) expense, net +CASH FLOW HEDGES +All changes in fair value of derivatives designated as cash flow hedge instruments are recorded in Accumulated other comprehensive income (loss) until Net income is affected by the variability of cash flows of the hedged transaction. Effective hedge results are classified in the Consolidated Statements of Income in the same manner as the underlying exposure. When it is no longer probable the forecasted hedged transaction will occur in the initially identified time period, hedge accounting is discontinued and the Company accounts for the associated derivative as an undesignated instrument as discussed below. Additionally, the gains and losses associated with derivatives no longer designated as cash flow hedge instruments in Accumulated other comprehensive income (loss) are recognized immediately in Other (income) expense, net, if it is probable the forecasted hedged transaction will not occur by the end of the initially identified time period or within an additional two-month period thereafter. In rare circumstances, the additional period of time may exceed two months due to extenuating circumstances related to the nature of the forecasted transaction that are outside the control or influence of the Company. +The purpose of the Company's foreign exchange risk management program is to lessen both the positive and negative effects of currency fluctuations on the Company's consolidated results of operations, financial position and cash flows. Foreign currency exposures the Company may elect to hedge in this manner include product costs, non-functional currency denominated revenues, intercompany revenues, demand creation expenses, investments in U.S. Dollar denominated available-for-sale debt securities and certain other intercompany transactions. +Product cost foreign currency exposures are primarily generated through non-functional currency denominated product purchases. NIKE entities primarily purchase product in two ways: (1) Certain NIKE entities purchase product from the NIKE Trading Company ("NTC"), a wholly-owned sourcing hub that buys NIKE branded products from third-party factories, predominantly in U.S. Dollars. The NTC, whose functional currency is the U.S. Dollar, then sells the product to NIKE entities in their respective functional currencies. NTC sales to a NIKE entity with a different functional currency result in a foreign currency +2025 FORM 10-K 79 +Table of Contents +exposure for the NTC. (2) Other NIKE entities purchase product directly from third-party factories in U.S. Dollars. These purchases generate a foreign currency exposure for those NIKE entities with a functional currency other than the U.S. Dollar. +The Company's policy permits the utilization of derivatives to reduce its foreign currency exposures where internal netting or other strategies cannot be effectively employed. Typically, the Company may enter into hedge contracts starting up to 12 to 24 months in advance of the forecasted transaction and may place incremental hedges up to 100 % of the exposure by the time the forecasted transaction occurs. The total notional amount of outstanding foreign currency derivatives designated as cash flow hedges was $ 18.4 billion and $ 16.2 billion as of May 31, 2025 and 2024, respectively. +As of May 31, 2025, approximately $ 24 million of deferred net losses (net of tax) on both outstanding and matured derivatives in Accumulated other comprehensive income (loss) are expected to be reclassified to Net income during the next 12 months concurrent with the underlying hedged transactions also being recorded in Net income. Actual amounts ultimately reclassified to Net income are dependent on the exchange rates in effect when derivative contracts currently outstanding mature. As of May 31, 2025, the maximum term over which the Company hedges exposures to the variability of cash flows for its forecasted transactions was 30 months. +FAIR VALUE HEDGES +The Company is exposed to the risk of changes in the fair value of certain fixed-rate debt attributable to changes in interest rates. Derivatives used by the Company to hedge this risk are receive-fixed, pay-variable interest rate swaps which are designated as fair value hedges of the related long-term debt. Changes in the fair values of the interest rate swaps are recorded in Long-term debt or Current portion of long-term debt. The total notional amount of outstanding interest rate swaps designated as fair value hedges was $ 2.4 billion and $ 1.8 billion as of May 31, 2025 and 2024, respectively. +UNDESIGNATED DERIVATIVE INSTRUMENTS +The Company may elect to enter into foreign exchange forwards to mitigate the change in fair value of specific assets and liabilities on the Consolidated Balance Sheets. These undesignated instruments are recorded at fair value as a derivative asset or liability on the Consolidated Balance Sheets with their corresponding change in fair value recognized in Other (income) expense, net, together with the remeasurement gain or loss from the hedged balance sheet position. The total notional amount of outstanding undesignated derivative instruments was $ 4.0 billion and $ 4.4 billion as of May 31, 2025 and 2024, respectively. +CREDIT RISK +The Company is exposed to credit-related losses in the event of nonperformance by counterparties to hedging instruments. The counterparties to all derivative transactions are major financial institutions with investment grade credit ratings; however, this does not eliminate the Company's exposure to credit risk with these institutions. This credit risk is limited to the unrealized gains in such contracts should any of these counterparties fail to perform as contracted. To manage this risk, the Company has established strict counterparty credit guidelines that are continually monitored. +The Company's derivative contracts contain credit risk-related contingent features designed to protect against significant deterioration in counterparties' creditworthiness and their ultimate ability to settle outstanding derivative contracts in the normal course of business. The Company's bilateral credit-related contingent features generally require the owing entity, either the Company or the derivative counterparty, to post collateral for the fair value of outstanding derivatives per counterparty. For certain counterparties, collateral would only be posted for the fair value of outstanding derivatives per counterparty greater than $ 50 million. Additionally, for those counterparties, a certain level of decline in credit rating of either the Company or the counterparty could trigger collateral requirements. As of May 31, 2025, the Company was in compliance with all credit risk-related contingent features. The Company considers the impact of the risk of counterparty default to be immaterial. +For additional information related to the Company's derivative financial instruments and collateral, refer to Note 4 — Fair Value Measurements. +2025 FORM 10-K 80 +Table of Contents +NOTE 13 — ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) +The changes in Accumulated other comprehensive income (loss), net of tax, were as follows: +(Dollars in millions) +FOREIGN CURRENCY TRANSLATION ADJUSTMENT (1) +CASH FLOW HEDGES +NET INVESTMENT HEDGES (1) +OTHER TOTAL +Balance at May 31, 2024 $ ( 256 ) $ 247 $ 115 $ ( 53 ) $ 53 +Other comprehensive income (loss): +Other comprehensive gains (losses) before reclassifications +142 ( 132 ) — ( 5 ) 5 +Reclassifications to net income of previously deferred (gains) losses (2) +— ( 322 ) — 6 ( 316 ) +Total other comprehensive income (loss) 142 ( 454 ) — 1 ( 311 ) +Balance at May 31, 2025 $ ( 114 ) $ ( 207 ) $ 115 $ ( 52 ) $ ( 258 ) +(1) The accumulated foreign currency translation adjustment and net investment hedge gains/losses related to an investment in a foreign subsidiary are reclassified to Net income upon sale or upon complete or substantially complete liquidation of the respective entity. +(2) Reclassifications to net income of previously deferred (gains) losses are recorded within Other (income) expense, net for foreign currency translation adjustment, net investment hedges, and other. +(Dollars in millions) +FOREIGN CURRENCY TRANSLATION ADJUSTMENT (1) +CASH FLOW HEDGES +NET INVESTMENT HEDGES (1) +OTHER TOTAL +Balance at May 31, 2023 $ ( 253 ) $ 431 $ 115 $ ( 62 ) $ 231 +Other comprehensive income (loss): +Other comprehensive gains (losses) before reclassifications +( 4 ) 239 — 15 250 +Reclassifications to net income of previously deferred (gains) losses (2) +1 ( 423 ) — ( 6 ) ( 428 ) +Total other comprehensive income (loss) ( 3 ) ( 184 ) — 9 ( 178 ) +Balance at May 31, 2024 $ ( 256 ) $ 247 $ 115 $ ( 53 ) $ 53 +(1) The accumulated foreign currency translation adjustment and net investment hedge gains/losses related to an investment in a foreign subsidiary are reclassified to Net income upon sale or upon complete or substantially complete liquidation of the respective entity. +(2) Reclassifications to net income of previously deferred (gains) losses are recorded within Other (income) expense, net for foreign currency translation adjustment, net investment hedges, and other. +For additional information related to the Company's cash flow hedges refer to Note 12 — Risk Management and Derivatives. +2025 FORM 10-K 81 +Table of Contents +NOTE 14 — REVENUES +DISAGGREGATION OF REVENUES +The following tables present the Company's Revenues disaggregated by reportable operating segment, major product line and distribution channel: +YEAR ENDED MAY 31, 2025 +(Dollars in millions) +NORTH AMERICA EUROPE, MIDDLE EAST & AFRICA GREATER CHINA +ASIA PACIFIC & LATIN AMERICA +GLOBAL BRAND DIVISIONS TOTAL NIKE BRAND CONVERSE CORPORATE TOTAL NIKE, INC. +Revenues by: +Footwear $ 12,684 $ 7,569 $ 4,805 $ 4,452 $ — $ 29,510 $ 1,457 $ — $ 30,967 +Apparel 5,837 3,971 1,616 1,541 — 12,965 80 — 13,045 +Equipment 1,051 717 165 258 — 2,191 32 — 2,223 +Other — — — — 48 48 123 ( 97 ) 74 +TOTAL REVENUES $ 19,572 $ 12,257 $ 6,586 $ 6,251 $ 48 $ 44,714 $ 1,692 $ ( 97 ) $ 46,309 +Revenues by: +Sales to Wholesale Customers $ 10,484 $ 8,022 $ 3,699 $ 3,678 $ — $ 25,883 $ 875 $ — $ 26,758 +Sales through Direct to Consumer 9,088 4,235 2,887 2,573 — 18,783 694 — 19,477 +Other — — — — 48 48 123 ( 97 ) 74 +TOTAL REVENUES $ 19,572 $ 12,257 $ 6,586 $ 6,251 $ 48 $ 44,714 $ 1,692 $ ( 97 ) $ 46,309 +YEAR ENDED MAY 31, 2024 +(Dollars in millions) +NORTH AMERICA EUROPE, MIDDLE EAST & AFRICA GREATER CHINA +ASIA PACIFIC & LATIN AMERICA +GLOBAL BRAND DIVISIONS TOTAL NIKE BRAND CONVERSE CORPORATE TOTAL NIKE, INC. +Revenues by: +Footwear $ 14,537 $ 8,473 $ 5,552 $ 4,865 $ — $ 33,427 $ 1,800 $ — $ 35,227 +Apparel 5,953 4,380 1,828 1,614 — 13,775 93 — 13,868 +Equipment 906 754 165 250 — 2,075 37 — 2,112 +Other — — — — 45 45 152 ( 42 ) 155 +TOTAL REVENUES $ 21,396 $ 13,607 $ 7,545 $ 6,729 $ 45 $ 49,322 $ 2,082 $ ( 42 ) $ 51,362 +Revenues by: +Sales to Wholesale Customers $ 11,004 $ 8,562 $ 4,262 $ 3,930 $ — $ 27,758 $ 1,098 $ — $ 28,856 +Sales through Direct to Consumer 10,392 5,045 3,283 2,799 — 21,519 832 — 22,351 +Other — — — — 45 45 152 ( 42 ) 155 +TOTAL REVENUES $ 21,396 $ 13,607 $ 7,545 $ 6,729 $ 45 $ 49,322 $ 2,082 $ ( 42 ) $ 51,362 +2025 FORM 10-K 82 +Table of Contents +YEAR ENDED MAY 31, 2023 +(Dollars in millions) +NORTH AMERICA EUROPE, MIDDLE EAST & AFRICA GREATER CHINA +ASIA PACIFIC & LATIN AMERICA +GLOBAL BRAND DIVISIONS TOTAL NIKE BRAND CONVERSE CORPORATE TOTAL NIKE, INC. +Revenues by: +Footwear $ 14,897 $ 8,260 $ 5,435 $ 4,543 $ — $ 33,135 $ 2,155 $ — $ 35,290 +Apparel 5,947 4,566 1,666 1,664 — 13,843 90 — 13,933 +Equipment 764 592 147 224 — 1,727 28 — 1,755 +Other — — — — 58 58 154 27 239 +TOTAL REVENUES $ 21,608 $ 13,418 $ 7,248 $ 6,431 $ 58 $ 48,763 $ 2,427 $ 27 $ 51,217 +Revenues by: +Sales to Wholesale Customers $ 11,273 $ 8,522 $ 3,866 $ 3,736 $ — $ 27,397 $ 1,299 $ — $ 28,696 +Sales through Direct to Consumer 10,335 4,896 3,382 2,695 — 21,308 974 — 22,282 +Other — — — — 58 58 154 27 239 +TOTAL REVENUES $ 21,608 $ 13,418 $ 7,248 $ 6,431 $ 58 $ 48,763 $ 2,427 $ 27 $ 51,217 +Global Brand Divisions revenues included NIKE Brand licensing and other miscellaneous revenues that are not part of a geographic operating segment. Converse Other revenues were primarily attributable to licensing businesses. Corporate revenues primarily consisted of foreign currency hedge gains and losses related to revenues generated by entities within the NIKE Brand geographic operating segments and Converse but managed through the Company's central foreign exchange risk management program. +As of May 31, 2025 and 2024, the Company did not have any contract assets and had an immaterial amount of contract liabilities recorded in Accrued liabilities on the Consolidated Balance Sheets. +SALES-RELATED RESERVES +As of May 31, 2025 and 2024, the Company's sales-related reserve balance, which includes returns, post-invoice sales discounts and claims, was $ 1,834 million and $ 1,282 million, respectively, recorded in Accrued liabilities on the Consolidated Balance Sheets. As of May 31, 2025 and 2024, the Company's sales returns reserve balance, included within sales-related reserves, was $ 1,277 million and $ 799 million, respectively. The related estimated cost of inventory for expected product returns was $ 528 million and $ 331 million as of May 31, 2025 and 2024, respectively, and was recorded in Prepaid expenses and other current assets on the Consolidated Balance Sheets. +2025 FORM 10-K 83 +Table of Contents +NOTE 15 — SEGMENT INFORMATION +The Company's reportable operating segments reflect the structure of the Company's internal organization and the financial information the Chief Operating Decision Maker ("CODM"), the Company's Chief Executive Officer, regularly reviews to assess Company performance and allocate resources. The CODM evaluates the performance of the Company's segments and allocates resources based on earnings before interest and taxes ("EBIT"), which represents Net income before Interest expense (income), net and Income tax expense in the Consolidated Statements of Income. +The Company's segments are defined as follows: +NIKE BRAND +The NIKE Brand reportable segments are: North America; Europe, Middle East & Africa ("EMEA"); Greater China; and Asia Pacific & Latin America ("APLA"), and include results for the NIKE and Jordan brands. Each NIKE Brand segment represents a geographic region operating predominantly in one industry: the design, development, marketing and selling of athletic footwear, apparel and equipment. +Global Brand Divisions is included within the NIKE Brand for presentation purposes to align with the way management views the Company. Global Brand Divisions revenues include NIKE Brand licensing and other miscellaneous revenues that are not part of a geographic operating segment. Global Brand Divisions primarily represents costs, including product creation and design expenses, that are centrally managed for the NIKE Brand, as well as costs associated with NIKE Direct global digital operations and enterprise technology. +CONVERSE +Converse operates in one industry: the design, marketing, licensing and selling of casual sneakers, apparel and accessories. +CORPORATE +Corporate consists primarily of unallocated general and administrative expenses, including expenses associated with centrally managed departments; depreciation and amortization related to the Company's headquarters; unallocated insurance, benefit and compensation programs, including stock-based compensation; and certain foreign currency gains and losses, including certain hedge gains and losses. +As part of the Company's centrally managed foreign exchange risk management program, standard foreign currency rates are assigned twice per year to each NIKE Brand entity in the Company's geographic segments and to Converse. Inventories and Cost of sales for geographic segments and Converse reflect the use of these standard rates to recognize non-functional currency product purchases in the entity's functional currency. Differences between these standard rates and actual market rates are included in Corporate, together with foreign currency hedge gains and losses and other conversion gains and losses. +2025 FORM 10-K 84 +Table of Contents +YEAR ENDED MAY 31, 2025 +(Dollars in millions) +NORTH AMERICA +EUROPE, MIDDLE EAST & AFRICA +GREATER CHINA +ASIA PACIFIC & LATIN AMERICA +GLOBAL BRAND DIVISIONS +TOTAL NIKE BRAND +CONVERSE +CORPORATE +TOTAL NIKE, INC. +Revenues +$ 19,572 $ 12,257 $ 6,586 $ 6,251 $ 48 $ 44,714 $ 1,692 $ ( 97 ) $ 46,309 +Cost of Sales +11,056 6,967 3,558 3,502 634 25,717 868 ( 66 ) 26,519 +Gross profit +8,516 5,290 3,028 2,749 ( 586 ) 18,997 824 ( 31 ) 19,790 +Demand creation expense +1,633 1,222 529 421 716 4,521 156 12 4,689 +Operating overhead expense +2,150 1,479 973 804 3,401 8,807 430 2,162 11,399 +Total selling and administrative expense +3,783 2,701 1,502 1,225 4,117 13,328 586 2,174 16,088 +Other segment items (1) +( 2 ) 14 ( 76 ) ( 3 ) ( 4 ) ( 71 ) ( 2 ) ( 3 ) ( 76 ) +EARNINGS (LOSS) BEFORE INTEREST AND TAXES +$ 4,735 $ 2,575 $ 1,602 $ 1,527 $ ( 4,699 ) $ 5,740 $ 240 $ ( 2,202 ) +Interest expense (income), net +( 107 ) +TOTAL NIKE, INC. INCOME BEFORE INCOME TAXES +$ 3,885 +Supplemental information: +Depreciation and amortization (2) +$ 157 143 49 50 237 636 14 125 $ 775 +Inventories +$ 3,198 2,042 951 905 148 7,244 272 ( 27 ) $ 7,489 +(1) At the NIKE Brand segments and Converse, other segment items consist of unusual or non-operating transactions that occur outside the normal course of business. At Corporate, this also includes foreign currency conversion gains and losses from the remeasurement of monetary assets and liabilities denominated in non-functional currencies and the impact of certain foreign currency derivative instruments. +(2) The amounts of depreciation and amortization disclosed by segment are included within Cost of sales and Operating overhead expense, as applicable. +YEAR ENDED MAY 31, 2024 +(Dollars in millions) +NORTH AMERICA +EUROPE, MIDDLE EAST & AFRICA +GREATER CHINA +ASIA PACIFIC & LATIN AMERICA +GLOBAL BRAND DIVISIONS +TOTAL NIKE BRAND +CONVERSE +CORPORATE +TOTAL NIKE, INC. +Revenues +$ 21,396 $ 13,607 $ 7,545 $ 6,729 $ 45 $ 49,322 $ 2,082 $ ( 42 ) $ 51,362 +Cost of Sales +11,899 7,589 3,761 3,639 602 27,490 989 ( 4 ) 28,475 +Gross profit +9,497 6,018 3,784 3,090 ( 557 ) 21,832 1,093 ( 38 ) 22,887 +Demand creation expense +1,495 1,114 519 407 596 4,131 140 14 4,285 +Operating overhead expense +2,189 1,517 1,019 801 3,534 9,060 485 2,746 12,291 +Total selling and administrative expense +3,684 2,631 1,538 1,208 4,130 13,191 625 2,760 16,576 +Other segment items (1) +( 9 ) ( 1 ) ( 63 ) ( 3 ) 33 ( 43 ) ( 6 ) ( 179 ) ( 228 ) +EARNINGS (LOSS) BEFORE INTEREST AND TAXES +$ 5,822 $ 3,388 $ 2,309 $ 1,885 $ ( 4,720 ) $ 8,684 $ 474 $ ( 2,619 ) +Interest expense (income), net +( 161 ) +TOTAL NIKE, INC. INCOME BEFORE INCOME TAXES +$ 6,700 +Supplemental information: +Depreciation and amortization (2) +$ 152 146 56 51 236 641 17 138 $ 796 +Inventories $ 3,134 2,028 1,070 810 166 7,208 296 15 $ 7,519 +(1) At the NIKE Brand segments and Converse, other segment items consist of unusual or non-operating transactions that occur outside the normal course of business. At Corporate, this also includes foreign currency conversion gains and losses from the remeasurement of monetary assets and liabilities denominated in non-functional currencies and the impact of certain foreign currency derivative instruments. +(2) The amounts of depreciation and amortization disclosed by segment are included within Cost of sales and Operating overhead expense, as applicable. +2025 FORM 10-K 85 +Table of Contents +YEAR ENDED MAY 31, 2023 +(Dollars in millions) +NORTH AMERICA +EUROPE, MIDDLE EAST & AFRICA +GREATER CHINA +ASIA PACIFIC & LATIN AMERICA +GLOBAL BRAND DIVISIONS +TOTAL NIKE BRAND +CONVERSE +CORPORATE +TOTAL NIKE, INC. +Revenues $ 21,608 $ 13,418 $ 7,248 $ 6,431 $ 58 $ 48,763 $ 2,427 $ 27 $ 51,217 +Cost of Sales 12,497 7,340 3,552 3,337 516 27,242 1,121 562 28,925 +Gross profit 9,111 6,078 3,696 3,094 ( 458 ) 21,521 1,306 ( 535 ) 22,292 +Demand creation expense 1,455 1,050 499 373 511 3,888 138 34 4,060 +Operating overhead expense 2,207 1,500 1,012 789 3,881 9,389 499 2,429 12,317 +Total selling and administrative expense 3,662 2,550 1,511 1,162 4,392 13,277 637 2,463 16,377 +Other segment items (1) +( 5 ) ( 3 ) ( 98 ) — ( 9 ) ( 115 ) ( 7 ) ( 158 ) ( 280 ) +EARNINGS (LOSS) BEFORE INTEREST AND TAXES +$ 5,454 $ 3,531 $ 2,283 $ 1,932 $ ( 4,841 ) $ 8,359 $ 676 $ ( 2,840 ) +Interest expense (income), net ( 6 ) +TOTAL NIKE, INC. INCOME BEFORE INCOME TAXES $ 6,201 +Supplemental information: +Depreciation and amortization (2) +$ 128 120 54 42 211 555 17 131 $ 703 +Inventories +$ 3,806 2,167 973 894 232 8,072 305 77 $ 8,454 +(1) At the NIKE Brand segments and Converse, other segment items consist of unusual or non-operating transactions that occur outside the normal course of business. At Corporate, this also includes foreign currency conversion gains and losses from the remeasurement of monetary assets and liabilities denominated in non-functional currencies and the impact of certain foreign currency derivative instruments. +(2) The amounts of depreciation and amortization by segment are included within Cost of sales and Operating overhead expense, as applicable. +REVENUES AND LONG-LIVED ASSETS BY GEOGRAPHIC AREA +After allocation of revenues for Global Brand Divisions, Converse and Corporate to geographical areas based on the location where the sales originated, revenues by geographical area are similar to that as reported above for the NIKE Brand operating segments with the exception of the United States. Revenues derived in the United States were $ 19,725 million, $ 21,551 million and $ 22,007 million for the fiscal years ended May 31, 2025, 2024 and 2023, respectively. +The Company's largest concentrations of long-lived assets primarily consist of the Company's corporate headquarters, retail locations and distribution facilities in the United States, China and the United Kingdom, as well as distribution facilities in Belgium. Long-lived assets attributable to operations in these countries, which consist of property, plant and equipment, net and operating lease ROU assets, net, were as follows: +MAY 31, +(Dollars in millions) +2025 2024 +United States $ 4,467 $ 4,837 +Belgium 774 757 +China 488 501 +United Kingdom +422 324 +Other +1,389 1,299 +TOTAL LONG-LIVED ASSETS +$ 7,540 $ 7,718 +2025 FORM 10-K 86 +Table of Contents +NOTE 16 — COMMITMENTS AND CONTINGENCIES +As of May 31, 2025 and 2024, the Company had bank guarantees and letters of credit outstanding totaling $ 884 million and $ 768 million, respectively, issued primarily for real estate agreements, self-insurance programs, other general business obligations and legal matters. +In connection with various contracts and agreements, the Company provides routine indemnification relating to the enforceability of intellectual property rights, coverage for legal issues that arise and other items where the Company is acting as the guarantor. Currently, the Company has several such agreements in place. However, based on the Company's historical experience and the estimated probability of future loss, the Company has determined the fair value of such indemnification is not material to the Company's financial position or results of operations. +In the ordinary course of business, the Company is subject to various legal proceedings, claims and government investigations relating to its business, products and actions of its employees and representatives, including contractual and employment relationships, product liability, antitrust, customs, tax, intellectual property and other matters. The outcome of these legal matters is inherently uncertain, and the Company cannot predict the eventual outcome of currently pending matters, the timing of their ultimate resolution or the eventual losses, fines, penalties or consequences relating to those matters. When a loss related to a legal proceeding or claim is probable and reasonably estimable, the Company accrues its best estimate for the ultimate resolution of the matter. If one or more legal matters were to be resolved against the Company in a reporting period for amounts above management's expectations, the Company's financial position, operating results and cash flows for that reporting period could be materially adversely affected. In the opinion of management, based on its current knowledge and after consultation with counsel, the Company does not believe any currently pending legal matters will have a material adverse impact on the Company's results of operations, financial position or cash flows, except as described below. +BELGIAN CUSTOMS CLAIM +The Company has received claims for certain years from Belgian Customs for alleged underpaid duties related to products imported beginning in fiscal 2018. The Company disputes these claims and has engaged in the appellate process. The Company has issued bank guarantees in order to appeal the claims. At this time, the Company is unable to estimate the range of loss and cannot predict the final outcome as it could take several years to reach a resolution on this matter. If this matter is ultimately resolved against the Company, the amounts owed, including fines, penalties and other consequences relating to the matter, could have a material adverse effect on the Company's results of operations, financial position and cash flows. +NOTE 17 — LEASES +Lease expense is recognized in Cost of sales or Operating overhead expense within the Consolidated Statements of Income, based on the underlying nature of the leased asset. For the fiscal years ended May 31, 2025, 2024 and 2023, lease expense primarily consisted of operating lease costs of $ 663 million, $ 618 million and $ 585 million, respectively, as well as $ 432 million, $ 433 million and $ 403 million, respectively, primarily related to variable lease costs. As of and for the fiscal years ended May 31, 2025 and 2024 and 2023, finance leases were not a material component of the Company's lease portfolio. +The undiscounted cash flows for future maturities of the Company's operating lease liabilities and the reconciliation to the Operating lease liabilities recognized in the Company's Consolidated Balance Sheets are as follows: +(Dollars in millions) +AS OF MAY 31, 2025 (1) +Fiscal 2026 $ 565 +Fiscal 2027 575 +Fiscal 2028 487 +Fiscal 2029 437 +Fiscal 2030 389 +Thereafter 885 +Total undiscounted future cash flows related to lease payments $ 3,338 +Less interest 286 +PRESENT VALUE OF LEASE LIABILITIES $ 3,052 +(1) Excludes $ 482 million as of May 31, 2025, of future operating lease payments for lease agreements signed but not yet commenced. +2025 FORM 10-K 87 +Table of Contents +The following table includes supplemental information used to calculate the present value of Operating lease liabilities: +AS OF MAY 31, +2025 2024 +Weighted-average remaining lease term (in years) 6.6 6.9 +Weighted-average discount rate 3.1 % 2.9 % +The following table includes supplemental cash and non-cash information related to operating leases: +YEAR ENDED MAY 31, +(Dollars in millions) +2025 2024 2023 +Cash paid for amounts included in the measurement of lease liabilities: +Operating cash flows from operating leases $ 647 $ 613 $ 575 +Operating lease right-of-use assets obtained in exchange for new operating lease liabilities $ 607 $ 458 $ 602 +NOTE 18 — RESTRUCTURING +During the third quarter of fiscal 2024, management streamlined the organization which resulted in a net reduction in the Company's global workforce. In fiscal 2024, the Company recognized pre-tax restructuring charges of $ 443 million, primarily associated with $ 392 million related to employee severance costs and $ 51 million related to accelerated stock-based compensation expense. Of the $ 443 million pre-tax restructuring charges, $ 379 million was classified in Operating overhead expense and $ 64 million was classified in Cost of sales . The related cash payments during fiscal 2024 were $ 123 million. As of May 31, 2024, restructuring charges of $ 267 million were reflected within Accrued liabilities on the Consolidated Balance Sheets. +As of the second quarter of fiscal 2025, the fiscal 2024 restructuring was substantially complete and there was an immaterial amount of restructuring charges recognized in fiscal 2025. The Company made cash payments of $ 247 million during fiscal 2025, and the remaining immaterial amounts are to be settled in fiscal 2026. +NOTE 19 — SUPPLIER FINANCE PROGRAMS +Certain financial institutions offer voluntary supplier finance programs facilitated through a third-party platform that provide participating suppliers the option to finance valid payment obligations from the Company. The Company is not a party to agreements negotiated between participating suppliers and third-party financial institutions. The Company's obligations to its suppliers, including amounts due and payment terms, are not affected by a supplier's decision to participate in these programs and the Company does not provide guarantees to third parties in connection with these programs. As of May 31, 2025 and May 31, 2024, the Company had $ 1,101 million and $ 840 million, respectively, of outstanding supplier obligations confirmed as valid under these programs. These amounts are included within Accounts payable on the Consolidated Balance Sheets. +(Dollars in millions) +Confirmed obligations outstanding as of May 31, 2024 +$ 840 +Invoices confirmed during the year +11,741 +Confirmed invoices paid during the year +( 11,480 ) +Confirmed obligations outstanding as of May 31, 2025 +$ 1,101 +2025 FORM 10-K 88 +Table of Contents +ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE +There has been no change of accountants nor any disagreements with accountants on any matter of accounting principles or practices or financial statement disclosure required to be reported under this Item. +ITEM 9A. CONTROLS AND PROCEDURES +We maintain disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in our Securities Exchange Act of 1934, as amended (the "Exchange Act"), reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. +We carry out a variety of ongoing procedures, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, to evaluate the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of May 31, 2025. +"Management's Annual Report on Internal Control Over Financial Reporting" is included in Item 8 of this Annual Report. +There have not been any changes in our internal control over financial reporting during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. +ITEM 9B. OTHER INFORMATION +Rule 10b5-1 Trading Plans +During the fiscal quarter ended May 31, 2025, none of our directors or officers (as defined in Rule 16a-1 under the Exchange Act) adopted or terminated a "Rule 10b5-1 trading arrangement" or "non-Rule 10b5-1 trading arrangement" (as those terms are defined in Item 408 of Regulation S-K). +ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS +Not applicable. +2025 FORM 10-K 89 +Table of Contents +PART III +ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE +The information required by Item 401 of Regulation S-K regarding directors is included under "Corporate Governance — NIKE, Inc. Board of Directors" in the definitive Proxy Statement for our 2025 Annual Meeting of Shareholders and is incorporated herein by reference. The information required by Item 401 of Regulation S-K regarding executive officers is included under "Information about our Executive Officers" in Item 1 of this Annual Report. The information required by Item 406 of Regulation S-K is included under "Corporate Governance — Code of Conduct" in the definitive Proxy Statement for our 2025 Annual Meeting of Shareholders and is incorporated herein by reference. The information required by Items 407(d)(4) and (d)(5) of Regulation S-K regarding the Audit & Finance Committee of the Board of Directors is included under "Corporate Governance — Board Structure and Responsibilities — Board Committees" in the definitive Proxy Statement for our 2025 Annual Meeting of Shareholders and is incorporated herein by reference. The information required by Item 408(b)(1) of Regulation S-K regarding our insider trading policies is included under "Additional Information — Insider Trading Arrangements and Policies" in the definitive Proxy Statement for our 2025 Annual Meeting of Shareholders and is incorporated herein by reference. +ITEM 11. EXECUTIVE COMPENSATION +The information required by Items 402, 407(e)(4) and 407(e)(5) of Regulation S-K regarding executive compensation is included under "Corporate Governance — Director Compensation for Fiscal 2025," "Executive Compensation — Compensation Discussion and Analysis," "Executive Compensation — Executive Compensation Tables," and "Additional Information — Compensation Committee Interlocks and Insider Participation," in the definitive Proxy Statement for our 2025 Annual Meeting of Shareholders and is incorporated herein by reference. +ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS +The information required by Item 201(d) of Regulation S-K is included under "Executive Compensation — Executive Compensation Tables — Equity Compensation Plan Information" in the definitive Proxy Statement for our 2025 Annual Meeting of Shareholders and is incorporated herein by reference. The information required by Item 403 of Regulation S-K is included under "Stock Ownership Information — Stock Holdings of Certain Owners and Management" in the definitive Proxy Statement for our 2025 Annual Meeting of Shareholders and is incorporated herein by reference. +ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE +The information required by Items 404 and 407(a) of Regulation S-K is included under "Additional Information — Transactions with Related Persons" and "Corporate Governance — NIKE, Inc. Board of Directors — Director Independence" in the definitive Proxy Statement for our 2025 Annual Meeting of Shareholders and is incorporated herein by reference. +ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES +The information required by Item 9(e) of Schedule 14A is included under "Audit Matters — Ratification of Appointment of Independent Registered Public Accounting Firm" in the definitive Proxy Statement for our 2025 Annual Meeting of Shareholders and is incorporated herein by reference. +2025 FORM 10-K 90 +Table of Contents +PART IV +ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES +(a) The following documents are filed as part of this Annual Report: +FORM 10-K PAGE NO. +1. Financial Statements: +Report of Independent Registered Public Accounting Firm (PCAOB ID 238 ) +54 +Consolidated Statements of Income for each of the three years ended May 31, 2025 , May 31, 2024, and May 31, 2023 +56 +Consolidated Statements of Comprehensive Income for each of the three years ended May 31, 2025 , May 31, 2024, and May 31, 2023 +57 +Consolidated Balance Sheets at May 31, 2025 and May 31, 2024 +58 +Consolidated Statements of Cash Flows for each of the three years ended May 31, 2025 , May 31, 2024, and May 31, 2023 +59 +Consolidated Statements of Shareholders' Equity for each of the three years ended May 31, 2025 , May 31, 2024, and May 31, 2023 +60 +Notes to Consolidated Financial Statements +61 +2 Financial Statement Schedule: +All financial statement schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. +3. Exhibits: +3.1 +Restated Articles of Incorporation, as amended (incorporated by reference to Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended November 30, 2015). +3.2 +Sixth Amended and Restated Bylaws (incorporated by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K fil ed September 20 , 202 4 ). +4.1 +Restated Articles of Incorporation, as amended (see Exhibit 3.1). +4.2 +Sixth Amended and Restated Bylaw s (see Exhibit 3.2). +4.3 +Indenture dated as of April 26, 2013, by and between NIKE, Inc. and Deutsche Bank Trust Company Americas, as trustee (incorporated by reference to Exhibit 4.1 to the Company's Form 8-K filed April 26, 2013). +4.4 +Second Supplemental Indenture, dated as of October 29, 2015, by and between NIKE, Inc. and Deutsche Bank Trust Company Americas, as trustee, including the form of 3.875% Notes due 2045 (incorporated by reference to Exhibit 4.2 to the Company's Form 8-K filed October 29, 2015). +4.5 +Third Supplemental Indenture, dated as of October 21, 2016, by and between NIKE, Inc. and Deutsche Bank Trust Company Americas, as trustee, including the form of 2.375% Notes due 2026 and form of 3.375% Notes due 2046 (incorporated by reference to Exhibit 4.2 to the Company's Form 8-K filed October 21, 2016). +4.6 +Fourth Supplemental Indenture, dated as of March 27, 2020, by and between NIKE, Inc. and Deutsche Bank Trust Company Americas, as trustee, including the form of 2.400% Notes due 2025, form of 2.750% Notes due 2027, form of 2.850% Notes due 2030, form of 3.250% Notes due 2040 and form of 3.375% Notes due 2050 (incorporated by reference to Exhibit 4.2 to the Company's Form 8-K filed March 27, 2020). +4.7 +Description of Securities . +10.1 +Form of Restricted Stock Agreement for non-employee directors under the Stock Incentive Plan (incorporated by reference to Exhibit 10.4 to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 2014).* +10.2 +Form of Non-Statutory Stock Option Agreement for options granted to executives under the Stock Incentive Plan (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended February 28, 2018).* +10.3 +Form of Indemnity Agreement entered into between the Company and each of its officers and directors (incorporated by reference to Exhibit 10.2 to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 2008).* +10.4 +NIKE, Inc. Deferred Compensation Plan (Amended and Restated effective April 1, 2013) (incorporated by reference to Exhibit 10.9 to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 2013).* +10.5 +NIKE, Inc. Foreign Subsidiary Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended November 30, 2023).* +2025 FORM 10-K 91 +Table of Contents +10.6 +Amended and Restated Covenant Not to Compete and Non-Disclosure Agreement between NIKE, Inc. and Mark G. Parker dated July 24, 2008 (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed July 24, 2008).* +10.7 +Form of Covenant Not to Compete and Non-Disclosure Agreement between NIKE, Inc. and its executive officers (other than Ma rk Parker , Elliott Hill, a nd John Donahoe II) (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed February 18, 2020).* +10.8 +NIKE, Inc. Stock Incentive Plan (incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K filed September 23, 2015).* +10.9 +Form of Discretionary Performance Award Agreement (incorporated by reference to Exhibit 10.22 to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 2018).* +10.10 +Offer Letter between NIKE, Inc. and John J. Donahoe II (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed October 22, 2019).* +10.11 +Form of Covenant Not to Compete and Non-Disclosure Agreement between NIKE, Inc. and John J. Donahoe II (incorporated by reference to Exhibit 10.3 to the Company's Current Report on Form 8-K filed October 22, 2019).* +10.12 +Form of Performance-Based Stock Option Agreement (incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K filed October 22, 2019). * +10.13 +Letter Agreement between NIKE, Inc. and Mark G. Parker (incorporated by reference to Exhibit 10.6 to the Company's Current Report on Form 8-K filed October 22, 2019).* +10.14 +NIKE, Inc. Executive Performance Sharing Plan (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed June 19, 2020).* +10.15 +Form of Non-Statutory Stock Option Agreement under the NIKE, Inc. Stock Incentive Plan (incorporated by reference to Exhibit 10.3 to the Company's Current Report on Form 8-K filed June 19, 2020).* +10.16 +Form of Restricted Stock Unit Agreement under the NIKE, Inc. Stock Incentive Plan (incorporated by reference to Exhibit 10.4 to the Company's Current Report on Form 8-K filed June 19, 2020).* +10.17 +NIKE, Inc. Stock Incentive Plan (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed September 18, 2020).* +10.18 +Form of Performance-Based Restricted Stock Unit Agreement under the NIKE, Inc. Stock Incentive Plan (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on June 17, 2021) .* +10.19 +Five Year Credit Agreement dated as of March 7, 2025, among NIKE, Inc., Bank of America, N.A., as Administrative Agent, and the other Banks named therein (incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K filed on March 10, 2025). +10.20 +NIKE, Inc. Employee Stock Purchase Plan, as amended (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended November 30, 2023). * +10.21 +364-Day Credit Agreement dated as of March 7, 2025, among NIKE, Inc., Bank of America, N.A., as Administrative Agent, and the other Banks named therein (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on March 10, 2025). +10.22 +Form of Stock Option Agreement under the NIKE, Inc. Stock Incentive Plan (incorporated by reference to Exhibit 10.26 to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 2024) . * +10.23 +Form of Restricted Stock Unit Agreement under the NIKE, Inc. Stock Incentive Plan (inco rporated by referen ce to Exhibit 10.27 to the Company's Annu al Report on Form 10-K for the fiscal year ended May 31, 2024) .* +10.24 +Form of Performance-Based Restricted Stock Unit Agreement under the NIKE, Inc. Stock Incentive Plan (incorporated by reference to Exhibit 10.28 to the Company's Annual Report on Form 10-K for the fiscal year ended Ma y 31, 2024) .* +10.25 +Offer Letter, dated September 19, 2024, between NIKE, Inc. and Elliott Hill (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended November 30, 2024) . * +10.26 +Covenant Not to Compete and Non-Disclosure Agreement, dated September 19, 2024, between NIKE, Inc. and Elliott Hill (incorporated by reference to Exhibit 10. 2 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended November 30, 2024). * +10.27 +Letter Agreement, dated September 19, 2024, between NIKE, Inc. and John J. Donahoe II (incorporated by reference to Exhibit 10. 3 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended November 30, 2024). * +10.28 +Letter Agreement, dated May 1, 2025, between NIKE, Inc. and Heidi O'Neill. * +19.1 +NIKE, Inc. Insider Trading Policy (incorporated by reference to Exhibit 19.1 to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 2024). +19.2 +NIKE, Inc. Blackout and Pre-clearance Policy (incorporated by reference to Exhibit 19.2 to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 2024). +21 +Subsidiaries of the Registrant. +23 +Consent of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm (included within this Annual Report on Form 10-K). +31.1 +Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer. +31.2 +Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer. +32† +Section 1350 Certifications. +2025 FORM 10-K 92 +Table of Contents +97 +NIKE, Inc. Policy for Recoupment of Incentive Compensation (incorporated by reference to Exhibit 97 to the Company's Annual Report on F orm 10-K for the fiscal year ended May 31, 2024) . * +101.INS Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. +101.SCH Inline XBRL Taxonomy Extension Schema +101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase +101.DEF Inline XBRL Taxonomy Extension Definition Document +101.LAB Inline XBRL Taxonomy Extension Label Linkbase +101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase +104 Cover Page Interactive Data File - formatted in Inline XBRL and included in Exhibit 101 +* Management contract or compensatory plan or arrangement. +† Furnished herewith +The Exhibits filed herewith do not include certain instruments with respect to long-term debt of NIKE and its subsidiaries, inasmuch as the total amount of debt authorized under any such instrument does not exceed 10 percent of the total assets of NIKE and its subsidiaries on a consolidated basis. NIKE agrees, pursuant to Item 601(b)(4)(iii) of Regulation S-K, that it will furnish a copy of any such instrument to the SEC upon request. +2025 FORM 10-K 93 +Table of Contents +ITEM 16. FORM 10-K SUMMARY +None. +2025 FORM 10-K 94 +Table of Contents +Consent of Independent Registered Public Accounting Firm +We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (No. 333-266267) and Form S-8 (Nos. 033-63995, 333-63581, 333-63583, 333-68864, 333-68886, 333-71660, 333-104822, 333-117059, 333-133360, 333-164248, 333-171647, 333-173727, 333-208900, 333-215439, 333-266269 and 333-273358) of NIKE, Inc. of our report dated July 17, 2025 relating to the financial statements and the effectiveness of internal control over financial reporting, which appears in this Form 10-K. +/s/ PricewaterhouseCoopers LLP +Portland, Oregon +July 17, 2025 +2025 FORM 10-K 95 +Table of Contents +SIGNATURES +Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. +NIKE, INC. +By: +/s/ ELLIOTT HILL +Elliott Hill +President and Chief Executive Officer +Date: July 17, 2025 +Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. +SIGNATURE TITLE DATE +PRINCIPAL EXECUTIVE OFFICER AND DIRECTOR: +/s/ ELLIOTT HILL +Elliott Hill +President and Chief Executive Officer July 17, 2025 +PRINCIPAL FINANCIAL OFFICER: +/s/ MATTHEW FRIEND +Matthew Friend +Executive Vice President and Chief Financial Officer July 17, 2025 +PRINCIPAL ACCOUNTING OFFICER: +/s/ JOHANNA NIELSEN +Johanna Nielsen +Vice President, Chief Accounting Officer +July 17, 2025 +DIRECTORS: +/s/ MARK PARKER +Mark Parker +Director, Chairman of the Board July 17, 2025 +/s/ CATHLEEN BENKO +Cathleen Benko +Director July 17, 2025 +/s/ TIMOTHY COOK +Timothy Cook +Director July 17, 2025 +/s/ THASUNDA DUCKETT +Thasunda Duckett +Director July 17, 2025 +/s/ MÓNICA GIL +Mónica Gil +Director July 17, 2025 +/s/ MARIA HENRY +Maria Henry +Director July 17, 2025 +/s/ PETER HENRY +Peter Henry +Director July 17, 2025 +/s/ TRAVIS KNIGHT +Travis Knight +Director July 17, 2025 +/s/ MICHELLE PELUSO +Michelle Peluso +Director July 17, 2025 +/s/ JOHN ROGERS, JR. +John Rogers, Jr. +Director July 17, 2025 +/s/ ROBERT SWAN +Robert Swan +Director July 17, 2025 +2025 FORM 10-K 96 \ No newline at end of file diff --git a/raw/filings/0000320187/2024/0000320187-25-000047/filing_metadata.csv b/raw/filings/0000320187/2024/0000320187-25-000047/filing_metadata.csv new file mode 100644 index 0000000000000000000000000000000000000000..c799e47fa9ceccaba548d76b783d880ec65b1287 --- /dev/null +++ b/raw/filings/0000320187/2024/0000320187-25-000047/filing_metadata.csv @@ -0,0 +1,2 @@ +cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing +0000320187,NKE,"NIKE, Inc.",10-K,2025-07-17,2025-05-31,2025-07-18T00:25:25.000Z,0000320187-25-000047,nke-20250531.htm,10-K,28018229,1,1,https://www.sec.gov/Archives/edgar/data/320187/000032018725000047/nke-20250531.htm,https://www.sec.gov/Archives/edgar/data/320187/000032018725000047/,2024,2024,1 diff --git a/raw/filings/0000320187/2024/0000320187-25-000047/item1.txt b/raw/filings/0000320187/2024/0000320187-25-000047/item1.txt new file mode 100644 index 0000000000000000000000000000000000000000..953d340973c3f4840179eab3c868a2ea4e556566 --- /dev/null +++ b/raw/filings/0000320187/2024/0000320187-25-000047/item1.txt @@ -0,0 +1,126 @@ +ITEM 1. BUSINESS +GENERAL +NIKE, Inc. was incorporated in 1967 under the laws of the State of Oregon. As used in this Annual Report on Form 10-K (this "Annual Report"), the terms "we," "us," "our," "NIKE" and the "Company" refer to NIKE, Inc. and its predecessors, subsidiaries and affiliates, collectively, unless the context indicates otherwise. +Our principal business activity is the design, development and worldwide marketing and selling of athletic footwear, apparel, equipment, accessories and services. NIKE is the largest seller of athletic footwear and apparel in the world. We sell our products through NIKE Direct operations, which are comprised of both NIKE-owned retail stores and sales through our digital platforms (also referred to as "NIKE Brand Digital") and to wholesale accounts, which include a mix of independent distributors, licensees and sales representatives in nearly all countries around the world. We also offer interactive consumer services and experiences. Nearly all of our products are manufactured by independent contractors. Nearly all footwear and apparel products are manufactured outside the United States, while equipment products are manufactured both in the United States and abroad. +All references to fiscal 2025, 2024 and 2023 are to NIKE, Inc.'s fiscal years ended May 31, 2025, 2024 and 2023, respectively. Any references to other fiscal years refer to a fiscal year ending on May 31 of that year. +PRODUCTS +We offer our products under the NIKE, Jordan and Converse brands. Our strategy is to achieve sustainable, profitable long-term growth by leading with sport, creating innovative, “must-have” products, building deep personal consumer connections with our brands and delivering compelling consumer experiences through digital platforms and at retail. We believe this approach will allow us to create products that better meet individual consumer needs while accelerating our largest growth opportunities. +NIKE's athletic footwear products are designed primarily for specific athletic use, although a large percentage of the products are worn for casual or leisure purposes. We place considerable emphasis on innovation and high-quality construction in the development and manufacturing of our products. +We also sell sports apparel, which features the same trademarks and are sold predominantly through the same marketing and distribution channels as athletic footwear. Our sports apparel, similar to our athletic footwear products, is designed primarily for athletic use, although many of the products are worn for casual or leisure purposes, and demonstrates our commitment to innovation and high-quality construction. We often market footwear, apparel and accessories in "collections" of similar use. We also market apparel with licensed college and professional team and league logos. +We sell a line of performance equipment and accessories under the NIKE Brand name, including bags, socks, sport balls, eyewear, timepieces, digital devices, bats, gloves, protective equipment and other equipment designed for sports activities. We also sell small amounts of various plastic products to other manufacturers through our wholly-owned subsidiary, doing business as Air Manufacturing Innovation. +Our Jordan Brand designs, distributes and licenses athletic and casual footwear, apparel and accessories predominantly focused on sport performance and streetwear using the Jumpman trademark. Sales and operating results for Jordan Brand products are reported within the respective NIKE Brand geographic operating segments. +Our wholly-owned subsidiary brand, Converse, headquartered in Boston, Massachusetts, designs, distributes and licenses casual sneakers, apparel and accessories under the Converse, Chuck Taylor, All Star, One Star, Star Chevron and Jack Purcell trademarks. Operating results of the Converse brand are reported on a stand-alone basis. +In addition to the products we sell to our wholesale customers and directly to consumers through our NIKE Direct operations, we have also entered into license agreements that permit unaffiliated parties to manufacture and sell, using NIKE-owned trademarks, certain apparel, digital devices and applications and other equipment designed for sports activities. +We also offer interactive consumer services and experiences, including sport focused events and activations; fitness and activity apps; sport, fitness and wellness content; and digital services and features in retail stores that enhance the consumer experience. +2025 FORM 10-K 1 +Table of Contents +SALES AND MARKETING +We experience moderate fluctuations in aggregate sales volume during the year. Historically, revenues in the first and fourth fiscal quarters have slightly exceeded those in the second and third fiscal quarters. However, the mix of product sales may vary considerably as a result of changes in seasonal and geographic demand for particular types of footwear, apparel and equipment, as well as other macroeconomic, strategic, operating and logistics-related factors. +Because NIKE is a consumer products company, the relative popularity and availability of various sports and fitness activities, as well as changing design trends and consumer preferences, affect the demand for our products. We must, therefore, respond to trends and shifts in consumer preferences by adjusting the mix of existing product offerings and channels, developing new products, styles and categories and influencing sports and fitness preferences through extensive marketing. Failure to respond in a timely and adequate manner could have a material adverse effect on our sales and profitability. This is a continuing risk. Refer to Item 1A. Risk Factors. +OUR MARKETS +We report our NIKE Brand operations based on our internal geographic organization. Each NIKE Brand geographic segment operates predominantly in one industry: the design, development, marketing and selling of athletic footwear, apparel and equipment. The Company's reportable operating segments for the NIKE Brand are: North America; Europe, Middle East & Africa ("EMEA"); Greater China; and Asia Pacific & Latin America ("APLA"), and include results for the NIKE and Jordan brands. +Converse is also a reportable operating segment and operates predominately in one industry: the design, marketing, licensing and selling of casual sneakers, apparel and accessories. Converse direct to consumer operations, including digital commerce, are reported within the Converse operating segment results. +UNITED STATES MARKET +For fiscal 2025, NIKE Brand and Converse sales in the United States accounted for approximately 43% of total revenues, compared to 42% and 43% for fiscal 2024 and fiscal 2023, respectively. We sell our products to wholesale accounts in the United States, including a mix of footwear stores, sporting goods stores, athletic specialty stores, department stores, skate, tennis and golf shops and other wholesale accounts. In the United States, we utilize NIKE sales offices to solicit such sales. During fiscal 2025, our three largest United States customers accounted for approximately 25% of sales in the United States. +Our NIKE Direct and Converse direct to consumer operations sell our products to consumers through various digital platforms, as well as through the following number of retail stores in the United States: +U.S. RETAIL STORES NUMBER +NIKE Brand factory stores 213 +NIKE Brand in-line stores (including employee-only stores) 85 +Converse stores (including factory stores) 78 +TOTAL 376 +In the United States, NIKE has eight significant distribution centers. Refer to Item 2. Properties for additional information. +2025 FORM 10-K 2 +Table of Contents +INTERNATIONAL MARKETS +For fiscal 2025, non-U.S. NIKE Brand and Converse sales accounted for approximately 57% of total revenues, compared to 58% and 57% for fiscal 2024 and fiscal 2023, respectively. We sell our products to wholesale accounts, which include a mix of independent distributors, licensees and sales representatives around the world. We also ship products from 72 distribution centers outside of the United States. Refer to Item 2. Properties for additional information on distribution facilities outside of the United States. During fiscal 2025, NIKE's three largest customers outside of the United States accounted for approximately 16% of total non-U.S. sales. +In addition to NIKE-owned and Converse-owned digital commerce platforms in over 40 countries, our NIKE Direct and Converse direct to consumer businesses operate the following number of retail stores outside the United States: +NON-U.S. RETAIL STORES NUMBER +NIKE Brand factory stores 543 +NIKE Brand in-line stores (including employee-only stores) 61 +Converse stores (including factory stores) 54 +TOTAL 658 +SIGNIFICANT CUSTOMER +No customer accounted for 10% or more of our consolidated net Revenues during fiscal 2025. +PRODUCT RESEARCH, DESIGN AND DEVELOPMENT +We believe our research, design and development efforts are key factors in our success. Technical innovation in the design and manufacturing process of footwear, apparel and athletic equipment receives continued emphasis as we strive to produce products that help to enhance athletic performance, reduce injury and maximize comfort, while decreasing our environmental impact. +In addition to our own staff of specialists in the areas of biomechanics, chemistry, exercise physiology, engineering, digital technologies, industrial design, sustainability and related fields, we also utilize research committees and advisory boards made up of athletes, coaches, trainers, equipment managers, orthopedists, podiatrists, physicians and other experts who consult with us and review certain designs, materials and concepts for product and manufacturing, design and other process improvements and compliance with product safety regulations around the world. Employee athletes, athletes engaged under sports marketing contracts and other athletes wear-test and evaluate products during the design and development process. +As we continue to develop new technologies, we are simultaneously focused on the design of innovative products and experiences incorporating such technologies throughout our products and consumer applications. Using market intelligence and research, our various design teams identify opportunities to leverage new technologies in existing categories to respond to consumer preferences. The proliferation of Nike Air, Zoom, Free, Dri-FIT, Flyknit, FlyEase, ZoomX, Air Max, and React technologies, among others, typifies our dedication to designing innovative products. +MANUFACTURING +Nearly all of our footwear and apparel products are manufactured outside the United States by independent contract manufacturers ("contract manufacturers"), many of which operate multiple factories. We are also supplied, primarily indirectly, by a number of materials, or "Tier 2", suppliers who provide the principal materials used in footwear and apparel finished goods products. As of May 31, 2025, we had 184 strategic Tier 2 suppliers. +As of May 31, 2025, contract manufacturers operated 97 finished goods footwear factories located in 11 countries. For fiscal 2025, NIKE Brand footwear finished goods were manufactured by 15 contract manufacturers, many of which operate multiple factories. The largest single finished goods footwear factory accounted for approximately 11% of total fiscal 2025 NIKE Brand footwear production. For fiscal 2025, factories in Vietnam, Indonesia and China manufactured approximately 51%, 28% and 17% of total NIKE Brand footwear, respectively. For fiscal 2025, four footwear contract manufacturers each accounted for greater than 10% of footwear production and in the aggregate accounted for approximately 59% of NIKE Brand footwear production. +As of May 31, 2025, contract manufacturers operated 303 finished goods apparel factories located in 34 countries. For fiscal 2025, NIKE Brand apparel finished goods were manufactured by 67 contract manufacturers, many of which operate multiple factories. The largest single finished goods apparel factory accounted for approximately 8% of total fiscal 2025 NIKE Brand apparel production. For fiscal 2025, factories in Vietnam, China and Cambodia manufactured approximately 31%, 15% and 15% +2025 FORM 10-K 3 +Table of Contents +of total NIKE Brand apparel, respectively. For fiscal 2025, two apparel contract manufacturers accounted for more than 10% of apparel production, and the top five contract manufacturers in the aggregate accounted for approximately 51% of NIKE Brand apparel production. +NIKE's contract manufacturers buy raw materials for the manufacturing of our footwear, apparel and equipment products from Tier 2 suppliers. Most raw materials are available and purchased by those contract manufacturers in the countries where manufacturing takes place. +The principal materials used in our footwear products are natural and synthetic rubber, plastic compounds, foam cushioning materials, natural and synthetic leather, nylon, polyester and natural fiber textiles, as well as polyurethane films used to make NIKE Air-Sole cushioning components. During fiscal 2025, Air Manufacturing Innovation, a wholly-owned subsidiary, with facilities near Beaverton, Oregon, in Dong Nai Province, Vietnam, and St. Charles, Missouri, as well as contract manufacturers in China and Vietnam, were our suppliers of NIKE Air-Sole and other cushioning components used in footwear. +The principal materials used in our apparel products are natural and synthetic fabrics, yarns, trims and threads (both virgin and recycled); specialized performance fabrics designed to efficiently wick moisture away from the body, retain heat and repel rain and/or snow; and plastic and metal hardware. +From time to time, certain materials used in the production of our products experience periods of high demand, shortages and price volatility. In fiscal 2025, contract manufacturers were able to source sufficient quantities of raw materials for use in our footwear and apparel products. Refer to Item 1A. Risk Factors, for additional discussion of the impact of sourcing risks on our business. +Since 1972, Sojitz Corporation of America ("Sojitz America"), a large Japanese trading company and the sole owner of our redeemable preferred stock, has performed import-export financing services for us. +INTERNATIONAL OPERATIONS AND TRADE +Our international operations and sources of supply are subject to the usual risks of doing business abroad, such as the implementation of, or potential changes in, foreign and domestic trade policies, increases in import duties, anti-dumping measures, quotas, trade agreement enforcement practices, safeguard measures, trade restrictions, restrictions on the transfer of funds and, in certain parts of the world, political tensions, instability, conflicts, nationalism and terrorism, and resulting sanctions and other measures imposed in response to such issues. +In 2025 and in other recent years, uncertain global and regional economic and political conditions have affected international trade and increased protectionist actions around the world. These trends are affecting many global manufacturing and service sectors, and the footwear and apparel industries, as a whole, are not immune. Companies in our industry are facing trade protectionism in many different regions, and, in nearly all cases, we are working together with industry groups to address trade issues and reduce the impact to the industry, while observing applicable competition laws. Notwithstanding our efforts, protectionist measures have resulted in increases in the cost of our products, and additional measures, if implemented, will adversely affect sales and/or profitability for NIKE, as well as the imported footwear and apparel industry as a whole, possibly materially. +We monitor protectionist trends and developments throughout the world that may materially impact our industry, and we engage in administrative and judicial processes to mitigate trade restrictions. We are actively monitoring actions that may result in additional anti-dumping measures and could affect our industry. We are also monitoring for other impediments that may limit or delay customs clearance for imports of footwear, apparel and equipment and advocating for trade facilitation. NIKE also advocates for trade liberalization for footwear and apparel in a number of bilateral and multilateral free trade agreements. Changes in, and responses to, U.S. trade policies, including the imposition of tariffs or penalties on imported goods or retaliatory measures by other countries, have negatively affected, and could in the future materially negatively affect, U.S. corporations, including NIKE, with business operations and/or consumer markets in those countries, which could also make it necessary for us to change the way we conduct business, either of which may have an adverse effect on our business, financial condition or our results of operations. In addition, we work with a broad coalition of global businesses and trade associations representing a wide variety of sectors to help support the development and implementation of legislation that (i) addresses legitimate and core concerns, (ii) is consistent with international trade rules and (iii) reflects and considers domestic economies and the important role they may play in the global economic community. +Where trade protection measures are implemented, we believe we have the ability to develop, over a period of time, adequate alternative sources of supply for the products obtained from our present suppliers. If events prevented us from acquiring products from our suppliers in a particular country, our operations could be temporarily disrupted and we could experience an adverse financial impact. However, we believe we could abate any such disruption, and that much of the adverse impact on supply would, therefore, be of a short-term nature, although alternate sources of supply might not be as cost-effective and could have an ongoing adverse impact on profitability. +2025 FORM 10-K 4 +Table of Contents +Our international operations are also subject to compliance with the U.S. Foreign Corrupt Practices Act (the "FCPA"), and other anti-bribery laws applicable to our operations. We source a significant portion of our products from, and have important consumer markets, outside of the United States. We have an ethics and compliance program to address compliance with the FCPA and similar laws by us, our employees, agents, suppliers and other partners. Refer to Item 1A. Risk Factors for additional information on risks relating to our international operations. +COMPETITION +The athletic footwear, apparel and equipment industry is highly competitive on a worldwide basis. We compete internationally with a significant number of athletic and leisure footwear companies, athletic and leisure apparel companies, sports equipment companies and large companies having diversified lines of athletic and leisure footwear, apparel and equipment, including adidas, Anta, ASICS, Deckers, Li Ning, lululemon athletica, New Balance, On, Puma, Under Armour and V.F. Corporation, among others. The intense competition and the rapid changes in technology and consumer preferences in the markets for athletic and leisure footwear and apparel and athletic equipment constitute significant risk factors in our operations. Refer to Item 1A. Risk Factors for additional information. +NIKE is the largest seller of athletic footwear and apparel in the world. Important aspects of competition in this industry are: +• Product attributes such as quality; innovation and development; performance and reliability; new product style, and design; as well as consumer price/value. +• Consumer connection, engagement and affinity for brands and products, developed through marketing, promotion and digital experiences; social media interaction; customer support and service; identification with prominent and influential athletes, influencers, public figures, coaches, teams, colleges and sports leagues who endorse our brands and use our products and active engagement through sponsored sporting events and clinics. +• Effective sourcing and distribution of products, with attractive merchandising and presentation at retail, both in-store and on digital platforms. +We believe that we are competitive in all of these areas. See Item 1A. Risk Factors, including the risk factor titled "Our products, services and experiences face intense competition." +TRADEMARKS AND PATENTS +We believe that our intellectual property rights are important to our brand, our success and our competitive position. We strategically pursue available protections of these rights and vigorously protect and enforce them against third-party theft and infringement. +We use trademarks on nearly all of our products and packaging, and in our marketing materials, and believe having distinctive marks that are readily identifiable is an important factor in creating a market for our goods, in identifying our brands and the Company, and in distinguishing our goods from the goods of others. We consider our NIKE and Swoosh Design trademarks to be among our most valuable assets and we have registered these trademarks in over 190 jurisdictions worldwide. In addition, we own many other trademarks that we use in marketing our products. Throughout the world, we own common law rights in the trade dress of several distinctive shoe designs and elements. For certain trade dress, we have sought and obtained trademark registrations. +We have copyright protection in our designs, graphics, software applications, digital goods and other original works. When appropriate, we also obtain registered copyrights. +We file for, own and maintain many U.S. and foreign utility and design patents protecting components, technologies, materials, manufacturing techniques, features, functionality, and industrial designs used in and for the manufacture of various athletic, performance, and leisure footwear and apparel, including physical and digital versions thereof, athletic equipment, and digital devices, and related software applications. These patents expire at various times. +We believe our success depends upon our capabilities in areas such as design, research and development, production and marketing and is supported and protected by our intellectual property rights, such as trademarks, utility and design patents, copyrights, and trade secrets, among others. +We have followed a policy of applying for and registering intellectual property rights in the United States and select foreign countries on trademarks, inventions, innovations and designs that we deem protectable and valuable. We also continue to vigorously protect and enforce our intellectual property, including trademarks, patents and trade secrets against third-party infringement and misappropriation. +2025 FORM 10-K 5 +Table of Contents +HUMAN CAPITAL RESOURCES +At NIKE, we consider the strength and effective management of our workforce to be essential to the ongoing success of our business. We believe that it is important to attract, develop and retain an engaged workforce with diverse experiences, backgrounds and perspectives at all levels of our business and that such a workforce fosters creativity and accelerates innovation. +CULTURE +Each employee shapes NIKE's culture through behaviors and practices. This starts with our Maxims, which represent our core values and, along with our Code of Conduct, feature the fundamental behaviors that help anchor, inform and guide us and apply to all employees. Our mission is to bring inspiration and innovation to every athlete in the world, which includes the belief that if you have a body, you are an athlete. We aim to do this by creating groundbreaking sport innovations, making our products more sustainably, building a creative global team with diverse experiences, backgrounds and perspectives, supporting the well-being of our employees and making a positive impact in communities where we live and work. Our mission is aligned with our deep commitment to maintaining an environment where all NIKE employees have the opportunity to reach their full potential, to connect to our brands and to shape our workplace culture. We believe providing for growth and retention of our employees is essential in fostering such a culture and are dedicated to providing access to training programs and career development opportunities, including trainings on NIKE's values, history and business, trainings on developing leadership skills at all levels, tools and resources for managers and qualified tuition reimbursement opportunities. +We are committed to having an inclusive and diverse team and culture, and accessible workplace. We achieve this through recruitment, development and retention of qualified talent with diverse experiences, backgrounds and perspectives through traditional channels, initiatives and partnerships, including those that serve colleges and universities. Additionally, we provide access to education so that all NIKE employees and leaders have the cultural knowledge and understanding to lead inclusively and build diverse and inclusive teams. We also have employee resource groups, collectively known as NikeUNITED, that promote NIKE cultural awareness and are open to all. +In empowering our employees to help shape our culture, we source employee feedback through a variety of survey tools: our annual Engagement Survey program, corporate pulse surveys and listening sessions. These tools provide employees throughout the globe an opportunity to provide confidential feedback on key areas known to drive employee engagement, including their satisfaction with their managers, their work and the Company generally. These tools also measure our employees' connection to NIKE's culture. NIKE also provides multiple points of contact for employees to speak up if they experience something that does not align with our values or otherwise violates our workplace policies, even if they are uncertain what they observed or heard is a violation of company policy. +As part of our commitment to making a positive impact on our communities, we maintain a goal of investing 2% of our prior fiscal year's pre-tax income into global communities. The focus of this investment continues to be inspiring youth to be active through play and sport as well as uniting and inspiring communities. Through our investments we bring the power of sport into our communities, with the goal of making play and sport more accessible. Our community investments are an important part of our culture, and we support employees in giving back to community organizations through volunteering and donations, which are matched by the NIKE Foundation where eligible. +EMPLOYEE BASE +As of May 31, 2025, we had approximately 77,800 employees worldwide, including retail and part-time employees. We also utilize independent contractors and temporary personnel to supplement our workforce. +Most of our employees are not represented by unions, except for certain employees in the EMEA and APLA geographies who are members of and/or are represented by trade unions, as allowed or required by local law and/or collective bargaining agreements. Also, in some countries outside of the United States, local laws require employee representation by works councils (which may be entitled to information and consultation on certain subsidiary decisions) or by organizations similar to a union. In certain European countries, we are required by local law to enter into, and/or comply with, industry-wide or national collective bargaining agreements. NIKE has never experienced a material interruption of operations due to labor disagreements. +COMPENSATION AND BENEFITS +NIKE's total rewards are intended to be competitive and equitable, meet the varied needs of our global teammates and reinforce our values. We are committed to providing comprehensive, competitive and equitable pay and benefits to our employees, and we have invested, and aim to continue to invest, in our employees through growth and development and holistic well-being initiatives. Our initiatives in this area include: +2025 FORM 10-K 6 +Table of Contents +• We are committed to competitive pay, pay equity and to reviewing our pay and promotion practices annually. +• We have an annual company bonus plan and a retail-focused bonus plan applicable to all eligible employees. Both programs are focused on rewarding employees for company performance, which we believe reinforces our culture and rewards behaviors that support collaboration and teamwork. +• We provide comprehensive family care benefits in the U.S. and globally where practicable, including family planning coverage, backup care and child/elder care assistance as well as an income-based childcare subsidy for eligible employees. +• Our Military Leave benefit provides up to 12 weeks of paid time off every 12 months. +• We offer free access to our sport centers at our World Headquarters for our full-time employees and North America store employees. +• We provide employees free access to mindfulness and meditation resources, as well as live classes through our sport centers. +• We provide all employees and their families globally with free and confidential visits with a mental health counselor through a third-party provider and our global Employee Assistance Program (EAP). +• We provide support to our employees in a variety of ways during times of crisis, including pay continuity under certain circumstances, and our natural disaster assistance program. +• We provide a hybrid work approach for the majority of employees, as well as a Four Week Flex program, which provides employees an opportunity to work remotely for up to four weeks per year. +• We offer a Well-Being Week where we close our corporate offices for a full week in the summer and Well-Being Days for our teammates in our retail stores and distribution centers, and encourage our teammates to focus on their well-being. +• We provide inclusive healthcare coverage and family planning benefits for eligible employees covered on the U.S. Health Plan, including access to both restorative services and personal care. +• We provide all U.S. employees with unlimited free financial coaching through a third-party provider. +Additional information related to our human capital strategy can be found on the Mission section of about.nike.com. Information contained on or accessible through our websites is not incorporated into, and does not form a part of, this Annual Report or any other report or document we file with the United States Securities and Exchange Commission (the "SEC"), and any references to our websites are intended to be inactive textual references only. +AVAILABLE INFORMATION AND WEBSITES +Our NIKE digital commerce website is located at www.nike.com. On our NIKE corporate website, located at investors.nike.com, we post the following filings as soon as reasonably practicable after they are electronically filed with, or furnished to, the SEC: our annual report on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities and Exchange Act of 1934, as amended. Our proxy statements are also posted on our corporate website. All such filings on our corporate website are available free of charge. Copies of these filings are also available on the SEC's website at www.sec.gov. Also available on our corporate website are the charters of the committees of our Board of Directors, as well as our corporate governance guidelines and code of ethics. Copies of any of these documents will be provided in print to any shareholder who submits a request in writing to NIKE Investor Relations, One Bowerman Drive, Beaverton, Oregon 97005-6453. Information contained on or accessible through our website is not incorporated into, and does not form a part of, this Annual Report or any other report or document we file with the SEC, and any references to our website are intended to be inactive textual references only. +2025 FORM 10-K 7 +Table of Contents +INFORMATION ABOUT OUR EXECUTIVE OFFICERS +The executive officers of NIKE, Inc. as of July 17, 2025, are as follows: +Mark Parker , Executive Chairman — Mr. Parker, 69, joined NIKE in 1979 and has served as Executive Chairman of the Board of Directors since 2020. Prior to his current role, Mr. Parker served as President and Chief Executive Officer of NIKE, Inc. from 2006 to 2020. During his employment with NIKE, he has had primary responsibilities in product research, design and development, marketing and brand management. Mr. Parker previously served in various roles at NIKE including President of the NIKE Brand, Vice President of Global Footwear, General Manager, corporate Vice President and divisional Vice President in charge of product development. +Elliott Hill , President and Chief Executive Officer — Mr. Hill, 61, joined NIKE in 1988 and has served as President and Chief Executive Officer of NIKE, Inc. since October 2024. Previously, Mr. Hill served as President – Consumer and Marketplace from 2018 until his retirement in 2020, in which role he led all commercial and marketing operations for the NIKE and Jordan brands. During his employment with NIKE, he has served in various roles, including Apparel Sales Director in Europe, Retail Development Director in Europe, Vice President of Sales and Retail in EMEA, General Manager of U.S. Retail, Vice President of U.S. Sales, Retail and NIKE.com, Vice President of Global Retail, President of Geographies and Sales and Vice President and General Manager of North America. +Matthew Friend , Executive Vice President and Chief Financial Officer — Mr. Friend, 47, joined NIKE in 2009 and has served as Executive Vice President and Chief Financial Officer of NIKE, Inc. since 2020. In this role, Mr. Friend leads the Company's strategy, finance and business services organizations. Mr. Friend previously served in various roles at NIKE including as Vice President of Investor Relations and Chief Financial Officer of the NIKE Brand. Prior to joining NIKE, Mr. Friend worked in the financial industry, including as Vice President in the investment banking and mergers and acquisitions groups at Goldman Sachs and Morgan Stanley. +Treasure Heinle , Executive Vice President, Chief People Officer — Ms. Heinle, 55, joined NIKE in 2012 and has served as Executive Vice President, Chief People Officer of NIKE, Inc. since January 2025. She leads the Company’s global Human Resources function and its People vision and strategy. Ms. Heinle was previously Vice President, Chief Talent Officer and Vice President, HR Business Partner for the Global Operations & Technology and Global Consumer & Marketplace teams, inclusive of Jordan Brand and Converse. Prior to joining NIKE as Vice President, HR Business Partner for North America, Ms. Heinle held Human Resources leadership positions at Danaher Corporation, Tektronix, Inc. and InFocus Corporation. +Rob Leinwand , Executive Vice President, Chief Legal Officer — Mr. Leinwand, 57, joined NIKE in 2004 and has served as Executive Vice President, Chief Legal Officer of NIKE, Inc. since 2024. In this role, Mr. Leinwand leads the strategic vision for the Company's Legal, Social and Community Impact, Government and Public Affairs and Resilience teams. Mr. Leinwand previously served as Vice President, Deputy General Counsel, Enterprise which included oversight of the Company's Global Litigation, Employment Law/Employee Relations, Brand Protection, Supply Chain and Corporate Governance functions. Prior to joining NIKE, Mr. Leinwand was a shareholder at the law firm of Littler Mendelson. +Phil McCartney , Executive Vice President, Chief Innovation, Design & Product Officer — Mr. McCartney, 50, joined NIKE in 1998 and has served as Executive Vice President, Chief Innovation, Design & Product Officer of NIKE, Inc. since May 2025. In this role, Mr. McCartney is responsible for the creation of innovative product and oversees how NIKE, Jordan and Converse innovate, design and create products for athletes around the world. Previously, Mr. McCartney was Vice President and General Manager of Global Footwear, a position held since 2016. He also previously served in various roles, including Vice President of Sport, Vice President of Running, Vice President of Football Footwear and started at NIKE as a brand ambassador and product expert, known as an EKIN. Prior to joining NIKE, Mr. McCartney was a professional athlete. +Amy Montagne , President, Nike — Ms. M ontagne, 53, joined NIKE in 2005 and has served as President, Nike of NIKE, Inc. since May 2025. In this role, Ms. Montagne is responsible for serving consumers across all sports and driving future growth for the NIKE Brand. Previously, Ms. Montagne served in various Vice President and General Manager roles at NIKE, including APLA, Global Men’s, Global Categories, Global Women’s and Global Merchandising, as well as in other leadership positions in North America, Running, Women’s Training, and Sportswear. Prior to joining NIKE, Ms. Montagne worked in allocation, planning and merchandising at Gap Inc., Mervyn’s and Walmart Inc. +Craig Williams , Executive Vice President, Chief Commercial Officer — Mr. Williams, 56, joined NIKE in 2019 and has served as Executive Vice President, Chief Commercial Officer of NIKE, Inc. since June 2025. In this role, Mr. Williams leads NIKE's four geographic operating units, the global direct to consumer business and wholesale marketplace partnerships. Mr. Williams previously served as President of Geographies & Marketplace of NIKE, Inc. and President of Jordan Brand, overseeing the global business and team of designers, footwear and apparel developers, marketers and geography leaders. Prior to joining NIKE, Mr. Williams held executive leadership positions at The Coca-Cola Company as well as roles at CIBA Vision, a subsidiary of Novartis AG, and Kraft Foods Inc. Mr. Williams also served five years in the U.S. Navy as a Naval Nuclear Power Officer. +2025 FORM 10-K 8 +Table of Contents \ No newline at end of file diff --git a/raw/filings/0000320187/2024/0000320187-25-000047/item13.txt b/raw/filings/0000320187/2024/0000320187-25-000047/item13.txt new file mode 100644 index 0000000000000000000000000000000000000000..20392826eaddf714875e0bd63010f8bd4b9eb718 --- /dev/null +++ b/raw/filings/0000320187/2024/0000320187-25-000047/item13.txt @@ -0,0 +1,2 @@ +ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE +The information required by Items 404 and 407(a) of Regulation S-K is included under "Additional Information — Transactions with Related Persons" and "Corporate Governance — NIKE, Inc. Board of Directors — Director Independence" in the definitive Proxy Statement for our 2025 Annual Meeting of Shareholders and is incorporated herein by reference. \ No newline at end of file diff --git a/raw/filings/0000320187/2024/0000320187-25-000047/item9a.txt b/raw/filings/0000320187/2024/0000320187-25-000047/item9a.txt new file mode 100644 index 0000000000000000000000000000000000000000..bd9e707edd174dc51f50f63d17878df63c367ce5 --- /dev/null +++ b/raw/filings/0000320187/2024/0000320187-25-000047/item9a.txt @@ -0,0 +1,5 @@ +ITEM 9A. CONTROLS AND PROCEDURES +We maintain disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in our Securities Exchange Act of 1934, as amended (the "Exchange Act"), reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. +We carry out a variety of ongoing procedures, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, to evaluate the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of May 31, 2025. +"Management's Annual Report on Internal Control Over Financial Reporting" is included in Item 8 of this Annual Report. +There have not been any changes in our internal control over financial reporting during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. \ No newline at end of file diff --git a/raw/filings/0000320187/2024/0000320187-25-000047/rp_note.txt b/raw/filings/0000320187/2024/0000320187-25-000047/rp_note.txt new file mode 100644 index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391 diff --git a/raw/filings/0000320187/2024/0000320187-25-000047/rpt_disclosure.txt b/raw/filings/0000320187/2024/0000320187-25-000047/rpt_disclosure.txt new file mode 100644 index 0000000000000000000000000000000000000000..f49fe998b6299fd84d002de0615b199ccd939f95 --- /dev/null +++ b/raw/filings/0000320187/2024/0000320187-25-000047/rpt_disclosure.txt @@ -0,0 +1,6 @@ +TRANSACTIONS WITH RELATED PERSONS +Philip Knight, the father of NIKE director Travis Knight, serves as Chairman Emeritus, which provides a standing invitation for Philip Knight to attend meetings of the Board and its committees as a non-voting observer. In fiscal 2026, as Chairman Emeritus, Mr. Knight received salary of approximately $221,000, and medical and dental insurance coverage generally available to employees. +Mark Parker's son, Matthew Parker, was employed by the Company in fiscal 2026 in a non-executive role for which the Company paid Matthew Parker aggregate compensation of approximately $146,000. The compensation and benefits received by Matthew Parker were consistent with compensation and benefits paid to other employees holding similar positions. +Mark Parker's sister, Betsy Parker, was contracted by the Company in fiscal 2026 in a non-executive role for which the Company paid Betsy Parker aggregate compensation of approximately $175,000. +Kenneth Smith, son-in-law of former NEO Craig Williams, was employed by the Company in fiscal 2026 in a non-executive role for which the Company paid Kenneth Smith aggregate compensation of approximately $125,000. The compensation and benefits received by Kenneth Smith were consistent with compensation and benefits paid to other employees holding similar positions. +The Company's written policy requires the Corporate Responsibility, Sustainability & Governance Committee to review any transaction or proposed transaction with a related person that would be required to be reported under Item 404(a) of Regulation S-K, and to determine whether to ratify or approve the transaction, with ratification or approval to occur only if the committee determines that the transaction is fair to the Company and that approval or ratification of the transaction is in the interest of the Company. \ No newline at end of file diff --git a/raw/filings/0001168054/2014/0001558370-15-000150/filing.txt b/raw/filings/0001168054/2014/0001558370-15-000150/filing.txt new file mode 100644 index 0000000000000000000000000000000000000000..4c31f858ae5e5fcff95d6e35b1975fb937009179 --- /dev/null +++ b/raw/filings/0001168054/2014/0001558370-15-000150/filing.txt @@ -0,0 +1,5803 @@ +10-K +1 +xec-20141231x10k.htm +10-K +xec_Current folio_10K +Table of Contents +UNITED STATES +SECURITIES AND EXCHANGE COMMISSION +Washington, D C 20549 +Form 10 - K +(Mark One) +☒ +ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 +For the fiscal year ended December 31, 201 4 +OR +☐ +TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 +Commission file number 001 - 31446 +CIMAREX ENERGY CO. +(Exact name of registrant as specified in its charter) +Delaware +(State or other jurisdiction of +incorporation or organization) +45 - 0466694 +(I.R.S. Employer +Identification No.) +1700 Lincoln Street, Suite 37 00, Denver, Colorado 80203 +(Address of principal executive offices including ZIP code) +(303) 295 - 3995 +(Registrant ’ s telephone number) +Securities Registered Pursuant to Section 12(b) of the Act: +Title of Each Class +Name of each exchange on which registered +Common Stock ($0.01 par value) +New York Stock Exchange +Securities Registered Pursuant to Section 12(g) of the Act: None +Indicate by check mark if the registrant is a well - known seasoned issuer, as defined in Rule 405 of the Securities Act. YES ☒ NO ☐ +Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES ☐ NO ☒ +Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES ☒ NO ☐ +Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S - T ( § 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES ☒ NO ☐ +Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S - K is not contained herein, and will not be contained, to the best of the registrant ’ s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10 - K or any amendment to this Form 10 - K. ☒ +Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non - accelerated filer, or a smaller reporting company. See the definitions of “ large accelerated filer, ” “ accelerated filer, ” and “ smaller reporting company ” in Rule 12b - 2 of the Exchange Act. +Large accelerated filer ☒ +Accelerated filer ☐ +Non - accelerated filer ☐ +(Do not check if a +smaller reporting company) +Smaller reporting company ☐ +Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b - 2 of the Act). YES ☐ NO ☒ +Aggregate market value of the voting stock held by non - affiliates of Cimarex Energy Co. as of June 30, 201 4 was approximately $ 12.3 billion. +Number of shares of Cimarex Energy Co. common stock outstanding as of February 1 3 , 201 5 was 87,597,134 . Documents Incorporated by Reference: Portions of the Registrant ’ s Proxy Statement for its 201 5 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10 - K. +Table of Contents +TABLE OF CONTENTS +DESCRIPTION +Item +Page +Glossary +Part I +1 .& 2 . +Busines s and Properties +6 +1 A . +Risk Factors +16 +1B . +Unresolved Staff Comments +27 +3. +Legal Proceedings +28 +4. +Mine Safety Disclosures +28 +Part II +5. +Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities +29 +6. +Selected Financial Data +31 +7. +Management’s Discussion and Analysis of Financial Condition and Results of Operations +32 +7 A . +Quantitative and Qualitative Disclosures About Market Risk +55 +8. +Financial Statements and Supplementary Data +56 +9. +Changes In and Disagreements with Accountants on Accounting and Financial Disclosure +86 +9A . +Controls and Procedures +86 +9B . +Other Information +88 +Part III +10. +Directors, Executive Officers and Corporate Governance +89 +11. +Executive Compensation +90 +12. +Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters +90 +13. +Certain Relationships and Related Transactions, and Director Independence +90 +14. +Principal Accounting Fees and Services +90 +Part IV +15. +Exhibits, Financial Statement Schedules +91 +2 +Table of Contents +GLOSSAR Y +Bbl/d — Barrels (of oil or natural gas liquids) per day +Bbls — Barrels (of oil or natural gas liquids) +Bcf — Billion cubic feet +Bcfe — Billion cubic feet equivalent +Btu — British thermal unit +GAAP —Generally accepted accounting principles in the U.S. +MBbls — Thousand barrels +Mcf — Thousand cubic feet (of natural gas) +Mcfe — Thousand cubic feet equivalent +MMBbl/MMBbls — Million barrels +MMBtu — Million British T hermal units +MMcf — Million cubic feet +MMcf/d — Million cubic feet per day +MMcfe — Million cubic feet equivalent +MMcfe/d — Million cubic feet equivalent per day +Net Acres — Gross acreage multiplied by working interest percentage +Net Production — Gross production multiplied by net revenue interest +NGL or NGLs — Natural gas liquids +PUD —Proved undeveloped +Tcf — Trillion cubic feet +Tcfe — Trillion cubic feet equivalent +Energy equivalent is determined using the ratio of one barrel of crude oil, condensate or NGL to six Mcf of natural gas +3 +Table of Contents +PART I +Forward - Looking Statements +Throughout this Form 10 - K, we make statements that may be deemed “ forward - looking ” statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. In particular, in our Management ’ s Discussion and Analysis of Financial Condition, we are providing “ 201 5 Outlook, ” which contains projections for certain 201 5 operational activities. All statements, other than statements of historical facts, that address activities, events, outcomes and other matters that Cimarex plans, expects, intends, assumes, believes, budgets, predicts, forecasts, projects, estimates or anticipates (and other similar expressions) will, should or may occur in the future are forward - looking statements. These forward - looking statements are based on management ’ s current belief, based on currently available information, as to the outcome and timing of future events. When considering forward - looking statements, you should keep in mind the risk factors and other cautionary statements in this Form 10 - K. Forward - looking statements include statements with respect to, among other things: +· +Fluctuations in the price we receive for our oil and gas production; +· +Timing and amount of future production of oil and natural gas; +· +Reductions in the quantity of oil and gas sold due to decreased industrywide demand and/or curtailments in production from specific properties or areas due to mechanical, transportation, marketing, weather or other problems; +· +Reserve estimates; +· +Cash flow and anticipated liquidity; +· +Amount, nature and timing of capital expenditures; +· +Access to capital markets ; +· +Legislation and regulatory changes; +· +Operating costs and other expenses; +· +Operating and capital expenditures that are either significantly higher or lower than anticipated because the actual cost of identified projects varied from original estimates and/or from the number of exploration and development opportunities being greater or fewer than currently anticipated; +· +Exploration and development opportunities that we pursue may not result in economic, productive oil and gas properties; +· +Drilling of wells; +· +Estimates of proved reserves, exploitation potential or exploration prospect size; +· +Increased financing costs due to a significant increase in interest rates; +· +De-risking of acreage. +We caution you that these forward-looking statements are subject to all of the risks and uncertainties, many of which are beyond our control, incident to the exploration for and development, production and sale of oil and gas. These risks include, but are not limited to, commodity price volatility, inflation, lack of availability of goods and services, +4 +Table of Contents +environmental risks, drilling and other operating risks, regulatory changes, the uncertainty inherent in estimating proved oil and natural gas reserves and in projecting future rates of production and timing of development expenditures and other risks described herein. +Reserve engineering is a subjective process of estimating underground accumulations of oil and natural gas that cannot be measured in an exact way. The accuracy of any reserve estimate depends on the quality of available data and the interpretation of such data by our engineers. As a result, estimates made by different engineers often vary from one another. In addition, the results of drilling, testing and production activities may justify revisions of estimates that were made previously. If significant, such revisions could change the timing of future production and development drilling. Accordingly, reserve estimates are generally different from the quantities of oil and natural gas that are ultimately recovered. +Should one or more of the risks or uncertainties described above or elsewhere in this Form 10-K cause our underlying assumptions to be incorrect, our actual results and plans could differ materially from those expressed in any forward-looking statements. +All forward-looking statements, express or implied, included in this Form 10-K and attributable to Cimarex are qualified in their entirety by this cautionary statement. This cautionary statement should also be considered in connection with any subsequent written or oral forward-looking statements that Cimarex or persons acting on its behalf may issue. Cimarex does not undertake any obligation to update any forward-looking statements to reflect events or circumstances after the date of filing this Form 10-K with the Securities and Exchange Commission, except as required by law. +5 +Table of Contents +ITEM S 1 AND 2 . BUSINES S AND PROPERTIES +General +Cimarex Energy Co., a Delaware corporation formed in 2002, is an independent oil and gas exploration and production company. Our operations are located mainly in Oklahoma, Texas and New Mexico. On o ur website -- www.cimarex.com -- you will find our annual reports, proxy statements and all of our Securities and Exchange Commission (SEC) filings. +Our principal business objective is to profitably grow proved reserves and production for the long-term benefit of our shareholders. Our strategy centers on maximizing cash flow from producing properties to reinvest in exploration and development opportunities. We consider merger and acquisition opportunities that enhance our competitive position and we occasionally divest of non-core assets. Key elements to our approach include: +· +Maintaining a strong financial position +· +Investment in a diversified portfolio of drilling opportunities with varying geologic characteristics, in different geographic areas and with assorted exposure to oil, natural gas and NGLs +· +Detailed evaluation and ranking of investment decisions based on rate of return +· +Tracking predicted versus actual results in a centralized exploration management system, providing feedback to improve results +· +Attracting quality employees and maintaining integrated teams of geoscientists, landmen and engineers +· +Maximizing profitability by efficiently operating our properties +Conservative use of leverage has long been the key to our financial strategy. We believe that low leverage mitigates financial risk , which enables us to withstand volatility in commodity prices and provide competitive returns to shareholders. Cimarex looks to enhance shareholder returns through quarterly dividend s which have increased 100 % over the last five years. In June 2014, Cimarex was added to the S&P 500. See Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer purchases of Equity Securities – Stock Performance Graph and Item. 6 Selected Financial Data for additional financial and operating information for fiscal years 2010-2014. +Proved Oil and Gas Reserves +In 2014, our total proved reserves grew 25% to 3.1 Tcfe. Proved undeveloped reserves as a percentage of total proved reserves increased to 23% from 20% a year ago. We added 814 Bcfe of new reserves through extensions and discoveries and had upward revisions of 105 Bcfe. Organic growth, as represented by our reserve replacement ratio ( excluding reserve purchases and sales) was 2.9 times. The change in our proved reserves is as follows (in Bcfe) : +Proved Reserves at December 31, 2013 +2,497.0 +Revisions of previous estimates +104.8 +Extensions and discoveries +813.9 +Purchases of reserves +133.6 +Production +(317.0) +Sales of reserves +(100.0) +Proved Reserves at December 31, 2014 +3,132.3 +6 +Table of Contents +A breakdown by commodity of our proved oil and gas reserves follows: +Years Ended December 31, +2014 +2013 +2012 +Total Proved Reserves: +Gas (Bcf) +1,666.7 +1,293.5 +1,251.9 +Oil (MMBbls) +119.0 +108.5 +77.9 +NGL (MMBbls) +125.3 +92.0 +89.9 +Equivalent (Bcfe) +3,132.3 +2,497.0 +2,258.8 +% Developed +77 +80 +80 +See “ Supplemental Oil and Gas Information ” in Item 8 of this report for further information. +Production volumes totaled 869 MMcfe of natural gas equivalent per day, a 25% increase over 2013. Production volumes are comprised of 49% natural gas, 30% oil and 21% NGL s . The following tables show our production volumes by region, the average commodity prices received and production cost per unit of production (Mcfe). Separate data also is included for our Cana-Woodford project, which is part of our Mid-Continent region and is part of our largest producing field. +Production Volumes +Net Average Daily Volumes +Gas +Oil +NGL +Equivalent +Gas +Oil +NGL +Equivalent +Years Ended December 31, +(MMcf) +(MBbls) +(MBbls) +(MMcfe) +(MMcf) +(MBbls) +(MBbls) +(MMcfe) +2014 +Permian Basin +45,200 +12,552 +4,187 +145,636 +123.8 +34.4 +11.5 +399.0 +Mid-Continent +106,711 +2,682 +6,980 +164,682 +292.4 +7.3 +19.1 +451.2 +Other +3,217 +405 +176 +6,704 +8.8 +1.1 +0.5 +18.4 +Total Company +155,128 +15,639 +11,343 +317,022 +425.0 +42.8 +31.1 +868.6 +Cana-Woodford +76,915 +1,903 +5,937 +123,952 +210.7 +5.2 +16.3 +339.6 +2013 +Permian Basin +35,414 +10,739 +2,823 +116,783 +97.0 +29.4 +7.7 +320.0 +Mid-Continent +84,779 +2,171 +4,757 +126,345 +232.3 +5.9 +13.0 +346.1 +Other +5,055 +470 +296 +9,659 +13.8 +1.4 +0.9 +26.5 +Total Company +125,248 +13,380 +7,876 +252,787 +343.1 +36.7 +21.6 +692.6 +Cana-Woodford +50,919 +1,150 +3,863 +81,000 +139.5 +3.2 +10.6 +221.9 +2012 +Permian Basin +29,135 +8,750 +2,480 +96,517 +79.6 +23.9 +6.8 +263.7 +Mid-Continent +80,998 +2,210 +3,962 +118,029 +221.3 +6.1 +10.8 +322.5 +Other +8,362 +556 +510 +14,754 +22.9 +1.5 +1.4 +40.3 +Total Company +118,495 +11,516 +6,952 +229,300 +323.8 +31.5 +19.0 +626.5 +Cana-Woodford +43,222 +898 +2,830 +65,593 +118.1 +2.5 +7.7 +179.2 +7 +Table of Contents +Average Realized Price +Production +Gas +Oil +NGL +Cost +Years Ended December 31, +(per Mcf) +(per Bbl) +(per Bbl) +(per Mcfe) +2014 +Permian Basin +$ +4.48 +$ +82.44 +$ +30.04 +$ +1.58 +Mid-Continent +$ +4.42 +$ +88.23 +$ +35.03 +$ +0.58 +Other +$ +4.40 +$ +92.82 +$ +32.09 +$ +2.31 +Total Company +$ +4.43 +$ +83.70 +$ +33.14 +$ +1.08 +Cana-Woodford +$ +4.32 +$ +88.21 +$ +34.89 +$ +0.24 +2013 +Permian Basin +$ +3.91 +$ +93.02 +$ +26.13 +$ +1.48 +Mid-Continent +$ +3.70 +$ +93.48 +$ +31.25 +$ +0.76 +Other +$ +3.74 +$ +102.67 +$ +29.81 +$ +1.85 +Total Company +$ +3.76 +$ +93.44 +$ +29.36 +$ +1.13 +Cana-Woodford +$ +3.57 +$ +94.33 +$ +30.64 +$ +0.27 +2012 +Permian Basin +$ +2.93 +$ +87.93 +$ +30.78 +$ +1.50 +Mid-Continent +$ +2.86 +$ +90.41 +$ +29.91 +$ +0.77 +Other +$ +2.88 +$ +105.37 +$ +35.95 +$ +1.55 +Total Company +$ +2.88 +$ +89.25 +$ +30.66 +$ +1.13 +Cana-Woodford +$ +2.69 +$ +90.64 +$ +29.67 +$ +0.25 +Acquisitions and Divestitures +In 2014 we made property acquisitions totaling $250 million, including a $238 million acquisition of properties in our Cana-Woodford shale play where enhanced completion techniques along with new workover designs were used to increase returns. In addition, we sold interests in various non-core oil and gas properties for $446 million , including non-strategic, high-value acreage in Reagan County, Texas, for $242 million, and other producing properties in southwestern Kansas. +Exploration and Production Overview +Cimarex has one reportable segment, exploration and produc tion (E&P). Our E&P activities take place primarily in two areas: the Permian Basin and the Mid-Continent region. Almost all of our exploration and development (E&D) +8 +Table of Contents +capital is allocated between these two areas. In 2014, E&D investment totaled $1. 88 billion. Of that, 73% was invested in the Permian Basin and 25% in the Mid-Continent region. +In 2014 , Cimarex drilled or participated in 312 gross ( 174.6 net) wells , of which w e operated 185 gross ( 144.5 net ) wells. At year-end, we were in the process of drilling or participating in 8 gross ( 4.0 net) wells and there were 54 gross ( 31 . 9 net) wells waiting on completion. A summary of our 2014 exploration and development activity by region is as follows: +Gross +Net +% +E&D +Wells +Wells +Completed +Capital +Drilled +Drilled +As Producers +(in millions) +Permian Basin +$ +1,377 +171 +117 +99 +Mid-Continent +463 +139 +57 +100 +Other +41 +2 +1 +50 +$ +1,881 +312 +175 +99 +The Permian region encompasses west Texas and southeast New Mexico. Cimarex’s Permian Basin efforts are located in the western half of the Permian Basin known as the Delaware Basin. In 2014, we focused on drilling horizontal wells that yielded oil and liquids-rich gas from the Wolfcamp shale, the Bone Spring formation, and the Avalon shale. Cimarex saw improved results in its Wolfcamp shale wells, as measured by production and reserves, with the implementation of long laterals and in the Bone Spring wells via upsized well completions . +The Permian region produced 399 MMcfe per day in 2014, which was 46% of our total company production. Because of strong oil prices in the first nine months, the Permian was our most active drilling region in 2014. Oil production in the Permian Basin in 2014 averaged a record 34,390 barrels per day, a 17% increase over 2013. +Our Mid-Continent region consists of Oklahoma and the Texas Panhandle. Our activity in 2014 in the Mid-Continent was focused in the Cana-Woodford shale in Oklahoma. Returns increased significantly in this play during 2014 as we implemented well completion techniques in this area that were highly successful in our Delaware Basin Wolfcamp +9 +Table of Contents +Shale wells in 2013. These improved results, combined with a favorable average product price mix, led to the Mid-Continent region posting the company’s strongest returns in 2014. Cimarex also had success in a new zone, the Meramec, which sits above the Woodford Shale. Cimarex is working to delineate the size and potential of the Meramec play. +The Mid-Continent region is our largest producing area. During 2014 , production averaged 451.2 MMcf e per day, or 52% of total company production. Production from the region increased 30% in 2014 versus 2013. New completion design s and improved workover technology both contributed to higher production from the region. +Wells Drilled +We drilled the following exploratory and developmental wells in 2014: +Wells Drilled +2014 +2013 +2012 +Gross +Net +Gross +Net +Gross +Net +Exploratory +Productive +1 +0.4 +1 +1.0 +8 +6.3 +Dry +1 +0.5 +3 +2.4 +5 +2.6 +Total +2 +0.9 +4 +3.4 +13 +8.9 +Developmental +Productive +309 +173.6 +359 +181.0 +328 +177.0 +Dry +1 +0.1 +2 +1.0 +11 +6.1 +Total +310 +173.7 +361 +182.0 +339 +183.1 +We have working interests in the following productive wells by region as of December 31, 2014: +Gas +Oil +Gross +Net +Gross +Net +Mid-Continent +3,757 +1,447 +490 +166 +Permian Basin +1,002 +511 +4,968 +991 +Other +295 +86 +108 +39 +5,054 +2,044 +5,566 +1,196 +Significant Properties +All of our oil and gas assets (proved reserves and undeveloped acreage) are located in the United States. We have varying levels of ownership interests in our properties consisting of working, royalty and overriding royalty interests. We operate the wells that comprise 74% of our proved reserves. In 2014, proved reserves in the Watonga-Chickasha field were approximately 5 4 % of the company’s total proved reserves. The Cana-Woodford shale makes up the majority of this field. No other field had reserves in excess of 15% of our total proved reserves. +10 +Table of Contents +At December 31, 2014, 63% of our total proved reserves were located in the Mid-Continent region and 36% were in the Permian Basin. We owned an interest in 10,620 gross ( 3,240 net) productive oil and gas wells. The following table summarizes our estimated proved oil and gas reserves by region as of December 31, 2014. +% of +Gas +Oil +NGL +Equivalent +Total Proved +(Bcf) +(MMBbl) +(MMBbl) +(Bcfe) +Reserves +Mid-Continent +1,280.2 +27.8 +89.6 +1,984.7 +63 +Permian Basin +370.7 +90.1 +35.3 +1,122.7 +36 +Other +15.8 +1.1 +0.4 +24.9 +1 +1,666.7 +119.0 +125.3 +3,132.3 +100 +At December 31, 2014, our ten largest producing fields h e ld 80% of total proved reserves. We are the principal operator of our production in each of these fields. +% of +Total +Average +Approximate +Proved +Working +Average Depth +Field +Region +Reserves +Interest % +(feet) +Primary Formation +Watonga-Chickasha +Mid-Continent +54.0 +46.4 +13,000' +Woodford +Ford, West +Permian Basin +5.3 +59.9 +9,500' +Wolfcamp +Lusk +Permian Basin +5.0 +55.4 +9,500' +Bone Spring +Dixieland +Permian Basin +3.1 +98.3 +11,000' +Wolfcamp +Two Georges +Permian Basin +2.5 +92.7 +11,500' +Bone Spring +Cottonwood Draw +Permian Basin +2.4 +72.5 +3,000'-10,000' +Delaware/Wolfcamp +Red Hills +Permian Basin +2.4 +64.3 +8,800' +Bone Spring/Wolfcamp +Phantom +Permian Basin +2.3 +58.9 +11,500' +Bone Spring +Sandbar +Permian Basin +1.9 +58.1 +7,500' +Bone Spring +Benson +Permian Basin +1.1 +83.8 +9,500' +Bone Spring +79.9 +11 +Table of Contents +Acreage +The following table sets forth the gross and net acres of both developed and undeveloped leases held by Cimarex as of December 31, 2014. Gross acres are the total number of acres in which we own a working interest. Net acres are the gross acres multiplied by our working interest. +Acreage +Undeveloped +Developed +Total +Gross +Net +Gross +Net +Gross +Net +Mid-Continent +Kansas +18,231 +18,191 +— +— +18,231 +18,191 +Oklahoma +103,907 +80,314 +700,703 +290,550 +804,610 +370,864 +Texas +28,577 +18,314 +134,207 +58,148 +162,784 +76,462 +150,715 +116,819 +834,910 +348,698 +985,625 +465,517 +Permian Basin +New Mexico +83,091 +58,017 +198,185 +138,291 +281,276 +196,308 +Texas +149,724 +125,275 +186,686 +138,684 +336,410 +263,959 +232,815 +183,292 +384,871 +276,975 +617,686 +460,267 +Other +Arizona +2,098,481 +2,098,481 +17,207 +— +2,115,688 +2,098,481 +California +380,782 +380,782 +— +— +380,782 +380,782 +Colorado +67,892 +44,408 +36,414 +2,127 +104,306 +46,535 +Gulf of Mexico +25,000 +13,000 +58,388 +13,443 +83,388 +26,443 +Louisiana +5,362 +1,601 +11,842 +3,040 +17,204 +4,641 +Michigan +31,794 +31,716 +1,183 +1,183 +32,977 +32,899 +Montana +35,258 +10,379 +8,248 +1,875 +43,506 +12,254 +Nevada +1,196,299 +1,196,299 +440 +1 +1,196,739 +1,196,300 +New Mexico +1,635,750 +1,629,343 +18,412 +2,578 +1,654,162 +1,631,921 +Texas +36,464 +11,976 +96,729 +36,137 +133,193 +48,113 +Utah +86,068 +59,433 +26,211 +1,575 +112,279 +61,008 +Wyoming +98,801 +13,865 +43,118 +4,796 +141,919 +18,661 +Other +161,978 +146,193 +9,512 +3,486 +171,490 +149,679 +5,859,929 +5,637,476 +327,704 +70,241 +6,187,633 +5,707,717 +Total +6,243,459 +5,937,587 +1,547,485 +695,914 +7,790,944 +6,633,501 +The table below summarizes by year and region our undeveloped acreage expirations in the next five years. In most cases , the drilling of a commercial well will hold the acreage beyond the expiration. +Acreage +2015 +2016 +2017 +2018 +2019 +Gross +Net +Gross +Net +Gross +Net +Gross +Net +Gross +Net +Mid-Continent +10,174 +9,865 +22,293 +20,600 +15,859 +15,859 +325 +325 +— +— +Permian Basin +27,976 +25,659 +43,196 +42,711 +11,066 +11,051 +19,297 +18,309 +3,983 +3,983 +Other +20,754 +20,754 +200,352 +200,175 +52,641 +52,641 +31,412 +31,412 +67,448 +67,448 +58,904 +56,278 +265,841 +263,486 +79,566 +79,551 +51,034 +50,046 +71,431 +71,431 +% of undeveloped +0.9 +0.9 +4.3 +4.4 +1.3 +1.3 +0.8 +0.8 +1.1 +1.2 +12 +Table of Contents +Marketing +Our oil and gas production is sold under short-term arrangements at market-responsive prices. We sell our oil at prices tied directly or indirectly to field postings. Our gas is sold under price mechanisms related to either monthly or daily index prices on pipelines where we deliver our gas. +We sell our oil and gas to a broad portfolio of customers. Our major customers during 2014 were Enterprise Products Partners L.P. (Enterprise) , Sunoco Logistics Partners L.P. (Sunoco) and Oneok Partners, L.P. (Oneok) . Enterprise and Sunoco each accounted for 19% of our consolidated revenues in 2014. Oneok accounted for 10% of our 2014 consolidated revenues. +Enterprise is a significant oil purchaser in Oklahoma and West Texas. Sunoco is a significant purchaser of our oil in Southeast New Mexico and Canadian County, Oklahoma. If either of these entities were to stop purchasing our production, we believe there are a number of other purchasers to whom we could sell our production with some delay. If both parties were to discontinue purchasing our product, there would be challenges initially, but ample markets to handle the disruption. +Oneok primarily purchases our NGLs and provides gathering, compression and processing services for the majority of our Mid-Continent region gas production. In the event Oneok ceased buying our NGLs, a minimal impact would occur as these products are piped to various processing and storage market areas where we could sell to a different purchaser. In the event Oneok ceased gathering, compressing, and processing our gas, there would be challenges initially, but several other entities exist to fill in the gap . +We regularly monitor the credit worthiness of all our customers and may require parent company guarantees, letters of credit or prepayments when deemed necessary. +Corporate Headquarters and Employees +Our corporate headquarters is located at 1700 Lincoln St., Suite 3700 , Denver, Colorado 80203. On December 31, 2014, and 2013, Cimarex had 9 91 and 908 employees, respectively. None of our employees are subject to collective bargaining agreements. +Competition +The oil and gas industry is highly competitive, particularly for prospective undeveloped leases and purchases of proved reserves. There is also competition for rigs and related equipment used to drill for and produce oil and gas. Our competitive position is also highly dependent on our ability to recruit and retain geological, geophysical and engineering expertise. We compete for prospects, proved reserves, oil-field services and qualified oil and gas professionals with major and diversified energy companies and other independent operators that have larger financial, human and technological resources than we do. +We compete with integrated, independent and other energy companies for the sale and transportation of our oil and gas to marketing companies and end users. The oil and gas industry competes with other energy industries that supply fuel and power to industrial, commercial and residential consumers. Many of these competitors have greater financial and human resources. The effect of these competitive factors cannot be predicted. +Proved Reserves Estimation Procedures +Proved oil and gas reserve quantities are based on estimates prepared by Cimarex in accordance with the SEC’s rules for reporting oil and gas reserves. Our r eserve definitions co nform with definitions of Rules 4-10(a) (1)-(32) of Regulation S-X of the SEC. All of our reserve estimates are maintained by our internal Corporate Reservoir Engineering group, which is comprised of reservoir engineers and engineering technicians. The objectives and management of this group are separate from and independent of the exploration and production functions of the company. The primary objective of our Corporate Reservoir Engineering group is to maintain accurate forecasts on all properties of the company +13 +Table of Contents +through ongoing monitoring and timely updates of operating and economic parameters (production forecasts, prices and regional differentials, operating expenses, ownership, etc.) in accordance with guidelines established by the SEC. This separation of function and responsibility is a key internal control. +Cimarex engineers are responsible for estimates of proved reserves. Corporate engineers interact with the exploration and production departments to ensure all available engineering and geologic data is taken into account prior to establishing or revising an estimate. After preparing the reserves update, the corporate engineers review their recommendations with the Vice President of Corporate Engineering. After approval from the Vice President of Corporate Engineering, the revisions are entered into our reserves database by the engineering technician. +During the course of the year, the Vice President of Corporate Engineering presents summary reserves information to senior management and to our Board of Directors for their review. From time to time, the Vice President of Corporate Engineering also will confer with the Vice President of Exploration, Chief Operating Officer and the Chief Executive Officer regarding specific reserves-related issues. In addition, Corporate Reservoir Engineering maintains a set of basic guidelines and procedures to ensure that critical checks and reviews of the reserves database are performed on a regular basis. +Together, these internal controls are designed to promote a comprehensive, objective and accurate reserves estimation process. As an additional confirmation of the reasonableness of our internal estimates, DeGolyer and MacNaughton, an independent petroleum engineering consulting firm, reviewed greater than 80% of the total future net revenue discounted at 10% attributable to the total interests owned by Cimarex as of December 31, 2014. The individual primarily responsible for overseeing the review is a Senior Vice President with DeGolyer and MacNaughton and a Registered Professional Engineer in the State of Texas with over 40 years of experience in oil and gas reservoir studies and evaluations. +The technical employee primarily responsible for overseeing the oil and gas reserves estimation process is Cimarex’s Vice President of Corporate Engineering. This individual graduated from the Colorado School of Mines with a Bachelor of Science degree in Engineering and has more than 20 years of practical experience in oil and gas reservoir evaluation. He has been directly involved in the annual reserves reporting process of Cimarex since 2002 and has served in his current role for the past ten years. +Title to Oil and Gas Properties +We undertake title examination and perform curative work at the time we lease undeveloped acreage, prepare for the drilling of a prospect or acquire proved properties. We believe title to our properties is good and defensible, and is in accordance with industry standards. Nevertheless, we are involved in title disputes from time to time that result in litigation. Our oil and gas properties are subject to customary royalty interests, liens incidental to operating agreements, tax liens and other burdens and minor encumbrances, easements and restrictions. +Government Regulation +Oil and gas production and transportation is subject to extensive federal, state and local laws and regulations. Compliance with existing laws often is difficult and costly, but has not had a significant adverse effect on our operations or financial condition. In recent years, we have been most directly impacted by federal and state environmental regulations and energy conservation rules. We are also impacted by federal and state regulation of pipelines and other oil and gas transportation systems. +The states in which we conduct operations establish requirements for drilling permits, the method of developing fields, the size of well spacing units, drilling density within productive formations and the unitization or pooling of properties. In addition, state conservation laws include requirements for waste prevention, establish limits on the maximum rate of production from wells, generally prohibit the venting or flaring of natural gas and impose certain requirements regarding the ratability of production. +14 +Table of Contents +Environmental Regulation. Various federal, state and local laws regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, directly impact oil and gas exploration, development and production operations, which consequently impact our operations and costs. These laws and regulations govern, among other things, emissions to the atmosphere, discharges of pollutants into waters, underground injection of waste water, the generation, storage, transportation and disposal of waste materials, and protection of public health, natural resources and wildlife. These laws and regulations may impose substantial liabilities for noncompliance and for any contamination resulting from our operations and may require the suspension or cessation of operations in affected areas. +Cimarex is committed to environmental protection and believes we are in material compliance with applicable environmental laws and regulations. We obtain permits for our facilities and operations in accordance with the applicable laws and regulations. There are no known issues that have a significant adverse effect on the permitting process or permit compliance status of any of our facilities or operations. Expenditures are required to comply with environmental regulations. These costs are a normal, recurring expense of operations and not an extraordinary cost of compliance with government regulations. +We do not anticipate that we will be required under current environmental laws and regulations to expend amounts that will have a material adverse effect on our financial position or operations. However, due to continuing changes in these laws and regulations, we are unable to predict with any reasonable degree of certainty any potential delays in development plans that could arise, or our future costs of complying with these governmental requirements. We maintain levels of insurance customary in the industry to limit our financial exposure in the event of a substantial environmental claim resulting from sudden, unanticipated and accidental discharges of oil, produced water or other substances as well as additional coverage for certain other pollution events. +Gas Gathering and Transportation. The Federal Energy Regulatory Commission (FERC) requires interstate gas pipelines to provide open access transportation. FERC also enforces the prohibition of market manipulation by any entity, and the facilitation of the sale or transportation of natural gas in interstate commerce. Interstate pipelines have implemented these requirements, providing us with additional market access and more fairly applied transportation services and rates. FERC continues to review and modify its open access and other regulations applicable to interstate pipelines. +Under the Natural Gas Policy Act (NGPA), natural gas gathering facilities are expressly exempt from FERC jurisdiction. What constitutes “gathering” under the NGPA has evolved through FERC decisions and judicial review of such decisions. We believe that our gathering systems meet the test for non-jurisdictional “gathering” systems under the NGPA and that our facilities are not subject to federal regulations. Although exempt from FERC oversight, our natural gas gathering systems and services may receive regulatory scrutiny by state and federal agencies regarding the safety and operating aspects of the transportation and storage activities of these facilities. +In addition to using our own gathering facilities, we may use third-party gathering services or interstate transmission facilities (owned and operated by interstate pipelines) to ship our gas to markets. +Additional proposals and proceedings that might affect the oil and gas industry are pending before the U.S. Congress, FERC, Bureau of Land Management (BLM), state legislatures, state agencies, local governments and the courts. We cannot predict when or whether any such proposals may become effective and what effect they will have on our operations. We do not anticipate that compliance with existing federal, state and local laws, rules or regulations will have a material adverse effect upon our capital expenditures, earnings or competitive position. +Federal and State Income and Other Local Taxation +Cimarex and the petroleum industry in general are affected by both federal and state income tax laws, as well as other local tax regulations involving ad valorem, personal property, franchise, severance and other excise taxes. We have considered the effects of these provisions on our operations and do not anticipate that there will be any undisclosed impact on our capital expenditures, earnings or competitive position . +15 +Table of Contents +ITEM 1A. RISK FACTORS +The following risks and uncertainties, together with other information set forth in this Form 10-K, should be carefully considered by current and future investors in our securities. These risks and uncertainties are not the only ones we face. Additional risks and uncertainties presently unknown to us or currently deemed immaterial also may impair our business operations. The occurrence of one or more of these risks or uncertainties could materially and adversely affect our business, our financial condition, and the results of our operations, which in turn could negatively impact the value of our securities. +Oil, gas, and NGL prices fluctuate due to a number of uncontrollable factors, creating a component of uncertainty in our development plans and overall operations. Declines in prices adversely affect our financial results and rate of growth in proved reserves and production. +Oil and gas markets are volatile. We cannot predict future prices. The prices we receive for our production heavily influence our revenue, profitability, access to capital, and future rate of growth. The prices we receive depend on numerous factors beyond our control. These factors include, but are not limited to, changes in domestic and global supply and demand for oil and gas, the level of domestic and global oil and gas exploration and production activity, geopolitical instability, the actions of the Organization of Petroleum Exporting Countries, weather conditions, technological advances affecting energy consumption, governmental regulations and taxes, and the price and technological advancement of alternative fuels. +Our proved oil and gas reserves and production volumes will decrease unless those reserves are replaced with new discoveries or acquisitions. Accordingly, for the foreseeable future, we expect to make substantial capital investments for the exploration and development of new oil and gas reserves. Historically, we have paid for these types of capital expenditures with cash flow provided by our production operations, our revolving credit facility, and proceeds from the sale of senior notes. Low prices reduce our cash flow and the amount of oil and gas that we can economically produce and may cause us to curtail, delay, or defer certain exploration and development projects. Moreover, low prices also may impact our abilities to borrow under our revolving credit facility and to raise additional debt or equity capital to fund acquisitions. +If prices stay at recent lower levels or decrease, we will be required to take write-downs of the carrying values of our oil and gas properties and/or our goodwill. +Accounting rules require that we periodically review the carrying value of our oil and gas properties and goodwill for possible impairment. +As of December 31, 2014, the calculated value of the ceiling limitation exceeded the carrying value of our oil and gas properties subject to a ceiling test and no impairment was necessary. However, a decline of 8% or more in the value of the ceiling limitation would have resulted in an impairment. If commodity prices stay at the current early 2015 levels or decline further , we will incur fu ll cost ceiling impairments in future quarters. Because the ceiling calculation uses rolling 12-month average commodity prices, the effect of lower quarter-over-quarter prices in 2015 compared to 2014 is a lower ceiling value each quarter. This will result in ongoing impairments each quarter until prices stabilize or improve. I mpairment charge s would not a ffect cash flow from operating activities, but would adversely affect our net income and stockholders’ equity . +U.S. or global financial markets may impact our business and financial condition. +A credit crisis or other turmoil in the U.S. or global financial system may have a negative impact on our business and our financial condition. Our ability to access the capital markets may be restricted at a time when we would like, or need, to raise financing. This could have an impact on our flexibility to react to changing economic and business conditions. Deteriorating economic conditions could have a negative impact on our lenders, the purchasers of our oil and gas production and the working interest owners in properties we operate, causing them to fail to meet their obligations to us. +16 +Table of Contents +Failure to economically replace oil and gas reserves could negatively affect our financial results and future rate of growth. +In order to replace the reserves depleted by production and to maintain or increase our total proved reserves and overall production levels, we must either locate and develop new oil and gas reserves or acquire producing properties from others. This requires significant capital expenditures and can impose reinvestment risk for us, as we may not be able to continue to replace our reserves economically. While we occasionally may seek to acquire proved reserves, our main business strategy is to grow through exploration and drilling. Without successful exploration and development, our reserves, production and revenues could decline rapidly, which would negatively impact the results of our operations. +Exploration and development involves numerous risks, including new governmental regulations and the risk that we will not discover any commercially productive oil or gas reservoirs. Additionally, it can be unprofitable, not only from drilling dry holes, but also from drilling productive wells that do not return a profit because of insufficient reserves or declines in commodity prices. +Our drilling operations may be curtailed, delayed, or canceled for many reasons. Factors such as unforeseen poor drilling conditions, title problems, unexpected pressure irregularities, equipment failures, accidents, adverse weather conditions, compliance with environmental and other governmental requirements, bans, moratoria or other restrictions implemented by local governments and the cost of, or shortages or delays in the availability of, drilling and completion services could negatively impact our drilling operations. +Our proved reserve estimates may be inaccurate and future net cash flows are uncertain. +Estimates of total proved oil and gas reserves (consisting of proved developed and proved undeveloped reserves) and associated future net cash flow depend on a number of variables and assumptions. See “Forward-Looking Statement” in this report. Among others, changes in any of the following factors may cause actual results to vary considerably from our estimates: +· +timing of development expenditures; +· +amount of required capital expenditures and associated economics; +· +recovery efficiencies, decline rates, drainage areas, and reservoir limits; +· +anticipated reservoir and production characteristics and interpretations of geologic and geophysical data; +· +production rates, reservoir pressure, unexpected water encroachment, and other subsurface conditions; +· +oil, gas, and NGL prices; +· +governmental regulation; +· +access to assets restricted by local government action; +· +operating costs; +· +property, severance, excise and other taxes incidental to oil and gas operations; +· +workover and remediation costs; and +· +federal and state income taxes. +At December 31, 2014, 23% of our total proved reserves are categorized as proved undeveloped. +17 +Table of Contents +Our proved oil and gas reserve estimates are prepared by Cimarex engineers in accordance with guidelines established by the SEC. DeGolyer and MacNaughton, independent petroleum engineers, reviewed our reserve estimates for properties that comprised at least 80% of the discounted future net cash flows before income taxes, using a 10% discount rate, as of December 31, 2014. +The cash flow amounts referred to in this filing should not be construed as the current market value of our proved reserves. In accordance with SEC guidelines, the estimated discounted net cash flow from proved reserves is based on the average of the previous 12 months' first-day-of-the-month prices and costs as of the date of the estimate, whereas actual future prices and costs may be materially different. +Hedging transactions may limit our potential gains and involve other risks. +To limit our exposure to price risk, we enter into hedging agreements from time to time, and use commodity derivatives. During 2014, we had hedges covering 28 % of our oil production and 32 % of our gas production. We currently do not have any hedges in place for 2015 or later periods. Hedges limit volatility and increase the predictability of a portion of our cash flow. These transactions also limit our potential gains when oil and gas prices exceed the prices established by the hedges. +In certain circumstances, hedging transactions may expose us to the risk of financial loss, including instances in which: +· +the counterparties to our hedging agreements fail to perform; +· +there is a sudden unexpected event that materially increases oil and natural gas prices; or +· +there is a widening of price basis differentials between delivery points for our production and the delivery point assumed in the hedge arrangement. +Because we account for derivative contracts under mark-to-market accounting, during periods we have hedging transactions in place we expect continued volatility in derivative gains or losses on our income statement as changes occur in the relevant price indexes. +The adoption of derivatives legislation could have an adverse effect on our ability to use derivative instruments as hedges against fluctuating commodity prices. +In July 2010, the Dodd-Frank Act was enacted, representing an extensive overhaul of the framework for regulation of U.S. financial markets. The Dodd-Frank Act called for various regulatory agencies, including the SEC and the Commodities Futures Trading Commission (CFTC), to establish regulations for implementation of many of its provisions. The Dodd-Frank Act contains significant derivatives regulations, including requirements that certain transactions be cleared on exchanges and that cash collateral (margin) be posted for such transactions. The Dodd-Frank Act provides for an exemption from the clearing and cash collateral requirements for commercial end-users, such as Cimarex, and it includes a number of defined terms used in determining how this exemption applies to particular derivative transactions and the parties to those transactions. +We have satisfied the requirements for the end-user exception to the clearing requirement and intend to continue to engage in derivative transactions. However, the CFTC is still finalizing rules that will have an impact on our hedging counterparties and possibly end-users as well. The ultimate effect of these new rules and any additional regulations is currently uncertain. New rules and regulations in this area may result in significant increased costs and disclosure obligations as well as decreased liquidity as entities that previously served as hedge counterparties exit the market. +18 +Table of Contents +We have been an early entrant into new or emerging resource plays. As a result, our drilling results in these areas are uncertain. The value of our undeveloped acreage may decline and we may incur impairment charges if drilling results are unsuccessful. +New or emerging oil and gas resource plays have limited or no production history. Consequently, in those areas it is difficult to predict our future drilling costs and results. Therefore, our cost of drilling, completing and operating wells in these areas may be higher than initially expected. Similarly, our production may be lower than initially expected, and the value of our undeveloped acreage may decline if our results are unsuccessful. As a result, we may be required to write down the carrying value of our undeveloped acreage in new or emerging plays. +Furthermore, unless production is established during the primary term of certain of our undeveloped oil and gas leases, the leases will expire, and we will lose our right to develop those properties. +Our business depends on oil and gas pipeline and transportation facilities, some of which are owned by others. +In addition to the existence of adequate markets, our oil and natural gas production depends in large part on the proximity and capacity of pipeline systems, as well as storage, transportation, processing and fractionation facilities, most of which are owned by third parties. The lack of availability or the lack of capacity on these systems and facilities could result in the curtailment of production or the delay or discontinuance of drilling plans. This is more likely in remote areas without established infrastructure, such as our Culberson County, Texas area where we have significant development activities. The lack of availability or capacity in these facilities or the loss of the these facilities due to weather, fire or other reasons, for an extended period of time could negatively affect our revenues. +A limited number of companies purchase a majority of our oil, NGLs and natural gas. The loss of a significant purchaser could have a material adverse effect on our ability to sell production. +Federal and state regulation of oil and natural gas, local government activity, adverse court rulings, tax and energy policies, changes in supply and demand, pipeline pressures, damage to or destruction of pipelines and general economic conditions could adversely affect our ability to produce and market oil and natural gas. +Competition in our industry is intense and many of our competitors have greater financial and technological resources. +We operate in the competitive area of oil and gas exploration and production. Many of our competitors are large, well-established companies that have larger operating staffs and greater capital resources. These competitors may be willing to pay more for exploratory prospects and productive oil and gas properties. They may also be able to define, evaluate, bid for and purchase a greater number of properties and prospects than our financial or human resources permit. +Because our activity is also concentrated in areas of heavy industry competition, there is heightened demand for personnel, equipment, power, services, facilities and resources, resulting in higher costs than in other areas. Such intense competition also could result in delays in securing, or the inability to secure, the personnel, equipment, power, services, resources or facilities necessary for our development activities, which could negatively impact our production volumes. We also face higher costs in remote areas where vendors can charge higher rates due to that remoteness along with the inability to attract employees to those areas and the ability to deploy their resources in easier to access areas. +We may be subject to information technology system failures, network disruptions and breaches in data security. +Information system failures, network disruptions and breaches in data security could have a material adverse effect on our ability to conduct our business. We could experience system failures due to power or telecommunications failures, human error, natural disasters, fire, sabotage, hardware or software malfunction or defects, computer viruses, intentional acts of vandalism or terrorism and similar acts. Such system failures could result in the unanticipated disruption of our operations, the processing of transactions, the failure to meet regulatory standards and the reporting of our financial results. While management has taken steps to address these concerns by implementing network security and internal control measures, there can be no assurance that a system failure or data security breach will not have a material adverse effect on our financial condition and results of operations. +19 +Table of Contents +We are subject to complex laws and regulations that can adversely affect the cost, manner, and feasibility of doing business. +Exploration, production, and the sale of oil and gas are subject to extensive laws and regulations, including those implemented to protect the environment, human health and safety and wildlife. Federal, state, and local regulatory agencies frequently require permitting and impose conditions on our activities. During the permitting process, these regulatory agencies often exercise considerable discretion in both the timing and scope of the permits, and the public, including special interest groups, often has an opportunity to influence the timing and outcome of the process. The requirements or conditions imposed by these agencies can be costly and can delay the commencement of our operations. +Failing to comply with any of the applicable laws and regulations could result in the suspension or termination of our operations and subject us to administrative, civil and criminal liabilities and penalties. Such costs could have a material adverse effect on both our financial condition and operations. +Environmental matters and costs can be significant. +As an owner, lessee, or operator of oil and gas properties, we are subject to various complex, stringent and constantly evolving environmental laws and regulations. Our operations inherently create the risk of environmental liability to the government and private parties stemming from our use, generation, handling and disposal of water and waste materials, as well as the release of hydrocarbons or other substances into the air, soil, or water. The environmental laws and regulations to which we are subject impose numerous obligations applicable to our operations, including: the acquisition of a permit before conducting regulated activities associated with drilling for and producing oil and gas; the restriction of types, quantities, and concentration of materials that can be released into the environment; the limitation or prohibition of drilling activities on certain lands lying within wilderness, wetlands, and other protected areas; the application of specific health and safety criteria addressing worker protection; and the imposition of substantial liabilities for pollution resulting from our operations. Numerous governmental authorities, such as the U.S. Environmental Protection Agency (EPA) and analogous state agencies have the power to enforce compliance with these laws and regulations and the permits issued under them. Such enforcement actions often involve taking difficult and costly compliance measures or corrective actions. Failure to comply with these laws and regulations may result in the assessment of sanctions, including administrative, civil or criminal penalties, the imposition of investigatory or remedial obligations, and the issuance of orders limiting or prohibiting some or all of our operations. In addition, we may experience delays in obtaining or be unable to obtain required permits, which may delay or interrupt our operations and limit our growth and revenue. +Liabilities under certain environmental laws can be joint and several and may in some cases be imposed regardless of fault on our part such as where we own a working interest in a property operated by another party. We also could be held liable for damages or remediating lands or facilities previously owned or operated by others regardless of whether such contamination resulted from our own actions and regardless if we were in compliance with all applicable law at the time. Further, claims for damages to persons or property, including natural resources, may result from the environmental, health and safety impacts of our operations. Since these environmental risks generally are not fully insurable and can result in substantial costs, such liabilities could have a material adverse effect on both our financial condition and operations. +Our financial condition and results of operations may be materially adversely affected if we incur costs and liabilities due to a failure to comply with environmental regulations or a release of hazardous substances into the environment. +Our operations are subject to environmental laws and regulations relating to the management and release of hazardous substances, pollutants, solid and hazardous wastes and petroleum hydrocarbons. These laws generally regulate the generation, storage, treatment, discharge, transportation and disposal of pollutants and solid and hazardous waste and may impose strict and, in some cases, joint and several liability for the investigation and remediation of affected areas +20 +Table of Contents +where hazardous substances may have been released or disposed. The most significant of these environmental laws is as follows: +· +The Comprehensive Environmental Response, Compensation, and Liability Act, as amended, referred to as CERCLA or the Superfund law, and comparable state laws, which imposes liability on generators, transporters and arrangers of hazardous substances at sites where hazardous substance releases have occurred or are threatening to occur; +· +The Oil Pollution Act of 1990 (OPA), under which owners and operators of onshore facilities and pipelines, lessees or permittees of an area in which an offshore facility is located, and owners and operators of vessels are liable for removal costs and damages that result from a discharge of oil into navigable waters of the United States; +· +The Resource Conservation and Recovery Act (RCRA), as amended, and comparable state statutes, which governs the treatment, storage and disposal of solid waste; +· +The Federal Water Pollution Control Act, as amended, also known as the Clean Water Act (CWA), which governs the discharge of pollutants, including natural gas wastes into federal and state waters; +· +The Safe Drinking Water Act ( SDWA), which governs the disposal of wastewater in underground injection wells; and +· +The Clean Air Act (CAA) which governs the emission of pollutants into the air, +We believe we are in substantial compliance with the requirements of CERCLA, RCRA, OPA, CWA, SDWA, CAA and related state and local laws and regulations. We also believe we hold all necessary and up-to-date permits, registrations and other authorizations required under such laws and regulations. Although the current costs of managing our wastes as they are presently classified are reflected in our budget, any legislative or regulatory reclassification of oil and natural gas exploration and production wastes could increase our costs to manage and dispose of such wastes and have a material adverse effect on our financial condition and operations. +Federal regulatory initiatives relating to the protection of threatened or endangered species could result in increased costs and additional operating restrictions or delays. +The F ederal Endangered Species Act (ESA) was established to protect endangered and threatened species. Pursuant to the ESA, if a species is listed as threatened or endangered, restrictions may be imposed on activities adversely affecting that species' habitat. The U.S. Fish and Wildlife Service (FWS) may designate critical habitat and suitable habitat areas it believes are necessary for survival of a threatened or endangered species. A critical habitat or suitable habitat designation could result in further material restrictions to federal land use and may materially delay or prohibit land access for oil and natural gas development. Similar protections are offered to migratory birds under the Migratory Bird Treaty Act. We conduct operations on federal oil and natural gas leases in areas where certain species are currently listed as threatened or endangered, or could be listed as such, under the ESA. Operations in areas where threatened or endangered species or their habitat are known to exist may require us to incur increased costs to implement mitigation or protective measures and also may restrict or preclude our drilling activities in those areas or during certain seasons, such as breeding and nesting seasons. On March 27, 2014, the FWS announced the listing of the lesser prairie chicken, whose habitat is over a five-state region, including Texas, New Mexico and Oklahoma, where we conduct operations, as a threatened species under the ESA. Listing of the lesser prairie chicken as a threatened species imposes restrictions on disturbances to critical habitat by landowners and drilling companies that would harass, harm or otherwise result in a "taking" of this species. However, the FWS also announced a final rule that will limit regulatory impacts on landowners and businesses from the listing if those landowners and businesses have entered into certain range-wide conservation planning agreements, such as those developed by the Western Association of Fish and Wildlife Agencies (WAFWA), pursuant to which such parties agreed to take steps to protect the lesser prairie chicken's habitat and to pay a mitigation fee if its actions harm the lesser prairie chicken's habitat . We entered into a voluntary Candidate Conservation Agreement (CCA) with the WAFWA, whereby we agreed to take certain actions and limit certain activities, such as limiting drilling on certain portions of our +21 +Table of Contents +acreage during nesting seasons, in an effort to protect the lesser prairie chicken. Such CCA could result in increased costs to us from species protection measures, time delays or limitations on drilling activities, which costs, delays or limitations may be significant. We could encounter similar issues if the greater sage grouse is listed as a threatened or endangered species because its habitat includes our areas of operation. A listing decision is anticipated in 2015. +We use some of the latest available horizontal drilling and completion techniques, which involve risk and uncertainty in their application. +Our horizontal drilling operations utilize some of the latest drilling and completion techniques. The risks or such techniques include, but are not limited to, the following: +· +landing the wellbore in the desired drilling zone; +· +staying in the desired drilling zone while drilling horizontally through the formation; +· +running casing the entire length of the wellbore; +· +being able to run tools and other equipment consistently through the horizontal wellbore. +· +the ability to fracture stimulate the planned number of stages; +· +the ability to run tools the entire length of the wellbore during completion operations; and +· +the ability to successfully clean out the wellbore after completion of the final fracture stimulation stage. +Any of the above factors could have a material adverse effect on our financial position, results of operations or cash flows. +Our hydraulic fracturing activities are subject to risks that could negatively impact our operations and profitability. +We use hydraulic fracturing for the completion of almost all of our wells. Hydraulic fracturing is a process that involves pumping fluid and proppant at high pressure into a hydrocarbon bearing formation to create and hold open fractures. Those fractures enable gas or oil to move through the formation's pores to the well bore. Typically, the fluid used in this process is primarily water. In plays where hydraulic fracturing is necessary for successful development, the demand for water may exceed the supply. A lack of readily available water or a significant increase in the cost of water could cause delays or increased completion costs. +While hydraulic fracturing historically has been regulated by state oil and natural gas commissions, the practice has become increasingly controversial in certain parts of the country, resulting in increased scrutiny and regulation from federal agencies. For example, in October 2011, the EPA announced its plan to propose federal pre-treatment standards for wastewater generated during the hydraulic fracturing process. Hydraulic fracturing requires the use of a significant volume of water with some resulting "flowback water," as well as "produced water." If adopted, the new pretreatment rules will require shale gas operations to pretreat wastewater before transferring it to treatment facilities. Moreover, the EPA has indicated that it may develop and issue regulations under the Toxic Substances Control Act to require companies to disclose information regarding the chemicals used in hydraulic fracturing; however, to date, it has taken no action to do so. In addition to the use of water, hydraulic fracturing fluid contains chemicals or additives designed to optimize production. Many states already require companies to disclose the components of this fluid, and additional states and municipalities, as well as the federal government, may follow with additional regulations regarding disclosure and other issues concerning hydraulic fracturing. Indeed, in May 2013, the BLM published a supplemental notice of proposed rulemaking governing hydraulic fracturing on federal and Indian lands that replaces a prior draft of proposed rulemaking issued by the agency in May 2012. The revised proposed rule would continue to require public disclosure of chemicals used in hydraulic fracturing on federal and Indian lands, confirmation that wells used in fracturing operations meet appropriate construction standards, and development of appropriate plans for managing flowback water that returns to the +22 +Table of Contents +surface. A final rule is expected to be published in 2015. In May 2013, the Texas Railroad Commission adopted new rules governing well casing, cementing and other standards for ensuring that hydraulic fracturing operations do not contaminate nearby water resources. Many additional regulations also are being considered by federal, state and municipal governments and agencies, including limiting water withdrawals and usage, water disposal, restricting which additives may be used, implementing local or state-wide hydraulic fracturing moratoriums and temporary or permanent bans in certain environmentally sensitive and other areas. Public sentiment against hydraulic fracturing and shale gas production has become more vocal, which could lead to permitting and compliance requirements becoming more stringent. Consequences of these actions could increase our capital, compliance, and operating costs significantly, as well as delay or halt our ability to develop our oil and gas reserves. +Any of the above factors could have a material adverse effect on our financial position, results of operations or cash flows. +The adoption of climate change legislation or regulations restricting emission of greenhouse gases could result in increased operating costs and reduced demand for the oil and natural gas we produce. +Studies have suggested that emission of certain gases, commonly referred to as greenhouse gases (GHGs) may be impacting the earth's climate. Methane, a primary component of natural gas, and carbon dioxide, also present in natural gas as a secondary product, sometimes considered an impurity or a by-product of the burning of oil and natural gas, are examples of GHGs. The U.S. Congress and various states have been evaluating, and in some cases implementing, climate-related legislation and other regulatory initiatives that restrict emissions of GHGs. In December 2009, the EPA published its findings that emissions of GHGs present an endangerment to public health and the environment because emissions of such gases are contributing to the warming of the earth's atmosphere and other climatic changes. Based on these findings, the EPA adopted regulations under exi sting provisions of the F ederal Clean Air Act that establish Prevention of Significant Deterioration (PSD) and Title V permit reviews for GHG emissions from certain large stationary sources. Facilities required to obtain PSD and/or Title V permits under EPA’s GHG Tailoring Rule for their GHG emissions also may be required to meet " B est A vailable C ontrol T echnology" standards that will be established by the states or, in some cases, by the EPA on a case-by-case basis. The EPA has also adopted rules requiring the monitoring and reporting of GHG emissions from specified sources in the United States, including, among others, certain oil and natural gas production facilities on an annual basis, which includes certain of our operations. In recent proposed rulemaking EPA is widening the scope of annual GHG reporting to include not only activities associated with completion and workover of gas wells with hydraulic fracturing and activities associated with oil and natural gas production operations, but also completions and workovers of oil wells with hydraulic fracturing, gathering and boosting systems, and transmission pipelines. +While Congress has from time to time considered legislation to reduce emissions of GHGs, there has not been significant activity in the form of adopted legislation to reduce GHG emissions at the federal level in recent years. In the absence of such federal climate legislation, a number of state and regional efforts have emerged that are aimed at tracking and/or reducing GHG emissions by means of cap and trade programs that typically require major sources of GHG emissions, such as electric power plants, to acquire and surrender emission allowances in return for emitting those GHGs. In January 2015, President Obama announced a series of administration actions to reduce methane emissions, including rulemaking by the EPA and the BLM as well as updating of standards by the Department of Transportation’s Pipeline and Hazardous Materials Administration. The current administration intends to promulgate proposed climate change rulemaking this summer aimed at reducing GHG emissions by 45% by 2025 compared to 2012 levels. The current administration intends to finalize proposed climate change rulemaking by 2016. I t is not possible at this time to predict how legislation or new regulations that may be adopted to address GHG emissions would impact our business . A ny such future laws and regulations that require reporting of GHGs or otherwise limit emissions of GHGs from our equipment and operations could require us to incur costs to develop and implement best management practices aimed at reducing GHG emissions, install and maintain emissions control technologies, as well as monitor and report on GHG emissions associated with our operations, and such requirements also could adversely affect demand for the oil and natural gas that we produce. +23 +Table of Contents +Our limited ability to influence operations and associated costs on non-operated properties could result in economic losses that are partially beyond our control. +Other companies operate approximately 23% of our net production. Our success in properties operated by others depends upon a number of factors outside of our control. These factors include timing and amount of capital expenditures, the operator's expertise and financial resources, approval of other participants in drilling wells, selection of technology and maintenance of safety and environmental standards. Our dependence on the operator and other working interest owners for these projects could prevent the realization of our targeted returns on capital in drilling or acquisition activities. +Our business involves many operating risks that may result in substantial losses for which insurance may be unavailable or inadequate. +Our operations are subject to hazards and risks inherent in drilling for oil and gas, such as fires, natural disasters, explosions, formations with abnormal pressures, casing collapses, uncontrollable flows of underground gas, blowouts, surface cratering, pipeline ruptures or cement failures. Other such risks include theft, vandalism, environmental hazards such as natural gas leaks, oil spills and discharges of toxic gases. Any of these risks can cause substantial losses resulting from: +· +injury or loss of life; +· +damage to, loss of or destruction of, property, natural resources and equipment; +· +pollution and other environmental damages; +· +regulatory investigations, civil litigation and penalties; +· +damage to our reputation; +· +suspension of our operations; and +· +costs related to repair and remediation. +In addition, our liability for environmental hazards may include conditions created by the previous owners of properties that we purchase or lease. +We maintain insurance coverage against some, but not all, potential losses. We do not believe that insurance coverage for all environmental damages that could occur is available at a reasonable cost. Losses could occur for uninsurable or uninsured risks, or in amounts in excess of existing insurance coverage. The occurrence of an event that is not fully covered by insurance could harm our financial condition and results of operation. +We may not be able to generate enough cash flow to meet our debt obligations. +At December 31, 2014, our long-term debt consisted of $750 million of 4.375% senior notes due in 2024 and $750 million of 5.875% senior notes due in 2022. In addition to interest expense and principal on our long-term debt, we have demands on our cash resources including, among others, operating expenses and capital expenditures. +Our ability to pay the principal and interest on our long-term debt and to satisfy our other liabilities will depend upon future performance and our ability to repay or refinance our debt as it becomes due. Our future operating performance and ability to refinance will be affected by economic and capital market conditions, results of operations and other factors, many of which are beyond our control. Our ability to meet our debt service obligations also may be impacted by changes in prevailing interest rates, as borrowing under our existing revolving credit facility bears interest at floating rates. +24 +Table of Contents +We may not generate sufficient cash flow from operations. Without sufficient cash flow, there may not be adequate future sources of capital to enable us to service our indebtedness or to fund our other liquidity needs. If we are unable to service our indebtedness and fund our operating costs, we will be forced to adopt alternative strategies that may include: +· +reducing or delaying capital expenditures; +· +seeking additional debt financing or equity capital; +· +selling assets; or +· +restructuring or refinancing debt. +We may be unable to complete any such strategies on satisfactory terms, if at all. Our inability to generate sufficient cash flows to satisfy our debt obligations, or to refinance our indebtedness on commercially reasonable terms, would materially and adversely affect our financial condition and results of operations. +The instruments governing our indebtedness contain various covenants limiting the discretion of our management in operating our business. +The indenture governing our senior notes and our credit agreement contain various restrictive covenants that may limit management's discretion in certain respects. In particular, these agreements limit Cimarex's and its subsidiaries' ability to, among other things: +· +pay dividends on, redeem or repurchase our capital stock or redeem or repurchase our subordinated debt; +· +make loans to others; +· +make investments; +· +incur additional indebtedness or issue preferred stock; +· +create certain liens; +· +sell assets; +· +enter into agreements that restrict dividends or other payments from our restricted subsidiaries to us; +· +consolidate, merge or transfer all, or substantially all, of our assets and our restricted subsidiaries; +· +engage in transactions with affiliates; +· +enter into hedging contracts; +· +create unrestricted subsidiaries; and +· +enter into sale and leaseback transactions. +In addition, our revolving credit agreement requires us to maintain a debt to EBITDA ratio (as defined in the credit agreement) of not more than 3.5 and a current ratio (defined to include undrawn borrowings) of greater than 1.0. Also, the indenture, under which we issued our senior unsecured notes, restricts us from incurring additional indebtedness, subject to certain exceptions, unless our fixed charge coverage ratio (as defined in the indenture) is at least 2.25. The +25 +Table of Contents +additional indebtedness limitation does not prohibit us from borrowing under our revolving credit facility. See Note 2 to the Consolidated Financial Statements for further information. +If we fail to comply with the restrictions in the indenture governing our senior notes or the agreement governing our credit facility or any other subsequent financing agreements, a default may allow the creditors, if the agreements so provide, to accelerate the related indebtedness as well as any other indebtedness to which a cross-acceleration or cross-default provision applies. In addition, lenders may be able to terminate any commitments they had made to make available further funds. +Our acquisition activities may not be successful, which may hinder our replacement of reserves and adversely affect our results of operations. +The successful acquisition of properties requires an assessment of several factors, including: +· +geological risks and recoverable reserves; +· +future oil and gas prices and their appropriate market differentials; +· +operating costs; and +· +potential environmental risks and other liabilities. +The accuracy of these assessments is inherently uncertain. In connection with these assessments, we perform a review of the subject properties we believe to be generally consistent with industry practices. Our review will not reveal all existing or potential problems nor will it permit us to become sufficiently familiar with the properties to fully assess their deficiencies and capabilities. Inspections will not likely be performed on every well or facility, and structural and environmental problems are not necessarily observable even when an inspection is undertaken. Furthermore, the seller may be unwilling or unable to provide effective contractual protection against all or part of the identified problems. +We may lose leases if production is not established within the time periods specified in the leases. +Unless production is established within the spacing units covering the undeveloped acres on which some of the locations are identified, the leases for such acreage will expire. If we are not able to renew leases before they expire, any proved undeveloped reserves associated with such leases will be removed from our proved reserves. The combined net acreage expiring in the next three years represents 6.7 % of our total net undeveloped acreage at December 31, 2014. At that date, we had leases representing 56,278 net acres expiring in 2015, 263,486 net acres expiring in 2016, and 79,551 net acres expiring in 2017. Our actual drilling activities may materially differ from those presently identified, which could adversely affect our business. +Our disposition activities may be subject to factors beyond our control, and in certain cases we may retain unforeseen liabilities for certain matters . +We regularly sell non-core assets in order to increase capital resources available for other core assets and to create organizational and operational efficiencies. We also occasionally sell interests in core assets for the purpose of accelerating the development and increasing efficiencies in such core assets. Various factors could materially affect our ability to dispose of such assets, including the approvals of governmental agencies or third parties and the availability of purchasers willing to acquire the assets with terms we deem acceptable. +Sellers often retain certain liabilities or agree to indemnify buyers for certain matters related to the sold assets. The magnitude of any such retained liability or of the indemnification obligation is difficult to quantify at the time of the transaction and ultimately could be material. Also, as is typical in divestiture transactions, third parties may be unwilling to release the c ompany from guarantees or other credit support provided prior to the sale of the divested assets. As a result, after a divestiture, the c ompany may remain secondarily liable for the obligations guaranteed or supported to the extent that the buyer of the assets fails to perform these obligations. +26 +Table of Contents +Competition for experienced, technical personnel may negatively impact our operations. +Our exploratory and development drilling success depends, in part, on our ability to attract and retain experienced professional personnel. The loss of any key executives or other key personnel could have a material adverse effect on our operations. As we continue to grow our asset base and the scope of our operations, our future profitability will depend on our ability to attract and retain qualified personnel, particularly individuals with a strong background in geology, geophysics, engineering and operations. +We are involved in various legal proceedings, the outcome of which could have an adverse effect on our liquidity. +In the normal course of business, we have various lawsuits and related disputed claims, including but not limited to claims concerning title, royalty payments, environmental issues, personal injuries, and contractual issues. Although we currently believe the resolution of these lawsuits and claims, individually or in the aggregate, would not have a material adverse effect on our financial condition or results of operations, our assessment of our current litigation and other legal proceedings could change in light of the discovery of facts with respect to legal actions or other proceedings pending against us not presently known to us or determinations by judges, juries or other finders of fact that are not in accord with our evaluation of the possible liability or outcome of such proceedings. Therefore, there can be no assurance that outcomes of future legal proceedings would not have an adverse effect on our liquidity and capital resources. +Certain federal income tax deductions currently available with respect to natural gas and oil exploration and development may be eliminated, as a result of future legislation. +Various proposals have been made recommending the elimination of certain key U.S. federal income tax incentives currently available to oil and natural gas exploration and production companies. Legislation is often introduced in Congress which would implement many of these proposals. These changes include, but are not limited to, (i) the repeal of the percentage depletion allowance for oil and gas properties; (ii) the elimination of current deductions for intangible drilling and development costs; and (iii) an extension of the amortization period for certain geological and geophysical expenditures. It is unclear, however, whether any such changes will be enacted or how soon such changes could be effective. +The passage of this legislation or any other similar change in U.S. federal income tax law could eliminate or postpone certain tax deductions that are currently available with respect to oil and natural gas exploration and development, and any such change could have an adverse effect on our financial position. +The refining industry may be unable to absorb rising U.S. oil and condensate production; in such a case, the resulting surplus could depress prices and restrict the availability of markets. +The export of oil and certain condensates is restricted under U.S. law. Absent a change in this law or an expansion of U.S. refining capacity, rising U.S. production of oil and condensate could result in a surplus of these products, which could cause prices for these commodities to fall and markets to constrict. If this occurs, our returns on our capital projects would decline, which could make some of our drilling plans uneconomic and which could require us to shut in some of our production. This could have a material adverse effect on our cash flow and profitability. +ITEM 1B. UNRESOLVED STAFF COMMENTS +None. +27 +Table of Contents +ITEM 3. LEGAL PROCEEDING S +The information set forth under th e heading “Litigation” in Note 11 of the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K is incorporated by reference in response to this item. +ITEM 4. MINE SAFETY DISCLOSURE S +Not applicable. +28 +Table of Contents +PART I I +ITEM 5. MARKE T FOR THE REGISTRANT ’ S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES +Our $0.01 par value common stock trades on the New York Stock Exchange (NYSE) under the symbol XEC. A cash dividend was paid to stockholders in each quarter of 2014 . Future dividend payments will depend on the company ’ s level of earnings, financial requirements and other factors considered relevant by the Board of Directors. +Stock Prices and Dividends by Quarter. The following table sets forth, for the periods indicated, the high and low sales price per share of Common Stock on the NYSE and the quarterly dividends paid per share. +Dividends +Paid Per +2014 +High +Low +Share +First Quarter +$ +121.71 +$ +92.38 +$ +0.14 +Second Quarter +$ +143.75 +$ +111.49 +$ +0.16 +Third Quarter +$ +150.71 +$ +125.25 +$ +0.16 +Fourth Quarter +$ +129.12 +$ +96.02 +$ +0.16 +Dividends +Paid Per +2013 +High +Low +Share +First Quarter +$ +79.69 +$ +56.96 +$ +0.12 +Second Quarter +$ +76.61 +$ +62.98 +$ +0.14 +Third Quarter +$ +97.60 +$ +65.17 +$ +0.14 +Fourth Quarter +$ +113.03 +$ +94.11 +$ +0.14 +The closing price of Cimarex stock as reported on the New York Stock Exchange on February 1 3 , 201 5 , was $112.01 . At December 31, 2014 , Cimarex ’ s 87,592,535 shares of outstanding common stock were held by approximately 2,1 48 stockholders of record. +The following table sets forth information with respect to the equity compensation plans available to directors, officers, and employees of the company at December 31, 2014 : +(c) +Number of securities +(a) +remaining available +Number of securities +(b) +for future issuance +to be issued upon +Weighted-average +under equity +exercise of +exercise price of +compensation plans +outstanding options, +outstanding options, +(excluding securities +Plan Category +warrants, and rights +warrants, and rights +reflected in column (a)) +Equity compensation plans approved by security holders +384,082 +$ +78.19 +5,331,312 +Equity compensation plans not approved by security holders +— +— +— +Total +384,082 +$ +78.19 +5,331,312 +29 +Table of Contents +In June 2014, Cimarex was added to the S&P 500. The following graph compares the cumulative 5 - year total return attained by stockholders on Cimarex Energy Co. ’ s common stock relative to the cumulative total returns of the S&P 500 index , the Dow Jones US Exploration & Production index, and the S&P Oil & Gas Exploration & Production index. The graph tracks the performance of a $100 investment in our common stock and in each of the indexes (with the reinvestment of all dividends) from December 31, 200 9 to December 31, 2014 . +12/2009 +12/2010 +12/2011 +12/2012 +12/2013 +12/2014 +Cimarex Energy Co. +$ +100.00 +$ +167.87 +$ +117.94 +$ +110.80 +$ +202.75 +$ +205.90 +S&P 500 +$ +100.00 +$ +115.06 +$ +117.49 +$ +136.30 +$ +180.44 +$ +205.14 +Dow Jones US Exploration & Production +$ +100.00 +$ +116.74 +$ +111.85 +$ +118.36 +$ +156.05 +$ +139.24 +S&P Oil & Gas Exploration & Production +$ +100.00 +$ +109.28 +$ +102.25 +$ +105.98 +$ +135.11 +$ +120.81 +The stock price performance included in this graph is not necessarily indicative of future stock price performance. +Stock Repurchases. In December 2005, the Board of Directors authorized the repurchase of up to four million shares of our common stock. The authorization expired on December 31, 2011. Through December 31, 2007, we had repurchased and cancelled a total of 1,364,300 shares at an overall average price of $39.05. No shares have been repurchased since the quarter ended September 30, 2007. +30 +Table of Contents +ITEM 6. SELECTED FINANCIAL DATA +The selected financial data set forth below should be read in conjunction with the Consolidated Financial Statements and accompanying notes thereto provided in Item 8 of this report. +For the Years Ended December 31, +2014 +2013 +2012 +2011 +2010 +(in millions, except per share and proved reserves amounts) +Operating Results: +Oil, gas and NGL sales +$ +2,373 +$ +1,953 +$ +1,582 +$ +1,704 +$ +1,559 +Total Revenues +$ +2,424 +$ +1,998 +$ +1,624 +$ +1,758 +$ +1,614 +Net income (loss) +$ +507 +$ +565 +$ +354 +$ +530 +$ +575 +Earnings (loss) per share to common Stockholders: +Basic +$ +5.79 +$ +6.48 +$ +4.08 +$ +6.17 +$ +6.74 +Diluted +$ +5.78 +$ +6.47 +$ +4.07 +$ +6.15 +$ +6.70 +Cash dividends declared per share +$ +0.64 +$ +0.56 +$ +0.48 +$ +0.40 +$ +0.32 +Balance sheet data: +Cash and Cash Equivalents +$ +406 +$ +5 +$ +70 +$ +2 +$ +114 +Oil and Gas Properties, net +$ +6,904 +$ +5,966 +$ +5,005 +$ +4,126 +$ +2,922 +Goodwill +$ +620 +$ +620 +$ +620 +$ +620 +$ +620 +Total assets +$ +8,725 +$ +7,253 +$ +6,305 +$ +5,358 +$ +4,287 +Long-term Obligations +Long-term debt +$ +1,500 +$ +924 +$ +750 +$ +405 +$ +350 +Deferred Income Taxes +$ +1,755 +$ +1,460 +$ +1,121 +$ +904 +$ +548 +Other +$ +194 +$ +164 +$ +313 +$ +302 +$ +267 +Stockholders' equity +$ +4,501 +$ +4,022 +$ +3,475 +$ +3,131 +$ +2,610 +Cash flow data: +Net cash flow provided by operating activities +$ +1,619 +$ +1,324 +$ +1,193 +$ +1,292 +$ +1,130 +Net cash used in investing activities +$ +(1,740) +$ +(1,531) +$ +(1,415) +$ +(1,429) +$ +(978) +Net cash provided by (used in) financing activities +$ +522 +$ +142 +$ +289 +$ +25 +$ +(41) +Proved Reserves: +Oil (MBbls) +118,992 +108,533 +77,921 +72,322 +63,656 +Gas (Bcf) +1,667 +1,294 +1,252 +1,216 +1,254 +NGL (MBbls) +125,273 +92,044 +89,909 +65,815 +41,310 +Total equivalent (Bcfe) +3,132 +2,497 +2,259 +2,045 +1,884 +31 +Table of Contents +ITEM 7. MANAGEMENT ’ S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS +The following discussion and analysis should be read in conjunction with our Consolidated Financial Statements included in Item 8 of this report and also with “ Risk Factors” in Item 1A of this report . This di scussion also includes forward- looking statements. Please refer to “ Cautionary Information about Forward - Looking Statements ” in Part I of this report for important information about these types of statements. +OVERVIEW +Cimarex is an independent oil and gas exploration and production company. Our operations are entirely located in the United States, mainly in Oklahoma, Texas and New Mexico. Our operations currently are focused in two main areas: the Permian Basin and the Mid-Continent region. Our Permian Basin region encompasses west Tex as and southeast New Mexico. Our Mid-Continent region consists of Oklahoma and the Texas Panhandle. +Our principal business objective is to profitably grow proved reserves and production for the long-term benefit of our stockholders through a diversified drilling portfolio. Our strategy centers on maximizing cash flow from producing properties and profitably reinvesting that cash flow in exploration and development. We consider property acquisitions , dispositions and occasional mergers to enhance our competitive position. +We believe that detailed technical analysis, operational focus and a disciplined capital investment process mitigates risk and positions us to continue to achieve profitable increases in proved reserves and production. Our diversified drilling portfolio and limited long-term commitments provide the flexibility to respond quickly to industry volatility. +Growth is generally funded with cash flow provided by operating activities together with bank borrowings, sales of non - strategic assets and occasional public financing. Conservative use of leverage has long been a part of our financial strategy. We believe that maintaining a strong balance sheet mitigates financial risk and enables us to withstand low prices. +2014 Summary of Operating and Financial Results +· +Average daily production increased by 25% to 868.6 MMcfe/d. +· +Proved reserves increased 25% to 3.1 T cfe. +· +We added 813.9 Bcfe of proved reserves from extensions and discoveries, replacing 257% of production. +· +Exploration and devel opment expenditures totaled $1.9 billion. +· +Revenues reached $2.4 billion, up 21% from 2013 . +· +Cash flow provided by o perating activities totaled $1.6 billion. +· +Net income was $507.2 million, or $5.78 per diluted share. +During 2014, o ur drilling activities were f ocused almost exclusively in our Permian Basin and Mid-Continent regions. We participated in the drilling and completion of 312 gross (175 net) wells, 185 of which we operated. +Total debt a t December 31, 2014 was $1.5 billion comprised entirely of long-term s enior notes. Cash on hand was $405.9 million. Our stockholders’ equity grew to $4.5 billion from $4.0 billion a year earlier. +32 +Table of Contents +Proved Reserves +Year Ended December 31, 2014 +Total Gas +Gas +Oil +NGL +Equivalents +(MMcf) +(MBbl) +(MBbl) +(MMcfe) +Permian Basin +370,729 +90,081 +35,253 +1,122,734 +Mid-Continent +1,280,234 +27,791 +89,621 +1,984,709 +Other +15,770 +1,120 +399 +24,880 +Total +1,666,733 +118,992 +125,273 +3,132,323 +Year Ended December 31, 2013 +Total Gas +Gas +Oil +NGL +Equivalents +(MMcf) +(MBbl) +(MBbl) +(MMcfe) +Permian Basin +336,016 +85,532 +26,157 +1,006,152 +Mid-Continent +939,224 +21,656 +65,335 +1,461,170 +Other +18,260 +1,345 +552 +29,642 +Total +1,293,500 +108,533 +92,044 +2,496,964 +Year - end 2014 proved reserves grew 25% to 3.1 Tcfe, up from 2.5 Tcfe at year-end 2013 . Pro ved natural gas reserves were 1.7 Tcfe, and both oil and NGLs contributed 0.7 Tcfe each. Increases in the Mid-Continent’s proved reserves accounted for 82 % of the year-over-year increase and the region now represents 63 % of the company ’ s total proved reserves. The remainder of the increase was from the Permian Basin, where most of the rest of our proved reserves are located. +Reserves added from extens ions and discoveries totaled 813.9 Bcfe, of which 52% was from natural gas. During 2014 , we had net positive reserve revisions of 104.9 Bcfe. This included positive revisions of 16.1 Bcfe due to prices offset by negative revisions of 24.6 Bcfe due to increases in operating expenses, which shortened the economic lives of properties. Performance revisions were a net positive 113.4 Bcfe. This net increase was primarily due to better than expected performance of PUD reserves converted to proved developed reserves during the year. +The process of estimating quantities of oil, gas and NGL reserves is complex. Significant decisions are required in the evaluation of all available geological, geophysical, engineering and economic data. The data for a given field may also change substantially over time as a result of numerous factors including, but not limited to, additional development activity, evolving production history, contractual arrangements and continual reassessment of the viability of production under varying economic conditions. As a result, material revisions to existing reserve estimates may occur from time to time. +Although every reasonable effort is made to ensure that our reserve estimates represent the most accurate assessments possible, subjective decisions and available data for our various fields make these estimates generally less precise than other estimates included in financial statement disclosures. See “Supplemental Oil and Gas Information” in Item 8 of this report for further discussion regarding our proved reserves. +Revenues +Almost all of our revenues are derived from sales of oil, natural gas and NGL production. Increases or decreases in our revenue, profitability and future production growth are highly dependent on the commodity prices we receive . Commodity prices are market driven and future prices will continue to fluctuate due to supply and demand factors, seasonality and geopolitical and economic factors. +33 +Table of Contents +Oil sales contributed 55% of our total production revenue for 2014. Gas sales accounted for 29% and NGL sales contributed 16%. A $1.00 per barrel change in our realized oil price would have resulted in a $ 15.6 million change in revenues. A $0.10 per Mcf change in our realized gas price would have resulted in a $ 15.5 million change in our gas revenues. A $1.00 per barrel change in NGL prices would have changed revenues by $11.3 million. +The following table presents our average realized commodity prices. Realized prices do not include settlements of commodity hedging contracts. +Years Ended December 31, +2014 +2013 +2012 +Oil Prices: +Average realized sales price ($/Bbl) +$ +83.70 +$ +93.44 +$ +89.25 +Average WTI Midland price ($/Bbl) +$ +86.18 +$ +95.33 +$ +91.24 +Average WTI Cushing price ($/Bbl) +$ +93.01 +$ +97.97 +$ +94.20 +Gas Prices: +Average realized sales price ($/Mcf) +$ +4.43 +$ +3.76 +$ +2.88 +Average Henry Hub price ($/Mcf) +$ +4.43 +$ +3.65 +$ +2.79 +NGL Prices: +Average realized sales price ($/Bbl) +$ +33.14 +$ +29.36 +$ +30.66 +In the fourth quarter of 2014, and through the date of this report, domestic prices for oil, gas and NGLs have declined precipitously. It is likely that prices will continue to fluctuate in the future. +Approximately 80% of our 2014 oil production was in the Permian Basin, the sale of which is tied to the WTI Midland benchmark price. Due to greater industry-wide production in this area, west Texas oil prices have declined relative to the Cushing benchmark. In 2014, the average Midland index price was $6.83 per barrel lower than the average Cushing index price. In 2013, the average Midland price was only $2.64 per barrel lower than the average Cushing price. The overall decline in realized average oil prices together with the decline in the Midland benchmark price resulted in our lower realized oil prices in 2014. +Prior to 2014, our average realized prices for gas and NGLs were net of certain processing fees. Beginning in 2014, these fees are no longer netted against realized prices. The resulting positive impact on gas prices for 2014 was $0.07 per Mcf. The positive impact on NGL prices was $3.54 per barrel. These positive impacts to prices were equally offset by increased transportation, processing and other operating costs. See RESULTS OF OPERATIONS below and Note 1, Basis of Presentation – Oil, Gas and NGL Sales, to the Consolidated Financial Statements in Item 8 of this report for additional information regarding these processing fees. +See RESULTS OF OPERATIONS below fo r analysis of the impact changes in realized prices had on our year-over-year revenues. +Production and other operating expenses +Co sts associated with producing oil, gas and NGLs are substantial. Some of these costs vary with commodity prices, some trend with the type and volume of production and others are a function of the number of wells we own. At the end of 2014, we owned interests in 10,620 gross wells. +Production expense generally consists of costs for labor, equipment, maintenance, salt water disposal, compression, power, treating and miscellaneous other costs. Production expense also includes well workover activity necessary to maintain production from existing wells. +34 +Table of Contents +Transportation, processing and other operating costs principally consist of expenditures to prepare and transport production from the well head to a specified sales point and gas processing costs. These cos ts vary by region and will fluctuate with increases or decreases in production volumes , contractual fees and changes in fuel and compression costs. +Depreciation, depletion and amortization (DD&A) of our producing properties is computed using the units - of - production method. The economic life of each producing well depends upon the estimated proved reserves for that well, which in turn depend upon the assumed realized sales price for future sales of production. Therefore, fluctuations in oil and gas prices will impact the level of proved reserves used in the calculation. Higher prices generally have the effect of increasing reserves , which reduces depletion expense. Conversely, lower prices generally have the effect of decreasing reserves, which increases depletion expense. The cost of replacing production also impacts our DD&A rate. In addition, changes in estimates of reserve quantities, estimates of operating and future development costs, and reclassifications of properties from unproved to proved will impact depletion expense. +We use the full cost method of accounting for our oil and gas properties. Accounting rules require us to perform a quarterly ceiling test calculation to test our oil and gas properties for possible impairment. The primary components impacting this analysis are commodity prices, reserve quantities added and produced, overall exploration and development costs, depletion expense, and tax effects. If the net capitalized cost of our oil and gas properties subject to amortization (the carrying value) exceeds the ceiling limitation, the excess would be expensed. The ceiling limitation is equal to the sum of (a) the present value discounted at 10% of estimated future net cash flows from proved reserves, (b) the cost of properties not being amortized, (c) the lower of cost or estimated fair value of unproven properties included in the costs being amortized, and (d) all related tax effects. +At December 31, 2014 , the calculated value of the ceiling limitation exceeded the carrying value of our oil and gas properties subject to the test, and no impairment was necessary. However, a decline of 8% or more in the value of the ceiling limitation would have resul ted in an impairment. +If commodity prices stay at current early 2015 levels or decline further, we will incur fu ll cost ceiling impairments in future quarters. Because the ceiling calculation uses rolling 12-month average commodity prices, the effect of lower quarter-over-quarter prices in 2015 compared to 2014 is a lower ceiling value each quarter. This will result in ongoing impairments each quarter until prices stabilize or improve. I mpairment charge s would not a ffect cash flow from operating activities, but would adversely affect our net income and stockholders’ equity. +General and administrative (G&A) expenses consist primarily of salaries and related benefits, office rent, legal fees, consultants, systems costs and other administrative costs incurred in our offices and not directly associated with exploration, development or production activities. Our G&A expense is reported net of amounts reimbursed to us by working interest owners of the oil and gas properties we operate and net of amounts capitalized pursuant to the full cost method of accounting. +A discussion of changes in production and other operating expenses is included in RESULTS OF OPERATIONS , below. +RESULTS OF OPERATIONS +2014 compared to 2013 +Net income for the year ended December 31, 2014 was $507.2 million ($5.78 per diluted share), down 10% from $564.7 million ($6.47 per diluted share) for the previous year. In 2014, higher revenues from increased production volumes and higher realized prices received for gas and NGL production were offset by lower realized oil prices and increased operating expenses, primarily for DD&A and other operating, net expenses. In 2013, other operating, net included a +35 +Table of Contents +significant reduction in our estimated exposure to certain litigation expense which had been accruing since 2008. Changes in our net income are discussed further in the analysis that follows. +Percent +Years Ended +Change +December 31, +Between +Price / Volume Change +Production Revenue +2014 +2013 +2014 / 2013 +Price +Volume +Total +(in thousands or as indicated) +Oil sales +$ +1,308,958 +$ +1,250,212 +5 +% +$ +(152,324) +$ +211,070 +$ +58,746 +Gas sales +687,930 +471,045 +46 +% +103,936 +112,949 +216,885 +NGL sales +375,941 +231,248 +63 +% +42,877 +101,816 +144,693 +Total production revenue +$ +2,372,829 +$ +1,952,505 +22 +% +$ +(5,511) +$ +425,835 +$ +420,324 +Total oil volume — thousand barrels +15,639 +13,380 +17 +% +Oil volume — Bbl/d +42,846 +36,659 +17 +% +Average oil price — per barrel +$ +83.70 +$ +93.44 +(10) +% +Total gas volume — MMcf +155,128 +125,248 +24 +% +Gas volume — MMcf/d +425.0 +343.1 +24 +% +Average gas price — per Mcf +$ +4.43 +$ +3.76 +18 +% +Total NGL volume — thousand barrels +11,343 +7,876 +44 +% +NGL volume — Bbl/d +31,078 +21,578 +44 +% +Average NGL price — per barrel +$ +33.14 +$ +29.36 +13 +% +Total equivalent production volumes — MMcfe/d +868.6 +692.6 +25 +% +As reflected in the table above, our 2014 production revenue was 22% higher than that of 2013. Increased r evenue from greater production volumes and higher realized prices for gas and NGL sales were partially offset by lower realized oil prices. See Revenues above, for a discussion regarding realized prices. +Our 2014 aggregate production volumes were 317.0 Bcfe, comprised of 49% natural gas, 30% oil and 21% NGL. This compares to 2013 aggregate production volumes of 252.8 Bcfe, made up of 50% natural gas, 32% oil and 18% NGL. The 25% year-over-year growth was primarily due to our successful drilling programs in the Permian Basin and Mid-Continent region. See Items 1 and 2 of this report for a discussion of 2014 activity in these regions. +We sometimes transport, process and market third - party gas that is associated with our equity gas. The table below reflects our pre-tax operating margin (revenues less direct expenses) for third - party gas gathering and processing as well as the marketing margin (revenues less purchases) for marketing third - party gas. +Years Ended December 31, +2014 +2013 +Gas Gathering and Marketing (in thousands): +Gas gathering and other revenues +$ +49,602 +$ +45,441 +Gas gathering and other costs +(35,113) +(25,876) +Gas gathering and other margin +$ +14,489 +$ +19,565 +Gas marketing revenues, net of related costs +$ +1,745 +$ +105 +Fluctuations in net margins from gas gathering and gas marketing activities are a function of increases and decreases in volumes , prices and costs associated with third - party gas. +36 +Table of Contents +Our total op erating costs and expenses (not including gas gathering and marketing costs, or income tax expense) in 2014 were $1.58 billion, an increase of 46% compared to $1.08 billion for the prior year. In 2013 we recorded a $142.8 million reduction in our estimated exposure to litigation expense , which had been accruing since 2008. E xcluding the effect of the litigation expense estimate reduction, 2013 operating costs and expenses would have been $1.22 billion and the year-over-year increase would have been 29%. Analyses of the year - over - year differences are discussed below. +Variance +Years Ended December 31, +Between +Per Mcfe +2014 +2013 +2014 / 2013 +2014 +2013 +Operating costs and expenses (in thousands): +DD&A +$ +806,021 +$ +615,874 +$ +190,147 +$ +2.54 +$ +2.44 +Asset retirement obligation +10,082 +7,989 +2,093 +$ +0.03 +$ +0.03 +Production +342,304 +286,742 +55,562 +$ +1.08 +$ +1.13 +Transportation, processing and other operating +195,414 +93,580 +101,834 +$ +0.62 +$ +0.37 +Taxes other than income +128,793 +112,732 +16,061 +$ +0.41 +$ +0.45 +General and administrative +81,160 +77,466 +3,694 +$ +0.26 +$ +0.31 +Stock compensation +15,001 +14,279 +722 +$ +0.05 +$ +0.06 +(Gain) loss on derivative instruments, net +(3,762) +209 +(3,971) +N/A +N/A +Other operating (income) expense, net +116 +(132,334) +132,450 +N/A +N/A +$ +1,575,129 +$ +1,076,537 +$ +498,592 +Our 2014 DD&A expense increased 31% and account ed for 53 % of the aggregate increase in operating costs and expenses, excluding the effect of the 2013 litigation expense estimate rev ersal. About 78% of the 2014 increase in DD&A was attributable to our higher production volumes . On a per Mcfe basis, 2014 DD&A increased by 4%. Our DD&A rate has increased because the per unit cost of adding new proved reserves has exceeded the net remaining book basis of proved reserves added in prior years. +We expect our 2015 average DD&A rate to fluctuate depending on average realized prices in 2015. Continued lower realized prices during 2015 will cause the value of our oil and gas reserves to decrease and will result in impairments of our oil and gas properties during 2015. In quarters subsequent to an impairment, our DD&A rate will be lower than it is currently and will continue to decline after each subsequent impairment. If 2015 realized prices rebound, we would expect our DD&A rates in subsequent periods to increase moderately each quarter. +Asset retire ment obligation expense increased by 26 % compared to 2013. Most of the in crease resulted from higher plugging and abandonment costs incurred than had previously been estimated. +Our production costs consist of lease operating expense and workover expense as follows: +Variance +Years Ended December 31, +Between +Per Mcfe +(in thousands) +2014 +2013 +2014 / 2013 +2014 +2013 +Lease operating expense +$ +276,395 +$ +226,730 +$ +49,665 +$ +0.87 +$ +0.90 +Workover expense +65,909 +60,012 +5,897 +$ +0.21 +$ +0.23 +$ +342,304 +$ +286,742 +$ +55,562 +$ +1.08 +$ +1.13 +37 +Table of Contents +Lease operating expens e in 2014 increased 22% compared to 2013. Increased costs associated with put ting new wells on production in 2014 accounted for approximately 65% of the $49.7 million year-over-year increase. Most of these costs were for salt water disposal, rental equipment, and chemicals and treating. We also experienced year-over-year increases for labor, and site maintenance and restoration. These increased expenditures were partially offset by decreased costs resulting from property divestitures during the year. The lower rate per Mcfe was primarily a function of increased production volumes in 2014. +Workover expense increased by 10% from 2013 to 2014. Generally, these costs will fluctuate based on the amount of maintenance and remedial activity planned and/or required during the period. +Our year - over - year transportation , processing and other operating costs increased significantly during 2014. These costs will vary by product type and region . During 2014, approximately half of the increase in costs resulted from i ncreases in sales and processing volumes, contractual fees, compression charges and fuel costs . The remaining increase relates to the inclusion of certain processing fees that in previous years were treated as a reduction in realized sales prices for residue gas and NGLs. These costs accounted for approximately $0.16 per Mcfe for 2014. See Note 1, Basis of Presentation – Oil, Gas and NGL Sales , to the Consolidated Financial Statements in this report for additional information. +Taxes other than income are assessed by state and local taxing authorities on production, revenues or the value of properties. Revenue based severance taxes comprise approximately 85% of these taxes. The 2014 year-over-year increase results primarily from higher severance taxes on greater oil, gas and NGL productio n volumes. While the aggregate tax amount increased by 14%, the rate per Mcfe declined 9% due to the increase in production volumes. +General and administrative (G&A) costs were as follows: +Variance +Years Ended December 31, +Between +(in thousands) +2014 +2013 +2014 / 2013 +G&A capitalized to oil and gas properties +$ +76,636 +$ +74,691 +$ +1,945 +G&A expense +81,160 +77,466 +3,694 +$ +157,796 +$ +152,157 +$ +5,639 +G&A expense per Mcfe +$ +0.26 +$ +0.31 +$ +(0.05) +Our 2014 overall G&A cost increased modestly (4%) compared to 2013. In 2014 , we experienced increased costs for salaries and benefits , consulting fees and higher rent related to new office facilities , which were partially offset by lower charitable contributions. The 16% decline in G&A expense per Mcfe is due to increased production volumes in 2014. +38 +Table of Contents +Stock compensation expense consists of non - cash charges resulting from the issuance of restricted stock and stock option awards, net of amounts capitalized. We have recognized non - cash stock - based compensation cost as follows: +Variance +Years Ended December 31, +Between +(in thousands) +2014 +2013 +2014 / 2013 +Performance restricted stock awards +$ +12,141 +$ +11,105 +$ +1,036 +Service-based restricted stock awards +13,607 +12,018 +1,589 +Restricted stock +25,748 +23,123 +2,625 +Stock option awards +3,057 +3,145 +(88) +Total stock compensation +28,805 +26,268 +2,537 +Less amounts capitalized to oil and gas properties +(13,804) +(11,989) +(1,815) +Stock compensation +$ +15,001 +$ +14,279 +$ +722 +Expense associated with stock compensation will fluctuate based on the grant - date market value of the award and the number of shares granted. See Note 7 to the Consolidated Financial Statements in Item 8 of this report for further discussion regarding our stock - based compensation. +Net g ains and lo sses on our derivative instruments are a function of fluctuations in the underlying commodity prices and the monthly settlement of t he instruments. Since 2009, we have chosen not to apply hedge accounting treatment to our derivative instruments. As a result, settlements on the contracts are included as a component of operating costs and expenses as either a net gain or loss on derivative instruments. +The following table summarizes the net (gains) and losses from settlements and changes in fair va lue of our derivative contracts. All of our derivative contracts were settled as of December 31, 2014 , and we have not entered into any new contracts through the date of this report. See Note 5 to the Consolidated Financial Statements in Item 8 of this report for further details regarding our derivative instruments. +Years Ended December 31, +(in thousands) +2014 +2013 +(Gain) loss on derivative instruments, net: +Natural gas contracts +$ +6,750 +$ +(4,651) +Oil contracts +(10,512) +4,860 +(Gain) loss on derivative instruments, net +$ +(3,762) +$ +209 +Settlement (gains) losses: +Natural gas contracts +$ +4,287 +$ +(2,187) +Oil contracts +(11,928) +6,275 +Settlement (gains) losses +$ +(7,641) +$ +4,088 +Other operating (income) expense, net consists primarily of costs related to various legal matters, most of which pertain to litigation and contract settlements, and title and royalty issues. In 2014, we have expense of $116 thousand versus income of $132.3 million for 201 3. In 2013, based on a ruling from the Oklahoma Supreme Court, we reduced our estimated exposure to litigation expense that had been accruing since 2008 b y $142.8 million. See Note 11 to the Consolidated Financial Statements in Item 8 of this report for further information regarding litigation matters. +39 +Table of Contents +Other (income) and expense +Variance +Years Ended December 31, +Between +(in thousands) +2014 +2013 +2014 / 2013 +Interest expense +$ +72,865 +$ +54,973 +$ +17,892 +Capitalized interest +(35,925) +(31,517) +(4,408) +Other, net +(28,907) +(21,518) +(7,389) +$ +8,033 +$ +1,938 +$ +6,095 +I nterest expense is primarily made up of interest on debt and amortization of financing costs . The 33 % year - over -year increase is primarily due to the issuance of $750 million of senior notes in June of 2014. See Long- Term Debt below for further information regarding our debt. +We capitalize interest on non - producing leasehold costs, the in-progress costs of drilling and completing wells and construct ing qualified assets. The 14% increase in 2014 capitalized interest compared to 2013 was a result of higher co sts on which interes t was calculated in 2014 . +Components of “ other, net ” consist of miscellaneous income and expense items that will vary from period to period, including gain or loss on the sale or value of oil and gas well equipment and supplies , income and expense associated with other non - operating activities, miscellaneous asset sales and interest income. Most of the 34% year-over-year increase was due to net gains on transactions related to oil and gas well equipment and supplies. +The recent steep decline in oil, gas and NGL prices has resulted in fewer drilling rigs running in the United States as companies cut back on their capital expenditures. Through the first part of February 2015, published oil rig counts are at their lowest since December 2011. The effect of lower exploration and development activity, and thus lower demand, will create downward pressure on the price of oil and gas well equipment and supplies. Accounting rules require that these assets are to be carried at the lower of cost or market. Declines in prices related to our oil and gas well equipment and supplies will likely result in impairments in future quarters. Such impairments would not affect cash flow from operating activities, but would adversely affect our net income and stockholders’ equity. +Income Tax Expense +The components of our provision for income taxes are as follows: +Years Ended December 31, +(in thousands) +2014 +2013 +Current taxes (benefit) +$ +404 +$ +(689) +Deferred taxes +298,293 +329,700 +$ +298,697 +$ +329,011 +Combined Federal and state effective income tax rate +37.1 +% +36.8 +% +Our combined Federal and state effective tax rates differ from the statutory rate of 35% primarily due to state i ncome taxes and non-deductible expenses. See Note 10 to the Consolidated Financial Statements in Item 8 of this report for further information regarding our income taxes. +40 +Table of Contents +RESULTS OF OPERATIONS +2013 compared to 2012 +Net income for the year ended December 31, 2013, was $564.7 million ($6.47 per diluted share), up 60% from $353.8 million ($4.07 per diluted share) for the previous year. The increase in 2013 net income was primarily the result of higher revenues from increased production volumes and higher realized prices received for oil and gas production. Net income in 2013 also benefited from a reduction in our estimated exposure to certain litigation expense which had been accruing since 2008. The increases to 2013 net income were partially offset by increased DD&A, other oil and gas operational expenses and income taxes compared to 2012. These changes are discussed further in the analysis that follows. +Percent +Change +Years Ended December 31, +Between +Price / Volume Change +Production Revenue +2013 +2012 +2013 / 2012 +Price +Volume +Total +(in thousands or as indicated) +Oil sales +$ +1,250,212 +$ +1,027,757 +22 +% +$ +56,062 +$ +166,393 +$ +222,455 +Gas sales +471,045 +340,744 +38 +% +110,218 +20,083 +130,301 +NGL sales +231,248 +213,149 +8 +% +(10,239) +28,338 +18,099 +Total production revenue +$ +1,952,505 +$ +1,581,650 +23 +% +$ +156,041 +$ +214,814 +$ +370,855 +Total oil volume — thousand barrels +13,380 +11,516 +16 +% +Oil volume — Bbl/d +36,659 +31,463 +17 +% +Average oil price — per barrel +$ +93.44 +$ +89.25 +5 +% +Total gas volume — MMcf +125,248 +118,495 +6 +% +Gas volume — MMcf/d +343.1 +323.8 +6 +% +Average gas price — per Mcf +$ +3.76 +$ +2.88 +31 +% +Total NGL volume — thousand barrels +7,876 +6,952 +13 +% +NGL volume — Bbl/d +21,578 +18,994 +14 +% +Average NGL price — per barrel +$ +29.36 +$ +30.66 +(4) +% +Total equivalent production volumes — MMcfe/d +692.6 +626.5 +11 +% +As reflected in the table above, our 2013 production revenue was 23% higher than that of 2012. Increased revenue from greater production volumes together with higher realized prices for oil and gas sales were partially offset by lower realized NGL prices. +In 2013, our aggregate production volumes increased 11% compared to 2012. The growth in production resulted from our successful drilling programs in the Permian Basin and Mid-Continent region. +The changes in realized commodity prices were the result of overall market conditions. See Revenues above, for a discussion regarding realized prices. +41 +Table of Contents +We sometimes transport, process and market third - party gas that is associated with our gas. The table below reflects our pre-tax operating margin (revenues less direct expenses) for third - party gas gathering and processing as well as the marketing margin (revenues less purchases) for marketing third - party gas. +Years Ended December 31, +2013 +2012 +Gas Gathering and Marketing (in thousands): +Gas gathering and other revenues +$ +45,441 +$ +43,042 +Gas gathering and other costs +(25,876) +(21,965) +Gas gathering and other margin +$ +19,565 +$ +21,077 +Gas marketing revenues, net of related costs +$ +105 +$ +(754) +Fluctuations in net margins from gas gathering and processing and gas marketing activities are a function of increases and decreases in volumes and prices associated with third - party gas. +In 2013, our total operating costs and expenses of $1.077 billion (not including gas gathering, processing and marketing costs, or income tax expense) benefited from a $142.8 million reduction in our estimated exposure to litigation expense which had been accruing since 2008. Excluding the effect of the litigation reduction, our total operating costs and expenses would have been $1.219 billion, or $188 million (18%) higher than 2012 costs and expenses of $1.031 billion. Analyses of the year - over - year differences are discussed below: +Variance +Years Ended December 31, +Between +Per Mcfe +2013 +2012 +2013 / 2012 +2013 +2012 +Operating costs and expenses (in thousands): +DD&A +$ +615,874 +$ +513,916 +$ +101,958 +$ +2.44 +$ +2.24 +Asset retirement obligation +7,989 +13,019 +(5,030) +$ +0.03 +$ +0.06 +Production +286,742 +258,584 +28,158 +$ +1.13 +$ +1.13 +Transportation, processing and other operating +93,580 +57,354 +36,226 +$ +0.37 +$ +0.25 +Taxes other than income +112,732 +86,994 +25,738 +$ +0.45 +$ +0.38 +General and administrative +77,466 +54,428 +23,038 +$ +0.31 +$ +0.24 +Stock compensation +14,279 +21,919 +(7,640) +$ +0.06 +$ +0.10 +(Gain) loss on derivative instruments, net +209 +(245) +454 +N/A +N/A +Other operating (income) expense, net +(132,334) +24,961 +(157,295) +N/A +N/A +$ +1,076,537 +$ +1,030,930 +$ +45,607 +Our 2013 DD&A expense increased 20% to $615.9 million, compared to $513.9 million in 2012. The $102.0 million increase accounted for 54% of the aggregate increase in operating costs and expenses, excluding the effect of the litigation reversal. On a per Mcfe basis, 2013 DD&A increased by 9% to $2.44 compared to $2.24 for 2012. About half of the 2013 increase in DD&A was attributable to our higher production volumes. The rest of the increase was a result of a higher DD&A rate. Our DD&A rate has increased because the per unit cost of adding new proved reserves has exceeded the net remaining book basis of proved reserves added in prior years. We expect our average DD&A rate to increase modestly during 2014. +Asset retirement obligation expense declined by 39% to $8.0 million in 2013, compared to $13.0 million in 2012. Half of the decrease resulted from property sales in the latter half of 2012, which lowered our retirement obligation expense +42 +Table of Contents +during 2013. This decrease was partially offset by increased expense related to newly drilled wells. The remaining decrease was due to higher plugging and abandonment costs in the Permian Basin and Gulf of Mexico during 2012. +Our production costs consist of lease operating expense and workover expense as follows: +Variance +Years Ended December 31, +Between +Per Mcfe +(in thousands) +2013 +2012 +2013 / 2012 +2013 +2012 +Lease operating expense +$ +226,730 +$ +217,891 +$ +8,839 +$ +0.90 +$ +0.95 +Workover expense +60,012 +40,693 +19,319 +$ +0.23 +$ +0.18 +$ +286,742 +$ +258,584 +$ +28,158 +$ +1.13 +$ +1.13 +Lease operating expense in 2013 increased by 4% compared to 2012. In 2013, as we continued to put new wells on production, we had increased costs for compression, rental equipment, fuel and overhead. We also had year - over - year increased costs for e quipment & maintenance, roads and location s , and environmental expenditures. These increases were partially offset by lower salt water disposal costs and decreased year - over - year costs resulting from property divestitures that occurred in the latter half of 2012. The lower rate per Mcfe was primarily a function of increased production volumes and efficiencies of horizontal well operations in 2013 compared to 2012. +Workover expense increased by 47% from 2012 to 2013. Generally, these costs will fluctuate based on the amount of maintenance and remedial activity planned and/or required during the period. About 60% of the 2013 increase was incurred in the Permian Basin region and the remainder was primarily in the Mid-Continent region. +Our year - over - year transportation and other operating costs increased by 63% during 2013. Transportation costs will vary by product type and area. Increases or decreases in sales volumes, compression charges and fuel costs also have an impact. The increase in these costs is primarily from the growth of our oil and NGL production in the Permian Basin and western Oklahoma. +Taxes other than income are assessed by state and local taxing authorities on production, revenues or the value of properties. Revenue based severance taxes are the largest component of these taxes. Our 2013 taxes increased by 30% compared to 2012. The increase is primarily due to increased severance taxes on higher production volumes. In addition, our 2012 taxes were lower due to a refund for taxes paid in prior years. +General and administrative (G&A) costs were as follows: +Variance +Years Ended December 31, +Between +(in thousands) +2013 +2012 +2013 / 2012 +G&A capitalized to oil and gas properties +$ +74,691 +$ +66,611 +$ +8,080 +G&A expense +77,466 +54,428 +23,038 +$ +152,157 +$ +121,039 +$ +31,118 +G&A expense per Mcfe +$ +0.31 +$ +0.24 +$ +0.07 +Our 2013 overall G&A cost increased 26% compared to 2012. In 2013, we experienced increased costs for salaries and benefits as well as higher rent related to new office facilities. In addition, our 2013 expenditures included $7 million for university endowments established in honor of our former Chairman, F.H. Merelli, and $1 million of contributions for tornado relief in Oklahoma. +43 +Table of Contents +Stock compensation expense consists of non - cash charges resulting from the issuance of restricted stock and stock option awards, net of amounts capitalized. In accordance with our stock incentive plan, such grants are periodically made to non - employee directors, officers and other eligible employees. We have recognized non - cash stock - based compensation cost as follows: +Variance +Years Ended December 31, +Between +(in thousands) +2013 +2012 +2013 / 2012 +Performance restricted stock awards +$ +11,105 +$ +19,066 +$ +(7,961) +Service-based restricted stock awards +12,018 +12,231 +(213) +Restricted stock and units +23,123 +31,297 +(8,174) +Stock option awards +3,145 +2,889 +256 +Total stock compensation +26,268 +34,186 +(7,918) +Less amounts capitalized to oil and gas properties +(11,989) +(12,267) +278 +Stock compensation +$ +14,279 +$ +21,919 +$ +(7,640) +Expense associated with stock compensation will fluctuate based on the grant - date market value of the award and the number of shares granted. The 2012 cost for the performance awards includes $3.9 million of accelerated compensation expense related to the death of former Chairman, F.H. Merelli. In addition, the 2013 cost for performance awards is approximately $4.3 million lower than 2012 cost due to the timing of awards granted. Almost all of the performance awards granted in 2013 were awarded in mid - December. Awards granted in January of 2010 were fully amortized in early January of 2013, resulting in 2013 having less cost amortized during the year. +See Note 7 to the Consolidated Financial Statements of this report for further discussion regarding our stock - based compensation. +We have not elected hedge accounting treatment for our derivative instruments. Therefore, we recognize settlements and changes in the assets or liabilities relating to our open derivative contracts in earnings. Cash settlements of our contracts are included in cash flows from operating activities in our statements of cash flows. +Gains and losses on our derivative contracts are a function of fluctuations in the underlying commodity prices and the monthly settlement of the instruments. See Note 5 to the Consolidated Financial Statements of this report for further details regarding our derivative instruments. +The following table summarizes the net (gains) and losses from settlements and changes in fair value of our derivative contracts: +Years Ended December 31, +(in thousands) +2013 +2012 +(Gain) loss on derivative instruments, net: +Natural gas contracts +$ +(4,651) +$ +— +Oil contracts +4,860 +(245) +(Gain) loss on derivative instruments, net +$ +209 +$ +(245) +Settlement (gains) losses: +Natural gas contracts +$ +(2,187) +$ +— +Oil contracts +6,275 +— +Settlement (gains) losses +$ +4,088 +$ +— +44 +Table of Contents +Other operating (income) expense, net consists of costs related to various legal matters, most of which pertain to litigation and contract settlements, and title and ro yalty issues. For 2013, we had income of $132.3 million versus expense of $25.0 million for 2012. In December 2013, based on a ruling from the Oklahoma Supreme Court, we reduced our estimated exposure to litigation expense that had been accruing since 2008 by $142.8 million. See Note 11 to the Consolidated Financial Statements of this report for further information regarding litigation matters. +Other (income) and expense +Variance +Years Ended December 31, +Between +(in thousands) +2013 +2012 +2013 / 2012 +Interest expense +$ +54,973 +$ +49,317 +$ +5,656 +Capitalized interest +(31,517) +(35,174) +3,657 +Loss on early extinguishment of debt +— +16,214 +(16,214) +Other, net +(21,518) +(19,864) +(1,654) +$ +1,938 +$ +10,493 +$ +(8,555) +Our interest expense includes interest on debt, amortization of financing costs and miscellaneous interest expense. Most of the 11% year - over - year increase of $5.7 million relates to our 5.875% senior notes being outstanding for all of 2013, whereas they were only outstanding for eight months during 2012. See Long- Term Debt below for further information regarding our senior notes. +We capitalize interest on non - producing leasehold costs, the in-progress costs of drilling and completing wells and constructing qualified assets. The 10% decline in 2013 capitalized interest compared to amounts capitalized in 2012 resulted because both the average rate of interest and the amount of costs on which interest is calculated declined in 2013. +In connection with the retirement of our 7.125% senior notes in 2012, we recognized a $16.2 million loss on early extinguishment of debt. +Components of other, net consist of miscellaneous income and expense items that will vary from period to period, including gain or loss on the sale or value of oil and gas well equipment, income and expense associated with other non - operating activities, miscellaneous asset sales and interest income. The 8% increase in 2013 income compared to 2012 was mainly due to net gains on asset sales which were partially offset by lower income from non - operating activities. +Income Tax Expense +The components of our provision for income taxes are as follows: +Years Ended December 31, +(in thousands) +2013 +2012 +Current benefit +$ +(689) +$ +(1,489) +Deferred taxes +329,700 +208,216 +$ +329,011 +$ +206,727 +Combined Federal and state effective income tax rate +36.8 +% +36.9 +% +Our income tax expense (benefit) differs from the statutory rate of 35% due to the effects of state income taxes, the Domestic Production Activities allowance and other permanent differences. See Note 10 to the Consolidated Financial Statements of this report for further information regarding our income taxes. +45 +Table of Contents +LIQUIDITY AND CAPITAL RESOURCES +Overview +We strive to maintain an adequate liquidity level to address volatility and risk. Traditional sources of our liquidity are cash flows from operations, cash on hand, available borrowing capacity under our revolving credit facility (Credit Facility), proceeds from sales of non-core properties and occasional public financings. +Our liqu idity is highly dependent on prices we receive for the oil, natural gas and NGLs we produce . Prices received heavily influence our revenue, cash flow, profitability, access to capital and future rate of growth. See Revenues above for a comparison of year-over-year price realizations and RESULTS OF OPERATIONS above for analysis of the impact realized prices had on our 2014 revenues. +Prices we receive are determined by prevailing market conditions. Regional and worldwide economic and geopolitical activity, supply versus demand, weather , seasonality and other factors influence market conditions, which often result in significant volatility in commodity prices. In the fourth quarter of 2014, oil, gas and NGL commodity prices began declining significantly and are likely to continue to fluctuate in the future. +We deal with volatility in commodity prices primarily by maintaining flexibility in our capital investment program with a diversified drilling portfolio and limited long-term commitments, which enables us to respond quickly to industry volatility. In addition, we believe our conservative use of leverage and strong balance sheet will mitigate our exposure to lower prices. +From time to time we may enter into hedging agreements. At December 31, 2014, however, we had no hedges outstanding. Hedges limit volatility and increase the predictability of a portion of our cash flow. Hedge transactions also limit potential gains when oil and gas prices exceed the prices established by the hedges. Management will decide whether or not to enter into derivative contracts depending on their view of underlying supply and demand trends, changes in the oil and gas futures markets and other considerations. +During 2014, we invested $1.88 billion in exploration and development (E&D) and $250 million in property acquisitions. We also invested $100.6 million in other fixed assets. These investments were largely funded by cash flow provided by operating activities (operating cash flow) and proceeds from property sales. Based on current economic conditions, our 201 5 E&D capital expen ditures are estimated to range from $900 million to $1.1 bil lion. Additional capital expenditures for gathering, processing and other fixed assets are expected to approximate $50-80 million. +At December 31, 2014 , our long-term debt totaled $1.5 b illion and consisted of $750 million of 5.875% senior notes due in 2022 and $750 million of 4.375% senior notes due in 2024. W e had letters o f credit outstanding under our Credit F acility of $2.5 million, leaving an unuse d borrowing availability of $997 .5 million. +Our debt to total capitalization at December 31, 2014 was 25 %. The reconciliation of debt to total capitalization, which is a non - GAAP measure, is : long-term debt of $1.5 billion divided by the sum of long-term debt of $1.5 billion plus stockholders ’ equity of $4.5 billion . Management believes that this non - GAAP measure is useful information as it is a common statistic used in the investment community to assist with the analysis of the financial condition of an entity. +We believe that our operating cash flow and other capital resources will be adequate to meet our needs for planned capital expenditures, working capital, debt service and dividend payments in 2015 and beyond. +Sources and Uses of Cash +Our primary sources of liquidity and capital resources are operating cash flow, borrowings under our Credit Facility, asset sales and occasional public financings. Our primary uses of funds are expenditures for exploration and development, leasehold and property acquisitions, other capital expenditures, debt service and cash dividends paid to holders of our common stock. +46 +Table of Contents +The following table presents our sources and uses of cash and cash equivalents from 2012 to 2014. Capital expenditures are presented on a cash basis. These amounts differ from capital expenditures (including accruals) that are referred to elsewhere in this report. +Years Ended December 31, +(in thousands) +2014 +2013 +2012 +Sources of cash and cash equivalents: +Operating cash flow +$ +1,619,365 +$ +1,324,348 +$ +1,192,764 +Sales of oil and gas and other assets +458,394 +93,164 +312,622 +Net increase in bank debt +— +174,000 +— +Increase in other long-term debt +750,000 +— +750,000 +Issuance of common stock and other +11,898 +14,494 +11,433 +Total sources of cash and cash equivalents +2,839,657 +1,606,006 +2,266,819 +Uses of cash and cash equivalents: +Oil and gas capital expenditures +(2,108,250) +(1,572,288) +(1,662,707) +Other capital expenditures +(90,611) +(51,913) +(64,987) +Net decrease in bank debt +(174,000) +— +(55,000) +Decrease in other long-term debt +— +— +(363,595) +Financing costs incurred +(11,616) +(100) +(13,821) +Dividends paid +(53,849) +(46,712) +(39,577) +Total uses of cash and cash equivalents +(2,438,326) +(1,671,013) +(2,199,687) +Net increase (decrease) in cash and cash equivalents +$ +401,331 +$ +(65,007) +$ +67,132 +Cash and cash equivalents at end of year +$ +405,862 +$ +4,531 +$ +69,538 +Analysis of Cash Flow Changes (See the Consolidated Statements of Cash Flows) +Net c ash flow provided by operating activities (operating cash flow) for 2014 increased $295 million to $1.62 billion compared to $1.32 billion for 2013. The 22% increase was primarily a result of increased revenue s from greater production volumes and higher realized prices for natural gas and NGLs, which were partially offset by lower realized oil prices and increased operating expenses. Similarly, the 11% inc rease in 201 3 operating cash flow compared to 201 2 was mostly due to higher production volumes and increased realized prices for oil and natural gas, partially offset by lower realized prices for NGLs and increased operating expenses. +In 2014 , net cash flow used for investing activities was $1.74 billion, compared to $1. 53 billion for 201 3 and $1.42 billion for 201 2 . In 2014, our E&D and other capital investments were $2 . 20 billion, which were partially offset by proceeds from asset sales of $458 million. Our 2013 E&D and othe r capital expenditures were $1.62 billion, which were parti ally offset by asset sales of $93 million. For 2012 , our E&D and ot her capital expenditures of $1.73 billion were partial ly offset by asset sales of $313 million. +Net cash flow provided by financing activities in 2014 was $ 522 million compared to $142 million in 2013 and $289 millio n in 2012 . During 2014, we issued $750 million of senior notes and had $12 million of proceeds from issuance of common stock from employee option exercises. These cash inflows were partially offset by payments of $174 million on our Credit Facility, $12 million for financing costs and dividend payments of $54 million. +In 2013, financing activity cash inflows came fr om net bank borrowings of $174 million together with net proceeds from the issuance of common stock from employee option exercises and other of $14 million, whic h were partially offset by $46 million of dividend payments. During 2012, cash proceeds from issuance of $750 million of senior notes and $11 million of proceeds from employee stock option exercises were o ffset by debt payments of $418 m illion, financing costs of $14 millio n and dividend payments of $40 million. +47 +Table of Contents +Reconciliation of Adjusted Cash Flow from Operations +Years Ended December 31, +(in thousands) +2014 +2013 +2012 +Net cash provided by operating activities +$ +1,619,365 +$ +1,324,348 +$ +1,192,764 +Change in operating assets and liabilities +14,847 +63,840 +(58,049) +Adjusted cash flow from operations +$ +1,634,212 +$ +1,388,188 +$ +1,134,715 +Management believes the non - GAAP measure of adjusted cash flow from operations is useful information for investors. It is accepted by the investment commu nity as a means of measuring a company ’ s ability to fund its capital program without reflecting fluctuations caused by changes in current assets and liabilities (which are included in the GAAP measure of cash flow from operating activities). It is also used by professional research analysts in providing investment recommendations pertaining to companies in the oil and gas exploration and production industry. +Capital Expenditures +The following table sets forth certain historical information regarding capitalized expenditures for oil and gas acquisitions, exploration and development activities and property sales: +Years Ended December 31, +(in thousands) +2014 +2013 +Acquisitions: +Proved +$ +138,508 +$ +682 +Unproved +111,225 +36,396 +249,733 +37,078 +Exploration and development: +Land & seismic +176,061 +165,107 +Exploration +40,084 +46,290 +Development +1,664,877 +1,354,098 +1,881,022 +1,565,495 +Property sales +(446,107) +(61,503) +$ +1,684,648 +$ +1,541,070 +Capital expenditures in the table above are presented on an accrual basis. Oil and gas expenditures and sales in the Consolidated Statements of Cash Flows in this report reflect capital expenditures on a cash basis, when payments are made. +During 2014, approximately 73% of our $1.88 billion E&D expenditures were in the Permian Basin and 25% were in our Mid-Continent region. We participated in the drilling and completion of 312 gross (175 net) wells, 185 of which we operated. +Of the total wells drilled, 171 gross (117 net) were in the Permian Basin and 139 gross (57 net) were in the Mid-Continent region. At year-end 54 gross (32 net) wells were awaiting completion with 39 gross (27 net) in the Permian Basin and 15 gross (5 net) in the Mid-Continent region. See Items 1 and 2 of this report for further information regarding our wells drilled and other information regarding our oil and gas properties. +Our 2015 E&D capital investment is presently expected to range from $900 million to $1.1 billion , which will again be directed toward drilling in the Permian Basin and Mid-Continent regions. We intend to fund our capital program with cash on hand at December 31, 2014 and cash flow from 2015 operating activities. Occasional sales of non - core assets may also be used to supplement funding of capital expenditures. The timing of capital expenditures and the receipt of cash flows d o not necessarily match, which may cause us to borrow and rep ay funds under our Credit F acility throughout the year. +In the ordinary course of business w e actively evaluate opportunities to purchase properties that utilize our technical expertise, particularly in our core area s of operations. We also evaluate our non - core property holdings for +48 +Table of Contents +potential divestitures. For further information on our property acquisitio ns and dispositions, see Note 3 to the Consolidated Financial Statements in Item 8 of this report. +We have made, and will continue to make, expenditures to comply with environmental and safety regulations and requirements. These costs are considered a normal recurring cost of our ongoing operations. We do not anticipate that we will be required to expend amounts that will have a material adverse effect on our financial position or operations, nor are we aware of any pending regulatory changes th at would have a material impact. +Financial Condition +During 2014 , our total assets increased $1.5 billion (20%) to $8.7 billion, up from $7.2 billion at December 31, 2013 . The incr ease was primarily due to a $938 million increas e in net oil and gas properties and a $401 million increase in cash. +Total liabilities at year-end 2014 increased to $4.2 bi llion, up $1.0 billion (31%) from $3.2 billion at year-end 2013. During 2014, net long-term debt increased by $576 million and d eferred income taxes increased $295 million. +On December 31, 2014 , stockholders ’ equity totaled $4.5 billion, an increase of $0.5 billion (12%) from $4.0 billion at December 31, 2013. The increase resulted from our 2014 net income of $507 million less $56 million of dividends. +Long - Term Debt +Long-term debt at year end 2014 and 2013 consisted of the following: +December 31, +(in thousands) +2014 +2013 +Bank debt +$ +— +$ +174,000 +5.875% Senior Notes, due May 1, 2022 +750,000 +750,000 +4.375% Senior Notes, due June 1, 2024 +750,000 +— +Total long-term debt +$ +1,500,000 +$ +924,000 +All of our long-term debt is senior unsecured debt and is, therefore, pari passu with respect to the payment of both principal and interest. +Bank Debt +In May 2014 we amended our senior unsecured revolving Credit Facility to extend the matur ity date two years to July 14, 2018 and lowered the margins applicable to loans and commitments. The amendment also raised our borrowing base from $2.25 billion to $2.5 billlion until the next regular annual redetermination date scheduled for April 15, 2015. T he borrowing base is determined at the discretion of the lenders based on the v alue of our proved reserves. Our aggregate commitments remain ed unchanged at $1 billion. +At December 31, 2014 , w e had letters of credit outstanding of $2.5 million, leaving an unuse d borrowing availability of $997 .5 million. During 2014 , we had average daily bank debt outstanding of $132.6 million, compared to $159.3 million in 2013 . Our highest amount of bank borrowings outstanding during 2014 was $515.0 million in May. During 2013 , the highest amount of outstanding ba nk borrowings was $300 million in December. +At our option, borrowings under the Credit Facility , as amended, may bear inter est at either (a) LIBOR plus 1. 5 - 2. 2 5%, based on our leverage ratio; or (b) the higher of (i) a prime rate, (ii) the federal funds effective rate plus 0.5 %, or (iii) adjusted one - month LIBOR plus 1.0% plus, in each case, an additional 0. 5 - 1 .2 5%, based on our leverage ratio. +The Credit Facility has a number of financial and non -financial covenants of which w e were in com pliance with at December 31, 2014 . Fo r further information see Note 2 to the Consolidated Financial Statements in Item 8 of this report. +49 +Table of Contents +Senior Notes +In June 2014, we issued $750 million of 4.375% senior notes due 2024 and received net proceeds of $740.9 million, after deducting offering discounts and costs. The net proceeds were used to pay outstanding bank debt and for general corporate purposes. +In April 2012, we issued $750 million of 5.875% senior notes due 2022 and received net proceeds of $737.0 million, after deducting underwriting discounts and offering costs. We used a portion of the net proceeds to retire our 7.125% senior notes and the remaining proceeds were used to pay outstanding bank debt and for general corporate purposes. +In the second quarter of 2012, we completed a cash tender offer to purchase all of our outstanding 7.125% senior notes. We recognized a $16.2 million loss on early extinguishment of debt during the second quarter of 2012 . +Each of our outstanding senior notes is governed by an indenture containing certain covenants, events of default a nd other restrictive provisions . Interest on each of the senior notes is payable semi-annually. +Working Capital Analysis +Our working capital fluctuates primarily as a result of our realized commodity prices, changes in receivables and payables related to our operating and exploration and development activities and changes in our oil and gas well equipment and supplies balance. +At December 31, 2014, we had working capital of $155.5 million, an increase of $369.5 million compared to a deficit of $214.0 million at December 31, 2013. +Working capital increases consisted of the following: +· +Cash an d cash equivalents increased by $401.3 million primarily from third quarter asset sales. +· +O perations - rela ted accounts receivable increased $44.5 million. +· +Oil and gas well equipment and supplies increased by $23.0 million. +Increases in working capital were partially offset by the following : +· +Operations-related accounts payable and accrued liabilities increased by $66.0 million. +· +Accrued liabilities related to our E&D expenditures increased by $27.6 million. +Accounts receivable are a major component of working capital and include a diverse group of companies comprised of major energy companies, pipeline companies, local distribution companies and other end - users. The collection of receivables during the periods presented has been timely. Historically, losses associated with uncollectible receivables have not been significant. +50 +Table of Contents +Dividends +A quarterly cash dividend has been paid to stockholders every quarter since the first quarter of 2006. In February 2014 , the quarterly dividend was incre ased to $0.16 per share from $0.14 per share. Future dividend payments will depend on our level of earnings, financial requirements and other fa ctors considered relevant by our Board of Directors. +2014 +2013 +2012 +Dividend declared (in millions) +$ +55.7 +$ +48.4 +$ +41.3 +Dividend per share +$ +0.64 +$ +0.56 +$ +0.48 +Off - Balance Sheet Arrangements +We may enter into off - balance sheet arrangements and transactions that can give rise to material off - balance sheet obligations. As of December 31, 2014 , our material off - balance sheet arrangements included operating lease agreements , which are customary in the oil and gas industry. +Contractual Obligations and Material Commitments +At December 31, 2014 , we had the following contractual obligations and material commitments . +Payments Due by Period +1 Year or +More than +Contractual obligations: +Total +Less +2 - 3 Years +4 - 5 Years +5 Years +(in thousands) +Long-term debt (1) +$ +1,500,000 +$ +— +$ +— +$ +— +$ +1,500,000 +Fixed-Rate interest payments (1) +642,188 +76,876 +153,750 +153,750 +257,812 +Operating leases +120,949 +10,166 +22,050 +20,938 +67,795 +Drilling commitments (2) +259,437 +240,450 +18,987 +— +— +Gathering facilities and pipelines (3) +6,878 +6,878 +— +— +— +Asset retirement obligation (4) +173,008 +13,216 +— +(4) +— +(4) +— +(4) +Other liabilities (5) +84,178 +20,166 +44,064 +— +19,948 +Firm Transportation +357 +321 +36 +— +— +(1) +See Item 7A: Interest Rate Risk for more information regarding fixed and variable rate debt. +(2) +We have commitments of $207.7 million to finish drilling and completing wells in progress at December 31, 2014 . We also have various commitments for drilling rigs. The total minimum expenditure commitments under these agreements are $51.7 million. +(3) +We have projects in New Mexico and Texas where we are constructing gathering facilities and pipelines. At December 31, 2014, we had commitments of $6.9 million relating to this construction. +(4) +We have not included the long-term asset retirement obligations because we are not able to precisely predict the timing of these amounts. +(5) +Other includes the estimated value of our commitment associated with our benefit obligations and other miscellaneous commitments. +At December 31, 2014 , we had firm sales contracts to deliver approxi mately 30.8 Bcf of natural gas over the next 12 months. In total, our financial expos ure would be approximately $91.7 million should this gas not be delivered. Our exposure will fluctuate with price volatility and actual volumes delivered, however, we beli eve we ha ve no financial exposure from these contracts based on our current proved reserves and production levels. In the normal course of business we have various other delivery commitments which are not material individually or in the aggregate. All of the noted commitments were routine and were made in the normal course of our business. +51 +Table of Contents +Taking into account current commodity prices and anticipated levels of produ ction, we believe that our net cash flow generated fr om operations and our other capital resources will be adequate to meet future obligations. +2015 Outlook +Based on current economic conditions, our 2015 E&D capital expenditures are estimated to range from $900 million to $ 1.1 billion, to be allocated almost equally between our Permian Basin and Mid-Continent regions. Investments in gathering, processing and other fixed assets are expected to approximate $50-80 million. +We currently project production growth of 3% to 8%, or an average of 89 5 -935 MMcfe per day , in 2015. As has been our historical practice, we regularly review capital expenditures throughout the year and will adjust our investments based on changes in commodity prices, service costs and drilling success. We have the flexibility to adjust our capital expenditures based upon market conditions. +CRITICAL ACCOUNTING POLICIES AND ESTIMATES +Discussion and analysis of our financial condition and results of operation are based on our Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. We analyze and base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates. +A complete list of our significant accounting policies are described in Note 1 to our Consolidated Financial Statements in Item 8 of this report. We have identified the following policies as being of particular importance to the portrayal of our financial position and results of operations and which require the application of significant judgment by management. +Oil and Gas Reserves +The process of estimating quantities of oil and gas reserves is complex, requiring significant decisions in the evaluation of all available geological, geophysical, engineering and economic data. The data for a given field may also change substantially over time due to numerous factors including, but not limited to, additional development activity, evolving production history and continual reassessment of the viability of production under varying economic conditions. As a result, material revisions to existing reserve estimates may occur from time to time. Although every reasonable effort is made to ensure that our reserve estimates represent the most accurate assessments possible, subjective decisions and available data for our various fields make these estimates generally less precise than other estimates included in financial statement disclosures. +At year-end 2014, 23 % of our total proved reserves are categorized as proved undeveloped reserves, or PUDs. Our reserve engineers review and revise these reserve estimates regularly, as new information becomes available. +We use the units - of - production method to amortize the cost associated with our oil and gas properties. Changes in estimates of reserve quantities and commodity prices will cause corresponding changes in depletion expense, or in some cases , a full cost ceiling impairment charge in the period of the revision. See Full Cost Accounting below for further information regarding the ceiling limitation calculation. See “Supplemental Oil and Gas Information” in Item 8 of this report for additional reserve data. +Full Cost Accounting +We use the full cost method of accounting for our oil and gas operations. All costs associated with property acquisition, exploration and development activities are capitalized. Exploration and development costs include dry hole costs, geological and geophysical costs, direct overhead related to exploration and development activities and other costs incurred for the purpose of finding oil and gas reserves. Salaries and benefits paid to employees directly involved in the +52 +Table of Contents +exploration and development of properties, as well as other internal costs that can be directly identified with acquisition, exploration and development activities also are capitalized. Under the full cost method, no gain or loss is recognized upon the disposition of oil and gas properties unless such disposition would significantly alter the relationship between capitalized costs and proved reserves. +Companies that follow the full cost accounting method are required to make a quarterly ceiling test calculation. This test ensures that total capitalized costs for oil and gas properties (net of accumulated DD&A and deferred income taxes) do not exceed the sum of the present value discounted at 10% of estimated future net cash flows from proved reserves, the cost of properties not being amortized, the lower of cost or estimated fair value of unproven properties included in the costs being amortized and all related tax effects. We currently do not have any unproven properties being amortized. Revenue calculations in the reserves are based on the unweighted average first - day - of - the - month commodity price for the prior 12 months. Changes in proved reserve estimates (whether based upon quantity revisions or commodity price) will cause corresponding changes to the full cost ceiling limitation. If net capitalized costs subject to amortization exceed this limit, the excess would be expensed. Recorded impairment of oil and gas properties is not reversible. +Quarterly and annual ceiling tests are primarily impacted by commodity prices, reserve quantities added and produced, overall exploration and development costs, depletion expense and deferred taxes. As of December 31, 2014 , the calculated value of the ceiling limitation exceeded the carrying value of our oil and gas properties subject to the test, and no impairment was necessar y. However, a decline of 8 % or more in the value of the ceiling limitation would have resulted in an impairment. If commodity prices stay at the current 2015 rates, decline further, or if there is a negative impact on one or more of the other components of the calculation, we will incur a full cost ceiling impairment related to our oil and gas properties in future quarters. An impairment charge would have no effect on liquidity or our capital resources, but w ould adversely affect our results of operations in the period incurred. +Depletion of proved oil and gas properties is computed on the units - of - production method, whereby capitalized costs, including future development costs and asset retirement obligations, are amortized over total estimated proved reserves. Changes in our estimate of proved reserve quantities and commodity prices will cause corresponding changes in depletion expense in periods subsequent to these changes. The capitalized costs of unproved properties, including those in wells in progress, are excluded from the costs being amortized. We do not have major development projects that are excluded from costs being amortized. On a quarterly basis, we evaluate excluded costs for inclusion in the costs to be amortized resulting from the determination o f proved reserves or changes in our development plans . To the extent that the evaluation indicates these properties will not be developed, their cost is added to the capitalized costs to be amortized. See Note 1 to our Consolidated Financial statements in Item 8 of this report for information regarding the effect of a ceiling impairment on our depletion rate. Expenditures for maintenance and repairs are charged to production expense in the period incurred. +Goodwill +Goodwill represents the excess of the purchase price of business combinations over the fair value of the net assets acquired and is tested for impairment at least annually. We first assess qualitative factors to determine whether it is more likely than not (with a greater than 50% threshold) that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two - step goodwill impairment test. If goodwill is determined to be impaired, then it is written down to a calculated fair value by charging the impairment to expense. +We evaluate our goodwill for impairment in the fourth quarter of each year or whenever events or changes in circumstances indicate the possibility that goodwill may be impaired. Based upon our qualitative assessment at December 31, 2014 , goodwill was not impaired. It is possible that goodwill could become impaired in the future if commodity prices or other economic factors become less favorable. +Contingencies +A provision for contingencies is charged to expense when the loss is probable and the cost can be reasonably estimated. Determining when expenses should be recorded for these contingencies and the appropriate amounts for accrual is a complex estimation process that includes subjective judgment. In many cases, this judgment is based on interpretation +53 +Table of Contents +of laws and regulations, which can be interpreted differently by regulators and/or courts of law. We closely monitor known and potential legal, environmental, and other contingencies periodically to determine if we should record losses. Actual costs can vary from our estimates for a variety of reasons. See Note 11 to the Consolidated Financial Statements in this report for further information regarding litigation and other commitments and contingencies. +At December 31, 201 4, we had not made any accruals related to environmental remediation costs. However, we may be required to make such estimates in future periods if applicable laws and regulations change or if the interpretation or administration of laws and regulations change. Other factors, such as unanticipated construction problems or identification of areas of contaminated soil or groundwater, could also cause us to accrue for such costs. +Asset Retirement Obligation +Our asset retirement obligation represents the estimated present value of the amount we will incur to retire long - lived assets at the end of their productive lives, in accordance with applicable state laws. Our asset retirement obligation is determined by calculating the present value of estimated cash flows related to the liability. The retirement obligation is recorded as a liability at its estimated present value as of inception with an offsetting increase in the carrying amount of the related long - lived asset. Periodic accretion of discount of the estimated liability is recorded as an expense in the income statement. The cost of the tangible asset, including the asset retirement cost, is depreciated over the useful life of the asset. +Asset retirement liability is determined using significant assumptions including current estimates of plugging and abandonment costs, annual inflation of these costs, the productive lives of assets and our risk-adjusted interest rate. Changes in any of these assumptions can result in significant revisions to the estimated asset retirement obligation. Because of the subjectivity of assumptions, the costs to ultimately retire our wells may vary significantly from prior estimates. See Note 9 to the Consolidated Financial Statements of this report for additional information regarding our asset retirement obligations. +Income Taxes +Our oil and gas exploration and production operations are subject to taxation on income in numerous jurisdictions. We record deferred tax assets and liabilities to account for the expected future tax consequences of events that have been recognized in our financial statements and our tax returns. We routinely assess the realizability of our deferred tax assets. If we conclude that it is more likely than not that some portion or all of the deferred tax assets will not be realized under accounting standards, the tax asset would be reduced by a valuation allowance. Numerous judgments and assumptions are inherent in the determination of future taxable income, including factors such as future operating conditions (particularly as related to prevailing oil and gas prices). +The c ompany regularly assesses and, if required, establishes accruals for tax contingencies that could result from assessments of additional tax by taxing jurisdictions where the c ompany operates. See Note 10 to the Consolidated Financial Statements of this report for additional in formation regarding our income t axes. +Recently Issued Accounting Standards +In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (Topic 606). The new revenue standard provides a five-step analysis of transactions to determine when and how revenue is recognized. The core principle of the guidance is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance in this update supersedes the revenue recognition requirements in Topic 605, Revenue Recognition , and most industry-specific guidance throughout the Industry Topics of the Codification . We must comply with this ASU beginning in fiscal year 2017 and early adoption is not permitted. Entities can choose to apply the standard using either the full retrospective approach or a modified retrospective approach. We are currently evaluating the potential impact of this guidance, but at this time, do not expect that the adoption of this standard will have a material effect on our financial position or results of operation. +54 +Table of Contents +ITEM 7A. QUANTITATIV E AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK +Market risk refers to the risk of loss arising from adverse changes in commodity prices and interest rates. The disclosures are not meant to be precise indicators of expected future losses but rather indicators of reasonably possible losses. +Price Fluctuations +Our major market risk is pricing applicable to our oil , gas and NGL production. The prices we receive for our production are based on prevailing market conditions and are influenced by many factors that are beyond our c ontrol. Pricing for oil, gas and NGL production has been volatile and unpredictable. We periodically enter into financial derivative contracts to hedge a portion of our price risk associated with our future oil and gas production. At December 31, 2014, we had no hedges in place. +Counterparty credit risk did not have a significant effect on our cash flow calculations and commodity derivative valuations. This is primarily because we mitigated our exposure to any single counterparty by contracting with a number of financial institutions, each of which had a high credit rating and was a member of our bank credit facility. See Note 5 to the Consolidated Financial Statements of this report for additional information regarding our derivative instruments. +Interest Rate Risk +At December 31, 2014 , our long-term debt consisted of $750 million in 5.875% senior notes that will mature on May 1, 2022 and $750 million in 4.375% senior notes that will mature on June 1, 2024. Because all of our long-term debt is at a fixed rate, we consider our interest rate exposure to be minimal. This sensitivity analysis for interest rate risk excludes accounts receivables, accounts payable and accrued liabilities because of the short-term maturity of such instruments. See Note 2 and Note 4 to the Consolidated Financial Statements in this report for additional information regarding debt. +55 +Table of Contents +ITEM 8. FINANCIAL STATEMENT S AND SUPPLEMENTARY DATA +CIMAREX ENERGY CO. +INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTAL SCHEDULES +Page +Report of Independent Registered Public Accounting Firm for the years ended December 31, 201 4 , 201 3 , and 20 12 +57 +Consolidated balance sheets as of December 31, 201 4 and 20 13 +58 +Consolidated statements of income and comprehensive income for the years ended December 31, 201 4 , 201 3 , and 20 12 +59 +Consolidated statements of cash flows for the years ended December 31, 201 4 , 201 3 , and 20 12 +60 +Consolidated statements of stockholders’ equity for the years ended December 31, 201 4 , 201 3 , and 20 12 +61 +Notes to consolidated financial statements +Note 1 – Basis of Presentation and Summary of Significant Accounting Policies +62 +Note 2 – Long-term Debt +66 +Note 3 – Property Sales and Acquisitions +67 +Note 4 – Fair Value Measurements +68 +Note 5 – Derivative Instruments/Hedging +69 +Note 6 – Capital Stock +70 +Note 7 – Stock-Based and Other Compensation +71 +Note 8 – Earnings per Share +74 +Note 9 – Asset Retirement Obligations +75 +Note 10 – Income Taxes +75 +Note 11 – Commitments and Contingencies +76 +Note 12 – Related Party Transactions +78 +Note 13 – Supplemental Cash Flow Information +78 +Supplemental information to consolidated financial statements +Supplemental oil and gas information (Unaudited) +79 +Supplemental quarterly financial data (Unaudited) +84 +All other supplemental information and schedules have been omitted because they are not applicable or the information required is shown in the consolidated financial statements or related notes thereto. +56 +Table of Contents +Report of Independent Registered Public Accounting Firm +The Board of Directors and Stockholders +Cimarex Energy Co.: +We have audited the accompanying consolidated balance sheets of Cimarex Energy Co. and subsidiaries (the Company) as of December 31, 2014 and 2013, and the related consolidated statements of income and comprehensive income, stockholders’ equity, and cash flows for each of the years in the three year period ended December 31, 2014. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. +We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. +In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Cimarex Energy Co. and subsidiaries as of December 31, 2014 and 2013, and the results of their operations and their cash flows for each of the years in the three year period ended December 31, 2014, in conformity with U.S. generally accepted accounting principles. +We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Cimarex Energy Co. and subsidiaries’ internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 25, 2015 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting. +KPMG LLP +Denver, Colorado +February 2 5 , 201 5 +57 +Table of Contents +CIMAREX ENERGY CO. +CONSOLIDATED BALANCE SHEET S +(in thousands, except share and per share information) +December 31, +2014 +2013 +Assets +Current assets: +Cash and cash equivalents +$ +405,862 +$ +4,531 +Accounts receivable: +Trade, net of allowance +134,443 +83,070 +Oil and gas sales, net of allowance +259,220 +265,050 +Gas gathering, processing, and marketing, net of allowance +18,009 +19,102 +Other +436 +532 +Oil and gas well equipment and supplies +89,780 +66,772 +Deferred income taxes +13,475 +16,854 +Derivative instruments +— +4,268 +Prepaid Expenses +9,356 +7,867 +Other current assets +1,223 +1,093 +Total current assets +931,804 +469,139 +Oil and gas properties at cost, using the full cost method of accounting: +Proved properties +14,402,064 +12,863,961 +Unproved properties and properties under development, not being amortized +759,149 +585,361 +15,161,213 +13,449,322 +Less—accumulated depreciation, depletion and amortization +(8,257,502) +(7,483,685) +Net oil and gas properties +6,903,711 +5,965,637 +Fixed assets, less accumulated depreciation of $175,453 and $167,675 +211,031 +146,918 +Goodwill +620,232 +620,232 +Other assets, net +58,515 +51,209 +$ +8,725,293 +$ +7,253,135 +Liabilities and Stockholders’ Equity +Current liabilities: +Accounts payable: +Trade +$ +102,276 +$ +80,918 +Gas gathering, processing, and marketing +35,775 +35,192 +Accrued liabilities: +Exploration and development +200,929 +173,298 +Taxes other than income +26,950 +27,509 +Other +219,505 +211,688 +Derivative instruments +— +389 +Revenue payable +190,892 +154,173 +Total current liabilities +776,327 +683,167 +Long-term debt +1,500,000 +924,000 +Deferred income taxes +1,754,706 +1,459,841 +Asset retirement obligation +159,792 +126,968 +Other liabilities +33,836 +36,951 +Total liabilities +4,224,661 +3,230,927 +Commitments and contingencies +Stockholders’ equity: +Preferred stock, $0.01 par value, 15,000,000 shares authorized, no shares issued +— +— +Common stock, $0.01 par value, 200,000,000 shares authorized, 87,592,535 and 87,152,197 shares issued, respectively +876 +872 +Paid-in capital +1,997,080 +1,970,113 +Retained earnings +2,501,574 +2,050,034 +Accumulated other comprehensive income +1,102 +1,189 +4,500,632 +4,022,208 +$ +8,725,293 +$ +7,253,135 +The accompanying notes are an integral part of these consolidated financial statements. +58 +Table of Contents +CIMAREX ENERGY CO. +CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME +(in thousands, except per share data) +Years Ended December 31, +2014 +2013 +2012 +Revenues: +Oil sales +$ +1,308,958 +$ +1,250,212 +$ +1,027,757 +Gas sales +687,930 +471,045 +340,744 +NGL Sales +375,941 +231,248 +213,149 +Gas gathering and other +49,602 +45,441 +43,042 +Gas marketing, net of related costs of $256,836 , $187,772 and $86,813 respectively +1,745 +105 +(754) +2,424,176 +1,998,051 +1,623,938 +Costs and expenses: +Depreciation, depletion and amortization +806,021 +615,874 +513,916 +Asset retirement obligation +10,082 +7,989 +13,019 +Production +342,304 +286,742 +258,584 +Transportation, processing, and other operating +195,414 +93,580 +57,354 +Gas gathering and other +35,113 +25,876 +21,965 +Taxes other than income +128,793 +112,732 +86,994 +General and administrative +81,160 +77,466 +54,428 +Stock compensation +15,001 +14,279 +21,919 +(Gain) loss on derivative instruments, net +(3,762) +209 +(245) +Other operating (income) expense, net +116 +(132,334) +24,961 +1,610,242 +1,102,413 +1,052,895 +Operating income +813,934 +895,638 +571,043 +Other (income) and expense: +Interest expense +72,865 +54,973 +49,317 +Capitalized interest +(35,925) +(31,517) +(35,174) +Loss on early extinguishment of debt +— +— +16,214 +Other, net +(28,907) +(21,518) +(19,864) +Income before income tax +805,901 +893,700 +560,550 +Income tax expense +298,697 +329,011 +206,727 +Net income +$ +507,204 +$ +564,689 +$ +353,823 +Earnings per share to common stockholders: +Basic +Distributed +$ +0.64 +$ +0.56 +$ +$ +0.48 +Undistributed +5.15 +5.92 +3.60 +$ +5.79 +$ +6.48 +$ +4.08 +Diluted +Distributed +$ +0.64 +$ +0.56 +$ +$ +0.48 +Undistributed +5.14 +5.91 +3.59 +$ +5.78 +$ +6.47 +$ +4.07 +Comprehensive income: +Net income +$ +507,204 +$ +564,689 +$ +353,823 +Other comprehensive income: +Change in fair value of investments, net of tax +(87) +715 +488 +Total comprehensive income +$ +507,117 +$ +565,404 +$ +354,311 +The accompanying notes are an integral part of these consolidated financial statements. +59 +Table of Contents +CIMAREX ENERGY CO. +CONSOLIDATED STATEMENTS OF CASH FLOW S +(in thousands) +Years Ended December 31, +2014 +2013 +2012 +Cash flows from operating activities: +Net income +$ +507,204 +$ +564,689 +$ +353,823 +Adjustments to reconcile net income to net cash provided by operating activities: +Depreciation, depletion and amortization +806,021 +615,874 +513,916 +Asset retirement obligation +10,082 +7,989 +13,019 +Deferred income taxes +298,293 +329,700 +208,216 +Stock compensation +15,001 +14,279 +21,919 +(Gain) loss on derivative instruments +(3,762) +209 +(245) +Settlements on derivative instruments +7,641 +(4,088) +— +Loss on early extinguishment of debt +— +— +16,214 +Changes in non-current assets and liabilities +(2,440) +(141,215) +3,125 +Other, net +(3,828) +751 +4,728 +Changes in operating assets and liabilities: +Receivables, net +(35,133) +(64,780) +56,435 +Other current assets +(25,428) +14,234 +4,209 +Accounts payable and other current liabilities +45,714 +(13,294) +(2,595) +Net cash provided by operating activities +1,619,365 +1,324,348 +1,192,764 +Cash flows from investing activities: +Oil and gas expenditures +(2,108,250) +(1,572,288) +(1,662,707) +Sales of oil and gas assets +449,981 +61,503 +311,562 +Sales of other assets +8,413 +31,661 +1,060 +Other capital expenditures +(90,611) +(51,913) +(64,987) +Net cash used by investing activities +(1,740,467) +(1,531,037) +(1,415,072) +Cash flows from financing activities: +Net bank debt borrowings +(174,000) +174,000 +(55,000) +Proceeds from other long-term debt +750,000 +— +750,000 +Other long-term debt payments +— +— +(363,595) +Financing costs incurred +(11,616) +(100) +(13,821) +Dividends paid +(53,849) +(46,712) +(39,577) +Issuance of common stock and other +11,898 +14,494 +11,433 +Net cash provided by financing activities +522,433 +141,682 +289,440 +Net change in cash and cash equivalents +401,331 +(65,007) +67,132 +Cash and cash equivalents at beginning of period +4,531 +69,538 +2,406 +Cash and cash equivalents at end of period +$ +405,862 +$ +4,531 +$ +69,538 +The accompanying notes are an integral part of these consolidated financial statements. +60 +Table of Contents +CIMAREX ENERGY CO. +CONSOLIDATED STATEMENTS OF STOCKHOLDERS ’ EQUIT Y +(in thousands) +Accumulated +Other +Total +Common Stock +Paid-in +Retained +Comprehensive +Stockholders’ +Shares +Amount +Capital +Earnings +Income (loss) +Equity +Balance, December 31, 2011 +85,774 +$ +858 +$ +1,908,506 +$ +1,221,263 +$ +(14) +$ +3,130,613 +Dividends +— +— +— +(41,318) +— +(41,318) +Net Income +— +— +— +353,823 +— +353,823 +Unrealized change in fair value of investments, net of tax +— +— +— +— +488 +488 +Issuance of restricted stock awards +562 +5 +(5) +— +— +— +Common stock reacquired and retired +(184) +(2) +(11,015) +— +— +(11,017) +Restricted stock forfeited and retired +(141) +(1) +1 +— +— +— +Exercise of stock options +559 +6 +11,427 +— +— +11,433 +Vesting of restricted stock units +26 +— +— +— +— +— +Stock-based compensation +— +— +34,085 +— +— +34,085 +Stock-based compensation tax benefit +(3,371) +— +— +(3,371) +Balance, December 31, 2012 +86,596 +$ +866 +$ +1,939,628 +$ +1,533,768 +$ +474 +$ +3,474,736 +Dividends +— +— +— +(48,423) +— +(48,423) +Net Income +— +— +— +564,689 +— +564,689 +Unrealized change in fair value of investments, net of tax +— +— +— +— +715 +715 +Issuance of restricted stock awards +579 +6 +(6) +— +— +— +Common stock reacquired and retired +(153) +(1) +(10,100) +— +— +(10,101) +Restricted stock forfeited and retired +(171) +(2) +2 +— +— +— +Exercise of stock options +276 +3 +14,491 +— +— +14,494 +Vesting of restricted stock units +25 +— +— +— +— +— +Stock-based compensation +— +— +26,098 +— +— +26,098 +Balance, December 31, 2013 +87,152 +$ +872 +$ +1,970,113 +$ +2,050,034 +$ +1,189 +$ +4,022,208 +Dividends +— +— +— +(55,664) +— +(55,664) +Net Income +— +— +— +507,204 +— +507,204 +Unrealized change in fair value of investments, net of tax +— +— +— +— +(87) +(87) +Issuance of restricted stock awards +487 +4 +(4) +— +— +— +Common stock reacquired and retired +(123) +(1) +(13,559) +— +— +(13,560) +Restricted stock forfeited and retired +(135) +(1) +1 +— +— +— +Exercise of stock options +211 +2 +11,896 +— +— +11,898 +Stock-based compensation +— +— +28,633 +— +— +28,633 +Balance, December 31, 2014 +87,592 +$ +876 +$ +1,997,080 +$ +2,501,574 +$ +1,102 +$ +4,500,632 +The accompanying notes are an integral part of these consolidated financial statements. +61 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +1. BASI S OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES +Cimarex Energy Co., a Delaware corporation, is an independent oil and gas exploration and production company. Our operations are mainly located in Texas, Oklahoma and New Mexico. +Basis of presentation +Our Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP. Our significant accounting policies are discussed below. The accounts of Cimarex and its subsidiaries are presented in the accompanying Consolidated Financial Statements. All intercompany accounts and transactions were eliminated in consolidation. +Segment Information +We have determined that our business is comprised of only one segment because our gathering, processing and marketing activities are ancillary to our production operations and are not separately managed. +Use of estimates +The preparation of our financial statements in conformity with GAAP requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses. The more significant areas requiring the use of management’s estimates and judgments relate to the estimation of proved oil and gas reserves, the use of these oil and gas reserves in calculating depletion, depreciation, and amortization (DD&A), the use of the estimates of future net revenues in computing ceiling test limitations and estimates of future abandonment obligations used in recording asset retirement obligations, and the assessment of goodwill. +The process of estimating quantities of oil and gas reserves is complex, requiring significant decisions in the evaluation of all available geological, geophysical, engineering and economic data. The data for a given field may also change substantially over time as a result of numerous factors including, but not limited to, additional development activity, evolving production history and continual reassessment of the viability of production under varying economic conditions. As a result, material revisions to existing reserve estimates may occur from time to time. Although every reasonable effort is made to ensure that our reserve estimates represent the most accurate assessments possible, subjective decisions and available data for our various fields make these estimates generally less precise than other estimates included in financial statement disclosures. +Estimates and judgments are also required in determining allowance for doubtful accounts, impairments of undeveloped properties and other assets, purchase price allocation, valuation of deferred tax assets, fair value measurements, and commitments and contingencies. We analyze our estimates, including those related to oil, gas and NGL revenues, and base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. +Cash and Cash Equivalents +Cash and cash equivalents consist of cash in banks and investments readily convertible into cash, which have original maturities of three months or less. Cash equivalents are stated at cost, which approximates market value. +Oil and Gas Well Equipment and Supplies +Our oil and gas well equipment and supplies are valued at the lower of cost or market using weighted average cost. The steep decline in oil, gas and NGL prices has resulted in fewer drilling rigs running in the United States as companies cut back on their capital expenditures. Through the first part of February 2015, published oil rig counts are at their lowest since December 2011. The effect of lower exploration and development activity, and thus lower demand, will create downward pressure on the price of oil and gas well equipment and supplies. GAAP requires that these assets are to +62 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +be carried at the lower of cost or market. Declines in prices related to our oil and gas well equipment and supplies will likely result in impairments in future quarters. +Oil and Gas Properties +We use the full cost method of accounting for our oil and gas operations. All costs associated with property acquisition, exploration, and development activities are capitalized. Exploration and development costs include dry hole costs, geological and geophysical costs, direct overhead related to exploration and development activities, and other costs incurred for the purpose of finding oil and gas reserves. Salaries and benefits paid to employees directly involved in the exploration and development of properties, as well as other internal costs that can be directly identified with acquisition, exploration, and development activities, are also capitalized. Under the full cost method of accounting, no gain or loss is recognized upon the disposition of oil and gas properties unless such disposition would significantly alter the relationship between capitalized costs and proved reserves. +Companies that follow the full cost accounting method are required to make quarterly ceiling test calculations. This test ensures that total capitalized costs for oil and gas properties (net of accumulated DD&A and deferred income taxes) do not exceed the sum of the present value discounted at 10% of estimated future net cash flows from proved reserves, the cost of properties not being amortized, the lower of cost or estimated fair value of unproven properties included in the costs being amortized, and all related tax effects. We currently do not have any unproven properties that are being amortized. Revenue calculations in the reserves are based on the unweighted average first-day-of-the-month prices for the prior 12 months. Changes in proved reserve estimates (whether based upon quantity revisions or commodity prices) will cause corresponding changes to the full cost ceiling limitation. If net capitalized costs subject to amortization exceed this limit, the excess would be charged to expense. Any recorded impairment of oil and gas properties is not reversible at a later date. +Our quarterly and annual ceiling tests are primarily impacted by commodity prices, reserve quantities added and produced, overall exploration and development costs and depletion expense. As of December 31, 2014, the calculated value of the ceiling limitation exceeded the carrying value of our oil and gas properties subject to the test and no impairment was necessary. However, a decline of 8% or more in the value of the ceiling limitation would have resulted in an impairment. If commodity prices stay at the current early 2015 levels or decline further, we will incur full cost ceiling impairments in future quarters. Because the ceiling calculation uses rolling 12-month average commodity prices, the effect of lower quarter-over-quarter prices in 2015 compared to 2014 is a lower ceiling value each quarter. This will result in ongoing impairments each quarter until prices stabilize or improve. Impairment charges would not affect cash flow from operating activities, but would adversely affect our net income and stockholders’ equity. +Depletion of proved oil and gas properties is computed on the units- of-production method, whereby capitalized costs, including future development costs and asset retirement obligations, are amortized over total estimated proved reserves. Changes in our estimate of proved reserve quantities, commodity prices and impairment of oil and gas properties will cause corresponding changes in depletion expense in periods subsequent to these changes. +The capitalized costs of unproved properties, including those in wells in progress, are excluded from the costs being amortized. We do not have major development projects that are excluded from costs being amortized. On a quarterly basis, we evaluate excluded costs for inclusion in the costs to be amortized resulting from the determination of proved reserves or impairments. To the extent that the evaluation indicates these properties are impaired, the amount of the impairment is added to the capitalized costs to be amortized. Expenditures for maintenance and repairs are charged to production expense in the period incurred. +63 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +Fixed assets, net +Fixed assets consist primarily of gathering and plant facilities, vehicles, airplanes, office furniture, and computer equipment and software. These items are recorded at cost and are depreciated on the straight-line method based on expected lives of the individual assets, which range from 3 to 30 years. +Goodwill +Goodwill represents the excess of the purchase price of business combinations over the fair value of the net assets acquired and is tested for impairment at least annually. We first assess qualitative factors to determine whether it is more likely than not (with a greater than 50% threshold) that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. If goodwill is determined to be impaired then it is written down to a calculated fair value by charging the impairment to expense. +We evaluate our goodwill for impairment in the fourth quarter of each year or whenever events or changes in circumstances indicate the possibility that goodwill may be impaired. Based upon our qualitative assessment at December 31, 2014, goodwill was not impaired. It is possible that goodwill could become impaired in the future if commodity prices or other economic factors become less favorable. +Revenue Recognition +Oil, Gas and NGL Sales +Revenue is recorded from the sales of oil, gas and NGLs when the product is delivered at a fixed or determinable price, title has transferred and collectability is reasonably assured. There is a ready market for our products and sales occur soon after production. +Under certain contracts, when NGLs are extracted from the gas stream, processors receive a portion of the sales value from both the residue gas and the NGLs as a processing fee and remit the contractual proceeds to us. Prior to 2014, revenue was recognized net of these processing fees for residue gas and NGLs sold under these contracts as allowed under EITF 00-10 Accounting for Shipping and Handling Fees and Costs. Increasing NGL production combined with the impact of recent changes to these contracts has resulted in processing costs becoming more significant. Accordingly, we have changed our policy to record these processing costs with operating costs as allowed under EITF 00-10. Beginning in 2014, our realized prices for sales under these contracts reflect the value of 100% of the residue gas and NGLs yielded by processing, rather than the value associated with the contractual proceeds we received. The related processing fees now are included in “transportation, processing and other operating” costs. The effect of this change in 2014 was that total revenue was $51.4 million higher with an offsetting increase in total transportation, processing and other operating costs. There was no impact on operating income. Financial statements for periods prior to 2014 have not been reclassified to reflect this change in accounting treatment as it was impracticable to do so. +Marketing Sales +We market and sell natural gas for working interest owners under short term sales and supply agreements and earn a fee for such services. Revenues are recognized as gas is delivered and are reflected net of gas purchases on the consolidated statements of income and comprehensive income. +Gas Imbalances +We use the sales method of accounting for gas imbalances. Under this method, revenue is recorded on the basis of gas actually sold. Gas reserves are adjusted to the extent there are sufficient quantities of natural gas to make up an imbalance. A liability is established in situations where there are insufficient proved reserves available to make-up an overproduced imbalance. Imbalances have not been significant in the periods presented. +64 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +General and Administrative Expenses +General and administrative expenses are reported net of amounts reimbursed by working interest owners of the oil and gas properties operated by Cimarex and net of amounts capitalized pursuant to the full cost method of accounting. +Derivatives +Our derivative contracts are recorded on the balance sheet at fair value. Our firm sales contracts qualify for the normal purchase and normal sale exception. Contracts that qualify for this treatment do not require mark-to-market accounting treatment. See Note 5 for additional information regarding our derivative instruments. +Income Taxes +Cimarex records deferred tax assets and liabilities to account for the expected future tax consequences of events that have been recognized in the financial statements and tax returns. The company routinely assesses the realizability of its deferred tax assets. If the company concludes that it is more likely than not that some or all of the deferred tax assets will not be realized, the tax asset is reduced by a valuation allowance. Numerous judgments and assumptions are inherent in the determination of future taxable income, including factors such as future operating conditions (particularly as related to prevailing oil and gas prices) and changing tax laws. +The company regularly assesses and, if required, establishes accruals for tax contingencies that could result from assessments of additional tax by taxing jurisdictions where the company operates. See Note 10 for additional information regarding our income taxes. +Contingencies +A provision for contingencies is charged to expense when the loss is probable and the cost can be reasonably estimated. Determining when expenses should be recorded for these contingencies and the appropriate amounts for accrual is a complex estimation process that includes subjective judgment. In many cases, this judgment is based on interpretation of laws and regulations, which can be interpreted differently by regulators and/or courts of law. We closely monitor known and potential legal, environmental, and other contingencies and periodically determine when we should record losses for these items based on information available to us. See Note 11 for additional information regarding our contingencies. +Asset Retirement Obligations +We recognize the fair value of liabilities for retirement obligations associated with tangible long-lived assets in the period in which there is a legal obligation associated with the retirement of such assets and the amount can be reasonably estimated. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. This liability includes costs related to the abandonment of wells, the removal of facilities and equipment, and site restorations. Subsequent to initial measurement, the asset retirement liability is required to be accreted each period. If the fair value of a recorded asset retirement obligation changes, a revision is recorded to both the asset retirement obligation and the asset retirement capitalized cost. Capitalized costs are included as a component of the DD&A calculations. The current portions of the asset retirement obligations are recorded in “accrued liabilities, other” in the accompanying consolidated balance sheets and expenditures are classified as cash used in operating activities in the accompanying consolidated statements of cash flows. See Note 9 for additional information regarding our asset retirement obligations. +Stock-based Compensation +We recognize compensation related to all stock-based awards, including stock options, in the financial statements based on their estimated grant-date fair value. We grant various types of stock-based awards including stock options, restricted stock (including awards with service-based vesting and market condition-based vesting provisions) and restricted stock units. The fair value of stock option awards is determined using the Black-Scholes option pricing model. Service-based restricted stock and units are valued using the market price of our common stock on the grant date. The fair value of the market condition-based restricted stock is based on the grant-date market value of the award utilizing a statistical +65 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +analysis. Compensation cost is recognized ratably over the applicable vesting period. To the extent compensation cost relates to employees directly involved in oil and gas acquisition, exploration and development activities, such amounts are capitalized to oil and gas properties. Amounts not capitalized to oil and gas properties are recognized as stock compensation expense. See Note 7 for additional information regarding our stock-based compensation. +Earnings per Share +We calculate earnings (loss) per share recognizing that unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents are “participating securities” and therefore should be included in computing earnings per share using the two-class earnings allocation method. The two-class method is an earnings allocation formula that determines earnings per share for each class of common stock and participating security according to dividends declared (or accumulated) and participation rights in undistributed earnings. Our unvested share based payment awards, consisting of restricted stock and units qualify as participating securities. See Note 8 for additional information regarding our earnings per share. +Recently Issued Accounting Standards +In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (Topic 606). The new revenue standard provides a five-step analysis of transactions to determine when and how revenue is recognized. The core principle of the guidance is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance in this update supersedes the revenue recognition requirements in Topic 605, Revenue Recognition , and most industry-specific guidance throughout the Industry Topics of the Codification . We must comply with this ASU beginning in fiscal year 2017 and early adoption is not permitted. Entities can choose to apply the standard using either the full retrospective approach or a modified retrospective approach. We are currently evaluating the potential impact of this guidance, but at this time, do not expect that the adoption of this standard will have a material effect on our financial position or results of operation. +Subsequent Events +The accompanying financial disclosures include an evaluation of subsequent events through the date of this filing. +2. LONG-TERM DEBT +A summary of our debt is as follows: +December 31, +(in thousands) +2014 +2013 +Bank debt +$ +— +$ +174,000 +5.875% Senior Notes, due May 1, 2022 +750,000 +750,000 +4.375% Senior Notes, due June 1, 2024 +750,000 +— +Total long-term debt +$ +1,500,000 +$ +924,000 +All of our long-term debt is senior unsecured debt and is, therefore, pari passu with respect to the payment of both principal and interest. +66 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +Bank Debt +In May 2014, we amended our senior unsecured revolving credit facility (Credit Facility) to extend the maturity date two years to July 14, 2018 and lowered the margins applicable to loans and commitments. The amendment also raised our borrowing base from $2.25 billion to $2.5 billion until the next regular annual redetermination date scheduled for April 15, 2015. The borrowing base under the Credit Facility is determined at the discretion of the lenders based on the value of our proved reserves. Our aggregate commitments remained unchanged at $1 billion. +As of December 31, 2014, we had letters of credit outstanding under the Credit Facility of $2.5 million, leaving an unused borrowing availability of $997.5 million. +At our option, borrowings under the Credit Facility, as amended in May 2014, may bear interest at either (a) LIBOR plus 1.5 - 2.25%, based on our leverage ratio, or (b) the higher of (i) a prime rate, (ii) the federal funds effective rate plus 0.50%, or (iii) adjusted one-month LIBOR plus 1.0% plus, in each case, an additional 0.5 - 1.25%, based on our leverage ratio. +The Credit Facility also has financial covenants that include the maintenance of current assets (including unused bank commitments) to current liabilities of greater than 1.0. We also must maintain a leverage ratio of total debt to earnings before interest expense, income taxes and non-cash items (such as depreciation, depletion and amortization expense, unrealized gains and losses on commodity derivatives, ceiling test write-downs, and goodwill impairments) of not more than 3.5. Other covenants could limit our ability to incur additional indebtedness, pay dividends, repurchase our common stock, or sell assets. As of December 31, 2014, we were in compliance with all of the financial and non-financial covenants. +Senior Notes +In June 2014, we issued $750 million of 4.375% senior notes due 2024 and received net proceeds of $740.9 million, after deducting offering discounts and costs. The net proceeds were used to pay outstanding bank debt and for general corporate purposes. +In April 2012, we issued $750 million of 5.875% senior notes due 2022 and received net proceeds of $737.0 million, after deducting underwriting discounts and offering costs. We used a portion of the net proceeds to retire our 7.125% senior notes and the remaining proceeds were used to pay outstanding bank debt and for general corporate purposes. +In the second quarter of 2012, we completed a cash tender offer to purchase all of our outstanding 7.125% senior notes. We recognized a $16.2 million loss on early extinguishment of debt during the second quarter of 2012. +Each of our outstanding senior notes is governed by an indenture containing certain covenants, events of default and other restrictive provisions. Interest on each of the senior notes is payable semi-annually. +3. PROPERTY SALES AN D ACQUISITIONS +The following sales and acquisitions were made in the ordinary course of business. All amounts are net of customary purchase price adjustments. +We sold interests in various non-core oil and gas properties for $446.1 million during 2014. Most of the proceeds were related to sales of producing gas wells in southwestern Kansas and undeveloped acreage in Reagan County, Texas. During 2014, we made property acquisitions totaling $249.7 million, most of which were in our Cana-Woodford shale play in Western Oklahoma. +In 2013, we sold interests in non-core oil and gas assets for $61.5 million. During the second quarter of 2013, we also sold a 50% interest in our Culberson County, Texas Triple Crown gas gathering and processing system for approximately $31 million. Total property acquisitions during 2013 were $37.1 million, mostly for undeveloped acreage in Reeves County, Texas. +67 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +During 2012, we sold interests in non-core oil and gas assets for $306 million. Of this total, $290 million was related to non-core oil and gas assets located in Texas. We had property acquisitions of $33.5 million during 2012, most of which were undeveloped acreage in the Permian Basin. +4. FAIR VALUE ME ASUREMENTS +Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The FASB has established a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. This hierarchy consists of three broad levels. Level 1 inputs are the highest priority and consist of unadjusted quoted prices in active markets for identical assets and liabilities. Level 2 are inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. Level 3 are unobservable inputs for an asset or liability. +The following tables provide fair value measurement information for certain assets and liabilities as of December 31, 2014 and 2013. +December 31, 2014: +Carrying +Fair +(in thousands) +Amount +Value +Financial Assets (Liabilities): +5.875% Notes due 2022 +$ +(750,000) +$ +(776,250) +4.375% Notes due 2024 +$ +(750,000) +$ +(720,000) +December 31, 2013: +Carrying +Fair +(in thousands) +Amount +Value +Financial Assets (Liabilities): +Bank debt +$ +(174,000) +$ +(174,000) +5.875% Notes due 2022 +$ +(750,000) +$ +(799,988) +Derivative instruments — assets +$ +4,268 +$ +4,268 +Derivative instruments — liabilities +$ +(389) +$ +(389) +Assessing the significance of a particular input to the fair value measurement requires judgment, including the consideration of factors specific to the asset or liability. The following methods and assumptions were used to estimate the fair value of the liabilities in the table above. +Debt (Level 1) +The fair value of our bank debt at December 31, 2013 was estimated to approximate the carrying amount because the floating rate interest paid on such debt was set for periods of three months or less. +The fair value for our 4.375% and 5.875% fixed rate notes was based on their last traded value before year end. +Derivative Instruments (Level 2) +The fair value of our derivative instruments was estimated using internal discounted cash flow calculations. Cash flows are based on the stated contract prices and current and published forward commodity price curves, adjusted for volatility. The cash flows are risk adjusted relative to non-performance for both our counterparties and our liability positions. Please see Note 5 for further information on the fair value of our derivative instruments. +Other Financial Instruments +The carrying amounts of our cash, cash equivalents, accounts receivable, accounts payable, and accrued liabilities approximate fair value because of the short-term maturities and/or liquid nature of these assets and liabilities. Included in +68 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +“accrued liabilities, other” at December 31, 2014 and 2013, respectively, are liabilities of approximately $42.0 million and $43.7 million representing the amount by which checks issued, but not yet presented to our banks for collection, exceeded balances in applicable bank accounts. Also included in “accrued liabilities, other” at December 31, 2014 and 2013, respectively, are accrued payroll related general and administrative expenses of $44.2 million and $41.9 million. +Our accounts receivable are primarily from either purchasers of our gas, oil and NGL production (customers) or from exploration and production companies which own interests in properties we operate. This industry concentration has the potential to impact our overall exposure to credit risk, either positively or negatively, because our customers and joint working interest owners may be similarly affected by changes in industry conditions. +We conduct credit analyses prior to making any sales to new customers or increasing credit for existing customers and may require parent company guarantees, letters of credit or prepayments when deemed necessary. +We routinely assess the recoverability of all material accounts receivable to determine their collectability. We accrue a reserve to the allowance for doubtful accounts when it is probable that a receivable will not be collected and the amount of the reserve may be reasonably estimated. At December 31, 2014, the allowance for doubtful accounts totaled $1.5 million. At December 31, 2013, the allowance for doubtful accounts was $6.0 million. +Major Customers +Our major customers during 2014 were Enterprise Products Partners L.P. (Enterprise), Sunoco Logistics Partners L.P. (Sunoco) and Oneok Partners, L.P. (Oneok). Enterprise and Sunoco each accounted for 19% of our consolidated revenues in 2014 . Oneok accounted for 10% of our 2014 consolidated revenues. During 2013, Enterprise and Sunoco were our major customers and accounted for 24% and 22% of our consolidated revenues, respectively. +Enterprise is a significant oil purchaser in Oklahoma and West Texas. Sunoco is a significant purchaser of our oil in Southeast New Mexico and Canadian County, Oklahoma. If either of these entities were to stop purchasing our production, we believe there are a number of other purchasers to whom we could sell our production with some delay. If both parties were to discontinue purchasing our product, there would be challenges initially, but ample markets to handle the disruption. +Oneok primarily purchases our NGLs and provides gathering, compression and processing services for the majority of our Mid-Continent region gas production. In the event Oneok ceased buying our NGLs, a minimal impact would occur as these products are piped to various processing and storage market areas where we could sell to a different purchaser. In the event Oneok ceased gathering, compressing, and processing our gas, there would be challenges initially, but several other entities exist to fill in the gap. +5. DERIVATIVE INSTR UMENTS/HEDGING +We periodically enter into derivative instruments to mitigate a portion of our potential exposure to a decline in commodity prices and the corresponding negative impact on cash flow available for reinvestment. While the use of these instruments limits the downside risk of adverse price changes, their use may also limit future revenues from favorable price changes. +We have elected not to account for our derivatives as cash flow hedges. Therefore, we recognize settlements and changes in the assets or liabilities relating to our open derivative contracts in earnings. Cash settlements of our contracts are included in cash flows from operating activities in our statements of cash flows. +69 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +The following table presents the net gains and (losses) from settlements and changes in fair value of our derivative contracts, and the gains (losses) only from settlements during the periods shown below. +(in thousands) +2014 +2013 +2012 +Gain (loss) on derivative instruments, net +$ +3,762 +$ +(209) +$ +245 +Settlement gains (losses) +$ +7,641 +$ +(4,088) +$ +— +Our derivative contracts are carried at their fair value on our balance sheet using Level 2 inputs and are subject to enforceable master netting arrangements, which allow us to offset recognized asset and liability fair value amounts on contracts with the same counterparty. Our policy is to not offset asset and liability positions in our accompanying balance sheets. We entered into oil and gas contracts at the end of 2013 and the beginning of 2014. All of these contracts were settled as of December 31, 2014 and we have not entered into any new contracts. Depending on oil and gas futures markets and management’s view of underlying supply and demand trends, we may hedge in the future. +The following table presents the amounts and classifications of our derivative assets and liabilities as of December 31, 2013, as well as the potential effect of netting arrangements on contracts with the same counterparty. +December 31, 2013: +(in thousands) +Balance Sheet Location +Asset +Liability +Oil contracts +Current assets — Derivative instruments +$ +1,805 +$ +— +Natural gas contracts +Current assets — Derivative instruments +2,463 +— +Oil contracts +Current liabilities — Derivative instruments +— +389 +Total gross amounts presented in accompanying balance sheet +4,268 +389 +Less: gross amounts not offset in the accompanying balance sheet +(389) +(389) +Net amount: +$ +3,879 +$ +— +We were exposed to financial risks associated with our derivative contracts from non-performance by our counterparties. We mitigated our exposure to any single counterparty by contracting with a number of financial institutions, each of which had a high credit rating and was a member of our bank credit facility. Our member banks do not require us to post collateral for our hedge liability positions. Because some of the member banks have discontinued hedging activities, in the future we may hedge with counterparties outside our bank group to obtain competitive terms and to spread counterparty risk. +6. CAPITAL STOCK +Authorized capital stock consists of 200 million shares of common stock and 15 million shares of preferred stock. At December 31, 2014, there were no shares of preferred stock outstanding. See our Consolidated Statements of Stockholders’ Equity for detailed capital stock activity. +Dividends +A cash dividend has been paid to stockholders in every quarter since the first quarter of 2006. In February 2014, the quarterly dividend was increased to $0.16 per share from $0.14 per share. Future dividend payments will depend on our level of earnings, financial requirements and other factors considered relevant by the Board of Directors. +2014 +2013 +2012 +Dividend declared (in millions) +$ +55.7 +$ +48.4 +$ +41.3 +Dividend per share +$ +0.64 +$ +0.56 +$ +0.48 +70 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +7. STOCK-BASED and OT HER COMPENSATION +We have recognized non-cash stock-based compensation cost as follows: +Years Ended December 31, +(in thousands) +2014 +2013 +2012 +Performance stock awards +$ +12,141 +$ +11,105 +$ +19,066 +Service-based stock awards +13,607 +12,018 +12,231 +Restricted stock awards +25,748 +23,123 +31,297 +Stock option awards +3,057 +3,145 +2,889 +28,805 +26,268 +34,186 +Less amounts capitalized to oil and gas properties +(13,804) +(11,989) +(12,267) +Compensation expense +$ +15,001 +$ +14,279 +$ +21,919 +Historical amounts may not be representative of future amounts as additional awards may be granted. The 2012 compensation cost for the performance awards includes $3.9 million of accelerated vesting related to the death of former Chairman, F.H. Merelli. In addition, the 2013 cost for performance awards is approximately $4.3 million lower than 2012 costs due to the timing of awards granted. Almost all of the performance awards granted in 2013 were awarded in mid-December. Awards granted in early January of 2010 were fully amortized in January of 2013, resulting in 2013 having less costs amortized during the year. +Equity Incentive Plan +Our 2014 Equity Incentive Plan (the 2014 Plan) was approved by stockholders in May 2014 and our previous plan was terminated at that time. Outstanding awards under the previous plan were not impacted. A total of 6.6 million shares of common stock may be issued under the 2014 Plan, including shares available from the previous plan. The primary purposes of the 2014 Plan are to increase the number of shares available in connection with awards, provide flexibility in the types of available awards and design of awards, modify certain individual award limits and revise the performance measures for qualified performance-based awards. The 2014 Plan provides for grants of stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, performance units, dividend equivalents and other stock-based awards. +Restricted Stock +The following table provides information about restricted stock awards granted during the last three years. +Years Ended December 31, +2014 +2013 +2012 +Weighted +Weighted +Weighted +Average +Average +Average +Number +Grant-Date +Number +Grant-Date +Number +Grant-Date +of Shares +Fair Value +of Shares +Fair Value +of Shares +Fair Value +Performance stock awards +316,441 +$ +83.22 +298,000 +$ +77.75 +262,770 +$ +43.22 +Service-based stock awards +170,402 +$ +136.72 +281,236 +$ +72.89 +299,499 +$ +54.17 +Total restricted stock awards +486,843 +$ +101.95 +579,236 +$ +75.39 +562,269 +$ +49.05 +Performance awards were granted to eligible executives and are subject to market condition-based vesting determined by our stock price performance relative to a defined peer group’s stock price performance. After three years of continued service, an executive will be entitled to vest in 50% to 100% of the award. In accordance with Internal Revenue +71 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +Code Section 162(m), certain of the amounts awarded may not be deductible for tax purposes. Service-based stock awards granted to other eligible employees and non-employee directors have vesting schedules of three to five years. +Compensation cost for the performance stock awards is based on the grant-date fair value of the award utilizing a Monte Carlo simulation model. Compensation cost for the service-based vesting restricted shares is based upon the grant-date market value of the award. Such costs are recognized ratably over the applicable vesting period. +The following table provides information on restricted stock activity during the year. +Performance +Service-based +(subject to market conditions) +Weighted +Weighted +Average +Average +Grant-Date +Grant-Date +Awards +Fair Value +Awards +Fair Value +Outstanding beginning of period +1,035,032 +$ +68.41 +828,802 +$ +65.27 +Vested +(106,817) +$ +37.91 +(195,664) +$ +73.01 +Granted +170,402 +$ +136.72 +316,441 +$ +83.22 +Canceled +(62,200) +$ +69.91 +(72,368) +$ +73.01 +Outstanding end of period +1,036,417 +$ +82.69 +877,211 +$ +69.38 +The total fair value of restricted stock that vested was $ 34.1 million in 2014, $ 25.7 million in 2013, and $ 36.0 million in 2012. +Unrecognized compensation cost related to unvested restricted shares at December 31, 2014 was $ 83.9 million. We expect to recognize that cost over a weighted average period of 2.2 years. +Restricted Units +As of December 31, 2014 and 2013, we had 8,838 restricted units outstanding. These represent restricted units held by a non-employee director who has elected to defer payment of common stock represented by the units until termination of his service on the Board of Directors. +Stock Options +Options that have been granted under the 2014 plan and previous plans expire seven to ten years from the grant date and have service-based vesting schedules of three to five years. The exercise price for an option under the 2014 plan is the closing price of our common stock as reported by the New York Stock Exchange (NYSE) on the date of grant. The previous plans provided that all grants have an exercise price of the average of the high and low prices of our common stock as reported by the NYSE on the date of grant. +Compensation cost related to stock options is based on the grant-date fair value of the award, recognized ratably over the applicable vesting period. We estimate the fair value using the Black-Scholes option-pricing model. Expected volatilities are based on the historical volatility of our common stock. We also use historical data to estimate the probability of option exercise, expected years until exercise and potential forfeitures. We use U.S. Treasury bond rates in effect at the grant date for our risk-free interest rates. +72 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +The following summarizes the options granted and related information, and the assumptions used to determine the fair value of those options. +Years Ended December 31, +2014 +2013 +2012 +Options granted +82,500 +144,400 +152,800 +Weighted average grant-date fair value +$ +41.69 +$ +21.64 +$ +20.55 +Weighted average exercise price +$ +139.02 +$ +72.25 +$ +51.92 +Total Fair Value (in thousands) +$ +3,439 +$ +3,125 +$ +3,140 +Expected years until exercise +4.0 +4.0 +5.3 +Expected stock volatility +36.7 +% +38.6 +% +47.4 +% +Dividend yield +0.5 +% +0.8 +% +0.9 +% +Risk-free interest rate +1.8 +% +1.4 +% +0.6 +% +Information about outstanding stock options is summarized below. +Weighted +Weighted +Aggregate +Average +Average +Intrinsic +Exercise +Remaining +Value +Options +Price +Term +(in thousands) +Outstanding as of January 1, 2014 +531,016 +$ +59.78 +Exercised +(211,258) +$ +56.32 +Granted +82,500 +$ +139.02 +Forfeited +(18,176) +$ +70.67 +Outstanding as of December 31, 2014 +384,082 +$ +78.19 +5.0 +Years +$ +13,260 +Exercisable as of December 31, 2014 +178,926 +$ +59.19 +4.1 +Years +$ +8,319 +The following table provides information regarding options exercised and the grant-date fair value of options vested. +Years Ended December 31, +(in thousands) +2014 +2013 +2012 +Number of options exercised +211,258 +276,069 +558,419 +Cash received from option exercises +$ +11,899 +$ +14,494 +$ +11,433 +Tax benefit from option exercises included in paid-in-capital (1) +$ +— +$ +— +$ +76 +Intrinsic value of options exercised +$ +15,384 +$ +10,109 +$ +22,482 +Grant-date fair value of options vested +$ +4,419 +$ +2,521 +$ +2,560 +(1) +No tax benefit is recorded until the benefit reduces current taxes payable. +73 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +The following summary reflects the status of non-vested stock options as of December 31, 2014 and changes during the year. +Weighted +Weighted +Average +Average +Grant-Date +Exercise +Options +Fair Value +Price +Non-vested as of January 1, 2014 +343,014 +$ +21.64 +$ +63.81 +Vested +(202,182) +$ +21.86 +$ +62.48 +Granted +82,500 +$ +41.69 +$ +139.02 +Forfeited +(18,176) +$ +23.24 +$ +70.67 +Non-vested as of December 31, 2014 +205,156 +$ +29.35 +$ +94.76 +As of December 31, 2014, there was $ 4.1 million of unrecognized compensation cost related to non-vested stock options. We expect to recognize that cost on a pro rata basis over a weighted average period of 1.8 years. +Other Compensation +We maintain and sponsor a contributory 401(k) plan for our employees. Annual costs related to the plan were $ 11.0 million for 2014. During 2013 and 2012, such costs were $9.0 million and $8.2 million, respectively. +8. EARNINGS P ER SHARE +The calculations of basic and diluted net earnings per common share under the two-class method are presented below. +Years Ended December 31, +(in thousands, except per share data) +2014 +2013 +2012 +Basic: +Net income +$ +507,204 +$ +564,689 +$ +353,823 +Participating securities’ share in earnings +(9,906) +(11,091) +(6,753) +Net income applicable to common stockholders +$ +497,298 +$ +553,598 +$ +347,070 +Diluted: +Net income +$ +507,204 +$ +564,689 +$ +353,823 +Participating securities’ share in earnings +(9,891) +(11,076) +(6,732) +Net income applicable to common stockholders +$ +497,313 +$ +553,613 +$ +347,091 +Shares: +Basic shares outstanding +85,679 +85,288 +84,757 +Incremental shares from assumed exercise of stock options +131 +121 +277 +Fully diluted common stock +85,810 +85,409 +85,034 +Excluded (1) +94 +251 +414 +Earnings per share to common stockholders (2): +Basic +$ +5.79 +$ +6.48 +$ +4.08 +Diluted +$ +5.78 +$ +6.47 +$ +4.07 +(1) +Inclusion of certain outstanding stock options would have an anti-dilutive effect. +(2) +Earnings per share are based on actual figures rather than the rounded figures presented. +74 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +9. ASSET RETIREM ENT OBLIGATIONS +The following table reflects the components of the change in the carrying amount of the asset retirement obligation for the years ended December 31, 2014 and 2013. +(in thousands) +2014 +2013 +Asset retirement obligation at January 1, +$ +154,026 +$ +185,138 +Liabilities incurred +13,015 +5,547 +Liability settlements and disposals +(27,036) +(47,842) +Accretion expense +7,583 +7,871 +Revisions of estimated liabilities +25,420 +3,312 +Asset retirement obligation at December 31, +173,008 +154,026 +Less current obligation +13,216 +27,058 +Long-term asset retirement obligation +$ +159,792 +$ +126,968 +During 2014, the liability settlements and disposals included $11.2 million related to properties that were sold. Also during this period we recognized revisions of estimated liabilities totaling $25.4 million, which were due to changes in abandonment cost and timing estimates. During 2013, the liability settlements and disposals included $4.4 million related to properties that were sold. +10. INCOME TAXES +Federal income tax expense (benefit) for the years presented differs from the amounts that would be provided by applying the U.S. Federal income tax rate, primarily due to the effect of state income taxes. The components of the provision for income taxes are as follows: +Years Ended December 31, +(in thousands) +2014 +2013 +2012 +Current Taxes: +Federal (benefit) +$ +— +$ +(381) +$ +(1,629) +State (benefit) +404 +(308) +140 +404 +(689) +(1,489) +Deferred taxes: +Federal +282,729 +315,165 +199,459 +State +15,564 +14,535 +8,757 +298,293 +329,700 +208,216 +$ +298,697 +$ +329,011 +$ +206,727 +Reconciliations of the income tax expense calculated at the federal statutory rate of 35% to the total income tax expense are as follows: +Years Ended December 31, +(in thousands) +2014 +2013 +2012 +Provision at statutory rate +$ +282,066 +$ +312,795 +$ +196,192 +Effect of state taxes +15,826 +14,226 +8,902 +Domestic Production Activities allowance +— +— +567 +Other permanent differences +805 +1,990 +1,066 +Income tax expense +$ +298,697 +$ +329,011 +$ +206,727 +75 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +The components of Cimarex’s net deferred tax liabilities are as follows: +December 31, +(in thousands) +2014 +2013 +Long-term: +Assets: +Stock compensation and other accrued amounts +$ +26,527 +$ +24,815 +Net operating loss carryforward, net of valuation allowance +218,584 +207,282 +Credit carryforward +4,068 +4,068 +249,179 +236,165 +Liabilities: +Property, plant and equipment +(2,003,885) +(1,696,006) +Net, long-term deferred tax liability +(1,754,706) +(1,459,841) +Current: +Assets: +Other accrued amounts +13,475 +16,854 +13,475 +16,854 +Net deferred tax liabilities +$ +(1,741,231) +$ +(1,442,987) +At December 31, 2014, the company had a U.S. net tax operating loss carryforward of approximately $ 651.1 million, which would expire in years 2031 through 2034. We believe that the carryforward will be utilized before it expires. The c ompany recorded an increase to its net operating loss carryforward at December 31, 2014 for certain state losses. A corresponding valuation allowance of $19.1 million was established since it is not more likely than not that these additional state net operating losses will be utilized before they expire. The amount of the U.S. net tax operating loss carryforward that will be recorded to equity when utilized to reduce taxes payable is $ 83.1 million. We also had an alternative minimum tax credit carryforward of approximately $ 4.1 million. +At December 31, 2014 and 2013, we had no unrecognized tax benefits that would impact our effective rate and we have made no provisions for interest or penalties related to uncertain tax positions. The tax years 2011 through 2013 remain open to examination by the Internal Revenue Service of the United States. We file tax returns with various state taxing authorities which remain open to examination for the 2010 through 2013 tax years. +11. COMMITMENTS AN D CONTINGENCIES +Lease Commitments +We have various commitments for office space and equipment under operating lease arrangements. Rent expense for the operating leases totaled $14.3 million in 2014. Rent expense was $13.2 million and $5.7 million for 2013 and 2012, respectively. The increases in rent expense over the periods were due to additional costs associated with office relocations and entering into new lease arrangements. +76 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +Shown below are future minimum cash payments required under these leases as of December 31, 2014. +(in thousands) +Operating +Leases +2015 +$ +10,166 +2016 +11,261 +2017 +10,789 +2018 +10,416 +2019 +10,522 +Later years +67,795 +Total future minimum lease payments +$ +120,949 +Other Commitments +We have commitments of $207.7 million to finish drilling and completing wells in progress at December 31, 2014. We also have various commitments for drilling rigs. The total minimum expenditure commitments under these agreements are $51.7 million. +In New Mexico and Texas, we are constructing gathering facilities and pipelines. At December 31, 2014, we had commitments of $6.9 million relating to these construction projects. +At December 31, 2014, we had firm sales contracts to deliver approximately 30.8 Bcf of natural gas over the next 12 months. If this gas is not delivered, our financial commitment would be approximately $91.7 million. This commitment will fluctuate due to price volatility and actual volumes delivered. However, we believe no financial commitment will be due based on our current proved reserves and production levels. +We have other various transportation and delivery commitments in the normal course of business, which are not material individually or in the aggregate. +All of the noted commitments were routine and were made in the normal course of our business. +Litigation +In the normal course of business, we have various litigation matters. We assess the probability of estimable amounts related to litigation matters in accordance with guidance established by the FASB and adjust our accruals accordingly. Though some of the related claims may be significant, the resolution of them we believe, individually or in the aggregate, would not have a material adverse effect on our financial condition or results of operations after consideration of current accruals. +H.B. Krug, et al. versus H&P +In 2008, we recorded litigation expense of $119.6 million for the H.B. Krug, et al. v. Helmerich & Payne, Inc. (H&P) lawsuit, and began accruing additional post-judgment interest and costs for this case. +Over the years, the lawsuit has been disputed until December 13, 2013 when the Oklahoma Supreme Court reversed the Tulsa County District Court’s original judgment of $119.6 million and affirmed an alternative jury verdict for $3.65 million. It also remanded the case back to the trial court for consideration of potential prejudgment interest, attorney’s fees and cost awards. Accordingly, on December 31, 2013 we reduced the previously recognized litigation expense, which included related interest and costs, and the associated long-term liability by $142.8 million. +77 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +On April 1, 2014, Cimarex paid the Plaintiffs $15.8 million in satisfaction of the $3.65 million damages award, the post-judgment interest award and the payment in lieu of bond, all of which are now final and not appealable. On June 24, 2014, the trial court ruled the Plaintiffs were not entitled to prejudgment interest but were entitled to attorney’s fees and costs, the amount of which will be determined at a subsequent hearing. On July 31, 2014, the Plaintiffs appealed the trial court’s denial of prejudgment interest, which will be determined by the Oklahoma Supreme Court. The outcome of these remaining issues cannot be determined, and our current estimates and assessments likely will change, as a result of these future legal proceedings. +Hitch Enterprises, Inc. et al. v. Cimarex Energy Co. +On December 11, 2012, Cimarex entered into a preliminary resolution of the Hitch Enterprises, Inc., et al. v. Cimarex Energy Co., et al. ( Hitch ) litigation matter for $16.4 million. Hitch is a statewide royalty class action pending in the Federal District Court in Oklahoma City, Oklahoma. The settlement was reached at a mediation, which occurred after the parties began to exchange information, including damage analyses, on November 16, 2012. On July 2, 2013, the Court entered a judgment approving the parties’ settlement. The judgment became final and unappealable on August 2, 2013. Cimarex distributed the settlement proceeds pursuant to the Court’s order in September 2013 and the administration of the settlement is ongoing. In the fourth quarter of 2012, we accrued $16.4 million for this matter. +12. RELATED PARTY TRA NSACTIONS +Helmerich & Payne, Inc. (H&P) provides contract drilling services to Cimarex. Drilling costs of approximately $18.4 million were incurred by Cimarex related to such services for 2014. During 2013 and 2012, such costs were $17.0 million and $20.8 million, respectively. Hans Helmerich, a director of Cimarex, is Chairman of the Board of Directors of H&P. +Jerry Box, a director of Cimarex, was the non-executive Chairman of the Board of Newpark through May 2014. Certain subsidiaries of Newpark Resources, Inc. have provided various drilling services to Cimarex. Costs of such services were $0.6 million through May 2014. During 2013 and 2012, such costs were $3.5 million and $4.1 million, respectively. +13. SUPPLEMENTAL DISC LOSURE OF CASH FLOW INFORMATION +Years Ended December 31, +(in thousands) +2014 +2013 +2012 +Cash paid during the period for: +Interest expense (including capitalized amounts) +$ +66,167 +$ +50,754 +$ +42,420 +Interest capitalized +$ +32,623 +$ +29,098 +$ +30,255 +Income taxes +$ +354 +$ +205 +$ +377 +Cash received for income taxes +$ +460 +$ +966 +$ +49,754 +78 +Table of Contents +SUPPLEMENTAL OIL AND GAS INFORMATION (UNAUDITED) +Oil and Gas Reserve Information —Proved reserve quantities are based on estimates prepared by Cimarex in accordance with guidelines established by the Securities and Exchange Commission (SEC). +Reserve definitions comply with definitions of Rules 4-10(a) (1)-(32) of Regulation S-X of the SEC. All of our reserve estimates are maintained by our internal Corporate Reservoir Engineering group, which is comprised of reservoir engineers and engineering technicians. The objectives and management of this group are separate from and independent of the exploration and production functions of our company. The technical employee primarily responsible for overseeing the reserve estimation process is our company’s Vice President of Corporate Engineering. This individual graduated from the Colorado School of Mines with a Bachelor of Science degree in Engineering and has more than 20 years of practical experience in reserve evaluation. He has been directly involved in the annual reserve reporting process of Cimarex since 2002 and has served in his current role for the past ten years. +DeGolyer and MacNaughton, an independent petroleum engineering consulting firm, reviewed greater than 80% of the total future net revenue discounted at 10% attributable to the total interests owned by Cimarex as of December 31, 2014. The individual primarily responsible for overseeing the review is a Senior Vice President with DeGolyer and MacNaughton and a Registered Professional Engineer in the State of Texas with over 40 years of experience in oil and gas reservoir studies and evaluations. +Proved reserves are those quantities of oil, NGL and gas, which, by analysis of geosciences and engineering data, can be estimated with reasonable certainty to be economically producible—from a given date forward, from known reservoirs, and under existing economic conditions, operating methods, and government regulations—prior to the time at which contracts providing the right to operate expire, unless evidence indicates that renewal is reasonably certain, regardless of whether deterministic or probabilistic methods are used for the estimation. The project to extract the hydrocarbons must have commenced or the operator must be reasonably certain that it will commence the project within a reasonable time. +There are numerous uncertainties inherent in estimating quantities of proved reserves and projecting future rates of production and the timing of development expenditures. The estimation of our proved reserves employs one or more of the following: production trend extrapolation, analogy, volumetric assessment and material balance analysis. Techniques including review of production and pressure histories, analysis of electric logs and fluid tests, and interpretations of geologic and geophysical data are also involved in this estimation process. +79 +Table of Contents +The following reserve data represents estimates only and should not be construed as being exact. +Total Gas +Gas +Oil +NGL +Equivalents +(MMcf) +(MBbl) +(MBbl) +(MMcfe) +Total proved reserves: +December 31, 2011 +1,216,441 +72,322 +65,815 +2,045,265 +Revisions of previous estimates +(211,401) +(3,154) +(4,492) +(257,276) +Extensions and discoveries +372,459 +27,817 +36,324 +757,307 +Purchases of reserves +50 +14 +2 +145 +Production +(118,495) +(11,516) +(6,952) +(229,299) +Sales of properties +(7,191) +(7,562) +(788) +(57,298) +December 31, 2012 +1,251,863 +77,921 +89,909 +2,258,844 +Revisions of previous estimates +(101,235) +(2,942) +(16,197) +(216,068) +Extensions and discoveries +280,619 +48,010 +26,431 +727,267 +Purchases of reserves +263 +27 +9 +479 +Production +(125,248) +(13,380) +(7,876) +(252,787) +Sales of properties +(12,762) +(1,103) +(232) +(20,771) +December 31, 2013 +1,293,500 +108,533 +92,044 +2,496,964 +Revisions of previous estimates +85,533 +(1,039) +4,262 +104,873 +Extensions and discoveries +420,442 +29,155 +36,424 +813,911 +Purchases of reserves +88,227 +1,383 +6,186 +133,641 +Production +(155,128) +(15,639) +(11,343) +(317,022) +Sales of properties +(65,841) +(3,401) +(2,300) +(100,044) +December 31, 2014 +1,666,733 +118,992 +125,273 +3,132,323 +Proved developed reserves: +December 31, 2011 +989,511 +68,250 +44,755 +1,667,541 +December 31, 2012 +985,352 +73,524 +63,757 +1,809,037 +December 31, 2013 +1,060,704 +86,665 +69,089 +1,995,233 +December 31, 2014 +1,263,957 +100,050 +89,630 +2,402,033 +Proved undeveloped reserves: +December 31, 2011 +226,930 +4,072 +21,060 +377,724 +December 31, 2012 +266,511 +4,397 +26,152 +449,807 +December 31, 2013 +232,796 +21,868 +22,955 +501,731 +December 31, 2014 +402,776 +18,942 +35,643 +730,290 +During 2014, we added 813.9 Bcfe of proved reserves through extensions and discoveries, primarily in the Mid-Continent and Permian Basin. In the Mid-Continent, we added 80.4 Bcfe from wells drilled. We also added 496.6 Bcfe of proved undeveloped (PUD) reserves in our Can-Woodford shale area. In the Permian Basin, development drilling added 234.3 Bcfe. +During 2014, we had net positive reserve revisions of 105 Bcfe. This included positive revisions of 16 Bcfe due to prices offset by negative revisions of 25 Bcfe due to increases in operating expenses which shortened the economic lives of properties. Performance revisions were a net positive of roughly 114 Bcfe. This net increase was due to better than expected performance of PUD reserves converted to proved developed reserves during the year (125 Bcfe) and positive adjustments to previously booked PUD reserves (10 Bcfe) offset by 21 Bcfe of net negative revisions primarily attributed to Cana-Woodford wells impacted by infill drilling. +80 +Table of Contents +During 2013, we added 727.3 Bcfe of proved reserves through extensions and discoveries, primarily in the Permian Basin and Cana-Woodford area. We added 489.4 Bcfe in the Permian Basin (288.2 Bcfe development drilling and 201.2 Bcfe in proved undeveloped reserves). Of this amount, 52% consisted of oil. In our western Oklahoma Cana-Woodford shale area, we added 44.9 Bcfe from wells drilled and 179.9 Bcfe of PUD reserves. +During 2013, we had net negative reserve revisions of 216 Bcfe. Approximately 208 Bcfe of the net negative revisions relates to performance of certain wells drilled in our Cana-Woodford shale development project. Negative revisions resulted from poorer than expected production performance of PUD reserves converted to proved developed reserves during the year (72 Bcfe); wells adversely impacted by infill drilling and/or exhibiting poorer than expected performance (60 Bcfe); the removal of PUD locations due to altered future drilling plans (40 Bcfe); and adjustments to previously booked PUD reserves based on actual results observed in 2013 (36 Bcfe). The remainder of net negative revisions relates to offsetting increases and decreases primarily associated with higher commodity prices and increased operating expenses. +In 2012, we added 757.3 Bcfe of proved reserves through extensions and discoveries. In our western Oklahoma Cana-Woodford shale area, we added 202.5 Bcfe from infill wells drilled and 315.9 Bcfe of PUD reserves. Development drilling in the Permian Basin added 229.2 Bcfe. +Approximately 72 Bcfe of the 257.3 Bcfe net negative revisions during 2012 related to production performance of certain wells drilled in our Cana-Woodford shale project. The remainder of the net negative revisions primarily resulted from decreases in prices (91 Bcfe), increases in operating expenses (21 Bcfe) which shortened the economic lives, adjustments to previously booked PUD reserves (25 Bcfe) and the removal of PUD locations due to altered future drilling plans (42 Bcfe). +At December 31, 2014, we had PUD reserves of 730 Bcfe, up 228 Bcfe from 502 Bcfe of PUDs at December 31, 2013. Changes in our PUD reserves are summarized in the table below (in Bcfe). +PUD reserves at December 31, 2013 +501.7 +Converted to developed +(279.7) +Additions +496.6 +Acquisitions +1.9 +Net revisions +9.8 +PUD reserves at December 31, 2014 +730.3 +During 2014, we invested $ 503.5 million to develop and convert 56% of our 2013 PUD reserves to proved developed reserves. A portion of the development costs were on PUD locations that are expected to be converted to developed in subsequent periods. During 2013, we invested $255.5 million for conversion of PUD reserves to proved developed reserves, converting 56% of our 2012 PUD reserves. +All 497 Bcfe of PUD reserve additions occurred in our western Oklahoma, Cana - Woodford shale play. Roughly 88% of our PUD reserves are associated with this area. The remainder of our PUD reserves is found in the Permian Basin. We have no PUD reserves that have remained undeveloped for five years or more after initial disclosure. We have no PUD reserves whose scheduled delay to initiation of development is beyond five years of initial booking. +81 +Table of Contents +Costs Incurred —The following table sets forth the capitalized costs incurred in our oil and gas production, exploration, and development activities. +Years Ended December 31, +(in thousands) +2014 +2013 +2012 +Costs incurred during the year: +Acquisition of properties +Proved +$ +138,508 +$ +682 +$ +2,645 +Unproved +277,099 +195,121 +117,695 +Exploration +50,271 +52,672 +109,169 +Development +1,664,877 +1,354,098 +1,426,918 +Oil and gas expenditures +2,130,755 +1,602,573 +1,656,427 +Property sales +(446,107) +(61,503) +(305,862) +1,684,648 +1,541,070 +1,350,565 +Asset retirement obligation, net +27,243 +4,426 +12,525 +$ +1,711,891 +$ +1,545,496 +$ +1,363,090 +Aggregate Capitalized Costs —The table below reflects the aggregate capitalized costs relating to our oil and gas producing activities at December 31, 2014. +(in thousands) +Proved properties +$ +14,402,064 +Unproved properties and properties under development, not being amortized +759,149 +15,161,213 +Less-accumulated depreciation, depletion and amortization +(8,257,502) +Net oil and gas properties +$ +6,903,711 +Costs Not Being Amortized —The following table summarizes oil and gas property costs not being amortized at December 31, 2014, by year that the costs were incurred. +(in thousands) +2014 +$ +428,551 +2013 +158,038 +2012 +33,428 +2011 and prior +139,132 +$ +759,149 +Of the costs not being amortized, $172.5 million (23%) relates to unevaluated wells in progress and $61.2 million (8%) is capitalized interest. The remaining $525.4 million is for land and seismic expenditures, most of which were for costs invested in our Cana-Woodford shale project ($251.0 million) and our Permian Basin region ($208.9 million). On a quarterly basis, all of these costs are evaluated for inclusion in the costs to be amortized resulting from the determination of proved reserves, impairments or reductions in value. We expect to include these costs in the amortization computation as we continue with our exploration and development plans over the next five years. +82 +Table of Contents +Oil and Gas Operations —The following table contains direct revenue and cost information relating to our oil and gas exploration and production activities for the periods indicated. We have no long-term supply or purchase agreements with governments or authorities in which we act as producer. Income tax expense related to our oil and gas operations are computed using the effective tax rate for the period. +Years Ended December 31, +(in thousands, except per Mcfe) +2014 +2013 +2012 +Oil, gas and NGL revenues from production +$ +2,372,829 +$ +1,952,505 +$ +1,581,650 +Less operating costs and income taxes: +Depletion +773,817 +584,628 +484,529 +Asset retirement obligation +10,082 +7,989 +13,019 +Production +342,304 +286,742 +258,584 +Transportation, processing and other operating +195,414 +93,580 +57,354 +Taxes other than income +128,793 +112,732 +86,994 +Income tax expense +341,848 +319,082 +251,215 +1,792,258 +1,404,753 +1,151,695 +Results of operations from oil and gas producing activities +$ +580,571 +$ +547,752 +$ +429,955 +Depletion rate per Mcfe +$ +2.44 +$ +2.31 +$ +2.11 +Standardized Measure of Future Net Cash Flows —The “Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil and Gas Reserves” (Standardized Measure) is calculated in accordance with guidance provided by the FASB. The Standardized Measure does not purport, nor should it be interpreted, to present the fair value of a company’s proved oil and gas reserves. Fair value would require, among other things, consideration of expected future economic and operating conditions, a discount factor more representative of the time value of money, and risks inherent in reserve estimates. +Under the Standardized Measure, future cash inflows are based upon the forecasted future production of year-end proved reserves. Future cash inflows are then reduced by estimated future production and development costs to determine net pre-tax cash flow. Future income taxes are computed by applying the statutory tax rate to the excess of pre-tax cash flow over our tax basis in the associated oil and gas properties. Tax credits and permanent differences are also considered in the future income tax calculation. Future net cash flow after income taxes is discounted using a 10% annual discount rate to arrive at the Standardized Measure. +The following summary sets forth our Standardized Measure. +December 31, +(in thousands) +2014 +2013 +2012 +Cash inflows +$ +19,892,471 +$ +16,565,980 +$ +12,384,251 +Production costs +(5,777,710) +(5,000,004) +(3,684,875) +Development costs +(1,453,860) +(1,113,743) +(562,994) +Income tax expense +(3,768,780) +(3,099,304) +(2,368,115) +Net cash flow +8,892,121 +7,352,929 +5,768,267 +10% annual discount rate +(4,539,276) +(3,754,035) +(2,859,566) +Standardized measure of discounted future net cash flow +$ +4,352,845 +$ +3,598,894 +$ +2,908,701 +The estimates of cash flows and reserve quantities shown above are based upon the unweighted average 12-month-first-day-of-the-month benchmark prices. If future gas sales are covered by contracts at specified prices, the contract prices would be used. Fluctuations in prices are due to supply and demand and are beyond our control. +83 +Table of Contents +The following average prices were used in determining the Standardized Measure as of: +December 31, +2014 +2013 +2012 +Gas price per Mcf +$ +3.61 +$ +3.01 +$ +2.27 +Oil price per Bbl +$ +86.85 +$ +92.74 +$ +88.91 +NGL price per Bbl +$ +28.23 +$ +28.42 +$ +29.12 +The following are the principal sources of change in the Standardized Measure. +December 31, +(in thousands) +2014 +2013 +2012 +Standardized Measure, beginning of period +$ +3,598,894 +$ +2,908,701 +$ +3,139,750 +Sales, net of production costs +(1,706,318) +(1,459,451) +(1,178,718) +Net change in sales prices, net of production costs +(166,746) +371,563 +(957,606) +Extensions and discoveries, net of future production and development costs +1,633,285 +1,901,786 +1,707,024 +Changes in future development costs +23,025 +121,347 +146,808 +Previously estimated development costs incurred during the period +442,780 +253,047 +148,976 +Revision of quantity estimates +230,673 +(436,856) +(457,013) +Accretion of discount +520,058 +416,594 +459,490 +Change in income taxes +(434,949) +(344,447) +197,916 +Purchases of reserves in place +228,539 +1,552 +572 +Sales of properties +(185,326) +(38,080) +(214,746) +Change in production rates and other +168,930 +(96,862) +(83,752) +Standardized Measure, end of period +$ +4,352,845 +$ +3,598,894 +$ +2,908,701 +SUPPLEMENTAL QUARTERLY FINANCIAL DATA (UNAUDITED) +2014 +First +Second +Third +Fourth +(in thousands, except for per share data) +Revenues +$ +599,216 +$ +636,669 +$ +649,740 +$ +538,551 +Expenses, net +460,759 +488,029 +505,425 +462,759 +Net income +$ +138,457 +$ +148,640 +$ +144,315 +$ +75,792 +Earnings per share to common stockholders: +Basic: +Distributed +$ +0.16 +$ +0.16 +$ +0.16 +$ +0.16 +Undistributed +1.43 +1.55 +1.49 +0.71 +$ +1.59 +$ +1.71 +$ +1.65 +$ +0.87 +Diluted: +Distributed +$ +0.16 +$ +0.16 +$ +0.16 +$ +0.16 +Undistributed +1.43 +1.54 +1.49 +0.70 +$ +1.59 +$ +1.70 +$ +1.65 +$ +0.86 +84 +Table of Contents +2013 +First +Second +Third +Fourth +(in thousands, except for per share data) +Revenues +$ +426,356 +$ +493,757 +$ +561,336 +$ +516,602 +Expenses, net +336,429 +364,192 +422,966 +309,775 +Net income +$ +89,927 +$ +129,565 +$ +138,370 +$ +206,827 +Earnings per share to common stockholders: +Basic: +Distributed +$ +0.14 +$ +0.14 +$ +0.14 +$ +0.14 +Undistributed +0.90 +1.36 +1.45 +2.23 +$ +1.04 +$ +1.50 +$ +1.59 +$ +2.37 +Diluted: +Distributed +$ +0.14 +$ +0.14 +$ +0.14 +$ +0.14 +Undistributed +0.90 +1.35 +1.45 +2.23 +$ +1.04 +$ +1.49 +$ +1.59 +$ +2.37 +The sum of the individual quarterly net income per common share amounts may not agree with year-to-date net income per common share because each quarter’s computation is based on the number of shares outstanding at the end of the applicable quarter using the two-class method. +85 +Table of Contents +ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE +None. +ITEM 9A . CONTROLS AND PROCEDURES +EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES +Cimarex ’ s management, under the supervision and with the participation of the Chief Executive Officer (CEO) and Chief Financial Officer (CFO), have evaluated the effectiveness of Cimarex ’ s disclosure controls and procedures (as defined in Rules 13a - 15(e) and 15d - 15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)) as of December 31, 201 4 . Based on that evaluation, the CEO and CFO concluded that the disclosure controls and procedures are effective in providing reasonable assurance that information required to be disclosed in reports filed with the SEC is recorded, processed, summarized and reported within the time periods specified in the SEC ’ s rules and forms. The disclosure controls and procedures are designed to provide reasonable assurance that such information is accumulated and communicated to our management, including the CEO and CFO, as appropriate, to allow such persons to make timely decisions regarding required disclosures. +CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING +There was no change in our internal control over financial reporting that occurred during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. +MANAGEMENT ’ S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING +Cimarex ’ s management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a - 15(f) and 15d - 15(f) under the Exchange Act). The company ’ s internal control over financial reporting is a process designed by, or under the supervision of, the CEO and CFO to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with generally accepted accounting principles. +Because of the inherent limitations of internal control over financial reporting, misstatements may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +As of December 31, 201 4 , management assessed the effectiveness of the company ’ s internal control over financial reporting based on the criteria established in “ Internal Control - Integrated Framework (2013) , ” issued by the Committee of Sponsoring Organizati ons of the Treadway Commission . Based on that assessment, management concluded that the company ’ s internal control over financial reporting was effective as of December 31, 201 4 . +Our independent registered public accounting firm has audited, and reported on, the effectiveness of our internal controls over financial reporting as of December 31, 201 4 , which follows this report. +86 +Table of Contents +Report of Independent Registered Public Accounting Firm +The Board of Directors and Stockholders +Cimarex Energy Co.: +We have audited Cimarex Energy Co. and subsidiaries internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Cimarex Energy Co. and subsidiaries’ management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on Cimarex Energy Co. and subsidiaries’ internal control over financial reporting based on our audit. +We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. +A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. +Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +In our opinion, Cimarex Energy Co. and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). +We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Cimarex Energy Co. and subsidiaries as of December 31, 2014 and 2013, and the related consolidated statements of income and comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2014, and our report dated February 25, 2015 expressed an unqualified opinion on those consolidated financial statements. +KPMG LLP +Denver, Colorado +February 25 , 201 5 +87 +Table of Contents +ITEM 9 B. OTHER INFORMATION +None. +88 +Table of Contents +PART II I +ITEM 10. DIRECTOR S, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE +Information concerning the directors of Cimarex required under this item is incorporated by reference from the Cimarex Energy Co. definitive Proxy Statement for the May 1 4 , 201 5 Annual Meeting of Shareholders . The Proxy Statement will be filed with the Securities and Exchange Commission no later than 120 days subsequent to December 31, 2014 . The executive officers of Cimarex as of February 2 5 , 201 5 were: +Name +Age +Office +Thomas E. Jorden +57 +Chief Executive Officer , President and Chairman of the Board +Joseph R. Albi +56 +Executive Vice President – Operations, Chief Operating Officer +Stephen P. Bell +60 +Executive Vice President – Business Development +Paul Korus +58 +Senior Vice President – Chief Financial Officer +Francis B. Barron +52 +Senior Vice President – General Counsel +Gary R. Abbott +42 +Vice President, Corporate Engineering +Richard S. Dinkins +70 +Vice President – Human Resources +John Lambuth +52 +Vice President – Exploration +James H. Shonsey +63 +Vice President, Controller , Chief Accounting Officer +There are no family relationships by blood, marriage, or adoption among any of the above executive officers. All executive officers are elected annually by the board of directors to serve for one year or until a successor is elected and qualified. There is no arrangement or understanding between any of the officers and any other person pursuant to which he was selected as an executive officer. +THOMAS E. JORDEN was elected chairman of the board effective August 14, 2012 after being named president and chief executive officer effective September 30, 2011. Since December 8, 2003, Mr. Jorden served as executive vice president of exploration and had served in a similar capacity since September 30, 2002. Prior to September 2002, Mr. Jorden was with Key Production Company, Inc., where he served as vice president of exploration (October 1999 to September 2002) and chief geophysicist (November 1993 to September 1999). Prior to joining Key, Mr. Jorden was with Union Pacific Resources. +JOSEPH R. ALBI was named executive vice president and chief operating officer effective September 30, 2011. Mr. Albi served as executive vice president of operations since March 1, 2005. Since December 8, 2003, Mr. Albi served as senior vice president of corporate engineering. From September 30, 2002 to December 8, 2003, he served as vice president of engineering. From October 1999 to September, 2002, Mr. Albi was with Key Production Company, Inc. where he served as vice president of engineering and manager of engineering. +STEPHEN P. BELL was named executive vice president, business development effective September 13, 2012. Since September, 2002, Mr. Bell served as senior vice president of business development and land. Prior to its merger with Cimarex, Mr. Bell was with Key Production Company, Inc. since February 1994. In September 1999, he was appointed senior vice president, business development and land. From February 1994 to September 1999, he served as vice president, land. +PAUL KORUS was named senior vice president in December 2010 and has served as chief financial officer of Cimarex since September 2002. From June 1999 to September 2002, Mr. Korus was vice president and chief financial officer of Key Production Company. Prior to Key, he was an equity research analyst with an energy investment banking firm from 1995 to 1999 and was with Apache Corporation from 1982 to 1995. +FRANCIS B. BARRON joined Cimarex in July 2013 as senior vice president, general counsel. Mr. Barron served as executive vice president, general counsel of Bill Barrett Corporation, a Denver - based oil and gas exploration and development company, from February 2009 until July 2013 and as secretary from March 2004 until July 2013. He served as their senior vice president, general counsel from March 2004 until February 2009 and as chief financial officer from November 2006 until March 2007. Previously, Mr. Barron was a partner at the Denver, Colorado office of the law firm of +89 +Table of Contents +Patton Boggs LLP as well as a partner at Bearman Talesnick & Clowdus Professional Corporation. Mr. Barron ’ s practice included corporate, securities and business law for publicly traded oil and gas companies. +GARY R. ABBOTT was elected vice president of corporate engineering March 1, 2005. Since January 2002, Mr. Abbott served as manager, corporate reservoir engineering. From April 1999 to January 2002, Mr. Abbott was a reservoir engineer with Key Production Company, Inc. +RICHARD S. DINKINS was named vice president of human resources on December 8, 2003. Mr. Dinkins joined Key Production Company, Inc. in March 2002 as its director of human resources and continued in that position with Cimarex commencing in September 2002. Prior to joining Key, Mr. Dinkins was with Sprint and before that, served as Vice President of Human Resources for Terra Resources, Inc. and Pacific Enterprises Oil Company. +JOHN LAMBUTH was named vice president of exploration in September 2012. Prior to his promotion, he served as the company ’ s chief geophysicist, a position he held since joining Cimarex in 2004. Mr. Lambuth began his career in 1985 with Shell Oil Co., where he held various positions in exploration and in research and development. Immediately prior to joining Cimarex, he spent three years as onshore exploration manager of El Paso Energy Company. Mr. Lambuth holds a Bachelors ’ Degree in Geophysical Engineering from the Colorado School of Mines. +JAMES H. SHONSEY was named vice president in April 2006. Mr. Shonsey was elected chief accounting officer and controller on May 28, 2003. From 2001 to May 2003, Mr. Shonsey was chief financial officer of The Meridian Resource Corporation; and from 1997 to 2001, he served as the chief financial officer of Westport Resources Corporation. +ITEM 11. EXECUTIV E COMPENSATION +Information required under this item is incorporated by reference from the Cimarex Energy Co. definitive Proxy Statement for the May 1 4 , 201 5 Annual Meeting of Shareholders . The Proxy Statement will be filed with the Securities and Exchange Commission no later than 120 days subsequent to December 31, 2014 . +ITEM 12. SECURITY OWNERSHI P OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS +Information required under this item is incorporated by reference from the Cimarex Energy Co. definitive Proxy Statement for the May 1 4 , 201 5 Annual Meeting of Shareholders . The Proxy Statement will be filed with the Securities and Exchange Commission no later than 120 days subsequent to December 31, 2014 . +ITEM 13. CERTAI N RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE +Information required under this item is incorporated by reference from the Cimarex Energy Co. definitive Proxy Statement for the May 1 4 , 201 5 Annual Meeting of Shareholders . The Proxy Statement will be filed with the Securities and Exchange Commission no later than 120 days subsequent to December 31, 2014 . +ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES +Information required under this item is incorporated by reference from the Cimarex Energy Co. definitive Proxy Statement for the May 1 4 , 201 5 Annual Meeting of Shareholders . The Proxy Statement will be filed with the Securities and Exchange Commission no later than 120 days subsequent to December 31, 2014 . +90 +Table of Contents +PART I V +ITEM 15. EXHIBIT S, FINANCIAL STATEMENT SCHEDULES +Page +(a) (1) +The following financial statements are included in Item 8 to this 10-K : +Consolidated balance sheets as of December 31, 201 4 and 20 13 +58 +Consolidated statements of income and comprehensive income for the years ended December 31, 201 4 , 201 3 , and 20 12 +59 +Consolidated statements of cash flows for the years ended December 31, 201 4 , 201 3 , and 20 12 +60 +Consolidated statements of stockholders’ equity for the years ended December 31, 201 4 , 201 3 , and 20 12 +61 +Notes to consolidated financial statemen ts +62 +(2) +Financial statement schedules — None +(3) +Exhibits: +Exhibits not incorporated by reference to a prior filing are designated by an asterisk (*) and are filed herewith; all exhibits not so designated are incorporated by reference to a prior SEC filing as indicated. +Exhibit +Title +3.1 +Amended and Restated Certificate of Incorporation of Cimarex Energy Co. (filed as Exhibit 3.1 to Registrant ’ s Form 8-K (Commission File no. 001 - 31446) dated June 7, 2005 and incorporated herein by reference). +3.2 +Amended and Restated By - laws of Cimarex Energy Co. dated December 11, 2013 (filed on December 16, 2013 (Commission File No. 001 - 31446) and incorporated herein by reference). +4.1 +Specimen Certificate of Cimarex Energy Co. common stock (filed as Exhibit 4.3 to Registration Statement on Form S - 3 filed September 17, 2012 (Registration No. 333 - 183939) and incorporated herein by reference). +4.2 +Debt Securities Indenture dated as of April 5, 2012, by and among Cimarex Energy Co. and U.S. Bank National Association, as trustee included as Exhibit 4.1 to Registrant ’ s Current Report on Form 8-K filed on April 5, 2012 and incorporated herein by reference. +4.3 +First Supplemental Indenture dated as of April 5, 2012, by and among Cimarex Energy Co., the Subsidiary Guarantors party thereto and U.S. Bank National Association, as trustee included as Exhibit 4.2 to Registrant ’ s Current Report on Form 8-K filed on April 5, 2012 and incorporated herein by reference. +4.4 +Form of 5.875% Senior Notes due 2022 included in Exhibit 4.3 to the Registrant ’ s Current Report on Form 8-K filed on April 5, 2012 and incorporated herein by reference. +4.5 +Indenture dated as of June 4, 2014, by and between Cimarex Energy Co. and U.S. Bank National Association, as trustee included as Exhibit 4.1 to Registrant’s Current Report on Form 8-K filed on June 4, 2014 and incorporated herein by reference. +4.6 +First Supplemental Indenture dated as of June 4, 2014, by and among Cimarex Energy Co., the Subsidiary Guarantors party thereto and U.S. Bank National Association, as trustee included as Exhibit 4.2 to Registrant’s Current Report on Form 8-K filed on June 4, 2014 and incorporated herein by reference. +4.7 +Form of 4.375% Senior Notes due 2024 included in Exhibit 4.2 to the Registrant’s Current Report on Form 8-K filed on June 4, 2014 and incorporated herein by reference. +91 +Table of Contents +10.1 +Credit Agreement dated as of July 14, 2011, among Cimarex, the Administrative Agent, the Co - Syndication Agents, the Co - Documentation Agents and the Lenders filed on July 18, 2011 as Exhibit 10.l to the Registrant ’ s Current Report on Form 8-K and incorporated herein by reference. +10.2 +First Amendment to Credit Agreement dated as of July 19, 2012, among Cimarex, the Guarantors, the Administrative Agent, and the Lenders filed on May 5, 2014 as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K and incorporated herein by reference. +10.3 +Second Amendment to Credit Agreement dated as of May 1, 2014, among Cimarex, the Guarantors, the Administrative Agent, and the Lenders filed on May 5, 2014 as Exhibit 10.2 to the Registrant’s Current Report on Form 8-K and incorporated herein by reference. +10.4 +Employment Agreement, dated September 7, 1999, by and between Paul Korus and Key Production Company, Inc. (filed as Exhibit 10.6 to the Registration Statement on Form S - 4 dated May 9, 2002 (Registration No. 333 - 87948) and incorporated herein by reference). +10.5 +Amendment to Employment Agreement effective January 1, 2009 between Cimarex Energy Co. and Paul Korus (filed as Exhibit 10.9 to the Annual Report on Form 10-K for the year ended December 31, 2008 filed on February 27, 2009 (Commission File No. 001 - 31446) and incorporated herein by reference). +10.6 +Employment Agreement, dated October 25, 1993, by and between Thomas E. Jorden and Key Production Company, Inc. (filed as Exhibit 10.7 to the Registration Statement on Form S - 4 dated May 9, 2002 (Registration No. 333 - 87948) and incorporated herein by reference). +10.7 +Amendment to Employment Agreement effective January 1, 2009 between Cimarex Energy Co. and Thomas E. Jorden (filed as Exhibit 10.11 to the Annual Report on Form 10-K for the year ended December 31, 2008 filed on February 27, 2009 (Commission File No. 001 - 31446) and incorporated herein by reference). +10.8 +Employment Agreement, dated February 2, 1994, by and between Stephen P. Bell and Key Production Company, Inc. (filed as Exhibit 10.8 to the Registration Statement on Form S - 4 dated May 9, 2002 (Registration No. 333 - 87948) and incorporated herein by reference). +10.9 +Amendment to Employment Agreement effective January 1, 2009 between Cimarex Energy Co. and Stephen P. Bell (filed as Exhibit 10.13 to the Annual Report on Form 10-K for the year ended December 31, 2008 filed on February 27, 2009 (Commission File No. 001 - 31446) and incorporated herein by reference). +10.10 +Employment Agreement, dated March 11, 1994, by and between Joseph R. Albi and Key Production Company, Inc. (filed as Exhibit 10.9 to the Registration Statement on Form S - 4 dated May 9, 2002 (Registration No. 333 - 87948) and incorporated herein by reference). +10.11 +Amendment to Employment Agreement effective January 1, 2009 between Cimarex Energy Co. and Joseph R. Albi (filed as Exhibit 10.15 to the Annual Report on Form 10-K for the year ended December 31, 2008 filed on February 27, 2009 (Commission File No. 001 - 31446) and incorporated herein by reference). +10.12 +Amended and Restated 2002 Stock Incentive Plan of Cimarex Energy Co. effective January 1, 2009 (filed as Exhibit 10.16 to the Annual Report on Form 10-K for the year ended December 31, 2008 filed on February 27, 2009 (Commission File No. 001 - 31446) and incorporated herein by reference). +10.13 +2011 Equity Incentive Plan adopted May 18, 2011 (filed as Appendix A to the Definitive Proxy Statement 14 - A filed on March 23, 2011 (Commission File No. 001 - 31446) and incorporated herein by reference). +10.14 +Form of Notice of Grant of Award of Performance Stock and Award Agreement (filed as Exhibit 10.2 to Registrant ’ s Quarterly Report on Form 10-Q for the quarter ended June 30, 2011 filed on August 4, 2011 (Commission File no. 001 - 31446) and incorporated herein by reference). +92 +Table of Contents +10.15 +Form of Notice of Grant of Restricted Stock and Award Agreement (filed as Exhibit 10.3 to Registrant ’ s Quarterly Report on Form 10-Q for the quarter ended June 30, 2011 filed on August 4, 2011 (Commission File no. 001 - 31446) and incorporated herein by reference). +10.16 +Form of Notice of Grant of Nonqualified Stock Option and Award Agreement (filed as Exhibit 10.4 to Registrant ’ s Quarterly Report on Form 10-Q for the quarter ended June 30, 2011 filed on August 4, 2011 (Commission File no. 001 - 31446) and incorporated herein by reference). +10.17 +Form of Notice of Grant and Award Agreement (Other Stock Awar d with performance conditions) (filed as Exhibit 10.15 to the Annual Report on Form 10-K for the year ended December 31, 2013 filed on February 26, 2014 (Commission File No. 001-31446) and incorporated herein by reference). +10.18 +2014 Equity Incentive Plan adopted May 15, 2014 (filed as Appendix A to the Definitive Proxy Statement 14-A filed on April 1, 2014 (Commission File No. 001-31446) and incorporated herein by reference. +10.19 +Form of Notice of Grant of Restricted Stock (Director) and Award Agreement (filed as Exhibit 10.1 to Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014 filed on August 6, 2014 (Commission File No. 001-31446) and incorporated herein by reference). +10.20 +Form of Notice of Grant of Nonqualified Stock Option and Award Agreement (filed as Exhibit 10.2 to Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014 filed on August 6, 2014 (Commission File No. 001-31446) and incorporated herein by reference). +10.21 +Form of Notice of Grant of Restricted Stock and Award Agreement (filed as Exhibit 10.3 to Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014 filed on August 6, 2014 (Commission File No. 001-31446) and incorporated herein by reference). +10.22 +Form of Notice of Grant of Restricted Stock and Award Agreement (Performance Award) (filed as Exhibit 10.4 to Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014 filed on August 6, 2014 (Commission File No. 001-31446) and incorporated herein by reference). +10.23 +Form of Notice of Grant of Restricted Stock and Award Agreement (Performance Award).* +10.24 +Deferred Compensation Plan for Nonemployee Directors adopted May 19, 2004, as amended and restated effective January 1, 2009 (filed as Exhibit 10.18 to the Annual Report on Form 10-K for the year ended December 31, 2008 filed on February 27, 2009 (Commission File No. 001 - 31446) and incorporated herein by reference). +10.25 +Cimarex Energy Co. Supplemental Savings Plan (amended and restated, effective January 1, 2009) (filed as Exhibit 10.19 to the Annual Report on Form 10-K for the year ended December 31, 2008 filed on February 27, 2009 (Commission File No. 001 - 31446) and incorporated herein by reference). +10.26 +Cimarex Energy Co. Change in Control Severance Plan dated effective April 1, 2005, amended and restated effective January 1, 2009 (filed as Exhibit 10.20 to the Annual Report on Form 10-K for the year ended December 31, 2008 filed on February 27, 2009 (Commission File No. 001 - 31446) and incorporated herein by reference). +10.27 +Amendment to Cimarex Energy Co. Change in Control Severance Plan dated effective March 19, 2013 (filed as Exhibit 10.1 to the Current Report on Form 8-K filed on March 20, 2013 (Commission File No. 001 - 31446) and incorporated herein by reference). +93 +Table of Contents +10.28 +Form of Indemnification Agreement between Cimarex Energy Co. and each of its executive officers and directors (filed as Exhibit 10.20 to the Annual Report on Form 10-K for the year ended December 31, 2012 filed on February 26, 2013 (Commission File No. 001 - 31446) and incorporated herein by reference). +10.29 +Retentio n Agreement dated June 9, 2010 (filed as Exhibit 10.21 to the Annual Report on Form 10-K for the year ended December 31, 2013 filed on February 26, 2014 (Commission File No. 001-31446) and incorporated herein by reference). +14.1 +Code of Ethics for Chief Executive Officer and Senior Financial Officers (filed as Exhibit 14.1 to the Annual Report on Form 10-K for the year ended December 31, 2003 filed on March 11, 2004 (Commission File No. 001 - 31446) and incorporated herein by reference). +21.1 +Significant Subsidiaries of the Registrant.* +23.1 +Consent of KPMG LLP.* +23.2 +Consent of DeGolyer and MacNaughton* +24.1 +Power of Attorney of directors of the Registrant. * +31.1 +Certification of Thomas E. Jorden, Chief Executive Officer of Cimarex Energy Co., pursuant to Section 302 of the Sarbanes - Oxley Act of 2002.* +31.2 +Certification of Paul Korus, Chief Financial Officer of Cimarex Energy Co., pursuant to Section 302 of the Sarbanes - Oxley Act of 2002.* +32.1 +Certification of Thomas E. Jorden, Chief Executive Officer of Cimarex Energy Co., pursuant to Section 906 of the Sarbanes - Oxley Act of 2002.* +32.2 +Certification of Paul Korus, Chief Financial Officer of Cimarex Energy Co., pursuant to Section 906 of the Sarbanes - Oxley Act of 2002.* +99.1 +Letter dated January 16, 2015 from DeGolyer and MacNaughton, independent petroleum engineering consulting firm, reporting the results of its audit of Cimarex reserves as of December 31, 2014 of certain selected properties. * +101.INS +XBRL Instance Document +101.SCH +XBRL Taxonomy Extension Schema Document +101.CAL +XBRL Taxonomy Extension Calculation Linkbase Document +101.LAB +XBRL Taxonomy Extension Label Linkbase Document +101.PRE +XBRL Taxonomy Extension Presentation Linkbase Document +101.DEF +XBRL Taxonomy Extension Definition Linkbase Document +94 +Table of Contents +SIGNATURE +Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. +Date: February 2 5 , 2015 +CIMAREX ENERGY CO. +By: +/s/ Thomas E. Jorden +Thomas E. Jorden +Chairman of the Board , Chief Executive Officer +and Presiden t +Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. +Signature +Title +Date +/s/ Thomas E. Jorden +Chairman of the Board , Director, +Thomas E. Jorden +Chief Executive Officer , and President (Principal Executive Officer) +February 2 5 , 201 5 +* +Director, Executive Vice President – +Attorney - in - Fact +Chief Operating Officer +February 2 5 , 201 5 +Joseph R. Albi +/s/ Paul Korus +Senior Vice President – Chief +Paul Korus +Financial Officer (Principal Financial Officer) +February 2 5 , 201 5 +/s/ James H. Shonsey +Vice President, C ontroller , Chief +James H. Shonsey +Accounting Officer (Principal Accounting Officer) +February 2 5 , 201 5 +* +Attorney - in - Fact +Director +February 2 5 , 201 5 +Jerry Box +* +Attorney - in - Fact +Director +February 2 5 , 201 5 +Hans Helmerich +* +Attorney - in - Fact +Director +February 2 5 , 201 5 +David A. Hentschel +* +Attorney - in - Fact +Director +February 2 5 , 201 5 +Harold R. Logan, Jr. +* +Attorney - in - Fact +Director +February 2 5 , 201 5 +Floyd R. Price +95 +Table of Contents +* +Attorney - in - Fact +Director +February 2 5 , 201 5 +Monroe W. Robertson +* +Attorney - in - Fact +Director +February 2 5 , 201 5 +Michael J. Sullivan +* +Attorney - in - Fact +Director +February 2 5 , 201 5 +L. Paul Teague +*By: +/s/ Paul Korus +Senior Vice President and Chief +Paul Korus +Financial Officer (Principal Financial Officer) +February 2 5 , 201 5 +Attorney - in - Fact +96 \ No newline at end of file diff --git a/raw/filings/0001168054/2014/0001558370-15-000150/filing_metadata.csv b/raw/filings/0001168054/2014/0001558370-15-000150/filing_metadata.csv new file mode 100644 index 0000000000000000000000000000000000000000..248e49faf76f91a1e0fd6240bce6e54b9ed07598 --- /dev/null +++ b/raw/filings/0001168054/2014/0001558370-15-000150/filing_metadata.csv @@ -0,0 +1,2 @@ +cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing +0001168054,XEC,CIMAREX ENERGY CO,10-K,2015-02-25,2014-12-31,2015-02-25T16:15:06.000Z,0001558370-15-000150,xec-20141231x10k.htm,10-K,13820089,1,0,https://www.sec.gov/Archives/edgar/data/1168054/000155837015000150/xec-20141231x10k.htm,https://www.sec.gov/Archives/edgar/data/1168054/000155837015000150/,2014,2014,1 diff --git a/raw/filings/0001168054/2014/0001558370-15-000150/item1.txt b/raw/filings/0001168054/2014/0001558370-15-000150/item1.txt new file mode 100644 index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391 diff --git a/raw/filings/0001168054/2014/0001558370-15-000150/item13.txt b/raw/filings/0001168054/2014/0001558370-15-000150/item13.txt new file mode 100644 index 0000000000000000000000000000000000000000..4af031cfdecbf2969bc0fd585e6e11e8499508a4 --- /dev/null +++ b/raw/filings/0001168054/2014/0001558370-15-000150/item13.txt @@ -0,0 +1,2 @@ +ITEM 13. CERTAI N RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE +Information required under this item is incorporated by reference from the Cimarex Energy Co. definitive Proxy Statement for the May 1 4 , 201 5 Annual Meeting of Shareholders . The Proxy Statement will be filed with the Securities and Exchange Commission no later than 120 days subsequent to December 31, 2014 . \ No newline at end of file diff --git a/raw/filings/0001168054/2014/0001558370-15-000150/item9a.txt b/raw/filings/0001168054/2014/0001558370-15-000150/item9a.txt new file mode 100644 index 0000000000000000000000000000000000000000..522c4dbf458b880167285ec3c92ef5e3f52d33ea --- /dev/null +++ b/raw/filings/0001168054/2014/0001558370-15-000150/item9a.txt @@ -0,0 +1,26 @@ +ITEM 9A . CONTROLS AND PROCEDURES +EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES +Cimarex ’ s management, under the supervision and with the participation of the Chief Executive Officer (CEO) and Chief Financial Officer (CFO), have evaluated the effectiveness of Cimarex ’ s disclosure controls and procedures (as defined in Rules 13a - 15(e) and 15d - 15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)) as of December 31, 201 4 . Based on that evaluation, the CEO and CFO concluded that the disclosure controls and procedures are effective in providing reasonable assurance that information required to be disclosed in reports filed with the SEC is recorded, processed, summarized and reported within the time periods specified in the SEC ’ s rules and forms. The disclosure controls and procedures are designed to provide reasonable assurance that such information is accumulated and communicated to our management, including the CEO and CFO, as appropriate, to allow such persons to make timely decisions regarding required disclosures. +CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING +There was no change in our internal control over financial reporting that occurred during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. +MANAGEMENT ’ S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING +Cimarex ’ s management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a - 15(f) and 15d - 15(f) under the Exchange Act). The company ’ s internal control over financial reporting is a process designed by, or under the supervision of, the CEO and CFO to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with generally accepted accounting principles. +Because of the inherent limitations of internal control over financial reporting, misstatements may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +As of December 31, 201 4 , management assessed the effectiveness of the company ’ s internal control over financial reporting based on the criteria established in “ Internal Control - Integrated Framework (2013) , ” issued by the Committee of Sponsoring Organizati ons of the Treadway Commission . Based on that assessment, management concluded that the company ’ s internal control over financial reporting was effective as of December 31, 201 4 . +Our independent registered public accounting firm has audited, and reported on, the effectiveness of our internal controls over financial reporting as of December 31, 201 4 , which follows this report. +86 +Table of Contents +Report of Independent Registered Public Accounting Firm +The Board of Directors and Stockholders +Cimarex Energy Co.: +We have audited Cimarex Energy Co. and subsidiaries internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Cimarex Energy Co. and subsidiaries’ management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on Cimarex Energy Co. and subsidiaries’ internal control over financial reporting based on our audit. +We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. +A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. +Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +In our opinion, Cimarex Energy Co. and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). +We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Cimarex Energy Co. and subsidiaries as of December 31, 2014 and 2013, and the related consolidated statements of income and comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2014, and our report dated February 25, 2015 expressed an unqualified opinion on those consolidated financial statements. +KPMG LLP +Denver, Colorado +February 25 , 201 5 +87 +Table of Contents \ No newline at end of file diff --git a/raw/filings/0001168054/2014/0001558370-15-000150/rp_note.txt b/raw/filings/0001168054/2014/0001558370-15-000150/rp_note.txt new file mode 100644 index 0000000000000000000000000000000000000000..a96a5e9a31c620198f35e6ffcb10f3ae37ae6ef2 --- /dev/null +++ b/raw/filings/0001168054/2014/0001558370-15-000150/rp_note.txt @@ -0,0 +1,2 @@ +Note 12 – Related Party Transactions +78 \ No newline at end of file diff --git a/raw/filings/0001168054/2014/0001558370-15-000150/rpt_disclosure.txt b/raw/filings/0001168054/2014/0001558370-15-000150/rpt_disclosure.txt new file mode 100644 index 0000000000000000000000000000000000000000..8bc4ef5a6438e6c871c081ede6b36a1500242579 --- /dev/null +++ b/raw/filings/0001168054/2014/0001558370-15-000150/rpt_disclosure.txt @@ -0,0 +1,25 @@ +Review of related party transactions +Yes +Diverse Board skills and experience +Yes +Non-Hedging and non-pledging policies +Yes +Annual Board and Committee self-evaluations +Yes +Clawback policy +Yes +Consultant review of Board skills +Yes +Management and Director stock ownership guidelines +Yes +Annual equity grants to Directors +Yes +Tax gross-ups +No +Annual Board education +Yes +Proxy Access +Yes +Interested parties may communicate with our Board by mail directed to our Corporate Secretary or by facsimile (720) 403-9383. All communications will be forwarded to the Lead Director for the Lead Director’s review. The Lead Director may take any action the Lead Director deems appropriate or necessary, including, without limitation, forwarding the information to the Board for consideration or, with the concurrence of the Board, retaining independent or outside counsel, accountants or other advisors to address the concern. +20 +Table of Contents \ No newline at end of file diff --git a/raw/filings/0001168054/2015/0001558370-16-003392/filing.txt b/raw/filings/0001168054/2015/0001558370-16-003392/filing.txt new file mode 100644 index 0000000000000000000000000000000000000000..fc143584dbaf72f47bc38f5317681d1ebc62d777 --- /dev/null +++ b/raw/filings/0001168054/2015/0001558370-16-003392/filing.txt @@ -0,0 +1,6191 @@ +10-K +1 +xec-20151231x10k.htm +10-K +xec_Current folio_10K +Table of Contents +UNITED STATES +SECURITIES AND EXCHANGE COMMISSION +Washington, D C 20549 +Form 10 - K +(Mark One) +☒ +ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 +For the fiscal year ended December 31, 201 5 +OR +☐ +TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 +Commission file number 001 - 31446 +CIMAREX ENERGY CO. +(Exact name of registrant as specified in its charter) +Delaware +(State or other jurisdiction of +incorporation or organization) +45 - 0466694 +(I.R.S. Employer +Identification No.) +1700 Lincoln Street, Suite 37 00, Denver, Colorado 80203 +(Address of principal executive offices including ZIP code) +(303) 295 - 3995 +(Registrant ’ s telephone number) +Securities Registered Pursuant to Section 12(b) of the Act: +Title of Each Class +Name of each exchange on which registered +Common Stock ($0.01 par value) +New York Stock Exchange +Securities Registered Pursuant to Section 12(g) of the Act: None +Indicate by check mark if the registrant is a well - known seasoned issuer, as defined in Rule 405 of the Securities Act. YES ☒ NO ☐ +Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES ☐ NO ☒ +Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES ☒ NO ☐ +Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S - T ( § 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES ☒ NO ☐ +Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S - K is not contained herein, and will not be contained, to the best of the registrant ’ s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10 - K or any amendment to this Form 10 - K. ☒ +Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non - accelerated filer, or a smaller reporting company. See the definitions of “ large accelerated filer, ” “ accelerated filer, ” and “ smaller reporting company ” in Rule 12b - 2 of the Exchange Act. +Large accelerated filer ☒ +Accelerated filer ☐ +Non - accelerated filer ☐ +(Do not check if a +smaller reporting company) +Smaller reporting company ☐ +Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b - 2 of the Act). YES ☐ NO ☒ +Aggregate market value of the voting stock held by non - affiliates of Cimarex Energy Co. as of June 30, 201 5 was approximately $ 10.2 billion . +Number of shares of Cimarex Energy Co. common stock outstanding as of February 12, 2016 was 94,819,854 . Documents Incorporated by Reference: Portions of the Registrant ’ s Proxy Statement for its 201 6 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10 - K. +Table of Contents +TABLE OF CONTENTS +DESCRIPTION +Item +Page +Glossary +Part I +1 .& 2 . +Busines s and Properties +6 +1 A . +Risk Factors +15 +1B . +Unresolved Staff Comments +28 +3. +Legal Proceedings +28 +4. +Mine Safety Disclosures +28 +Part II +5. +Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities +29 +6. +Selected Financial Data +31 +7. +Management’s Discussion and Analysis of Financial Condition and Results of Operations +32 +7 A . +Quantitative and Qualitative Disclosures About Market Risk +56 +8. +Financial Statements and Supplementary Data +57 +9. +Changes In and Disagreements with Accountants on Accounting and Financial Disclosure +88 +9A . +Controls and Procedures +88 +9B . +Other Information +90 +Part III +10. +Directors, Executive Officers and Corporate Governance +91 +11. +Executive Compensation +92 +12. +Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters +92 +13. +Certain Relationships and Related Transactions, and Director Independence +92 +14. +Principal Accounting Fees and Services +93 +Part IV +15. +Exhibits, Financial Statement Schedules +94 +2 +Table of Contents +GLOSSAR Y +Bbl/d — Barrels (of oil or natural gas liquids) per day +Bbls — Barrels (of oil or natural gas liquids) +Bcf — Billion cubic feet +Bcfe — Billion cubic feet equivalent +Btu — British thermal unit +GAAP —Generally accepted accounting principles in the U.S. +MBbls — Thousand barrels +Mcf — Thousand cubic feet (of natural gas) +Mcfe — Thousand cubic feet equivalent +MMBbl/MMBbls — Million barrels +MMBtu — Million British t hermal units +MMcf — Million cubic feet +MMcf/d — Million cubic feet per day +MMcfe — Million cubic feet equivalent +MMcfe/d — Million cubic feet equivalent per day +Net Acres — Gross acreage multiplied by working interest percentage +Net Production — Gross production multiplied by net revenue interest +NGL or NGLs — Natural gas liquids +PUD —Proved undeveloped +Tcf — Trillion cubic feet +Tcfe — Trillion cubic feet equivalent +Energy equivalent is determined using the ratio of one barrel of crude oil, condensate or NGL to six Mcf of natural gas +3 +Table of Contents +PART I +Cautionary Information about Forward - Looking Statements +Throughout this Form 10 - K, we make statements that may be deemed “ forward - looking ” statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. In particular, in our Management ’ s Discussion and Analysis of Financial Condition and Results of Operations , we are providing “ 201 6 Outlook, ” which contains projections for certain 201 6 operational activities. All statements, other than statements of historical facts, that address activities, events, outcomes and other matters that Cimarex plans, expects, intends, assumes, believes, budgets, predicts, forecasts, projects, estimates or anticipates (and other similar expressions) will, should or may occur in the future are forward - looking statements. These forward - looking statements are based on management ’ s current belief, based on currently available information, as to the outcome and timing of future events. When considering forward - looking statements, you should keep in mind the risk factors and other cautionary statements in this Form 10 - K. Forward - looking statements include statements with respect to, among other things: +· +Fluctuations in the price we receive for our oil and gas production; +· +Timing and amount of future production of oil and natural gas; +· +Reductions in the quantity of oil and gas sold due to decreased industrywide demand and/or curtailments in production from specific properties or areas due to mechanical, transportation, marketing, weather or other problems; +· +Reserve estimates; +· +Cash flow and anticipated liquidity; +· +Amount, nature and timing of capital expenditures; +· +Access to capital markets ; +· +Legislation and regulatory changes; +· +Operating costs and other expenses; +· +Operating and capital expenditures that are either significantly higher or lower than anticipated because the actual cost of identified projects varied from original estimates and/or from the number of exploration and development opportunities being greater or fewer than currently anticipated; +· +Exploration and development opportunities that we pursue may not result in economic, productive oil and gas properties; +· +Drilling of wells; +· +Estimates of proved reserves, exploitation potential or exploration prospect size; +· +Increased financing costs due to a significant increase in interest rates; +· +De-risking of acreage. +We caution you that these forward-looking statements are subject to all of the risks and uncertainties, many of which are beyond our control, incident to the exploration for and development, production and sale of oil and gas. These risks include, but are not limited to, commodity price volatility, inflation, lack of availability of goods and services, environmental risks, drilling and other operating risks, regulatory changes, the uncertainty inherent in estimating proved +4 +Table of Contents +oil and natural gas reserves and in projecting future rates of production and timing of development expenditures and other risks described herein. +Reserve engineering is a subjective process of estimating underground accumulations of oil and natural gas that cannot be measured in an exact way. The accuracy of any reserve estimate depends on the quality of available data and the interpretation of such data by our engineers. As a result, estimates made by different engineers often vary from one another. In addition, the results of drilling, testing and production activities may justify revisions of estimates that were made previously. If significant, such revisions could change the timing of future production and development drilling. Accordingly, reserve estimates are generally different from the quantities of oil and natural gas that are ultimately recovered. +Should one or more of the risks or uncertainties described above or elsewhere in this Form 10-K cause our underlying assumptions to be incorrect, our actual results and plans could differ materially from those expressed in any forward-looking statements. +All forward-looking statements, express or implied, included in this Form 10-K and attributable to Cimarex are qualified in their entirety by this cautionary statement. This cautionary statement should also be considered in connection with any subsequent written or oral forward-looking statements that Cimarex or persons acting on its behalf may issue. Cimarex does not undertake any obligation to update any forward-looking statements to reflect events or circumstances after the date of filing this Form 10-K with the Securities and Exchange Commission, except as required by law. +5 +Table of Contents +ITEM S 1 AND 2 . BUSINES S AND PROPERTIES +General +Cimarex Energy Co., a Delaware corporation formed in 2002, is an independent oil and gas exploration and production company. Our operations are located mainly in Oklahoma, Texas and New Mexico. On o ur website -- www.cimarex.com -- you will find our annual reports, proxy statements and all of our Securities and Exchange Commission (SEC) filings. Throughout this Form 10-K we use the terms “Cimarex,” “company,” “we,” “our,” and “us” to refer to Cimarex Energy Co. and its subsidiaries. +Our principal business objective is to profitably grow proved reserves and production for the long-term benefit of our shareholders. Our strategy centers on maximizing cash flow from producing properties to reinvest in exploration and development opportunities. We consider merger and acquisition opportunities that enhance our competitive position and we occasionally divest non-core assets. Key elements to our approach include: +· +Maintaining a strong financial position +· +Investment in a diversified portfolio of drilling opportunities with varying geologic characteristics, in different geographic areas and with assorted exposure to oil, natural gas and NGLs +· +Detailed evaluation and ranking of investment decisions based on rate of return +· +Tracking predicted versus actual results in a centralized exploration management system, providing feedback to improve results +· +Attracting quality employees and maintaining integrated teams of geoscientists, landmen and engineers +· +Maximizing profitability by efficiently operating our properties +Conservative use of leverage has long been the key to our financial strategy. We believe that low leverage and our full-cycle returns mitigate financial risk , which enables us to better withstand volatility in commodity prices and provide competitive returns to shareholders. S ee Item 5 Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer P urchases of Equity Securities – Stock Performance Graph and Item 6 Selected Financial Data for additional financial and operating i nformation for fiscal years 2011 – 2 01 5 . +Proved Oil and Gas Reserves +O ur total proved reserves declined 7% to 2.9 Tcfe in 2015, largely as a result of 399 Bcfe of negative price related revisions . Proved undeveloped reserves as a percentage of total proved reserves increased to 25% from 23% a year ago. We added 571 Bcfe of new reserves through extensions and discoveries and net positive performance revisions , replacing 159% of production. T he change in our proved reserves is as follows (in Bcfe): +Reserves at December 31, 2014 +3,132.3 +Revisions of previous estimates +(276.2) +Extensions and discoveries +428.7 +Purchases of reserves +— +Production +(359.3) +Sales of reserves +(16.1) +Reserves at December 31, 2015 +2,909.4 +6 +Table of Contents +Revisions of previous estimates in the above table include negative commodity price and operating cost related revisions of 399 and 19 Bcfe, respectively, partially offset by net positive performance revisions of 142 Bcfe. +A breakdown by commodity of our proved oil and gas reserves follows: +Years Ended December 31, +2015 +2014 +2013 +Total Proved Reserves: +Gas (Bcf) +1,517.0 +1,666.7 +1,293.5 +Oil (MMBbls) +107.8 +119.0 +108.5 +NGL (MMBbls) +124.3 +125.3 +92.0 +Equivalent (Bcfe) +2,909.4 +3,132.3 +2,497.0 +% Developed +75 +77 +80 +See “ Supplemental Oil and Gas Information ” in Item 8 of this report for further information. +Production volumes totaled 985 MMcfe of natural gas equivalent per day, a 13 % increase over 201 4 . Production volumes are comprised of 47 % natural gas, 31 % oil and 22 % NGL s . The following tables show our production volumes by region, the average commodity prices received and production cost per unit of production (Mcfe). Separate data also is included for our Cana-Woodford project, which is part of our Mid-Continent region and is part of our largest producing field. +Production Volumes +Net Average Daily Volumes +Gas +Oil +NGL +Equivalent +Gas +Oil +NGL +Equivalent +Years Ended December 31, +(MMcf) +(MBbls) +(MBbls) +(MMcfe) +(MMcf) +(MBbls) +(MBbls) +(MMcfe) +2015 +Permian Basin +66,006 +15,719 +6,220 +197,644 +180.8 +43.1 +17.0 +541.5 +Mid-Continent +100,801 +2,746 +6,757 +157,821 +276.2 +7.5 +18.5 +432.4 +Other +2,180 +198 +86 +3,878 +6.0 +0.5 +0.3 +10.6 +Total Company +168,987 +18,663 +13,063 +359,343 +463.0 +51.1 +35.8 +984.5 +Cana-Woodford +77,882 +2,206 +5,957 +126,865 +213.4 +6.0 +16.3 +347.6 +2014 +Permian Basin +45,200 +12,552 +4,187 +145,636 +123.8 +34.4 +11.5 +399.0 +Mid-Continent +106,711 +2,682 +6,980 +164,682 +292.4 +7.3 +19.1 +451.2 +Other +3,217 +405 +176 +6,704 +8.8 +1.1 +0.5 +18.4 +Total Company +155,128 +15,639 +11,343 +317,022 +425.0 +42.8 +31.1 +868.6 +Cana-Woodford +76,915 +1,903 +5,937 +123,952 +210.7 +5.2 +16.3 +339.6 +2013 +Permian Basin +35,414 +10,739 +2,823 +116,783 +97.0 +29.4 +7.7 +320.0 +Mid-Continent +84,779 +2,171 +4,757 +126,345 +232.3 +5.9 +13.0 +346.1 +Other +5,055 +470 +296 +9,659 +13.8 +1.4 +0.9 +26.5 +Total Company +125,248 +13,380 +7,876 +252,787 +343.1 +36.7 +21.6 +692.6 +Cana-Woodford +50,919 +1,150 +3,863 +81,000 +139.5 +3.2 +10.6 +221.9 +7 +Table of Contents +Average Realized Price +Production +Gas +Oil +NGL +Cost +Years Ended December 31, +(per Mcf) +(per Bbl) +(per Bbl) +(per Mcfe) +2015 +Permian Basin +$ +2.55 +$ +43.58 +$ +11.94 +$ +1.06 +Mid-Continent +$ +2.51 +$ +41.90 +$ +15.41 +$ +0.52 +Other +$ +3.16 +$ +48.01 +$ +14.72 +$ +1.72 +Total Company +$ +2.53 +$ +43.38 +$ +13.75 +$ +0.83 +Cana-Woodford +$ +2.51 +$ +41.54 +$ +15.59 +$ +0.26 +2014 +Permian Basin +$ +4.48 +$ +82.44 +$ +30.04 +$ +1.58 +Mid-Continent +$ +4.42 +$ +88.23 +$ +35.03 +$ +0.58 +Other +$ +4.40 +$ +92.82 +$ +32.09 +$ +2.31 +Total Company +$ +4.43 +$ +83.70 +$ +33.14 +$ +1.08 +Cana-Woodford +$ +4.32 +$ +88.21 +$ +34.89 +$ +0.24 +2013 +Permian Basin +$ +3.91 +$ +93.02 +$ +26.13 +$ +1.48 +Mid-Continent +$ +3.70 +$ +93.48 +$ +31.25 +$ +0.76 +Other +$ +3.74 +$ +102.67 +$ +29.81 +$ +1.85 +Total Company +$ +3.76 +$ +93.44 +$ +29.36 +$ +1.13 +Cana-Woodford +$ +3.57 +$ +94.33 +$ +30.64 +$ +0.27 +Acquisitions and Divestitures +In 2015 we sold interests in various non-core oil and gas properties for $ 41 million. Cimarex made no material property acquisitions in 2015. +8 +Table of Contents +Exploration and Production Overview +Cimarex has one reportable segment, exploration and produc tion (E&P). Our E&P activities take place primarily in two areas: the Permian Basin and the Mid-Continent region. Almost all of our exploration and development (E&D) capital is allocated between these two areas. In 201 5 , E&D investment totaled $ 877 m illion. Of that, 55 % was invested in the Permian Basin and 43 % in the Mid-Continent region. +In 2015, Cimarex drilled or participated in 219 gross ( 99 net) wells , of which w e operated 123 gross ( 81.9 net ) wells. At year-end, we were in the process of drilling or participating in 20 gross ( 9.9 net) wells and there were 49 gross ( 20 net) wells waiting on completion. A summary of our 2015 exploration and development activity by region is as follows: +Gross +Net +% +E&D +Wells +Wells +Completed +Capital +Drilled +Drilled +As Producers +(in millions) +Permian Basin +$ +482 +85 +60 +99 +Mid-Continent +381 +134 +39 +99 +Other +14 +— +— +— +$ +877 +219 +99 +99 +The Permian region encompasses west Texas and southeast New Mexico. Cimarex’s Permian Basin efforts are located in the western half of the Permian Basin known as the Delaware Basin. In 201 5 , we focused on drilling horizontal wells that yielded oil and liquids-rich gas from the Wolfcamp shale, the Bone Spring formation, and the Avalon shale. Cimarex saw improved results in its Wolfcamp shale wells, as measured by production and reserves, with the implementation of long laterals and continued improvement in well completion design and in the Bone Spring wells via upsized well completions . +The Permian region produced 542 MMcfe per day in 201 5 , which was 55 % of our total company production. Oil production in the Permian Basin in 201 5 averaged a record 43,067 barrels per day, a 25% increase over 2014 . +9 +Table of Contents +Our Mid-Continent region consists of Oklahoma and the Texas Panhandle. Our activity in 201 5 in the Mid-Continent was focused in the Cana-Woodford shale and the Meramec horizon, both in Oklahoma. We continued to implement larger well completion s in the Cana-Woodford shale that were highly successful in 201 4 . We applied those same techniques to delineate the Meramec horizon, located above the Woodford. Cimarex continues to evaluate the size and potential of the Meramec play. +During 201 5, production from the Mid-Continent averaged 432 MMcf e per day, or 44 % of total company production. Due to the timing of well completions, p roduction from the region de creased 4 % in 201 5 versus 201 4 . +Wells Drilled +We drilled the following exploratory and developmental wells in 201 5 : +Wells Drilled +2015 +2014 +2013 +Gross +Net +Gross +Net +Gross +Net +Exploratory +Productive +— +— +1 +0.4 +1 +1.0 +Dry +— +— +1 +0.5 +3 +2.4 +Total +— +— +2 +0.9 +4 +3.4 +Developmental +Productive +219 +98.7 +309 +173.6 +359 +181.0 +Dry +3 +1.7 +1 +0.1 +2 +1.0 +Total +222 +100.4 +310 +173.7 +361 +182.0 +We have working interests in the following productive wells by region as of December 31, 2015: +Gas +Oil +Gross +Net +Gross +Net +Mid-Continent +3,766 +1,447 +494 +165 +Permian Basin +998 +500 +4,962 +1,025 +Other +106 +11 +22 +5 +4,870 +1,958 +5,478 +1,195 +Significant Properties +All of our oil and gas assets (proved reserves and undeveloped acreage) ar e located in the United States. We have varying levels of ownership interests in our properties consisting of working, royalty an d overriding royalty interests. We operate the wells that comprise 76% of our proved reserves. In 201 5 , proved reserves in the Watonga-Chickasha field were approximately 56 % of the company’s total proved reserves. The Cana-Woodford shale makes up the majority of this field. No other field had reserves in excess of 15% of our total proved reserves. +At December 31, 201 5 , 63% of our total proved reserves were located in the Mid-Continent region and 3 7 % were in the Permian Basin. We owned an interest in 10,348 gross ( 3,153 net) productive oil and gas wells. The following table summarizes our estimated proved oil and gas reserves by region as of December 31, 201 5 . +% of +Gas +Oil +NGL +Equivalent +Total Proved +(Bcf) +(MMBbl) +(MMBbl) +(Bcfe) +Reserves +Mid-Continent +1,134.4 +29.0 +87.6 +1,834.6 +63 +Permian Basin +378.5 +78.5 +36.6 +1,069.0 +37 +Other +4.1 +0.3 +0.1 +5.8 +— +1,517.0 +107.8 +124.3 +2,909.4 +100 +10 +Table of Contents +At December 31, 201 5 , our ten largest producing fields h e ld 83% of total proved reserves. We are the principal operator of our production in each of these fields. +% of +Total +Average +Approximate +Proved +Working +Average Depth +Field +Region +Reserves +Interest % +(feet) +Primary Formation +Watonga-Chickasha (Cana) +Mid-Continent +56.3 +45.8 +13,000' +Woodford +Ford, West +Permian Basin +6.6 +56.6 +9,500' +Wolfcamp +Lusk +Permian Basin +5.0 +55.2 +9,500' +Bone Spring +Dixieland +Permian Basin +4.6 +98.6 +11,000' +Wolfcamp +Cottonwood Draw +Permian Basin +2.8 +72.6 +3,000'-10,000' +Delaware/Wolfcamp +Phantom +Permian Basin +1.7 +59.2 +11,500' +Bone Spring +Two Georges +Permian Basin +1.7 +91.4 +11,500' +Bone Spring +Sandbar +Permian Basin +1.6 +54.6 +7,500' +Bone Spring +Grisham +Permian Basin +1.3 +98.7 +11,000' +Wolfcamp +Benson +Permian Basin +1.0 +76.0 +9,500' +Bone Spring +82.6 +Acreage +The following table sets forth the gross and net acres of both developed and undeveloped leases held by Cimarex as of December 31, 201 5 . Gross acres are the total number of acres in which we own a working interest. Net acres are the gross acres multiplied by our working interest. +Acreage +Undeveloped +Developed +Total +Gross +Net +Gross +Net +Gross +Net +Mid-Continent +Kansas +18,231 +18,191 +— +— +18,231 +18,191 +Oklahoma +121,821 +85,819 +699,891 +292,344 +821,712 +378,163 +Texas +22,700 +12,437 +133,519 +57,163 +156,219 +69,600 +162,752 +116,447 +833,410 +349,507 +996,162 +465,954 +Permian Basin +New Mexico +75,025 +53,388 +199,752 +138,776 +274,777 +192,164 +Texas +131,658 +107,886 +195,368 +145,363 +327,026 +253,249 +206,683 +161,274 +395,120 +284,139 +601,803 +445,413 +Other +Arizona +2,097,841 +2,097,841 +17,207 +— +2,115,048 +2,097,841 +California +383,647 +383,647 +— +— +383,647 +383,647 +Colorado +51,354 +29,389 +37,696 +2,120 +89,050 +31,509 +Gulf of Mexico +25,000 +13,000 +38,388 +9,724 +63,388 +22,724 +Louisiana +3,472 +400 +4,020 +1,048 +7,492 +1,448 +Michigan +31,773 +31,695 +1,183 +1,183 +32,956 +32,878 +Montana +34,301 +9,127 +7,768 +1,761 +42,069 +10,888 +Nevada +1,196,299 +1,196,299 +440 +1 +1,196,739 +1,196,300 +New Mexico +1,641,778 +1,634,170 +18,572 +2,618 +1,660,350 +1,636,788 +Texas +13,998 +5,343 +31,111 +9,667 +45,109 +15,010 +Utah +80,527 +59,433 +32,552 +1,575 +113,079 +61,008 +Wyoming +99,133 +13,777 +43,147 +4,201 +142,280 +17,978 +Other +191,629 +168,331 +10,723 +5,472 +202,352 +173,803 +5,850,752 +5,642,452 +242,807 +39,370 +6,093,559 +5,681,822 +Total +6,220,187 +5,920,173 +1,471,337 +673,016 +7,691,524 +6,593,189 +11 +Table of Contents +The table below summarizes by year and region our undeveloped acreage expirations in the next five years. In most cases , the drilling of a commercial well will hold the acreage beyond the expiration. +Acreage +2016 +2017 +2018 +2019 +2020 +Gross +Net +Gross +Net +Gross +Net +Gross +Net +Gross +Net +Mid-Continent +19,679 +17,978 +25,219 +20,582 +11,207 +6,474 +2 +2 +— +— +Permian Basin +38,445 +37,960 +17,739 +17,724 +17,393 +16,684 +6,482 +6,482 +— +— +Other +19,281 +18,936 +52,494 +51,479 +31,603 +30,823 +63,333 +59,098 +23,744 +23,688 +77,405 +74,874 +95,452 +89,785 +60,203 +53,981 +69,817 +65,582 +23,744 +23,688 +% of undeveloped +1.2 +1.3 +1.5 +1.5 +1.0 +0.9 +1.1 +1.1 +0.4 +0.4 +Marketing +Our oil and gas production is sold under short-term arrangements at market-responsive prices. We sell our oil at prices tied directly or indirectly to field postings. Our gas is sold under price mechanisms related to either monthly or daily index prices on pipelines where we deliver our gas. +We sell our oil and gas to a broad portfolio of customers. Our major customers during 201 5 were Sunoco Logistics Partners L.P. (Sunoco ) and Enterprise Produc ts Partners L.P. (Enterprise). Sunoco and Enterprise accounted for 21 % and 17%, respectively, of our consolidated revenues in 2015 . +Sunoco is a significant purchaser of our oil in Southeast New Mexico and Canadian County, Oklahoma. Enterprise is a significant oil purcha ser in Oklahoma and West Texas. If either of these entities were to stop purchasing our production, we believe there are a number of other purchasers to whom we could sell our production with some delay. If both parties were to discontinue purchasing our product, we believe there would be challenges initially, but ample markets to handle the disruption . +We regularly monitor the credit worthiness of all our customers and may require parent company guarantees, letters of credit or prepayments when deemed necessary. +Corporate Headquarters and Employees +Our corporate headquarters is located at 1700 Lincoln St., Suite 3700 , Denver, Colorado 80203. On December 31, 201 5 , and 201 4 , Cimarex had 9 25 and 9 91 employees, respectively. None of our employees are subject to collective bargaining agreements. +Competition +The oil and gas industry is highly competitive, particularly for prospective undeveloped leases and purchases of proved reserves. There is also competition for rigs and related equipment used to drill for and produce oil and gas , however, to a lesser extent in the current market environment. Our competitive position is also highly dependent on our ability to recruit and retain geological, geophysical and engineering expertise. We compete for prospects, proved reserves, oil-field services and qualified oil and gas professionals with major and diversified energy companies and other independent operators that have larger financial, human and technological resources than we do. +We compete with integrated, independent and other energy companies for the sale and transportation of our oil and gas to marketing companies and end users. The oil and gas industry competes with other energy industries that supply fuel and power to industrial, commercial and residential consumers. Many of these competitors have greater financial and human resources. The effect of these competitive factors cannot be predicted. +12 +Table of Contents +Proved Reserves Estimation Procedures +Proved oil and gas reserve quantities are based on estimates prepared by Cimarex in accordance with the SEC’s rules for reporting oil and gas reserves. Our r eserve definitions co nform with definitions of Rules 4-10(a) (1)-(32 ) of Regulation S-X of the SEC. All of our reserve estimates are maintained by our internal Corporate Reservoir Engineering group, which is comprised of reservoir enginee rs and engineering technicians. The objectives and management of this group are separate from and independent of the exploration and produ ction functions of the company. The primary objective of our Corporate Reservoir Engineering group is to maintain accurate forecasts on all properties of the company through ongoing monitoring and timely updates of operating and economic parameters (production forecasts, prices and regional differentials, operating expenses, ownership, etc.) in accordance with guidelines established by the SEC. This separation of function and responsibility is a key internal control. +Cimarex engineers are responsible for estimates of proved reserves. Corporate engineers interact with the exploration and production departments to ensure all available engineering and geologic data is taken into account prior to establishing or revising an estimate. After preparing the reserves update, the corporate engineers review their recommendations with the Vice President of Corporate Engineering. After approval from the Vice President of Corporate Engineering, the revisions are entered into our reserves database by the engineering technician. +During the course of the year, the Vice President of Corporate Engineering presents summary reserves information to senior management and to our Board of Directors for their review. From time to time, the Vice President of Corporate Engineering also will confer with the Vice President of Exploration, Chief Operating Officer and the Chief Executive Officer regarding specific reserves-related issues. In addition, Corporate Reservoir Engineering maintains a set of basic guidelines and procedures to ensure that critical checks and reviews of the reserves database are performed on a regular basis. +Together, these internal controls are designed to promote a comprehensive, objective and accurate reserves estimation process. As an additional confirmation of the reasonableness of our internal estimates, DeGolyer and MacNaughton, an independent petroleum engineering consulting firm, reviewed greater than 80% of the total future net revenue discounted at 10% attributable to the total interests owned by Cimarex as of December 31, 2015. The individual primarily responsible for overseeing the review is a Senior Vice President with DeGolyer and MacNaughton and a Registered Professional Engineer in the State of Texas with over 41 years of experience in oil and gas reservoir studies and evaluations. +The technical employee primarily responsible for overseeing the oil and gas reserves estimation process is Cimarex’s Vice President of Corporate Engineering. This individual graduated from the Colorado School of Mines with a Bachelor of Science degree in Engineering and has more than 21 years of practical experience in oil and gas reservoir evaluation. He has been directly involved in the annual reserves reporting process of Cimarex since 2002 and has served in his current role for the past 11 years. +Title to Oil and Gas Properties +We undertake title examination and perform curative work at the time we lease undeveloped acreage, prepare for the drilling of a prospect or acquire proved properties. We believe title to our properties is good and defensible, and is in accordance with industry standards. Nevertheless, we are involved in title disputes from time to time that result in litigation. Our oil and gas properties are subject to customary royalty interests, liens incidental to operating agreements, tax liens and other burdens and minor encumbrances, easements and restrictions. +Government Regulation +Oil and gas production and transportation is subject to extensive federal, state and local laws and regulations. Compliance with existing laws often is difficult and costly, but has not had a significant adverse effect on our operations or financial condition. In recent years, we have been most directly impacted by federal and state environmental regulations and energy conservation rules. We are also impacted by federal and state regulation of pipelines and other oil and gas transportation systems. +13 +Table of Contents +The states in which we conduct operations establish requirements for drilling permits, the method of developing fields, the size of well spacing units, drilling density within productive formations and the unitization or pooling of properties. In addition, state conservation laws include requirements for waste prevention, establish limits on the maximum rate of production from wells, generally prohibit the venting or flaring of natural gas and impose certain requirements regarding the ratability of production. +Environmental Regulation. Various federal, state and local laws regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, directly impact oil and gas exploration, development and production operations, which consequently impact our operations and costs. These laws and regulations govern, among other things, emissions to the atmosphere, discharges of pollutants into waters, underground injection of waste water, the generation, storage, transportation and disposal of waste materials, and protection of public health, natural resources and wildlife. These laws and regulations may impose substantial liabilities for noncompliance and for any contamination resulting from our operations and may require the suspension or cessation of operations in affected areas. +Cimarex is committed to environmental protection and believes we are in material compliance with applicable environmental laws and regulations. We obtain permits for our facilities and operations in accordance with the applicable laws and regulations. There are no known issues that have a significant adverse effect on the permitting process or permit compliance status of any of our facilities or operations. Expenditures are required to comply with environmental regulations. These costs are a normal, recurring expense of operations and not an extraordinary cost of compliance with current government regulations. +We do not anticipate that we will be required under current environmental laws and regulations to expend amounts that will have a material adverse effect on our financial position or operations. However, due to continuing changes in these laws and regulations, we are unable to predict with any reasonable degree of certainty any potential delays in development plans that could arise, or our future costs of complying with governmental requirements. We maintain levels of insurance customary in the industry to limit our financial exposure in the event of a substantial environmental claim resulting from sudden, unanticipated and accidental discharges of oil, produced water or other substances as well as additional coverage for certain other pollution events. +Gas Gathering and Transportation. The Federal Energy Regulatory Commission (FERC) requires interstate gas pipelines to provide open access transportation. FERC also enforces the prohibition of market manipulation by any entity, and the facilitation of the sale or transportation of natural gas in interstate commerce. Interstate pipelines have implemented these requirements, providing us with additional market access and more fairly applied transportation services and rates. FERC continues to review and modify its open access and other regulations applicable to interstate pipelines. +Under the Natural Gas Policy Act (NGPA), natural gas gathering facilities are expressly exempt from FERC jurisdiction. What constitutes “gathering” under the NGPA has evolved through FERC decisions and judicial review of such decisions. We believe that our gathering systems meet the test for non-jurisdictional “gathering” systems under the NGPA and that our facilities are not subject to federal regulations. Although exempt from FERC oversight, our natural gas gathering systems and services may receive regulatory scrutiny by state and federal agencies regarding the safety and operating aspects of the transportation and storage activities of these facilities. +In addition to using our own gathering facilities, we may use third-party gathering services or interstate transmission facilities (owned and operated by interstate pipelines) to ship our gas to markets. +Additional proposals and proceedings that might affect the oil and gas industry are pending before the U.S. Congress, FERC, Bureau of Land Management (BLM), U.S. Environmental Protection Agency (EPA), state legislatures, state agencies, local governments and the courts. We cannot predict when or whether any such proposals may become effective and what effect they will have on our operations. We do not anticipate that compliance with existing federal, state and local laws, rules or regulations will have a material adverse effect upon our capital expenditures, earnings or competitive position. +Federal and State Income and Other Local Taxation +Cimarex and the petroleum industry in general are affected by both federal and state income tax laws, as well as +14 +Table of Contents +other local tax regulations involving ad valorem, personal property, franchise, severance and other excise taxes. We have considered the effects of these provisions on our operations and do not anticipate that there will be any undisclosed impact on our capital expenditures, earnings or competitive position . +ITEM 1A. RISK FACTORS +The following risks and uncertainties, together with other information set forth in this Form 10-K, should be carefully considered by current and future investors in our securities. These risks and uncertainties are not the only ones we face. Additional risks and uncertainties presently unknown to us or currently deemed immaterial also may impair our business operations. The occurrence of one or more of these risks or uncertainties could materially and adversely affect our business, our financial condition, and the results of our operations, which in turn could negatively impact the value of our securities. +Oil, gas, and NGL prices fluctuate due to a number of uncontrollable factors, creating a component of uncertainty in our development plans and overall operations. Declines in prices adversely affect our financial results and rate of growth in proved reserves and production. +Oil and gas markets are volatile. We cannot predict future prices. The prices we receive for our production heavily influence our revenue, profitability, access to capital, and future rate of growth. The prices we receive depend on numerous factors beyond our control. These factors include, but are not limited to, changes in domestic and global supply and demand for oil and gas, the level of domestic and global oil and gas exploration and production activity, geopolitical instability, the actions of the Organization of Petroleum Exporting Countries, weather conditions, technological advances affecting energy consumption, governmental regulations and taxes, and the price and technological advancement of alternative fuels. +Our proved oil and gas reserves and production volumes will decrease unless those reserves are replaced with new discoveries or acquisitions. Accordingly, for the foreseeable future, we expect to make substantial capital investments for the exploration and development of new oil and gas reserves. Historically, we have paid for these types of capital expenditures with cash flow provided by our production operations, our revolving credit facility, and proceeds from the sale of senior notes or equity. Low prices reduce our cash flow and the amount of oil and gas that we can economically produce and may cause us to curtail, delay, or defer certain exploration and development projects. Moreover, low prices also may impact our abilities to borrow under our revolving credit facility and to raise additional debt or equity capital to fund acquisitions. +If prices stay at recent lower levels or decrease, we will be required to take write-downs of the carrying values of our oil and gas properties and/or our goodwill. +Accounting rules require that we periodically review the carrying value of our oil and gas properties and goodwill for possible impairment. +As of December 31, 2015, the carrying value of our oil and gas properties subject to a ceiling test exceeded the calculated value of the ceiling limitation and impairment was necessary. If pricing conditions stay at current levels or decline further we will incur full cost ceiling impairments in future quarters. Because the ceiling calculation uses rolling 12-month average commodity prices, the effect of lower quarter-over-quarter prices in 2016 compared to 2015 is a lower ceiling value each quarter. This will result in ongoing impairments each quarter until prices stabilize or im prove. Impairment charges do not affect cash flow from operating activities, but do adversely affect our net income and various components of our balance sheet. +U.S. or global financial markets may impact our business and financial condition. +A credit crisis or other turmoil in the U.S. or global financial system may have a negative impact on our business and our financial condition. Our ability to access the capital markets may be restricted at a time when we would like, or need, to raise financing. This could have an impact on our flexibility to react to changing economic and business conditions. Deteriorating economic conditions could have a negative impact on our lenders, the purchasers of our oil and gas production and the working interest owners in properties we operate, causing them to fail to meet their obligations to us. +15 +Table of Contents +Failure to economically replace oil and gas reserves could negatively affect our financial results and future rate of growth. +In order to replace the reserves depleted by production and to maintain or increase our total proved reserves and overall production levels, we must either locate and develop new oil and gas reserves or acquire producing properties from others. This requires significant capital expenditures and can impose reinvestment risk for us, as we may not be able to continue to replace our reserves economically. While we occasionally may seek to acquire proved reserves, our main business strategy is to grow through exploration and drilling. Without successful exploration and development, our reserves, production and revenues could decline rapidly, which would negatively impact the results of our operations. +Exploration and development involves numerous risks, including new governmental regulations and the risk that we will not discover any commercially productive oil or gas reservoirs. Additionally, it can be unprofitable, not only from drilling dry holes, but also from drilling productive wells that do not return a profit because of insufficient reserves or declines in commodity prices. +Our drilling operations may be curtailed, delayed, or canceled for many reasons. Factors such as unforeseen poor drilling conditions, title problems, unexpected pressure irregularities, equipment failures, accidents, adverse weather conditions, compliance with environmental and other governmental requirements, bans, moratoria or other restrictions implemented by local governments and the cost of, or shortages or delays in the availability of, drilling and completion services could negatively impact our drilling operations. +Our proved reserve estimates may be inaccurate and future net cash flows are uncertain. +Estimates of total proved oil and gas reserves (consisting of proved developed and proved undeveloped reserves) and associated future net cash flow depend on a number of variables and assumptions. See “Forward-Looking Statement” in this report. Among others, changes in any of the following factors may cause actual results to vary considerably from our estimates: +· +timing of development expenditures; +· +amount of required capital expenditures and associated economics; +· +recovery efficiencies, decline rates, drainage areas, and reservoir limits; +· +anticipated reservoir and production characteristics and interpretations of geologic and geophysical data; +· +production rates, reservoir pressure, unexpected water encroachment, and other subsurface conditions; +· +oil, gas, and NGL prices; +· +governmental regulation; +· +access to assets restricted by local government action; +· +operating costs; +· +property, severance, excise and other taxes incidental to oil and gas operations; +· +workover and remediation costs; and +· +federal and state income taxes. +Our proved oil and gas reserve estimates are prepared by Cimarex engineers in accordance with guidelines established by the SEC. DeGolyer and MacNaughton, independent petroleum engineers, reviewed our reserve estimates for properties that comprised at least 80% of the discounted future net cash flows before income taxes, using a 10% discount rate, as of December 31, 2015. +16 +Table of Contents +The cash flow amounts referred to in this filing should not be construed as the current market value of our proved reserves. In accordance with SEC guidelines, the estimated discounted net cash flow from proved reserves is based on the average of the previous 12 months' first-day-of-the-month prices and costs as of the date of the estimate, whereas actual future prices and costs may be materially different. +Hedging transactions may limit our potential gains and involve other risks. +To limit our exposure to price risk, we enter into hedging agreements from time to time, and use commodity derivatives. Hedges limit volatility and increase the predictability of a portion of our cash flow. These transactions also limit our potential gains when oil and gas prices exceed the prices established by the hedges. +In certain circumstances, hedging transactions may expose us to the risk of financial loss, including instances in which: +· +the counterparties to our hedging agreements fail to perform; +· +there is a sudden unexpected event that materially increases oil and natural gas prices; or +· +there is a widening of price basis differentials between delivery points for our production and the delivery point assumed in the hedge arrangement. +Because we account for derivative contracts under mark-to-market accounting, during periods we have hedging transactions in place we expect continued volatility in derivative gains or losses on our income statement as changes occur in the relevant price indexes. +The adoption of derivatives legislation could have an adverse effect on our ability to use derivative instruments as hedges against fluctuating commodity prices. +In July 2010, the Dodd-Frank Act was enacted, representing an extensive overhaul of the framework for regulation of U.S. financial markets. The Dodd-Frank Act called for various regulatory agencies, including the SEC and the Commodities Futures Trading Commission (CFTC), to establish regulations for implementation of many of its provisions. The Dodd-Frank Act contains significant derivatives regulations, including requirements that certain transactions be cleared on exchanges and that cash collateral (margin) be posted for such transactions. The Dodd-Frank Act provides for an exemption from the clearing and cash collateral requirements for commercial end-users, such as Cimarex, and it includes a number of defined terms used in determining how this exemption applies to particular derivative transactions and the parties to those transactions. +We have satisfied the requirements for the commercial end-user exception to the clearing requirement and intend to continue to engage in derivative transactions. In December 2015, the CFTC approved final rules on margin requirements that will have an impact on our hedging counterparties and an interim final rule exemption from the margin requirements for certain uncleared swaps with commercial end-users. The final rules did not impose additional requirements on commercial end-users. The ultimate effect of these new rules and any additional regulations is currently uncertain. New rules and regulations in this area may result in significant increased costs and disclosure obligations as well as decreased liquidity as entities that previously served as hedge counterparties exit the market. +17 +Table of Contents +We have been an early entrant into new or emerging resource plays. As a result, our drilling results in these areas are uncertain. The value of our undeveloped acreage may decline and we may incur impairment charges if drilling results are unsuccessful. +New or emerging oil and gas resource plays have limited or no production history. Consequently, in those areas it is difficult to predict our future drilling costs and results. Therefore, our cost of drilling, completing and operating wells in these areas may be higher than initially expected. Similarly, our production may be lower than initially expected, and the value of our undeveloped acreage may decline if our results are unsuccessful. As a result, we may be required to write down the carrying value of our undeveloped acreage in new or emerging plays. +Furthermore, unless production is established during the primary term of certain of our undeveloped oil and gas leases, the leases will expire, and we will lose our right to develop those properties. +Our business depends on oil and gas pipeline and transportation facilities, some of which are owned by others. +In addition to the existence of adequate markets, our oil and natural gas production depends in large part on the proximity and capacity of pipeline systems, as well as storage, transportation, processing and fractionation facilities, most of which are owned by third parties. The lack of availability or the lack of capacity on these systems and facilities could result in the curtailment of production or the delay or discontinuance of drilling plans. This is more likely in remote areas without established infrastructure, such as our Culberson County, Texas area where we have significant development activities. The lack of availability or capacity in these facilities or the loss of these facilities due to weather, fire or other reasons, for an extended period of time could negatively affect our revenues. +A limited number of companies purchase a majority of our oil, NGLs and natural gas. The loss of a significant purchaser could have a material adverse effect on our ability to sell production. +Federal and state regulation of oil and natural gas, local government activity, adverse court rulings, tax and energy policies, changes in supply and demand, pipeline pressures, damage to or destruction of pipelines and general economic conditions could adversely affect our ability to produce and market oil and natural gas. +Competition in our industry is intense and many of our competitors have greater financial and technological resources. +We operate in the competitive area of oil and gas exploration and production. Many of our competitors are large, well-established companies that have larger operating staffs and greater capital resources. These competitors may be willing to pay more for exploratory prospects and productive oil and gas properties. They may also be able to define, evaluate, bid for and purchase a greater number of properties and prospects than our financial or human resources permit. +Because our activity is also concentrated in areas of heavy industry competition, there is heightened demand for personnel, equipment, power, services, facilities and resources, resulting in higher costs than in other areas. Such intense competition also could result in delays in securing, or the inability to secure, the personnel, equipment, power, services, resources or facilities necessary for our development activities, which could negatively impact our production volumes. We also face higher costs in remote areas where vendors can charge higher rates due to that remoteness along with the inability to attract employees to those areas and the ability to deploy their resources in easier to access areas. +We are subject to complex laws and regulations that can adversely affect the cost, manner, and feasibility of doing business. +Exploration, production and the sale of oil and gas are subject to extensive laws and regulations, including those implemented to protect the environment, human health and safety and wildlife. Federal, state, and local regulatory agencies frequently require permitting and impose conditions on our activities. During the permitting process, these regulatory agencies often exercise considerable discretion in both the timing and scope of the permits, and the public, including special interest groups, often has an opportunity to influence the timing and outcome of the process. The requirements or conditions imposed by these agencies can be costly and can delay the commencement of our operations. In addition, a number of initiatives have been put forth by the President Obama administration not in the form of regulation but rather as Presidential or Secretarial Memoranda which have the potential to impact the cost of doing business or could result in +18 +Table of Contents +substantial delays in permitting, drilling and other oil and gas activities. One example is the Presidential Memorandum on “no net loss” which will take the form of agency action by the Department of Interior, EPA and other agencies to ensure that harmful effects to lands are avoided, minimized and those which remain mitigated up to and including prohibiting actions which may have been previously allowed or requiring compensation. +Failing to comply with any of the applicable laws and regulations, or Presidential initiatives, could result in the suspension or termination of our operations and subject us to administrative, civil and criminal liabilities and penalties. Such costs could have a material adverse effect on both our financial condition and operations. +Environmental matters and costs can be significant. +As an owner, lessee, or operator of oil and gas properties, we are subject to various complex, stringent and constantly evolving environmental laws and regulations. Our operations inherently create the risk of environmental liability to the government and private parties stemming from our use, generation, handling and disposal of water and waste materials, as well as the release of hydrocarbons or other substances into the air, soil, or water. The environmental laws and regulations to which we are subject impose numerous obligations applicable to our operations, including: the acquisition of permits before conducting regulated activities associated with drilling for and producing oil and gas; the restriction of types, quantities, and concentration of materials that can be released into the environment; the limitation or prohibition of drilling activities on certain lands lying within wilderness, wetlands, waters of the United States, and other protected areas; the application of specific health and safety criteria addressing worker protection; and the imposition of substantial liabilities for pollution resulting from our operations. Numerous governmental authorities, such as the EPA and analogous state agencies have the power to enforce compliance with these laws and regulations and the permits issued under them. Such enforcement actions often involve taking difficult and costly compliance measures or corrective actions. Failure to comply with these laws and regulations may result in the assessment of sanctions, including administrative, civil or criminal penalties, the imposition of investigatory or remedial obligations, and the issuance of orders limiting or prohibiting some or all of our operations. In addition, we may experience delays in obtaining or be unable to obtain required permits, which may delay or interrupt our operations and limit our growth and revenue. +Liabilities under certain environmental laws can be joint and several and may in some cases be imposed regardless of fault on our part such as where we own a working interest in a property operated by another party. We also could be held liable for damages or remediating lands or facilities previously owned or operated by others regardless of whether such contamination resulted from our own actions and regardless if we were in compliance with all applicable law at the time. Further, claims for damages to persons or property, including natural resources, may result from the environmental, health and safety impacts of our operations. Since these environmental risks generally are not fully insurable and can result in substantial costs, such liabilities could have a material adverse effect on both our financial condition and operations. +Our financial condition and results of operations may be materially adversely affected if we incur costs and liabilities due to a failure to comply with environmental regulations or a release of hazardous substances into the environment. +Our operations are subject to environmental laws and regulations relating to the management and release of hazardous substances, pollutants, solid and hazardous wastes and petroleum hydrocarbons. These laws generally regulate the generation, storage, treatment, discharge, transportation and disposal of pollutants and solid and hazardous waste and may impose strict and, in some cases, joint and several liability for the investigation and remediation of affected areas where hazardous substances may have been released or disposed. The most significant of these environmental laws are as follows: +· +The Comprehensive Environmental Response, Compensation, and Liability Act, as amended, referred to as CERCLA or the Superfund law, and comparable state laws, which imposes liability on generators, transporters and arrangers of hazardous substances at sites where hazardous substance releases have occurred or are threatening to occur; +· +The Oil Pollution Act of 1990 (OPA), under which owners and operators of onshore facilities and pipelines, lessees or permittees of an area in which an offshore facility is located, and owners and operators of vessels are liable for removal costs and damages that result from a discharge of oil into navigable waters of the United States; +19 +Table of Contents +· +The Resource Conservation and Recovery Act (RCRA), as amended, and comparable state statutes, which governs the treatment, storage and disposal of solid waste; +· +The Federal Water Pollution Control Act, as amended, also known as the Clean Water Act (CWA), which governs the discharge of pollutants, including natural gas wastes into federal and state waters; +· +The Safe Drinking Water Act (SDWA), which governs the disposal of wastewater in underground injection wells; and +· +The Clean Air Act (CAA) which governs the emission of pollutants into the air. +We believe we are in substantial compliance with the requirements of CERCLA, RCRA, OPA, CWA, SDWA, CAA and related state and local laws and regulations. We also believe we hold all necessary and up-to-date permits, registrations and other authorizations required under such laws and regulations. Although the current costs of managing our wastes as they presently are classified are reflected in our budget, any legislative or regulatory reclassification of oil and natural gas exploration and production wastes could increase our costs to manage and dispose of such wastes and have a material adverse effect on our financial condition and operations. +Federal regulatory initiatives relating to the protection of threatened or endangered species could result in increased costs and additional operating restrictions or delays. +The Federal Endangered Species Act (ESA) was established to protect endangered and threatened species. Pursuant to the ESA, if a species is listed as threatened or endangered, restrictions may be imposed on activities adversely affecting that species' habitat. The U.S. Fish and Wildlife Service (FWS) may designate critical habitat and suitable habitat areas it believes are necessary for survival of a threatened or endangered species. A critical habitat or suitable habitat designation could result in further material restrictions to federal land use and may materially delay or prohibit land access for oil and natural gas development. Similar protections are offered to migratory birds under the Migratory Bird Treaty Act. We conduct operations on federal oil and natural gas leases in areas where certain species are currently listed as threatened or endangered, or could be listed as such, under the ESA. Operations in areas where threatened or endangered species or their habitat are known to exist may require us to incur increased costs to implement mitigation or protective measures and also may restrict or preclude our drilling activities in those areas or during certain seasons, such as breeding and nesting seasons. On March 27, 2014, the FWS announced the listing of the lesser prairie chicken, whose habitat is over a five-state region, including Texas, New Mexico and Oklahoma, where we conduct operations, as a threatened species under the ESA. Listing of the lesser prairie chicken as a threatened species imposes restrictions on disturbances to critical habitat by landowners and drilling companies that would harass, harm or otherwise result in a "taking" of this species. However, the FWS also announced a final rule that will limit regulatory impacts on landowners and businesses from the listing if those landowners and businesses have entered into certain range-wide conservation planning agreements, such as those developed by the Western Association of Fish and Wildlife Agencies (WAFWA), pursuant to which such parties agreed to take steps to protect the lesser prairie chicken's habitat and to pay a mitigation fee if its actions harm the lesser prairie chicken's habitat. We entered into a voluntary Candidate Conservation Agreement (CCA) with the WAFWA, whereby we agreed to take certain actions and limit certain activities, such as limiting drilling on certain portions of our acreage during nesting seasons, in an effort to protect the lesser prairie chicken. Such CCA could result in increased costs to us from species protection measures, time delays or limitations on drilling activities, which costs, delays or limitations may be significant. While a federal judge in Texas vacated the listing of the lesser prairie chicken in 2015, listing petitions continue to be filed with the FWS which could impact our operations. Many non-governmental organizations (NGOs) work closely with the FWS regarding the listing of many species, including species with broad and even nationwide ranges. The recent listing of the Mexican Long Nosed bat, whose habitat includes the Permian Basin where we operate, is an example of the NGOs’ influence on ESA listing decisions. The increase in endangered species listings may impact our ability to explore for or produce oil and gas in certain areas and increase our costs. +Our hydraulic fracturing activities are subject to risks that could negatively impact our operations and profitability. +We use hydraulic fracturing for the completion of almost all of our wells. Hydraulic fracturing is a process that involves pumping fluid and proppant at high pressure into a hydrocarbon bearing formation to create and hold open fractures. Those fractures enable gas or oil to move through the formation's pores to the well bore. Typically, the fluid +20 +Table of Contents +used in this process is primarily water. In plays where hydraulic fracturing is necessary for successful development, the demand for water may exceed the supply. A lack of readily available water or a significant increase in the cost of water could cause delays or increased completion costs. +While hydraulic fracturing historically has been regulated by state oil and natural gas commissions, the practice has become increasingly controversial in certain parts of the country, resulting in increased scrutiny and regulation from federal agencies. For example, the EPA has asserted federal regulatory authority over certain hydraulic-fracturing activities under the SDWA involving the use of diesel fuels and published permitting guidance in February 2014 addressing the use of diesel in fracturing operations. Although the EPA has delegated the permitting authority for the SDWA’s Underground Injection Control Class II programs in Oklahoma, Texas or New Mexico where we maintain operational acreage, the EPA is encouraging state programs to review and consider use of such draft guidance. Also, the EPA is updating chloride water quality criteria for the protection of aquatic life under the Clean Water Act, which criteria are used by states for establishing acceptable discharge limits. The EPA is expected to release draft criteria in early 2016. On April 7, 2015, the EPA published in the Federal Register a proposed rule requiring federal pre-treatment standards for wastewater generated during the hydraulic fracturing process. Hydraulic fracturing stimulation requires the use of a significant volume of water with some resulting “flowback water” as well as “produced water.” If adopted, the new pretreatment rules will require shale gas operations to pretreat wastewater before transferring it to treatment facilities. The public comment period for the proposed rates ended on June 8, 2015 and final rules have not yet been issued. Moreover, in May 2014, the EPA issued an Advanced Notice of Proposed Rulemaking seeking public comment on its intent to develop and issue regulations under the Toxic Substances Control Act regarding the disclosure of information related to the chemicals used in hydraulic fracturing. The public comment period ended on September 18, 2014. +In addition, on March 26, 2015, the federal Bureau of Land Management published a final rule governing hydraulic fracturing on federal and Indian lands. The rule requires public disclosure of chemicals used in hydraulic fracturing on federal and Indian lands, confirmation that wells used in fracturing operations meet appropriate construction standards, development of appropriate plans for managing flowback water that returns to the surface, increased standards for interim storage of recovered waste fluids, and submission to the Bureau of Land Management of detailed information on the geology, depth and location of preexisting wells. This rule originally was scheduled to take effect on June 24, 2015. However, the rule is the subject of several pending lawsuits filed by industry groups, two Indian tribes, and at least four states, alleging that federal law does not give the Bureau of Land Management authority to regulate hydraulic fracturing. The federal judge has enjoined the rule until the merits of the case can be heard sometime in 2016. +There are also certain governmental reviews either underway or being proposed that focus on environmental aspects of hydraulic fracturing practices. The EPA has commenced a study of the potential environmental effects of hydraulic fracturing on drinking water and groundwater. The EPA’s draft report was released on June 4, 2015. The findings of the report suggest that hydraulic fracturing does not pose a systemic risk to groundwater although there are risks to both groundwater and soils posed by inadequate water handling practices in certain situations. A public comment period on the report was open until August 28, 2015 and a series of public hearings were conducted by the EPA’s Scientific Advisory Board (SAB) throughout the fall of 2015. The EPA issued its final report and concluded there is no evidence of widespread contamination associated with hydraulic fracturing. The SAB has indicated that they want to continue to study the matter. Other governmental agencies, including the U.S. Department of Energy and the U.S. Department of the Interior, have evaluated or are evaluating various other aspects of hydraulic fracturing. These ongoing or proposed studies could spur initiatives to further regulate hydraulic fracturing. +Additionally, Congress from time to time has considered the adoption of legislation to provide for federal regulation of hydraulic fracturing and to require disclosure of the chemicals used in the hydraulic fracturing process. Most producing states, including Texas and Colorado, have adopted, and other states are considering adopting, regulations that could impose more stringent permitting, public disclosure, and well construction requirements on hydraulic-fracturing operations or otherwise seek to ban fracturing activities altogether. +Any of the above factors could have a material adverse effect on our financial position, results of operations or cash flows and could make it more difficult or costly for us to perform fracturing to stimulate production from dense subsurface rock formations and, in the event of local prohibitions against commercial production of natural gas, may +21 +Table of Contents +preclude our ability to drill wells. In addition, our fracturing activities could become subject to additional permitting requirements and result in permitting delays as well as potential increases in costs. Restrictions on hydraulic fracturing could also reduce the amount of oil and natural gas that we are ultimately able to produce from our reserves. +Air quality regulations could negatively impact our operations and profitability. +In August 2012, the EPA adopted rules that subject oil and natural gas production, processing, transmission and storage operations to regulation under the New Source Performance Standards (NSPS) and National Emission Standards for Hazardous Air Pollutants programs. The rules include NSPS standards for completions of hydraulically fractured gas wells and establishes specific new requirements for emissions from compressors, controllers, dehydrators, storage vessels, natural gas processing plants and certain other equipment. The final rules seek to achieve a 95% reduction in volatile organic compounds (VOCs) emitted by requiring the use of reduced emission completions or “green completions” on all hydraulically-fractured wells constructed or refractured after January 1, 2015. The EPA received numerous requests for reconsideration of these rules from both industry and the environmental community. In response, the EPA has issued, and will likely continue to issue, revised rules responsive to some of these requests for reconsideration. In addition, on January 14, 2015, the EPA announced a series of steps it plans to take to address methane and smog-forming VOC emissions from the oil and gas industry. Proposed rules implementing the various elements of the package were published in September 2015 and the public comment period ended in December 2015. These standards, as well as any future laws and their implementing regulations, may require us to obtain pre-approval for the expansion or modification of existing facilities or the construction of new facilities expected to produce air emissions, impose stringent air permit requirements, or utilize specific equipment or technologies to control emissions. Compliance with such rules could result in significant costs, including increased capital expenditures and operating costs, and could adversely impact our business. +The adoption of climate change legislation or regulations restricting emission of greenhouse gases could result in increased operating costs and reduced demand for the oil and natural gas we produce. +Studies have suggested that emission of certain gases, commonly referred to as greenhouse gases (GHGs) may be impacting the earth's climate. Methane, a primary component of natural gas, and carbon dioxide, also present in natural gas as a secondary product, sometimes considered an impurity or a by-product of the burning of oil and natural gas, are examples of GHGs. The U.S. Congress and various states have been evaluating, and in some cases implementing, climate-related legislation and other regulatory initiatives that restrict emissions of GHGs. In December 2009, the EPA published its findings that emissions of GHGs present an endangerment to public health and the environment because emissions of such gases are contributing to the warming of the earth's atmosphere and other climatic changes. Based on these findings, the EPA adopted regulations under existing provisions of the Federal Clean Air Act that establish Prevention of Significant Deterioration (PSD) and Title V permit reviews for GHG emissions from certain large stationary sources. Facilities required to obtain PSD and/or Title V permits under EPA’s GHG Tailoring Rule for their GHG emissions also may be required to meet "Best Available Control Technology" standards that will be established by the states or, in some cases, by the EPA on a case-by-case basis. The EPA has also adopted rules requiring the monitoring and reporting of GHG emissions from specified sources in the United States, including, among others, certain oil and natural gas production facilities on an annual basis, which includes certain of our operations. In recent proposed rulemaking EPA is widening the scope of annual GHG reporting to include not only activities associated with completion and workover of gas wells with hydraulic fracturing and activities associated with oil and natural gas production operations, but also completions and workovers of oil wells with hydraulic fracturing, gathering and boosting systems and transmission pipelines. +While Congress has from time to time considered legislation to reduce emissions of GHGs, there has not been significant activity in the form of adopted legislation to reduce GHG emissions at the federal level in recent years. In the absence of such federal climate legislation, a number of state and regional efforts have emerged that are aimed at tracking and/or reducing GHG emissions by means of cap and trade programs that typically require major sources of GHG emissions, such as electric power plants, to acquire and surrender emission allowances in return for emitting those GHGs. In January 2015, President Obama announced a series of administration actions to reduce methane emissions, including rulemaking by the EPA and the BLM as well as updating of standards by the Department of Transportation’s Pipeline and Hazardous Materials Administration. The current administration intends to promulgate proposed climate change rulemaking this summer aimed at reducing GHG emissions by 45% by 2025 compared to 2012 levels. On January 22, 2016, the Department of the Interior announced its proposed emissions mandate on oil and natural gas producers who +22 +Table of Contents +operate on federal and Indian lands. While we expect new legislation and regulations to increase the cost of business, at this time it is not possible to quantify the impact on our business. Any such future laws and final regulations that require reporting of GHGs or otherwise limit emissions of GHGs from our equipment and operations could require us to incur costs to develop and implement best management practices aimed at reducing GHG emissions, install and maintain emissions control technologies, as well as monitor and report on GHG emissions associated with our operations, which would increase our operating costs, and such requirements also could adversely affect demand for the oil and natural gas that we produce. +Legislation or regulatory initiatives intended to address seismic activity could restrict our ability to dispose of saltwater produced in connection with our oil and gas production, which could limit our ability to produce oil and gas economically and have a material adverse effect on our business. +We dispose of large volumes of saltwater produced in connection with our drilling and production operations, pursuant to permits issued to us or third party operators of disposal wells by governmental authorities overseeing produced water disposal activities. While these permits are issued pursuant to existing laws and regulations, these legal requirements are subject to change, which could result in the imposition of more stringent operating constraints or new monitoring and reporting requirements, owing to, among other things, concerns of the public or governmental authorities regarding such gathering or disposal activities. +There exists a growing concern that the injection of produced water into belowground disposal wells triggers seismic activity in certain areas, including Oklahoma and Texas, where we operate. In response to these concerns, regulators in some states are pursuing initiatives designed to impose additional requirements in the permitting of saltwater disposal wells or otherwise to assess any relationship between seismicity and the use of such wells. For example, in 2014, the Oklahoma Corporation Commission adopted rules for operators of saltwater disposal wells in certain seismically-active areas, or Areas of Interest, in the Arbuckle formation, requiring operators to monitor and record well pressure and discharge volume on a daily basis and further requiring operators of wells permitted for disposal of 20,000 barrels per day or more of saltwater to conduct mechanical integrity testing. Throughout 2015, the Oklahoma Corporation Commission’s Oil and Gas Conservation Division, or OGCD, issued a series of directives, expanding the areas of interest for induced seismicity and enhanced disposal restrictions and limiting the depths at which produced water could be injected or, in the alternative, reducing disposal volumes. Additional regulations and restrictions have been proposed in Oklahoma in 2016. +In addition, in 2014 the Texas Railroad Commission, or TRC, published a new rule governing permitting or re-permitting of disposal wells in Texas that would require, among other things, the submission of information on seismic events occurring within a specified radius of the disposal well location, as well as logs, geologic cross sections and structure maps relating to the disposal area in question. If a permittee or a prospective permittee fails to demonstrate that the saltwater or other fluids are confined to the disposal zone or if scientific data indicates such a disposal well is likely to be or determined to be contributing to seismic activity, then the TRC may deny, modify, suspend or terminate the permit application or existing operating permit for that well. +The adoption and implementation of any new laws, regulations, or directives that restrict our ability to dispose of produced water, by changing the depths of disposal wells, reducing the volume of oil and natural gas wastewater disposed in such wells, restricting disposal well locations or otherwise, or by requiring us or third parties who dispose of our saltwater to shut down disposal wells, could increase disposal costs or require us to shut in a substantial number of our oil and natural gas wells or otherwise have a material adverse effect on our ability to produce oil and gas economically and, accordingly, could materially and adversely affect our business, financial condition and results of operations. +We use some of the latest available horizontal drilling and completion techniques, which involve risk and uncertainty in their application. +Our horizontal drilling operations utilize some of the latest drilling and completion techniques. The risks or such techniques include, but are not limited to, the following: +· +landing the wellbore in the desired drilling zone; +23 +Table of Contents +· +staying in the desired drilling zone while drilling horizontally through the formation; +· +running casing the entire length of the wellbore; +· +being able to run tools and other equipment consistently through the horizontal wellbore; +· +the ability to fracture stimulate the planned number of stages; +· +the ability to run tools the entire length of the wellbore during completion operations; and +· +the ability to successfully clean out the wellbore after completion of the final fracture stimulation stage. +Any of the above factors could have a material adverse effect on our financial position, results of operations or cash flows. +We may be subject to information technology system failures, network disruptions and breaches in data security and our business, financial position, results of operations and cash flows could be negatively affected by such security threats and disruptions. +As an oil and gas producer, we face various security threats, including cybersecurity threats such as attempts to gain unauthorized access to sensitive information or to render data or systems unusable; threats to the security of our facilities and infrastructure or third-party facilities and infrastructure, such as gathering and processing facilities, pipelines and refineries; and threats from terrorist acts. Cybersecurity attacks are becoming more sophisticated and include, but are not limited to, malicious software, attempts to gain unauthorized access to data and systems, and other electronic security breaches that could lead to disruptions in critical systems, unauthorized release of confidential or otherwise protected information, and corruption of data, which could have an adverse effect on our reputation, business, financial condition, results of operations or cash flows. While we have not suffered any material losses relating to such attacks, there can be no assurance that we will not suffer such losses in the future. +We rely heavily on our information systems, and the availability and integrity of these systems are essential for us to conduct our business and operations. In addition to cybersecurity and data security threats, other information system failures and network disruptions could have a material adverse effect on our ability to conduct our business. We could experience system failures due to power or telecommunications failures, human error, natural disasters, fire, sabotage, hardware or software malfunction or defects, computer viruses, intentional acts of vandalism or terrorism and similar acts or occurrences. Such system failures could result in the unanticipated disruption of our operations, communications or processing of transactions, as well as loss of, or damage to, sensitive information, facilities, infrastructure and systems essential to our business and operations, the failure to meet regulatory standards and the reporting of our financial results, and other disruptions to our operations, which, in turn, could have a material adverse effect on our business, financial position, results of operations and cash flows. +While management has taken steps to address these concerns by implementing network security and internal control measures to monitor and mitigate security threats and to increase security for our information, facilities, and infrastructure, our implementation of such procedures and controls may result in increased costs, and there can be no assurance that a system failure or data security breach will not occur and have a material adverse effect on our business, financial condition and results of operations. In addition, as cybersecurity threats continue to evolve, we may be required to expend additional resources to continue to modify or enhance our protective measures or to investigate or remediate any cybersecurity or information technology infrastructure vulnerabilities. +Our limited ability to influence operations and associated costs on non-operated properties could result in economic losses that are partially beyond our control. +Other companies operate approximately 26% of our net production. Our success in properties operated by others depends upon a number of factors outside of our control. These factors include timing and amount of capital expenditures, the operator's expertise and financial resources, approval of other participants in drilling wells, selection of technology and maintenance of safety and environmental standards. Our dependence on the operator and other working interest owners +24 +Table of Contents +for these projects could prevent the realization of our targeted returns on capital in drilling or acquisition activities. +Our business involves many operating risks that may result in substantial losses for which insurance may be unavailable or inadequate. +Our operations are subject to hazards and risks inherent in drilling for oil and gas, such as fires, natural disasters, explosions, formations with abnormal pressures, casing collapses, uncontrollable flows of underground gas, blowouts, surface cratering, pipeline ruptures or cement failures. Other such risks include theft, vandalism, environmental hazards such as natural gas leaks, oil spills and discharges of toxic gases. Any of these risks can cause substantial losses resulting from: +· +injury or loss of life; +· +damage to, loss of or destruction of, property, natural resources and equipment; +· +pollution and other environmental damages; +· +regulatory investigations, civil litigation and penalties; +· +damage to our reputation; +· +suspension of our operations; and +· +costs related to repair and remediation. +In addition, our liability for environmental hazards may include conditions created by the previous owners of properties that we purchase or lease. +We maintain insurance coverage against some, but not all, potential losses. We do not believe that insurance coverage for all environmental damages that could occur is available at a reasonable cost. Losses could occur for uninsurable or uninsured risks, or in amounts in excess of existing insurance coverage. The occurrence of an event that is not fully covered by insurance could harm our financial condition and results of operation. +We may not be able to generate enough cash flow to meet our debt obligations. +At December 31, 2015, our long-term debt consisted of $750 million of 4.375% senior notes due in 2024 and $750 million of 5.875% senior notes due in 2022. In addition to interest expense and principal on our long-term debt, we have demands on our cash resources including, among others, operating expenses and capital expenditures. +Our ability to pay the principal and interest on our long-term debt and to satisfy our other liabilities will depend upon future performance and our ability to repay or refinance our debt as it becomes due. Our future operating performance and ability to refinance will be affected by economic and capital market conditions, results of operations and other factors, many of which are beyond our control. Our ability to meet our debt service obligations also may be impacted by changes in prevailing interest rates, as borrowing under our existing revolving credit facility bears interest at floating rates. +We may not generate sufficient cash flow from operations. Without sufficient cash flow, there may not be adequate future sources of capital to enable us to service our indebtedness or to fund our other liquidity needs. If we are unable to service our indebtedness and fund our operating costs, we will be forced to adopt alternative strategies that may include: +· +reducing or delaying capital expenditures; +· +seeking additional debt financing or equity capital; +25 +Table of Contents +· +selling assets; or +· +restructuring or refinancing debt. +We may be unable to complete any such strategies on satisfactory terms, if at all. Our inability to generate sufficient cash flows to satisfy our debt obligations, or to refinance our indebtedness on commercially reasonable terms, would materially and adversely affect our financial condition and results of operations. +The instruments governing our indebtedness contain various covenants limiting the discretion of our management in operating our business. +The indenture governing our senior notes and our credit agreement contain various restrictive covenants that may limit management's discretion in certain respects. In particular, these agreements limit Cimarex's and its subsidiaries' ability to, among other things: +· +create certain liens; +· +consolidate, merge or transfer all, or substantially all, of our assets and our restricted subsidiaries; +· +enter into sale and leaseback transactions. +In addition, our revolving credit agreement requires us to maintain a total debt to capitaliztion ratio (as defined in the credit agreement) of not more than 65%. Also, the indenture, under which we issued our senior unsecured notes, restricts us from incurring additional indebtedness, subject to certain exceptions, unless our fixed charge coverage ratio (as defined in the indenture) is at least 2.25. The additional indebtedness limitation does not prohibit us from borrowing under our revolving credit facility. See Note 3 to the Consolidated Financial Statements for further information. +If we fail to comply with the restrictions in the indenture governing our senior notes or the agreement governing our credit facility or any other subsequent financing agreements, a default may allow the creditors, if the agreements so provide, to accelerate the related indebtedness as well as any other indebtedness to which a cross-acceleration or cross-default provision applies. In addition, lenders may be able to terminate any commitments they had made to make available further funds. +Our acquisition activities may not be successful, which may hinder our replacement of reserves and adversely affect our results of operations. +The successful acquisition of properties requires an assessment of several factors, including: +· +geological risks and recoverable reserves; +· +future oil and gas prices and their appropriate market differentials; +· +operating costs; and +· +potential environmental risks and other liabilities. +The accuracy of these assessments is inherently uncertain. In connection with these assessments, we perform a review of the subject properties we believe to be generally consistent with industry practices. Our review will not reveal all existing or potential problems nor will it permit us to become sufficiently familiar with the properties to fully assess their deficiencies and capabilities. Inspections will not likely be performed on every well or facility, and structural and environmental problems are not necessarily observable even when an inspection is undertaken. Furthermore, the seller may be unwilling or unable to provide effective contractual protection against all or part of the identified problems. +We may lose leases if production is not established within the time periods specified in the leases. +26 +Table of Contents +Unless production is established within the spacing units covering the undeveloped acres on which some of the locations are identified, the leases for such acreage will expire. If we are not able to renew leases before they expire, any proved undeveloped reserves associated with such leases will be removed from our proved reserves. The combined net acreage expiring in the next three years represents 3.7% of our total net undeveloped acreage at December 31, 2015. At that date, we had leases representin g 7 4 ,874 net acres expiring in 2016, 89,785 net acres expiring in 2017, and 53,981 net acres expiring in 2018. Our actual drilling activities may materially differ from those presently identified, which could adversely affect our business. +Our disposition activities may be subject to factors beyond our control, and in certain cases we may retain unforeseen liabilities for certain matters . +We regularly sell non-core assets in order to increase capital resources available for other core assets and to create organizational and operational efficiencies. We also occasionally sell interests in core assets for the purpose of accelerating the development and increasing efficiencies in such core assets. Various factors could materially affect our ability to dispose of such assets, including the approvals of governmental agencies or third parties and the availability of purchasers willing to acquire the assets with terms we deem acceptable. +Sellers often retain certain liabilities or agree to indemnify buyers for certain matters related to the sold assets. The magnitude of any such retained liability or of the indemnification obligation is difficult to quantify at the time of the transaction and ultimately could be material. Also, as is typical in divestiture transactions, third parties may be unwilling to release the company from guarantees or other credit support provided prior to the sale of the divested assets. As a result, after a divestiture, the company may remain secondarily liable for the obligations guaranteed or supported to the extent that the buyer of the assets fails to perform these obligations. +Competition for experienced, technical personnel may negatively impact our operations. +Our exploratory and development drilling success depends, in part, on our ability to attract and retain experienced professional personnel. The loss of any key executives or other key personnel could have a material adverse effect on our operations. As we continue to develop our asset base and the scope of our operations, our future profitability will depend on our ability to attract and retain qualified personnel, particularly individuals with a strong background in geology, geophysics, engineering and operations. +We are involved in various legal proceedings, the outcome of which could have an adverse effect on our liquidity. +In the normal course of business, we have various lawsuits and related disputed claims, including but not limited to claims concerning title, royalty payments, environmental issues, personal injuries, and contractual issues. Although we currently believe the resolution of these lawsuits and claims, individually or in the aggregate, would not have a material adverse effect on our financial condition or results of operations, our assessment of our current litigation and other legal proceedings could change in light of the discovery of facts with respect to legal actions or other proceedings pending against us not presently known to us or determinations by judges, juries or other finders of fact that are not in accord with our evaluation of the possible liability or outcome of such proceedings. Therefore, there can be no assurance that outcomes of future legal proceedings would not have an adverse effect on our liquidity and capital resources. +Certain federal income tax deductions currently available with respect to natural gas and oil exploration and development may be eliminated, as a result of future legislation. +Various proposals have been made recommending the elimination of certain key U.S. federal income tax incentives currently available to oil and natural gas exploration and production companies. Legislation is often introduced in Congress which would implement many of these proposals. These changes include, but are not limited to, (i) the repeal of the percentage depletion allowance for oil and gas properties; (ii) the elimination of current deductions for intangible drilling and development costs; and (iii) an extension of the amortization period for certain geological and geophysical expenditures. It is unclear, however, whether any such changes will be enacted or how soon such changes could be effective. +The passage of this legislation or any other similar change in U.S. federal income tax law could eliminate or +27 +Table of Contents +postpone certain tax deductions that are currently available with respect to oil and natural gas exploration and development, and any such change could have an adverse effect on our financial position. +ITEM 1B. UNRESOLVED STAFF COMMENTS +None. +ITEM 3. LEGAL PROCEEDING S +The information set forth under th e heading “Litigation” in Note 10 of the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K is incorporated by reference in response to this item. +ITEM 4. MINE SAFETY DISCLOSURE S +Not applicable. +28 +Table of Contents +PART I I +ITEM 5. MARKE T FOR THE REGISTRANT ’ S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES +Our $0.01 par value common stock trades on the New York Stock Exchange (NYSE) under the symbol XEC. A cash dividend was paid to stockholders in each quarter of 2015 . Future dividend payments will depend on the company ’ s level of earnings, financial requirements and other factors considered relevant by the Board of Directors. +Stock Prices and Dividends by Quarter. The following table sets forth, for the periods indicated, the high and low sales price per share of Common Stock on the NYSE and the quarterly dividends paid per share. +Dividends +Paid Per +2015 +High +Low +Share +First Quarter +$ +118.87 +$ +91.74 +$ +0.16 +Second Quarter +$ +132.18 +$ +108.59 +$ +0.16 +Third Quarter +$ +118.87 +$ +97.23 +$ +0.16 +Fourth Quarter +$ +124.91 +$ +85.00 +$ +0.16 +Dividends +Paid Per +2014 +High +Low +Share +First Quarter +$ +121.71 +$ +92.38 +$ +0.14 +Second Quarter +$ +143.75 +$ +111.49 +$ +0.16 +Third Quarter +$ +150.71 +$ +125.25 +$ +0.16 +Fourth Quarter +$ +129.12 +$ +96.02 +$ +0.16 +The closing price of Cimarex stock as reported on the New York Stock Exchange on February 12 , 201 6 , was $ 84.67 . At December 31, 2015 , Cimarex ’ s 94,820,570 shares of outstanding common stock were held by approximately 1,960 stockholders of record. +The following table sets forth information with respect to the equity compensation plans available to directors, officers, and employees of the company at December 31, 2015 : +(c) +Number of securities +(a) +remaining available +Number of securities +(b) +for future issuance +to be issued upon +Weighted-average +under equity +exercise of +exercise price of +compensation plans +outstanding options, +outstanding options, +(excluding securities +Plan Category +warrants, and rights +warrants, and rights +reflected in column (a)) +Equity compensation plans approved by security holders +299,229 +$ +93.76 +4,423,042 +Equity compensation plans not approved by security holders +— +— +— +Total +299,229 +$ +93.76 +4,423,042 +29 +Table of Contents +The following graph compares the cumulative 5-year total return attained by stockholders on Cimarex Energy Co.’s common stock relative to the cumulative total returns of the S&P 500 index, the Dow Jones US Exploration & Production index, and the S&P Oil & Gas Exploration & Production index. The graph tracks the performance of a $100 investment in our common stock and in each of the indexes (with the reinvestment of all dividends) from December 31, 2010 to December 31, 2015. The stock price performance included in this graph is not necessarily indicative of future stock price performance. +12/2010 +12/2011 +12/2012 +12/2013 +12/2014 +12/2015 +Cimarex Energy Co. +$ +100.00 +$ +70.26 +$ +66.01 +$ +120.78 +$ +122.66 +$ +104.00 +S&P 500 +$ +100.00 +$ +102.11 +$ +118.45 +$ +156.82 +$ +178.29 +$ +180.75 +Dow Jones US Exploration & Production +$ +100.00 +$ +95.81 +$ +101.39 +$ +133.68 +$ +119.27 +$ +90.97 +S&P Oil & Gas Exploration & Production +$ +100.00 +$ +93.57 +$ +96.98 +$ +123.65 +$ +110.55 +$ +72.80 +Stock Repurchases. In December 2005, the Board of Directors authorized the repurchase of up to four million shares of our common stock. The authorization expired on December 31, 2011. Through December 31, 2007, we had repurchased and cancelled a total of 1,364,300 shares at an overall average price of $39.05. No shares have been repurchased since the quarter ended September 30, 2007. +30 +Table of Contents +ITEM 6. SELECTED FINANCIAL DATA +The selected financial data set forth below should be read in conjunction with the Consolidated Financial Statements and accompanying notes thereto provided in Item 8 of this report. +For the Years Ended December 31, +2015 +2014 +2013 +2012 +2011 +(in millions, except per share amounts) +Operating Results: +Oil, gas and NGL sales +$ +1,418 +$ +2,373 +$ +1,953 +$ +1,582 +$ +1,704 +Total Revenues +$ +1,453 +$ +2,424 +$ +1,998 +$ +1,624 +$ +1,758 +Net income (loss) (1) +$ +(2,409) +$ +507 +$ +565 +$ +354 +$ +530 +Earnings (loss) per share to common Stockholders: +Basic +$ +(25.92) +$ +5.79 +$ +6.48 +$ +4.08 +$ +6.17 +Diluted +$ +(25.92) +$ +5.78 +$ +6.47 +$ +4.07 +$ +6.15 +Cash dividends declared per share +$ +0.64 +$ +0.64 +$ +0.56 +$ +0.48 +$ +0.40 +Cash flow data: +Net cash flow provided by operating activities +$ +692 +$ +1,619 +$ +1,324 +$ +1,193 +$ +1,292 +Net cash used in investing activities +$ +(1,009) +$ +(1,740) +$ +(1,531) +$ +(1,415) +$ +(1,429) +Net cash provided by financing activities +$ +691 +$ +522 +$ +142 +$ +289 +$ +25 +December 31, +2015 +2014 +2013 +2012 +2011 +(in millions, except proved reserves amounts) +Balance sheet data: +Cash and Cash Equivalents +$ +779 +$ +406 +$ +5 +$ +70 +$ +2 +Oil and Gas Properties, net (1) +$ +3,276 +$ +6,904 +$ +5,966 +$ +5,005 +$ +4,126 +Goodwill +$ +620 +$ +620 +$ +620 +$ +620 +$ +620 +Total assets (1) (2) +$ +5,243 +$ +8,708 +$ +7,243 +$ +6,294 +$ +5,355 +Long-term Obligations +Long-term debt (principal) +$ +1,500 +$ +1,500 +$ +924 +$ +750 +$ +405 +Deferred Income Taxes +$ +353 +$ +1,755 +$ +1,460 +$ +1,121 +$ +904 +Other +$ +197 +$ +194 +$ +164 +$ +313 +$ +302 +Stockholders' equity +$ +2,798 +$ +4,501 +$ +4,022 +$ +3,475 +$ +3,131 +Proved Reserves: +Oil (MBbls) +107,798 +118,992 +108,533 +77,921 +72,322 +Gas (Bcf) +1,517 +1,667 +1,294 +1,252 +1,216 +NGL (MBbls) +124,277 +125,273 +92,044 +89,909 +65,815 +Total equivalent (Bcfe) +2,909 +3,132 +2,497 +2,259 +2,045 +(1) +During 2015, we recorded non-cash full cost ceiling impairments to our oil and gas properties totaling $3.7 billion ($ 2.4 billion, net of tax). +(2) +At December 31, 2015, we adopted new guidance which requires debt issuance costs (except for those related to revolving credit facilities) to be presented in the balance sheet as a direct deduction from the carrying amount of the related debt liability rather than as an asset. Such costs were previously recorded as deferred assets. Prior periods have been adjusted to conform to this guidance. See Notes 1 and 3 to the Consolidated Financial Statements of this report for additional information. +31 +Table of Contents +ITEM 7. MANAGEMENT ’ S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS +The following discussion and analysis should be read in conjunction with our Consolidated Financial Statements included in Item 8 of this report and also with “ Risk Factors” in Item 1A of this report . This di scussion also includes forward- looking statements. Please refer to “ Cautionary Information about Forward - Looking Statements ” in Part I of this report for important information about these types of statements. +OVERVIEW +Cimarex is an independent oil and gas exploration and production company. Our operations are entirely located in the United States, mainly in Oklahoma, Texas and New Mexico. C urrently o ur operations are focused in two main areas: the Permian Basin and the Mid-Continent region. Our Permian Basin region encompasses west Tex as and southeast New Mexico. Our Mid-Continent region consists of Oklahoma and the Texas Panhandle. +Our principal business objective is to profitably grow proved reserves and production for the long-term benefit of our stockholders through a diversified drilling portfolio. Our strategy centers on maximizing cash flow from producing properties and profitably reinvesting that cash flow in exploration and development. We consider property acquisitions , dispositions and occasional mergers to enhance our competitive position. +We believe that detailed technical analysis, operational focus and a disciplined capital investment process mitigates risk and positions us to continue to achieve profitable increases in proved reserves and production. Our robust drilling portfolio and limited long-term commitments provide the flexibility to respond quickly to industry volatility. +Our investments are generally funded with cash flow provided by operating activities together with bank borrowings, sales of non - strategic assets and occasional public financing. Conservative use of leverage has long been a part of our financial strategy. We believe that maintaining a strong balance sheet mitigates financial risk and enables us to withstand low prices. +Market Conditions +The oil and gas industry is cyclical and commodity prices can be volatile. In the second half of 2014, oil prices began a rapid and significant decline as global oil supplies began to outpace demand. During 2015 and thus far in 2016, global oil supply has continued to outpace demand resulting in further deterioration in realized prices for oil production. +Prices for domestic natural gas and NGLs began to decline during the third quarter of 2014 and have continued to be weak throughout 2015 and thus far in 2016. The declines in these prices are primarily due to an imbalance between supply and demand across North America. +Our revenue, profitability and future growth are highly dependent on the prices we receive for our oil and natural gas production. Compared to 2014, our realized oil price for 2015 fell 48% to $43.38 per barrel. Similarly, our realized price for natural gas dropped 43% to $2.53 per mcf and our realized price for NGLs declined 59% to $13.75 per barrel. The U.S. oil and gas industry continues to confront weak commodity prices due to oversupply, growing inventories and concern over global demand. +Continued downward pressure on commodity prices has adverse effects on our business and financial position. Our ability to access capital markets may be restricted, which could have an impact on our flexibility to react to changing economic and business conditions. Further, the global oversupply situation could have an adverse impact on our business partners, customers and lenders, potentially causing them to fail to meet their obligations to us. +Based on current economic conditions, our 2016 exploration and development expenditures are projected to range from $600-$650 million. Investments in gathering and processing infrastructure and other fixed assets are expected to approximate an additional $50 million. +32 +Table of Contents +2015 Summary of Operating and Financial Results +Continued weakness in commodity prices had a significant adverse impact on our results of operations, our balance sheet and the amount of cash flow available to invest in exploration and development activities. +The following is a summary of certain 2015 operating and financial results: +· +Average daily production increased 13% to 984.5 MMcfe per day. +· +Oil production grew 19% to 51,132 barrels per day, gas volumes increased by 9% to 463.0 MMcf per day and NGL volumes rose 15% to 35,789 barrels per day. +· +We added 571 Bcfe of proved reserves from extensions and discoveries and net positive performance revisions, replacing 159% of production. +· +In the second quarter of 2015 we completed a common stock offering and received net proceeds of $730.0 million. +· +Cash on hand at year end was $779.4 million. +· +Production revenues declined 40% to $1.4 billion. +· +Cash flow provided by operating activities of $691.5 million was 57% lower than that of the prior year. +· +We incurred non-cash impairments of our oil and gas properties totaling $3.7 billion. +· +We had a net loss for the year of $2.4 billion, or $25.92 per diluted share. +· +Proved reserves decreased 7.1% to 2,909.4 Bcfe primarily due to negative price-related revisions of 398.8 Bcfe. +In response to lower commodity prices we significantly reduced our 2015 exploration and development expenditures to $877.0 million compared to $1.9 billion in 2014. +Total debt a t December 31, 2015 consisted of $1.5 billion of senior notes, with $750 million maturing in 2022 and $750 million maturing in 2024, unchanged from total debt at December 31, 2014. +33 +Table of Contents +Proved Reserves +Year Ended December 31, 2015 +Total Gas +Gas +Oil +NGL +Equivalents +(MMcf) +(MBbl) +(MBbl) +(MMcfe) +Permian Basin +378,516 +78,482 +36,598 +1,069,002 +Mid-Continent +1,134,434 +29,048 +87,639 +1,834,554 +Other +4,002 +268 +40 +5,851 +Total +1,516,952 +107,798 +124,277 +2,909,407 +Year Ended December 31, 2014 +Total Gas +Gas +Oil +NGL +Equivalents +(MMcf) +(MBbl) +(MBbl) +(MMcfe) +Permian Basin +370,729 +90,081 +35,253 +1,122,734 +Mid-Continent +1,280,234 +27,791 +89,621 +1,984,709 +Other +15,770 +1,120 +399 +24,880 +Total +1,666,733 +118,992 +125,273 +3,132,323 +Year - end 2015 proved reserves declined by 7% to 2.9 Tcfe, compared to 3.1 Tcfe at year-end 2014 . Pro ved natural gas reserves were 1.5 Tcf, oil contributed 0.65 Tcfe and NGLs accounted for 0.75 Tcfe. Our Mid-Continent’s reserves accounted for 63% of total proved reserves with the remainder in the Permian Basin . +During 201 5 , we added 429 Bcfe of proved reserves through extensions and discoveries, primarily in the Mid-Continent and Permian Basin. In the Mid-Continent, we added 177 Bcfe . In the Permian Basin, we added 251 Bcfe. In addition, we had net positive performance revisions of 142 Bcfe. The performance revisions included 47 Bcfe for better than expected performance of PUD reserves converted to proved developed reserves during the year and positive adjustments of 95 Bcfe to previously booked PUD reserves. +During 2015 , we had net negative reserve revisions of 276 Bcfe. The significant decrease in commodity prices seen in 2015 resulted in negative revisions of 399 Bcfe due to prices. In addition, 19 Bcfe of negative revisions was due to increases in operating expenses , which shortened the economic lives of properties. These decreases were partially offset by the 142 Bcfe of net positive performance revisions discussed above. +The process of estimating quantities of oil, gas and NGL reserves is complex. Significant decisions are required in the evaluation of all available geological, geophysical, engineering and economic data. The data for a given field may also change substantially over time as a result of numerous factors including, but not limited to, additional development activity, evolving production history, contractual arrangements and continual reassessment of the viability of production under varying economic conditions. As a result, material revisions to existing reserve estimates may occur from time to time. See SUPPLEMENTAL OIL AND GAS INFORMATION (UNAUDITED) in Item 8 of this report for further discussion regarding year-over-year changes in our proved reserves. +Although every reasonable effort is made to ensure that our reserve estimates represent the most accurate assessments possible, subjective decisions and available data for our various fields make these estimates generally less precise than other estimates included in financial statement disclosures. See Proved Reserves Estimation Procedures in Items 1 and 2 of this report for a discussion of our reserve estimation process. +Revenues +Almost all of our revenues are derived from sales of our oil, natural gas and NGL production. Increases or decreases in our revenue, profitability and future production growth are highly dependent on the commodity prices we receive . P rices are market driven and we expect that future prices will continue to fluctuate due to supply and demand factors, seasonality and geopolitical and economic factors. +34 +Table of Contents +Oil sales contributed 57% of our total production revenue for 2015. Gas sales accounted for 30% and NGL sales contributed 13%. A $1.00 per barrel change in our realized oil price would have resulted in an $ 18.7 million change in revenues. A $0.10 per Mcf change in our realized gas price would have resulted in a $ 16.9 million change in our gas revenues. A $1.00 per barrel change in NGL prices would have changed revenues by $13.1 million. +The following table presents our average realized commodity prices and certain major U.S. index prices. Our r ealized prices do not include settlements of commodity derivative contracts. +Years Ended December 31, +2015 +2014 +2013 +Oil Prices: +Average realized sales price ($/Bbl) +$ +43.38 +$ +83.70 +$ +93.44 +Average WTI Midland price ($/Bbl) +$ +48.39 +$ +86.18 +$ +95.33 +Average WTI Cushing price ($/Bbl) +$ +48.80 +$ +93.01 +$ +97.97 +Gas Prices: +Average realized sales price ($/Mcf) +$ +2.53 +$ +4.43 +$ +3.76 +Average Henry Hub price ($/Mcf) +$ +2.67 +$ +4.43 +$ +3.65 +NGL Prices: +Average realized sales price ($/Bbl) +$ +13.75 +$ +33.14 +$ +29.36 +During 2015, 2014 and 2013, approximately 84%, 80% and 80% , respectively, of our oil production was in the Permian Basin, the sale of which is tied to the WTI Midland benchmark price. The majority of the remaining oil production is from our Mid-Continent region. +Prior to 2014, our average realized prices for gas and NGLs were net of certain processing fees. Beginning in 2014, these fees were no longer netted against realized prices. The resulting positive impact on gas prices for 2014 was $0.07 per Mcf. The positive impact on NGL prices was $3.54 per barrel. These positive impacts to prices were equally offset by increased transportation, processing and other operating costs. See Note 1, Basis of Presentation – Oil, Gas and NGL Sales, to the Consolidated Financial Statements in Item 8 of this report for additional information regarding these processing fees. +See RESULTS OF OPERATIONS below fo r analysis of the impact changes in realized prices had on our year-over-year revenues. +O perating costs and expenses +Co sts associated with producing oil and natural gas a re substantial. Some of these costs vary with commodity prices, some trend with the type and volume of production and others are a function of the number of wells we own. At the end of 2015, we owned interests in 10,348 gross productive wells. +We use the full cost method of accounting for our oil and gas operations. Accounting rules require us to perform a quarterly ceiling test calculation to test our oil and gas properties for possible impairment. If the net capitalized cost of our oil and gas properties subject to amortization (the carrying value) exceeds the ceiling limitation, the excess is charged to expense. The ceiling limitation is equal to the sum of the present value discounted at 10% of estimated future net cash flows from proved reserves, the cost of properties not being amortized, the lower of cost or estimated fair value of unproven properties included in the costs being amortized, and all related tax effects. Estimated future net cash flows are determined by proved reserve quantities and commodity prices net of operating costs and capital expenditures. +The carrying value of our oil and gas properties subject to the ceiling test exceeded the calculated value of the ceiling limitation for each of the four quarters of 2015 resulting in aggregate impairments of $3.7 billion ($2.4 billion, net of tax). The impairments resulted primarily from the impact of decreases in the 12-month average trailing prices for oil, natural gas and NGLs utilized in determining the estimated future net cash flows from proved reserves. If pricing conditions stay at current early 2016 levels or decline further, we will incur full cost ceiling impairments in future quarters, the magnitude of which will be affected by one or more of the other components of the ceiling test calculations, until prices stabilize or improve over a 12-month period. +35 +Table of Contents +At December 31, 2015, commodity prices used in the ceiling calculation, based on the required trailing 12-month average, were $2.59 per Mcf of gas and $50.28 per barrel of oil, resulting in a pretax impairment of $965.3 million for the fourth quarter of 2015. To demonstrate the impact of commodity prices on the ceiling calculation, had average prices of $2.45 per Mcf of gas and $46.03 per barrel of oil been used instead, our pre-tax ceiling test impairment would have been approximately $1.259 billion at December 31, 2015. This would have increased our total 2015 impairments by approximately $294 million. The lower commodity prices were calculated based on a 12-month simple average of the commodity prices on the first day of the month for the 11 months ended February 2016 and the prices for February 2016 were used for the remainin g month in the 12-month average. +The above calculation of the impact of lower commodity prices was prepared based on the presumption that all other inputs and assumptions are held constant with the exception of oil and natural gas prices. Therefore, this calculation strictly isolates the potential impact of commodity prices on our ceiling test limitation. An amount of any future write-downs or impairment is difficult to reasonably predict and will depend upon not only commodity prices but also other factors that include, but are not limited to, incremental proved reserves that may be added each period, revisions to previous reserve estimates, capital expenditures, operating costs, and all related tax effects. There are numerous uncertainties inherent in the estimation of proved reserves and accounting for oil and natural gas properties in future periods and the estimate described in this paragraph should not be construed as indicative of our development plans or future results. +The ceiling limitation calculation is not intended to be indicative of the fair market value of our proved reserves or future results. Impairment charges do not affect cash flow from operating activities, but do adversely affect our net income and various components of our balance sheet. Any recorded impairment of oil and gas properties is not reversible at a later date. +Depletion, depreciation and amortization (DD&A) of our producing properties is computed using the units-of-production method. The economic life of each producing well depends upon the estimated proved reserves for that well, which in turn depend upon the assumed realized sales price for future sales of production. Therefore, fluctuations in oil and gas prices will impact the level of proved reserves used in the calculation. Higher prices generally have the effect of increasing reserves, which reduces depletion expense. Conversely, lower prices generally have the effect of decreasing reserves, which increases depletion expense. The cost of replacing production also impacts our DD&A rate. In addition, changes in estimates of reserve quantities, estimates of operating and future development costs, reclassifications of properties from unproved to proved and impairments of oil and gas properties will also impact depletion expense. DD&A is calculated quarterly before the ceiling test impairment calculation. The impairments of our oil and gas properties, discussed above, resulted in lower DD&A rates in each quarter following the impairment. +Production expense generally consists of costs for labor, equipment, maintenance, salt water disposal, compression, power, treating and miscellaneous other costs. Production expense also includes well workover activity necessary to maintain production from existing wells. +Transportation, processing and other operating costs principally consist of expenditures to prepare and transport production from the well head, together with gas processing costs and costs to transport production to a specified sales point. C os ts vary by region and will fluctuate with increases or decreases in production volumes , contractual fees and changes in fuel and compression costs. +General and administrative (G&A) expenses consist primarily of salaries and related benefits, office rent, legal fees, consultants, systems costs and other administrative costs incurred in our offices and not directly associated with exploration, development or production activities. Our G&A expense is reported net of amounts reimbursed to us by working interest owners of the oil and gas properties we operate and net of amounts capitalized pursuant to the full cost method of accounting. +A discussion of changes in operating costs and expenses is included in RESULTS OF OPERATIONS , below. +36 +Table of Contents +RESULTS OF OPERATIONS +201 5 compared to 201 4 +F or the year ended December 31, 2015, we had a net loss of $2.4 billion ($ 25.92 per diluted share), compared to net income of $507.2 million ($5.78 per dilu ted share) for 2014 . The net loss in 2015 was primarily a result of lower realized commodity prices, which also brought about impairments of our oil and gas properties. Year-over-year c hanges are discussed further in the analysis that follows. +Percent +Years Ended +Change +December 31, +Between +Price / Volume Change +Production Revenue +2015 +2014 +2015 / 2014 +Price +Volume +Total +(in thousands or as indicated) +Oil sales +$ +809,664 +$ +1,308,958 +(38) +% +$ +(752,492) +$ +253,198 +$ +(499,294) +Gas sales +428,227 +687,930 +(38) +% +(321,075) +61,372 +(259,703) +NGL sales +179,647 +375,941 +(52) +% +(253,292) +56,998 +(196,294) +Total production revenue +$ +1,417,538 +$ +2,372,829 +(40) +% +$ +(1,326,859) +$ +371,568 +$ +(955,291) +Total oil volume — thousand barrels +18,663 +15,639 +19 +% +Oil volume — barrels per day +51,132 +42,846 +19 +% +Percent of total equivalent production +31 +% +30 +% +Average oil price — per barrel +$ +43.38 +$ +83.70 +(48) +% +Total gas volume — MMcf +168,987 +155,128 +9 +% +Gas volume — MMcf per day +463.0 +425.0 +9 +% +Percent of total equivalent production +47 +% +49 +% +Average gas price — per Mcf +$ +2.53 +$ +4.43 +(43) +% +Total NGL volume — thousand barrels +13,063 +11,343 +15 +% +NGL volume — barrels per day +35,789 +31,078 +15 +% +Percent of total equivalent production +22 +% +21 +% +Average NGL price — per barrel +$ +13.75 +$ +33.14 +(59) +% +Total equivalent production — MMcfe +359,343 +317,022 +13 +% +Total equivalent production volumes — MMcfe/d +984.5 +868.6 +13 +% +As reflected in the table above, our 2015 production revenue was 40% lower than that of 2014. Increased revenues from higher production volumes were more than offset by decreased revenues from lower realized commodity prices. The 13% year-over-year growth in production volumes was primarily due to our successful drilling programs in the Permian Basin and Mid -Continent region. See Exploration and Production Overview in I tems 1 and 2 of this report for further information and a discussion of 2015 activity in these regions. S ee Revenues above, for information regarding realized prices. +Our 2015 aggregate production volumes were 359.3 Bcfe, comprised of 47% natural gas, 31% oil and 22% NGL. This compares to 2014 aggregate production volumes of 317.0 Bcfe, made up of 49% natural gas, 30% oil and 21% NGL. +Other revenues +We sometimes transport, process and market third-party gas that is associated with our equity gas. The table below reflects income from third-party gas gathering and processing and our net marketing margin (revenues less +37 +Table of Contents +purchases) for marketing third-party gas. We market and sell natural gas for working interest owners under short term sales and supply agreements and earn a fee for such services . +Years Ended December 31, +2015 +2014 +Gas Gathering and Marketing (in thousands): +Gas gathering and other revenues +$ +34,688 +$ +49,602 +Gas marketing revenues, net of related costs +$ +393 +$ +1,745 +Fluctuations in revenues from gas gathering and marketing activities are a function of inc reases and decreases in volumes and prices associated with third party gas. In 2015, revenue from gas gathering declined by $14.9 million (30%), primarily due to l ower realized prices which were partially offset by increased volumes. +T otal op erating costs and expenses ( not including income tax expense) in 2015 were $5.19 billion compared to $1.61 billion for the prior year. As discussed above in O perating costs and expenses , during 2015 our quarterly ceiling limitation calculations resulted in impairments totaling $3.72 billion. Excluding the effect of the impairments, our year-over-year operating costs and expenses decreased by $133.70 million. Analyses of the year - over - year differences are discussed below. +Variance +Years Ended December 31, +Between +Per Mcfe +2015 +2014 +2015 / 2014 +2015 +2014 +Operating costs and expenses (in thousands): +Impairment of oil and gas properties +$ +3,716,883 +$ +— +$ +3,716,883 +N/A +N/A +DD&A +778,923 +806,021 +(27,098) +$ +2.17 +$ +2.54 +Asset retirement obligation +9,121 +10,082 +(961) +$ +0.03 +$ +0.03 +Production +299,374 +342,304 +(42,930) +$ +0.83 +$ +1.08 +Transportation, processing and other operating +182,362 +195,414 +(13,052) +$ +0.51 +$ +0.62 +Gas gathering and other +38,138 +35,113 +3,025 +$ +0.11 +$ +0.11 +Taxes other than income +84,764 +128,793 +(44,029) +$ +0.24 +$ +0.41 +General and administrative +74,688 +81,160 +(6,472) +$ +0.21 +$ +0.26 +Stock compensation +19,559 +15,001 +4,558 +$ +0.05 +$ +0.05 +(Gain) loss on derivative instruments, net +(11,246) +(3,762) +(7,484) +N/A +N/A +Other operating (income) expense, net +856 +116 +740 +N/A +N/A +$ +5,193,422 +$ +1,610,242 +$ +3,583,180 +DD&A expense in 2015 decreased 3% compared to 2014. Increased expense due to higher 2015 production volumes was more than offset by lower DD&A rates in 2015. The impairments of our oil and gas properties, discussed above, resulted in lower DD&A rates in each quarter following the impairment. DD&A is calculated quarterly before the ceiling test impairment calculation. We expect our 2016 average DD&A rate to fluctuate depending on average realized prices in 2016. Continued lower realized prices will result in further impairments of our oil and gas properties, which would likely result in a lower DD&A rate in the quarter following an impairment. +Our year-over-year production costs decreased by 12.5% and accounted for 32.1% of the aggregate decrease in operating costs and expenses, excluding impairments. Production costs consist of lease operating expense and workover expense as follows: +Variance +Years Ended December 31, +Between +Per Mcfe +(in thousands) +2015 +2014 +2015 / 2014 +2015 +2014 +Lease operating expense +$ +249,744 +$ +276,395 +$ +(26,651) +$ +0.70 +$ +0.87 +Workover expense +49,630 +65,909 +(16,279) +$ +0.13 +$ +0.21 +$ +299,374 +$ +342,304 +$ +(42,930) +$ +0.83 +$ +1.08 +38 +Table of Contents +Lease operating expens e in 2015 declined 9.6% compared to 2014. The decline was primarily a result of property divestitures, lower salt water disposal costs and decreased equipment and maintenance costs. These decreases were partially offset by increased expense related to new wells acquired and drilled. Increased production volumes in 2015 also contributed to the lower rate per Mcfe in 2015. +Workover expense decreased by 24.7% in 2015 compared to 2014. Generally, these costs will fluctuate based on the amount of maintenance and remedial activity planned and/or required during the period. +Our 2015 year - over - year transportation , processing and other operating costs were 6.7% lower than those in 2014. These costs will vary by product type and region. In 2015, lower prices for natural gas and NGLs resulted in lower costs associated with fuel and processing fees, which were partially offset by higher processing volumes. Approximately 5% of the 2015 costs relates to accruals for expected minimum volume agreement shortfalls. See Contractual Obligations and Material Commitments below for further information. +Gas gathering and other includes costs associated with operating our gas gathering and processing infrastructure, including product costs, operating and maintenance expenses. The year-over-year increase is due primarily to higher overall costs related to increased activity, which were largely offset by lower costs associated with product purchases. +Taxes other than income are assessed by state and local taxing authorities on production, revenues or the value of properties. Revenue based production and severance taxes comprised approximately 81% and 85% of these taxes for 2015 and 2014, respectively. The 34.2% decrease in 2015 taxes resulted primarily from lower production revenues due to lower realized commodity prices and accounted for 32.9% of the aggregate decrease in operating costs and expenses, excluding impairments. +General and administrative (G&A) costs were as follows: +Variance +Years Ended December 31, +Between +(in thousands) +2015 +2014 +2015 / 2014 +G&A capitalized to oil and gas properties +$ +58,332 +$ +76,636 +$ +(18,304) +G&A expense +74,688 +81,160 +(6,472) +$ +133,020 +$ +157,796 +$ +(24,776) +G&A expense per Mcfe +$ +0.21 +$ +0.26 +$ +(0.05) +During 2015, aggregate G&A declined 16% compared to 2014. Because of the adverse effect of lower commodity prices on our financial results, we reduced our expectations and accruals for short-term incentive-based cash compensation and benefits. +Stock compensation expense consists of non - cash charges resulting fro m the amortization of the cost of restricted stock and stock option awa rds, net of amounts capitalized to oil and gas properties. We have recognized stock - based compensation cost as follows: +Variance +Years Ended December 31, +Between +(in thousands) +2015 +2014 +2015 / 2014 +Restricted stock awards +Performance stock awards +$ +18,991 +$ +12,141 +$ +6,850 +Service-based stock awards +14,547 +13,607 +940 +33,538 +25,748 +7,790 +Stock option awards +2,803 +3,057 +(254) +36,341 +28,805 +7,536 +Less amounts capitalized +(16,782) +(13,804) +(2,978) +Stock compensation +$ +19,559 +$ +15,001 +$ +4,558 +39 +Table of Contents +Expense associated with stock compensation will fluctuate based on the grant -date fair valu e of award s, the number of awards and the timing of the awards. The increase in 2015 stock compensation is primarily related to performance awards granted in December 2014, a portion of which were amortized during 2015. Historical amounts may not be representative of future amounts as the value of future awards may vary from historical amounts. See Note 6 to the Consolidated Financial Statements in Item 8 of this report for further discussion regarding our stock - based compensation. +Net g ains and lo sses on our derivative instruments are a function of fluctuations in the underlying commodity prices and the monthly settlement (if any) of t he instruments. Since 2009, we have chosen not to apply hedge accounting treatment to our derivative instruments. As a result, settlements on the contracts are included as a component of operating costs and expenses as either a net gain or loss on derivative instruments. +The following table presents the aggregate net (gain) loss from settlements and changes in the fair value of our derivative contracts and the (gains) losses only from settlements during 2015 and 2014. See Note 4 to the Consolidated Financial Statements in Item 8 of this report for further details regarding our derivative instruments. +Years Ended December 31, +(in thousands) +2015 +2014 +(Gain) loss on derivative instruments, net +$ +(11,246) +$ +(3,762) +Settlement (gains) losses +$ +— +$ +(7,641) +Other (income) and expense +Variance +Years Ended December 31, +Between +(in thousands) +2015 +2014 +2015 / 2014 +Interest expense +$ +85,746 +$ +72,865 +$ +12,881 +Capitalized interest +(30,589) +(35,925) +5,336 +Other, net +(13,576) +(28,907) +15,331 +$ +41,581 +$ +8,033 +$ +33,548 +The majority of our i nterest expense relates to interest on debt and amortization of financing costs . The 18 % year - over -year increase is primarily due to the issuance of $750 million of senior notes in June of 2014. See Long- Term Debt below for further information regarding our debt. +W e capitalize interest on non - producing leasehold costs, the in-progress costs of drilling and completing wells and construct ing qualified assets. Capitalized interest will fluctuate based on our current rate of interest and the amount of costs on which interest is calculated. +Components of “ other, net ” consist of miscellaneous income and expense items that will vary from period to period, including gain or loss on the sale or value of oil and gas well equipment and supplies , income and expense associated with other non - operating activities, miscellaneous asset sales and interest income. Most of the 53% year-over-year decrease in income was due to lower net gains on transactions related to oil and gas well equipment and supplies and lower gains from sales of fixed assets . +40 +Table of Contents +An analysis of our oil and gas well equipment and supplies was performed and no impairment was required. However, the industry-wide decline in drilling operations has put downward pressure on the price of oil and gas well equipment and supplies. Further declines in future periods could cause us to recognize impairments on these assets. An impairment would not affect cash flow from operating activities, but would adversely affect our net income and stockholders’ equity. See Note 1, Oil and Gas Well Equipment and Supplies , of the Consolidated Financial Statements in Item 8 of this report for information regarding the carrying value of our oil and gas well equipment and supplies . +Income Tax Expense +The components of our provision for income taxes are as follows: +Years Ended December 31, +(in thousands) +2015 +2014 +Current tax expense +$ +14,710 +$ +404 +Deferred tax expense (benefit) +(1,388,146) +298,293 +$ +(1,373,436) +$ +298,697 +Combined Federal and State effective income tax rate +36.3 +% +37.1 +% +Our combined Federal and state effective tax rates differ from the statutory rate of 35% primarily due to state income taxes, non-deductible expenses and revisions. See Note 9 to the Consolidated Financial Statements in Item 8 of this report for further information regarding our income taxes. +41 +Table of Contents +RESULTS OF OPERATIONS +201 4 compared to 201 3 +Net income for the year ended December 31, 2014 was $507.2 million ($5.78 per diluted share), down 10% from $564.7 million ($6.47 per diluted share) for the previous year. In 2014, higher revenues from increased production volumes and higher realized prices received for gas and NGL production were offset by lower realized oil prices and increased operating expenses, primarily for DD&A and other operating, net expenses. In 2013, other operating, net included a significant reduction in our estimated exposure to certain litigation expense which had been accruing since 2008. Changes in our net income are discussed further in the analysis that follows . +Percent +Change +Years Ended December 31, +Between +Price / Volume Change +Production Revenue +2014 +2013 +2014 / 2013 +Price +Volume +Total +(in thousands or as indicated) +Oil sales +$ +1,308,958 +$ +1,250,212 +5 +% +$ +(152,324) +$ +211,070 +$ +58,746 +Gas sales +687,930 +471,045 +46 +% +103,936 +112,949 +216,885 +NGL sales +375,941 +231,248 +63 +% +42,877 +101,816 +144,693 +Total production revenue +$ +2,372,829 +$ +1,952,505 +22 +% +$ +(5,511) +$ +425,835 +$ +420,324 +Total oil volume — thousand barrels +15,639 +13,380 +17 +% +Oil volume — barrels per day +42,846 +36,659 +17 +% +Percent of total equivalent production +30 +% +32 +% +Average oil price — per barrel +$ +83.70 +$ +93.44 +(10) +% +Total gas volume — MMcf +155,128 +125,248 +24 +% +Gas volume — MMcf per day +425.0 +343.1 +24 +% +Percent of total equivalent production +49 +% +50 +% +Average gas price — per Mcf +$ +4.43 +$ +3.76 +18 +% +Total NGL volume — thousand barrels +11,343 +7,876 +44 +% +NGL volume — barrels per day +31,078 +21,578 +44 +% +Percent of total equivalent production +21 +% +18 +% +Average NGL price — per barrel +$ +33.14 +$ +29.36 +13 +% +Total equivalent production — MMcfe +317,022 +252,787 +Total equivalent production volumes — MMcfe/d +868.6 +692.6 +25 +% +As reflected in the table above, our 2014 production revenue was 22% higher than that of 2013. Increased r evenue from greater production volumes and higher realized prices for gas and NGL sales were partially offset by lower realized oil prices. See Revenues above, for a discussion regarding realized prices. +Our 2014 aggregate production volumes were 317.0 Bcfe, comprised of 49% natural gas, 30% oil and 21% NGL. This compares to 2013 aggregate production volumes of 252.8 Bcfe, made up of 50% natural gas, 32% oil and 18% NGL. The 25% year-over-year growth was primarily due to our successful drilling programs in the Permian B asin and Mid-Continent region in 2014. +We sometimes transport, process and market third-party gas that is associated with our equity gas. The table below reflects income from third-party gas gathering and processing and our net marketing margin (revenues less +42 +Table of Contents +purchases) for marketing third-party gas. We market and sell natural gas for working interest owners under short term sales and supply agreements and earn a fee for such services . +Years Ended December 31, +2014 +2013 +Gas Gathering and Marketing (in thousands): +Gas gathering and other revenues +$ +49,602 +$ +45,441 +Gas marketing revenues, net of related costs +$ +1,745 +$ +105 +Fluctuations in revenues from gas gathering and marketing activities are a function of inc reases and decreases in volumes and prices associated with third-party gas. +Our total op erating costs and expenses ( not including income tax expense) in 2014 were $1.61 billion, an increase of 46% compared to $1.10 billion for the prior year. In 2013 we recorded a $142.8 million reduction in our estimated exposure to litigation expense , which had been accruing since 2008. E xcluding the effect of the litigation expense estimate reduction, 2013 operating costs and expenses would have been $1.25 billion and the year-over-year increase would have been 29%. Analyses of the year - over - year differences are discussed below. +Variance +Years Ended December 31, +Between +Per Mcfe +2014 +2013 +2014 / 2013 +2014 +2013 +Operating costs and expenses (in thousands): +DD&A +$ +806,021 +$ +615,874 +$ +190,147 +$ +2.54 +$ +2.44 +Asset retirement obligation +10,082 +7,989 +2,093 +$ +0.03 +$ +0.03 +Production +342,304 +286,742 +55,562 +$ +1.08 +$ +1.13 +Transportation, processing and other operating +195,414 +93,580 +101,834 +$ +0.62 +$ +0.37 +Gas gathering and other +35,113 +25,876 +9,237 +$ +0.11 +$ +0.10 +Taxes other than income +128,793 +112,732 +16,061 +$ +0.41 +$ +0.45 +General and administrative +81,160 +77,466 +3,694 +$ +0.26 +$ +0.31 +Stock compensation +15,001 +14,279 +722 +$ +0.05 +$ +0.06 +(Gain) loss on derivative instruments, net +(3,762) +209 +(3,971) +N/A +N/A +Other operating (income) expense, net +116 +(132,334) +132,450 +N/A +N/A +$ +1,610,242 +$ +1,102,413 +$ +507,829 +Our 2014 DD&A expense increased 31% and account ed for 52 % of the aggregate increase in operating costs and expenses, excluding the effect of the 2013 litigation expense estimate rev ersal. About 78% of the 2014 increase in DD&A was attributable to our higher production volumes . On a per Mcfe basis, 2014 DD&A increased by 4%. Our DD&A rate has increased because the per unit cost of adding new proved reserves has exceeded the net remaining book basis of proved reserves added in prior years. +Asset retirement obligation expense increased by 26% compared to 2013. Most of the increase resulted from higher plugging and abandonment costs incurred than had previously been estimated. +Our production costs consist of lease operating expense and workover expense as follows: +Variance +Years Ended December 31, +Between +Per Mcfe +(in thousands) +2014 +2013 +2014 / 2013 +2014 +2013 +Lease operating expense +$ +276,395 +$ +226,730 +$ +49,665 +$ +0.87 +$ +0.90 +Workover expense +65,909 +60,012 +5,897 +$ +0.21 +$ +0.23 +$ +342,304 +$ +286,742 +$ +55,562 +$ +1.08 +$ +1.13 +43 +Table of Contents +Lease operating expense in 2014 increased 22% compared to 2013. Increased costs associated with putting new wells on production in 2014 accounted for approximately 65% of the $49.7 million year-over-year increase. Most of these costs were for salt water disposal, rental equipment, and chemicals and treating. We also experienced year-over-year increases for labor, and site maintenance and restoration. These increased expenditures were partially offset by decreased costs resulting from property divestitures during the year. The lower rate per Mcfe was primarily a function of increased production volumes in 2014. +Workover expense increased by 10% from 2013 to 2014. Generally, these costs will fluctuate based on the amount of maintenance and remedial activity planned and/or required during the period. +Our year - over - year transportation , processing and other operating costs increased significantly during 2014. These costs will vary by product type and region . During 2014, approximately half of the increase in costs resulted from i ncreases in sales and processing volumes, contractual fees, compression charges and fuel costs . The remaining increase relates to the inclusion of certain processing fees that in previous years were treated as a reduction in realized sales prices for residue gas and NGLs. These costs accounted for approximately $0.16 per Mcfe for 2014. See Note 1, Revenue Recognition , Oil, Gas and NGL Sales , to the Consolidated Financial Statements in Item 8 of this report for additional information. +Gas gathering and other includes costs associated with operating our gas gathering and processing infrastructure, including product costs, operating and maintenance expenses. +Taxes other than income are assessed by state and local taxing authorities on production, revenues or the value of properties. Revenue based severance taxes comprise approximately 85% of these taxes. The 2014 year-over-year increase results primarily from higher severance taxes on greater oil, gas and NGL productio n volumes. While the aggregate tax amount increased by 14%, the rate per Mcfe declined 9% due to the increase in production volumes . +General and administrative (G&A) costs were as follows: +Variance +Years Ended December 31, +Between +(in thousands) +2014 +2013 +2014 / 2013 +G&A capitalized to oil and gas properties +$ +76,636 +$ +74,691 +$ +1,945 +G&A expense +81,160 +77,466 +3,694 +$ +157,796 +$ +152,157 +$ +5,639 +G&A expense per Mcfe +$ +0.26 +$ +0.31 +$ +(0.05) +Our 2014 overall G&A cost increased modestly (4%) compared to 2013. In 2014 , we experienced increased costs for salaries and benefits , consulting fees and higher rent related to new office facilities , which were partially offset by lower charitable contributions. The 16% decline in G&A expense per Mcfe is due to increased production volumes in 2014. +44 +Table of Contents +Stock compensation expense consists of non - cash charges resulting from the issuance of restricted stock and stock option awar ds, net of amounts capitalized. We have recognized non - cash stock - based compensation cost as follows: +Variance +Years Ended December 31, +Between +(in thousands) +2014 +2013 +2014 / 2013 +Restricted stock awards +Performance stock awards +$ +12,141 +$ +11,105 +$ +1,036 +Service-based stock awards +13,607 +12,018 +1,589 +25,748 +23,123 +2,625 +Stock option awards +3,057 +3,145 +(88) +28,805 +26,268 +2,537 +Less amounts capitalized +(13,804) +(11,989) +(1,815) +Stock compensation +$ +15,001 +$ +14,279 +$ +722 +Expense associated with stock compensation will fluctuate based on the grant - date market value of the award and the number of shares granted. See Note 6 to the Consolidated Financial Statements in Item 8 of this report for further discussion regarding our stock - based compensation. +Net g ains and lo sses on our derivative instruments are a function of fluctuations in the underlying commodity prices and the monthly settlement of t he instruments. Since 2009, we have chosen not to apply hedge accounting treatment to our derivative instruments. As a result, settlements on the contracts are included as a component of operating costs and expenses as either a net gain or loss on derivative instruments. +The foll owing table presents the aggregate net (gain) loss from settlements and the changes in fair va lue of our derivative contracts and the (gains) losses only from settlements during 2014 and 2013. All of our derivative contracts were settled as of December 31, 2014. See Note 4 to the Consolidated Financial Statements in Item 8 of this report for further details regarding our derivative instruments . +Years Ended December 31, +(in thousands) +2014 +2013 +(Gain) loss on derivative instruments, net +$ +(3,762) +$ +209 +Settlement (gains) losses +$ +(7,641) +$ +4,088 +Other operating (income) expense, net consists primarily of costs related to various legal matters, most of which pertain to litigation and contract settlements, and title and royalty issues. In 2014, we have expense of $116 thousand versus income of $132.3 million for 201 3. In 2013, based on a ruling from the Oklahoma Supreme Court, we reduced our estimated exposure to litigation expense that had been accruing since 2008 b y $142.8 million. See Note 10 to the Consolidated Financial Statements in Item 8 of this report for further information regarding litigation matters. +Other (income) and expense +Variance +Years Ended December 31, +Between +(in thousands) +2014 +2013 +2014 / 2013 +Interest expense +$ +72,865 +$ +54,973 +$ +17,892 +Capitalized interest +(35,925) +(31,517) +(4,408) +Other, net +(28,907) +(21,518) +(7,389) +$ +8,033 +$ +1,938 +$ +6,095 +I nterest expense is primarily made up of interest on debt and amortization of financing costs . The 33 % year - over -year increase is primarily due to the issuance of $750 million of senior notes in June of 2014. See Long- Term Debt below for further information regarding our debt. +45 +Table of Contents +We capitalize interest on non - producing leasehold costs, the in-progress costs of drilling and completing wells and construct ing qualified assets. The 14% increase in 2014 capitalized interest compared to 2013 was a result of higher co sts on which interes t was calculated in 2014 . +Components of “ other, net ” consist of miscellaneous income and expense items that will vary from period to period, including gain or loss on the sale or value of oil and gas well equipment and supplies , income and expense associated with other non - operating activities, miscellaneous asset sales and interest income. Most of the 34% year-over-year increase was due to net gains on transactions related to oil and gas well equipment and supplies. +Income Tax Expense +The components of our provision for income taxes are as follows: +Years Ended December 31, +(in thousands) +2014 +2013 +Current tax expense (benefit) +$ +404 +$ +(689) +Deferred tax expense +298,293 +329,700 +$ +298,697 +$ +329,011 +Combined Federal and state effective income tax rate +37.1 +% +36.8 +% +Our combined Federal and state effective tax rates differ from the statutory rate of 35% primarily due to state i ncome taxes and non-deductible expenses. See Note 9 to the Consolidated Financial Statements in Item 8 of this report for further information regarding our income taxes. +LIQUIDITY AND CAPITAL RESOURCES +Overview +We strive to maintain an adequate liquidity level to address volatility and risk. Sources of liquidity include our cash flow from operations, cash on hand, available borrowing capacity under our revolving credit facility, proceeds from sales of non-core assets and occasional public financings. +In May 2015, we completed an underwritten public offering of 6.9 million shares of our common stock, 900,000 of which were issued pursuant to an overallotment option to purchase additional shares granted to the underwriters. The stock was sold to the public at $109.00 per share. After deducting customary underwriting discounts, net proceeds of approximately $730 million were received from this offering. Our intent continues to be to use the net proceeds for general corporate purposes and to fund drilling and completion activity. +Our liqu idity is highly dependent on prices we receive for the oil, natural gas and NGLs we produce . Prices we receive are determined by prevailing market conditions and greatly influence our revenue, cash flow, profitability, access to capital and future rate of growth. See Market conditions, Revenues and RESULTS OF OPERATIONS above for further information and analysis of the impact realized prices have had on our 2015 earnings. +We deal with volatility in commodity prices primarily by maintaining flexibility in our capital investment program. We have a diversified drilling portfolio and limited long-term commitments, which enables us to respond quickly to industry volatility. See Capital Expenditures below for information regarding our 2015 exploration and development (E&D) investment program. +From time to time we may enter into hedging agreements. We entered 2015 with no hedges outstanding. During the third quarter of 2015 and subsequently, we entered into derivative contracts covering a portion of our 2016 and 2017 production. See Note 4 to the Consolidated Financial Statements in Item 8 of this report for information regarding our derivative instruments. Management will decide whether to enter into derivative contracts depending on their view of underlying supply and demand trends, changes in the oil and gas futures markets and other considerations. +46 +Table of Contents +We believe our conservative use of leverage and strong balance sheet will mitigate our exposure to lower prices. Cash and cash equivalents at December 31, 2015 was $779.4 million. Our long-term debt consisted of $1.5 billion of senior notes, with $750 million due in 2022 and $750 million due in 2024. We had letters of credit outstanding under our credit facility of $2.5 million, leaving an unused borrowing availability of $997.5 million. +Our debt to total capitalization at December 31, 2015 was 35 %. The reconciliation of debt to total capitalization, which is a non - GAAP measure, is : long-term debt of $1.5 billion divided by the sum of long-term debt of $1.5 billion plus stockholders ’ equity of $2.8 billion . Management believes that this non - GAAP measure is useful information as it is a common statistic used in the investment community to assist with the analysis of the financial condition of an entity. +We expect o ur operating cash flow and other capital resources to be adequate to meet our needs for planned capital expenditures, working capital, debt service and dividend payments in 2016 and beyond. +Sources and Uses of Cash +Our primary sources of liquidity and capital resources are operating cash flow, borrowings under our Credit Facility, asset sales and occasional public financings. Our primary uses of funds are expenditures for exploration and development, leasehold and property acquisitions, other capital expenditures, debt service and cash dividends paid to holders of our common stock. +The significant decline in year-over-year realized prices for our oil and natural gas production adversely impacted our operating cash flow for 2015 and consequently reduced the amount of cash available for exploration and development activities. See Market Conditions above for further information regarding prevailing economic conditions. +The following table presents our sources and uses of cas h and cash equivalents from 2013 to 2015 . Capital expenditures are presented on a cash basis. These amounts differ from capital expenditures (including accruals) that are referr ed to elsewhere in this report. +Years Ended December 31, +(in thousands) +2015 +2014 +2013 +Sources of cash and cash equivalents: +Operating cash flow +$ +691,500 +$ +1,619,365 +$ +1,324,348 +Sales of oil and gas and other assets +41,031 +458,394 +93,164 +Net increase in bank debt +— +— +174,000 +Increase in other long-term debt +— +750,000 +— +Proceeds from sale of common stock +752,100 +— +— +Proceeds from exercise of stock options and other +21,439 +11,898 +14,494 +Total sources of cash and cash equivalents +1,506,070 +2,839,657 +1,606,006 +Uses of cash and cash equivalents: +Oil and gas capital expenditures +(979,044) +(2,108,250) +(1,572,288) +Other capital expenditures +(70,592) +(90,611) +(51,913) +Net decrease in bank debt +— +(174,000) +— +Financing and underwriting fees +(24,633) +(11,616) +(100) +Dividends paid +(58,281) +(53,849) +(46,712) +Total uses of cash and cash equivalents +(1,132,550) +(2,438,326) +(1,671,013) +Net increase (decrease) in cash and cash equivalents +$ +373,520 +$ +401,331 +$ +(65,007) +Cash and cash equivalents at end of year +$ +779,382 +$ +405,862 +$ +4,531 +47 +Table of Contents +Analysis of Cash Flow Changes (See the Consolidated Statements of Cash Flows in Item 8 of this report. ) +Net c ash flow provided by operating activities (operating cash flow) for 2015 was $691.5 million, down 57% from $1.6 billion for 2014. The $927.9 million decrease was primarily a result of a net de crease in production revenue from lower realized commodity prices in 2015. The decrease in production revenue was partially offset by lower net operating costs in 2015. The 22% inc rease in 201 4 operating cash flow compared to 201 3 was mostly due to increased revenues from greater production volumes and higher realized prices for natural gas and NGLs, which were partially offset by lower realized oil prices and increased operating expenses. See RESULTS OF OPERATIONS above for details regarding year-over-year changes in production revenues and operating expenses. +In 2015 , net cash flow used for investing activities was $1.0 billion, compared to $1. 7 billion for 201 4 and $1.5 billion for 201 3 . In 2015, our E&D and other capital investments were $1.1 billion, which were partially offset by asset sales of $41.0 million. Our 2014 E&D and other capital investments were $2 . 2 billion, which were partially offset by proceeds from asset sales of $458 million. For 2013, our E&D and othe r capital expenditures were $1.6 billion, which were parti ally offset by asset sales of $93.2 million. +Net cash flow provided by financing activities in 2015 was $ 690.6 million compared to $522.4 million in 2014 and $141.7 millio n in 2013 . During 2015, cash provided by financing activities included approximately $730 million of net proceeds from the sale of common stock and $21.4 million of proceeds from issuance of common stock from employee option exercises and other. These cash flows were partially offset by dividend payments of $58.3 million and $2.5 million of financing costs. +In 2014, net cash flow provided by financing activities included the issuance of $750.0 million of senior notes and $11.9 million of proceeds from the issuance of common stock from employee option exercises, which were partially offset by payments of $174.0 million on our Credit Facility, $11.6 million for financing costs and dividend payments of $53.8 million. +In 2013, financing activity cash inflows came fr om net bank borrowings of $174.0 million together with net proceeds from the issuance of common stock from employee option exercises of $14.5 million, whic h were partially offset by $46.7 million of dividend payments. +Reconciliation of Adjusted Cash Flow from Operations +Years Ended December 31, +(in thousands) +2015 +2014 +2013 +Net cash provided by operating activities +$ +691,500 +$ +1,619,365 +$ +1,324,348 +Change in operating assets and liabilities +52,082 +14,847 +63,840 +Adjusted cash flow from operations +$ +743,582 +$ +1,634,212 +$ +1,388,188 +Management believes the non - GAAP measure of adjusted cash flow from operations is useful information for investors. It is accepted by the investment commu nity as a means of measuring a company ’ s ability to fund its capital program without reflecting fluctuations caused by changes in current assets and liabilities (which are included in the GAAP measure of cash flow from operating activities). It is also used by professional research analysts in providing investment recommendations pertaining to companies in the oil and gas exploration and production industry. +48 +Table of Contents +Capital Expenditures +The following table reflects capitalized expenditures for oil and gas acquisitions, exploration and development activities and property sales: +Years Ended December 31, +(in thousands) +2015 +2014 +Acquisitions: +Proved +$ +30 +$ +138,508 +Unproved +6,666 +111,225 +Net purchase price adjustments (*) +(11,653) +— +(4,957) +249,733 +Exploration and development: +Land & seismic +52,049 +176,061 +Exploration +1,073 +40,084 +Development +823,830 +1,664,877 +876,952 +1,881,022 +Property sales +(41,276) +(446,107) +$ +830,719 +$ +1,684,648 +(*) The negative amount in 2015 reflects purchase price adjustments related to an acquisition in the second quarter of 2014. +Capital expenditures in the table above are presented on an accrual basis. Oil and gas expenditures and sales in the Consolidated Statements of Cash Flows in this report reflect capital expenditures on a cash basis, when payments are made. +Because of lower commodity prices, we reduced our capital ex penditures for 2015 by 53 % compared to 2014. Our 2016 E&D capital investment is presently expected to range from $600-$650 million, a 29% reduction from 2015 at the midpoint. Our expectation is that 65% of our 2016 capital investment will be in the Permian Basin with the remaining 35% in the Mid-Continent region. Based on our current development plans, our estimates of proved reserves have yet to be materially impacted by our response to lower prices. +As has been our historical practice, we regularly review capital expenditures throughout the year and will adjust our investments based on increases or decreases in commodity prices, service costs and drilling success. We have the flexibility to adjust our capital expenditures based upon market conditions. Due to the uncertainty of the duration of a low commodity price environment, with the possibility of further declines in prices, our current plan for the pace of development of our proved undeveloped reserves could change in the future. +We intend to fund our 2016 capital program with cash on hand at December 31, 2015 and cash flow from our operating activities. S ales of non - core assets and borrowings under our credit facility may also be used to supplement funding of capital expenditures. The timing of capital expenditures and the receipt of cash flows d o not necessarily match, which may cause us to borrow and rep ay funds under our credit facility from time-to-time . See Bank Debt below for further information regarding our credit facility. +During 2015, approximately 55% of our $877.0 million E&D expenditures were in the Permian Basin and 43% were in our Mid-Continent region. We participated in the drilling and completion of 219 gross (99 net) wells, 123 of which we operated. +Of the total wells dri lled, 85 gross (60 net) were in the Permian Basin and 134 gross (39 net) were in the Mid-Continent region. At year-end 49 gross (20 net) wells were awaiting completion with 12 gross (7 net) in the Permian Basin and 37 gross (13 net) i n the Mid-Continent region. See Items 1 and 2 of this report for further information regarding our wells drilled and other information regarding our oil and gas properties. +In the ordinary course of business w e actively evaluate opportunities to purchase properties that we believe could benefit from our technical capabilities, particularly in our core area s of operations. We also evaluate our non - core property +49 +Table of Contents +holdings for potential divestitures. For further information on our property acquisitio ns and dispositions, see Note 12 to the Consolidated Financial Statements in Item 8 of this report. +We have made, and will continue to make, expenditures to comply with environmental and safety regulations and requirements. These costs are considered a normal recurring cost of our ongoing operations. We do not anticipate that we will be required to expend amounts that will have a material adverse effect on our financial position or operations , nor are we aware of any pending regulatory changes that would have a material impact, based on current laws and regulations. While we expec t pending or new legislation or regulations to increase the cost of business, at this time it is not possible to quantify the impact on our business. Compliance with pending or new legislation or regulations could increase our costs or adversely affect demand for oil or gas and result in a material adverse effect on our financial position or operations. +Financial Condition +During 2015 , our total assets decreased $3.5 billion (40%) to $5.2 billion, compared to $8.7 billion at December 31, 2014. The de cr ease was mainly attributable to the $3.7 b illion impairment of our oil and gas properties, which was partially offset by a $373.5 million increase in cash. +Total liabilities at year-end 2015 were $2.4 bi llion, down $1.8 billion (42%) from $4.2 billion at year-end 2014. Of the $1.8 billion decrease, $366.3 million is the result of a decrease in total current liabilities primarily related to our oil and gas operations and drilling activity. Almost all of the remaining decrease is due to a $1.4 billion decline in deferred income taxes , mainly attributable to our net loss for 2015. +On December 31, 2015 , stockholders ’ equity totaled $2.8 billion, a decrease of $1.7 billion (38%) from $4.5 billion at December 31, 2014. The decrease resulted from our 2015 net loss of $2.4 billion and from dividends of $59.3 million. These decreases were only partially offset by net proceeds of $730.0 million from our second quarter common stock offering. +The 2015 decreases in our total assets, liabilities and stockholders’ equity and our net loss for the year resulted primarily from the $3.7 billion aggregate impairment of our oil and gas properties. Quarterly impairments resulted from the continued impact of lower prices on the present value of future cash flows from our proved reserves used in our full cost pool ceiling limitation calculation. As noted above under O perating costs and expense s , the ceiling limitation calculation is not intended to be indicative of the fair market value of our proved reserves or future results. Impairment charges do not affect cash flow from operating activities, but do adversely affect our net income and various components of our balance sheet. +Long - Term Debt +Long-term debt at year end 2015 and 2014 consisted of the following: +December 31, 2015 +December 31, 2014 +Unamortized Debt +Unamortized Debt +(in thousands) +Principal +Issuance Costs +Principal +Issuance Costs +5.875% Senior Notes, due May 1, 2022 +$ +750,000 +$ +6,978 +$ +750,000 +$ +8,343 +4.375% Senior Notes, due June 1, 2024 +750,000 +7,402 +750,000 +8,481 +Total long-term debt +$ +1,500,000 +$ +14,380 +$ +1,500,000 +$ +16,824 +At December 31, 2015 and 2014 we had no bank debt outstanding. All of our long-term debt is senior unsecured debt and is, therefore, pari passu with respect to the payment of both principal and interest. At December 31, 2015, we adopted FASB ASU 2015-15 regarding the balance sheet presentation of debt issuance costs. See Note 3 to the Consolidated Financial Statements in Item 8 o f this report for further information. +Bank Debt +In October 2015, we entered into a new senior unsecured revolving credit facility (Credit Facility) with an initial aggregate commitment from the lenders of $1.0 billion. We have the option to increase the commitment to $1.25 billion +50 +Table of Contents +at any time. Unlike the prior credit facility, the new Credit Facility is not a borrowing base facility subject to the discretion of the lenders, and is not based on the value of our proved reserves. +At December 31, 2015 , w e had letters of credit outstanding of $2.5 million under the Credit Facility , leaving an unuse d borrowing availability of $997 .5 million. During 2015 , we had average daily bank debt outstanding of $27.4 thousand, compared to $132.6 million in 2014 . Our highest amount of bank borrowings outstanding during 2015 was $ 10.0 million in May . During 2014 , the highest amount of outstanding ba nk borrowings was $515.0 million also in May. +The Credit Facility contains representations, warranties, covenants and events of default that are customary for investment grade, senior unsecured bank credit agreements, including a financial covenant for the maintenance of a defined total debt-to-capital ratio of no greater than 65%. For further information regarding the terms of the Credit Facility see Note 3 to the Consolidated Financial Statements in Item 8 of this report. +Senior Notes +Interest on our senior notes is payable semi-annually. Each of our outstanding senior notes is governed by an indenture containing customary covenants, events of default a nd other restrictive provisions . For further information regarding our senior notes see Note 3 to the Consolidated Financial Statements in Item 8 of this report. +Working Capital Analysis +Our working capital fluctuates primarily as a result of our realized commodity prices, increases or decreases in our production volumes, changes in receivables and payables related to our operating and E&D activities , changes in our oil and gas well equipment and supplies and changes in our cash and cash equivalents. +At December 31, 2015, we had working capital of $667.9 million, an increase of $512.4 million compared to working capital of $155.5 million at December 31, 2014. +Working capital increases consisted primarily of the following: +· +Cash an d cash equivalents increased by $373.5 million primarily from our second quarter common stock offering. +· +O perations - rela ted accounts payable and accrued liabilities decreased $222.3 million. +· +Accrued liabilities related to our E&D expenditures decreased by $144.2 million. +Increases in working capital were partially offset by the following : +· +Operations-related accounts receivable decreased $186.3 million +· +Oil and gas well equipment and supplies decreased by $35.2 million. +Accounts receivable are a major component of working capital and include a diverse group of companies comprised of major energy companies, pipeline companies, local distribution companies and other end - users. The collection of receivables during the periods presented has been timely. Historically, losses associated with uncollectible receivables have not been significant. +51 +Table of Contents +Dividends +A quarterly cash dividend has been paid to stockholders every quarter since the first quarter of 2006 . In February 2016, the quarterly dividend was decreased to $0.08 per share from $0.16 per share. Future dividend paym ents will depend on our level of earnings, financial requirements and other fa ctors considered relevant by our Board of Directors. +2015 +2014 +2013 +Dividend declared (in millions) +$ +59.3 +$ +55.7 +$ +48.4 +Dividend per share +$ +0.64 +$ +0.64 +$ +0.56 +Off - Balance Sheet Arrangements +We may enter into off - balance sheet arrangements and transactions that can give rise to material off - balance sheet obligations. As of December 31, 2015 , our material off - balance sheet arrangements included operating lease agreements , which are customary in the oil and gas industry. +Contractual Obligations and Material Commitments +At December 31, 2015 , we had the following contractual obligations and material commitments . +Payments Due by Period +1 Year or +More than +Contractual obligations: +Total +Less +2 - 3 Years +4 - 5 Years +5 Years +(in thousands) +Long-term debt (1) +$ +1,500,000 +$ +— +$ +— +$ +— +$ +1,500,000 +Fixed-Rate interest payments (1) +565,312 +76,876 +153,750 +153,750 +180,936 +Operating leases +96,710 +9,248 +18,744 +18,545 +50,173 +Drilling commitments (2) +223,260 +222,940 +320 +— +— +Asset retirement obligation (3) +164,105 +10,248 +— +(3) +— +(3) +— +(3) +Other liabilities (4) +130,938 +38,523 +62,555 +2,027 +27,833 +Firm Transportation +31,813 +7,557 +10,871 +4,118 +9,267 +(1) +See Item 7A: Interest Rate Risk for more information regarding fixed and variable rate debt. +(2) +We have drilling commitments of $201.7 million, consisting of obligations to finish drilling and completing wells in progress at December 31, 2015 . We also have various commitments for drilling rigs. The total minimum expenditure commitments under these agreements are $21.6 million. +(3) +We have not included the long-term asset retirement obligations because we are not able to precisely predict the timing of these amounts. +(4) +Other includes the estimated value of our commitment associated with our benefit obligations and other miscellaneous commitments. +At December 31, 2015, we had firm sales contracts to deliver approximately 56 Bcf of natural gas over the next three years . If this gas is not delivered, our financial commitment would be approximately $ 116 .7 million. This commitment will fluctuate due to price volatility and actual volumes delivered. However, we believe no financial commitment will be due based on our current proved reserves and production levels from which we can fulfill these obligations . +In connection with gas gathering and processing agreements, we have volume commitments over the next ten years. If no gas is delivered, the maximum amount that would be payable under these commitments would be approximately $20 3 . 0 million. However, we believe no financial commitment will be due based on our current proved reserves and production levels from which we can fulfill these obligations. +52 +Table of Contents +We have minimum volume delivery commitments in connection with agreements to reimburse connection costs to various pipelines. The maximum amount that would be payable if no gas is delivered would be approximately $12.4 million. Of this total, we have accrued a liability of $9 .7 million . Due to reduced drilling activity in 2015 and projected for 2016, we may have additional liabilities associated with these delivery commitments in the future . +We have other various transportation , delivery and facilities commitments in the normal course of business, which approximate $3 6.3 million. We currently anticipate meeting these obligations. +All of the noted commitments were routine and were made in the normal course of our business. +Taking into account current commodity prices and anticipated levels of produ ction, we believe that our net cash flow generated fr om operations and our other capital resources will be adequate to meet future obligations. +2016 Outlook +In 2016, our total production is projected to average 890-930 MMcfe per day. +As a result of continued declines in commodity prices we have reduced our planned drilling activity. Our 2016 E&D capital investment is expected to decrease from $877.0 million in 2015 to $600-$650 million in 2016, a 29% reduction at midpoint. Our capital investment is expected to be allocated 65% to our Permian Basin and 35% to the Mid-Continent region. Investments in gathering and processing infrastructure and other fixed assets are expected to approximate $50 million. +As has been our historical practice, we regularly review capital expenditures throughout the year and will adjust our investments based on increases or decreases in commodity prices, service costs and drilling success. We have the flexibility to adjust our capital expenditures based upon market conditions. Due to the uncertainty of the duration of a low commodity price environment, with the possibility of further declines in prices, our current plan for the pace of development of our proved undeveloped reserves could change in the future. +CRITICAL ACCOUNTING POLICIES AND ESTIMATES +Discussion and analysis of our financial condition and results of operation are based on our Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. We analyze and base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Changes in facts and circumstances or additional information may result in revised estimates, and actual results may differ from these estimates. +A complete list of our significant accounting policies are described in Note 1 to our Consolidated Financial Statements in Item 8 of this report. We have identified the following policies as being of particular importance to the portrayal of our financial position and results of operations and which require the application of significant judgment by management. +Oil and Gas Reserves +The process of estimating quantities of oil and gas reserves is complex, requiring significant decisions in the evaluation of all available geological, geophysical, engineering and economic data. The data for a given field may also change substantially over time due to numerous factors including, but not limited to, additional development activity, evolving production history and continual reassessment of the viability of production under varying economic conditions. As a result, material revisions to existing reserve estimates may occur from time to time. Although every reasonable effort is made to ensure that our reserve estimates represent the most accurate assessments possible, subjective decisions and available data for our various fields make these estimates generally less precise than other estimates included in financial statement disclosures. +53 +Table of Contents +At year-end 2015 , 25% of our total proved reserves are categorized as proved undeveloped reserves, or PUDs. Our reserve engineers review and revise these reserve estimates regularly, as new information becomes available. +We use the units - of - production method to amortize the cost associated with our oil and gas properties. Changes in estimates of reserve quantities and commodity prices will cause corresponding changes in depletion expense, or in some cases , a full cost ceiling impairment charge in the period of the revision. See Full Cost Accounting below for further information regarding the ceiling limitation calculation. See SUPPLEMENTAL OIL AND GAS INFORMATION (UNAUDITED ) in Item 8 of this report for additional reserve data. +Full Cost Accounting +We use the full cost method of accounting for our oil and gas operations. All costs associated with property acquisition, exploration and development activities are capitalized. Exploration and development costs include dry hole costs, geological and geophysical costs, direct overhead related to exploration and development activities and other costs incurred for the purpose of finding oil and gas reserves. Salaries and benefits paid to employees directly involved in the exploration and development of properties, as well as other internal costs that can be directly identified with acquisition, exploration and development activities also are capitalized. Under the full cost method, no gain or loss is recognized upon the disposition of oil and gas properties unless such disposition would significantly alter the relationship between capitalized costs and proved reserves. +Companies that follow the full cost accounting method are required to make a quarterly ceiling test calculation. This test ensures that total capitalized costs for oil and gas properties (net of accumulated DD&A and deferred income taxes) do not exceed the sum of the present value discounted at 10% of estimated future net cash flows from proved reserves, the cost of properties not being amortized, the lower of cost or estimated fair value of unproven properties included in the costs being amortized and all related tax effects. We currently do not have any unproven properties being amortized. Revenue calculations in the reserves are based on the unweighted average first - day - of - the - month commodity price for the prior 12 months. Changes in proved reserve estimates (whether based upon quantity revisions or commodity price) will cause corresponding changes to the full cost ceiling limitation. If net capitalized costs subject to amortization exceed this limit, the excess would be expensed. +Quarterly ceiling tests are primarily impacted by commodity prices, reserve quantities added and produced, overall exploration and development costs, depletion expense and deferred taxes. For each of the four quarters ended December 31, 2015, the carrying value of our oil and gas properties subject to the ceiling test exceeded the calculated value of the ceiling limitation, and we recognized aggregate impairments of $3. 7 billion ($2.4 billion , net of tax). These impairments resulted primarily from the impact of decreases in the 12-month average trailing prices for oil, natural gas and NGLs utilized in determining the future net cash flows from proved reserves. If pricing conditions stay at current levels or decline further we will incur full cost ceiling impairments in future quarters, the magnitude of which will be affected by one or more of the other components of the ceiling test calculations, until prices stabilize or improve over a twelve-month period. See O perating costs and expenses above for a complete discussion of our 2015 ceiling impairments. +The ceiling limitation calculation is not intended to be indicative of the fair market value of our proved reserves or future results. Impairment charges do not affect cash flow from operating activities, but do adversely affect our net income and stockholders’ equity. Any recorded impairment of oil and gas properties is not reversible at a later date. +Depletion of proved oil and gas properties is computed on the units - of - production method, whereby capitalized costs, including future development costs and asset retirement obligations, are amortized over total estimated proved reserves. Changes in our estimate of proved reserve quantities and commodity prices will cause corresponding changes in depletion expense in periods subsequent to these changes. The capitalized costs of unproved properties, including those in wells in progress, are excluded from the costs being amortized. We do not have major development projects that are excluded from costs being amortized. On a quarterly basis, we evaluate excluded costs for inclusion in the costs to be amortized resulting from the determination o f proved reserves or changes in our development plans . To the extent that the evaluation indicates these properties will not be developed, their cost is added to the capitalized costs to be amortized. See Note 1 to our Consolidated Financial statements in Item 8 of this report for information regarding the effect of a ceiling +54 +Table of Contents +impairment on our depletion rate. Expenditures for maintenance and repairs are charged to production expense in the period incurred. +Goodwill +Goodwill represents the excess of the purchase price of business combinations over the fair value of the net assets acquired and is tested for impairment at least annually. We first assess qualitative factors to determine whether it is more likely than not (with a greater than 50% threshold) that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two - step goodwill impairment test. If goodwill is determined to be impaired, then it is written down to a calculated fair value by charging the impairment to expense. +We evaluate our goodwill for impairment in the fourth quarter of each year or whenever events or changes in circumstances indicate the possibility that goodwill may be impaired. Based upon our qualitative assessment at December 31, 2015 , goodwill was not impaired. It is possible that goodwill could become impaired in the future if commodity prices or other economic factors become less favorable. +Contingencies +A provision for contingencies is charged to expense when the loss is probable and the cost can be reasonably estimated. Determining when expenses should be recorded for these contingencies and the appropriate amounts for accrual is a complex estimation process that includes subjective judgment. In many cases, this judgment is based on interpretation of laws and regulations, which can be interpreted differently by regulators and/or courts of law. We closely monitor known and potential legal, environmental, and other contingencies periodically to determine if we should record losses. Actual costs can vary from our estimates for a variety of reasons. See Note 10 to the Consolidated Financial Statements in Item 8 of this report for further information regarding litigation and other commitments and contingencies. +At December 31, 201 5, we had not made any accruals related to environmental remediation costs. However, we may be required to make such estimates in future periods if applicable laws and regulations change or if the interpretation or administration of laws and regulations change. Other factors, such as unanticipated construction problems or identification of areas of contaminated soil or groundwater, could also cause us to accrue for such costs. +Asset Retirement Obligation +Our asset retirement obligation represents the estimated present value of the amount we will incur to retire long - lived assets at the end of their productive lives, in accordance with applicable state laws. Our asset retirement obligation is determined by calculating the present value of estimated cash flows related to the liability. The retirement obligation is recorded as a liability at its estimated present value as of inception with an offsetting increase in the carrying amount of the related long - lived asset. Periodic accretion of discount of the estimated liability is recorded as an expense in the income statement. The cost of the tangible asset, including the asset retirement cost, is depreciated over the useful life of the asset. +Asset retirement liability is determined using significant assumptions including current estimates of plugging and abandonment costs, annual inflation of these costs, the productive lives of assets and our risk-adjusted interest rate. Changes in any of these assumptions can result in significant revisions to the estimated asset retirement obligation. Because of the subjectivity of assumptions, the costs to ultimately retire our wells may vary significantly from prior estimates. See Note 8 to the Consolidated Financial Statements in Item 8 of this report for additional information regarding our asset retirement obligations. +Income Taxes +Our oil and gas exploration and production operations are subject to taxation on income in numerous jurisdictions. We record deferred tax assets and liabilities to account for the expected future tax consequences of events that have been recognized in our financial statements and our tax returns. We routinely assess the realizability of our deferred tax assets. If we conclude that it is more likely than not that some portion or all of the deferred tax assets will not be realized under accounting standards, the tax asset would be reduced by a valuation allowance. Numerous judgments and assumptions are inherent in the determination of future taxable income, including factors such as future operating conditions (particularly as +55 +Table of Contents +related to prevailing oil and gas prices). +The c ompany regularly assesses and, if required, establishes accruals for tax contingencies that could result from assessments of additional tax by taxing jurisdictions where the company operates. See Note 9 to the Consolidated Financial Statements in Item 8 of this report for additional in formation regarding our income t axes. +Recently Issued Accounting Standards +Please refer to Note 1, Basis of Presentation and Summary of Significant Accounting Policies – Recently Issued Accounting Standards , to the Consolidated Financial Statements in Item 8 of this report for a discussion of recent accounting pronouncements and their anticipated effect on our business. +ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK +Market risk refers to the risk of loss arising from adverse changes in commodity prices and interest rates. The disclosures are not meant to be precise indicators of expected future losses but rather indicators of reasonably possible losses. +Price Fluctuations +Our major market risk is pricing applicable to our oil, gas and NGL production. The prices we receive for our production are based on prevailing market conditions and are influenced by many factors that are beyond our control. Pricing for oil, gas and NGL production has been volatile and unpredictable. Oil sales contributed 57% of our total production revenue for 2015. Gas sales accounted for 30 % and NGL sales contributed 13%. A $1.00 per barrel change in our realized oil price would have resulted in an $18.7 million change in revenues. A $0.10 per Mcf change in our realized gas price would have resulted in a $16.9 million change in our gas revenues. A $1.00 per barrel change in NGL prices would have changed revenues by $13.1 million. See Market Conditions in Item 7 of this report for further information. +We periodically enter into financial derivative contracts to hedge a portion of our price risk associated with our future oil and gas production. At December 31, 2015, we have gas collars in place for the years 2016 and 2017 with a total fair value of $4.5 million. We have three-way oil collars in place for the year 2016 with a total fair value of $6.7 million. Subsequent to December 31, 2015, we entered into additional gas collars . See Note 4 to the Consolidated Financial Statements in Item 8 of this report for additional information regarding derivative instruments. +While these contracts limit the downside risk of adverse price movements, they may also limit future revenues from favorable price movements. For the gas contracts described above, a hypothetical $0.10 change in the price below or above the contracted price applied to the notional amounts would cause a change in our gain (loss) on mark-to-market derivatives in 2015 of $ 1.0 million . For the oil contracts described above, a hypothetical $1.00 change in the price below or above the contracted price applied to the notional amounts would cause a change in our gain (loss) on mark-to-market derivatives in 2015 of $ 1. 1 million . +Interest Rate Risk +At December 31, 2015 , our long-term debt consisted of $750 million in 5.875% senior notes that will mature on May 1, 2022 and $750 million in 4.375% senior notes that will mature on June 1, 2024. Because all of our long-term debt is at a fixed rate, we consider our interest rate exposure to be minimal. This sensitivity analysis for interest rate risk excludes accounts receivables, accounts payable and accrued liabilities because of the short-term maturity of such instruments. See Note 3 and Note 5 to the Consolidated Financial Statements in Item 8 of this report for additional information regarding debt. +56 +Table of Contents +ITEM 8. FINANCIAL STATEMENT S AND SUPPLEMENTARY DATA +CIMAREX ENERGY CO. +INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTAL SCHEDULES +Page +Report of Independent Registered Public Accounting Firm for the years ended December 31, 2015, 2014, and 2013 +58 +Consolidated balance sheets as of December 31, 2015 and 2014 +59 +Consolidated statements of operations and comprehensive income (loss) for the years ended December 31, 2015, 2014, and 2013 +60 +Consolidated statements of cash flows for the years ended December 31, 2015, 2014, and 2013 +61 +Consolidated statements of stockholders’ equity for the years ended December 31, 2015, 2014, and 2013 +62 +Notes to consolidated financial statements +Note 1 – Basis of Presentation and Summary of Significant Accounting Policies +63 +Note 2 – Capital Stock +68 +Note 3 – Long-term Debt +68 +Note 4 – Derivative Instruments/Hedging +69 +Note 5 – Fair Value Measurements +72 +Note 6 – Stock-Based and Other Compensation +73 +Note 7 – Earnings (loss) per Share +76 +Note 8 – Asset Retirement Obligations +77 +Note 9 – Income Taxes +77 +Note 1 0 – Commitments and Contingencies +78 +Note 1 1 – Related Party Transactions +80 +Note 12 – Property Sales and Acquisitions +80 +Note 13 – Supplemental Cash Flow Information +80 +Supplemental information to consolidated financial statements +Supplemental oil and gas information (Unaudited) +81 +Supplemental quarterly financial data (Unaudited) +86 +All other supplemental information and schedules have been omitted because they are not applicable or the information required is shown in the consolidated financial statements or related notes thereto. +57 +Table of Contents +Report of Independent Registered Public Accounting Firm +The Board of Directors and Stockholders +Cimarex Energy Co.: +We have audited the accompanying consolidated balance sheets of Cimarex Energy Co. and subsidiaries (the Company) as of December 31, 2015 and 2014, and the related consolidated statements of operations and comprehensive income (loss), stockholders’ equity, and cash flows for each of the years in the three year period ended December 31, 2015. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. +We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. +In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Cimarex Energy Co. and subsidiaries as of December 31, 2015 and 2014, and the results of their operations and their cash flows for each of the years in the three year period ended December 31, 2015, in conformity with U.S. generally accepted accounting principles. +We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Cimarex Energy Co. and subsidiaries’ internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 23, 2016 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting. +KPMG LLP +Denver, Colorado +February 2 3 , 201 6 +58 +Table of Contents +CIMAREX ENERGY CO. +CONSOLIDATED BALANCE SHEET S +(in thousands, except share and per share information) +December 31, +2015 +2014 +Assets +Current assets: +Cash and cash equivalents +$ +779,382 +$ +405,862 +Accounts receivable: +Trade, net of allowance +81,888 +134,443 +Oil and gas sales, net of allowance +136,537 +259,220 +Gas gathering, processing, and marketing, net of allowance +6,935 +18,009 +Other +38 +436 +Oil and gas well equipment and supplies +54,579 +89,780 +Deferred income taxes +— +13,475 +Derivative instruments +10,745 +— +Prepaid Expenses +7,036 +9,356 +Other current assets +790 +1,223 +Total current assets +1,077,930 +931,804 +Oil and gas properties at cost, using the full cost method of accounting: +Proved properties +15,546,948 +14,402,064 +Unproved properties and properties under development, not being amortized +440,166 +759,149 +15,987,114 +15,161,213 +Less—accumulated depreciation, depletion and amortization and impairment +(12,710,968) +(8,257,502) +Net oil and gas properties +3,276,146 +6,903,711 +Fixed assets, less accumulated depreciation of $207,173 and $175,453 +230,009 +211,031 +Goodwill +620,232 +620,232 +Derivative instruments +501 +— +Other assets, net +38,468 +41,691 +$ +5,243,286 +$ +8,708,469 +Liabilities and Stockholders’ Equity +Current liabilities: +Accounts payable: +Trade +$ +53,384 +$ +102,276 +Gas gathering, processing, and marketing +13,431 +35,775 +Accrued liabilities: +Exploration and development +56,721 +200,929 +Taxes other than income +17,545 +26,950 +Other +173,242 +219,505 +Revenue payable +95,744 +190,892 +Total current liabilities +410,067 +776,327 +Long-term debt: +Principal +1,500,000 +1,500,000 +Less—unamortized debt issuance costs +(14,380) +(16,824) +Long-term debt, net +1,485,620 +1,483,176 +Deferred income taxes +352,705 +1,754,706 +Asset retirement obligation +153,857 +159,792 +Other liabilities +43,359 +33,836 +Total liabilities +2,445,608 +4,207,837 +Commitments and contingencies +Stockholders’ equity: +Preferred stock, $0.01 par value, 15,000,000 shares authorized, no shares issued +— +— +Common stock, $0.01 par value, 200,000,000 shares authorized, 94,820,570 and 87,592,535 shares issued, respectively +948 +876 +Paid-in capital +2,762,976 +1,997,080 +Retained earnings +33,313 +2,501,574 +Accumulated other comprehensive income +441 +1,102 +2,797,678 +4,500,632 +$ +5,243,286 +$ +8,708,469 +The accompanying notes are an integral part of these consolidated financial statements. +59 +Table of Contents +CIMAREX ENERGY CO. +CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) +(in thousands, except per share data) +Years Ended December 31, +2015 +2014 +2013 +Revenues: +Oil sales +$ +809,664 +$ +1,308,958 +$ +1,250,212 +Gas sales +428,227 +687,930 +471,045 +NGL Sales +179,647 +375,941 +231,248 +Gas gathering and other +34,688 +49,602 +45,441 +Gas marketing, net of related costs of $144,673 , $256,836 and $187,772 respectively +393 +1,745 +105 +1,452,619 +2,424,176 +1,998,051 +Costs and expenses: +Impairment of oil and gas properties +3,716,883 +— +— +Depreciation, depletion and amortization +778,923 +806,021 +615,874 +Asset retirement obligation +9,121 +10,082 +7,989 +Production +299,374 +342,304 +286,742 +Transportation, processing, and other operating +182,362 +195,414 +93,580 +Gas gathering and other +38,138 +35,113 +25,876 +Taxes other than income +84,764 +128,793 +112,732 +General and administrative +74,688 +81,160 +77,466 +Stock compensation +19,559 +15,001 +14,279 +(Gain) loss on derivative instruments, net +(11,246) +(3,762) +209 +Other operating (income) expense, net +856 +116 +(132,334) +5,193,422 +1,610,242 +1,102,413 +Operating income (loss) +(3,740,803) +813,934 +895,638 +Other (income) and expense: +Interest expense +85,746 +72,865 +54,973 +Capitalized interest +(30,589) +(35,925) +(31,517) +Other, net +(13,576) +(28,907) +(21,518) +Income (loss) before income tax +(3,782,384) +805,901 +893,700 +Income tax expense (benefit) +(1,373,436) +298,697 +329,011 +Net income (loss) +$ +(2,408,948) +$ +507,204 +$ +564,689 +Earnings (loss) per share to common stockholders: +Basic +Distributed +$ +0.64 +$ +0.64 +$ +$ +0.56 +Undistributed +(26.56) +5.15 +5.92 +$ +(25.92) +$ +5.79 +$ +6.48 +Diluted +Distributed +$ +0.64 +$ +0.64 +$ +$ +0.56 +Undistributed +(26.56) +5.14 +5.91 +$ +(25.92) +$ +5.78 +$ +6.47 +Comprehensive income (loss): +Net income (loss) +$ +(2,408,948) +$ +507,204 +$ +564,689 +Other comprehensive income (loss): +Change in fair value of investments, net of tax +(661) +(87) +715 +Total comprehensive income (loss) +$ +(2,409,609) +$ +507,117 +$ +565,404 +The accompanying notes are an integral part of these consolidated financial statements. +60 +Table of Contents +CIMAREX ENERGY CO. +CONSOLIDATED STATEMENTS OF CASH FLOW S +(in thousands) +Years Ended December 31, +2015 +2014 +2013 +Cash flows from operating activities: +Net income (loss) +$ +(2,408,948) +$ +507,204 +$ +564,689 +Adjustments to reconcile net income (loss) to net cash provided by operating activities: +Impairments and other valuation losses +3,716,883 +— +— +Depreciation, depletion and amortization +778,923 +806,021 +615,874 +Asset retirement obligation +9,121 +10,082 +7,989 +Deferred income taxes +(1,388,146) +298,293 +329,700 +Stock compensation +19,559 +15,001 +14,279 +(Gain) loss on derivative instruments +(11,246) +(3,762) +209 +Settlements on derivative instruments +— +7,641 +(4,088) +Changes in non-current assets and liabilities +23,230 +(2,440) +(141,215) +Other, net +4,206 +(3,828) +751 +Changes in operating assets and liabilities: +Receivables, net +186,699 +(35,133) +(64,780) +Other current assets +37,954 +(25,428) +14,234 +Accounts payable and other current liabilities +(276,735) +45,714 +(13,294) +Net cash provided by operating activities +691,500 +1,619,365 +1,324,348 +Cash flows from investing activities: +Oil and gas expenditures +(979,044) +(2,108,250) +(1,572,288) +Sales of oil and gas assets +39,853 +449,981 +61,503 +Sales of other assets +1,178 +8,413 +31,661 +Other capital expenditures +(70,592) +(90,611) +(51,913) +Net cash used by investing activities +(1,008,605) +(1,740,467) +(1,531,037) +Cash flows from financing activities: +Net bank debt borrowings +— +(174,000) +174,000 +Proceeds from other long-term debt +— +750,000 +— +Proceeds from sale of common stock +752,100 +— +— +Financing and underwriting fees +(24,633) +(11,616) +(100) +Dividends paid +(58,281) +(53,849) +(46,712) +Proceeds from exercise of stock options and other +21,439 +11,898 +14,494 +Net cash provided by financing activities +690,625 +522,433 +141,682 +Net change in cash and cash equivalents +373,520 +401,331 +(65,007) +Cash and cash equivalents at beginning of period +405,862 +4,531 +69,538 +Cash and cash equivalents at end of period +$ +779,382 +$ +405,862 +$ +4,531 +The accompanying notes are an integral part of these consolidated financial statements. +61 +Table of Contents +CIMAREX ENERGY CO. +CONSOLIDATED STATEMENTS OF STOCKHOLDERS ’ EQUIT Y +(in thousands) +Accumulated +Other +Total +Common Stock +Paid-in +Retained +Comprehensive +Stockholders’ +Shares +Amount +Capital +Earnings +Income (loss) +Equity +Balance, December 31, 2012 +86,596 +$ +866 +$ +1,939,628 +$ +1,533,768 +$ +474 +$ +3,474,736 +Dividends +— +— +— +(48,423) +— +(48,423) +Net Income +— +— +— +564,689 +— +564,689 +Unrealized change in fair value of investments, net of tax +— +— +— +— +715 +715 +Issuance of restricted stock awards +579 +6 +(6) +— +— +— +Common stock reacquired and retired +(153) +(1) +(10,100) +— +— +(10,101) +Restricted stock forfeited and retired +(171) +(2) +2 +— +— +— +Exercise of stock options +276 +3 +14,491 +— +— +14,494 +Vesting of restricted stock units +25 +— +— +— +— +— +Stock-based compensation +— +— +26,098 +— +— +26,098 +Balance, December 31, 2013 +87,152 +$ +872 +$ +1,970,113 +$ +2,050,034 +$ +1,189 +$ +4,022,208 +Dividends +— +— +— +(55,664) +— +(55,664) +Net Income +— +— +— +507,204 +— +507,204 +Unrealized change in fair value of investments, net of tax +— +— +— +— +(87) +(87) +Issuance of restricted stock awards +487 +4 +(4) +— +— +— +Common stock reacquired and retired +(123) +(1) +(13,559) +— +— +(13,560) +Restricted stock forfeited and retired +(135) +(1) +1 +— +— +— +Exercise of stock options +211 +2 +11,896 +— +— +11,898 +Stock-based compensation +— +— +28,633 +— +— +28,633 +Balance, December 31, 2014 +87,592 +$ +876 +$ +1,997,080 +$ +2,501,574 +$ +1,102 +$ +4,500,632 +Dividends +— +— +— +(59,313) +— +(59,313) +Net Income (loss) +— +— +— +(2,408,948) +— +(2,408,948) +Unrealized change in fair value of investments, net of tax +— +— +— +— +(661) +(661) +Issuance of common stock +6,900 +69 +729,468 +— +— +729,537 +Issuance of restricted stock awards +471 +5 +(5) +— +— +— +Common stock reacquired and retired +(194) +(2) +(21,238) +— +— +(21,240) +Restricted stock forfeited and retired +(90) +(1) +1 +— +— +— +Exercise of stock options +142 +1 +8,450 +— +— +8,451 +Stock-based compensation +— +— +36,232 +— +— +36,232 +Stock-based compensation tax benefit +— +— +12,988 +— +— +12,988 +Balance, December 31, 2015 +94,821 +$ +948 +$ +2,762,976 +$ +33,313 +$ +441 +$ +2,797,678 +The accompanying notes are an integral part of these consolidated financial statements. +62 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +1. BASI S OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES +Cimarex Energy Co., a Delaware corporation, is an independent oil and gas exploration and production company. Our operations are mainly located in Texas, Oklahoma and New Mexico. +Basis of presentation +Our Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP. Our significant accounting policies are discussed below. The accounts of Cimarex and its subsidiaries are presented in the accompanying Consolidated Financial Statements. All intercompany accounts and transactions were eliminated in consolidation. +Segment Information +We have determined that our business is comprised of only one segment because our gathering, processing and marketing activities are ancillary to our production operations and are not separately managed. +Use of estimates +The preparation of our financial statements in conformity with GAAP requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. The more significant areas requiring the use of management’s estimates and judgments relate to the estimation of proved oil and gas reserves, the use of these oil and gas reserves in calculating depletion, depreciation and amortization (DD&A), the use of the estimates of future net revenues in computing ceiling test limitations and estimates of future abandonment obligations used in recording asset retirement obligations and the assessment of goodwill. +The process of estimating quantities of oil and gas reserves is complex, requiring significant decisions in the evaluation of all available geological, geophysical, engineering and economic data. The data for a given field may also change substantially over time as a result of numerous factors including, but not limited to, additional development activity, evolving production history and continual reassessment of the viability of production under varying economic conditions. As a result, material revisions to existing reserve estimates may occur from time to time. Although every reasonable effort is made to ensure that our reserve estimates represent the most accurate assessments possible, subjective decisions and available data for our various fields make these estimates generally less precise than other estimates included in financial statement disclosures. +Estimates and judgments are also required in determining allowance for doubtful accounts, impairments of undeveloped properties and other assets, purchase price allocation, valuation of deferred tax assets, fair value measurements and commitments and contingencies. We analyze our estimates, including those related to oil, gas and NGL revenues, and base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. +Cash and Cash Equivalents +Cash and cash equivalents consist of cash in banks and investments readily convertible into cash, which have original maturities of three months or less. Cash equivalents are stated at cost, which approximates market value. +63 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +Oil and Gas Well Equipment and Supplies +The Financial Accounting Standards Board (FASB) issued new guidance (ASU 2015-11) to simplify the measurement of inventory effective for interim and annual periods beginning in 2017 with early adoption permitted. Under current guidance, inventory is carried at the lower of cost or market, where market can be replacement cost or a net realizable value. Under the new guidance, inventory is to be carried at the lower of cost or net realizable value, where net realizable value is a defined estimated selling price. We adopted this standard as of December 31, 2015. +An analysis of our oil and gas well equipment and supplies was performed and no impairment was required. However, the industry-wide decline in drilling operations has put downward pressure on the price of oil and gas well equipment and supplies. Further declines in future periods could cause us to recognize impairments on these assets. An impairment would not affect cash flow from operating activities, but would adversely affect our net income and stockholders’ equity. +Oil and Gas Properties +We use the full cost method of accounting for our oil and gas operations. All costs associated with property acquisition, exploration and development activities are capitalized. Exploration and development costs include dry hole costs, geological and geophysical costs, direct overhead related to exploration and development activities and other costs incurred for the purpose of finding oil and gas reserves. Salaries and benefits paid to employees directly involved in the exploration and development of properties, as well as other internal costs that can be directly identified with acquisition, exploration and development activities, are also capitalized. Under the full cost method of accounting, no gain or loss is recognized upon the disposition of oil and gas properties unless such disposition would significantly alter the relationship between capitalized costs and proved reserves. +Companies that follow the full cost accounting method are required to make quarterly ceiling test calculations. This test ensures that total capitalized costs for oil and gas properties (net of accumulated DD&A and deferred income taxes) do not exceed the sum of the present value discounted at 10% of estimated future net cash flows from proved reserves, the cost of properties not being amortized, the lower of cost or estimated fair value of unproven properties included in the costs being amortized, and all related tax effects. We currently do not have any unproven properties that are being amortized. Estimated future net cash flows are determined by commodity prices and proved reserve quantities. Revenue calculations in the reserves are based on the unweighted average first-day-of-the-month prices for the prior 12 months. If net capitalized costs subject to amortization exceed this limit, the excess is charged to expense. +At December 31, 2015, the carrying value of our oil and gas properties subject to the test exceeded the calculated value of the ceiling limitation and we recognized an impairment of $965.3 m illion ( $613.4 million, net of tax). We also recognized impairments in the first three quarters of 2015. Full year impairments totaled $3.7 billion ($ 2.4 billion, net of tax). These impairments resulted primarily from the impact of decreases in the 12-month average trailing prices for oil, natural gas and NGLs utilized in determining the future net cash flows from proved reserves. If pricing conditions stay at current levels or decline further, or if there is a negative impact on one or more of the other components of the calculation, we will incur full cost ceiling impairments in future quarters. The ceiling calculation is not intended to be indicative of the fair market value of our proved reserves or future results. Impairment charges do not affect cash flow from operating activities, but do adversely affect our net income and stockholders’ equity. Any recorded impairment of oil and gas properties is not reversible at a later date. +Depletion of proved oil and gas properties is computed on the units- of-production method, whereby capitalized costs, including future development costs and asset retirement obligations, are amortized over total estimated proved reserves. Changes in our estimate of proved reserve quantities, commodity prices and impairment of oil and gas properties will cause corresponding changes in depletion expense in periods subsequent to these changes. +The capitalized costs of unproved properties, including those in wells in progress, are excluded from the costs being amortized. We do not have major development projects that are excluded from costs being amortized. On a quarterly basis, we evaluate excluded costs for inclusion in the costs to be amortized resulting from the determination of proved reserves or impairments. To the extent that the evaluation indicates these properties are impaired, the amount of the +64 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +impairment is added to the capitalized costs to be amortized. Expenditures for maintenance and repairs are charged to production expense in the period incurred. +Fixed assets, net +Fixed assets consist primarily of gathering and plant facilities, vehicles, airplanes, office furniture, and computer equipment and software. These items are recorded at cost and are depreciated on the straight-line method based on expected lives of the individual assets, which range from 3 to 30 years. +Goodwill +Goodwill represents the excess of the purchase price of business combinations over the fair value of the net assets acquired and is tested for impairment at least annually. We have one reporting unit for which we first assess qualitative factors to determine whether it is more likely than not (with a greater than 50% threshold) that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. If goodwill is determined to be impaired then it is written down to a calculated fair value by charging the impairment to expense. +We evaluate our goodwill for impairment in the fourth quarter of each year or whenever events or changes in circumstances indicate the possibility that goodwill may be impaired. Based upon our qualitative assessment at December 31, 201 5 , goodwill was not impaired. It is possible that goodwill could become impaired in the future if commodity prices or other economic factors become less favorable. +Revenue Recognition +Oil, Gas and NGL Sales +Revenue is recorded from the sales of oil, gas and NGLs when the product is delivered at a fixed or determinable price, title has transferred and collectability is reasonably assured. There is a ready market for our products and sales occur soon after production. +Under certain contracts, when NGLs are extracted from the gas stream, processors receive a portion of the sales value from both the residue gas and the NGLs as a processing fee and remit the contractual proceeds to us. Prior to 2014, revenue was recognized net of these processing fees for residue gas and NGLs sold under these contracts as allowed under EITF 00-10 Accounting for Shipping and Handling Fees and Costs. Increasing NGL production combined with the impact of recent changes to these contracts has resulted in processing costs becoming more significant. Accordingly, we have changed our policy to record these processing costs with operating costs as allowed under EITF 00-10. Beginning in 2014, our realized prices for sales under these contracts reflect the value of 100% of the residue gas and NGLs yielded by processing, rather than the value associated with the contractual proceeds we received. The related processing fees now are included in “transportation, processing and other operating” costs. The effect of this change in 2014 was that total revenue was $ 51.4 million higher with an offsetting increase in total transportation, processing and other operating costs. There was no impact on operating income. Financial statements for periods prior to 2014 have not been reclassified to reflect this change in accounting treatment as it was impracticable to do so. +Marketing Sales +We market and sell natural gas for working interest owners under short term sales and supply agreements and earn a fee for such services. Revenues are recognized as gas is delivered and are reflected net of gas purchases on the consolidated statements of operations and comprehensive income (loss) . +Gas Imbalances +We use the sales method of accounting for gas imbalances. Under this method, revenue is recorded on the basis of gas actually sold. Gas reserves are adjusted to the extent there are sufficient quantities of natural gas to make up an +65 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +imbalance. A liability is established in situations where there are insufficient proved reserves available to make-up an overproduced imbalance. Imbalances have not been significant in the periods presented. +General and Administrative Expenses +General and administrative expenses are reported net of amounts reimbursed by working interest owners of the oil and gas properties operated by Cimarex and net of amounts capitalized pursuant to the full cost method of accounting. +Derivatives +Our derivative contracts are recorded on the balance sheet at fair value. Our firm sales contracts qualify for the normal purchase and normal sale exception. Contracts that qualify for this treatment do not require mark-to-market accounting treatment. See Note 4 for additional information regarding our derivative instruments. +Income Taxes +In November 2015, the FASB issued a new standard (ASU 2015-17) regarding the balance sheet classification of deferred taxes for interim and annual periods beginning in 2017, with early adoption permitted on a prospective or retrospective basis. Under current guidance, entities that present a classified balance sheet must show both current and noncurrent amounts for deferred tax assets and liabilities. The new standard requires entities to classify all deferred tax assets and liabilities as noncurrent. We have elected to adopt this standard on a prospective basis as of December 31, 2015. Prior periods have not been retrospectively adjusted. +We record deferred tax assets and liabilities to account for the expected future tax consequences of events that have been recognized in the financial statements and tax returns. We routinely assess the realizability of the deferred tax assets. If we conclude that it is more likely than not that some or all of the deferred tax assets will not be realized, the tax asset is reduced by a valuation allowance. Numerous judgments and assumptions are inherent in the determination of future taxable income, including factors such as future operating conditions (particularly as related to prevailing oil and gas prices) and changing tax laws. +We regularly assess and, if required, establish accruals for tax contingencies that could result from assessments of additional tax by taxing jurisdictions where the company operates. See Note 9 for additional information regarding our income taxes. +Contingencies +A provision for contingencies is charged to expense when the loss is probable and the cost can be reasonably estimated. Determining when expenses should be recorded for these contingencies and the appropriate amounts for accrual is a complex estimation process that includes subjective judgment. In many cases, this judgment is based on interpretation of laws and regulations, which can be interpreted differently by regulators and/or courts of law. We closely monitor known and potential legal, environmental and other contingencies and periodically determine when we should record losses for these items based on information available to us. See Note 1 0 for additional information regarding our contingencies. +Asset Retirement Obligations +We recognize the fair value of liabilities for retirement obligations associated with tangible long-lived assets in the period in which there is a legal obligation associated with the retirement of such assets and the amount can be reasonably estimated. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. This liability includes costs related to the abandonment of wells, the removal of facilities and equipment and site restorations. Subsequent to initial measurement, the asset retirement liability is required to be accreted each period. If the fair value of a recorded asset retirement obligation changes, a revision is recorded to both the asset retirement obligation and the asset retirement capitalized cost. Capitalized costs are included as a component of the DD&A calculations. The current portions of the asset retirement obligations are recorded in “accrued liabilities, other” in the accompanying consolidated balance +66 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +sheets and expenditures are classified as cash used in operating activities in the accompanying consolidated statements of cash flows. See Note 8 for additional information regarding our asset retirement obligations. +Stock-based Compensation +We recognize compensation related to all stock-based awards, including stock options, in the financial statements based on their estimated grant-date fair value. We grant various types of stock-based awards including stock options, restricted stock (including awards with service-based vesting and market condition-based vesting provisions) and restricted stock units. The fair value of stock option awards is determined using the Black-Scholes option pricing model. Service-based restricted stock and units are valued using the market price of our common stock on the grant date. The fair value of the market condition-based restricted stock is based on the grant-date market value of the award utilizing a statistical analysis. Compensation cost is recognized ratably over the applicable vesting period. To the extent compensation cost relates to employees directly involved in oil and gas acquisition, exploration and development activities, such amounts are capitalized to oil and gas properties. Amounts not capitalized to oil and gas properties are recognized as stock compensation expense. See Note 6 for additional information regarding our stock-based compensation. +Earnings (loss) per Share +We calculate earnings (loss) per share recognizing that unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents are “participating securities” and therefore should be included in computing earnings per share using the two-class earnings allocation method. The two-class method is an earnings allocation formula that determines earnings per share for each class of common stock and participating security according to dividends declared (or accumulated) and participation rights in undistributed earnings. Our unvested share based payment awards, consisting of restricted stock and units , qualify as participating securities. See Note 7 for additional information regarding our earnings per share. +Recently Issued Accounting Standards +The FASB issued ASU 2015-03, Interest-Imputation of Interest, Simplifying the Presentation of Debt Issuance Costs in April 2015 and ASU 2015-15, Interest-Imputation of Interest-Presentation and Subsequent Measurement of Debt Issuance Costs associated with Line-of-Credit Arrangements in August 2015. These ASUs simplify the presentation of debt issuance costs by requiring such costs (except for those related to revolving credit facilities) to be presented in the balance sheet as a direct deduction from the carrying amount of the related debt liability rather than as an asset. These ASUs are effective for annual and interim periods beginning in 2016. Early adoption is permitted. We adopted these ASUs at December 31, 2015. Accordingly, prior periods have been adjusted retrospectively to conform to this guidance (see Note 3). +In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). In July 2015, the FASB deferred the effective date by one year to annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Early adoption is permitted, but not before the original effective date of reporting periods beginning after December 15, 2016. The new revenue standard provides a five-step analysis of transactions to determine when and how revenue is recognized. The core principle of the guidance is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance in this update supersedes the revenue recognition requirements in Topic 605, Revenue Recognition , and most industry-specific guidance throughout the Industry Topics of the Codification . Entities can choose to apply the standard using either the full retrospective approach or a modified retrospective approach. We do not intend to adopt the standard early. We have not determined which transition method we will use and are continuing to evaluate the potential impact of this guidance. At this time we do not expect that the adoption of this standard will have a material effect on our financial position or results of operation and related disclosures. +Subsequent Events +The accompanying financial disclosures include an evaluation of subsequent events through the date of this filing. +67 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +2 . CAPITAL STOCK +Authorized capital stock consists of 200 million shares of common stock and 15 million shares of preferred stock. At December 31, 201 5 , there were no shares of preferred stock outstanding. See our Consolidated Statements of Stockholders’ Equity for detailed capital stock activity. +In May 2015, we completed an underwritten public offering of 6,900,000 shares of common stock, which included 900,000 shares of common stock issued pursuant to an overallotment option to purchase additional shares granted to the underwriters. The stock was sold to the public at $109.00 per share, with a par value of $0.01 , and we received net proceeds of approximately $730 million from the sale of these shares of common stock, after deducting underwriting fees. +Dividends +A cash dividend has been paid to stockholders in every quarter since the first quarter of 2006. In February 2016, the quarterly dividend was decreased to $0.08 per share from $0.16 per share. Future dividend payments will depend on our level of earnings, financial requirements and other factors considered relevant by the Board of Directors. +2015 +2014 +2013 +Dividend declared (in millions) +$ +59.3 +$ +55.7 +$ +48.4 +Dividend per share +$ +0.64 +$ +0.64 +$ +0.56 +3 . LONG-TERM DEBT +A summary of our debt is as follows: +December 31, 2015 +December 31, 2014 +Unamortized Debt +Unamortized Debt +(in thousands) +Principal +Issuance Costs +Principal +Issuance Costs +5.875% Senior Notes, due May 1, 2022 +$ +750,000 +$ +6,978 +$ +750,000 +$ +8,343 +4.375% Senior Notes, due June 1, 2024 +750,000 +7,402 +750,000 +8,481 +Total long-term debt +$ +1,500,000 +$ +14,380 +$ +1,500,000 +$ +16,824 +All of our long-term debt is senior unsecured debt and is, therefore, pari passu with respect to the payment of both principal and interest. +In 2015, the FASB issued new guidance to simplify the presentation of debt issuance costs by requiring such costs (except for those related to revolving credit facilities) to be presented in the balance sheet as a direct deduction from the carrying amount of the related debt liability (ASU 2015-03 and 2015-15). Historically, we have treated these costs as deferred assets and included them in Other assets, net in our balance sheet. We adopted the new guidance at December 31, 2015, and have applied it on a retrospective basis. The following table reflects the reclassification of $16.8 million of debt issuance costs from an asset to a direct deduction of the related debt liability for the balance sheet line items affected by the retrospective application of the change in accounting principle. +December 31, 2014 +After +As Previously +(in thousands) +Adoption +Reported +Other assets, net +$ +41,691 +$ +58,515 +Long-term debt +$ +1,483,176 +$ +1,500,000 +Bank Debt +68 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +In October 2015, we entered into a new senior unsecured revolving credit facility (Credit Facility) which matures October 16, 2020. The Credit Facility has aggregate commitments of $1.0 billion, with an option to increase aggregate commitments to $1.25 billion at any time. There is no borrowing base subject to the discretion of the lenders based on the value of our proved reserves under the Credit Facility. As of December 31, 201 5 , there were no borrowings outstanding under the Credit Facility. W e had letters of credit outstanding under the Credit Facility of $2.5 million, leaving an unused borrowing availability of $997.5 million. +At our option, borrowings under the new facility may bear interest at either (a) LIBOR plus 1.125 – 2.0% based on the credit rating for our senior unsecured long-term debt, or (b) a base rate (as defined in the credit agreement) plus 0.125 – 1.0% , based on the credit rating for our senior unsecured long-term debt. Unused borrowings are subject to a commitment fee of 0.125 – 0.35% , based on the credit rating for our senior unsecured long-term debt. +The Credit Facility contains representations, warranties, covenants and events of default that are customary for investment grade, senior unsecured bank credit agreements, including a financial covenant for the maintenance of a defined total debt-to-capital ratio of no greater than 65% . As of December 31, 201 5 , we were in compliance with all of the financial and non-financial covenants. +ASU 2015-15 specifically exempts entities with revolving credit facilities from presenting associated debt issuance costs as a direct deduction from the carrying amount of the related liability. At December 31, 2015 and 2014, we had $5.7 million and $6.5 million, respectively, of unamortized debt issuance costs associated with our Credit Facility which were recorded as deferred assets and included in Other assets, net in our balance sheet. The costs are being amortized to interest expense ratably over the life of the Credit Facility. +Senior Notes +In June 2014, we issued $750 million of 4.375% senior notes due 2024 and received net proceeds of $740.9 million, after deducting offering discounts and costs. The net proceeds were used to pay outstanding bank debt and for general corporate purposes. The effective interest rate on the notes , including the debt issuance cost, is 4.50% . +In April 2012, we issued $750 million of 5.875% senior notes due 2022 and received net proceeds of $737.0 million, after deducting underwriting discounts and offering costs. We used a portion of the net proceeds to retire our 7.125% senior notes and the remaining proceeds were used to pay outstanding bank debt and for general corporate purposes. The effective interest rate on the notes, including the debt issuance cost, is 6.04% . +Each of our outstanding senior notes is governed by an indenture containing certain covenants, events of default and other restrictive provisions with which we were in compliance as of December 31, 2015 . Interest on each of the senior notes is payable semi-annually. +4 . DERIVATIVE INSTR UMENTS/HEDGING +We periodically enter into derivative instruments to mitigate a portion of our potential exposure to a decline in commodity prices and the corresponding negative impact on cash flow available for reinvestment. While the use of these instruments limits the downside risk of adverse price changes, their use may also limit future revenues from favorable price changes. Depending on changes in oil and gas futures markets and management’s view of underlying supply and demand trends, we may increase or decrease our hedging positions. +69 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +The following tables summarize our derivative contracts as of December 31, 2015: +First +Second +Third +Fourth +Quarter +Quarter +Quarter +Quarter +Total +Oil Three-Way Collars: +2016: +WTI (1) +Volume (Bbls) +273,000 +273,000 +276,000 +276,000 +1,098,000 +Wtd Avg Price - Lower Floor +$ +40.00 +$ +40.00 +$ +40.00 +$ +40.00 +$ +40.00 +Wtd Avg Price - Upper Floor +$ +50.00 +$ +50.00 +$ +50.00 +$ +50.00 +$ +50.00 +Wtd Avg Price - Ceiling +$ +60.00 +$ +60.00 +$ +60.00 +$ +60.00 +$ +60.00 +(1) +WTI refers to West Texas Intermediate price as quoted on the New York Mercantile Exchange. +First +Second +Third +Fourth +Quarter +Quarter +Quarter +Quarter +Total +Gas Collars: +2016: +PEPL (1) +Volume (MMBtu) +910,000 +910,000 +920,000 +920,000 +3,660,000 +Wtd Avg Price - Floor +$ +2.70 +$ +2.70 +$ +2.70 +$ +2.70 +$ +2.70 +Wtd Avg Price - Ceiling +$ +2.85 +$ +2.85 +$ +2.85 +$ +2.85 +$ +2.85 +Perm EP (1) +Volume (MMBtu) +1,820,000 +1,210,000 +920,000 +920,000 +4,870,000 +Wtd Avg Price - Floor +$ +2.75 +$ +2.75 +$ +2.75 +$ +2.75 +$ +2.75 +Wtd Avg Price - Ceiling +$ +3.12 +$ +3.09 +$ +3.06 +$ +3.06 +$ +3.09 +2017: +Perm EP (1) +Volume (MMBtu) +900,000 +910,000 +— +— +1,810,000 +Wtd Avg Price - Floor +$ +2.75 +$ +2.75 +$ +— +$ +— +$ +2.75 +Wtd Avg Price - Ceiling +$ +3.36 +$ +3.36 +$ +— +$ +— +$ +3.36 +(1) +PEPL refers to Panhandle Eastern Pipe Line, Tex/OK Mid-Continent Index as quoted in Platt’s Inside FERC. Perm EP refers to El Paso Natural Gas Company, Permian Basin Index as quoted in Platt’s Inside FERC. +A three-way collar is a combination of three options: lower floor (sold put), upper floor (bought put) and ceiling (sold call). If the published index price is below the lower floor, we receive the difference between the two floors. If the index price is between the two floors, we receive the difference between the upper floor and the index price. If the index price is between the upper floor and the ceiling, we do not receive or pay any amounts. If the index price is above the ceiling, we pay the excess over the ceiling price. +Under a collar agreement, we receive the difference between the published index price and a floor price if the index price is below the floor. We pay the difference between the ceiling price and the index price if the index price is above the contracted ceiling price. No amounts are paid or received if the index price is between the floor and the ceiling price. +70 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +Subsequent to December 31, 2015, we entered into the following gas hedges: +First +Second +Third +Fourth +Quarter +Quarter +Quarter +Quarter +Total +Gas Collars: +2016: +PEPL +Volume (MMBtu) +— +1,820,000 +1,840,000 +1,840,000 +5,500,000 +Wtd Avg Price - Floor +$ +— +$ +2.13 +$ +2.13 +$ +2.13 +$ +2.13 +Wtd Avg Price - Ceiling +$ +— +$ +2.70 +$ +2.70 +$ +2.70 +$ +2.70 +Perm EP +Volume (MMBtu) +— +1,820,000 +1,840,000 +1,840,000 +5,500,000 +Wtd Avg Price - Floor +$ +— +$ +2.25 +$ +2.25 +$ +2.25 +$ +2.25 +Wtd Avg Price - Ceiling +$ +— +$ +2.77 +$ +2.77 +$ +2.77 +$ +2.77 +2017: +PEPL +Volume (MMBtu) +1,800,000 +1,820,000 +— +— +3,620,000 +Wtd Avg Price - Floor +$ +2.13 +$ +2.13 +$ +— +$ +— +$ +2.13 +Wtd Avg Price - Ceiling +$ +2.70 +$ +2.70 +$ +— +$ +— +$ +2.70 +Perm EP +Volume (MMBtu) +1,800,000 +1,820,000 +— +— +3,620,000 +Wtd Avg Price - Floor +$ +2.25 +$ +2.25 +$ +— +$ +— +$ +2.25 +Wtd Avg Price - Ceiling +$ +2.77 +$ +2.77 +$ +— +$ +— +$ +2.77 +We have elected not to account for our derivatives as cash flow hedges. Therefore, we recognize settlements and changes in the assets or liabilities relating to our open derivative contracts in earnings. Cash settlements of our contracts are included in cash flows from operating activities in our statements of cash flows. +The following table presents the net ( gains ) and losses from settlements and changes in fair value of our derivative contracts, and the ( gains ) losses only from settlements during the periods shown below. +(in thousands) +2015 +2014 +2013 +(Gain) loss on derivative instruments, net +$ +(11,246) +$ +(3,762) +$ +209 +Settlement (gains) losses +$ +— +$ +(7,641) +$ +4,088 +Our derivative contracts are carried at their fair value on our balance sheet using Level 2 inputs and are subject to enforceable master netting arrangements, which allow us to offset recognized asset and liability fair value amounts on contracts with the same counterparty. Our policy is to not offset asset and liability positions in our accompanying balance sheets. +The following table presents the amounts and classifications of our derivative assets and liabilities as of December 31, 201 5 , as well as the potential effect of netting arrangements on contracts with the same counterparty. We did not have any outstanding contracts as of December 31, 2014. +December 31, 2015: +(in thousands) +Balance Sheet Location +Asset +Liability +Oil contracts +Current assets — Derivative instruments +$ +6,774 +$ +— +Natural gas contracts +Current assets — Derivative instruments +3,971 +— +Natural gas contracts +Non-current assets — Derivative instruments +501 +— +Total gross amounts presented in accompanying balance sheet +11,246 +— +Less: gross amounts not offset in the accompanying balance sheet +— +— +Net amount: +$ +11,246 +$ +— +We are exposed to financial risks associated with our derivative contracts from non-performance by our counterparties. We mitigate our exposure to any single counterparty by contracting with a number of financial institutions, +71 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +each of which ha ve a high credit rating and is a member of our bank credit facility. Our member banks do not require us to post collateral for our hedge liability positions. Because some of the member banks have discontinued hedging activities, in the future we may hedge with counterparties outside our bank group to obtain competitive terms and to spread counterparty risk. +5. FAIR VALUE ME ASUREMENTS +Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The FASB has established a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. This hierarchy consists of three broad levels. Level 1 inputs are the highest priority and consist of unadjusted quoted prices in active markets for identical assets and liabilities. Level 2 are inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. Level 3 are unobservable inputs for an asset or liability. +The following table provides fair value measurement information for certain assets and liabilities as of December 31, 2015 and 2014. +December 31, 2015 +December 31, 2014 +Carrying +Fair +Carrying +Fair +(in thousands) +Amount +Value +Amount +Value +Financial Assets (Liabilities): +5.875% Notes due 2022 +$ +(743,022) +$ +(723,750) +$ +(741,657) +$ +(776,250) +4.375% Notes due 2024 +$ +(742,598) +$ +(683,318) +$ +(741,519) +$ +(720,000) +Derivative instruments — assets +$ +11,246 +$ +11,246 +$ +— +$ +— +Assessing the significance of a particular input to the fair value measurement requires judgment, including the consideration of factors specific to the asset or liability. The following methods and assumptions were used to estimate the fair value of the assets and liabilities in the table above. +Debt (Level 1) +The fair value for our 4.375% and 5.875% fixed rate notes was based on their last traded value before year end. +Derivative Instruments (Level 2) +The fair value of our derivative instruments was estimated using option pricing models. These models use certain variables including forward price and volatility curves and the strike prices for the instruments. The fair value estimates are adjusted relative to non-performance risk as appropriate. Please see Note 4 for further information on the fair value of our derivative instruments. +Other Financial Instruments +The carrying amounts of our cash, cash equivalents, accounts receivable, accounts payable, and accrued liabilities approximate fair value because of the short-term maturities and/or liquid nature of these assets and liabilities. Included in “accrued liabilities, other” at December 31, 2015 and 2014, respectively, are: 1) liabilities of approximately $23.1 million and $42.0 million representing the amount by which checks issued, but not yet presented to our banks for collection, exceeded balances in applicable bank accounts; 2) accrued payroll related general and administrative expenses of $21.5 million and $44.2 million; and 3) accrued operating expenses of $60.4 million and $67.5 million. +Our accounts receivable are primarily from either purchasers of our gas, oil and NGL production (customers) or from exploration and production companies which own interests in properties we operate. This industry concentration has the potential to impact our overall exposure to credit risk, either positively or negatively, because our customers and joint working interest owners may be similarly affected by changes in industry conditions. +72 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +We conduct credit analyses prior to making any sales to new customers or increasing credit for existing customers and may require parent company guarantees, letters of credit or prepayments when deemed necessary. +We routinely assess the recoverability of all material accounts receivable to determine their collectability. We accrue a reserve to the allowance for doubtful accounts when it is probable that a receivable will not be collected and the amount of the reserve may be reasonably estimated. At December 31, 2015, the allowance for doubtful accounts totaled $1.8 million. At December 31, 2014, the allowance for doubtful accounts was $1.5 million. +Major Customers +Our major customers during 2015 were Sunoco Logistics Partners L.P. (Sunoco) and Enterprise Products Partners L.P. (Enterprise). Sunoco and Enterprise accounted for 21% and 17%, respectively, of our consolidated revenues in 2015. During 2014, Enterprise and Sunoco each accounted for 19% of our consolidated revenues. Oneok Partners, L.P. accounted for 10% of our 2014 consolidated revenues. +Sunoco is a significant purchaser of our oil in Southeast New Mexico and Canadian County, Oklahoma. Enterprise is a significant oil purchaser in Oklahoma and West Texas. If either of these entities were to stop purchasing our production, we believe there are a number of other purchasers to whom we could sell our production with some delay. If both parties were to discontinue purchasing our product, we believe there would be challenges initially, but ample markets to handle the disruption. +6 . STOCK-BASED and OT HER COMPENSATION +We have recognized non-cash stock-based compensation cost as shown below. Historical amounts may not be representative of future amounts as the value of future awards may vary from historical amounts. +Years Ended December 31, +(in thousands) +2015 +2014 +2013 +Restricted stock awards +Performance stock awards +$ +18,991 +$ +12,141 +$ +11,105 +Service-based stock awards +14,547 +13,607 +12,018 +33,538 +25,748 +23,123 +Stock option awards +2,803 +3,057 +3,145 +36,341 +28,805 +26,268 +Less amounts capitalized to oil and gas properties +(16,782) +(13,804) +(11,989) +Compensation expense +$ +19,559 +$ +15,001 +$ +14,279 +The increase in 2015 stock compensation is primarily related to performance awards granted in December 2014, a portion of which were amortized during 2015. +Equity Incentive Plan +Our 2014 Equity Incentive Plan (the 2014 Plan) was approved by stockholders in May 2014 and our previous plan was terminated at that time. Outstanding awards under the previous plan were not impacted. A total of 6.6 million shares of common stock may be issued under the 2014 Plan, including shares available from the previous plan. The 2014 Plan provides for grants of stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, performance units, dividend equivalents and other stock-based awards. +73 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +Restricted Stock +The following table provides information about restricted stock awards granted during the last three years. +Years Ended December 31, +2015 +2014 +2013 +Weighted +Weighted +Weighted +Average +Average +Average +Number +Grant-Date +Number +Grant-Date +Number +Grant-Date +of Shares +Fair Value +of Shares +Fair Value +of Shares +Fair Value +Performance stock awards +263,939 +$ +87.12 +316,441 +$ +83.22 +298,000 +$ +77.75 +Service-based stock awards +207,180 +$ +114.80 +170,402 +$ +136.72 +281,236 +$ +72.89 +Total restricted stock awards +471,119 +$ +99.29 +486,843 +$ +101.95 +579,236 +$ +75.39 +Performance awards were granted to eligible executives and are subject to market condition-based vesting determined by our stock price performance relative to a defined peer group’s stock price performance. After three years of continued service, an executive will be entitled to vest in 50% to 100% of the award. In accordance with Internal Revenue Code Section 162(m), certain of the amounts awarded may not be deductible for tax purposes. Service-based stock awards granted to other eligible employees and non-employee directors have vesting schedules of three to five years. +Compensation cost for the performance stock awards is based on the grant-date fair value of the award utilizing a Monte Carlo simulation model. Compensation cost for the service-based vesting restricted shares is based upon the grant-date market value of the award. Such costs are recognized ratably over the applicable vesting period. +The following table provides information on restricted stock activity during the year. +Performance +Service-based +(subject to market conditions) +Weighted +Weighted +Average +Average +Grant-Date +Grant-Date +Awards +Fair Value +Awards +Fair Value +Outstanding beginning of period +1,036,417 +$ +82.69 +877,211 +$ +69.38 +Vested +(181,665) +$ +72.16 +(284,675) +$ +47.29 +Granted +207,180 +$ +114.80 +263,939 +$ +87.12 +Canceled +(63,750) +$ +81.19 +(26,667) +$ +81.98 +Outstanding end of period +998,182 +$ +91.37 +829,808 +$ +82.99 +The total fair value of restricted stock that vested was $ 52.2 million in 201 5 , $ 34.1 million in 201 4 , and $ 25.7 million in 201 3 . +Unrecognized compensation cost related to unvested restricted shares at December 31, 201 5 was $ 85.8 million. We expect to recognize that cost over a weighted average period of 2.2 years. +Restricted Units +As of December 31, 201 5 and 201 4 , we had 8,838 restricted units outstanding . These represent restricted units held by a non-employee director who has elected to defer payment of common stock represented by the units until termination of his service on the Board of Directors. +74 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +Stock Options +Options that have been granted under the 2014 plan and previous plans expire seven to ten years from the grant date and have service-based vesting schedules of three to five years. The exercise price for an option under the 2014 plan is the closing price of our common stock as reported by the New York Stock Exchange (NYSE) on the date of grant. The previous plans provided that all grants have an exercise price of the average of the high and low prices of our common stock as reported by the NYSE on the date of grant. +Compensation cost related to stock options is based on the grant-date fair value of the award, recognized ratably over the applicable vesting period. We estimate the fair value using the Black-Scholes option-pricing model. Expected volatilities are based on the historical volatility of our common stock. We also use historical data to estimate the probability of option exercise, expected years until exercise and potential forfeitures. We use U.S. Treasury bond rates in effect at the grant date for our risk-free interest rates. +The following summarizes the options granted and related information, and the assumptions used to determine the fair value of those options. +Years Ended December 31, +2015 +2014 +2013 +Options granted +69,000 +82,500 +144,400 +Weighted average grant-date fair value +$ +37.56 +$ +41.69 +$ +21.64 +Weighted average exercise price +$ +115.28 +$ +139.02 +$ +72.25 +Total Fair Value (in thousands) +$ +2,592 +$ +3,439 +$ +3,125 +Expected years until exercise +5.0 +4.0 +4.0 +Expected stock volatility +36.6 +% +36.7 +% +38.6 +% +Dividend yield +0.6 +% +0.5 +% +0.8 +% +Risk-free interest rate +1.6 +% +1.8 +% +1.4 +% +Information about outstanding stock options is summarized below . +Weighted +Weighted +Aggregate +Average +Average +Intrinsic +Exercise +Remaining +Value +Options +Price +Term +(in thousands) +Outstanding as of January 1, 2015 +384,082 +$ +78.19 +Exercised +(141,517) +$ +59.73 +Granted +69,000 +$ +115.28 +Canceled +(666) +$ +139.02 +Forfeited +(11,670) +$ +118.77 +Outstanding as of December 31, 2015 +299,229 +$ +93.76 +4.9 +Years +$ +4,095 +Exercisable as of December 31, 2015 +142,188 +$ +74.07 +3.9 +Years +$ +3,398 +The following table provides information regarding options exercised and the grant-date fair value of options vested. +Years Ended December 31, +(in thousands) +2015 +2014 +2013 +Number of options exercised +141,517 +211,258 +276,069 +Cash received from option exercises +$ +8,451 +$ +11,898 +$ +14,494 +Tax benefit from option exercises included in paid-in-capital (1) +$ +4,442 +$ +— +$ +— +Intrinsic value of options exercised +$ +7,467 +$ +15,384 +$ +10,109 +Grant-date fair value of options vested +$ +2,734 +$ +4,419 +$ +2,521 +(1) +No tax benefit is recorded until the benefit reduces current taxes payable. However, in 2015 we recognized tax benefit on prior period option exercises. +75 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +The following summary reflects the status of non-vested stock options as of December 31, 201 5 and changes during the year. +Weighted +Weighted +Average +Average +Grant-Date +Exercise +Options +Fair Value +Price +Non-vested as of January 1, 2015 +205,156 +$ +29.35 +$ +94.76 +Vested +(105,445) +$ +25.93 +$ +80.49 +Granted +69,000 +$ +37.56 +$ +115.28 +Forfeited +(11,670) +$ +35.89 +$ +118.77 +Non-vested as of December 31, 2015 +157,041 +$ +34.77 +$ +111.58 +As of December 31, 201 5 , there was $ 3.9 million of unrecognized compensation cost related to non-vested stock options. We expect to recognize that cost on a pro rata basis over a weighted average period of 1.8 years. +Other Compensation +We maintain and sponsor a contributory 401(k) plan for our employees. Annual matching costs related to the plan were $ 6.4 million for 2015. During 2014 and 2013, such costs were $11.0 million and $9.0 million, respectively. +7 . EARNINGS (LOSS) P ER SHARE +The calculations of basic and diluted net earnings (loss) per common share under the two-class method are presented below. +Years Ended December 31, +(in thousands, except per share data) +2015 +2014 +2013 +Basic: +Net income (loss) +$ +(2,408,948) +$ +507,204 +$ +564,689 +Participating securities’ share in earnings (1) +— +(9,906) +(11,091) +Net income (loss) applicable to common stockholders +$ +(2,408,948) +$ +497,298 +$ +553,598 +Diluted: +Net income (loss) +$ +(2,408,948) +$ +507,204 +$ +564,689 +Participating securities’ share in earnings (1) +— +(9,891) +(11,076) +Net income (loss) applicable to common stockholders +$ +(2,408,948) +$ +497,313 +$ +553,613 +Shares: +Basic shares outstanding +92,992 +85,679 +85,288 +Dilutive effect of stock options +— +131 +121 +Fully diluted common stock +92,992 +85,810 +85,409 +Excluded (2) +2,136 +94 +251 +Earnings (loss) per share to common stockholders (3): +Basic +$ +(25.92) +$ +5.79 +$ +6.48 +Diluted +$ +(25.92) +$ +5.78 +$ +6.47 +(1) +Participating securities are not included in undistributed earnings when a loss exists. +(2) +Inclusion of certain shares would have an anti-dilutive effect. +(3) +Earnings (loss) per share are based on actual figures rather than the rounded figures presented. +76 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +8 . ASSET RETIREM ENT OBLIGATIONS +The following table reflects the components of the change in the carrying amount of the asset retirement obligation for the years ended December 31, 201 5 and 201 4 . +(in thousands) +2015 +2014 +Asset retirement obligation at January 1, +$ +173,008 +$ +154,026 +Liabilities incurred +4,114 +13,015 +Liability settlements and disposals +(25,061) +(27,036) +Accretion expense +7,682 +7,583 +Revisions of estimated liabilities +4,362 +25,420 +Asset retirement obligation at December 31, +164,105 +173,008 +Less current obligation +10,248 +13,216 +Long-term asset retirement obligation +$ +153,857 +$ +159,792 +The year-over-year decline in liabilities incurred resulted from lower drilling and acquisition activity in 2015. D uring 201 5 , the liability settlements and disposals included $13.3 million related to properties that were sold. During 201 4 , the liability settlements and disposals included $11.2 million related to properties that were sold. Also during 2014 we recognized revisions of estimated liabilities totaling $25.4 million, which were due to changes in abandonment cost and timing estimates. +9 . INCOME TAXES +Federal income tax expense (benefit) for the years presented differs from the amounts that would be provided by applying the U.S. Federal income tax rate, primarily due to the effect of state income taxes , non-deductible expenses and revisions . The components of the provision for income taxes are as follows: +Years Ended December 31, +(in thousands) +2015 +2014 +2013 +Current Taxes: +Federal (benefit) +$ +14,417 +$ +— +$ +(381) +State (benefit) +293 +404 +(308) +14,710 +404 +(689) +Deferred taxes: +Federal (benefit) +(1,294,194) +282,729 +315,165 +State (benefit) +(93,952) +15,564 +14,535 +(1,388,146) +298,293 +329,700 +$ +(1,373,436) +$ +298,697 +$ +329,011 +Reconciliations of the income tax expense (benefit) calculated at the federal statutory rate of 35% to the total income tax expense are as follows: +Years Ended December 31, +(in thousands) +2015 +2014 +2013 +Provision at statutory rate +$ +(1,323,834) +$ +282,066 +$ +312,795 +Effect of state taxes +(60,634) +15,826 +14,226 +Revision of previous balances +5,997 +— +— +Other permanent differences +5,035 +805 +1,990 +Income tax expense (benefit) +$ +(1,373,436) +$ +298,697 +$ +329,011 +77 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +The components of Cimarex’s net deferred tax liabilities are as follows: +December 31, +(in thousands) +2015 +2014 +Long-term: +Assets: +Stock compensation and other accrued amounts +$ +32,084 +$ +26,527 +Net operating loss carryforward, net of valuation allowance +305,506 +218,584 +Credit carryforward +6,016 +4,068 +343,606 +249,179 +Liabilities: +Property, plant and equipment +(696,311) +(2,003,885) +Net, long-term deferred tax liability +(352,705) +(1,754,706) +Current: +Assets: +Other accrued amounts +— +13,475 +— +13,475 +Net deferred tax liabilities +$ +(352,705) +$ +(1,741,231) +At December 31, 2015 , we had a U.S. net tax operating loss carryforward of approximately $ 907.5 million, which would expire in years 2031 through 203 5 . We believe that the carryforward will be utilized before it expires. We recorded an increase to the net operating loss carryforward at December 31, 2015, for certain state losses. The net increase in the state net operating loss valuation allowance during the year was $51.0 million. The total valuation allowance on state net operating losses at December 31, 2015, was $70.1 million because it is not more likely than not that these additional state net operating losses will be utilized before they expire. The amount of the U.S. net tax operating loss carryforward that will be recorded to equity when utilized to reduce taxes payable is $ 77.2 million. We also had an alternative minimum tax credit carryforward of approximately $ 6.0 million. +At December 31, 201 5 and 201 4 , we had no unrecognized tax benefits that would impact our effective rate and we have made no provisions for interest or penalties related to uncertain tax positions. The tax years 201 2 through 201 4 remain open to examination by the Internal Revenue Service of the United States. We file tax returns with various state taxing authorities which remain open to examination for tax years 201 1 through 201 4 . +1 0 . COMMITMENTS AN D CONTINGENCIES +Lease Commitments +We have various commitments for office space and equipment under operating lease arrangements. Rent expense for the operating leases totaled $ 13.2 million in 2015 . Rent expense was $14.3 million and $13.2 million for 201 4 and 201 3, respectively. +Shown below are future minimum cash payments required under these leases as of December 31, 201 5 . +(in thousands) +Operating +Leases +2016 +$ +9,248 +2017 +9,625 +2018 +9,119 +2019 +9,196 +2020 +9,349 +Later years +50,173 +Total future minimum lease payments +$ +96,710 +78 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +Other Commitments +We have commitments of $ 201.7 million to finish drilling and completing wells in progress at December 31, 2015. We also have various commitments for drilling rigs. The total minimum expenditure commitments under these agreements are $21.6 million. +At December 31, 2015, we had firm sales contracts to deliver approximately 56 Bcf of natural gas over the next three years . If this gas is not delivered, our financial commitment would be approximately $ 116.7 million. This commitment will fluctuate due to price volatility and actual volumes delivered. However, we believe no financial commitment will be due based on our current proved reserves and production levels from which we can fulfill these obligations . +In connection with gas gathering and processing agreements, we have volume commitments over the next ten years. If no gas is delivered, the maximum amount that would be payable under these commitments would be approximately $20 3 . 0 million. However, we believe no financial commitment will be due based on our current proved reserves and production levels from which we can fulfill these obligations. +We have minimum volume delivery commitments in connection with agreements to reimburse connection costs to various pipelines. The maximum amount that would be payable if no gas is delivered would be approximately $12.4 million. Of this total, we have accrued a liability of $9.7 million . Due to reduced drilling activity in 2015 and projected for 2016, we may have additional liabilities associated with these delivery commitments in the future . +We have other various transportation , delivery and facilities commitments in the normal course of business, which approximate $3 6.3 million. We currently anticipate meeting these obligations. +All of the noted commitments were routine and made in the normal course of our business. +Litigation +In the normal course of business, we have various litigation matters. We assess the probability of estimable amounts related to litigation matters in accordance with guidance established by the FASB and adjust our accruals accordingly. Though some of the related claims may be significant, the resolution of them we believe, individually or in the aggregate, would not have a material adverse effect on our financial condition or results of operations after consideration of current accruals. +H.B. Krug, et al. versus H&P +In 2008, we recorded litigation expense of $119.6 million for the H.B. Krug, et al. v. Helmerich & Payne, Inc. (H&P) lawsuit, and began accruing additional post-judgment interest and costs for this case. +Over the years, the lawsuit has been disputed until December 13, 2013 when the Oklahoma Supreme Court reversed the Tulsa County District Court’s original judgment of $119.6 million and affirmed an alternative jury verdict for $3.65 million. It also remanded the case back to the trial court for consideration of potential prejudgment interest, attorney’s fees and cost awards. Accordingly, on December 31, 2013 we reduced the previously recognized litigation expense, which included related interest and costs, and the associated long-term liability by $142.8 million. +On April 1, 2014, Cimarex paid the Plaintiffs $15.8 million in satisfaction of the $3.65 million damages award, the post-judgment interest award and the payment in lieu of bond, all of which are now final and not appealable. On June 24, 2014, the trial court ruled the Plaintiffs were not entitled to prejudgment interest but were entitled to attorney’s fees and costs, the amount of which will be determined at a subsequent hearing. On November 3, 2015, the Oklahoma Supreme Court affirmed the trial court’s denial of prejudgment interest. The only remaining issue is the amount of Plaintiffs’ award of attorney’s fees, which is subject to future trial and appellate court proceedings and, therefore, cannot be determined or estimated at this time . +79 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +1 1 . RELATED PARTY TRA NSACTIONS +Helmerich & Payne, Inc. (H&P) provides contract drilling services to Cimarex. Drilling costs of approximately $ 7.9 million were incurred by Cimarex related to such services for 201 5 . During 201 4 and 201 3 , such costs were $ 18.4 million and $17.0 million, respectively. Hans Helmerich, a director of Cimarex, is Chairman of the Board of Directors of H&P. +Lisa Stewart joined our Board of Directors in October, 2015. Ms. Stewart is Chairman and Chief Investment Officer of Sheridan Production Partners, a privately-owned oil and gas operating company she founded in 2007. During 2015, Cimarex paid certain affiliates of Sheridan Production Partners oil and gas revenues of $224.2 thousand and received $81.5 thousand for joint interest billings. In addition, Cimarex paid the Sheridan affiliates joint interest billings of $10.4 thousand and received $4.1 thousand of oil and gas revenues. +Jerry Box , a director of Cimarex whose term expired May 2015, was the non-executive Chairman of the Board of Newpark through May 2014. Certain subsidiaries of Newpark Resources, Inc. provided various drilling services to Cimarex. Costs of such services were $ 0.6 million through May 2014. During 2013, such costs were $3.5 million. +12 . PROPERTY SALES AN D ACQUISITIONS +The following sales and acquisitions were made in the ordinary course of business. All amounts are net of customary purchase price adjustments. +There were no significant sales and acquisitions in 2015. We sold interests in various non-core oil and gas properties for $446.1 million during 2014. Most of the proceeds were related to sales of producing gas wells in southwestern Kansas and undeveloped acreage in Reagan County, Texas. During 2014, we made property acquisitions totaling $249.7 million, most of which were in our Cana-Woodford shale play in Western Oklahoma. +In 2013, we sold interests in non-core oil and gas assets for $61.5 million. During the second quarter of 2013, we also sold a 50% interest in our Culberson County, Texas Triple Crown gas gathering and processing system for approximately $31 million. Total property acquisitions during 2013 were $37.1 million, mostly for undeveloped acreage in Reeves County, Texas. +13. SUPPLEMENTAL DISC LOSURE OF CASH FLOW INFORMATION +Years Ended December 31, +(in thousands) +2015 +2014 +2013 +Cash paid during the period for: +Interest expense (including capitalized amounts) +$ +80,785 +$ +66,167 +$ +50,754 +Interest capitalized +$ +28,819 +$ +32,623 +$ +29,098 +Income taxes +$ +558 +$ +354 +$ +205 +Cash received for income taxes +$ +1,503 +$ +460 +$ +966 +80 +Table of Contents +SUPPLEMENTAL OIL AND GAS INFORMATION (UNAUDITED) +Oil and Gas Reserve Information —Proved reserve quantities are based on estimates prepared by Cimarex in accordance with guidelines established by the Securities and Exchange Commission (SEC). +Reserve definitions comply with definitions of Rules 4-10(a) (1)-(32) of Regulation S-X of the SEC. All of our reserve estimates are maintained by our internal Corporate Reservoir Engineering group, which is comprised of reservoir engineers and engineering technicians. The objectives and management of this group are separate from and independent of the exploration and production functions of our company. The technical employee primarily responsible for overseeing the reserve estimation process is our company’s Vice President of Corporate Engineering. This individual graduated from the Colorado School of Mines with a Bachelor of Science degree in Engineering and has more than 21 years of practical experience in reserve evaluation. He has been directly involved in the annual reserve reporting process of Cimarex since 2002 and has served in his current role for the past eleven years. +DeGolyer and MacNaughton, an independent petroleum engineering consulting firm, reviewed greater than 80% of the total future net revenue discounted at 10% attributable to the total interests owned by Cimarex as of December 31, 201 5 . The individual primarily responsible for overseeing the review is a Senior Vice President with DeGolyer and MacNaughton and a Registered Professional Engineer in the State of Texas with over 41 years of experience in oil and gas reservoir studies and evaluations. +Proved reserves are those quantities of oil, NGL and gas, which, by analysis of geosciences and engineering data, can be estimated with reasonable certainty to be economically producible—from a given date forward, from known reservoirs, and under existing economic conditions, operating methods, and government regulations—prior to the time at which contracts providing the right to operate expire, unless evidence indicates that renewal is reasonably certain, regardless of whether deterministic or probabilistic methods are used for the estimation. The project to extract the hydrocarbons must have commenced or the operator must be reasonably certain that it will commence the project within a reasonable time. +There are numerous uncertainties inherent in estimating quantities of proved reserves and projecting future rates of production and the timing of development expenditures. The estimation of our proved reserves employs one or more of the following: production trend extrapolation, analogy, volumetric assessment and material balance analysis. Techniques including review of production and pressure histories, analysis of electric logs and fluid tests, and interpretations of geologic and geophysical data also are involved in this estimation process. +The following table summarizes the trailing 12-month index prices used in the reserve estimates for 2015, 2014, and 2013. These prices are prior to adjustments for fixed and determinable amounts under provisions in existing contracts, location, grade and quality. +December 31, +2015 +2014 +2013 +Gas price per Mcf +$ +2.59 +$ +4.35 +$ +3.67 +Oil price per Bbl +$ +50.28 +$ +94.99 +$ +96.78 +NGL price per Bbl +$ +14.41 +$ +30.89 +$ +32.31 +81 +Table of Contents +The following reserve data represents estimates only and should not be construed as being exact. +Total Gas +Gas +Oil +NGL +Equivalents +(MMcf) +(MBbl) +(MBbl) +(MMcfe) +Total proved reserves: +December 31, 2012 +1,251,863 +77,921 +89,909 +2,258,844 +Revisions of previous estimates +(101,235) +(2,942) +(16,197) +(216,068) +Extensions and discoveries +280,619 +48,010 +26,431 +727,267 +Purchases of reserves +263 +27 +9 +479 +Production +(125,248) +(13,380) +(7,876) +(252,787) +Sales of properties +(12,762) +(1,103) +(232) +(20,771) +December 31, 2013 +1,293,500 +108,533 +92,044 +2,496,964 +Revisions of previous estimates +85,533 +(1,039) +4,262 +104,873 +Extensions and discoveries +420,442 +29,155 +36,424 +813,911 +Purchases of reserves +88,227 +1,383 +6,186 +133,641 +Production +(155,128) +(15,639) +(11,343) +(317,022) +Sales of properties +(65,841) +(3,401) +(2,300) +(100,044) +December 31, 2014 +1,666,733 +118,992 +125,273 +3,132,323 +Revisions of previous estimates +(154,390) +(14,633) +(5,668) +(276,192) +Extensions and discoveries +183,084 +22,859 +18,079 +428,714 +Purchases of reserves +15 +1 +1 +25 +Production +(168,987) +(18,663) +(13,063) +(359,343) +Sales of properties +(9,503) +(758) +(345) +(16,120) +December 31, 2015 +1,516,952 +107,798 +124,277 +2,909,407 +Proved developed reserves: +December 31, 2012 +985,352 +73,524 +63,757 +1,809,037 +December 31, 2013 +1,060,704 +86,665 +69,089 +1,995,233 +December 31, 2014 +1,263,957 +100,050 +89,630 +2,402,033 +December 31, 2015 +1,129,490 +89,189 +87,549 +2,189,920 +Proved undeveloped reserves: +December 31, 2012 +266,511 +4,397 +26,152 +449,807 +December 31, 2013 +232,796 +21,868 +22,955 +501,731 +December 31, 2014 +402,776 +18,942 +35,643 +730,290 +December 31, 2015 +387,462 +18,609 +36,728 +719,487 +Year - end 2015 proved reserves declined by 7% to 2.9 Tcfe, compared to 3.1 Tcfe at year-end 2014 . Pro ved natural gas reserves were 1.5 Tcf, oil contributed 0.65 Tcfe and NGLs accounted for 0.75 Tcfe. Our Mid-Continent’s reserves accounted for 63% of total proved reserves with the remainder in the Permian Basin . +During 201 5 , we added 429 Bcfe of proved reserves through extensions and discoveries, primarily in the Mid-Continent and Permian Basin. In the Mid-Continent, we added 177 Bcfe . In the Permian Basin, we added 251 Bcfe. In addition, we had net positive performance revisions of 142 Bcfe. The performance revisions included 47 Bcfe for better than expected performance of PUD reserves converted to proved developed reserves during the year and positive adjustments of 95 Bcfe to previously booked PUD reserves. +During 2015 , we had net negative reserve revisions of 276 Bcfe. The significant decrease in commodity prices seen in 2015 resulted in negative revisions of 399 Bcfe due to prices. In addition, 19 Bcfe of negative revisions was due to increases in operating expenses , which shortened the economic lives of properties. These decreases were partially offset by the 142 Bcfe of net positive performance revisions discussed above. +During 2014, we added 813.9 Bcfe of proved reserves through extensions and discoveries, primarily in the Mid-Continent and Permian Basin. In the Mid-Continent, we added 80.4 Bcfe from wells drilled. We also added 496.6 Bcfe of PUD reserves in our Can a -Woodford shale area. In the Permian Basin, development drilling added 234.3 Bcfe. +82 +Table of Contents +During 2014, we had net positive reserve revisions of 105 Bcfe. This included positive revisions of 16 Bcfe due to prices offset by negative revisions of 25 Bcfe due to increases in operating expenses , which shortened the economic lives of properties. Performance revisions were a net positive of roughly 114 Bcfe. This net increase was due to better than expected performance of PUD reserves converted to proved developed reserves during the year (125 Bcfe) and positive adjustments to previously booked PUD reserves (10 Bcfe) offset by 21 Bcfe of net negative revisions primarily attributed to Cana-Woodford wells impacted by infill drilling. +In 2013, we added 727.3 Bcfe of proved reserves through extensions and discoveries, primarily in the Permian Basin and Cana-Woodford area. We added 489.4 Bcfe in the Permian Basin (288.2 Bcfe development drilling and 201.2 Bcfe in proved undeveloped reserves). Of this amount, 52% consisted of oil. In our western Oklahoma Cana-Woodford shale area, we added 44.9 Bcfe from wells drilled and 179.9 Bcfe of PUD reserves. +Approximately 208 Bcfe of the 216 Bcfe of net negative revisions in 2013 relates to performance of certain wells drilled in our Cana-Woodford shale development project. Negative revisions resulted from poorer than expected production performance of PUD reserves converted to proved developed reserves during the year (72 Bcfe); wells adversely impacted by infill drilling and/or exhibiting poorer than expected performance (60 Bcfe); the removal of PUD locations due to altered future drilling plans (40 Bcfe); and adjustments to previously booked PUD reserves based on actual results observed in 2013 (36 Bcfe). The remainder of net negative revisions relates to offsetting increases and decreases primarily associated with higher commodity prices and increased operating expenses. +At December 31, 201 5 , we had PUD reserves of 7 19 Bcfe, down 11 Bcfe from 730 Bcfe of PUDs at December 31, 201 4 . Changes in our PUD reserves are summarized in the table below (in Bcfe). +PUD reserves at December 31, 2014 +730 +Converted to developed +(173) +Additions +116 +Net revisions +46 +PUD reserves at December 31, 2015 +719 +During 201 5 , we investe d $246.5 million t o develop and convert 24% of our 201 4 PUD reserves to proved developed reserves . A portion of the development costs were on PUD locations that are expected to be converted to developed in subsequent periods. During 2014, we invested $503.5 million for conversion of PUD reserves to proved developed reserves, converting 56% of our 2013 PUD reserves. +All 116 Bcfe of PUD reserve additions occurred in our western Oklahoma, Cana-Woodford shale play. Roughly 90 % of our PUD reserves are associated with this area. Th e remainder of our PUD reserves is found in the Permian Basin. We have no PUD reserves that have remained undeveloped for five years or more after initial disclosure. We have no PUD reserves whose scheduled delay to initiation of development is beyond five years of initial booking. +83 +Table of Contents +Costs Incurred —The following table sets forth the capitalized costs incurred in our oil and gas production, exploration, and development activities. +Years Ended December 31, +(in thousands) +2015 +2014 +2013 +Costs incurred during the year: +Acquisition of properties +Proved +$ +30 +$ +138,508 +$ +682 +Unproved +41,233 +277,099 +195,121 +Exploration +6,902 +50,271 +52,672 +Development +823,830 +1,664,877 +1,354,098 +Oil and gas expenditures +871,995 +2,130,755 +1,602,573 +Property sales +(41,276) +(446,107) +(61,503) +830,719 +1,684,648 +1,541,070 +Asset retirement obligation, net +(4,818) +27,243 +4,426 +$ +825,901 +$ +1,711,891 +$ +1,545,496 +Aggregate Capitalized Costs —The table below reflects the aggregate capitalized costs relating to our oil and gas producing activities at December 31, 201 5 . +(in thousands) +Proved properties +$ +15,546,948 +Unproved properties and properties under development, not being amortized +440,166 +15,987,114 +Less-accumulated depreciation, depletion and amortization (*) +(12,710,968) +Net oil and gas properties +$ +3,276,146 +(*) Includes $3.7 billion of ceiling test limitation impairment incurred in 2015. +Costs Not Being Amortized —The following table summarizes oil and gas property costs not being amortized at December 31, 201 5 , by year that the costs were incurred. +(in thousands) +2015 +$ +119,972 +2014 +198,693 +2013 +51,502 +2012 and prior +69,999 +$ +440,166 +Of the costs not being amortized, $83.0 million (19%) relates to unevaluated wells in progress and $51.9 million (12%) is capitalized interest. The remaining $30 5.3 million is for land and seismic expenditures, most of which were for costs invested in our Mid-Continent region ($181.5 million) and our Permian Basin region ($87.2 million). On a quarterly basis, all of these costs are evaluated for inclusion in the costs to be amortized resulting from the determination of proved reserves, impairments or reductions in value. We expect to include these costs in the amortization computation as we continue with our exploration and development plans. +84 +Table of Contents +Oil and Gas Operations —The following table contains direct revenue and cost information relating to our oil and gas exploration and production activities for the periods indicated. We have no long-term supply or purchase agreements with governments or authorities in which we act as producer. Income tax expense related to our oil and gas operations are computed using the effective tax rate for the period. +Years Ended December 31, +(in thousands, except per Mcfe) +2015 +2014 +2013 +Oil, gas and NGL revenues from production +$ +1,417,538 +$ +2,372,829 +$ +1,952,505 +Less operating costs and income taxes: +Impairment of oil and gas properties +3,716,883 +— +— +Depletion +736,583 +773,817 +584,628 +Asset retirement obligation +9,121 +10,082 +7,989 +Production +299,374 +342,304 +286,742 +Transportation, processing and other operating +183,134 +215,246 +109,818 +Taxes other than income +84,764 +128,793 +112,732 +Income tax expense (benefit) +(1,311,634) +334,499 +313,104 +3,718,225 +1,804,741 +1,415,013 +Results of operations from oil and gas producing activities +$ +(2,300,687) +$ +568,088 +$ +537,492 +Depletion rate per Mcfe +$ +2.05 +$ +2.44 +$ +2.31 +Standardized Measure of Future Net Cash Flows —The “Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil and Gas Reserves” (Standardized Measure) is calculated in accordance with guidance provided by the FASB. The Standardized Measure does not purport, nor should it be interpreted, to present the fair value of a company’s proved oil and gas reserves. Fair value would require, among other things, consideration of expected future economic and operating conditions, varying price and cost assumptions, and risks inherent in reserve estimates. +Under the Standardized Measure, future cash inflows are based upon the forecasted future production of year-end proved reserves. Future cash inflows are then reduced by estimated future production and development costs to determine net pre-tax cash flow. Future income taxes are computed by applying the statutory tax rate to the excess of pre-tax cash flow over our tax basis in the associated oil and gas properties. Tax credits and permanent differences are also considered in the future income tax calculation. Future net cash flow after income taxes is discounted using a 10% annual discount rate to arrive at the Standardized Measure. +The following summary sets forth our Standardized Measure. +December 31, +(in thousands) +2015 +2014 +2013 +Cash inflows +$ +8,839,485 +$ +19,892,471 +$ +16,565,980 +Production costs +(3,521,881) +(5,777,710) +(5,000,004) +Development costs +(1,058,020) +(1,453,860) +(1,113,743) +Income tax expense +(728,029) +(3,768,780) +(3,099,304) +Net cash flow +3,531,555 +8,892,121 +7,352,929 +10% annual discount rate +(1,597,424) +(4,539,276) +(3,754,035) +Standardized measure of discounted future net cash flow +$ +1,934,131 +$ +4,352,845 +$ +3,598,894 +The estimates of cash flows and reserve quantities shown above are based upon the unweighted average 12-month-first-day-of-the-month benchmark prices. See table above under Oil and Gas Reserve Information for prices used in determining the Standardized Measure. If future gas sales are covered by contracts at specified prices, the contract prices would be used. Prices are market driven and will fluctuate due to supply and demand factors, seasonality and geopolitical and economic factors . +85 +Table of Contents +The following are the principal sources of change in the Standardized Measure. +December 31, +(in thousands) +2015 +2014 +2013 +Standardized Measure, beginning of period +$ +4,352,845 +$ +3,598,894 +$ +2,908,701 +Sales, net of production costs +(850,267) +(1,686,486) +(1,443,213) +Net change in sales prices, net of production costs +(4,262,261) +(176,200) +362,356 +Extensions and discoveries, net of future production and development costs +573,373 +1,633,285 +1,901,786 +Changes in future development costs +280,163 +23,025 +121,347 +Previously estimated development costs incurred during the period +214,749 +442,780 +253,047 +Revision of quantity estimates +(240,063) +230,673 +(436,856) +Accretion of discount +638,948 +520,058 +416,594 +Change in income taxes +1,691,721 +(434,949) +(344,447) +Purchases of reserves in place +20 +228,539 +1,552 +Sales of properties +(26,225) +(185,326) +(38,080) +Change in production rates and other +(438,872) +158,552 +(103,893) +Standardized Measure, end of period +$ +1,934,131 +$ +4,352,845 +$ +3,598,894 +SUPPLEMENTAL QUARTERLY FINANCIAL DATA (UNAUDITED) +Quarter +2015 +First +Second +Third +Fourth +(in thousands, except for per share data) +Revenues +$ +361,002 +$ +424,283 +$ +356,055 +$ +311,279 +Expenses, net (1) +775,943 +1,024,498 +1,119,339 +941,787 +Net income (loss) +$ +(414,941) +$ +(600,215) +$ +(763,284) +$ +(630,508) +Earnings (loss) per share to common stockholders: +Basic: +Distributed +$ +0.16 +$ +0.16 +$ +0.16 +$ +0.16 +Undistributed +(5.00) +(6.63) +(8.37) +(6.94) +$ +(4.84) +$ +(6.47) +$ +(8.21) +$ +(6.78) +Diluted: +Distributed +$ +0.16 +$ +0.16 +$ +0.16 +$ +0.16 +Undistributed +(5.00) +(6.63) +(8.37) +(6.94) +$ +(4.84) +$ +(6.47) +$ +(8.21) +$ +(6.78) +(1) +The 2015 quarterly expenses, net include non-cash impairments to our oil and gas properties of $603.6 million (or $4.47 per diluted share), $967.3 million (or $6.62 per diluted share), $1.2 billion (or $8.07 per diluted share) and $965.3 million (or $6.60 per diluted share) for the first quarter through the fourth quarter of 2015, respectively, as discussed in Note 1 to the Consolidated Financial Statements under Oil and Gas Properties . +86 +Table of Contents +Quarter +2014 +First +Second +Third +Fourth +(in thousands, except for per share data) +Revenues +$ +599,216 +$ +636,669 +$ +649,740 +$ +538,551 +Expenses, net +460,759 +488,029 +505,425 +462,759 +Net income +$ +138,457 +$ +148,640 +$ +144,315 +$ +75,792 +Earnings per share to common stockholders: +Basic: +Distributed +$ +0.16 +$ +0.16 +$ +0.16 +$ +0.16 +Undistributed +1.43 +1.55 +1.49 +0.71 +$ +1.59 +$ +1.71 +$ +1.65 +$ +0.87 +Diluted: +Distributed +$ +0.16 +$ +0.16 +$ +0.16 +$ +0.16 +Undistributed +1.43 +1.54 +1.49 +0.70 +$ +1.59 +$ +1.70 +$ +1.65 +$ +0.86 +The sum of the individual quarterly net income per common share amounts may not agree with year-to-date net income per common share because each quarter’s computation is based on the number of shares outstanding at the end of the applicable quarter using the two-class method. +87 +Table of Contents +ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE +None. +ITEM 9A . CONTROLS AND PROCEDURES +EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES +Cimarex ’ s management, under the supervision and with the participation of the Chief Executive Officer (CEO) and Chief Financial Officer (CFO), have evaluated the effectiveness of Cimarex ’ s disclosure controls and procedures (as defined in Rules 13a - 15(e) and 15d - 15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)) as of December 31, 201 5 . Based on that evaluation, the CEO and CFO concluded that the disclosure controls and procedures are effective in providing reasonable assurance that information required to be disclosed in reports filed with the SEC is recorded, processed, summarized and reported within the time periods specified in the SEC ’ s rules and forms. The disclosure controls and procedures are designed to provide reasonable assurance that such information is accumulated and communicated to our management, including the CEO and CFO, as appropriate, to allow such persons to make timely decisions regarding required disclosures. +CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING +There was no change in our internal control over financial reporting that occurred during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. +MANAGEMENT ’ S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING +Cimarex ’ s management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a - 15(f) and 15d - 15(f) under the Exchange Act). The company ’ s internal control over financial reporting is a process designed by, or under the supervision of, the CEO and CFO to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with generally accepted accounting principles. +Because of the inherent limitations of internal control over financial reporting, misstatements may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +As of December 31, 201 5 , management assessed the effectiveness of the company ’ s internal control over financial reporting based on the criteria established in “ Internal Control - Integrated Framework (2013) , ” issued by the Committee of Sponsoring Organizati ons of the Treadway Commission . Based on that assessment, management concluded that the company ’ s internal control over financial reporting was effective as of December 31, 201 5 . +Our independent registered public accounting firm has audited, and reported on, the effectiveness of our internal controls over financial reporting as of December 31, 201 5 , which follows this report. +88 +Table of Contents +Report of Independent Registered Public Accounting Firm +The Board of Directors and Stockholders +Cimarex Energy Co.: +We have audited Cimarex Energy Co. and subsidiaries internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Cimarex Energy Co. and subsidiaries’ management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on Cimarex Energy Co. and subsidiaries’ internal control over financial reporting based on our audit. +We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. +A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. +Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +In our opinion, Cimarex Energy Co. and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). +We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Cimarex Energy Co. and subsidiaries as of December 31, 2015 and 2014, and the related consolidated statements of operations and comprehensive income (loss), stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2015, and our report dated February 23, 2016 expressed an unqualified opinion on those consolidated financial statements. +KPMG LLP +Denver, Colorado +February 23 , 201 6 +89 +Table of Contents +ITEM 9 B. OTHER INFORMATION +None. +90 +Table of Contents +PART II I +ITEM 10. DIRECTOR S, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE +Information concerning the directors of Cimarex required under this item is incorporated by reference from the Cimarex Energy Co. definitive Proxy Statement for the May 1 2 , 201 6 Annual Meeting of Shareholders . The Proxy Statement will be filed with the Securities and Exchange Commission no later than 120 days subsequent to December 31, 2015 . The executive officers of Cimarex as of February 23 , 201 6 were: +Name +Age +Office +Thomas E. Jorden +58 +Chairman of the Board , Chief Executive Officer and President +Joseph R. Albi +57 +Executive Vice President – Operations, Chief Operating Officer +Stephen P. Bell +61 +Executive Vice President – Business Development +G. Mark Burford +48 +Vice President and Chief Financial Officer +Francis B. Barron +53 +Senior Vice President – General Counsel +John A. Lambuth +53 +Senior Vice President – Exploration +Gary R. Abbott +43 +Vice President – Corporate Engineering +Richard S. Dinkins +71 +Vice President – Human Resources +Krista L. Johnson +45 +Vice President –Governmental and External Affairs +James H. Shonsey +64 +Vice President – Controller , Chief Accounting Officer +There are no family relationships by blood, marriage, or adoption among any of the above executive officers. All executive officers are elected annually by the board of directors to serve for one year or until a successor is elected and qualified. There is no arrangement or understanding between any of the officers and any other person pursuant to which he was selected as an executive officer. +THOMAS E. JORDEN was elected chairman of the board effective August 14, 2012 after being named president and chief executive officer effective September 30, 2011. Since December 8, 2003, Mr. Jorden served as executive vice president of exploration and had served in a similar capacity since September 30, 2002. Prior to September 2002, Mr. Jorden was with Key Production Company, Inc., where he served as vice president of exploration (October 1999 to September 2002) and chief geophysicist (November 1993 to September 1999). Prior to joining Key, Mr. Jorden was with Union Pacific Resources. +JOSEPH R. ALBI was named executive vice president and chief operating officer effective September 30, 2011. Mr. Albi served as executive vice president of operations since March 1, 2005. Since December 8, 2003, Mr. Albi served as senior vice president of corporate engineering. From September 30, 2002 to December 8, 2003, he served as vice president of engineering. From October 1999 to September, 2002, Mr. Albi was with Key Production Company, Inc. where he served as vice president of engineering and manager of engineering. +STEPHEN P. BELL was named executive vice president, business development effective September 13, 2012. Since September, 2002, Mr. Bell served as senior vice president of business development and land. Prior to its merger with Cimarex, Mr. Bell was with Key Production Company, Inc. since February 1994. In September 1999, he was appointed senior vice president, business development and land. From February 1994 to September 1999, he served as vice president, land. +G. MARK BURFORD was named vice president and chief financial officer in September 2015. He was appointed vice president, capital markets and planning in December 2010. Mr. Burford joined Cimarex in April 2005 as director of capital markets. Prior to joining Cimarex he was director of investor relations for Whiting Petroleum and Tom Brown, Inc. His experience also includes equity research with Petrie Parkman & Co., an investment banking firm, and public accounting. +FRANCIS B. BARRON joined Cimarex in July 2013 as senior vice president, general counsel. Mr. Barron served as executive vice president, general counsel of Bill Barrett Corporation, a publicly traded, Denver - based oil and gas exploration and development company, from February 2009 until July 2013 and as secretary from March 2004 until +91 +Table of Contents +July 2013. He served as their senior vice president, general counsel from March 2004 until February 2009 and as chief financial officer from November 2006 until March 2007. Previously, Mr. Barron was a partner at the Denver, Colorado office of the law firm of Patton Boggs LLP as well as a partner at Bearman Talesnick & Clowdus Professional Corporation. Mr. Barron ’ s practice included corporate, securities and business law for publicly traded oil and gas companies. +JOHN LAMBUTH was named senior vice president of exploration in December 2015. Prior to his promotion, he served as the Company’s vice president of exploration s in ce September 2012 and chief geophysicist, a position he held since joining Cimarex in 2004. Mr. Lambuth began his career in 1985 with Shell Oil Co., where he held various positions in exploration and in research and development. Immediately prior to joining Cimarex, he spent three years as onshore exploration manager of El Paso Energy Company. Mr. Lambuth holds a Bachelors ’ Degree in Geophysical Engineering from the Colorado School of Mines. +GARY R. ABBOTT was elected vice president of corporate engineering March 1, 2005. Since January 2002, Mr. Abbott served as manager, corporate reservoir engineering. From April 1999 to January 2002, Mr. Abbott was a reservoir engineer with Key Production Company, Inc. +RICHARD S. DINKINS was named vice president of human resources on December 8, 2003. Mr. Dinkins joined Key Production Company, Inc. in March 2002 as its director of human resources and continued in that position with Cimarex commencing in September 2002. Prior to joining Key, Mr. Dinkins was with Sprint and before that, served as v ice p resident of h uman r esources for Terra Resources, Inc. and Pacific Enterprises Oil Company. +KRISTA L. JOHNSON joined Cimarex as vice president of governmental and external affairs in November 2014. Previously she served at Shell Oil Company since 2006, her last role as vice president, international organizations. Prior to joining Shell, she spent eight years with Western Gas Resources, most recently as director of government and media relations. Her experience also includes private practice in oil and gas law, client based energy advocacy in Washington, work in the Federal Relations Department of the American Petroleum Institute, and in the office of former U.S. Senator Conrad Burns. Ms. Johnson is a graduate of the University of Puget Sound and received her J.D. from The Georgetown University Law Center. +JAMES H. SHONSEY was named vice president in April 2006. Mr. Shonsey was elected chief accounting officer and controller on May 28, 2003. From 2001 to May 2003, Mr. Shonsey was chief financial officer of The Meridian Resource Corporation; and from 1997 to 2001, he served as the chief financial officer of Westport Resources Corporation. +ITEM 11. EXECUTIV E COMPENSATION +Information required under this item is incorporated by reference from the Cimarex Energy Co. definitive Proxy Statement for the May 1 2 , 201 6 Annual Meeting of Shareholders . The Proxy Statement will be filed with the Securities and Exchange Commission no later than 120 days subsequent to December 31, 2015 . +ITEM 12. SECURITY OWNERSHI P OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS +Information required under this item is incorporated by reference from the Cimarex Energy Co. definitive Proxy Statement for the May 1 2 , 201 6 Annual Meeting of Shareholders . The Proxy Statement will be filed with the Securities and Exchange Commission no later than 120 days subsequent to December 31, 2015 . +ITEM 13. CERTAI N RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE +Information required under this item is incorporated by reference from the Cimarex Energy Co. definitive Proxy Statement for the May 1 2 , 201 6 Annual Meeting of Shareholders . The Proxy Statement will be filed with the Securities and Exchange Commission no later than 120 days subsequent to December 31, 2015 . +92 +Table of Contents +ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES +Information required under this item is incorporated by reference from the Cimarex Energy Co. definitive Proxy Statement for the May 1 2 , 201 6 Annual Meeting of Shareholders . The Proxy Statement will be filed with the Securities and Exchange Commission no later than 120 days subsequent to December 31, 2015 . +93 +Table of Contents +PART I V +ITEM 15. EXHIBIT S, FINANCIAL STATEMENT SCHEDULES +Page +(a) (1) +The following financial statements are included in Item 8 to this 10-K : +Consolidated balance sheets as of December 31, 2015 and 2014 +59 +Consolidated statements of operations and comprehensive income (loss) for the years ended December 31, 2015, 2014, and 2013 +60 +Consolidated statements of cash flows for the years ended December 31, 2015, 2014, and 2013 +61 +Consolidated statements of stockholders’ equity for the years ended December 31, 2015, 2014, and 2013 +62 +Notes to consolidated financial statemen ts +63 +(2) +Financial statement schedules — None +(3) +Exhibits: +Exhibits not incorporated by reference to a prior filing are designated by an asterisk (*) and are filed herewith; all exhibits not so designated are incorporated by reference to a prior SEC filing as indicated. +Exhibit +Title +3.1 +Amended and Restated Certificate of Incorporation of Cimarex Energy Co. (filed as Exhibit 3.1 to Registrant ’ s Form 8-K (Commission File no. 001 - 31446) dated June 7, 2005 and incorporated herein by reference). +3.2 +Amended and Restated By - laws of Cimarex Energy Co. dated December 11, 2013 (filed on December 16, 2013 (Commission File No. 001 - 31446) and incorporated herein by reference). +3.3 +Amended and Restated By-laws of Cimarex Energy Co. dated November 11, 2015 (filed as Exhibits 3.1 and 3.2 to the Current Report on Form 8-K filed on November 12, 2015 (Commission File No. 001-31446) and incorporated herein by reference). +4.1 +Specimen Certificate of Cimarex Energy Co. common stock (filed as Exhibit 4.3 to Registration Statement on Form S - 3 filed September 17, 2012 (Registration No. 333 - 183939) and incorporated herein by reference). +4.2 +Debt Securities Indenture dated as of April 5, 2012, by and among Cimarex Energy Co. and U.S. Bank National Association, as trustee included as Exhibit 4.1 to Registrant ’ s Current Report on Form 8-K filed on April 5, 2012 and incorporated herein by reference. +4.3 +First Supplemental Indenture dated as of April 5, 2012, by and among Cimarex Energy Co., the Subsidiary Guarantors party thereto and U.S. Bank National Association, as trustee included as Exhibit 4.2 to Registrant ’ s Current Report on Form 8-K filed on April 5, 2012 and incorporated herein by reference. +4.4 +Form of 5.875% Senior Notes due 2022 included in Exhibit 4.3 to the Registrant ’ s Current Report on Form 8-K filed on April 5, 2012 and incorporated herein by reference. +4.5 +Indenture dated as of June 4, 2014, by and between Cimarex Energy Co. and U.S. Bank National Association, as trustee included as Exhibit 4.1 to Registrant’s Current Report on Form 8-K filed on June 4, 2014 and incorporated herein by reference. +4.6 +First Supplemental Indenture dated as of June 4, 2014, by and among Cimarex Energy Co., the Subsidiary Guarantors party thereto and U.S. Bank National Association, as trustee included as Exhibit 4.2 to Registrant’s Current Report on Form 8-K filed on June 4, 2014 and incorporated herein by reference. +94 +Table of Contents +4.7 +Form of 4.375% Senior Notes due 2024 included in Exhibit 4.2 to the Registrant’s Current Report on Form 8-K filed on June 4, 2014 and incorporated herein by reference. +4.8 +Form of Indenture by and among Cimarex Energy Co. and U.S. Bank National Association, as trustee (filed as Exhibit 4.7 to Registration Statement on Form S-3 filed September 21, 2015 (Registration No. 333-183939) and incorporated herein by reference). +10.1 +Credit Agreement dated as of July 14, 2011, among Cimarex, the Administrative Agent, the Co - Syndication Agents, the Co - Documentation Agents and the Lenders filed on July 18, 2011 as Exhibit 10.l to the Registrant ’ s Current Report on Form 8-K and incorporated herein by reference. +10.2 +First Amendment to Credit Agreement dated as of July 19, 2012, among Cimarex, the Guarantors, the Administrative Agent, and the Lenders filed on May 5, 2014 as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K and incorporated herein by reference. +10.3 +Second Amendment to Credit Agreement dated as of May 1, 2014, among Cimarex, the Guarantors, the Administrative Agent, and the Lenders filed on May 5, 2014 as Exhibit 10.2 to the Registrant’s Current Report on Form 8-K and incorporated herein by reference. +10.4 +Employment Agreement, dated September 7, 1999, by and between Paul Korus and Key Production Company, Inc. (filed as Exhibit 10.6 to the Registration Statement on Form S - 4 dated May 9, 2002 (Registration No. 333 - 87948) and incorporated herein by reference). +10.5 +Amendment to Employment Agreement effective January 1, 2009 between Cimarex Energy Co. and Paul Korus (filed as Exhibit 10.9 to the Annual Report on Form 10-K for the year ended December 31, 2008 filed on February 27, 2009 (Commission File No. 001 - 31446) and incorporated herein by reference). +10.6 +Employment Agreement, dated October 25, 1993, by and between Thomas E. Jorden and Key Production Company, Inc. (filed as Exhibit 10.7 to the Registration Statement on Form S - 4 dated May 9, 2002 (Registration No. 333 - 87948) and incorporated herein by reference). +10.7 +Amendment to Employment Agreement effective January 1, 2009 between Cimarex Energy Co. and Thomas E. Jorden (filed as Exhibit 10.11 to the Annual Report on Form 10-K for the year ended December 31, 2008 filed on February 27, 2009 (Commission File No. 001 - 31446) and incorporated herein by reference). +10.8 +Employment Agreement, dated February 2, 1994, by and between Stephen P. Bell and Key Production Company, Inc. (filed as Exhibit 10.8 to the Registration Statement on Form S - 4 dated May 9, 2002 (Registration No. 333 - 87948) and incorporated herein by reference). +10.9 +Amendment to Employment Agreement effective January 1, 2009 between Cimarex Energy Co. and Stephen P. Bell (filed as Exhibit 10.13 to the Annual Report on Form 10-K for the year ended December 31, 2008 filed on February 27, 2009 (Commission File No. 001 - 31446) and incorporated herein by reference). +10.10 +Employment Agreement, dated March 11, 1994, by and between Joseph R. Albi and Key Production Company, Inc. (filed as Exhibit 10.9 to the Registration Statement on Form S - 4 dated May 9, 2002 (Registration No. 333 - 87948) and incorporated herein by reference). +10.11 +Amendment to Employment Agreement effective January 1, 2009 between Cimarex Energy Co. and Joseph R. Albi (filed as Exhibit 10.15 to the Annual Report on Form 10-K for the year ended December 31, 2008 filed on February 27, 2009 (Commission File No. 001 - 31446) and incorporated herein by reference). +10.12 +Amended and Restated 2002 Stock Incentive Plan of Cimarex Energy Co. effective January 1, 2009 (filed as Exhibit 10.16 to the Annual Report on Form 10-K for the year ended December 31, 2008 filed on February 27, 2009 (Commission File No. 001 - 31446) and incorporated herein by reference). +95 +Table of Contents +10.13 +2011 Equity Incentive Plan adopted May 18, 2011 (filed as Appendix A to the Definitive Proxy Statement 14 - A filed on March 23, 2011 (Commission File No. 001 - 31446) and incorporated herein by reference). +10.14 +Form of Notice of Grant of Award of Performance Stock and Award Agreement (filed as Exhibit 10.2 to Registrant ’ s Quarterly Report on Form 10-Q for the quarter ended June 30, 2011 filed on August 4, 2011 (Commission File no. 001 - 31446) and incorporated herein by reference). +10.15 +Form of Notice of Grant of Restricted Stock and Award Agreement (filed as Exhibit 10.3 to Registrant ’ s Quarterly Report on Form 10-Q for the quarter ended June 30, 2011 filed on August 4, 2011 (Commission File no. 001 - 31446) and incorporated herein by reference). +10.16 +Form of Notice of Grant of Nonqualified Stock Option and Award Agreement (filed as Exhibit 10.4 to Registrant ’ s Quarterly Report on Form 10-Q for the quarter ended June 30, 2011 filed on August 4, 2011 (Commission File no. 001 - 31446) and incorporated herein by reference). +10.17 +Form of Notice of Grant and Award Agreement (Other Stock Awar d with performance conditions) (filed as Exhibit 10.15 to the Annual Report on Form 10-K for the year ended December 31, 2013 filed on February 26, 2014 (Commission File No. 001-31446) and incorporated herein by reference). +10.18 +2014 Equity Incentive Plan adopted May 15, 2014 (filed as Appendix A to the Definitive Proxy Statement 14-A filed on April 1, 2014 (Commission File No. 001-31446) and incorporated herein by reference. +10.19 +Form of Notice of Grant of Restricted Stock (Director) and Award Agreement (filed as Exhibit 10.1 to Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014 filed on August 6, 2014 (Commission File No. 001-31446) and incorporated herein by reference). +10.20 +Form of Notice of Grant of Nonqualified Stock Option and Award Agreement (filed as Exhibit 10.2 to Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014 filed on August 6, 2014 (Commission File No. 001-31446) and incorporated herein by reference). +10.21 +Form of Notice of Grant of Restricted Stock and Award Agreement (filed as Exhibit 10.3 to Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014 filed on August 6, 2014 (Commission File No. 001-31446) and incorporated herein by reference). +10.22 +Form of Notice of Grant of Restricted Stock and Award Agreement (Performance Award) (filed as Exhibit 10.4 to Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014 filed on August 6, 2014 (Commission File No. 001-31446) and incorporated herein by reference). +10.23 +Form of Notice of Grant of Restricted Stock and Award Agreement (Performance Award) (filed as Exhibit 10.23 to the Annual Report on Form 10-K for the year ended December 31, 2014 filed on February 25, 2015 (Commission File No. 001-31446) and incorporated herein by reference) . +10.24 +Deferred Compensation Plan for Nonemployee Directors adopted May 19, 2004, as amended and restated effective January 1, 2009 (filed as Exhibit 10.18 to the Annual Report on Form 10-K for the year ended December 31, 2008 filed on February 27, 2009 (Commission File No. 001 - 31446) and incorporated herein by reference). +10.25 +Cimarex Energy Co. Supplemental Savings Plan (amended and restated, effective January 1, 2009) (filed as Exhibit 10.19 to the Annual Report on Form 10-K for the year ended December 31, 2008 filed on February 27, 2009 (Commission File No. 001 - 31446) and incorporated herein by reference). +96 +Table of Contents +10.26 +Cimarex Energy Co. Change in Control Severance Plan dated effective April 1, 2005, amended and restated effective January 1, 2009 (filed as Exhibit 10.20 to the Annual Report on Form 10-K for the year ended December 31, 2008 filed on February 27, 2009 (Commission File No. 001 - 31446) and incorporated herein by reference). +10.27 +Amendment to Cimarex Energy Co. Change in Control Severance Plan dated effective March 19, 2013 (filed as Exhibit 10.1 to the Current Report on Form 8-K filed on March 20, 2013 (Commission File No. 001 - 31446) and incorporated herein by reference). +10.28 +Form of Indemnification Agreement between Cimarex Energy Co. and each of its executive officers and directors (filed as Exhibit 10.20 to the Annual Report on Form 10-K for the year ended December 31, 2012 filed on February 26, 2013 (Commission File No. 001 - 31446) and incorporated herein by reference). +10.29 +Retentio n Agreement dated June 9, 2010 (filed as Exhibit 10.21 to the Annual Report on Form 10-K for the year ended December 31, 2013 filed on February 26, 2014 (Commission File No. 001-31446) and incorporated herein by reference). +10.30 +Credit Agreement Dated as of October 16, 2015, by and among Cimarex, the Administrative Agent, the Syndication Agent, the Documentation Agents and the Lenders (filed on October 19, 2015 as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (Commission File No. 001-31446) and incorporated herein by reference). +10.31 +Form of Notice of Grant of Restricted Stock (Director) and Award Agreement (filed as Exhibit 10.2 to Registrant’s Form 8-K (Commission File No. 001-31446) dated November 2, 2015 and incorporated herein by reference). +10.32 +Succession Agreement dated August 17, 2015 (filed as Exhibit 10.2 to Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2015 filed on November 4, 2015 (Commission File No. 001-31446) and incorporated herein by reference). +14.1 +Code of Ethics for Chief Executive Officer and Senior Financial Officers (filed as Exhibit 14.1 to the Annual Report on Form 10-K for the year ended December 31, 2003 filed on March 11, 2004 (Commission File No. 001 - 31446) and incorporated herein by reference). +21.1 +Significant Subsidiaries of the Registrant .* +23.1 +Consent of KPMG LLP .* +23.2 +Consent of DeGolyer and MacNaughton .* +24.1 +Power of Attorney of directors of the Registrant .* +31.1 +Certification of Thomas E. Jorden, Chief Executive Officer of Cimarex Energy Co., pursuant to Section 302 of the Sarbanes - Oxley Act of 2002.* +31.2 +Certification of G. Mark Burford , Chief Financial Officer of Cimarex Energy Co., pursuant to Section 302 of the Sarbanes - Oxley Act of 2002.* +32.1 +Certification of Thomas E. Jorden, Chief Executive Officer of Cimarex Energy Co., pursuant to Section 906 of the Sarbanes - Oxley Act of 2002 .* +32.2 +Certification of G. Mark Burford , Chief Financial Officer of Cimarex Energy Co., pursuant to Section 906 of the Sarbanes -Oxley Act of 2002.* +97 +Table of Contents +99.1 +Letter dated January 15, 2016 from DeGolyer and MacNaughton, independent petroleum engineering consulting firm, reporting the results of its audit of Cimarex reserves as of December 31, 2015 of certain selected properties.* +101.INS +XBRL Instance Document . * +101.SCH +XBRL Taxonomy Extension Schema Document . * +101.CAL +XBRL Taxonomy Extension Calculation Linkbase Document . * +101.LAB +XBRL Taxonomy Extension Label Linkbase Document . * +101.PRE +XBRL Taxonomy Extension Presentation Linkbase Document . * +101.DEF +XBRL Taxonomy Extension Definition Linkbase Document . * +98 +Table of Contents +SIGNATURE +Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. +Date: February 23 , 2016 +CIMAREX ENERGY CO. +By: +/s/ Thomas E. Jorden +Thomas E. Jorden +Chairman of the Board, Chief Executive Officer +and President +Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. +Signature +Title +Date +/s/ Thomas E. Jorden +Chairman of the Board, Director, +Thomas E. Jorden +Chief Executive Officer, and President (Principal Executive Officer) +February 23, 2016 +* +Director, Executive Vice President – +Attorney-in-Fact +Chief Operating Officer +February 23, 2016 +Joseph R. Albi +/s/ G. Mark Burford +Vice President and Chief +G. Mark Burford +Financial Officer (Principal Financial Officer) +February 23, 2016 +/s/ James H. Shonsey +Vice President, Controller, Chief +James H. Shonsey +Accounting Officer (Principal Accounting Officer) +February 23, 2016 +* +Attorney-in-Fact +Director +February 23, 2016 +Hans Helmerich +* +Attorney-in-Fact +Director +February 23, 2016 +David A. Hentschel +* +Attorney-in-Fact +Director +February 23, 2016 +Harold R. Logan, Jr. +* +Attorney-in-Fact +Director +February 23, 2016 +Floyd R. Price +* +Attorney-in-Fact +Director +February 23, 2016 +Monroe W. Robertson +99 +Table of Contents +* +Attorney-in-Fact +Director +February 23, 2016 +Lisa A. Stewart +* +Attorney-in-Fact +Director +February 23, 2016 +Michael J. Sullivan +* +Attorney-in-Fact +Director +February 23, 2016 +L. Paul Teague +*By: +/s/ G. M ark Burford +Vice President and Chief +G. Mark Burford +Financial Officer (Principal Financial Officer) +February 23, 2016 +Attorney-in-Fact +100 \ No newline at end of file diff --git a/raw/filings/0001168054/2015/0001558370-16-003392/filing_metadata.csv b/raw/filings/0001168054/2015/0001558370-16-003392/filing_metadata.csv new file mode 100644 index 0000000000000000000000000000000000000000..c93e0318d9a52d74358cd9a9653b2fd160bd12ca --- /dev/null +++ b/raw/filings/0001168054/2015/0001558370-16-003392/filing_metadata.csv @@ -0,0 +1,2 @@ +cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing +0001168054,XEC,CIMAREX ENERGY CO,10-K,2016-02-23,2015-12-31,2016-02-23T21:34:47.000Z,0001558370-16-003392,xec-20151231x10k.htm,10-K,12802607,1,0,https://www.sec.gov/Archives/edgar/data/1168054/000155837016003392/xec-20151231x10k.htm,https://www.sec.gov/Archives/edgar/data/1168054/000155837016003392/,2015,2015,1 diff --git a/raw/filings/0001168054/2015/0001558370-16-003392/item1.txt b/raw/filings/0001168054/2015/0001558370-16-003392/item1.txt new file mode 100644 index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391 diff --git a/raw/filings/0001168054/2015/0001558370-16-003392/item13.txt b/raw/filings/0001168054/2015/0001558370-16-003392/item13.txt new file mode 100644 index 0000000000000000000000000000000000000000..312e2b927813fe5bff07f1179438c9175cfbb5bd --- /dev/null +++ b/raw/filings/0001168054/2015/0001558370-16-003392/item13.txt @@ -0,0 +1,4 @@ +ITEM 13. CERTAI N RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE +Information required under this item is incorporated by reference from the Cimarex Energy Co. definitive Proxy Statement for the May 1 2 , 201 6 Annual Meeting of Shareholders . The Proxy Statement will be filed with the Securities and Exchange Commission no later than 120 days subsequent to December 31, 2015 . +92 +Table of Contents \ No newline at end of file diff --git a/raw/filings/0001168054/2015/0001558370-16-003392/item9a.txt b/raw/filings/0001168054/2015/0001558370-16-003392/item9a.txt new file mode 100644 index 0000000000000000000000000000000000000000..c1d10336fdfb46f5b7afa98402468a670df4fb47 --- /dev/null +++ b/raw/filings/0001168054/2015/0001558370-16-003392/item9a.txt @@ -0,0 +1,26 @@ +ITEM 9A . CONTROLS AND PROCEDURES +EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES +Cimarex ’ s management, under the supervision and with the participation of the Chief Executive Officer (CEO) and Chief Financial Officer (CFO), have evaluated the effectiveness of Cimarex ’ s disclosure controls and procedures (as defined in Rules 13a - 15(e) and 15d - 15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)) as of December 31, 201 5 . Based on that evaluation, the CEO and CFO concluded that the disclosure controls and procedures are effective in providing reasonable assurance that information required to be disclosed in reports filed with the SEC is recorded, processed, summarized and reported within the time periods specified in the SEC ’ s rules and forms. The disclosure controls and procedures are designed to provide reasonable assurance that such information is accumulated and communicated to our management, including the CEO and CFO, as appropriate, to allow such persons to make timely decisions regarding required disclosures. +CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING +There was no change in our internal control over financial reporting that occurred during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. +MANAGEMENT ’ S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING +Cimarex ’ s management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a - 15(f) and 15d - 15(f) under the Exchange Act). The company ’ s internal control over financial reporting is a process designed by, or under the supervision of, the CEO and CFO to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with generally accepted accounting principles. +Because of the inherent limitations of internal control over financial reporting, misstatements may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +As of December 31, 201 5 , management assessed the effectiveness of the company ’ s internal control over financial reporting based on the criteria established in “ Internal Control - Integrated Framework (2013) , ” issued by the Committee of Sponsoring Organizati ons of the Treadway Commission . Based on that assessment, management concluded that the company ’ s internal control over financial reporting was effective as of December 31, 201 5 . +Our independent registered public accounting firm has audited, and reported on, the effectiveness of our internal controls over financial reporting as of December 31, 201 5 , which follows this report. +88 +Table of Contents +Report of Independent Registered Public Accounting Firm +The Board of Directors and Stockholders +Cimarex Energy Co.: +We have audited Cimarex Energy Co. and subsidiaries internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Cimarex Energy Co. and subsidiaries’ management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on Cimarex Energy Co. and subsidiaries’ internal control over financial reporting based on our audit. +We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. +A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. +Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +In our opinion, Cimarex Energy Co. and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). +We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Cimarex Energy Co. and subsidiaries as of December 31, 2015 and 2014, and the related consolidated statements of operations and comprehensive income (loss), stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2015, and our report dated February 23, 2016 expressed an unqualified opinion on those consolidated financial statements. +KPMG LLP +Denver, Colorado +February 23 , 201 6 +89 +Table of Contents \ No newline at end of file diff --git a/raw/filings/0001168054/2015/0001558370-16-003392/rp_note.txt b/raw/filings/0001168054/2015/0001558370-16-003392/rp_note.txt new file mode 100644 index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391 diff --git a/raw/filings/0001168054/2015/0001558370-16-003392/rpt_disclosure.txt b/raw/filings/0001168054/2015/0001558370-16-003392/rpt_disclosure.txt new file mode 100644 index 0000000000000000000000000000000000000000..285bc92c506c88f176aee93d8ef56b8ce0d4ec41 --- /dev/null +++ b/raw/filings/0001168054/2015/0001558370-16-003392/rpt_disclosure.txt @@ -0,0 +1,27 @@ +Review of related party transactions +Yes +20 +Table of Contents +Diverse Board skills and experience +Yes +Non-Hedging and non-pledging policies +Yes +Annual Board and Committee self-evaluations +Yes +Clawback policy +Yes +Periodic consultant review of Board skills +Yes +Management and Director stock ownership guidelines +Yes +Annual equity grants to Directors +Yes +Tax gross-ups +No +Annual Board education +Yes +Proxy Access +Yes +Shareholders may communicate with our Board by mail directed to our Corporate Secretary or by facsimile (720) 403-9383. All communications will be forwarded to the Lead Director for the Lead Director’s review. The Lead Director may take any action the Lead Director deems appropriate or necessary, including, without limitation, forwarding the information to the Board for consideration or, with the concurrence of the Board, retaining independent or outside counsel, accountants or other advisors to address the concern. +21 +Table of Contents \ No newline at end of file diff --git a/raw/filings/0001168054/2016/0001558370-17-000965/filing.txt b/raw/filings/0001168054/2016/0001558370-17-000965/filing.txt new file mode 100644 index 0000000000000000000000000000000000000000..beaf1ce6caf893945a1beeb84cadda46907af9fb --- /dev/null +++ b/raw/filings/0001168054/2016/0001558370-17-000965/filing.txt @@ -0,0 +1,6191 @@ +10-K +1 +xec-20161231x10k.htm +10-K +xec_Current folio_10K +Table of Contents +UNITED STATES +SECURITIES AND EXCHANGE COMMISSION +Washington, D.C. 20549 +Form 10-K +(Mark One) +☒ +ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 +For the fiscal year ended December 31, 2016 +OR +☐ +TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 +Commission file number 001-31446 +CIMAREX ENERGY CO. +(Exact name of registrant as specified in its charter) +Delaware +(State or other jurisdiction of +incorporation or organization) +45-0466694 +(I.R.S. Employer +Identification No.) +1700 Lincoln Street, Suite 3700, Denver, Colorado 80203 +(Address of principal executive offices) +(303) 295-3995 +(Registrant’s telephone number) +Securities Registered Pursuant to Section 12(b) of the Act: +Title of Each Class +Name of each exchange on which registered +Common Stock ($0.01 par value) +New York Stock Exchange +Securities Registered Pursuant to Section 12(g) of the Act: None +Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES ☒ NO ☐ +Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES ☐ NO ☒ +Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES ☒ NO ☐ +Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES ☒ NO ☐ +Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☒ +Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. +Large accelerated filer ☒ +Accelerated filer ☐ +Non-accelerated filer ☐ +(Do not check if a +smaller reporting company) +Smaller reporting company ☐ +Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). YES ☐ NO ☒ +Aggregate market value of the voting stock held by non-affiliates of Cimarex Energy Co. as of June 30, 2016 was approximately $11.1 billion. +Number of shares of Cimarex Energy Co. common stock outstanding as of January 31, 2017 was 95,121,492. +Documents Incorporated by Reference: Portions of the Registrant’s Proxy Statement for its 2017 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K. +Table of Contents +TABLE OF CONTENTS +DESCRIPTION +Item +Page +Glossary +Part I +1.& 2. +Business and Properties +6 +1A. +Risk Factors +15 +1B. +Unresolved Staff Comments +29 +3. +Legal Proceedings +29 +4. +Mine Safety Disclosures +29 +Part II +5. +Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities +30 +6. +Selected Financial Data +32 +7. +Management’s Discussion and Analysis of Financial Condition and Results of Operations +33 +7A. +Quantitative and Qualitative Disclosures About Market Risk +55 +8. +Financial Statements and Supplementary Data +56 +9. +Changes In and Disagreements with Accountants on Accounting and Financial Disclosure +87 +9A. +Controls and Procedures +87 +9B. +Other Information +89 +Part III +10. +Directors, Executive Officers and Corporate Governance +90 +11. +Executive Compensation +91 +12. +Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters +91 +13. +Certain Relationships and Related Transactions, and Director Independence +91 +14. +Principal Accounting Fees and Services +92 +Part IV +15. +Exhibits, Financial Statement Schedules +93 +16 . +Form 10-K Summary +97 +2 +Table of Contents +GLOSSAR Y +Bbl/d —Barrels (of oil or natural gas liquids) per day +Bbls —Barrels (of oil or natural gas liquids) +Bcf —Billion cubic feet +Bcfe —Billion cubic feet equivalent +Btu —British thermal unit +GAAP —Generally accepted accounting principles in the U.S. +MBbls —Thousand barrels +Mcf —Thousand cubic feet (of natural gas) +Mcfe —Thousand cubic feet equivalent +MMBbl/MMBbls —Million barrels +MMBtu —Million British thermal units +MMcf —Million cubic feet +MMcf/d —Million cubic feet per day +MMcfe —Million cubic feet equivalent +MMcfe/d —Million cubic feet equivalent per day +Net Acres —Gross acreage multiplied by working interest percentage +Net Production —Gross production multiplied by net revenue interest +NGL or NGLs —Natural gas liquids +PUD —Proved undeveloped +Tcf —Trillion cubic feet +Tcfe —Trillion cubic feet equivalent +Energy equivalent is determined using the ratio of one barrel of crude oil, condensate or NGL to six Mcf of natural gas +3 +Table of Contents +PART I +Cautionary Information about Forward-Looking Statements +Throughout this Form 10-K, we make statements that may be deemed “forward-looking” statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. In particular, in our Management’s Discussion and Analysis of Financial Condition and Results of Operations, we are providing “ 2017 Outlook,” which contains projections for certain 2017 operational activities. All statements, other than statements of historical facts, that address activities, events, outcomes and other matters that Cimarex plans, expects, intends, assumes, believes, budgets, predicts, forecasts, projects, estimates or anticipates (and other similar expressions) will, should or may occur in the future are forward-looking statements. These forward-looking statements are based on management’s current belief, based on currently available information, as to the outcome and timing of future events. When considering forward-looking statements, you should keep in mind the risk factors and other cautionary statements in this Form 10- K. Forward-looking statements include statements with respect to, among other things: +· +Fluctuations in the price we receive for our oil, gas and NGL production; +· +Timing and amount of future production of oil, gas and NGLs; +· +Reductions in the quantity of oil, gas and NGLs sold due to decreased industrywide demand and/or curtailments in production from specific properties or areas due to mechanical, transportation, marketing, weather or other problems; +· +Estimates of proved reserves, exploitation potential or exploration prospect size; +· +Cash flow and anticipated liquidity; +· +Amount, nature and timing of capital expenditures; +· +Access to capital markets; +· +Administrative, legislative, and regulatory changes; +· +Operating costs and other expenses; +· +Operating and capital expenditures that are either significantly higher or lower than anticipated because the actual cost of identified projects varied from original estimates and/or from the number of exploration and development opportunities being greater or fewer than currently anticipated; +· +Exploration and development opportunities that we pursue may not result in economic, productive oil and gas properties; +· +Drilling of wells; +· +Increased financing costs due to a significant increase in interest rates; +· +De-risking of acreage. +We caution you that these forward-looking statements are subject to all of the risks and uncertainties, many of which are beyond our control, incident to the exploration for and development, production and sale of oil, gas and NGLs. These risks include, but are not limited to, commodity price volatility, inflation, lack of availability of goods and services, environmental risks, drilling and other operating risks, regulatory changes, the uncertainty inherent in estimating proved oil and natural gas reserves and in projecting future rates of production and timing of development expenditures and other risks described herein. +4 +Table of Contents +Reserve engineering is a subjective process of estimating underground accumulations of oil and natural gas that cannot be measured in an exact way. The accuracy of any reserve estimate depends on the quality of available data and the interpretation of such data by our engineers. As a result, estimates made by different engineers often vary from one another. In addition, the results of drilling, testing and production activities may justify revisions of estimates that were made previously. If significant, such revisions could change the timing of future production and development drilling. Accordingly, reserve estimates are generally different from the quantities of oil and natural gas that are ultimately recovered. +Should one or more of the risks or uncertainties described above or elsewhere in this Form 10-K cause our underlying assumptions to be incorrect, our actual results and plans could differ materially from those expressed in any forward-looking statements. +All forward-looking statements, express or implied, included in this Form 10-K and attributable to Cimarex are qualified in their entirety by this cautionary statement. This cautionary statement should also be considered in connection with any subsequent written or oral forward-looking statements that Cimarex or persons acting on its behalf may issue. Cimarex does not undertake any obligation to update any forward-looking statements to reflect events or circumstances after the date of filing this Form 10-K with the Securities and Exchange Commission, except as required by law. +5 +Table of Contents +ITEMS 1 AND 2. BUSINES S AND PROPERTIES +General +Cimarex Energy Co., a Delaware corporation formed in 2002, is an independent oil and gas exploration and production company. Our operations are located mainly in Oklahoma, Texas and New Mexico. On our website — www.cimarex.com — you will find our annual reports, proxy statements and all of our Securities and Exchange Commission (SEC) filings. Throughout this Form 10-K we use the terms “Cimarex,” “company,” “we,” “our,” and “us” to refer to Cimarex Energy Co. and its subsidiaries. +Our principal business objective is to profitably grow proved reserves and production for the long-term benefit of our shareholders. Our strategy centers on maximizing cash flow from producing properties to reinvest in exploration and development opportunities. We consider merger and acquisition opportunities that enhance our competitive position and we occasionally divest non-core assets. Key elements to our approach include: +· +Maintain a strong financial position; +· +Investment in a diversified portfolio of drilling opportunities; +· +Rate-of-return driven evaluation and ranking of investment decisions; +· +Tracking predicted versus actual results in a centralized exploration management system, providing feedback to improve results; +· +Attracting quality employees and maintaining integrated teams of geoscientists, landmen and engineers; +· +Maximizing profitability. +Conservative use of leverage has long been the key to our financial strategy. We believe that low leverage coupled with strong full-cycle returns enables us to better withstand volatility in commodity prices and provide competitive returns and growth to shareholders. See Item 5 Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities – Stock Performance Graph and Item 6 Selected Financial Data for additional financial and operating information for fiscal years 2012 – 2016. +Proved Oil and Gas Reserves +Our total proved reserves were essentially flat in 2016. Proved undeveloped reserves as a percentage of total proved reserves decreased to 21% from 25% a year ago. We added 324.0 Bcfe of new reserves through extensions and discoveries and 126.2 Bcfe through net positive performance revisions, replacing 128% of production. The change in our proved reserves is as follows (in Bcfe): +Reserves at December 31, 2015 +2,909.4 +Revisions of previous estimates +19.8 +Extensions and discoveries +324.0 +Purchases of reserves +0.9 +Production +(352.6) +Sales of reserves +(11.0) +Reserves at December 31, 2016 +2,890.5 +6 +Table of Contents +Revisions of previous estimates in the above table include net positive performance and operating cost related revisions of 126.2 Bcfe and 138.5 Bcfe, respectively, partially offset by negative commodity price revisions of 244.9 Bcfe. +A breakdown by commodity of our proved oil and gas reserves follows: +December 31, +2016 +2015 +2014 +Total Proved Reserves: +Gas (Bcf) +1,471.4 +1,517.0 +1,666.7 +Oil (MMBbls) +105.9 +107.8 +119.0 +NGL (MMBbls) +130.6 +124.3 +125.3 +Equivalent (Bcfe) +2,890.5 +2,909.4 +3,132.3 +% Developed +79 +75 +77 +See “Supplemental Oil and Gas Information” in Item 8 of this report for further information. +Production Volumes, Prices, and Costs +Our 2016 production volumes totaled 963 MMcfe per day, a 2% decrease from 2015, and were comprised of 48% natural gas, 28% oil and 24% NGLs. The following tables show our production volumes by region, the average commodity prices received and production cost per unit of production. Separate data is also included for the Cana area, which comprises the majority of the production of our largest producing field, the Watonga-Chickasha in western Oklahoma. +Production Volumes +Net Average Daily Volumes +Gas +Oil +NGL +Total +Gas +Oil +NGL +Total +Years Ended December 31, +(MMcf) +(MBbls) +(MBbls) +(MMcfe) +(MMcf) +(MBbls) +(MBbls) +(MMcfe) +2016 +Permian Basin +65,191 +13,183 +6,677 +184,351 +178.1 +36.0 +18.2 +503.7 +Mid-Continent +102,501 +3,283 +7,508 +167,243 +280.1 +9.0 +20.5 +456.9 +Other +535 +62 +15 +997 +1.4 +0.2 +0.1 +2.8 +Total Company +168,227 +16,528 +14,200 +352,591 +459.6 +45.2 +38.8 +963.4 +Cana area +82,423 +2,848 +6,855 +140,647 +225.2 +7.8 +18.7 +384.3 +2015 +Permian Basin +66,006 +15,719 +6,220 +197,644 +180.8 +43.1 +17.0 +541.5 +Mid-Continent +100,801 +2,746 +6,757 +157,821 +276.2 +7.5 +18.5 +432.4 +Other +2,180 +198 +86 +3,878 +6.0 +0.5 +0.3 +10.6 +Total Company +168,987 +18,663 +13,063 +359,343 +463.0 +51.1 +35.8 +984.5 +Cana area +77,882 +2,206 +5,957 +126,865 +213.4 +6.0 +16.3 +347.6 +2014 +Permian Basin +45,200 +12,552 +4,187 +145,636 +123.8 +34.4 +11.5 +399.0 +Mid-Continent +106,711 +2,682 +6,980 +164,682 +292.4 +7.3 +19.1 +451.2 +Other +3,217 +405 +176 +6,704 +8.8 +1.1 +0.5 +18.4 +Total Company +155,128 +15,639 +11,343 +317,022 +425.0 +42.8 +31.1 +868.6 +Cana area +76,915 +1,903 +5,937 +123,952 +210.7 +5.2 +16.3 +339.6 +7 +Table of Contents +Average Realized Price +Production +Gas +Oil +NGL +Cost +Years Ended December 31, +(per Mcf) +(per Bbl) +(per Bbl) +(per Mcfe) +2016 +Permian Basin +$ +2.35 +$ +38.45 +$ +12.32 +$ +0.86 +Mid-Continent +$ +2.29 +$ +37.65 +$ +15.59 +$ +0.43 +Other +$ +2.00 +$ +38.86 +$ +14.80 +$ +1.59 +Total Company +$ +2.31 +$ +38.30 +$ +14.05 +$ +0.66 +Cana area +$ +2.28 +$ +37.73 +$ +15.80 +$ +0.23 +2015 +Permian Basin +$ +2.55 +$ +43.58 +$ +11.94 +$ +1.06 +Mid-Continent +$ +2.51 +$ +41.90 +$ +15.41 +$ +0.52 +Other +$ +3.16 +$ +48.01 +$ +14.72 +$ +1.72 +Total Company +$ +2.53 +$ +43.38 +$ +13.75 +$ +0.83 +Cana area +$ +2.51 +$ +41.54 +$ +15.59 +$ +0.26 +2014 +Permian Basin +$ +4.48 +$ +82.44 +$ +30.04 +$ +1.58 +Mid-Continent +$ +4.42 +$ +88.23 +$ +35.03 +$ +0.58 +Other +$ +4.40 +$ +92.82 +$ +32.09 +$ +2.31 +Total Company +$ +4.43 +$ +83.70 +$ +33.14 +$ +1.08 +Cana area +$ +4.32 +$ +88.21 +$ +34.89 +$ +0.24 +Acquisitions and Divestitures +In 2016 we sold interests in various non-core oil and gas properties for $21 million and made various acquisitions totaling $11 million. +8 +Table of Contents +Exploration and Development Overview +Cimarex has one reportable segment, exploration and production (E&P). Our E&P activities take place primarily in two areas: the Permian Basin and the Mid-Continent region. Almost all of our exploration and development (E&D) capital is allocated between these two areas. In 2016, E&D investment totaled $735 million. Of that, 59% was invested in the Permian Basin and 40% in the Mid-Continent region. +In 2016, Cimarex drilled or participated in 154 gross (61.0 net) wells, of which we operated 73 gross (51.2 net) wells. At year-end, we were in the process of drilling or participating in 19 gross (8.4 net) wells and there were 93 gross (27.0 net) wells waiting on completion. A summary of our 2016 exploration and development activity by region is as follows: +Gross +Net +% +E&D +Wells +Wells +Completed +Capital +Drilled +Drilled +As Producers +(in millions) +Permian Basin +$ +433 +48 +30.3 +100 +Mid-Continent +291 +106 +30.7 +99 +Other +11 +— +— +— +$ +735 +154 +61.0 +99 +The Permian region encompasses west Texas and southeast New Mexico. Cimarex’s Permian Basin efforts are located in the western half of the Permian Basin known as the Delaware Basin. In 2016, we focused on drilling horizontal wells that yielded oil and liquids-rich gas from the Wolfcamp shale and the Bone Spring formation. Cimarex saw improved results in its Wolfcamp shale wells, as measured by production and reserves, with the further implementation of long laterals and continued improvement in well completion design and in the Bone Spring wells via upsized well completions. +The Permian region produced 504 MMcfe per day in 2016, which was 52% of our total company production. Total production from the region decreased 7% in 2016 over 2015. +Our Mid-Continent region consists of Oklahoma and the Texas Panhandle. Our activity in 2016 in the Mid-Continent was focused in the Woodford shale and the Meramec horizon, both in Oklahoma. We continued to implement +9 +Table of Contents +larger well completions in the Woodford shale and we applied those same techniques to delineate the Meramec horizon, located above the Woodford. Cimarex continues to evaluate the size and potential of the Meramec play. +During 2016, production from the Mid-Continent averaged 457 MMcfe per day, or 47% of total company production. Total production from the region increased 6% in 2016 over 2015. +Drilling Activity +We completed the following number of exploratory and developmental wells in the years indicated: +Wells Completed +2016 +2015 +2014 +Gross +Net +Gross +Net +Gross +Net +Exploratory +Productive +— +— +— +— +1 +0.4 +Dry +— +— +— +— +1 +0.5 +Total +— +— +— +— +2 +0.9 +Developmental +Productive +153 +61.0 +219 +98.7 +309 +173.6 +Dry +1 +— +3 +1.7 +1 +0.1 +Total +154 +61.0 +222 +100.4 +310 +173.7 +We have working interests in the following number of productive wells by region as of December 31, 2016: +Gas +Oil +Gross +Net +Gross +Net +Mid-Continent +3,831 +1,480 +531 +166 +Permian Basin +831 +406 +4,967 +1,029 +Other +100 +9 +19 +4 +4,762 +1,895 +5,517 +1,199 +Significant Properties +All of our oil and gas assets are located in the United States. We have varying levels of ownership interests in our properties consisting of working, royalty and overriding royalty interests. Operated wells account for 76% of our proved reserves. In 2016, proved reserves in the Cana area of the Watonga-Chickasha field were approximately 57% of Cimarex’s total proved reserves. No other field had reserves in excess of 15% of our total proved reserves. +At December 31, 2016, 63% of our total proved reserves were located in the Mid-Continent region and 37% were in the Permian Basin. We owned an interest in 10,279 gross (3,094 net) productive oil and gas wells. The following table summarizes our estimated proved oil and gas reserves by region as of December 31, 2016. +% of +Gas +Oil +NGL +Total +Total Proved +(Bcf) +(MMBbl) +(MMBbl) +(Bcfe) +Reserves +Mid-Continent +1,095.2 +31.4 +89.6 +1,821.3 +63 +Permian Basin +372.4 +74.3 +41.0 +1,064.0 +37 +Other +3.8 +0.2 +— +5.2 +— +1,471.4 +105.9 +130.6 +2,890.5 +100 +10 +Table of Contents +At December 31, 2016, our ten largest producing fields held 86% of total proved reserves. We are the principal operator of our production in each of these fields. +% of +Total +Average +Approximate +Proved +Working +Average Depth +Field +Region +Reserves +Interest % +(feet) +Primary Formation +Watonga-Chickasha +Mid-Continent +57.1 +34.1 +13,000' +Woodford +Ford, West +Permian Basin +8.4 +56.9 +9,500' +Wolfcamp +Dixieland +Permian Basin +6.1 +96.8 +11,000' +Wolfcamp +Lusk +Permian Basin +3.9 +54.8 +9,500' +Bone Spring +Cottonwood Draw +Permian Basin +2.6 +73.7 +3,000' - 10,000' +Delaware/Wolfcamp +Grisham +Permian Basin +1.8 +100.0 +11,000' +Wolfcamp +Phantom +Permian Basin +1.7 +57.5 +11,500' +Bone Spring +Two Georges +Permian Basin +1.7 +90.5 +11,500' +Bone Spring +Sandbar +Permian Basin +1.4 +58.8 +7,500' +Bone Spring +Quail Ridge +Permian Basin +1.0 +36.5 +8,000' - 13,000' +Bone Spring/Morrow +85.7 +Acreage +The following table sets forth the gross and net acres of both developed and undeveloped leases held by Cimarex as of December 31, 2016. Gross acres are the total number of acres in which we own a working interest. Net acres are the gross acres multiplied by our working interest. +Acreage +Undeveloped +Developed +Total +Gross +Net +Gross +Net +Gross +Net +Mid-Continent +Kansas +18,231 +18,191 +— +— +18,231 +18,191 +Oklahoma +107,015 +71,658 +686,489 +295,176 +793,504 +366,834 +Texas +22,045 +11,301 +133,839 +56,708 +155,884 +68,009 +147,291 +101,150 +820,328 +351,884 +967,619 +453,034 +Permian Basin +New Mexico +73,882 +52,669 +175,842 +119,597 +249,724 +172,266 +Texas +81,443 +63,289 +201,078 +147,829 +282,521 +211,118 +155,325 +115,958 +376,920 +267,426 +532,245 +383,384 +Other +Arizona +2,097,201 +2,097,201 +17,847 +— +2,115,048 +2,097,201 +California +383,647 +383,647 +— +— +383,647 +383,647 +Colorado +41,992 +18,867 +40,800 +1,642 +82,792 +20,509 +Gulf of Mexico +25,000 +13,000 +28,848 +6,381 +53,848 +19,381 +Louisiana +3,533 +484 +2,877 +170 +6,410 +654 +Michigan +26,491 +26,414 +1,183 +1,183 +27,674 +27,597 +Montana +34,381 +9,167 +7,688 +1,721 +42,069 +10,888 +Nevada +1,007,167 +1,007,167 +440 +1 +1,007,607 +1,007,168 +New Mexico +1,641,206 +1,633,821 +18,371 +2,436 +1,659,577 +1,636,257 +Texas +10,478 +3,724 +27,174 +6,167 +37,652 +9,891 +Utah +80,527 +59,433 +32,552 +1,575 +113,079 +61,008 +Wyoming +97,157 +13,744 +43,626 +4,197 +140,783 +17,941 +Other +194,398 +171,229 +9,734 +3,460 +204,132 +174,689 +5,643,178 +5,437,898 +231,140 +28,933 +5,874,318 +5,466,831 +Total +5,945,794 +5,655,006 +1,428,388 +648,243 +7,374,182 +6,303,249 +11 +Table of Contents +The table below summarizes by year and region our undeveloped acreage expirations in the next five years. In most cases, the drilling of a commercial well will hold the acreage beyond the expiration. +Acreage +2017 +2018 +2019 +2020 +2021 +Gross +Net +Gross +Net +Gross +Net +Gross +Net +Gross +Net +Mid-Continent +22,804 +18,383 +11,288 +6,462 +1,695 +1,525 +— +— +— +— +Permian Basin +17,025 +17,005 +5,527 +5,527 +8,360 +8,198 +40 +40 +598 +598 +Other +51,036 +50,281 +30,709 +29,992 +63,334 +59,092 +28,867 +28,652 +7,042 +6,953 +90,865 +85,669 +47,524 +41,981 +73,389 +68,815 +28,907 +28,692 +7,640 +7,551 +% of undeveloped acreage +1.5 +1.5 +0.8 +0.7 +1.2 +1.2 +0.5 +0.5 +0.1 +0.1 +At December 31, 2016, we had no proved undeveloped reserves associated with expiring acreage. +Marketing +Our oil and gas production is sold under short-term arrangements at market-responsive prices. We sell our oil at prices tied directly or indirectly to field postings. Our gas is sold under price mechanisms related to either monthly or daily index prices on pipelines where we deliver our gas. +We sell our oil and gas to a broad portfolio of customers. Our major customer during 2016 was Sunoco Logistics Partners L.P. (Sunoco), which accounted for 20% of our consolidated revenues for the year. +If Sunoco were to stop purchasing our production, we believe there are a number of other purchasers to whom we could sell our production with some delay. If multiple significant customers were to discontinue purchasing our product, we believe there would be challenges initially, but ample markets to handle the disruption. +We regularly monitor the credit worthiness of all our customers and may require parent company guarantees, letters of credit or prepayments when deemed necessary. +Corporate Headquarters and Employees +Our corporate headquarters is located at 1700 Lincoln St., Suite 3700, Denver, Colorado 80203. On December 31, 2016 and 2015, Cimarex had 856 and 925 employees, respectively. None of our employees are subject to collective bargaining agreements. +Competition +The oil and gas industry is highly competitive, particularly for prospective undeveloped leases and purchases of proved reserves. There is also competition for rigs and related equipment used to drill for and produce oil and gas, however, to a lesser extent in the current market environment. Our competitive position is also highly dependent on our ability to recruit and retain geological, geophysical and engineering expertise. We compete for prospects, proved reserves, oil-field services and qualified oil and gas professionals with major and diversified energy companies and other independent operators that have larger financial, human and technological resources than we do. +We compete with integrated, independent and other energy companies for the sale and transportation of our oil, gas and NGLs to marketing companies and end users. The oil and gas industry competes with other energy industries that supply fuel and power to industrial, commercial and residential consumers. Many of these competitors have greater financial and human resources. The effect of these competitive factors cannot be predicted. +12 +Table of Contents +Proved Reserves Estimation Procedures +Proved oil and gas reserve quantities are based on estimates prepared by Cimarex in accordance with the SEC’s rules for reporting oil and gas reserves. Our reserve definitions conform with definitions of Rule 4-10(a) (1)-(32) of Regulation S-X of the SEC. All of our reserve estimates are maintained by our internal Corporate Reservoir Engineering group, which is comprised of reservoir engineers and engineering technicians. The objectives and management of this group are separate from and independent of the exploration and production functions of the company. The primary objective of our Corporate Reservoir Engineering group is to maintain accurate forecasts on all properties of the company through ongoing monitoring and timely updates of operating and economic parameters (production forecasts, prices and regional differentials, operating expenses, ownership, etc.) in accordance with guidelines established by the SEC. This separation of function and responsibility is a key internal control. +Cimarex engineers are responsible for estimates of proved reserves. Corporate engineers interact with the exploration and production departments to ensure all available engineering and geologic data is taken into account prior to establishing or revising an estimate. After preparing the reserves update, the corporate engineers review their recommendations with the Vice President of Corporate Engineering. After approval from the Vice President of Corporate Engineering, the revisions are entered into our reserves database by the engineering technician. +During the course of the year, the Vice President of Corporate Engineering presents summary reserves information to senior management and to our Board of Directors for their review. From time to time, the Vice President of Corporate Engineering also will confer with the Vice President of Exploration, Chief Operating Officer and the Chief Executive Officer regarding specific reserves-related issues. In addition, Corporate Reservoir Engineering maintains a set of basic guidelines and procedures to ensure that critical checks and reviews of the reserves database are performed on a regular basis. +Together, these internal controls are designed to promote a comprehensive, objective and accurate reserves estimation process. As an additional confirmation of the reasonableness of our internal estimates, DeGolyer and MacNaughton, an independent petroleum engineering consulting firm, reviewed reserves associated with greater than 80% of the total future net revenue discounted at 10% attributable to the total interests owned by Cimarex as of December 31, 2016. The individual primarily responsible for overseeing the review is a Senior Vice President with DeGolyer and MacNaughton and a Registered Professional Engineer in the State of Texas with over 37 years of experience in oil and gas reservoir studies and evaluations. +The technical employee primarily responsible for overseeing the oil and gas reserves estimation process is Cimarex’s Vice President of Corporate Engineering. This individual graduated from the Colorado School of Mines with a Bachelor of Science degree in Engineering and has more than 22 years of practical experience in oil and gas reservoir evaluation. He has been directly involved in the annual reserves reporting process of Cimarex since 2002 and has served in his current role for the past 12 years. +Title to Oil and Gas Properties +We undertake title examination and perform curative work at the time we lease undeveloped acreage, prepare for the drilling of a prospect or acquire proved properties. We believe title to our properties is good and defensible, and is in accordance with industry standards. Nevertheless, we are involved in title disputes from time to time that result in litigation. Our oil and gas properties are subject to customary royalty interests, liens incidental to operating agreements, tax liens and other burdens and minor encumbrances, easements and restrictions. +Government Regulation +Oil and gas production and transportation is subject to extensive federal, state and local laws and regulations. Compliance with existing laws often is difficult and costly, but has not had a significant adverse effect on our operations or financial condition. In recent years, we have been most directly impacted by federal and state environmental regulations and energy conservation rules. We are also impacted by federal and state regulation of pipelines and other oil and gas transportation systems. +13 +Table of Contents +The states in which we conduct operations establish requirements for drilling permits, the method of developing fields, the size of well spacing units, drilling density within productive formations and the unitization or pooling of properties. In addition, state conservation laws include requirements for waste prevention, establish limits on the maximum rate of production from wells, generally prohibit the venting or flaring of natural gas and impose certain requirements regarding the ratability of production. +Environmental Regulation. Various federal, state and local laws regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, directly impact oil and gas exploration, development and production operations, which consequently impact our operations and costs. These laws and regulations govern, among other things, emissions into the atmosphere, discharges of pollutants into waters, underground injection of waste water, the generation, storage, transportation and disposal of waste materials, and protection of public health, natural resources and wildlife. These laws and regulations may impose substantial liabilities for noncompliance and for any contamination resulting from our operations and may require the suspension or cessation of operations in affected areas. +Cimarex is committed to environmental protection and believes we are in material compliance with applicable environmental laws and regulations. We obtain permits for our facilities and operations in accordance with the applicable laws and regulations. There are no known issues that have a significant adverse effect on the permitting process or permit compliance status of any of our facilities or operations. Expenditures are required to comply with environmental regulations. These costs are a normal, recurring expense of operations and not an extraordinary cost of compliance with current government regulations. +We do not anticipate that we will be required under current environmental laws and regulations to expend amounts that will have a material adverse effect on our financial position or operations. However, due to continuing changes in these laws and regulations, we are unable to predict with any reasonable degree of certainty any potential delays in development plans that could arise, or our future costs of complying with governmental requirements. We maintain levels of insurance customary in the industry to limit our financial exposure in the event of a substantial environmental claim resulting from sudden, unanticipated and accidental discharges of oil, produced water or other substances as well as additional coverage for certain other pollution events. +Gas Gathering and Transportation. The Federal Energy Regulatory Commission (FERC) requires interstate gas pipelines to provide open access transportation. FERC also enforces the prohibition of market manipulation by any entity, and the facilitation of the sale or transportation of natural gas in interstate commerce. Interstate pipelines have implemented these requirements, providing us with additional market access and more fairly applied transportation services and rates. FERC continues to review and modify its open access and other regulations applicable to interstate pipelines. +Under the Natural Gas Policy Act (NGPA), natural gas gathering facilities are expressly exempt from FERC jurisdiction. What constitutes “gathering” under the NGPA has evolved through FERC decisions and judicial review of such decisions. We believe that our gathering systems meet the test for non-jurisdictional “gathering” systems under the NGPA and that our facilities are not subject to federal regulations. Although exempt from FERC oversight, our natural gas gathering systems and services may receive regulatory scrutiny by state and federal agencies regarding the safety and operating aspects of the transportation and storage activities of these facilities. +In addition to using our own gathering facilities, we may use third-party gathering services or interstate transmission facilities (owned and operated by interstate pipelines) to ship our gas to markets. +Additional proposals and proceedings that might affect the oil and gas industry are pending before the U.S. Congress, FERC, Bureau of Land Management (BLM), U.S. Environmental Protection Agency (EPA), state legislatures, state agencies, local governments and the courts. We cannot predict when or whether any such proposals may become effective and what effect they will have on our operations. We do not anticipate that compliance with existing federal, state and local laws, rules or regulations will have a material adverse effect upon our capital expenditures, earnings or competitive position. +14 +Table of Contents +Federal and State Income and Other Local Taxation +Cimarex and the petroleum industry in general are affected by both federal and state income tax laws, as well as other local tax regulations involving ad valorem, personal property, franchise, severance and other excise taxes. We have considered the effects of these provisions on our operations and do not anticipate that there will be any material undisclosed impact on our capital expenditures, earnings or competitive position. +Executive Officers of the Registrant +See Part III, Item 10, Directors, Executive Officers and Corporate Governance for information regarding our executive officers as of February 24, 2017. +ITEM 1A. RISK FACTORS +The following risks and uncertainties, together with other information set forth in this Form 10-K, should be carefully considered by current and future investors in our securities. These risks and uncertainties are not the only ones we face. Additional risks and uncertainties presently unknown to us or currently deemed immaterial also may impair our business operations. The occurrence of one or more of these risks or uncertainties could materially and adversely affect our business, our financial condition, and the results of our operations, which in turn could negatively impact the value of our securities. +Oil, gas, and NGL prices fluctuate due to a number of uncontrollable factors, creating a component of uncertainty in our development plans and overall operations. Declines in prices adversely affect our financial results and rate of growth in proved reserves and production. +Oil and gas markets are volatile. We cannot predict future prices. The prices we receive for our production heavily influence our revenue, profitability, access to capital, and future rate of growth. The prices we receive depend on numerous factors beyond our control. These factors include, but are not limited to, changes in domestic and global supply and demand for oil and gas, the level of domestic and global oil and gas exploration and production activity, geopolitical instability, the actions of the Organization of Petroleum Exporting Countries, weather conditions, technological advances affecting energy consumption, governmental regulations and taxes, and the price and technological advancement of alternative fuels. +Our proved oil and gas reserves and production volumes will decrease unless those reserves are replaced with new discoveries or acquisitions. Accordingly, for the foreseeable future, we expect to make substantial capital investments for the exploration and development of new oil and gas reserves. Historically, we have paid for these types of capital expenditures with cash flow provided by our production operations, our revolving credit facility, and proceeds from the sale of senior notes or equity. Low prices reduce our cash flow and the amount of oil and gas that we can economically produce and may cause us to curtail, delay, or defer certain exploration and development projects. Moreover, low prices may impact our abilities to borrow under our revolving credit facility and to raise additional debt or equity capital to fund acquisitions. +If prices decrease, we will be required to take write-downs of the carrying values of our oil and gas properties and/or our goodwill. +Accounting rules require that we periodically review the carrying value of our oil and gas properties and goodwill for possible impairment. +In 2016, we recognized ceiling test impairments totaling $719.1 million ($456.9 million, net of tax). In 2015, we recognized ceiling test impairments in each quarter totaling $3.7 billion ($2.4 billion, net of tax). The impairments resulted primarily from the impact of decreases in the 12-month average trailing prices for oil, natural gas and NGLs utilized in determining the estimated future net cash flows from proved reserves. At December 31, 2016, the calculated value of the ceiling limitation exceeded the carrying value of our oil and gas properties subject to the test, and no impairment was necessary. However, a decline of 11% or more in the value of the ceiling limitation would have resulted in an impairment. Because the ceiling calculation uses rolling 12-month average commodity prices, the effect of increases and decreases in +15 +Table of Contents +period-over-period prices can significantly impact the ceiling limitation calculation. Impairment charges do not affect cash flow from operating activities, but do adversely affect our net income and various components of our balance sheet. +U.S. or global financial markets may impact our business and financial condition. +A credit crisis or other turmoil in the U.S. or global financial system may have a negative impact on our business and our financial condition. Our ability to access the capital markets may be restricted at a time when we would like, or need, to raise financing. This could have an impact on our flexibility to react to changing economic and business conditions. Deteriorating economic conditions could have a negative impact on our lenders, the purchasers of our oil and gas production and the working interest owners in properties we operate, causing them to fail to meet their obligations to us. +Failure to economically replace oil and gas reserves could negatively affect our financial results and future rate of growth. +In order to replace the reserves depleted by production and to maintain or increase our total proved reserves and overall production levels, we must either locate and develop new oil and gas reserves or acquire producing properties from others. This requires significant capital expenditures and can impose reinvestment risk for us, as we may not be able to continue to replace our reserves economically. While we occasionally may seek to acquire proved reserves, our main business strategy is to grow through exploration and drilling. Without successful exploration and development, our reserves, production and revenues could decline rapidly, which would negatively impact the results of our operations. +Exploration and development involves numerous risks, including new governmental regulations and the risk that we will not discover any commercially productive oil or gas reservoirs. Additionally, it can be unprofitable, not only from drilling dry holes, but also from drilling productive wells that do not return a profit because of insufficient reserves or declines in commodity prices. +Our drilling operations may be curtailed, delayed, or canceled for many reasons. Factors such as unforeseen poor drilling conditions, title problems, unexpected pressure irregularities, equipment failures, accidents, adverse weather conditions, compliance with environmental and other governmental requirements, bans, moratoria or other restrictions implemented by local governments and the cost of, or shortages or delays in the availability of, drilling and completion services could negatively impact our drilling operations. +Our proved reserve estimates may be inaccurate and future net cash flows are uncertain. +Estimates of total proved oil and gas reserves (consisting of proved developed and proved undeveloped reserves) and associated future net cash flow depend on a number of variables and assumptions. Refer to “ Cautionary Information about Forward-Looking Statements ” in Part I of this report. Among others, changes in any of the following factors may cause actual results to vary considerably from our estimates: +· +timing of development expenditures; +· +amount of required capital expenditures and associated economics; +· +recovery efficiencies, decline rates, drainage areas, and reservoir limits; +· +anticipated reservoir and production characteristics and interpretations of geologic and geophysical data; +· +production rates, reservoir pressure, unexpected water encroachment, and other subsurface conditions; +· +oil, gas, and NGL prices; +· +governmental regulation; +· +access to assets restricted by local government action; +· +operating costs; +16 +Table of Contents +· +property, severance, excise and other taxes incidental to oil and gas operations; +· +workover and remediation costs; and +· +federal and state income taxes. +Our proved oil and gas reserve estimates are prepared by Cimarex engineers in accordance with guidelines established by the SEC. DeGolyer and MacNaughton, independent petroleum engineers, reviewed our reserve estimates for properties that comprised at least 80% of the discounted future net cash flows before income taxes, using a 10% discount rate, as of December 31, 2016. +The cash flow amounts referred to in this filing should not be construed as the current market value of our proved reserves. In accordance with SEC guidelines, the estimated discounted net cash flow from proved reserves is based on the average of the previous 12 months’ first-day-of-the-month prices and costs as of the date of the estimate, whereas actual future prices and costs may be materially different. +Our business depends on oil and gas pipeline and transportation facilities, some of which are owned by others. +In addition to the existence of adequate markets, our oil and natural gas production depends in large part on the proximity and capacity of pipeline systems, as well as storage, transportation, processing and fractionation facilities, most of which are owned by third parties. The lack of availability or the lack of capacity on these systems and facilities could result in the curtailment of production or the delay or discontinuance of drilling plans. This is more likely in remote areas without established infrastructure, such as our Delaware Basin area where we have significant development activities. The lack of availability or capacity in these facilities or the loss of these facilities due to construction delays, weather, fire or other reasons, for an extended period of time could negatively affect our revenues. +A limited number of companies purchase a majority of our oil, NGLs and natural gas. The loss of a significant purchaser could have a material adverse effect on our ability to sell production. +Federal and state regulation of oil and natural gas, local government activity, adverse court rulings, tax and energy policies, changes in supply and demand, pipeline pressures, damage to or destruction of pipelines and general economic conditions could adversely affect our ability to produce and market oil and natural gas. +Hedging transactions may limit our potential gains and involve other risks. +To limit our exposure to price risk, we enter into hedging agreements from time to time, and use commodity derivatives. Hedges limit volatility and increase the predictability of a portion of our cash flow. These transactions also limit our potential gains when oil and gas prices exceed the prices established by the hedges. +In certain circumstances, hedging transactions may expose us to the risk of financial loss, including instances in which: +· +the counterparties to our hedging agreements fail to perform; +· +there is a sudden unexpected event that materially increases oil and natural gas prices; or +· +there is a widening of price basis differentials between delivery points for our production and the delivery point assumed in the hedge arrangement. +Because we account for derivative contracts under mark-to-market accounting, during periods we have hedging transactions in place we expect continued volatility in derivative gains or losses on our income statement as changes occur in the relevant price indexes. +17 +Table of Contents +The adoption of derivatives legislation could have an adverse effect on our ability to use derivative instruments as hedges against fluctuating commodity prices. +In July 2010, the Dodd-Frank Act was enacted, representing an extensive overhaul of the framework for regulation of U.S. financial markets. The Dodd-Frank Act called for various regulatory agencies, including the SEC and the Commodities Futures Trading Commission (CFTC), to establish regulations for implementation of many of its provisions. The Dodd-Frank Act contains significant derivatives regulations, including requirements that certain transactions be cleared on exchanges and that cash collateral (margin) be posted for such transactions. The Dodd-Frank Act provides for an exemption from the clearing and cash collateral requirements for commercial end-users, such as Cimarex, and it includes a number of defined terms used in determining how this exemption applies to particular derivative transactions and the parties to those transactions. +We have satisfied the requirements for the commercial end-user exception to the clearing requirement and intend to continue to engage in derivative transactions. In December 2015, the CFTC approved final rules on margin requirements that will have an impact on our hedging counterparties and an interim final rule exemption from the margin requirements for certain uncleared swaps with commercial end-users. The final rules did not impose additional requirements on commercial end-users. The ultimate effect of these new rules and any additional regulations is currently uncertain. New rules and regulations in this area may result in significant increased costs and disclosure obligations as well as decreased liquidity as entities that previously served as hedge counterparties exit the market. +We have been an early entrant into new or emerging resource plays. As a result, our drilling results in these areas are uncertain. The value of our undeveloped acreage may decline and we may incur impairment charges if drilling results are unsuccessful. +New or emerging oil and gas resource plays have limited or no production history. Consequently, in those areas it is difficult to predict our future drilling costs and results. Therefore, our cost of drilling, completing and operating wells in these areas may be higher than initially expected. Similarly, our production may be lower than initially expected, and the value of our undeveloped acreage may decline if our results are unsuccessful. As a result, we may be required to impair the carrying value of our undeveloped acreage in new or emerging plays. +Furthermore, unless production is established during the primary term of certain of our undeveloped oil and gas leases, the leases will expire, and we will lose our right to develop those properties. +Competition in our industry is intense and many of our competitors have greater financial and technological resources. +We operate in the competitive area of oil and gas exploration and production. Many of our competitors are large, well-established companies that have larger operating staffs and greater capital resources. These competitors may be willing to pay more for exploratory prospects and productive oil and gas properties. They may also be able to define, evaluate, bid for and purchase a greater number of properties and prospects than our financial or human resources permit. +Because our activity is also concentrated in areas of heavy industry competition, there is heightened demand for personnel, equipment, power, services, facilities and resources, resulting in higher costs than in other areas. Such intense competition also could result in delays in securing, or the inability to secure, the personnel, equipment, power, services, resources or facilities necessary for our development activities, which could negatively impact our production volumes. We also face higher costs in remote areas where vendors can charge higher rates due to that remoteness along with the inability to attract employees to those areas and the ability to deploy their resources in easier to access areas. +We are subject to complex laws and regulations that can adversely affect the cost, manner, and feasibility of doing business. +Exploration, production and the sale of oil and gas are subject to extensive laws and regulations, including those implemented to protect the environment, human health and safety and wildlife. Federal, state, and local regulatory agencies frequently require permitting and impose conditions on our activities. During the permitting process, these regulatory agencies often exercise considerable discretion in both the timing and scope of the permits, and the public, including special interest groups, often has an opportunity to influence the timing and outcome of the process. The requirements or +18 +Table of Contents +conditions imposed by these agencies can be costly and can delay the commencement of our operations. In addition, a number of initiatives had been put forth by the Obama administration in the form of Presidential or Secretarial Memoranda, which are still in effect, and have the potential to impact the cost of doing business or could result in substantial delays in permitting, drilling and other oil and gas activities. One example is the Presidential Memorandum on “no net loss” which will take the form of agency action by the Department of Interior, EPA and other agencies to ensure that harmful effects to lands are avoided, minimized and those which remain mitigated up to and including prohibiting actions which may have been previously allowed or requiring compensation. +Failing to comply with any of the applicable laws and regulations, or Presidential initiatives, could result in the suspension or termination of our operations and subject us to administrative, civil and criminal liabilities and penalties. Such costs could have a material adverse effect on both our financial condition and operations. In addition, it is uncertain what impact the 2016 U.S. presidential and congressional elections will have on the energy industry. +Environmental matters and costs can be significant. +As an owner, lessee, or operator of oil and gas properties, we are subject to various complex, stringent and constantly evolving environmental laws and regulations. Our operations inherently create the risk of environmental liability to the government and private parties stemming from our use, generation, handling and disposal of water and waste materials, as well as the release of hydrocarbons or other substances into the air, soil, or water. The environmental laws and regulations to which we are subject impose numerous obligations applicable to our operations, including: the acquisition of permits before conducting regulated activities associated with drilling for and producing oil and gas; the restriction of types, quantities, and concentration of materials that can be released into the environment; the limitation or prohibition of drilling activities on certain lands lying within wilderness, wetlands, waters of the United States, and other protected areas; the application of specific health and safety criteria addressing worker protection; and the imposition of substantial liabilities for pollution resulting from our operations. Numerous governmental authorities, such as the EPA and analogous state agencies have the power to enforce compliance with these laws and regulations and the permits issued under them. Such enforcement actions often involve taking difficult and costly compliance measures or corrective actions. Failure to comply with these laws and regulations may result in the assessment of sanctions, including administrative, civil or criminal penalties, the imposition of investigatory or remedial obligations, and the issuance of orders limiting or prohibiting some or all of our operations. In addition, we may experience delays in obtaining or be unable to obtain required permits, which may delay or interrupt our operations and limit our growth and revenue. +Liabilities under certain environmental laws can be joint and several and may in some cases be imposed regardless of fault on our part such as where we own a working interest in a property operated by another party. We also could be held liable for damages or remediating lands or facilities previously owned or operated by others regardless of whether such contamination resulted from our own actions and regardless if we were in compliance with all applicable law at the time. Further, claims for damages to persons or property, including natural resources, may result from the environmental, health and safety impacts of our operations. Since these environmental risks generally are not fully insurable and can result in substantial costs, such liabilities could have a material adverse effect on both our financial condition and operations. +Our financial condition and results of operations may be materially adversely affected if we incur costs and liabilities due to a failure to comply with environmental regulations or a release of hazardous substances into the environment. +Our operations are subject to environmental laws and regulations relating to the management and release of hazardous substances, pollutants, solid and hazardous wastes and petroleum hydrocarbons. These laws generally regulate the generation, storage, treatment, discharge, transportation and disposal of pollutants and solid and hazardous waste and may impose strict and, in some cases, joint and several liability for the investigation and remediation of affected areas where hazardous substances may have been released or disposed. The most significant of these environmental laws are as follows: +· +The Comprehensive Environmental Response, Compensation, and Liability Act, as amended, referred to as CERCLA or the Superfund law, and comparable state laws, which imposes liability on generators, transporters and arrangers of hazardous substances at sites where hazardous substance releases have occurred or are threatening to occur; +19 +Table of Contents +· +The Oil Pollution Act of 1990 (OPA), under which owners and operators of onshore facilities and pipelines, lessees or permittees of an area in which an offshore facility is located, and owners and operators of vessels are liable for removal costs and damages that result from a discharge of oil into navigable waters of the United States; +· +The Resource Conservation and Recovery Act (RCRA), as amended, and comparable state statutes, which governs the treatment, storage and disposal of solid waste; +· +The Federal Water Pollution Control Act, as amended, also known as the Clean Water Act (CWA), which governs the discharge of pollutants, including natural gas wastes into federal and state waters; +· +The Safe Drinking Water Act (SDWA), which governs the disposal of wastewater in underground injection wells; and +· +The Clean Air Act (CAA) which governs the emission of pollutants into the air. +We believe we are in substantial compliance with the requirements of CERCLA, RCRA, OPA, CWA, SDWA, CAA and related state and local laws and regulations. We also believe we hold all necessary and up-to-date permits, registrations and other authorizations required under such laws and regulations. Although the current costs of managing our wastes as they presently are classified are reflected in our budget, any legislative or regulatory reclassification of oil and natural gas exploration and production wastes could increase our costs to manage and dispose of such wastes and have a material adverse effect on our financial condition and operations. +Federal regulatory initiatives relating to the protection of threatened or endangered species could result in increased costs and additional operating restrictions or delays. +The Federal Endangered Species Act (ESA) was established to protect endangered and threatened species. Pursuant to the ESA, if a species is listed as threatened or endangered, restrictions may be imposed on activities adversely affecting that species’ habitat. The U.S. Fish and Wildlife Service (FWS) may designate critical habitat and suitable habitat areas it believes are necessary for survival of a threatened or endangered species. A critical habitat or suitable habitat designation could result in further material restrictions to federal land use and may materially delay or prohibit land access for oil and natural gas development. Similar protections are offered to migratory birds under the Migratory Bird Treaty Act. We conduct operations on federal oil and natural gas leases in areas where certain species are currently listed as threatened or endangered, or could be listed as such, under the ESA. Operations in areas where threatened or endangered species or their habitat are known to exist may require us to incur increased costs to implement mitigation or protective measures and also may restrict or preclude our drilling activities in those areas or during certain seasons, such as breeding and nesting seasons. On March 27, 2014, the FWS announced the listing of the lesser prairie chicken, whose habitat is over a five-state region, including Texas, New Mexico and Oklahoma, where we conduct operations, as a threatened species under the ESA. Listing of the lesser prairie chicken as a threatened species imposes restrictions on disturbances to critical habitat by landowners and drilling companies that would harass, harm or otherwise result in a "taking" of this species. However, the FWS also announced a final rule that will limit regulatory impacts on landowners and businesses from the listing if those landowners and businesses have entered into certain range-wide conservation planning agreements, such as those developed by the Western Association of Fish and Wildlife Agencies (WAFWA), pursuant to which such parties agreed to take steps to protect the lesser prairie chicken’s habitat and to pay a mitigation fee if its actions harm the lesser prairie chicken’s habitat. We entered into a voluntary Candidate Conservation Agreement (CCA) with the WAFWA, whereby we agreed to take certain actions and limit certain activities, such as limiting drilling on certain portions of our acreage during nesting seasons, in an effort to protect the lesser prairie chicken. Such CCA could result in increased costs to us from species protection measures, time delays or limitations on drilling activities, which costs, delays or limitations may be significant. While a federal judge in Texas vacated the listing of the lesser prairie chicken in 2015, listing petitions continue to be filed with the FWS which could impact our operations. Many non-governmental organizations (NGOs) work closely with the FWS regarding the listing of many species, including species with broad and even nationwide ranges. The recent listing of the Mexican Long Nosed bat, whose habitat includes the Permian Basin where we operate, is an example of the NGOs’ influence on ESA listing decisions. The increase in endangered species listings may impact our ability to explore for or produce oil and gas in certain areas and increase our costs. +20 +Table of Contents +Our hydraulic fracturing activities are subject to risks that could negatively impact our operations and profitability. +We use hydraulic fracturing for the completion of almost all of our wells. Hydraulic fracturing is a process that involves pumping fluid and proppant at high pressure into a hydrocarbon bearing formation to create and hold open fractures. Those fractures enable gas or oil to move through the formation’s pores to the well bore. Typically, the fluid used in this process is primarily water. In plays where hydraulic fracturing is necessary for successful development, the demand for water may exceed the supply. A lack of readily available water or a significant increase in the cost of water could cause delays or increased completion costs. +While hydraulic fracturing historically has been regulated by state oil and natural gas commissions, the practice has become increasingly controversial in certain parts of the country, resulting in increased scrutiny and regulation from federal agencies. For example, the EPA has asserted federal regulatory authority over certain hydraulic-fracturing activities under the SDWA involving the use of diesel fuels and published permitting guidance in February 2014 addressing the use of diesel in fracturing operations. Although the EPA has delegated the permitting authority for the SDWA’s Underground Injection Control Class II programs in Oklahoma, Texas and New Mexico where we maintain operational acreage, the EPA is encouraging state programs to review and consider use of such draft guidance. +In addition, on March 26, 2015, the federal BLM published a final rule governing hydraulic fracturing on federal and Indian lands. The rule requires public disclosure of chemicals used in hydraulic fracturing on federal and Indian lands, confirmation that wells used in fracturing operations meet appropriate construction standards, development of appropriate plans for managing flowback water that returns to the surface, increased standards for interim storage of recovered waste fluids, and submission to the BLM of detailed information on the geology, depth and location of preexisting wells. This rule originally was scheduled to take effect on June 24, 2015. However, the rule is the subject of several pending lawsuits filed by industry groups, two Indian tribes, and at least four states, alleging that federal law does not give the BLM authority to regulate hydraulic fracturing. The federal judge has enjoined the rule while the case is pending. The district court held that BLM did not have jurisdiction to promulgate the rule. The Obama Justice Department appealed and that appeal is pending. +There are also certain governmental reviews either underway or being proposed that focus on environmental aspects of hydraulic fracturing practices. The EPA has concluded a study of the potential environmental effects of hydraulic fracturing on drinking water and groundwater. The EPA’s draft report was released on June 4, 2015. The findings of the report suggest that hydraulic fracturing does not pose a systemic risk to groundwater although there are risks to both groundwater and soils posed by inadequate water handling practices in certain situations. A public comment period on the report was open until August 28, 2015 and a series of public hearings were conducted by the EPA’s Scientific Advisory Board (SAB) throughout the fall of 2015. The EPA issued its final report and has reached two different topline conclusions, although the content of the study itself remains unchanged. Other governmental agencies, including the U.S. Department of Energy and the U.S. Department of the Interior, have evaluated or are evaluating various other aspects of hydraulic fracturing. These ongoing or proposed studies could spur initiatives to further regulate hydraulic fracturing. +Additionally, Congress from time to time has considered the adoption of legislation to provide for federal regulation of hydraulic fracturing and to require disclosure of the chemicals used in the hydraulic fracturing process. Most producing states, including Texas and Colorado, have adopted, and other states are considering adopting, regulations that could impose more stringent permitting, public disclosure, and well construction requirements on hydraulic-fracturing operations or otherwise seek to ban fracturing activities altogether. +Any of the above factors could have a material adverse effect on our financial position, results of operations or cash flows and could make it more difficult or costly for us to perform fracturing to stimulate production from dense subsurface rock formations and, in the event of local prohibitions against commercial production of natural gas, may preclude our ability to drill wells. In addition, our fracturing activities could become subject to additional permitting requirements and result in permitting delays as well as potential increases in costs. Restrictions on hydraulic fracturing could also reduce the amount of oil and natural gas that we are ultimately able to produce from our reserves. +21 +Table of Contents +The adoption of climate change legislation or regulations restricting emission of greenhouse gases could result in increased operating costs and reduced demand for the oil and natural gas we produce. +Studies have suggested that emission of certain gases, commonly referred to as greenhouse gases (GHGs) may be impacting the earth’s climate. Methane, a primary component of natural gas, and carbon dioxide, also present in natural gas as a secondary product, sometimes considered an impurity or a by-product of the burning of oil and natural gas, are examples of GHGs. The U.S. Congress and various states have been evaluating, and in some cases implementing, climate-related legislation and other regulatory initiatives that restrict emissions of GHGs. In December 2009, the EPA published its findings that emissions of GHGs present an endangerment to public health and the environment because emissions of such gases are contributing to the warming of the earth’s atmosphere and other climatic changes. Based on these findings, the EPA adopted regulations under existing provisions of the Federal Clean Air Act that establish Prevention of Significant Deterioration (PSD) and Title V permit reviews for GHG emissions from certain large stationary sources. Facilities required to obtain PSD and/or Title V permits under EPA’s GHG Tailoring Rule for their GHG emissions also may be required to meet "Best Available Control Technology" standards that will be established by the states or, in some cases, by the EPA on a case-by-case basis. The EPA has also adopted rules requiring the monitoring and reporting of GHG emissions from specified sources in the United States, including, among others, certain oil and natural gas production facilities on an annual basis, which includes certain of our operations. In recent proposed rulemaking EPA is widening the scope of annual GHG reporting to include not only activities associated with completion and workover of gas wells with hydraulic fracturing and activities associated with oil and natural gas production operations, but also completions and workovers of oil wells with hydraulic fracturing, gathering and boosting systems and transmission pipelines. +While Congress has from time to time considered legislation to reduce emissions of GHGs, there has not been significant activity in the form of adopted legislation to reduce GHG emissions at the federal level in recent years. In the absence of such federal climate legislation, a number of state and regional efforts have emerged that are aimed at tracking and/or reducing GHG emissions by means of cap and trade programs that typically require major sources of GHG emissions, such as electric power plants, to acquire and surrender emission allowances in return for emitting those GHGs. In January 2015, President Obama announced a series of administration actions to reduce methane emissions, including rulemaking by the EPA and the BLM as well as updating of standards by the Department of Transportation’s Pipeline and Hazardous Materials Administration. The previous administration intended to promulgate proposed climate change rulemaking aimed at reducing GHG emissions by 45% by 2025 compared to 2012 levels. These proposals target both new and existing sources. On January 22, 2016, the Department of the Interior announced its proposed emissions mandate on oil and natural gas producers who operate on federal and Indian lands. While this rule was finalized in November of 2016, it is currently being challenged by several states and industry. While we expect new legislation and regulations to increase the cost of business, at this time it is not possible to quantify the impact on our business. Any such future laws and final regulations that require reporting of GHGs or otherwise limit emissions of GHGs from our equipment and operations could require us to incur costs to develop and implement best management practices aimed at reducing GHG emissions, install and maintain emissions control technologies, as well as monitor and report on GHG emissions associated with our operations, which would increase our operating costs, and such requirements also could adversely affect demand for the oil and natural gas that we produce. +Legislation or regulatory initiatives intended to address seismic activity could restrict our ability to engage in hydraulic fracturing during completion operations and to dispose of saltwater produced in connection with our oil and gas production, which could limit our ability to produce oil and gas economically and have a material adverse effect on our business. +We dispose of large volumes of saltwater produced in connection with our drilling and production operations, pursuant to permits issued to us or third party operators of disposal wells by governmental authorities overseeing produced water disposal activities. While these permits are issued pursuant to existing laws and regulations, these legal requirements are subject to change, which could result in the imposition of more stringent operating constraints or new monitoring and reporting requirements, owing to, among other things, concerns of the public or governmental authorities regarding such gathering or disposal activities. +There exists a growing concern that hydraulic fracturing during well completion operations and the injection of produced water into belowground disposal wells triggers seismic activity in certain areas, including Oklahoma and Texas, where we operate. In response to these concerns, regulators in some states are pursuing initiatives designed to impose +22 +Table of Contents +additional requirements in connection with hydraulic fracturing and in the permitting of saltwater disposal wells or otherwise to assess any relationship between seismicity and these oil and gas operations. For example, in 2014, the Oklahoma Corporation Commission began adopting rules for operators of saltwater disposal wells in certain seismically-active areas, or Areas of Interest, in the Arbuckle formation, requiring operators to monitor and record well pressure and discharge volume on a daily basis and further requiring operators of wells permitted for disposal of 20,000 barrels per day or more of saltwater to conduct mechanical integrity testing. Throughout 2015 and 2016, the Oklahoma Corporation Commission’s Oil and Gas Conservation Division, or OGCD, issued a series of directives, expanding the areas of interest for induced seismicity and enhanced disposal restrictions and limiting the depths at which produced water could be injected or, in the alternative, reducing disposal volumes. Additional regulations and restrictions are possible as more is understood about this issue. In addition and separate from induced seismicity associated with injection, the OGCD has issued guidelines to operators to follow when engaged in well stimulation activities, which some studies now seem to correlate with a small number of low intensity seismic events. +In addition, in 2014 the Texas Railroad Commission, or TRC, published a new rule governing permitting or re-permitting of disposal wells in Texas that would require, among other things, the submission of information on seismic events occurring within a specified radius of the disposal well location, as well as logs, geologic cross sections and structure maps relating to the disposal area in question. If a permittee or a prospective permittee fails to demonstrate that the saltwater or other fluids are confined to the disposal zone or if scientific data indicates such a disposal well is likely to be or determined to be contributing to seismic activity, then the TRC may deny, modify, suspend or terminate the permit application or existing operating permit for that well. +The adoption and implementation of any new laws, regulations, or directives that restrict our ability to stimulate wells or to dispose of produced water, by changing the depths of disposal wells, reducing the volume of oil and natural gas wastewater disposed in such wells, restricting disposal well locations or otherwise, or by requiring us or third parties who dispose of our saltwater to shut down disposal wells, could increase disposal costs or require us to shut in a substantial number of our oil and natural gas wells or otherwise have a material adverse effect on our ability to produce oil and gas economically and, accordingly, could materially and adversely affect our business, financial condition and results of operations. +A substantial portion of our producing properties are located in limited geographic areas, making us vulnerable to risks associated with having geographically concentrated operations. +A substantial portion of our producing properties are geographically concentrated in the Permian Basin in Texas and New Mexico and our Cana area in the Mid-Continent region in Oklahoma, with these two areas comprising approximately 52% and 47%, respectively, of our oil, gas, and NGL production and approximately 61% and 39%, respectively, of our oil, gas, and NGL revenues for the year ended December 31, 2016. Approximately 37% of our estimated proved reserves were located in the Permian Basin and approximately 63% of our estimated proved reserves were located in the Mid-Continent region as of December 31, 2016. +Because of this concentration in limited geographic areas, the success and profitability of our operations may be disproportionately exposed to regional factors relative to our competitors that have more geographically dispersed operations. These factors include, among others: (i) the prices of crude oil and natural gas produced from wells in the regions and other regional supply and demand factors, including gathering, pipeline and rail transportation capacity constraints; (ii) the availability of rigs, equipment, oil field services, supplies, and labor; (iii) the availability of processing and refining facilities; and (iv) infrastructure capacity. In addition, our operations in the Permian Basin and Mid-Continent region, as well as other areas, may be adversely affected by severe weather events such as floods, lightning, ice and other storms, and tornadoes, which can intensify competition for the items described above during months when drilling is possible and may result in periodic shortages. The concentration of our operations in limited geographic areas also increases our exposure to changes in local laws and regulations including concerning hydraulic fracturing and waste water disposal as discussed above in “Legislation or regulatory initiatives intended to address seismic activity could restrict our ability to engage in hydraulic fracturing during completion operations and to dispose of saltwater produced in connection with our oil and gas production, which could limit our ability to produce oil and gas economically and have a material adverse effect on our business”, certain lease stipulations designed to protect wildlife, and unexpected events that may occur in the regions such as natural disasters, seismic events, industrial accidents or labor difficulties. Any one of these events has the potential to cause producing wells to be shut-in, delay operations, decrease cash flows, increase operating +23 +Table of Contents +and capital costs and prevent development of lease inventory before expiration. Any of the risks described above could have a material adverse effect on our financial condition, results of operations and cash flows. +We use some of the latest available horizontal drilling and completion techniques, which involve risk and uncertainty in their application. +Our horizontal drilling operations utilize some of the latest drilling and completion techniques. The risks or such techniques include, but are not limited to, the following: +· +landing the wellbore in the desired drilling zone; +· +staying in the desired drilling zone while drilling horizontally through the formation; +· +running casing the entire length of the wellbore; +· +being able to run tools and other equipment consistently through the horizontal wellbore; +· +the ability to fracture stimulate the planned number of stages; +· +the ability to run tools the entire length of the wellbore during completion operations; and +· +the ability to successfully clean out the wellbore after completion of the final fracture stimulation stage. +Any of the above factors could have a material adverse effect on our financial position, results of operations or cash flows. +Many of our properties are in areas that may have been partially depleted or drained by offset wells and certain of our wells may be adversely affected by actions other operators may take when drilling, completing or operating wells that they own. +Many of our properties are in areas that may have already been partially depleted or drained by earlier offset drilling. The owners of leasehold interests adjoining any of our properties could take actions, such as drilling and completing additional wells, which could adversely affect our operations. When a new well is completed and produced, the pressure differential in the vicinity of the well causes the migration of reservoir fluids toward the new wellbore (and potentially away from existing wellbores). As a result, the drilling and production of these potential locations could cause a depletion of our proved reserves and may inhibit our ability to further develop our proved reserves. In addition, completion operations and other activities conducted on adjacent or nearby wells could cause production from our wells to be shut in for indefinite periods of time, could result in increased lease operating expenses and could adversely affect the production and reserves from our wells after they re-commence production. We have no control over the operations or activities of offsetting operators. +We may be subject to information technology system failures, network disruptions and breaches in data security and our business, financial position, results of operations and cash flows could be negatively affected by such security threats and disruptions. +As an oil and gas producer, we face various security threats, including cybersecurity threats such as attempts to gain unauthorized access to sensitive information or to render data or systems unusable; threats to the security of our facilities and infrastructure or third-party facilities and infrastructure, such as gathering and processing facilities, pipelines and refineries; and threats from terrorist acts. Cybersecurity attacks are becoming more sophisticated and include, but are not limited to, malicious software, attempts to gain unauthorized access to data and systems, and other electronic security breaches that could lead to disruptions in critical systems, unauthorized release of confidential or otherwise protected information, and corruption of data, which could have an adverse effect on our reputation, business, financial condition, results of operations or cash flows. While we have not suffered any material losses relating to such attacks, there can be no assurance that we will not suffer such losses in the future. +24 +Table of Contents +We rely heavily on our information systems, and the availability and integrity of these systems are essential for us to conduct our business and operations. In addition to cybersecurity and data security threats, other information system failures and network disruptions could have a material adverse effect on our ability to conduct our business. We could experience system failures due to power or telecommunications failures, human error, natural disasters, fire, sabotage, hardware or software malfunction or defects, computer viruses, intentional acts of vandalism or terrorism and similar acts or occurrences. Such system failures could result in the unanticipated disruption of our operations, communications or processing of transactions, as well as loss of, or damage to, sensitive information, facilities, infrastructure and systems essential to our business and operations, the failure to meet regulatory standards and the reporting of our financial results, and other disruptions to our operations, which, in turn, could have a material adverse effect on our business, financial position, results of operations and cash flows. +A cyber attack involving our information systems and related infrastructure, or those of our business associates, could disrupt our business and negatively impact our operations in a variety of ways, including but not limited to: +· +unauthorized access to seismic data, reserves information, strategic information, or other sensitive or proprietary information could have a negative impact on our ability to compete for oil and gas resources; +· +data corruption or operational disruption of production-related infrastructure could result in a loss of production, or accidental discharge; +· +a cyber attack on a vendor or service provider could result in supply chain disruptions, which could delay or halt our major development projects; +· +a cyber attack on third party gathering, pipeline, or rail transportation systems could delay or prevent us from transporting and marketing our production, resulting in a loss of revenues; and +· +a cyber attack on our accounting or accounts payable systems could expose us to liability to employees and third parties if their personal identifying information is obtained. +These events could damage our reputation and lead to financial losses from remedial actions, loss of business or potential liability, which could have a material adverse effect on our financial condition, results of operations or cash flows. +While management has taken steps to address these concerns by implementing network security and internal control measures to monitor and mitigate security threats and to increase security for our information, facilities, and infrastructure, our implementation of such procedures and controls may result in increased costs, and there can be no assurance that a system failure or data security breach will not occur and have a material adverse effect on our business, financial condition and results of operations. In addition, as cybersecurity threats continue to evolve, we may be required to expend additional resources to continue to modify or enhance our protective measures or to investigate or remediate any cybersecurity or information technology infrastructure vulnerabilities. +Our limited ability to influence operations and associated costs on non-operated properties could result in economic losses that are partially beyond our control. +For the year ended December 31, 2016, other companies operated approximately 22% of our net production. Our success in properties operated by others depends upon a number of factors outside of our control. These factors include timing and amount of capital expenditures, the operator’s expertise and financial resources, approval of other participants in drilling wells, selection of technology and maintenance of safety and environmental standards. Our dependence on the operator and other working interest owners for these projects could prevent the realization of our targeted returns on capital in drilling or acquisition activities. +Our business involves many operating risks that may result in substantial losses for which insurance may be unavailable or inadequate. +Our operations are subject to hazards and risks inherent in drilling for oil and gas, such as fires, natural disasters, explosions, formations with abnormal pressures, casing collapses, uncontrollable flows of underground gas, blowouts, +25 +Table of Contents +surface cratering, pipeline ruptures or cement failures. Other such risks include theft, vandalism, environmental hazards such as natural gas leaks, oil spills and discharges of toxic gases. Any of these risks can cause substantial losses resulting from: +· +injury or loss of life; +· +damage to, loss of or destruction of, property, natural resources and equipment; +· +pollution and other environmental damages; +· +regulatory investigations, civil litigation and penalties; +· +damage to our reputation; +· +suspension of our operations; and +· +costs related to repair and remediation. +In addition, our liability for environmental hazards may include conditions created by the previous owners of properties that we purchase or lease. +We maintain insurance coverage against some, but not all, potential losses. We do not believe that insurance coverage for all environmental damages that could occur is available at a reasonable cost. Losses could occur for uninsurable or uninsured risks, or in amounts in excess of existing insurance coverage. The occurrence of an event that is not fully covered by insurance could harm our financial condition and results of operation. +We may not be able to generate enough cash flow to meet our debt obligations. +At December 31, 2016, our long-term debt consisted of $750 million of 4.375% senior notes due in 2024 and $750 million of 5.875% senior notes due in 2022. In addition to interest expense and principal on our long-term debt, we have demands on our cash resources including, among others, contractual commitments, operating expenses and capital expenditures. +Our ability to pay the principal and interest on our long-term debt and to satisfy our other liabilities will depend upon future performance and our ability to repay or refinance our debt as it becomes due. Our future operating performance and ability to refinance will be affected by economic and capital market conditions, results of operations and other factors, many of which are beyond our control. Our ability to meet our debt service obligations also may be impacted by changes in prevailing interest rates, as borrowing under our existing revolving credit facility bears interest at floating rates. +We may not generate sufficient cash flow from operations. Without sufficient cash flow, there may not be adequate future sources of capital to enable us to service our indebtedness or to fund our other liquidity needs. If we are unable to service our indebtedness and fund our operating costs, we will be forced to adopt alternative strategies that may include: +· +reducing or delaying capital expenditures; +· +seeking additional debt financing or equity capital; +· +selling assets; or +· +restructuring or refinancing debt. +We may be unable to complete any such strategies on satisfactory terms, if at all. Our inability to generate sufficient cash flows to satisfy our debt obligations or contractual commitments, or to refinance our indebtedness on +26 +Table of Contents +commercially reasonable terms, would materially and adversely affect our financial condition and results of operations. +The instruments governing our indebtedness contain various covenants limiting the discretion of our management in operating our business. +The indenture governing our senior notes and our credit agreement contain various restrictive covenants that may limit management’s discretion in certain respects. In particular, these agreements limit Cimarex’s and its subsidiaries’ ability to, among other things: +· +create certain liens; +· +consolidate, merge or transfer all, or substantially all, of our assets and our restricted subsidiaries; +· +enter into sale and leaseback transactions. +In addition, our revolving credit agreement requires us to maintain a total debt to capitalization ratio (as defined in the credit agreement) of not more than 65%. See Note 3 to the Consolidated Financial Statements for further information. +If we fail to comply with the restrictions in the indenture governing our senior notes or the agreement governing our credit facility or any other subsequent financing agreements, a default may allow the creditors, if the agreements so provide, to accelerate the related indebtedness as well as any other indebtedness to which a cross-acceleration or cross-default provision applies. In addition, lenders may be able to terminate any commitments they had made to make available further funds. +Our acquisition activities may not be successful, which may hinder our replacement of reserves and adversely affect our results of operations. +The successful acquisition of properties requires an assessment of several factors, including: +· +geological risks and recoverable reserves; +· +future oil and gas prices and their appropriate market differentials; +· +operating costs; and +· +potential environmental risks and other liabilities. +The accuracy of these assessments is inherently uncertain. In connection with these assessments, we perform a review of the subject properties we believe to be generally consistent with industry practices. Our review will not reveal all existing or potential problems nor will it permit us to become sufficiently familiar with the properties to fully assess their deficiencies and capabilities. Inspections will not likely be performed on every well or facility, and structural and environmental problems are not necessarily observable even when an inspection is undertaken. Furthermore, the seller may be unwilling or unable to provide effective contractual protection against all or part of the identified problems. +We may lose leases if production is not established within the time periods specified in the leases. +Unless production is established within the spacing units covering the undeveloped acres on which some of the locations are identified, the leases for such acreage will expire. If we are not able to renew leases before they expire, any proved undeveloped reserves associated with such leases will be removed from our proved reserves. The combined net acreage expiring in the next three years represents 3.5% of our total net undeveloped acreage at December 31, 2016. At that date, we had leases representing 85,669 net acres expiring in 2017, 41,981 net acres expiring in 2018, and 68,815 net acres expiring in 2019. Our actual drilling activities may materially differ from those presently identified, which could adversely affect our business. +27 +Table of Contents +Our disposition activities may be subject to factors beyond our control, and in certain cases we may retain unforeseen liabilities for certain matters . +We regularly sell non-core assets in order to increase capital resources available for other core assets and to create organizational and operational efficiencies. We also occasionally sell interests in core assets for the purpose of accelerating the development and increasing efficiencies in such core assets. Various factors could materially affect our ability to dispose of such assets, including the approvals of governmental agencies or third parties and the availability of purchasers willing to acquire the assets with terms we deem acceptable. +Sellers often retain certain liabilities or agree to indemnify buyers for certain matters related to the sold assets. The magnitude of any such retained liability or of the indemnification obligation is difficult to quantify at the time of the transaction and ultimately could be material. Also, as is typical in divestiture transactions, third parties may be unwilling to release the company from guarantees or other credit support provided prior to the sale of the divested assets. As a result, after a divestiture, the company may remain secondarily liable for the obligations guaranteed or supported to the extent that the buyer of the assets fails to perform these obligations. +Competition for experienced, technical personnel may negatively impact our operations. +Our exploratory and development drilling success depends, in part, on our ability to attract and retain experienced professional personnel. The loss of any key executives or other key personnel could have a material adverse effect on our operations. As we continue to develop our asset base and the scope of our operations, our future profitability will depend on our ability to attract and retain qualified personnel, particularly individuals with a strong background in geology, geophysics, engineering and operations. +We are involved in various legal proceedings, the outcome of which could have an adverse effect on our liquidity. +In the normal course of business, we have various lawsuits and related disputed claims, including but not limited to claims concerning title, royalty payments, environmental issues, personal injuries, and contractual issues. Although we currently believe the resolution of these lawsuits and claims, individually or in the aggregate, would not have a material adverse effect on our financial condition or results of operations, our assessment of our current litigation and other legal proceedings could change in light of the discovery of facts with respect to legal actions or other proceedings pending against us not presently known to us or determinations by judges, juries or other finders of fact that are not in accord with our evaluation of the possible liability or outcome of such proceedings. Therefore, there can be no assurance that outcomes of future legal proceedings would not have an adverse effect on our liquidity and capital resources. +Certain federal income tax deductions currently available with respect to natural gas and oil exploration and development may be eliminated, as a result of future legislation. +Various proposals have been made recommending the elimination of certain key U.S. federal income tax incentives currently available to oil and natural gas exploration and production companies. Legislation is often introduced in Congress which would implement many of these proposals. These changes include, but are not limited to, (i) the repeal of the percentage depletion allowance for oil and gas properties; (ii) the elimination of current deductions for intangible drilling and development costs; and (iii) an extension of the amortization period for certain geological and geophysical expenditures. It is unclear, however, whether any such changes will be enacted or how soon such changes could be effective. +The passage of this legislation or any other similar change in U.S. federal income tax law could eliminate or postpone certain tax deductions that are currently available with respect to oil and natural gas exploration and development, and any such change could have an adverse effect on our financial position. +28 +Table of Contents +ITEM 1B. UNRESOLVED STAFF COMMENTS +None. +ITEM 3. LEGAL PROCEEDING S +The information set forth under the heading “Litigation” in Note 10 of the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K is incorporated by reference in response to this item. +ITEM 4. MINE SAFETY DISCLOSURE S +Not applicable. +29 +Table of Contents +PART I I +ITEM 5. MARKE T FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES +Our $0.01 par value common stock trades on the New York Stock Exchange (NYSE) under the symbol XEC. A cash dividend was paid to stockholders in each quarter of 2016. Future dividend payments will depend on the company’s level of earnings, financial requirements and other factors considered relevant by the Board of Directors. +Stock Prices and Dividends by Quarter. The following table sets forth, for the periods indicated, the high and low sales price per share of our common stock on the NYSE and the per share dividends declared during the period. +Dividends +Declared Per +2016 +High +Low +Share +First Quarter +$ +100.07 +$ +72.77 +$ +0.08 +Second Quarter +$ +123.48 +$ +93.21 +$ +0.08 +Third Quarter +$ +136.95 +$ +112.19 +$ +0.08 +Fourth Quarter +$ +146.96 +$ +118.59 +$ +0.08 +Dividends +Declared Per +2015 +High +Low +Share +First Quarter +$ +118.87 +$ +91.74 +$ +0.16 +Second Quarter +$ +132.18 +$ +108.59 +$ +0.16 +Third Quarter +$ +118.87 +$ +97.23 +$ +0.16 +Fourth Quarter +$ +124.91 +$ +85.00 +$ +0.16 +The closing price of Cimarex stock as reported on the NYSE on January 31, 2017, was $135.21. At January 31, 2017, Cimarex’s 95,121,492 shares of outstanding common stock were held by approximately 1,393 stockholders of record. +The following table sets forth information with respect to the equity compensation plans available to directors, officers, and employees of the company at December 31, 2016: +(c) +Number of securities +(a) +remaining available +Number of securities +(b) +for future issuance +to be issued upon +Weighted-average +under equity +exercise of +exercise price of +compensation plans +outstanding options, +outstanding options, +(excluding securities +Plan Category +warrants, and rights +warrants, and rights +reflected in column (a)) +Equity compensation plans approved by security holders +307,810 +$ +101.72 +3,287,830 +Equity compensation plans not approved by security holders +— +— +— +Total +307,810 +$ +101.72 +3,287,830 +30 +Table of Contents +The following graph compares the cumulative 5-year total return attained by stockholders on Cimarex Energy Co.’s common stock relative to the cumulative total returns of the S&P 500 index, the Dow Jones US Exploration & Production index, and the S&P Oil & Gas Exploration & Production index. The graph tracks the performance of a $100 investment in our common stock and in each of the indexes (with the reinvestment of all dividends) from December 31, 2011 to December 31, 2016. The stock price performance included in this graph is not necessarily indicative of future stock price performance. +12/2011 +12/2012 +12/2013 +12/2014 +12/2015 +12/2016 +Cimarex Energy Co. +$ +100.00 +$ +93.95 +$ +171.90 +$ +174.58 +$ +148.03 +$ +225.95 +S&P 500 +$ +100.00 +$ +116.00 +$ +153.58 +$ +174.60 +$ +177.01 +$ +198.18 +Dow Jones US Exploration & Production +$ +100.00 +$ +105.82 +$ +139.52 +$ +124.48 +$ +94.94 +$ +118.19 +S&P Oil & Gas Exploration & Production +$ +100.00 +$ +103.65 +$ +132.14 +$ +118.15 +$ +77.80 +$ +103.36 +31 +Table of Contents +ITEM 6. SELECTED FINANCIAL DATA +The selected financial data set forth below should be read in conjunction with the Consolidated Financial Statements and accompanying notes thereto provided in Item 8 of this report. +Years Ended December 31, +2016 +2015 +2014 +2013 +2012 +(in millions, except per share amounts) +Operating Results: +Oil, gas and NGL sales +$ +1,221 +$ +1,418 +$ +2,373 +$ +1,953 +$ +1,582 +Total Revenues (1) +$ +1,257 +$ +1,453 +$ +2,424 +$ +1,998 +$ +1,624 +Net income (loss) (2) +$ +(431) +$ +(2,409) +$ +507 +$ +565 +$ +354 +Earnings (loss) per share to common stockholders: +Basic +$ +(4.62) +$ +(25.92) +$ +5.79 +$ +6.48 +$ +4.08 +Diluted +$ +(4.62) +$ +(25.92) +$ +5.78 +$ +6.47 +$ +4.07 +Cash dividends declared per share +$ +0.32 +$ +0.64 +$ +0.64 +$ +0.56 +$ +0.48 +Cash flow data: +Net cash provided by operating activities +$ +599 +$ +692 +$ +1,619 +$ +1,324 +$ +1,193 +Net cash used by investing activities +$ +(692) +$ +(1,009) +$ +(1,740) +$ +(1,531) +$ +(1,415) +Net cash (used) provided by financing activities +$ +(33) +$ +691 +$ +522 +$ +142 +$ +289 +December 31, +2016 +2015 +2014 +2013 +2012 +(in millions, except proved reserves amounts) +Balance sheet data: +Cash and cash equivalents +$ +653 +$ +779 +$ +406 +$ +5 +$ +70 +Oil and gas properties, net (2) +$ +2,854 +$ +3,276 +$ +6,904 +$ +5,966 +$ +5,005 +Goodwill +$ +620 +$ +620 +$ +620 +$ +620 +$ +620 +Total assets (2) (3) +$ +4,682 +$ +5,243 +$ +8,708 +$ +7,243 +$ +6,294 +Long-term obligations +Long-term debt (principal) +$ +1,500 +$ +1,500 +$ +1,500 +$ +924 +$ +750 +Deferred income taxes +$ +127 +$ +353 +$ +1,755 +$ +1,460 +$ +1,121 +Other +$ +184 +$ +197 +$ +194 +$ +164 +$ +313 +Stockholders’ equity +$ +2,360 +$ +2,798 +$ +4,501 +$ +4,022 +$ +3,475 +Proved Reserves: +Oil (MBbls) +105,878 +107,798 +118,992 +108,533 +77,921 +Gas (Bcf) +1,471 +1,517 +1,667 +1,294 +1,252 +NGL (MBbls) +130,633 +124,277 +125,273 +92,044 +89,909 +Total (Bcfe) +2,890 +2,909 +3,132 +2,497 +2,259 +(1) +Prior to 2014, our average realized prices for gas and NGLs were net of certain processing fees. Beginning in 2014, these fees were no longer netted against realized prices, but were included in “Transportation, processing and other operating” costs. The effect of this change in 2014 was that total revenue was $51.4 million higher with an offsetting increase in total transportation, processing and other operating costs. This change had no effect on operating income. Periods prior to 2014 were not reclassified to reflect this change in accounting treatment as it was impracticable. +(2) +During 2016 and 2015, we recorded non-cash full cost ceiling test impairments to our oil and gas properties totaling $719.1 million ($456.9 million, net of tax) and $3.7 billion ($2.4 billion, net of tax), respectively. +(3) +At December 31, 2015, we adopted new guidance which requires debt issuance costs (except for those related to revolving credit facilities) to be presented in the balance sheet as a direct deduction from the carrying amount of the related debt liability rather than as an asset. Such costs were previously recorded as deferred assets. Prior periods have been adjusted to conform to this guidance. +32 +Table of Contents +ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS +The following discussion and analysis should be read in conjunction with our Consolidated Financial Statements included in Item 8 of this report and also with “Risk Factors” in Item 1A of this report. This discussion also includes forward-looking statements. Refer to “ Cautionary Information about Forward-Looking Statements ” in Part I of this report for important information about these types of statements. +OVERVIEW +Cimarex is an independent oil and gas exploration and production company. Our operations are entirely located in the United States, mainly in Oklahoma, Texas and New Mexico. Currently our operations are focused in two main areas: the Permian Basin and the Mid-Continent. Our Permian Basin region encompasses west Texas and southeast New Mexico. Our Mid-Continent region consists of Oklahoma and the Texas Panhandle. +Our principal business objective is to profitably grow proved reserves and production for the long-term benefit of our stockholders through a balanced and abundant drilling inventory. Our strategy centers on maximizing cash flow from producing properties and profitably reinvesting that cash flow in exploration and development activities. We consider property acquisitions, dispositions and occasional mergers to enhance our competitive position. +We believe that detailed technical analysis, operational focus and a disciplined capital investment process mitigate risk and position us to continue to achieve profitable increases in proved reserves and production. Our drilling inventory and limited long-term commitments provide the flexibility to respond quickly to industry volatility. +Our investments are generally funded with cash flow provided by operating activities together with cash on hand, bank borrowings, sales of non-strategic assets and occasional public financing based on our monitoring of capital markets and our balance sheet. Conservative use of leverage has long been a part of our financial strategy. We believe that maintaining a strong balance sheet mitigates financial risk and enables us to withstand unpredictable fluctuations in commodity prices. +Market Conditions +The oil and gas industry is cyclical and commodity prices can be volatile. In the second half of 2014, oil prices began a rapid and significant decline as global oil supplies began to outpace demand. During 2015 and through the first quarter of 2016, global oil supply continued to outpace demand. While oil prices have been, and will likely remain, erratic, beginning in the second quarter of 2016 and thus far in 2017, realized oil prices have improved. +Due to an imbalance between supply and demand across North America, prices for domestic natural gas and NGLs began to decline during the third quarter of 2014 and continued to be weak through the first quarter of 2016. Beginning late in the second quarter of 2016, prices for natural gas and NGLs strengthened, but continue to fluctuate. +Our revenue, profitability and future growth are highly dependent on the prices we receive for our oil and natural gas production. Compared to 2015, our realized oil price for 2016 fell 12% to $38.30 per barrel. Similarly, our realized price for natural gas dropped 9% to $2.31 per Mcf, while our realized price for NGLs increased 2% to $14.05 per barrel. See Revenues below for further information regarding our realized commodity prices. +The U.S. oil and gas industry continues to confront weak commodity prices, which has had adverse effects on our business and financial position. Our ability to access capital markets may be restricted, which could have an impact on our flexibility to react to changing economic and business conditions. Further, oversupply and high oil and natural gas inventory storage levels could put downward pressure on commodity prices and have an adverse impact on our business partners, customers and lenders, potentially causing them to fail to meet their obligations to us. +33 +Table of Contents +2016 Summary of Operating and Financial Results +Weakness in commodity prices has continued to have a significant adverse impact on our results of operations, our balance sheet and the amount of cash flow available to invest in exploration and development activities. +The following is a summary of certain 2016 operating and financial results: +· +In response to lower commodity prices, we reduced exploration and development expenditures 16% to $734.8 million compared to $877.0 million in 2015. +· +Year-over-year average daily production declined 2% to 963.4 MMcfe per day. +· +During 2016, oil production declined by 12% to 45,158 barrels per day, gas volumes remained relatively flat at 459.6 MMcf per day and NGL volumes rose 8% to 38,797 barrels per day. +· +Year-over-year production revenues declined 14% to $1.2 billion. +· +During 2016, non-cash impairments of our oil and gas properties were $719.1 million, down from $3.7 billion in 2015. +· +In 2016, we incurred a net loss of $431.0 million ($4.62 per diluted share) compared to a net loss of $2.4 billion ($25.92 per diluted share) in 2015. +· +Cash flow provided by operating activities of $599.2 million was 13% lower than that of the prior year. +· +Cash on hand at December 31, 2016 was $652.9 million. +· +Year-end proved reserves were 2.89 Tcfe compared to 2.91 Tcfe at year-end 2015. +Total debt at December 31, 2016 consisted of $1.5 billion of senior notes, with $750 million maturing in 2022 and $750 million maturing in 2024, unchanged from total debt at December 31, 2015. +Proved Reserves +December 31, 2016 +Gas +Oil +NGL +Total +(MMcf) +(MBbl) +(MBbl) +(MMcfe) +Permian Basin +372,371 +74,295 +40,977 +1,064,000 +Mid-Continent +1,095,194 +31,399 +89,615 +1,821,278 +Other +3,855 +184 +41 +5,209 +Total +1,471,420 +105,878 +130,633 +2,890,487 +December 31, 2015 +Gas +Oil +NGL +Total +(MMcf) +(MBbl) +(MBbl) +(MMcfe) +Permian Basin +378,516 +78,482 +36,598 +1,069,002 +Mid-Continent +1,134,434 +29,048 +87,639 +1,834,554 +Other +4,002 +268 +40 +5,851 +Total +1,516,952 +107,798 +124,277 +2,909,407 +Year-end 2016 proved reserves declined by less than 1% to 2.89 Tcfe, compared to 2.91 Tcfe at year-end 2015. Proved natural gas reserves were 1.47 Tcf, proved oil reserves were 0.64 Tcfe, and proved NGL reserves were 0.78 Tcfe. Reserves in our Mid-Continent region accounted for 63% of total proved reserves with the majority of the remainder in the Permian Basin. +34 +Table of Contents +During 2016, we added 324.0 Bcfe of proved reserves through extensions and discoveries, primarily in the Mid-Continent and Permian Basin, where we added 121.6 Bcfe and 198.7 Bcfe, respectively. In addition, we had net positive revisions of previous estimates of 19.8 Bcfe. Revisions were comprised of an increase of 126.2 Bcfe for net positive performance revisions, an increase of 138.5 Bcfe related to lower operating expenses and a decrease of 244.9 Bcfe for negative revisions due to lower commodity prices. See SUPPLEMENTAL OIL AND GAS INFORMATION (UNAUDITED) in Item 8 of this report for a more detailed discussion regarding year-over-year changes in our proved reserves. +The process of estimating quantities of oil, gas and NGL reserves is complex. Significant decisions are required in the evaluation of all available geological, geophysical, engineering and economic data. Although every reasonable effort is made to ensure that our reserve estimates represent the most accurate assessments possible, subjective decisions and available data for our various fields make these estimates generally less precise than other estimates included in financial statement disclosures. See Proved Reserves Estimation Procedures in Items 1 and 2 of this report for a discussion of our reserve estimation process and Item 1A. RISK FACTORS for a discussion of factors that affect our proved reserves estimates. +Revenues +Almost all our revenues are derived from sales of our oil, natural gas and NGL production. Increases or decreases in our revenue, profitability and future production growth are highly dependent on the commodity prices we receive. Prices are market driven and we expect that future prices will continue to fluctuate due to supply and demand factors, seasonality and geopolitical and economic factors. +Oil sales contributed 52% of our total production revenue for 2016. Gas sales accounted for 32% and NGL sales contributed 16%. A $1.00 per barrel change in our realized oil price would have resulted in a $16.5 million change in revenues. A $0.10 per Mcf change in our realized gas price would have resulted in a $16.8 million change in our gas revenues. A $1.00 per barrel change in our realized NGL price would have changed revenues by $14.2 million. +The following table presents our average realized commodity prices and certain major U.S. index prices. Our realized prices do not include settlements of commodity derivative contracts. +Years Ended December 31, +2016 +2015 +2014 +Oil Prices ($/Bbl): +Average realized sales price +$ +38.30 +$ +43.38 +$ +83.70 +Average WTI Midland price +$ +43.34 +$ +48.39 +$ +86.18 +Average WTI Cushing price +$ +43.32 +$ +48.80 +$ +93.01 +Gas Prices ($/Mcf): +Average realized sales price +$ +2.31 +$ +2.53 +$ +4.43 +Average Henry Hub price +$ +2.46 +$ +2.67 +$ +4.43 +NGL Prices ($/Bbl): +Average realized sales price +$ +14.05 +$ +13.75 +$ +33.14 +During 2016, 2015 and 2014, approximately 80%, 84% and 80%, respectively, of our oil production was in the Permian Basin, the sale of which is tied to the WTI Midland benchmark price. The majority of the remaining oil production is from our Mid-Continent region, the sale of which is tied to the WTI Cushing benchmark price. +See RESULTS OF OPERATIONS below for analysis of the impact changes in realized prices had on our year-over-year revenues. +Operating costs and expenses +Costs associated with producing oil and natural gas are substantial. Some of these costs vary with commodity prices, some trend with the type and volume of production and others are a function of the number of wells we own. At the end of 2016, we owned interests in 10,279 gross productive wells. +35 +Table of Contents +We use the full cost method of accounting for our oil and gas operations. Accounting rules require us to perform a quarterly ceiling test calculation to test our capitalized oil and gas property costs for possible impairment. If the net capitalized cost of our oil and gas properties subject to amortization (the carrying value) exceeds the ceiling limitation, the excess is charged to expense. The ceiling limitation is equal to the sum of the present value discounted at 10% of estimated future net cash flows from proved reserves, the cost of properties not being amortized, the lower of cost or estimated fair value of unproven properties included in the costs being amortized, and all related tax effects. Estimated future net cash flows are determined by proved reserve quantities and commodity prices net of operating costs and capital expenditures. +We recognized ceiling test impairments in each quarter of 2015 totaling $3.7 billion ($2.4 billion, net of tax). In the first three quarters of 2016 we recognized ceiling test impairments totaling $719.1 million ($456.9 million, net of tax). The impairments resulted primarily from the impact of decreases in the 12-month average trailing prices for oil, natural gas and NGLs utilized in determining the estimated future net cash flows from proved reserves. +At December 31, 2016, the calculated value of the ceiling limitation exceeded the carrying value of our oil and gas properties subject to the test, and no impairment was necessary. However, a decline of 11% or more in the value of the ceiling limitation would have resulted in an impairment. Because the ceiling calculation uses rolling 12-month average commodity prices, the effect of increases and decreases in period-over-period prices can significantly impact the ceiling limitation calculation. In addition, other factors that also impact the ceiling limitation calculation include, but are not limited to, incremental proved reserves that may be added each period, revisions to previous reserve estimates, capital expenditures, operating costs, depletion expense and all related tax effects. +There are numerous uncertainties inherent in the estimation of proved reserves and accounting for oil and natural gas properties. The ceiling limitation calculation is not intended to be indicative of the fair market value of our proved reserves or future results. Impairment charges do not affect cash flow from operating activities, but do adversely affect our net income (loss) and various components of our balance sheet. Any recorded impairment of oil and gas properties is not reversible at a later date. +Depletion, depreciation and amortization (DD&A) of our proved oil and gas properties is computed using the units-of-production method. The economic life of each producing well depends upon the estimated proved reserves for that well, which in turn depend upon the assumed realized sales price for future sales of production. Therefore, fluctuations in oil and gas prices will impact the level of proved reserves used in the calculation. Higher prices generally have the effect of increasing reserves, which reduces depletion expense. Conversely, lower prices generally have the effect of decreasing reserves, which increases depletion expense. The cost of replacing production also impacts our DD&A rate. In addition, changes in estimates of reserve quantities, estimates of operating and future development costs, reclassifications of properties from unproved to proved and impairments of oil and gas properties will also impact depletion expense. DD&A is calculated quarterly before the ceiling test impairment calculation. The impairments of our oil and gas properties, discussed above, resulted in lower DD&A rates in each quarter following an impairment. +Production expense generally consists of costs for labor, equipment, maintenance, salt water disposal, compression, power, treating and miscellaneous other costs. Production expense also includes well workover activity necessary to maintain production from existing wells. +Transportation, processing and other operating costs principally consist of expenditures to prepare and transport production from the wellhead, together with gas processing costs and costs to transport production to a specified sales point. Costs vary by region and will fluctuate with increases or decreases in production volumes, contractual fees and changes in fuel and compression costs. +General and administrative expenses consist primarily of salaries and related benefits, office rent, legal and consultants fees, systems costs and other administrative costs incurred in our offices and not directly associated with exploration, development or production activities. Our G&A expense is reported net of amounts reimbursed to us by working interest owners of the oil and gas properties we operate and net of amounts capitalized pursuant to the full cost method of accounting. +A discussion of changes in operating costs and expenses is included in RESULTS OF OPERATIONS , below. +36 +Table of Contents +RESULTS OF OPERATIONS +2016 compared to 2015 +For the year ended December 31, 2016, we had a net loss of $431.0 million ($4.62 per diluted share), down from a net loss of $2.4 billion ($25.92 per diluted share) in 2015. Production revenues in 2016 and 2015 were adversely affected by low realized commodity prices, which also brought about impairments of our oil and gas properties and net losses for each year. Although production revenue in 2016 was lower than 2015, the decrease was more than offset by lower impairment, DD&A and other operating costs in 2016. Year-over-year changes are discussed further in the analysis that follows. +Percent +Years Ended +Change +December 31, +Between +Price / Volume Change +Production Revenue +2016 +2015 +2016 / 2015 +Price +Volume +Total +(in thousands or as indicated) +Oil sales +$ +632,934 +$ +809,664 +(22) +% +$ +(83,962) +$ +(92,768) +$ +(176,730) +Gas sales +388,786 +428,227 +(9) +% +(37,010) +(2,431) +(39,441) +NGL sales +199,498 +179,647 +11 +% +4,260 +15,591 +19,851 +Total production revenue +$ +1,221,218 +$ +1,417,538 +(14) +% +$ +(116,712) +$ +(79,608) +$ +(196,320) +Total oil volume — MBbls +16,528 +18,663 +(11) +% +Oil volume — barrels per day +45,158 +51,132 +(12) +% +Oil percentage of total production +28 +% +31 +% +Average oil price — per barrel +$ +38.30 +$ +43.38 +(12) +% +Total gas volume — MMcf +168,227 +168,987 +0 +% +Gas volume — MMcf per day +459.6 +463.0 +(1) +% +Gas percentage of total production +48 +% +47 +% +Average gas price — per Mcf +$ +2.31 +$ +2.53 +(9) +% +Total NGL volume — MBbls +14,200 +13,063 +9 +% +NGL volume — barrels per day +38,797 +35,789 +8 +% +NGL percentage of total production +24 +% +22 +% +Average NGL price — per barrel +$ +14.05 +$ +13.75 +2 +% +Total production — MMcfe +352,591 +359,343 +(2) +% +Total production — MMcfe per day +963.4 +984.5 +(2) +% +As reflected in the table above, our 2016 production revenue was 14% lower than that of 2015. Lower realized prices and production volumes for oil and gas were only partially offset by higher average realized prices and production volumes for NGLs. +Our 2016 aggregate production volumes were 352.6 Bcfe, a 2% decrease from 2015. Production volumes in 2016 were comprised of 48% natural gas, 28% oil and 24% NGL. In 2015, aggregate production volumes of 359.3 Bcfe were made up of 47% natural gas, 31% oil and 22% NGL. See Production Volumes, Prices, and Costs and Exploration and Development Overview in Items 1 and 2 of this report for production information by region and a discussion of our drilling activities. See Revenues above, for information regarding realized prices. +Other revenues +We sometimes transport, process and market third-party gas that is associated with our equity gas. The table below reflects income from third-party gas gathering and processing and our net marketing margin (revenues less +37 +Table of Contents +purchases) for marketing third-party gas. We market and sell natural gas for working interest owners under short term sales and supply agreements and may earn a fee for such services. +Years Ended December 31, +2016 +2015 +Gas Gathering and Marketing (in thousands): +Gas gathering and other revenues +$ +36,033 +$ +34,688 +Gas marketing revenues, net of related costs +$ +94 +$ +393 +Fluctuations in revenues from gas gathering and gas marketing activities are a function of increases and decreases in volumes, commodity prices and gathering rate charges. +Analysis of operating costs and expenses +Total operating costs and expenses of $1.9 billion in 2016 were 64% lower than $5.2 billion incurred in 2015. Most of the decrease resulted from lower ceiling test impairments of our oil and gas properties and lower DD&A expense. See Operating costs and expenses above for a discussion of the ceiling limitation and DD&A calculations. Analyses of year-over-year differences are discussed below. +Variance +Years Ended December 31, +Between +Per Mcfe +Operating Costs and Expenses +2016 +2015 +2016 / 2015 +2016 +2015 +(in thousands) +Impairment of oil and gas properties +$ +719,142 +$ +3,716,883 +$ +(2,997,741) +N/A +N/A +DD&A +465,936 +778,923 +(312,987) +$ +1.32 +$ +2.17 +Asset retirement obligation +7,828 +9,121 +(1,293) +$ +0.02 +$ +0.03 +Production +232,002 +299,374 +(67,372) +$ +0.66 +$ +0.83 +Transportation, processing and other operating +190,725 +182,362 +8,363 +$ +0.54 +$ +0.51 +Gas gathering and other +31,785 +38,138 +(6,353) +$ +0.09 +$ +0.11 +Taxes other than income +61,946 +84,764 +(22,818) +$ +0.18 +$ +0.24 +General and administrative +73,901 +74,688 +(787) +$ +0.21 +$ +0.21 +Stock compensation +24,523 +19,559 +4,964 +$ +0.07 +$ +0.05 +(Gain) loss on derivative instruments, net +55,749 +(11,246) +66,995 +N/A +N/A +Other operating (income) expense, net +755 +856 +(101) +N/A +N/A +$ +1,864,292 +$ +5,193,422 +$ +(3,329,130) +DD&A expense in 2016 decreased 40% compared to 2015. The impairments of our oil and gas properties discussed above resulted in lower DD&A rates in each quarter following an impairment. DD&A is calculated quarterly before the ceiling test impairment calculation. We did not incur a ceiling test impairment in the fourth quarter of 2016. Our 2017 DD&A rate will likely fluctuate depending on the per-unit cost of adding new proved reserves and the average trailing twelve-month commodity prices to be utilized in the DD&A calculations. +Production costs consist of lease operating expense and workover expense as follows: +Variance +Years Ended December 31, +Between +Per Mcfe +(in thousands) +2016 +2015 +2016 / 2015 +2016 +2015 +Lease operating expense +$ +189,291 +$ +249,744 +$ +(60,453) +$ +0.54 +$ +0.70 +Workover expense +42,711 +49,630 +(6,919) +0.12 +0.13 +$ +232,002 +$ +299,374 +$ +(67,372) +$ +0.66 +$ +0.83 +Lease operating expense in 2016 declined 24% compared to 2015. In 2016, we incurred lower salt water disposal costs due to implementation of operational efficiencies as well as lower costs associated with labor, rental equipment and property divestitures. +38 +Table of Contents +Workover expense decreased by 14% in 2016 compared to 2015. Generally, these costs will fluctuate based on the amount of maintenance and remedial activity planned and/or required during the period. +Our 2016 year-over-year transportation, processing and other operating costs were 5% higher than those of 2015. These costs will vary by product type and region. The increase in 2016 is primarily a result of more gas production and higher fees associated with our Mid-Continent region. +Gas gathering and other includes costs associated with operating our gas gathering and processing infrastructure, including product costs, operating and maintenance expenses. The 17% year-over-year decrease is primarily attributable to higher repair and maintenance activities occurring in 2015. +Taxes other than income are assessed by state and local taxing authorities on production, revenues or the value of properties. Revenue based production and severance taxes are the largest components of these taxes. The 27% decrease in 2016 taxes is a result of lower production revenues due to lower realized commodity prices and lower production volumes. +General and administrative (G&A) costs were as follows: +Variance +Years Ended December 31, +Between +(in thousands) +2016 +2015 +2016 / 2015 +G&A capitalized to oil and gas properties +$ +72,531 +$ +58,332 +$ +14,199 +G&A expense +73,901 +74,688 +(787) +$ +146,432 +$ +133,020 +$ +13,412 +During 2016, aggregate G&A increased 10% compared to 2015. The year-over-year increase in aggregate G&A results from a combination of higher accruals in 2016 for short-term incentive based compensation together with severance payments in connection with a voluntary early retirement incentive program, which were partially offset by lower salaries and wages and lower corporate contributions and consulting fees. +Stock compensation expense consists of non-cash charges resulting from the amortization of the cost of restricted stock and stock option awards, net of amounts capitalized to oil and gas properties. We have recognized stock-based compensation cost as follows: +Variance +Years Ended December 31, +Between +(in thousands) +2016 +2015 +2016 / 2015 +Restricted stock awards +Performance stock awards +$ +24,183 +$ +18,991 +$ +5,192 +Service-based stock awards +18,391 +14,547 +3,844 +42,574 +33,538 +9,036 +Stock option awards +2,565 +2,803 +(238) +45,139 +36,341 +8,798 +Less amounts capitalized +(20,616) +(16,782) +(3,834) +Stock compensation +$ +24,523 +$ +19,559 +$ +4,964 +Expense associated with stock compensation will fluctuate based on the grant-date fair value of awards, the number of awards and the timing of the awards. The increase in 2016 stock compensation is primarily related to performance awards granted in December 2015, a portion of which were amortized during 2016, forfeiture rate adjustments on the service-based stock awards and acceleration of expense on a portion of service-based awards for employees who participated in a voluntary early retirement incentive program. Historical amounts may not be representative of future amounts as the value of future awards may vary from historical amounts. See Note 6 to the Consolidated Financial Statements in Item 8 of this report for further discussion regarding our stock-based compensation. +Net gains and losses on our derivative instruments are a function of fluctuations in the underlying commodity prices and the monthly settlement (if any) of the instruments. We have chosen not to apply hedge accounting treatment to +39 +Table of Contents +our derivative instruments. Therefore, settlements on the contracts are included as a component of operating costs and expenses as either a net gain or loss on derivative instruments. +The following table presents the aggregate net (gain) loss from settlements and changes in the fair value of our derivative contracts and the (gains) losses from cash settlements included in the aggregate gain (loss) on derivative instruments, net. See Note 4 to the Consolidated Financial Statements in Item 8 of this report for further details regarding our derivative instruments. +Years Ended December 31, +(in thousands) +2016 +2015 +(Gain) loss on derivative instruments, net +$ +55,749 +$ +(11,246) +Settlement (gains) losses +$ +(7,437) +$ +— +Other (income) and expense +Variance +Years Ended December 31, +Between +(in thousands) +2016 +2015 +2016 / 2015 +Interest expense +$ +83,272 +$ +85,746 +$ +(2,474) +Capitalized interest +(21,248) +(30,589) +9,341 +Other, net +(10,707) +(13,576) +2,869 +$ +51,317 +$ +41,581 +$ +9,736 +The majority of our interest expense relates to interest on debt and amortization of financing costs. See Long-Term Debt below for further information regarding our debt. +We capitalize interest on the capitalized cost of unproved properties, the in-progress costs of drilling and completing wells and constructing qualified assets. Capitalized interest will fluctuate based on our current rate of interest and the amount of costs on which interest is calculated. The 31% decrease in year-over-year capitalized expense resulted from lower average unproved property costs in 2016. +Components of “Other, net” consist of miscellaneous income and expense items that will vary from period to period, including gain or loss on the sale or value of oil and gas well equipment and supplies, income and expense associated with other non-operating activities, miscellaneous asset sales and interest income. The 21% decrease in 2016 income was primarily due to lower net gains on transactions related to oil and gas well equipment and supplies. +Income tax expense +The components of our provision for income taxes are as follows: +Years Ended December 31, +(in thousands) +2016 +2015 +Current tax (benefit) expense +$ +(1,115) +$ +14,710 +Deferred tax benefit +(226,100) +(1,388,146) +$ +(227,215) +$ +(1,373,436) +Combined federal and state effective income tax rate +34.5 +% +36.3 +% +Our combined federal and state effective tax rates differ from the statutory rate of 35% primarily due to state income taxes, non-deductible expenses and revisions. See Note 9 to the Consolidated Financial Statements in Item 8 of this report for further information regarding our income taxes. +40 +Table of Contents +RESULTS OF OPERATIONS +2015 compared to 2014 +For the year ended December 31, 2015, we had a net loss of $2.4 billion ($25.92 per diluted share), compared to net income of $507.2 million ($5.78 per diluted share) for 2014. The net loss in 2015 was primarily a result of lower realized commodity prices, which also brought about impairments of our oil and gas properties. Year-over-year changes are discussed further in the analysis that follows. +Percent +Years Ended +Change +December 31, +Between +Price / Volume Change +Production Revenue +2015 +2014 +2015 / 2014 +Price +Volume +Total +(in thousands or as indicated) +Oil sales +$ +809,664 +$ +1,308,958 +(38) +% +$ +(752,492) +$ +253,198 +$ +(499,294) +Gas sales +428,227 +687,930 +(38) +% +(321,075) +61,372 +(259,703) +NGL sales +179,647 +375,941 +(52) +% +(253,292) +56,998 +(196,294) +Total production revenue +$ +1,417,538 +$ +2,372,829 +(40) +% +$ +(1,326,859) +$ +371,568 +$ +(955,291) +Total oil volume — MBbls +18,663 +15,639 +19 +% +Oil volume — barrels per day +51,132 +42,846 +19 +% +Oil percentage of total production +31 +% +30 +% +Average oil price — per barrel +$ +43.38 +$ +83.70 +(48) +% +Total gas volume — MMcf +168,987 +155,128 +9 +% +Gas volume — MMcf per day +463.0 +425.0 +9 +% +Gas percentage of total production +47 +% +49 +% +Average gas price — per Mcf +$ +2.53 +$ +4.43 +(43) +% +Total NGL volume — MBbls +13,063 +11,343 +15 +% +NGL volume — barrels per day +35,789 +31,078 +15 +% +NGL percentage of total production +22 +% +21 +% +Average NGL price — per barrel +$ +13.75 +$ +33.14 +(59) +% +Total production — MMcfe +359,343 +317,022 +13 +% +Total production — MMcfe per day +984.5 +868.6 +13 +% +As reflected in the table above, our 2015 production revenue was 40% lower than that of 2014. Increased revenues from higher production volumes were more than offset by decreased revenues from lower realized commodity prices. The 13% year-over-year growth in production volumes was primarily due to our successful drilling programs in the Permian Basin and Mid-Continent region. See Production Volumes, Prices, and Costs and Exploration and Development Overview in Items 1 and 2 of this report for further information and a discussion of 2015 activity in these regions. See Revenues above, for information regarding realized prices. +Our 2015 aggregate production volumes were 359.3 Bcfe, comprised of 47% natural gas, 31% oil and 22% NGL. This compares to 2014 aggregate production volumes of 317.0 Bcfe, made up of 49% natural gas, 30% oil and 21% NGL. +Other revenues +We sometimes transport, process and market third-party gas that is associated with our equity gas. The table below reflects income from third-party gas gathering and processing and our net marketing margin (revenues less purchases) for marketing third-party gas. We market and sell natural gas for working interest owners under short term sales and supply agreements and may earn a fee for such services. +Years Ended December 31, +2015 +2014 +Gas Gathering and Marketing (in thousands): +Gas gathering and other revenues +$ +34,688 +$ +49,602 +Gas marketing revenues, net of related costs +$ +393 +$ +1,745 +41 +Table of Contents +Fluctuations in revenues from gas gathering and marketing activities are a function of increases and decreases in volumes and prices associated with third party gas. In 2015, revenue from gas gathering declined by $14.9 million (30%), primarily due to lower realized prices which were partially offset by increased volumes. +Total operating costs and expenses in 2015 were $5.19 billion compared to $1.61 billion for the prior year. As discussed above in Operating costs and expenses , during 2015 our quarterly ceiling limitation calculations resulted in impairments totaling $3.7 billion. Excluding the effect of the impairments, our year-over-year operating costs and expenses decreased by $133.7 million. Analyses of the year-over-year differences are discussed below. +Variance +Years Ended December 31, +Between +Per Mcfe +Operating Costs and Expenses +2015 +2014 +2015 / 2014 +2015 +2014 +(in thousands) +Impairment of oil and gas properties +$ +3,716,883 +$ +— +$ +3,716,883 +N/A +N/A +DD&A +778,923 +806,021 +(27,098) +$ +2.17 +$ +2.54 +Asset retirement obligation +9,121 +10,082 +(961) +$ +0.03 +$ +0.03 +Production +299,374 +342,304 +(42,930) +$ +0.83 +$ +1.08 +Transportation, processing and other operating +182,362 +195,414 +(13,052) +$ +0.51 +$ +0.62 +Gas gathering and other +38,138 +35,113 +3,025 +$ +0.11 +$ +0.11 +Taxes other than income +84,764 +128,793 +(44,029) +$ +0.24 +$ +0.41 +General and administrative +74,688 +81,160 +(6,472) +$ +0.21 +$ +0.26 +Stock compensation +19,559 +15,001 +4,558 +$ +0.05 +$ +0.05 +(Gain) loss on derivative instruments, net +(11,246) +(3,762) +(7,484) +N/A +N/A +Other operating (income) expense, net +856 +116 +740 +N/A +N/A +$ +5,193,422 +$ +1,610,242 +$ +3,583,180 +DD&A expense in 2015 decreased 3% compared to 2014. Increased expense due to higher 2015 production volumes was more than offset by lower DD&A rates in 2015. The impairments of our oil and gas properties, discussed above, resulted in lower DD&A rates in each quarter following an impairment. DD&A is calculated quarterly before the ceiling test impairment calculation. +Our year-over-year production costs decreased by 13% and accounted for 32% of the aggregate decrease in operating costs and expenses, excluding impairments. Production costs consist of lease operating expense and workover expense as follows: +Variance +Years Ended December 31, +Between +Per Mcfe +(in thousands) +2015 +2014 +2015 / 2014 +2015 +2014 +Lease operating expense +$ +249,744 +$ +276,395 +$ +(26,651) +$ +0.70 +$ +0.87 +Workover expense +49,630 +65,909 +(16,279) +0.13 +0.21 +$ +299,374 +$ +342,304 +$ +(42,930) +$ +0.83 +$ +1.08 +Lease operating expense in 2015 declined 10% compared to 2014. The decline was primarily a result of property divestitures, lower salt water disposal costs and decreased equipment and maintenance costs. These decreases were partially offset by increased expense related to new wells acquired and drilled. Increased production volumes in 2015 also contributed to the lower rate per Mcfe in 2015. +Workover expense decreased by 25% in 2015 compared to 2014. Generally, these costs will fluctuate based on the amount of maintenance and remedial activity planned and/or required during the period. +Our 2015 year-over-year transportation, processing and other operating costs were 7% lower than those in 2014. These costs will vary by product type and region. In 2015, lower prices for natural gas and NGLs resulted in lower costs associated with fuel and processing fees, which were partially offset by higher processing volumes. Approximately 5% of the 2015 costs relates to accruals for expected minimum volume agreement shortfalls due to reduced drilling activity in 2015 and projected at the time for 2016. +42 +Table of Contents +Gas gathering and other includes costs associated with operating our gas gathering and processing infrastructure, including product costs, operating and maintenance expenses. The year-over-year increase is due primarily to higher overall costs related to increased activity, which were largely offset by lower costs associated with product purchases. +Taxes other than income are assessed by state and local taxing authorities on production, revenues or the value of properties. Revenue based production and severance taxes comprised approximately 81% and 85% of these taxes for 2015 and 2014, respectively. The 34% decrease in 2015 taxes resulted primarily from lower production revenues due to lower realized commodity prices and accounted for 33% of the aggregate decrease in operating costs and expenses, excluding impairments. +General and administrative (G&A) costs were as follows: +Variance +Years Ended December 31, +Between +(in thousands) +2015 +2014 +2015 / 2014 +G&A capitalized to oil and gas properties +$ +58,332 +$ +76,636 +$ +(18,304) +G&A expense +74,688 +81,160 +(6,472) +$ +133,020 +$ +157,796 +$ +(24,776) +During 2015, aggregate G&A declined 16% compared to 2014. Because of the adverse effect of lower commodity prices on our financial results, we reduced our expectations and accruals for short-term incentive-based cash compensation and benefits. +Stock compensation expense consists of non-cash charges resulting from the amortization of the cost of restricted stock and stock option awards, net of amounts capitalized to oil and gas properties. We have recognized stock-based compensation cost as follows: +Variance +Years Ended December 31, +Between +(in thousands) +2015 +2014 +2015 / 2014 +Restricted stock awards +Performance stock awards +$ +18,991 +$ +12,141 +$ +6,850 +Service-based stock awards +14,547 +13,607 +940 +33,538 +25,748 +7,790 +Stock option awards +2,803 +3,057 +(254) +36,341 +28,805 +7,536 +Less amounts capitalized +(16,782) +(13,804) +(2,978) +Stock compensation +$ +19,559 +$ +15,001 +$ +4,558 +Expense associated with stock compensation will fluctuate based on the grant-date fair value of awards, the number of awards and the timing of the awards. The increase in 2015 stock compensation is primarily related to performance awards granted in December 2014, a portion of which were amortized during 2015. Historical amounts may not be representative of future amounts as the value of future awards may vary from historical amounts. See Note 6 to the Consolidated Financial Statements in Item 8 of this report for further discussion regarding our stock-based compensation. +Net gains and losses on our derivative instruments are a function of fluctuations in the underlying commodity prices and the monthly settlement (if any) of the instruments. We have chosen not to apply hedge accounting treatment to our derivative instruments. As a result, settlements on the contracts are included as a component of operating costs and expenses as either a net gain or loss on derivative instruments. +43 +Table of Contents +The following table presents the aggregate net (gain) loss from settlements and changes in the fair value of our derivative contracts and the (gains) losses from cash settlements included in the aggregate gain (loss) on derivative instruments, net. See Note 4 to the Consolidated Financial Statements in Item 8 of this report for further details regarding our derivative instruments. +Years Ended December 31, +(in thousands) +2015 +2014 +(Gain) loss on derivative instruments, net +$ +(11,246) +$ +(3,762) +Settlement (gains) losses +$ +— +$ +(7,641) +Other (income) and expense +Variance +Years Ended December 31, +Between +(in thousands) +2015 +2014 +2015 / 2014 +Interest expense +$ +85,746 +$ +72,865 +$ +12,881 +Capitalized interest +(30,589) +(35,925) +5,336 +Other, net +(13,576) +(28,907) +15,331 +$ +41,581 +$ +8,033 +$ +33,548 +The majority of our interest expense relates to interest on debt and amortization of financing costs. The 18% year-over-year increase is primarily due to the issuance of $750 million of senior notes in June of 2014. See Long-Term Debt below for further information regarding our debt. +We capitalize interest on the capitalized cost of unproved properties, the in-progress costs of drilling and completing wells and constructing qualified assets. Capitalized interest will fluctuate based on our current rate of interest and the amount of costs on which interest is calculated. +Components of “other, net” consist of miscellaneous income and expense items that will vary from period to period, including gain or loss on the sale or value of oil and gas well equipment and supplies, income and expense associated with other non-operating activities, miscellaneous asset sales and interest income. Most of the 53% year-over-year decrease in income was due to lower net gains on transactions related to oil and gas well equipment and supplies and lower gains from sales of fixed assets. +Income tax expense +The components of our provision for income taxes are as follows: +Years Ended December 31, +(in thousands) +2015 +2014 +Current tax expense (benefit) +$ +14,710 +$ +404 +Deferred tax expense +(1,388,146) +298,293 +$ +(1,373,436) +$ +298,697 +Combined federal and state effective income tax rate +36.3 +% +37.1 +% +Our combined federal and state effective tax rates differ from the statutory rate of 35% primarily due to state income taxes, non-deductible expenses and revisions. See Note 9 to the Consolidated Financial Statements in Item 8 of this report for further information regarding our income taxes. +44 +Table of Contents +LIQUIDITY AND CAPITAL RESOURCES +Overview +We strive to maintain an adequate liquidity level to address volatility and risk. Sources of liquidity include our cash flow from operations, cash on hand, available borrowing capacity under our revolving credit facility, proceeds from sales of non-core assets and occasional public financings based on our monitoring of capital markets and our balance sheet. +Our liquidity is highly dependent on prices we receive for the oil, natural gas and NGLs we produce. Prices we receive are determined by prevailing market conditions and greatly influence our revenue, cash flow, profitability, access to capital and future rate of growth. See Market Conditions, Revenues and RESULTS OF OPERATIONS above for further information and analysis of the impact realized prices have had on our 2016 earnings. +We deal with volatility in commodity prices primarily by maintaining flexibility in our capital investment program. We have a balanced and abundant drilling inventory and limited long-term commitments, which enables us to respond quickly to industry volatility. Based on current economic conditions, our 2017 exploration and development expenditures are projected to range from $1.1 – $1.2 billion. Investments in gathering and processing infrastructure and other fixed assets are expected to approximate an additional $60 million. See Capital Expenditures below for information regarding our 2016 exploration and development (E&D) activities. +We periodically use derivative instruments to mitigate volatility in commodity prices. At December 31, 2016, we had derivative contracts covering a portion of our 2017 and 2018 production. Depending on changes in oil and gas futures markets and management’s view of underlying supply and demand trends, we may hedge up to 50% of our oil and natural gas production on a forward five-quarter basis. See Note 4 to the Consolidated Financial Statements in Item 8 of this report for information regarding our derivative instruments. +We believe our conservative use of leverage, strong balance sheet and hedging activities will mitigate our exposure to lower prices. Cash and cash equivalents at December 31, 2016 were $652.9 million. Our long-term debt consisted of $1.5 billion of senior notes, with $750 million due in 2022 and $750 million due in 2024. We had letters of credit outstanding under our credit facility of $2.5 million, leaving an unused borrowing availability of $997.5 million. +Our debt to total capitalization at December 31, 2016 was 39%. The reconciliation of debt to total capitalization, which is a non-GAAP measure, is: long-term debt of $1.5 billion divided by the sum of long-term debt of $1.5 billion plus stockholders’ equity of $2.36 billion. Management uses this non-GAAP measure as one indicator of our financial condition. Management believes professional research analysts and rating agencies use this non-GAAP measure for this purpose and to compare our financial condition to other companies’ financial conditions. +We expect our operating cash flow and other capital resources to be adequate to meet our needs for planned capital expenditures, working capital, debt service and dividends declared in 2017 and beyond. +Sources and Uses of Cash +Our primary sources of liquidity and capital resources are operating cash flow, borrowings under our credit facility, asset sales and occasional public financings based on our monitoring of capital markets and our balance sheet. Our primary uses of funds are expenditures for exploration and development, leasehold and property acquisitions, other capital expenditures, debt service, and cash dividends paid to holders of our common stock. +The decline in year-over-year realized prices for our oil and natural gas production adversely impacted our operating cash flow for 2016 and consequently reduced the amount of cash flow available for exploration and development activities. See Market Conditions above for further information regarding prevailing economic conditions. +45 +Table of Contents +The following table presents our sources and uses of cash and cash equivalents from 2014 to 2016. Capital expenditures are presented on a cash basis. These amounts differ from capital expenditures (including accruals) that are referred to elsewhere in this report. +Years Ended December 31, +(in thousands) +2016 +2015 +2014 +Sources of cash and cash equivalents: +Operating cash flow +$ +599,225 +$ +691,500 +$ +1,619,365 +Sales of oil and gas and other assets +29,376 +41,031 +458,394 +Increase in other long-term debt +— +— +750,000 +Proceeds from sale of common stock +— +752,100 +— +Proceeds from exercise of stock options and other +4,804 +21,439 +11,898 +Total sources of cash and cash equivalents +633,405 +1,506,070 +2,839,657 +Uses of cash and cash equivalents: +Oil and gas capital expenditures +(699,558) +(979,044) +(2,108,250) +Other capital expenditures +(22,228) +(70,592) +(90,611) +Net decrease in bank debt +— +— +(174,000) +Financing and underwriting fees +(101) +(24,633) +(11,616) +Dividends paid +(38,024) +(58,281) +(53,849) +Total uses of cash and cash equivalents +(759,911) +(1,132,550) +(2,438,326) +Net increase (decrease) in cash and cash equivalents +$ +(126,506) +$ +373,520 +$ +401,331 +Cash and cash equivalents at end of year +$ +652,876 +$ +779,382 +$ +405,862 +Analysis of Cash Flow Changes (See the Consolidated Statements of Cash Flows in Item 8 of this Report) +Net cash flow provided by operating activities (operating cash flow) for 2016 was $599.2 million, down 13% from $691.5 million for 2015. The $92.3 million decrease was primarily a result of a net decrease in production revenue from lower realized commodity prices and production volumes in 2016. The 2016 decrease in production revenue was partially offset by lower net operating expenses and increased proceeds from settlements of our derivative instruments. In 2015, operating cash flow was 57% lower than 2014, resulting from a net decrease in production revenue due to lower realized commodity prices in 2015, which was partially offset by lower net operating costs in 2015. See RESULTS OF OPERATIONS above for details regarding year-over-year changes in production revenues and operating expenses. +In 2016, net cash flow used for investing activities was $692.4 million, compared to $1.0 billion for 2015 and $1.7 billion for 2014. Weakness in commodity prices has had a significant adverse impact on the amount of cash flow available to invest in exploration and development (E&D) activities. In 2016, our E&D and other capital expenditures were $721.8 million, and were partially offset by proceeds from asset sales of $29.4 million. Our 2015 E&D and other capital expenditures were $1.0 billion, which were partially offset by proceeds from asset sales of $41.0 million. For 2014, our E&D and other capital expenditures were $2.2 billion, which were partially offset by proceeds from asset sales of $458.4 million. +Net cash flow used by financing activities in 2016 was $33.3 million compared to net cash flow provided by financing activities in 2015 of $690.6 million. In 2016, proceeds of $4.8 million from issuance of common stock from employee option exercises and other were more than offset by dividend payments and financing fees of $38.1 million. +In 2015, net cash flow provided by financing activities of $690.6 million included approximately $730 million of net proceeds from the sale of common stock and $21.4 million of proceeds from issuance of common stock from employee option exercises and other. These cash flows were partially offset by dividend payments of $58.3 million and $2.5 million of financing costs. +46 +Table of Contents +Net cash flow provided by financing activities of $522.4 million in 2014 included the issuance of $750 million of senior notes and $11.9 million of proceeds from the issuance of common stock from employee option exercises and other, which were partially offset by payments of $174.0 million on our credit facility, $11.6 million for financing and underwriting fees and dividend payments of $53.8 million. +Adjusted Cash Flow from Operations +The following table provides a reconciliation from the GAAP measure of net cash provided by operating activities to the non-GAAP measure adjusted cash flow from operations: +Years Ended December 31, +(in thousands) +2016 +2015 +2014 +Net cash provided by operating activities +$ +599,225 +$ +691,500 +$ +1,619,365 +Change in operating assets and liabilities +29,913 +52,082 +14,847 +Adjusted cash flow from operations +$ +629,138 +$ +743,582 +$ +1,634,212 +Management uses the non-GAAP measure of adjusted cash flow from operations as a means of measuring our ability to fund our capital program and dividends, without fluctuations caused by changes in current assets and liabilities, which are included in the GAAP measure of cash provided by operating activities. Management believes this non-GAAP measure provides useful information to investors for the same reason, and that it is also used by professional research analysts in providing investment recommendations pertaining to companies in the oil and gas exploration and production industry. +Capital Expenditures +The following table reflects capitalized expenditures for oil and gas acquisitions, exploration and development activities and property sales: +Years Ended December 31, +(in thousands) +2016 +2015 +Acquisitions: +Proved +$ +2,678 +$ +30 +Unproved +11,865 +6,666 +Net purchase price adjustments (*) +— +(11,653) +14,543 +(4,957) +Exploration and development: +Land and seismic +61,870 +52,049 +Exploration +40 +1,073 +Development +672,842 +823,830 +734,752 +876,952 +Property sales +(24,687) +(41,276) +$ +724,608 +$ +830,719 +(*) The net 2015 purchase price adjustments relate to activity in prior periods. +Capital expenditures in the table above are presented on an accrual basis. Oil and gas expenditures and sales of oil and gas assets in the Consolidated Statements of Cash Flows in this report reflect capital expenditures on a cash basis, when payments are made and proceeds received. +Because of lower commodity prices, we reduced our 2016 E&D expenditures 16% to $734.8 million compared to $877.0 million in 2015. Approximately 59% of our 2016 E&D expenditures were in the Permian Basin and 40% were in our Mid-Continent region. During 2016, we participated in the drilling and completion of 154 gross (61 net) wells, 73 of which we operated. See Items 1 and 2 of this report for further information regarding our wells drilled and other information regarding our oil and gas properties. +47 +Table of Contents +Approximately 66% of our planned 2017 E&D capital investment of $1.1 – $1.2 billion is expected to be invested in the Permian Basin and most of the remainder in the Mid-Continent region. +As has been our historical practice, we regularly review capital expenditures throughout the year and will adjust our investments based on increases or decreases in commodity prices, service costs and drilling success. We have the flexibility to adjust our capital expenditures based upon market conditions. +We intend to fund our 2017 capital program with cash flow from our operating activities and cash on hand at December 31, 2016. Sales of non-core assets and borrowings under our Credit Facility may also be used to supplement funding of capital expenditures. The timing of capital expenditures and the receipt of cash flows do not necessarily match, which may cause us to borrow and repay funds under our Credit Facility from time-to-time. See Bank Debt below for further information regarding our credit facility. +In the ordinary course of business we actively evaluate opportunities to purchase properties that we believe could benefit from our technical capabilities, particularly in our core areas of operations. We also evaluate our non-core property holdings for potential divestitures. For further information on our property acquisitions and dispositions, see Note 12 to the Consolidated Financial Statements in Item 8 of this report. +We have made, and will continue to make, expenditures to comply with environmental and safety regulations and requirements. These costs are considered a normal recurring cost of our ongoing operations. While we expect current pending legislation or regulations to increase the cost of business, we do not anticipate that we will be required to expend amounts that will have a material adverse effect on our financial position or operations, nor are we aware of any pending regulatory changes that would have a material impact, based on current laws and regulations. However, compliance with new legislation or regulations could increase our costs or adversely affect demand for oil or gas and result in a material adverse effect on our financial position or operations. +Financial Condition +During 2016, our total assets decreased $561.6 million (11%) to $4.7 billion. Most of the decrease related to net oil and gas properties, which declined by $422.1 million. In 2016, $719.1 million of impairments and DD&A of $465.9 million were only partially offset by net additions to oil and gas properties of $716.7 million. The remaining decrease in total assets was primarily related to a decrease of $126.5 million in cash and cash equivalents. +Total liabilities at year-end 2016 were $2.3 billion, down $124.0 million (5%) from $2.4 billion at year-end 2015. During 2016, deferred income taxes declined $225.8 million primarily as a result of our net loss for the year. The decline in deferred income taxes was partially offset by a net increase in current liabilities of $112.3 million. +At December 31, 2016, stockholders’ equity totaled $2.4 billion, a decrease of $437.6 million (16%) from $2.8 billion at December 31, 2015. The decrease resulted primarily from our 2016 net loss of $431.0 million. +The 2016 decreases in our total assets, liabilities and stockholders’ equity and our net loss for the year resulted primarily from the $719.1 million aggregate impairments of our oil and gas properties. During the first three quarters of 2016, impairments resulted from the continued impact of lower prices on the present value of future cash flows from our proved reserves used in our full cost ceiling limitation calculation. As noted above under Operating costs and expenses , the ceiling limitation calculation is not intended to be indicative of the fair market value of our proved reserves or future results. Impairment charges do not affect cash flow from operating activities, but do adversely affect our net income and various components of our balance sheet. +48 +Table of Contents +Long-Term Debt +Long-term debt at year-end 2016 and 2015 consisted of the following: +December 31, 2016 +December 31, 2015 +Unamortized Debt +Long-term +Unamortized Debt +Long-term +(in thousands) +Principal +Issuance Costs +Debt, net +Principal +Issuance Costs +Debt, net +5.875% Senior Notes +$ +750,000 +$ +(5,691) +$ +744,309 +$ +750,000 +$ +(6,978) +$ +743,022 +4.375% Senior Notes +750,000 +(6,370) +743,630 +750,000 +(7,402) +742,598 +Total long-term debt +$ +1,500,000 +$ +(12,061) +$ +1,487,939 +$ +1,500,000 +$ +(14,380) +$ +1,485,620 +At each of December 31, 2016 and 2015 we had no bank debt outstanding. All of our long-term debt is senior unsecured debt and is, therefore, pari passu with other unsecured debt with respect to the payment of both principal and interest. +Bank Debt +In October 2015, we entered into a new senior unsecured revolving credit facility (Credit Facility) with an initial aggregate commitment from the lenders of $1.0 billion. We have the option to increase the commitment to $1.25 billion at any time. Unlike the prior credit facility, the new Credit Facility is not a borrowing base facility subject to the discretion of the lenders, and is not based on the value of our proved reserves. +At December 31, 2016, we had letters of credit outstanding of $2.5 million under the Credit Facility, leaving an unused borrowing availability of $997.5 million. We did not have any bank debt outstanding during 2016. In 2015, we had average daily bank debt outstanding of $27.4 thousand and the highest amount of bank borrowings outstanding during 2015 was $10.0 million in May. +The Credit Facility contains representations, warranties, covenants and events of default that are customary for investment grade, senior unsecured bank credit agreements, including a financial covenant for the maintenance of a defined total debt-to-capital ratio of no greater than 65%. For further information regarding the terms of the Credit Facility see Note 3 to the Consolidated Financial Statements in Item 8 of this report. +Senior Notes +Our 5.875% senior notes are due May 1, 2022 and our 4.375% senior notes are due June 1, 2024. Interest on our senior notes is payable semi-annually. Each of the senior notes is governed by an indenture containing customary covenants, events of default and other restrictive provisions. For further information regarding our senior notes see Note 3 to the Consolidated Financial Statements in Item 8 of this report. +Working Capital Analysis +Our working capital fluctuates primarily as a result of our realized commodity prices, increases or decreases in our production volumes, changes in receivables and payables related to our operating and E&D activities, changes in our oil and gas well equipment and supplies and changes in the carrying value of our derivative instruments. +At December 31, 2016, we had working capital of $447.0 million, a decrease of $220.9 million (33%) compared to working capital of $667.9 million at December 31, 2015. +Working capital decreases consisted primarily of the following: +· +Cash and cash equivalents decreased by $126.5 million. +· +Net derivative instrument liability increased $60.1 million. +· +Operations-related accounts payable and accrued liabilities increased $37.3 million. +49 +Table of Contents +· +Accrued liabilities related to our E&D expenditures increased by $25.6 million. +· +Oil and gas well equipment and supplies decreased by $21.2 million. +Decreases in working capital were partially offset by the following: +· +Operations-related accounts receivable increased $49.2 million +Accounts receivable are a major component of working capital and include a diverse group of companies comprised of major energy companies, pipeline companies, local distribution companies and other end-users. The collection of receivables has historically been timely and losses associated with uncollectible receivables have not been significant. +Dividends +A quarterly cash dividend has been paid to stockholders every quarter since the first quarter of 2006. In February 2016, the quarterly dividend was decreased to $0.08 per share from $0.16 per share. Future dividend payments will depend on our level of earnings, financial requirements and other factors considered relevant by our Board of Directors. +Years Ended December 31, +2016 +2015 +2014 +Dividends declared from Retained earnings (in millions) +$ +7.5 +$ +59.3 +$ +55.7 +Dividends declared from Paid-in capital (in millions) +$ +22.8 +$ +— +$ +— +Dividends per share +$ +0.32 +$ +0.64 +$ +0.64 +See Note 2 to the Consolidated Financial Statements in Item 8 of this report for further information regarding dividends. +Off-Balance Sheet Arrangements +We may enter into off-balance sheet arrangements and transactions that can give rise to material off-balance sheet obligations. As of December 31, 2016, our material off-balance sheet arrangements included operating lease agreements, which are customary in the oil and gas industry. +50 +Table of Contents +Contractual Obligations and Material Commitments +At December 31, 2016, we had the following contractual obligations and material commitments. +Payments Due by Period +1 Year or +More than +Contractual obligations: +Total +Less +2 - 3 Years +4 - 5 Years +5 Years +(in thousands) +Long-term debt (1) +$ +1,500,000 +$ +— +$ +— +$ +— +$ +1,500,000 +Fixed-rate interest payments (1) +478,542 +76,876 +153,750 +153,750 +94,166 +Operating leases +96,923 +9,585 +21,208 +21,949 +44,181 +Drilling commitments (2) +157,505 +157,505 +— +— +— +Asset retirement obligation (3) +154,523 +13,753 +— +— +— +Other liabilities (4) +177,455 +88,793 +54,905 +6,956 +26,801 +Firm transportation +26,383 +7,655 +6,549 +4,427 +7,752 +(1) +See Item 7A: Interest Rate Risk for more information regarding fixed and variable rate debt. +(2) +We have drilling commitments of $157.5 million, consisting of obligations to finish drilling and completing wells in progress at December 31, 2016. +(3) +We have not included the long-term asset retirement obligations because we are not able to precisely predict the timing of these amounts. +(4) +Other includes the estimated value of our commitments associated with our benefit obligations, derivative obligations, and other miscellaneous commitments. +At December 31, 2016, we had firm sales contracts to deliver approximately 46.4 Bcf of natural gas over the next twenty-two months. If this gas is not delivered, our financial commitment would be approximately $164.8 million. This commitment will fluctuate due to price volatility and actual volumes delivered. However, we believe no financial commitment will be due based on our current proved reserves and production levels from which we can fulfill these obligations. +In connection with gas gathering and processing agreements, we have volume commitments over the next ten years. If no gas is delivered, the maximum amount that would be payable under these commitments would be approximately $220.0 million. However, we believe no financial commitment will be due based on our current proved reserves and production levels from which we can fulfill these obligations. +We have minimum volume delivery commitments in connection with agreements to reimburse connection costs to various pipelines. The maximum amount that would be payable if no gas is delivered would be approximately $7.9 million. Of this total, we have accrued a liability of $2.1 million. We may have additional liabilities associated with these delivery commitments in the future depending on our production levels and drilling results. +We have other various transportation, delivery, and facilities commitments in the normal course of business, which approximate $35.7 million. We currently anticipate meeting these obligations. +All of the noted commitments were made in the normal course of our business. +Taking into account current commodity prices and anticipated levels of production, we believe that our net cash flow generated from operations and our other capital resources will be adequate to meet future obligations. +51 +Table of Contents +2017 Outlook +For 2017, our total production is projected to average 1.06 – 1.11 Bcfe per day, an increase of 13% at the midpoint from 2016 production levels. First quarter 2017 production is expected to average 1.01 – 1.05 Bcfe per day. Oil production in the first quarter is expected to increase approximately 10% from fourth quarter 2016 levels, with natural gas and NGL production expected to increase 4 – 5% sequentially. +CRITICAL ACCOUNTING POLICIES AND ESTIMATES +Discussion and analysis of our financial condition and results of operation are based on our Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. We analyze and base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Changes in facts and circumstances or additional information may result in revised estimates, and actual results may differ from these estimates. +A complete list of our significant accounting policies are described in Note 1 to our Consolidated Financial Statements in Item 8 of this report. We have identified the following policies as being of particular importance to the portrayal of our financial position and results of operations and which require the application of significant judgment by management. +Oil and Gas Reserves +The process of estimating quantities of oil and gas reserves is complex, requiring significant decisions in the evaluation of all available geological, geophysical, engineering and economic data. The data for a given field may also change substantially over time due to numerous factors including, but not limited to, additional development activity, evolving production history and continual reassessment of the viability of production under varying economic conditions. As a result, material revisions to existing reserve estimates may occur from time to time. Although every reasonable effort is made to ensure that our reserve estimates represent the most accurate assessments possible, subjective decisions and available data for our various fields make these estimates generally less precise than other estimates included in financial statement disclosures. +At year-end 2016, 21% of our total proved reserves are categorized as proved undeveloped reserves, or PUDs. Our reserve engineers review and revise these reserve estimates regularly, as new information becomes available. +We use the units-of-production method to amortize the cost associated with our oil and gas properties. Changes in estimates of reserve quantities and commodity prices will cause corresponding changes in depletion expense, or in some cases, a full cost ceiling impairment charge in the period of the revision. See Full Cost Accounting below for further information regarding the ceiling limitation calculation. See SUPPLEMENTAL OIL AND GAS INFORMATION (UNAUDITED) in Item 8 of this report for additional reserve data. +Full Cost Accounting +We use the full cost method of accounting for our oil and gas operations. All costs associated with property acquisition, exploration and development activities are capitalized. Exploration and development costs include dry hole costs, geological and geophysical costs, direct overhead related to exploration and development activities and other costs incurred for the purpose of finding oil and gas reserves. Salaries and benefits paid to employees directly involved in the exploration and development of properties, as well as other internal costs that can be directly identified with acquisition, exploration and development activities also are capitalized. Under the full cost method, no gain or loss is recognized upon the disposition of oil and gas properties unless such disposition would significantly alter the relationship between capitalized costs and proved reserves. Expenditures for maintenance and repairs are charged to production expense in the period incurred. +Companies that follow the full cost accounting method are required to make a quarterly ceiling test calculation. This test ensures that total capitalized costs for oil and gas properties (net of accumulated DD&A and deferred income +52 +Table of Contents +taxes) do not exceed the sum of the present value discounted at 10% of estimated future net cash flows from proved reserves, the cost of properties not being amortized, the lower of cost or estimated fair value of unproven properties included in the costs being amortized and all related tax effects. We currently do not have any unproven properties being amortized. Revenue calculations in the reserves are based on the unweighted average first-day-of-the-month commodity price for the prior 12 months. Changes in proved reserve estimates (including those based upon quantity revisions or changes in commodity price) will cause corresponding changes to the full cost ceiling limitation. If net capitalized costs subject to amortization exceed this limit, the excess would be expensed. Any recorded impairment of oil and gas properties is not reversible at a later date. +Quarterly ceiling tests are primarily impacted by commodity prices, changes in estimated reserve quantities, reserves produced, overall exploration and development costs, depletion expense and deferred taxes. For each of the first three quarters of 2016, the carrying value of our oil and gas properties subject to the ceiling test exceeded the calculated value of the ceiling limitation, and we recognized aggregate impairments of $719.1 million ($456.9 million, net of tax). These impairments resulted primarily from the impact of decreases in the 12-month average trailing prices for oil, natural gas and NGLs utilized in determining the future net cash flows from proved reserves. At December 31, 2016, the calculated value of the ceiling limitation exceeded the carrying value of our oil and gas properties subject to the test, and no impairment was necessary. However, a decline of 11% or more in the value of the ceiling limitation would have resulted in an impairment. Because the ceiling calculation uses rolling 12-month average commodity prices, the effect of increases and decreases in period-over-period prices can significantly impact the ceiling limitation calculation. See Operating costs and expenses above for a complete discussion of our 2016 ceiling impairments. See Note 1 to our Consolidated Financial statements in Item 8 of this report for information regarding the effect of a ceiling impairment on our depletion rate. +The ceiling limitation calculation is not intended to be indicative of the fair market value of our proved reserves or future results. Impairment charges do not affect cash flow from operating activities, but do adversely affect our net income and various components of our balance sheet. +Depletion of proved oil and gas properties is computed on the units-of-production method, whereby capitalized costs, including future development costs and asset retirement costs, are amortized over total estimated proved reserves. Changes in our estimate of proved reserve quantities and commodity prices will cause corresponding changes in depletion expense in periods subsequent to these changes. The capitalized costs of unproved properties, including those in wells in progress, are excluded from the costs being amortized. We do not have major development projects that are excluded from costs being amortized. On a quarterly basis, we evaluate excluded costs for inclusion in the costs to be amortized. Significant unproved properties are evaluated individually. Unproved properties that are not considered individually significant are aggregated for evaluation purposes and related costs are transferred to the costs to be amortized quarterly based on the application of historical factors. +Goodwill +Goodwill represents the excess of the purchase price of business combinations over the fair value of the net assets acquired and is tested for impairment at least annually. We first assess qualitative factors to determine whether it is more likely than not (with a greater than 50% threshold) that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. If goodwill is determined to be impaired, then it is written down to a calculated fair value by charging the impairment to expense. +We evaluate our goodwill for impairment in the fourth quarter of each year and whenever events or changes in circumstances indicate the possibility that goodwill may be impaired. Based upon our qualitative assessment at December 31, 2016, goodwill was not impaired. It is possible that goodwill could become impaired in the future if commodity prices or other economic factors become unfavorable. +Contingencies +A provision for contingencies is charged to expense when the loss is probable and the cost can be reasonably estimated. Determining when expenses should be recorded for these contingencies and the appropriate amounts for accrual is a complex estimation process that includes subjective judgment. In many cases, this judgment is based on interpretation of laws and regulations, which can be interpreted differently by regulators and/or courts of law. We closely monitor known +53 +Table of Contents +and potential legal, environmental, and other contingencies to determine if we should record losses. Actual costs can vary from our estimates for a variety of reasons. See Note 10 to the Consolidated Financial Statements in Item 8 of this report for further information regarding litigation and other commitments and contingencies. +At December 31, 2016, we had not made any material accruals related to environmental remediation costs. However, we may be required to make such estimates in future periods if applicable laws and regulations change or if the interpretation or administration of laws and regulations change. Other factors, such as unanticipated construction problems or identification of areas of contaminated soil or groundwater, could also cause us to accrue for such costs. +Asset Retirement Obligation +Our asset retirement obligation represents the estimated present value of the amount we will incur to retire long-lived assets at the end of their productive lives, in accordance with applicable state laws. Our asset retirement obligation is determined by calculating the present value of estimated cash flows related to the liability. The retirement obligation is recorded as a liability at its estimated present value as of inception with an offsetting increase in the carrying amount of the related long-lived asset. Periodic accretion of discount of the estimated liability is recorded as an expense in the income statement. The cost of the tangible asset, including the asset retirement cost, is depreciated over the useful life of the asset or depleted using the units-of-production method. +Asset retirement liability is determined using significant assumptions including current estimates of plugging and abandonment costs, annual inflation of these costs, the productive lives of assets and our risk-adjusted interest rate. Changes in any of these assumptions can result in significant revisions to the estimated asset retirement obligation. Because of the subjectivity of assumptions, the costs to ultimately retire our wells may vary significantly from prior estimates. See Note 8 to the Consolidated Financial Statements in Item 8 of this report for additional information regarding our asset retirement obligations. +Income Taxes +Our oil and gas exploration and production operations are subject to taxation on income in numerous jurisdictions. We record deferred tax assets and liabilities to account for the expected future tax consequences of events that have been recognized in our financial statements and our tax returns. We routinely assess the realizability of our deferred tax assets. If we conclude that it is more likely than not that some portion or all of the deferred tax assets will not be realized, the tax asset would be reduced by a valuation allowance. Numerous judgments and assumptions are inherent in the determination of future taxable income, including factors such as future operating conditions (particularly as related to prevailing oil and gas prices). +The company regularly assesses and, if required, establishes accruals for tax contingencies that could result from assessments of additional tax by taxing jurisdictions where the company operates. See Note 9 to the Consolidated Financial Statements in Item 8 of this report for additional information regarding our income taxes. +Recently Issued Accounting Standards +See Note 1, Basis of Presentation and Summary of Significant Accounting Policies – Recently Issued Accounting Standards, to the Consolidated Financial Statements in Item 8 of this report for a discussion of recent accounting pronouncements and their anticipated effect on our business. +54 +Table of Contents +ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK +Market risk refers to the risk of loss arising from adverse changes in commodity prices and interest rates. The disclosures are not meant to be precise indicators of expected future losses but rather indicators of reasonably possible losses. +Price Fluctuations +Our major market risk is pricing applicable to our oil, gas and NGL production. The prices we receive for our production are based on prevailing market conditions and are influenced by many factors that are beyond our control. Pricing for oil, gas and NGL production has been volatile and unpredictable. Oil sales contributed 52% of our total production revenue for 2016. Gas and NGL sales accounted for 32% and 16%, respectively, of our 2016 production revenue. A $1.00 per barrel change in our realized oil price would have resulted in a $16.5 million change in revenues. A $0.10 per Mcf change in our realized gas price would have resulted in a $16.8 million change in our gas revenues. A $1.00 per barrel change in NGL prices would have changed revenues by $14.2 million. See Market Conditions in Item 7 of this report for further information. +We periodically enter into financial derivative contracts to hedge a portion of our price risk associated with our future oil and gas production. At December 31, 2016, we had oil and gas collars covering a portion of our 2017 and 2018 production, which were recorded as short and long-term liabilities. The fair value liability of our oil and gas collars was $29.0 million and $23.0 million, respectively. See Note 4 to the Consolidated Financial Statements in Item 8 of this report for additional information regarding derivative instruments. +While these contracts limit the downside risk of adverse price movements, they may also limit future revenues from favorable price movements. For the oil contracts described above, a hypothetical $1.00 change in the price below or above the forward price used to calculate the fair value would result in a decrease of $4.8 million or an increase of $5.0 million, respectively, to the fair value liability of the derivatives at December 31, 2016. For the gas contracts described above, a hypothetical $0.10 change in the price below or above the forward price used to calculate the fair value would result in a decrease of $5.1 million or an increase of $5.3 million, respectively, to the fair value liability of the derivatives at December 31, 2016. +Interest Rate Risk +At December 31, 2016, our long-term debt consisted of $750 million in 5.875% senior notes that will mature on May 1, 2022 and $750 million in 4.375% senior notes that will mature on June 1, 2024. Because all of our outstanding long-term debt is at a fixed rate, we consider our interest rate exposure to be minimal. This sensitivity analysis for interest rate risk excludes accounts receivable, accounts payable and accrued liabilities because of the short-term maturity of such instruments. See Note 3 and Note 5 to the Consolidated Financial Statements in Item 8 of this report for additional information regarding debt. +55 +Table of Contents +ITEM 8. FINANCIAL STATEMENT S AND SUPPLEMENTARY DATA +CIMAREX ENERGY CO. +INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTAL SCHEDULES +Page +Report of Independent Registered Public Accounting Firm for the years ended December 31, 2016, 2015, and 2014 +57 +Consolidated balance sheets as of December 31, 2016 and 2015 +58 +Consolidated statements of operations and comprehensive income (loss) for the years ended December 31, 2016, 2015, and 2014 +59 +Consolidated statements of cash flows for the years ended December 31, 2016, 2015, and 2014 +60 +Consolidated statements of stockholders’ equity for the years ended December 31, 2016, 2015, and 201 4 +61 +Notes to consolidated financial statements +Note 1 – Basis of Presentation and Summary of Significant Accounting Policies +62 +Note 2 – Capital Stock +67 +Note 3 – Long-term Debt +67 +Note 4 – Derivative Instruments/Hedging +68 +Note 5 – Fair Value Measurements +70 +Note 6 – Stock-Based and Other Compensation +72 +Note 7 – Earnings (loss) per Share +75 +Note 8 – Asset Retirement Obligations +76 +Note 9 – Income Taxes +76 +Note 10 – Commitments and Contingencies +77 +Note 11 – Related Party Transactions +79 +Note 12 – Property Sales and Acquisitions +79 +Note 13 – Supplemental Cash Flow Information +79 +Supplemental information to consolidated financial statements +Supplemental oil and gas information (Unaudited) +80 +Supplemental quarterly financial data (Unaudited) +85 +All other supplemental information and schedules have been omitted because they are not applicable or the information required is shown in the consolidated financial statements or related notes thereto. +56 +Table of Contents +Report of Independent Registered Public Accounting Firm +The Board of Directors and Stockholders +Cimarex Energy Co.: +We have audited the accompanying consolidated balance sheets of Cimarex Energy Co. and subsidiaries (the Company) as of December 31, 2016 and 2015, and the related consolidated statements of operations and comprehensive income (loss), stockholders’ equity, and cash flows for each of the years in the three year period ended December 31, 2016. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. +We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. +In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Cimarex Energy Co. and subsidiaries as of December 31, 2016 and 2015, and the results of their operations and their cash flows for each of the years in the three year period ended December 31, 2016, in conformity with U.S. generally accepted accounting principles. +We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Cimarex Energy Co. and subsidiaries’ internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 24, 2017 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting. +KPMG LLP +Denver, Colorado +February 24, 2017 +57 +Table of Contents +CIMAREX ENERGY CO. +CONSOLIDATED BALANCE SHEET S +(in thousands, except share and per share information) +December 31, +2016 +2015 +Assets +Current assets: +Cash and cash equivalents +$ +652,876 +$ +779,382 +Accounts receivable: +Trade, net of allowance +42,287 +81,888 +Oil and gas sales, net of allowance +217,395 +136,537 +Gas gathering, processing, and marketing, net of allowance +14,888 +6,935 +Other +27 +38 +Oil and gas well equipment and supplies +33,342 +54,579 +Derivative instruments +— +10,745 +Prepaid expenses +7,335 +7,036 +Other current assets +1,154 +790 +Total current assets +969,304 +1,077,930 +Oil and gas properties at cost, using the full cost method of accounting: +Proved properties +16,225,495 +15,546,948 +Unproved properties and properties under development, not being amortized +478,277 +440,166 +16,703,772 +15,987,114 +Less—accumulated depreciation, depletion and amortization and impairment +(13,849,701) +(12,710,968) +Net oil and gas properties +2,854,071 +3,276,146 +Fixed assets, net of accumulated depreciation of $246,901 and $207,173 +205,465 +230,009 +Goodwill +620,232 +620,232 +Derivative instruments +— +501 +Other assets, net +32,621 +38,468 +$ +4,681,693 +$ +5,243,286 +Liabilities and Stockholders’ Equity +Current liabilities: +Accounts payable: +Trade +$ +49,163 +$ +53,384 +Gas gathering, processing, and marketing +25,323 +13,431 +Accrued liabilities: +Exploration and development +82,320 +56,721 +Taxes other than income +18,766 +17,545 +Other +177,695 +173,242 +Derivative instruments +49,370 +— +Revenue payable +119,715 +95,744 +Total current liabilities +522,352 +410,067 +Long-term debt: +Principal +1,500,000 +1,500,000 +Less—unamortized debt issuance costs +(12,061) +(14,380) +Long-term debt, net +1,487,939 +1,485,620 +Deferred income taxes +126,894 +352,705 +Asset retirement obligation +140,770 +153,857 +Derivative instruments +2,570 +— +Other liabilities +41,104 +43,359 +Total liabilities +2,321,629 +2,445,608 +Commitments and contingencies (Note 10) +Stockholders’ equity: +Preferred stock, $0.01 par value, 15,000,000 shares authorized, no shares issued +— +— +Common stock, $0.01 par value, 200,000,000 shares authorized, 95,123,525 and 94,820,570 shares issued, respectively +951 +948 +Paid-in capital +2,763,452 +2,762,976 +Retained earnings (accumulated deficit) +(405,284) +33,313 +Accumulated other comprehensive income +945 +441 +2,360,064 +2,797,678 +$ +4,681,693 +$ +5,243,286 +The accompanying notes are an integral part of these consolidated financial statements. +58 +Table of Contents +CIMAREX ENERGY CO. +CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) +(in thousands, except per share data) +Years Ended December 31, +2016 +2015 +2014 +Revenues: +Oil sales +$ +632,934 +$ +809,664 +$ +1,308,958 +Gas sales +388,786 +428,227 +687,930 +NGL sales +199,498 +179,647 +375,941 +Gas gathering and other +36,033 +34,688 +49,602 +Gas marketing, net of related costs of $122,655, $144,673 and $256,836 respectively +94 +393 +1,745 +1,257,345 +1,452,619 +2,424,176 +Costs and expenses: +Impairment of oil and gas properties +719,142 +3,716,883 +— +Depreciation, depletion and amortization +465,936 +778,923 +806,021 +Asset retirement obligation +7,828 +9,121 +10,082 +Production +232,002 +299,374 +342,304 +Transportation, processing, and other operating +190,725 +182,362 +195,414 +Gas gathering and other +31,785 +38,138 +35,113 +Taxes other than income +61,946 +84,764 +128,793 +General and administrative +73,901 +74,688 +81,160 +Stock compensation +24,523 +19,559 +15,001 +(Gain) loss on derivative instruments, net +55,749 +(11,246) +(3,762) +Other operating expense, net +755 +856 +116 +1,864,292 +5,193,422 +1,610,242 +Operating income (loss) +(606,947) +(3,740,803) +813,934 +Other (income) and expense: +Interest expense +83,272 +85,746 +72,865 +Capitalized interest +(21,248) +(30,589) +(35,925) +Other, net +(10,707) +(13,576) +(28,907) +Income (loss) before income tax +(658,264) +(3,782,384) +805,901 +Income tax expense (benefit) +(227,215) +(1,373,436) +298,697 +Net income (loss) +$ +(431,049) +$ +(2,408,948) +$ +507,204 +Earnings (loss) per share to common stockholders: +Basic +Distributed +$ +0.32 +$ +0.64 +$ +0.64 +Undistributed +(4.94) +(26.56) +5.15 +$ +(4.62) +$ +(25.92) +$ +5.79 +Diluted +Distributed +$ +0.32 +$ +0.64 +$ +0.64 +Undistributed +(4.94) +(26.56) +5.14 +$ +(4.62) +$ +(25.92) +$ +5.78 +Comprehensive income (loss): +Net income (loss) +$ +(431,049) +$ +(2,408,948) +$ +507,204 +Other comprehensive income (loss): +Change in fair value of investments, net of tax +504 +(661) +(87) +Total comprehensive income (loss) +$ +(430,545) +$ +(2,409,609) +$ +507,117 +The accompanying notes are an integral part of these consolidated financial statements. +59 +Table of Contents +CIMAREX ENERGY CO. +CONSOLIDATED STATEMENTS OF CASH FLOW S +(in thousands) +Years Ended December 31, +2016 +2015 +2014 +Cash flows from operating activities: +Net income (loss) +$ +(431,049) +$ +(2,408,948) +$ +507,204 +Adjustments to reconcile net income (loss) to net cash provided by operating activities: +Impairments and other valuation losses +719,142 +3,716,883 +— +Depreciation, depletion and amortization +465,936 +778,923 +806,021 +Asset retirement obligation +7,828 +9,121 +10,082 +Deferred income taxes +(226,100) +(1,388,146) +298,293 +Stock compensation +24,523 +19,559 +15,001 +(Gain) loss on derivative instruments, net +55,749 +(11,246) +(3,762) +Settlements on derivative instruments +7,437 +— +7,641 +Changes in non-current assets and liabilities +3,867 +23,230 +(2,440) +Other, net +1,805 +4,206 +(3,828) +Changes in operating assets and liabilities: +Receivables, net +(49,340) +186,699 +(35,133) +Other current assets +20,880 +37,954 +(25,428) +Accounts payable and other current liabilities +(1,453) +(276,735) +45,714 +Net cash provided by operating activities +599,225 +691,500 +1,619,365 +Cash flows from investing activities: +Oil and gas expenditures +(699,558) +(979,044) +(2,108,250) +Sales of oil and gas assets +21,487 +39,853 +449,981 +Sales of other assets +7,889 +1,178 +8,413 +Other capital expenditures +(22,228) +(70,592) +(90,611) +Net cash used by investing activities +(692,410) +(1,008,605) +(1,740,467) +Cash flows from financing activities: +Net bank debt borrowings +— +— +(174,000) +Proceeds from other long-term debt +— +— +750,000 +Proceeds from sale of common stock +— +752,100 +— +Financing and underwriting fees +(101) +(24,633) +(11,616) +Dividends paid +(38,024) +(58,281) +(53,849) +Proceeds from exercise of stock options and other +4,804 +21,439 +11,898 +Net cash (used) provided by financing activities +(33,321) +690,625 +522,433 +Net change in cash and cash equivalents +(126,506) +373,520 +401,331 +Cash and cash equivalents at beginning of period +779,382 +405,862 +4,531 +Cash and cash equivalents at end of period +$ +652,876 +$ +779,382 +$ +405,862 +The accompanying notes are an integral part of these consolidated financial statements. +60 +Table of Contents +CIMAREX ENERGY CO. +CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUIT Y +(in thousands) +Retained +Accumulated +Earnings +Other +Total +Common Stock +Paid-in +(Accumulated +Comprehensive +Stockholders’ +Shares +Amount +Capital +Deficit) +Income (loss) +Equity +Balance, December 31, 2013 +87,152 +$ +872 +$ +1,970,113 +$ +2,050,034 +$ +1,189 +$ +4,022,208 +Dividends +— +— +— +(55,664) +— +(55,664) +Net income +— +— +— +507,204 +— +507,204 +Unrealized change in fair value of investments, net of tax +— +— +— +— +(87) +(87) +Issuance of restricted stock awards +487 +4 +(4) +— +— +— +Common stock reacquired and retired +(123) +(1) +(13,559) +— +— +(13,560) +Restricted stock forfeited and retired +(135) +(1) +1 +— +— +— +Exercise of stock options +211 +2 +11,896 +— +— +11,898 +Stock-based compensation +— +— +28,633 +— +— +28,633 +Balance, December 31, 2014 +87,592 +$ +876 +$ +1,997,080 +$ +2,501,574 +$ +1,102 +$ +4,500,632 +Dividends +— +— +— +(59,313) +— +(59,313) +Net loss +— +— +— +(2,408,948) +— +(2,408,948) +Unrealized change in fair value of investments, net of tax +— +— +— +— +(661) +(661) +Issuance of common stock +6,900 +69 +729,468 +— +— +729,537 +Issuance of restricted stock awards +471 +5 +(5) +— +— +— +Common stock reacquired and retired +(194) +(2) +(21,238) +— +— +(21,240) +Restricted stock forfeited and retired +(90) +(1) +1 +— +— +— +Exercise of stock options +142 +1 +8,450 +— +— +8,451 +Stock-based compensation +— +— +36,232 +— +— +36,232 +Stock-based compensation tax benefit +— +— +12,988 +— +— +12,988 +Balance, December 31, 2015 +94,821 +$ +948 +$ +2,762,976 +$ +33,313 +$ +441 +$ +2,797,678 +Dividends +— +— +— +(7,548) +— +(7,548) +Dividends in excess of retained earnings +— +— +(22,803) +— +— +(22,803) +Net loss +— +— +— +(431,049) +— +(431,049) +Unrealized change in fair value of investments, net of tax +— +— +— +— +504 +504 +Issuance of restricted stock awards +479 +5 +(5) +— +— +— +Common stock reacquired and retired +(208) +(3) +(26,622) +— +— +(26,625) +Restricted stock forfeited and retired +(32) +— +— +— +— +— +Exercise of stock options +64 +1 +4,803 +— +— +4,804 +Stock-based compensation +— +— +45,103 +— +— +45,103 +Balance, December 31, 2016 +95,124 +$ +951 +$ +2,763,452 +$ +(405,284) +$ +945 +$ +2,360,064 +The accompanying notes are an integral part of these consolidated financial statements. +61 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +1. BASI S OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES +Cimarex Energy Co., a Delaware corporation, is an independent oil and gas exploration and production company. Our operations are mainly located in Texas, Oklahoma and New Mexico. +Basis of Presentation +Our Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP. Our significant accounting policies are discussed below. The accounts of Cimarex and its subsidiaries are presented in the accompanying Consolidated Financial Statements. All intercompany accounts and transactions were eliminated in consolidation. +Segment Information +We have determined that our business is comprised of only one segment because our gathering, processing and marketing activities are ancillary to our production operations and are not separately managed. +Use of Estimates +The preparation of our financial statements in conformity with GAAP requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. The more significant areas requiring the use of management’s estimates and judgments relate to the estimation of proved oil and gas reserves, the use of these oil and gas reserves in calculating depletion, depreciation and amortization (DD&A), the use of the estimates of future net revenues in computing ceiling test limitations and estimates of future abandonment obligations used in recording asset retirement obligations and the assessment of goodwill. +The process of estimating quantities of oil and gas reserves is complex, requiring significant decisions in the evaluation of all available geological, geophysical, engineering and economic data. The data for a given field may also change substantially over time as a result of numerous factors including, but not limited to, additional development activity, evolving production history and continual reassessment of the viability of production under varying economic conditions. As a result, material revisions to existing reserve estimates may occur from time to time. Although every reasonable effort is made to ensure that our reserve estimates represent the most accurate assessments possible, subjective decisions and available data for our various fields make these estimates generally less precise than other estimates included in financial statement disclosures. +Estimates and judgments are also required in determining the allowance for doubtful accounts, impairments of unproved properties and other assets, purchase price allocation, valuation of deferred tax assets, fair value measurements and commitments and contingencies. We analyze our estimates, including those related to oil, gas and NGL revenues, and base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. +Cash and Cash Equivalents +Cash and cash equivalents consist of cash in banks and investments readily convertible into cash, which have original maturities of three months or less. Cash equivalents are stated at cost, which approximates market value. +Oil and Gas Well Equipment and Supplies +We carry our inventory at the lower of cost or net realizable value, where net realizable value is estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. We performed an analysis of our oil and gas well equipment and supplies as of December 31, 2016, and no impairment was required. However, the industry-wide decline in drilling operations has put downward pressure on the price of oil and gas well equipment and supplies. Declines in future periods could cause us to recognize impairments on these assets. An +62 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +impairment would not affect cash flow from operating activities, but would adversely affect our net income and stockholders’ equity. +Oil and Gas Properties +We use the full cost method of accounting for our oil and gas operations. All costs associated with property acquisition, exploration and development activities are capitalized. Exploration and development costs include dry hole costs, geological and geophysical costs, direct overhead related to exploration and development activities and other costs incurred for the purpose of finding oil and gas reserves. Salaries and benefits paid to employees directly involved in the exploration and development of properties, as well as other internal costs that can be directly identified with acquisition, exploration and development activities, are also capitalized. Under the full cost method of accounting, no gain or loss is recognized upon the disposition of oil and gas properties unless such disposition would significantly alter the relationship between capitalized costs and proved reserves. Expenditures for maintenance and repairs are charged to production expense in the period incurred. +Companies that follow the full cost accounting method are required to make quarterly ceiling test calculations. This test ensures that total capitalized costs for oil and gas properties (net of accumulated DD&A and deferred income taxes) do not exceed the sum of the present value discounted at 10% of estimated future net cash flows from proved reserves, the cost of properties not being amortized, the lower of cost or estimated fair value of unproven properties included in the costs being amortized, and all related tax effects. We currently do not have any unproven properties that are being amortized. Estimated future net cash flows are determined by commodity prices and proved reserve quantities. Revenue calculations in the reserves are based on the unweighted average first-day-of-the-month prices for the prior 12 months. If net capitalized costs exceed this limit, the excess is charged to expense. +At December 31, 2016, the carrying value of our oil and gas properties subject to the test did not exceed the calculated value of the ceiling limitation and, therefore, we did not recognize an impairment. However, a decline of 11% or more in the value of the ceiling limitation would have resulted in an impairment. We did recognize impairments in the first three quarters of 2016 totaling $719.1 million ($456.9 million, net of tax). For the year ended December 31, 2015, full year impairments totaled $3.7 billion ($2.4 billion, net of tax). These impairments resulted primarily from the impact of decreases in the 12-month average trailing prices for oil, natural gas and NGLs utilized in determining the future net cash flows from proved reserves. If pricing conditions decline, or if there is a negative impact on one or more of the other components of the calculation, we will incur full cost ceiling impairments in future quarters. The ceiling calculation is not intended to be indicative of the fair market value of our proved reserves or future results. Impairment charges do not affect cash flow from operating activities, but do adversely affect our net income and other components of our balance sheet. Any recorded impairment of oil and gas properties is not reversible at a later date. +Depletion of proved oil and gas properties is computed on the units-of-production method, whereby capitalized costs, including future development costs and asset retirement costs, are amortized over total estimated proved reserves. Changes in our estimate of proved reserve quantities, commodity prices and impairment of oil and gas properties will cause corresponding changes in depletion expense in periods subsequent to these changes. +The capitalized costs of unproved properties, including those in wells in progress, are excluded from the costs being amortized. We do not have major development projects that are excluded from costs being amortized. On a quarterly basis, we evaluate excluded costs for inclusion in the costs to be amortized. Significant unproved properties are evaluated individually. Unproved properties that are not considered individually significant are aggregated for evaluation purposes and related costs are transferred to the costs to be amortized quarterly based on the application of historical factors. +Fixed Assets, net +Fixed assets consist primarily of gathering and plant facilities, vehicles, airplanes, office furniture, and computer equipment and software. These items are recorded at cost and are depreciated on the straight-line method based on expected lives of the individual assets, which range from 3 to 30 years. +63 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +Goodwill +Goodwill represents the excess of the purchase price of business combinations over the fair value of the net assets acquired and is tested for impairment at least annually. We have one reporting unit for which we first assess qualitative factors to determine whether it is more likely than not (with a greater than 50% threshold) that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. If goodwill is determined to be impaired then it is written down to a calculated fair value by charging the impairment to expense. +We evaluate our goodwill for impairment in the fourth quarter of each year and whenever events or changes in circumstances indicate the possibility that goodwill may be impaired. Based upon our qualitative assessment at December 31, 2016, goodwill was not impaired. It is possible that goodwill could become impaired in the future if commodity prices or other economic factors become less favorable. +Revenue Recognition +Oil, Gas and NGL Sales +Revenue is recorded from the sales of oil, gas and NGLs when the product is delivered at a fixed or determinable price, title has transferred and collectability is reasonably assured. There is a ready market for our products and sales occur soon after production. +Marketing Sales +We market and sell natural gas for working interest owners under short term sales and supply agreements and earn a fee for such services. Revenues are recognized as gas is delivered and are reflected net of gas purchases on the consolidated statements of operations and comprehensive income (loss). +Gas Imbalances +We use the sales method of accounting for gas imbalances. Under this method, revenue is recorded on the basis of gas actually sold. Gas reserves are adjusted to the extent there are sufficient quantities of natural gas to make up an imbalance. A liability is established in situations where there are insufficient proved reserves available to make-up an overproduced imbalance. Imbalances have not been significant in the periods presented. +General and Administrative Expenses +General and administrative expenses are reported net of amounts reimbursed by working interest owners of the oil and gas properties operated by Cimarex and net of amounts capitalized pursuant to the full cost method of accounting. +Derivatives +Our derivative contracts are recorded on the balance sheet at fair value. Our firm sales contracts qualify for the normal purchase and normal sale exception. Contracts that qualify for this treatment do not require mark-to-market accounting treatment. See Note 4 for additional information regarding our derivative instruments. +Income Taxes +We record deferred tax assets and liabilities to account for the expected future tax consequences of events that have been recognized in the financial statements and tax returns. We classify all deferred tax assets and liabilities as noncurrent. We routinely assess the realizability of the deferred tax assets. If we conclude that it is more likely than not that some or all of the deferred tax assets will not be realized, the tax asset is reduced by a valuation allowance. Numerous judgments and assumptions are inherent in the determination of future taxable income, including factors such as future operating conditions (particularly as related to prevailing oil and gas prices) and changing tax laws. +64 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +We regularly assess and, if required, establish accruals for tax contingencies that could result from assessments of additional tax by taxing jurisdictions where the company operates. See Note 9 for additional information regarding our income taxes. +Contingencies +A provision for contingencies is charged to expense when the loss is probable and the cost can be reasonably estimated. Determining when expenses should be recorded for these contingencies and the appropriate amounts for accrual is a complex estimation process that includes subjective judgment. In many cases, this judgment is based on interpretation of laws and regulations, which can be interpreted differently by regulators and/or courts of law. We closely monitor known and potential legal, environmental and other contingencies and determine when we should record losses for these items based on information available to us. See Note 10 for additional information regarding our contingencies. +Asset Retirement Obligations +We recognize the present value of the fair value of liabilities for retirement obligations associated with tangible long-lived assets in the period in which there is a legal obligation associated with the retirement of such assets and the amount can be reasonably estimated. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. This liability includes costs related to the abandonment of wells, the removal of facilities and equipment, and site restorations. Subsequent to initial measurement, the asset retirement liability is required to be accreted each period. If the fair value of a recorded asset retirement obligation changes, a revision is recorded to both the asset retirement obligation and the asset retirement capitalized cost. Capitalized costs are included as a component of the DD&A calculations. The current portions of the asset retirement obligations are recorded in “Accrued liabilities — Other” in the accompanying consolidated balance sheets and expenditures are classified as cash used in operating activities in the accompanying consolidated statements of cash flows. See Note 8 for additional information regarding our asset retirement obligations. +Stock-based Compensation +We recognize compensation cost related to all stock-based awards in the financial statements based on their estimated grant-date fair value. We grant various types of stock-based awards including stock options, restricted stock (including awards with service-based vesting and market condition-based vesting provisions) and restricted stock units. The fair value of stock option awards is determined using the Black-Scholes option pricing model. Service-based restricted stock and units are valued using the market price of our common stock on the grant date. The fair value of the market condition-based restricted stock is based on the grant-date market value of the award utilizing a statistical analysis. Compensation cost is recognized ratably over the applicable vesting period. To the extent compensation cost relates to employees directly involved in oil and gas acquisition, exploration, and development activities, such amounts are capitalized to oil and gas properties. Amounts not capitalized to oil and gas properties are recognized as stock compensation expense. See Note 6 for additional information regarding our stock-based compensation. +Earnings (loss) per Share +We calculate earnings (loss) per share recognizing that unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents are “participating securities” and, therefore, should be included in computing earnings per share using the two-class earnings allocation method. The two-class method is an earnings allocation formula that determines earnings per share for each class of common stock and participating security according to dividends declared (or accumulated) and participation rights in undistributed earnings. Our unvested share based payment awards, consisting of restricted stock and units, qualify as participating securities. See Note 7 for additional information regarding our earnings per share. +Recently Issued Accounting Standards +In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (Topic 606) . In July 2015, the FASB deferred the effective date by one year to annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. +65 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +Early adoption is permitted, but not before the original effective date of reporting periods beginning after December 15, 2016. The new revenue standard provides a five-step analysis of transactions to determine when and how revenue is recognized. The core principle of the guidance is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance in this update supersedes the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance throughout the Industry Topics of the Codification . Entities can choose to apply the standard using either the full retrospective approach or a modified retrospective approach. We intend to adopt this standard on January 1, 2018, utilizing a modified retrospective approach. Management does not believe the effect of adoption will be material to our financial statements because we follow the sales method of accounting for our oil, gas and NGL production, which is generally consistent with the revenue recognition provisions of the new standard. However, we anticipate the new standard will result in more robust footnote disclosures. We cannot currently determine the extent of the new footnote disclosures as further clarification is needed for certain practices common to the industry. +In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) . The key provision of this ASU is that a lessee must recognize (i) liabilities to make lease payments and (ii) right-of-use assets on its balance sheet. The ASU permits lessees to make a policy election to not recognize lease assets and liabilities for leases with terms of less than twelve months. Under current GAAP, a determination of whether a lease is a capital or operating lease is made at lease inception and no assets or liabilities are recognized for operating leases. Under this ASU, the determination to be made at the inception of a contract is whether the contract is, or contains, a lease. Leases convey the right to control the use of an identified asset in exchange for consideration. Only the lease components of a contract must be accounted for in accordance with this ASU. Non-lease components, such as activities that transfer a good or service to the customer, shall be accounted for under other applicable Topics. An entity may make a policy election to not separate lease and non-lease components and account for the non-lease components together with the lease components as a single lease component. This ASU retains a distinction between finance and operating leases concerning the recognition and presentation of the expense and payments related to leases in the statements of operations and comprehensive income and cash flows, however, both types of leases require the recognition of assets and liabilities on the balance sheet. This ASU is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years, with early adoption permitted. Upon transition, lessees will be required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. While we are in the process of evaluating the potential impact of adopting this guidance, the primary effect will be to record assets and obligations for contracts currently recognized as operating leases. We do not intend to adopt the standard early. +In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting (ASU 2016-09). ASU 2016-09 simplifies the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The amendments in this ASU are effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. The standard contains various amendments, and specifies whether each amendment should be adopted using a retrospective, modified retrospective, or prospective transition method. We will adopt ASU 2016-09 effective January 1, 2017. The amendments within ASU 2016-09 related to the timing of when excess tax benefits and tax benefits on dividends on nonvested equity shares are recognized and accounting for forfeitures will be adopted using a modified retrospective method. In accordance with this method, we expect to record a cumulative-effect adjustment on that date relating to those amendments, representing a decrease to beginning Deferred income taxes of approximately $33 million, a reduction to beginning Accumulated deficit of approximately $31 million and an increase to beginning Paid-in capital of approximately $2 million. The amendments within ASU 2016-09 related to the presentation in the statement of cash flows of excess tax benefits and cash outflows attributable to tax withholdings on the net settlement of equity-classified awards will be adopted using a retrospective method. In accordance with this method, we estimate that Net cash provided by operating activities would have increased and Net cash (used) provided by financing activities would have decreased by approximately $27 million, $34 million and $14 million, for the years ended December 31, 2016, 2015 and 2014, respectively. +In January 2017, the FASB issued ASU 2017-04, Intangibles—Goodwill and Other (Topic 350)—Simplifying the Test for Goodwill Impairment . This ASU eliminates step two from the goodwill impairment test. Under current guidance, if the fair value of the reporting unit is less than its carrying amount (step 1 of the goodwill impairment test), entities must complete step two to determine the impairment amount, if any. Under step two, the impairment amount is determined by calculating the implied fair value of goodwill by assigning the fair value of a reporting unit to all of its assets and liabilities +66 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +as if that reporting unit had been acquired in a business combination, and comparing it to the carrying amount of the goodwill. Under this ASU, the impairment amount is the amount by which the carrying amount of the reporting unit exceeds the reporting unit’s fair value, with the amount of impairment not to exceed the carrying amount of the goodwill. This ASU retains the option to qualitatively assess whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount in order to determine if it is necessary to initiate step 1. This ASU is effective for annual or any interim goodwill impairment tests in the fiscal years beginning after December 15, 2019, with early adoption permitted for testing dates after January 1, 2017. The implementation of this ASU will affect the amount of goodwill impairment we record, if any. We adopted this ASU on January 1, 2017, and will apply its provisions in future periods if we determine our goodwill has been impaired. +Subsequent Events +The accompanying financial disclosures include an evaluation of subsequent events through the date of this filing. +2. CAPITAL STOCK +Authorized capital stock consists of 200 million shares of common stock and 15 million shares of preferred stock. At December 31, 2016, there were no shares of preferred stock outstanding. See our Consolidated Statements of Stockholders’ Equity for detailed capital stock activity. +In May 2015, we completed an underwritten public offering of 6,900,000 shares of common stock, which included 900,000 shares of common stock issued pursuant to an overallotment option to purchase additional shares granted to the underwriters. The stock was sold to the public at $109.00 per share, with a par value of $0.01, and we received net proceeds of approximately $730 million from the sale of these shares of common stock, after deducting underwriting fees. +Dividends +A cash dividend has been paid to stockholders in every quarter since the first quarter of 2006. In February 2016, the quarterly dividend was decreased to $0.08 per share from $0.16 per share. Dividends declared are recorded as a reduction of retained earnings to the extent retained earnings are available at the close of the period prior to the date of the declared dividend. Dividends in excess of retained earnings are recorded as a reduction of additional paid-in capital. Future dividend payments will depend on our level of earnings, financial requirements, and other factors considered relevant by the Board of Directors. +Years Ended December 31, +2016 +2015 +2014 +Dividends declared from Retained earnings (in millions) +$ +7.5 +$ +59.3 +$ +55.7 +Dividends declared from Paid-in capital (in millions) +$ +22.8 +$ +— +$ +— +Dividends per share +$ +0.32 +$ +0.64 +$ +0.64 +3. LONG-TERM DEBT +A summary of our debt is as follows: +December 31, 2016 +December 31, 2015 +Unamortized Debt +Long-term +Unamortized Debt +Long-term +(in thousands) +Principal +Issuance Costs +Debt, net +Principal +Issuance Costs +Debt, net +5.875% Senior Notes +$ +750,000 +$ +(5,691) +$ +744,309 +$ +750,000 +$ +(6,978) +$ +743,022 +4.375% Senior Notes +750,000 +(6,370) +743,630 +750,000 +(7,402) +742,598 +Total long-term debt +$ +1,500,000 +$ +(12,061) +$ +1,487,939 +$ +1,500,000 +$ +(14,380) +$ +1,485,620 +At December 31, 2016 and 2015, we had no bank debt outstanding. All of our long-term debt is senior unsecured debt and is, therefore, pari passu with respect to the payment of both principal and interest. +67 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +Bank Debt +In October 2015, we entered into a new senior unsecured revolving credit facility (Credit Facility) which matures October 16, 2020. The Credit Facility has aggregate commitments of $1.0 billion, with an option to increase aggregate commitments to $1.25 billion at any time. There is no borrowing base subject to the discretion of the lenders based on the value of our proved reserves under the Credit Facility. As of December 31, 2016, we had $2.5 million in letters of credit outstanding under the Credit Facility, leaving an unused borrowing availability of $997.5 million. +At our option, borrowings under the Credit Facility may bear interest at either (a) LIBOR plus 1.125 – 2.0% based on the credit rating for our senior unsecured long-term debt, or (b) a base rate (as defined in the credit agreement) plus 0.125 – 1.0%, based on the credit rating for our senior unsecured long-term debt. Unused borrowings are subject to a commitment fee of 0.125 – 0.35%, based on the credit rating for our senior unsecured long-term debt. +The Credit Facility contains representations, warranties, covenants and events of default that are customary for investment grade, senior unsecured bank credit agreements, including a financial covenant for the maintenance of a defined total debt-to-capital ratio of no greater than 65%. As of December 31, 2016, we were in compliance with all of the financial and non-financial covenants. +At December 31, 2016 and 2015, we had $4.5 million and $5.7 million, respectively, of unamortized debt issuance costs associated with our Credit Facility which were recorded as deferred assets and included in Other assets, net in our balance sheets. The costs are being amortized to interest expense ratably over the life of the Credit Facility. +Senior Notes +In June 2014, we issued $750 million of 4.375% senior notes due 2024 and received net proceeds of $740.9 million, after deducting offering discounts and costs. The net proceeds were used to pay outstanding bank debt and for general corporate purposes. The effective interest rate on the notes, including the debt issuance costs, is 4.50%. +In April 2012, we issued $750 million of 5.875% senior notes due 2022 and received net proceeds of $737.0 million, after deducting underwriting discounts and offering costs. We used a portion of the net proceeds to retire our 7.125% senior notes and the remaining proceeds were used to pay outstanding bank debt and for general corporate purposes. The effective interest rate on the notes, including the debt issuance costs, is 6.04%. These senior notes are callable by us beginning May 1, 2017 at a price of 102.938% of face value declining to 100% of face value on May 1, 2020 and thereafter. +Each of our outstanding senior notes is governed by an indenture containing certain covenants, events of default and other restrictive provisions with which we were in compliance as of December 31, 2016. Interest on each of the senior notes is payable semi-annually. +4. DERIVATIVE INSTR UMENTS/HEDGING +We periodically enter into derivative instruments to mitigate a portion of our potential exposure to a decline in commodity prices and the corresponding negative impact on cash flow available for reinvestment. While the use of these instruments limits the downside risk of adverse price changes, their use may also limit future revenues from favorable price changes. Depending on changes in oil and gas futures markets and management’s view of underlying supply and demand trends, we may increase or decrease our hedging positions. We may hedge up to 50% of our oil and natural gas production on a forward five quarter basis. +68 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +The following tables summarize our derivative contracts as of December 31, 2016: +First +Second +Third +Fourth +Quarter +Quarter +Quarter +Quarter +Total +Oil Collars: +2017: +WTI (1) +Volume (Bbls) +1,800,000 +1,820,000 +1,472,000 +1,012,000 +6,104,000 +Wtd Avg Price - Floor +$ +43.08 +$ +43.08 +$ +45.09 +$ +46.27 +$ +44.09 +Wtd Avg Price - Ceiling +$ +52.90 +$ +52.90 +$ +55.50 +$ +56.98 +$ +54.20 +2018: +WTI (1) +Volume (Bbls) +540,000 +— +— +— +540,000 +Wtd Avg Price - Floor +$ +47.33 +$ +— +$ +— +$ +— +$ +47.33 +Wtd Avg Price - Ceiling +$ +59.11 +$ +— +$ +— +$ +— +$ +59.11 +(1) +WTI refers to the West Texas Intermediate price as quoted on the New York Mercantile Exchange. +First +Second +Third +Fourth +Quarter +Quarter +Quarter +Quarter +Total +Gas Collars: +2017: +PEPL (1) +Volume (MMBtu) +9,900,000 +10,010,000 +8,280,000 +5,520,000 +33,710,000 +Wtd Avg Price - Floor +$ +2.52 +$ +2.52 +$ +2.61 +$ +2.79 +$ +2.59 +Wtd Avg Price - Ceiling +$ +3.04 +$ +3.04 +$ +3.12 +$ +3.22 +$ +3.09 +Perm EP (1) +Volume (MMBtu) +8,100,000 +8,190,000 +5,520,000 +3,680,000 +25,490,000 +Wtd Avg Price - Floor +$ +2.59 +$ +2.59 +$ +2.68 +$ +2.86 +$ +2.65 +Wtd Avg Price - Ceiling +$ +3.10 +$ +3.10 +$ +3.16 +$ +3.28 +$ +3.14 +2018: +PEPL (1) +Volume (MMBtu) +2,700,000 +— +— +— +2,700,000 +Wtd Avg Price - Floor +$ +2.90 +$ +— +$ +— +$ +— +$ +2.90 +Wtd Avg Price - Ceiling +$ +3.32 +$ +— +$ +— +$ +— +$ +3.32 +Perm EP (1) +Volume (MMBtu) +1,800,000 +— +— +— +1,800,000 +Wtd Avg Price - Floor +$ +3.00 +$ +— +$ +— +$ +— +$ +3.00 +Wtd Avg Price - Ceiling +$ +3.41 +$ +— +$ +— +$ +— +$ +3.41 +(1) +PEPL refers to the Panhandle Eastern Pipe Line, Tex/OK Mid-Continent Index as quoted in Platt’s Inside FERC. Perm EP refers to the El Paso Natural Gas Company, Permian Basin Index as quoted in Platt’s Inside FERC. +Under a collar agreement, we receive the difference between the published index price and a floor price if the index price is below the floor. We pay the difference between the ceiling price and the index price if the index price is above the contracted ceiling price. No amounts are paid or received if the index price is between the floor and the ceiling price. +We have elected not to account for our derivatives as cash flow hedges. Therefore, we recognize settlements and changes in the fair value of assets or liabilities relating to our open derivative contracts in earnings. Cash settlements of our contracts are included in cash flows from operating activities in our statements of cash flows. +69 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +The following table presents the net (gains) and losses from settlements and changes in fair value of our derivative contracts, and the (gains) losses from cash settlements during the periods shown below. +Years Ended December 31, +(in thousands) +2016 +2015 +2014 +(Gain) loss on derivative instruments, net: +Natural gas contracts +$ +20,995 +$ +(4,472) +$ +6,751 +Oil contracts +34,754 +(6,774) +(10,512) +(Gain) loss on derivative instruments, net +$ +55,749 +$ +(11,246) +$ +(3,761) +Settlement (gains) losses: +Natural gas contracts +$ +(6,467) +$ +— +$ +4,287 +Oil contracts +(970) +— +(11,928) +Settlement (gains) losses +$ +(7,437) +$ +— +$ +(7,641) +Our derivative contracts are carried at their fair value on our balance sheet using Level 2 inputs and are subject to enforceable master netting arrangements, which allow us to offset recognized asset and liability fair value amounts on contracts with the same counterparty. Our policy is to not offset asset and liability positions in our accompanying balance sheets. +The following table presents the amounts and classifications of our derivative assets and liabilities as of December 31, 2016 and 2015, as well as the potential effect of netting arrangements on contracts with the same counterparty. +December 31, 2016: +(in thousands) +Balance Sheet Location +Asset +Liability +Oil contracts +Current liabilities — Derivative instruments +$ +— +$ +27,892 +Natural gas contracts +Current liabilities — Derivative instruments +— +21,478 +Oil contracts +Non-current liabilities — Derivative instruments +— +1,059 +Natural gas contracts +Non-current liabilities — Derivative instruments +— +1,511 +Total gross amounts presented in accompanying balance sheet +— +51,940 +Less: gross amounts not offset in the accompanying balance sheet +— +— +Net amount: +$ +— +$ +51,940 +December 31, 2015: +(in thousands) +Balance Sheet Location +Asset +Liability +Oil contracts +Current assets — Derivative instruments +$ +6,774 +$ +— +Natural gas contracts +Current assets — Derivative instruments +3,971 +— +Natural gas contracts +Non-current assets — Derivative instruments +501 +— +Total gross amounts presented in accompanying balance sheet +11,246 +— +Less: gross amounts not offset in the accompanying balance sheet +— +— +Net amount: +$ +11,246 +$ +— +We are exposed to financial risks associated with our derivative contracts from non-performance by our counterparties. We mitigate our exposure to any single counterparty by contracting with a number of financial institutions, each of which have a high credit rating and is a member of our bank credit facility. Our member banks do not require us to post collateral for our hedge liability positions. Because some of the member banks have discontinued hedging activities, in the future we may hedge with counterparties outside our bank group to obtain competitive terms and to spread counterparty risk. +5. FAIR VALUE ME ASUREMENTS +Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The FASB has established a fair value hierarchy that +70 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +prioritizes the inputs to valuation techniques used to measure fair value. This hierarchy consists of three broad levels. Level 1 inputs are the highest priority and consist of unadjusted quoted prices in active markets for identical assets and liabilities. Level 2 are inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. Level 3 are unobservable inputs for an asset or liability. +The following table provides fair value measurement information for certain assets and liabilities as of December 31, 2016 and 2015. +December 31, 2016 +December 31, 2015 +Book +Fair +Book +Fair +(in thousands) +Value +Value +Value +Value +Financial Assets (Liabilities): +5.875% Notes due 2022 +$ +(750,000) +$ +(782,835) +$ +(750,000) +$ +(723,750) +4.375% Notes due 2024 +$ +(750,000) +$ +(779,453) +$ +(750,000) +$ +(683,318) +Derivative instruments — assets +$ +— +$ +— +$ +11,246 +$ +11,246 +Derivative instruments — liabilities +$ +(51,940) +$ +(51,940) +$ +— +$ +— +Assessing the significance of a particular input to the fair value measurement requires judgment, including the consideration of factors specific to the asset or liability. The following methods and assumptions were used to estimate the fair value of the assets and liabilities in the table above. +Debt (Level 1) +The fair value of our 4.375% and 5.875% fixed rate notes was based on their last traded value before year end. +Derivative Instruments (Level 2) +The fair value of our derivative instruments was estimated using option pricing models. These models use certain variables including forward price and volatility curves and the strike prices for the instruments. The fair value estimates are adjusted relative to non-performance risk as appropriate. See Note 4 for further information on the fair value of our derivative instruments. +Other Financial Instruments +The carrying amounts of our cash, cash equivalents, accounts receivable, accounts payable, and accrued liabilities approximate fair value because of the short-term maturities and/or liquid nature of these assets and liabilities. Included in “Accrued liabilities — other” at December 31, 2016 and 2015, respectively, are 1) liabilities of approximately $19.3 million and $23.1 million representing the amount by which checks issued, but not yet presented to our banks, exceeded balances in applicable bank accounts; 2) accrued payroll related costs of $43.5 million and $21.5 million; and 3) accrued operating expenses of $53.9 million and $60.4 million. +Our accounts receivable are primarily from either purchasers of our oil, gas, and NGL production (customers) or from exploration and production companies which own interests in properties we operate. This industry concentration has the potential to impact our overall exposure to credit risk, either positively or negatively, because our customers and joint working interest owners may be similarly affected by changes in industry conditions. +We conduct credit analyses prior to making any sales to new customers or increasing credit for existing customers and may require parent company guarantees, letters of credit, or prepayments when deemed necessary. +We routinely assess the recoverability of all material accounts receivable to determine their collectability. We accrue a reserve to the allowance for doubtful accounts when it is probable that a receivable will not be collected and the amount of the reserve may be reasonably estimated. At December 31, 2016 and 2015, the allowance for doubtful accounts totaled $1.6 million and $1.8 million, respectively. +71 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +Major Customers +Our major customer during 2016 was Sunoco Logistics Partners L.P. (Sunoco), which accounted for 20% of our consolidated revenues. Sunoco and Enterprise Products Partners L.P. (Enterprise) were our major customers in 2015, accounting for 21% and 17%, respectively, of our consolidated revenues that year. During 2014, Sunoco and Enterprise each accounted for 19% of our consolidated revenues and Oneok Partners, L.P. accounted for 10% of our consolidated revenues. +If Sunoco was to stop purchasing our production, we believe there are a number of other purchasers to whom we could sell our production with some delay. If multiple significant customers were to discontinue purchasing our product, we believe there would be challenges initially, but ample markets to handle the disruption. +6. STOCK-BASED AND OT HER COMPENSATION +We have recognized non-cash stock-based compensation cost as shown below. Historical amounts may not be representative of future amounts as the value of future awards may vary from historical amounts. +Years Ended December 31, +(in thousands) +2016 +2015 +2014 +Restricted stock awards +Performance stock awards +$ +24,183 +$ +18,991 +$ +12,141 +Service-based stock awards +18,391 +14,547 +13,607 +42,574 +33,538 +25,748 +Stock option awards +2,565 +2,803 +3,057 +45,139 +36,341 +28,805 +Less amounts capitalized to oil and gas properties +(20,616) +(16,782) +(13,804) +Compensation expense +$ +24,523 +$ +19,559 +$ +15,001 +The increase in 2016 stock compensation is primarily related to performance awards granted in December 2015, a portion of which were amortized during 2016, forfeiture rate adjustments on the service-based stock awards, and the acceleration of expense on a portion of service-based awards for employees who participated in a voluntary early retirement incentive program. +Equity Incentive Plan +Our 2014 Equity Incentive Plan (the 2014 Plan) was approved by stockholders in May 2014 and our previous plan was terminated at that time. Outstanding awards under the previous plan were not impacted. A total of 6.6 million shares of common stock may be issued under the 2014 Plan, including shares available from the previous plan. The 2014 Plan provides for grants of stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, performance units, dividend equivalents and other stock-based awards. +72 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +Restricted Stock +The following table provides information about restricted stock awards granted during the last three years. +Years Ended December 31, +2016 +2015 +2014 +Weighted +Weighted +Weighted +Average +Average +Average +Number +Grant-Date +Number +Grant-Date +Number +Grant-Date +of Shares +Fair Value +of Shares +Fair Value +of Shares +Fair Value +Performance stock awards +269,915 +$ +117.63 +263,939 +$ +87.12 +316,441 +$ +83.22 +Service-based stock awards +208,724 +$ +114.61 +207,180 +$ +114.80 +170,402 +$ +136.72 +Total restricted stock awards +478,639 +$ +116.31 +471,119 +$ +99.29 +486,843 +$ +101.95 +Performance awards were granted to eligible executives and are subject to market condition-based vesting determined by our stock price performance relative to a defined peer group’s stock price performance. After three years of continued service, an executive will be entitled to vest in 50% to 100% of the award. In accordance with Internal Revenue Code Section 162(m), certain of the amounts awarded may not be deductible for tax purposes. Service-based stock awards granted to other eligible employees and non-employee directors have vesting schedules of three to five years. +Compensation cost for the performance stock awards is based on the grant-date fair value of the award utilizing a Monte Carlo simulation model. Compensation cost for the service-based vesting restricted shares is based upon the grant-date market value of the award. Such costs are recognized ratably over the applicable vesting period. +The following table provides information on restricted stock activity during the year. +Performance +Service-based +(subject to market conditions) +Weighted +Weighted +Average +Average +Number of +Grant-Date +Number of +Grant-Date +Shares +Fair Value +Shares +Fair Value +Outstanding as of January 1, 2016 +998,182 +$ +91.37 +829,808 +$ +82.99 +Vested +(243,313) +$ +92.37 +(287,108) +$ +81.53 +Granted +208,724 +$ +114.61 +269,915 +$ +117.63 +Canceled +(28,870) +$ +110.84 +(3,345) +$ +87.14 +Outstanding as of December 31, 2016 +934,723 +$ +96.57 +809,270 +$ +96.41 +The total fair value of restricted stock that vested was $67.9 million in 2016, $52.2 million in 2015, and $34.1 million in 2014. +Unrecognized compensation cost related to unvested restricted stock at December 31, 2016 was $96.0 million. We expect to recognize that cost over a weighted average period of 2.8 years. +Restricted Units +As of December 31, 2016 and 2015, we had 8,838 restricted units outstanding. These represent restricted units held by a non-employee director who has elected to defer payment of common stock represented by the units until termination of his service on the Board of Directors. +73 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +Stock Options +Options that have been granted under the 2014 plan and previous plans expire seven to ten years from the grant date and have service-based vesting schedules of three to five years. The exercise price for an option under the 2014 plan is the closing price of our common stock as reported by the New York Stock Exchange (NYSE) on the date of grant. The previous plans provided that all grants have an exercise price of the average of the high and low prices of our common stock as reported by the NYSE on the date of grant. +Compensation cost related to stock options is based on the grant-date fair value of the award, recognized ratably over the applicable vesting period. We estimate the fair value using the Black-Scholes option-pricing model. Expected volatilities are based on the historical volatility of our common stock. We also use historical data to estimate the probability of option exercise, expected years until exercise and potential forfeitures. We use U.S. Treasury bond rates in effect at the grant date for our risk-free interest rates. +The following summarizes the options granted and related information, and the assumptions used to determine the fair value of those options. +Years Ended December 31, +2016 +2015 +2014 +Options granted +89,850 +69,000 +82,500 +Weighted average grant-date fair value +$ +33.38 +$ +37.56 +$ +41.69 +Weighted average exercise price +$ +114.07 +$ +115.28 +$ +139.02 +Total fair value (in thousands) +$ +2,999 +$ +2,592 +$ +3,439 +Expected years until exercise +4.0 +5.0 +4.0 +Expected stock volatility +36.7 +% +36.6 +% +36.7 +% +Dividend yield +0.3 +% +0.6 +% +0.5 +% +Risk-free interest rate +0.96 +% +1.6 +% +1.8 +% +Information about outstanding stock options is summarized below. +Weighted +Weighted +Aggregate +Average +Average +Intrinsic +Exercise +Remaining +Value +Options +Price +Term +(in thousands) +Outstanding as of January 1, 2016 +299,229 +$ +93.76 +Exercised +(63,727) +$ +75.37 +Granted +89,850 +$ +114.07 +Canceled +(1,997) +$ +139.02 +Forfeited +(15,545) +$ +123.00 +Outstanding as of December 31, 2016 +307,810 +$ +101.72 +4.6 +Years +$ +10,846 +Exercisable as of December 31, 2016 +159,449 +$ +86.99 +3.4 +Years +$ +7,996 +The following table provides information regarding options exercised and the grant-date fair value of options vested. +Years Ended December 31, +(in thousands) +2016 +2015 +2014 +Number of options exercised +63,727 +141,517 +211,258 +Cash received from option exercises +$ +4,804 +$ +8,451 +$ +11,898 +Tax benefit from option exercises included in paid-in-capital (1) +$ +— +$ +4,442 +$ +— +Intrinsic value of options exercised +$ +2,994 +$ +7,467 +$ +15,384 +Grant-date fair value of options vested +$ +2,486 +$ +2,734 +$ +4,419 +(1) +No tax benefit is recorded until the benefit reduces current taxes payable. However, in 2015 we recognized tax benefit on prior period option exercises. +74 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +The following summary reflects the status of non-vested stock options as of December 31, 2016 and changes during the year. +Weighted +Weighted +Average +Average +Grant-Date +Exercise +Options +Fair Value +Price +Non-vested as of January 1, 2016 +157,041 +$ +34.77 +$ +111.58 +Vested +(82,985) +$ +29.95 +$ +101.46 +Granted +89,850 +$ +33.38 +$ +114.07 +Forfeited +(15,545) +$ +19.70 +$ +123.00 +Non-vested as of December 31, 2016 +148,361 +$ +35.58 +$ +117.55 +As of December 31, 2016, there was $3.6 million of unrecognized compensation cost related to non-vested stock options. We expect to recognize that cost on a pro rata basis over a weighted average period of 2.0 years. +Other Compensation +We maintain and sponsor a contributory 401(k) plan for our employees. Annual matching costs related to the plan were $6.7 million, $6.4 million, and $11.0 million for 2016, 2015, and 2014, respectively. +7. EARNINGS (LOSS) P ER SHARE +The calculations of basic and diluted net earnings (loss) per common share under the two-class method are presented below. +Years Ended December 31, +(in thousands, except per share data) +2016 +2015 +2014 +Basic: +Net income (loss) +$ +(431,049) +$ +(2,408,948) +$ +507,204 +Participating securities’ share in earnings (1) +— +— +(9,906) +Net income (loss) applicable to common stockholders +$ +(431,049) +$ +(2,408,948) +$ +497,298 +Diluted: +Net income (loss) +$ +(431,049) +$ +(2,408,948) +$ +507,204 +Participating securities’ share in earnings (1) +— +— +(9,891) +Net income (loss) applicable to common stockholders +$ +(431,049) +$ +(2,408,948) +$ +497,313 +Shares: +Basic shares outstanding +93,379 +92,992 +85,679 +Dilutive effect of stock options +— +— +131 +Fully diluted common stock +93,379 +92,992 +85,810 +Excluded (2) +2,061 +2,136 +94 +Earnings (loss) per share to common stockholders (3): +Basic +$ +(4.62) +$ +(25.92) +$ +5.79 +Diluted +$ +(4.62) +$ +(25.92) +$ +5.78 +(1) +Participating securities are not included in undistributed earnings when a loss exists. +(2) +Inclusion of certain shares would have an anti-dilutive effect. +(3) +Earnings (loss) per share is based on actual figures rather than the rounded figures presented. +75 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +8. ASSET RETIREM ENT OBLIGATIONS +The following table reflects the components of the change in the carrying amount of the asset retirement obligation for the years ended December 31, 2016 and 2015. +(in thousands) +2016 +2015 +Asset retirement obligation at January 1, +$ +164,105 +$ +173,008 +Liabilities incurred +3,914 +4,114 +Liability settlements and disposals +(24,108) +(25,061) +Accretion expense +7,595 +7,682 +Revisions of estimated liabilities +3,017 +4,362 +Asset retirement obligation at December 31, +154,523 +164,105 +Less current obligation +13,753 +10,248 +Long-term asset retirement obligation +$ +140,770 +$ +153,857 +During 2016 and 2015, the liability settlements and disposals included $14.9 million and $13.3 million, respectively, related to properties that were sold. +9. INCOME TAXES +The components of the provision for income taxes are as follows: +Years Ended December 31, +(in thousands) +2016 +2015 +2014 +Current taxes: +Federal expense +$ +— +$ +14,417 +$ +— +State (benefit) expense +(1,115) +293 +404 +(1,115) +14,710 +404 +Deferred taxes: +Federal (benefit) expense +(213,508) +(1,294,194) +282,729 +State (benefit) expense +(12,592) +(93,952) +15,564 +(226,100) +(1,388,146) +298,293 +$ +(227,215) +$ +(1,373,436) +$ +298,697 +Federal income tax expense (benefit) for the years presented differs from the amounts that would be provided by applying the U.S. federal income tax rate, primarily due to the effect of state income taxes, non-deductible expenses and revisions. Reconciliations of the income tax expense (benefit) calculated at the federal statutory rate of 35% to the total income tax expense (benefit) are as follows: +Years Ended December 31, +(in thousands) +2016 +2015 +2014 +Provision at statutory rate +$ +(230,393) +$ +(1,323,834) +$ +282,066 +Effect of state taxes +(10,780) +(60,634) +15,826 +Revision of previous balances +7,181 +5,997 +— +Other permanent differences +5,296 +5,035 +805 +Change in valuation allowance +1,481 +— +— +Income tax expense (benefit) +$ +(227,215) +$ +(1,373,436) +$ +298,697 +76 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +The components of net deferred tax liabilities are as follows: +December 31, +(in thousands) +2016 +2015 +Assets: +Stock compensation and other accrued amounts +$ +58,306 +$ +32,084 +Net operating loss carryforward, net of valuation allowance +399,912 +305,506 +Credit carryforward +6,016 +6,016 +464,234 +343,606 +Liabilities: +Property, plant and equipment +(591,128) +(696,311) +Net deferred tax liabilities +$ +(126,894) +$ +(352,705) +At December 31, 2016, we had a U.S. net tax operating loss carryforward of approximately $1,182.4 million, which would expire in years 2031 through 2036. We believe that the carryforward will be utilized before it expires. We recorded a $10.4 million increase to the net operating loss carryforward at December 31, 2016, for certain state losses and a corresponding increase in the state net operating loss valuation allowance of $11.9 million. The net decrease in the state net operating losses after reduction for the valuation allowance was $1.5 million. The total valuation allowance on state net operating losses at December 31, 2016, was $82.0 million because it is not more likely than not that these additional state net operating losses will be utilized before they expire. Approximately $90.9 million of the U.S. net tax operating loss carryforward is attributable to deductions taken for employee stock awards on the Company’s tax returns in excess of amounts expensed through the Company’s income statement. We also had an alternative minimum tax credit carryforward of approximately $6.0 million. +At December 31, 2016 and 2015, we had no unrecognized tax benefits that would impact our effective rate and we have made no provisions for interest or penalties related to uncertain tax positions. The tax years 2013 through 2015 remain open to examination by the Internal Revenue Service of the United States. We file tax returns with various state taxing authorities which remain open to examination for tax years 2012 through 2015. +10. COMMITMENTS AN D CONTINGENCIES +Lease Commitments +We have various commitments for office space and equipment under operating lease arrangements. Rent expense for the operating leases totaled $12.9 million in 2016. Rent expense was $13.2 million and $14.3 million for 2015 and 2014, respectively. +Shown below are future minimum cash payments required under these leases as of December 31, 2016. +Operating +(in thousands) +Leases +2017 +$ +9,585 +2018 +10,531 +2019 +10,677 +2020 +10,864 +2021 +11,085 +Later years +44,181 +Total future minimum lease payments +$ +96,923 +77 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +Other Commitments +We have commitments of $157.5 million to finish drilling and completing wells in progress at December 31, 2016. +At December 31, 2016, we had firm sales contracts to deliver approximately 46.4 Bcf of natural gas over the next twenty-two months. If this gas is not delivered, our financial commitment would be approximately $164.8 million. This commitment will fluctuate due to price volatility and actual volumes delivered. However, we believe no financial commitment will be due based on our current proved reserves and production levels from which we can fulfill these obligations. +In connection with gas gathering and processing agreements, we have volume commitments over the next ten years. At December 31, 2016, if no gas is delivered, the maximum amount that would be payable under these commitments would be approximately $220.0 million. However, we believe no financial commitment will be due based on our current proved reserves and production levels from which we can fulfill these obligations. +We have minimum volume delivery commitments in connection with agreements to reimburse connection costs to various pipelines. At December 31, 2016, the maximum amount that would be payable if no gas is delivered would be approximately $7.9 million. Of this total, we have accrued a liability of $2.1 million. We may have additional liabilities associated with these delivery commitments in the future depending on our production levels and drilling results. +We have other various transportation, delivery, and facilities commitments in the normal course of business, which approximate $35.7 million at December 31, 2016. We currently anticipate meeting these obligations. +All of the noted commitments were made in the normal course of our business. +Litigation +In the normal course of business, we have various litigation matters. We assess the probability of estimable amounts related to litigation matters in accordance with guidance established by the FASB and adjust our accruals accordingly. Though some of the related claims may be significant, the resolution of them we believe, individually or in the aggregate, would not have a material adverse effect on our financial condition or results of operations after consideration of current accruals. +H.B. Krug, et al. v. Helmerich & Payne, Inc. +In 2008, we recorded litigation expense of $119.6 million for the H.B. Krug, et al. v. Helmerich & Payne, Inc. trial court verdict, and began accruing additional post-judgment interest and costs for this case. +On December 13, 2013, the Oklahoma Supreme Court reversed the trial court’s $119.6 million verdict and affirmed an alternative jury verdict for $3.65 million. The Supreme Court also remanded the case back to the trial court for consideration of potential prejudgment interest, attorney’s fees and cost awards. Accordingly, on December 31, 2013 we reduced the previously recognized litigation expense, which included related interest and costs, and the associated long-term liability by $142.8 million. +On April 1, 2014, Cimarex paid the Plaintiffs $15.8 million in satisfaction of the $3.65 million damages award, the post-judgment interest award and the payment in lieu of bond, all of which are now final and not appealable. On June 24, 2014, the trial court ruled the Plaintiffs were not entitled to prejudgment interest but were entitled to attorney’s fees and costs, the amount of which will be determined at a subsequent hearing. On November 3, 2015, the Oklahoma Supreme Court affirmed the trial court’s denial of prejudgment interest. The only remaining issue is the amount of Plaintiffs’ award of attorney’s fees, which is subject to future trial and appellate court proceedings and, therefore, cannot be determined at this time. +78 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +11. RELATED PARTY TRA NSACTIONS +Helmerich & Payne, Inc. (H&P) provides contract drilling services to Cimarex. Drilling costs of approximately $18.3 million were incurred by Cimarex related to such services for 2016. During 2015 and 2014, such costs were $7.9 million and $18.4 million, respectively. Hans Helmerich, a director of Cimarex, is Chairman of the Board of Directors of H&P. +Lisa Stewart, who joined Cimarex’s Board of Directors in October 2015, is Chairman, President, Chief Executive Officer, and Chief Investment Officer of Sheridan Production Partners (Sheridan). During 2016, Cimarex paid certain affiliates of Sheridan oil and gas revenues of $177.6 thousand and joint interest billings of $5.2 thousand and received oil and gas revenues of $0.4 thousand and joint interest billings of $73.1 thousand from Sheridan affiliates. During 2015, Cimarex paid certain affiliates of Sheridan oil and gas revenues of $224.2 thousand and joint interest billings of $10.4 thousand and received oil and gas revenues of $4.1 thousand and joint interest billings of $81.5 thousand from Sheridan affiliates. +Jerry Box, a director of Cimarex whose term expired May 2015, was the non-executive Chairman of the Board of Directors of Newpark Resources, Inc. (Newpark) through May 2014. Certain subsidiaries of Newpark provided various drilling services to Cimarex. Costs of such services were $589.2 thousand through May 2014. +12. PROPERTY SALES AN D ACQUISITIONS +The following sales and acquisitions were made in the ordinary course of business. All amounts are net of customary purchase price adjustments. +There were no significant sales and acquisitions in 2016 or 2015. We sold interests in various non-core oil and gas properties for $446.1 million during 2014. Most of the proceeds were related to sales of producing gas wells in southwestern Kansas and undeveloped acreage in Reagan County, Texas. During 2014, we made property acquisitions totaling $249.7 million, most of which were in our Cana area in Western Oklahoma. +13. SUPPLEMENTAL DISC LOSURE OF CASH FLOW INFORMATION +Years Ended December 31, +(in thousands) +2016 +2015 +2014 +Cash paid during the period for: +Interest expense (including capitalized amounts) +$ +79,590 +$ +80,785 +$ +66,167 +Interest capitalized +$ +20,308 +$ +28,819 +$ +32,623 +Income taxes +$ +13 +$ +558 +$ +354 +Cash received for income tax refunds +$ +1,450 +$ +1,503 +$ +460 +79 +Table of Contents +SUPPLEMENTAL OIL AND GAS INFORMATION (UNAUDITED) +Oil and Gas Reserve Information —Proved reserve quantities are based on estimates prepared by Cimarex in accordance with guidelines established by the Securities and Exchange Commission (SEC). +Reserve definitions comply with definitions of Rule 4-10(a) (1)-(32) of Regulation S-X of the SEC. All of our reserve estimates are maintained by our internal Corporate Reservoir Engineering group, which is comprised of reservoir engineers and engineering technicians. The objectives and management of this group are separate from and independent of the exploration and production functions of our company. The technical employee primarily responsible for overseeing the reserve estimation process is our company’s Vice President of Corporate Engineering. This individual graduated from the Colorado School of Mines with a Bachelor of Science degree in Engineering and has more than 22 years of practical experience in reserve evaluation. He has been directly involved in the annual reserve reporting process of Cimarex since 2002 and has served in his current role for the past twelve years. +DeGolyer and MacNaughton, an independent petroleum engineering consulting firm, reviewed reserves associated with greater than 80% of the total future net revenue discounted at 10% attributable to the total interests owned by Cimarex as of December 31, 2016. The individual primarily responsible for overseeing the review is a Senior Vice President with DeGolyer and MacNaughton and a Registered Professional Engineer in the State of Texas with over 37 years of experience in oil and gas reservoir studies and evaluations. +Proved reserves are those quantities of oil, NGL, and gas, which, by analysis of geosciences and engineering data, can be estimated with reasonable certainty to be economically producible—from a given date forward, from known reservoirs, and under existing economic conditions, operating methods, and government regulations—prior to the time at which contracts providing the right to operate expire, unless evidence indicates that renewal is reasonably certain, regardless of whether deterministic or probabilistic methods are used for the estimation. The project to extract the hydrocarbons must have commenced or the operator must be reasonably certain that it will commence the project within a reasonable time. +There are numerous uncertainties inherent in estimating quantities of proved reserves and projecting future rates of production and the timing of development expenditures. The estimation of our proved reserves employs one or more of the following: production trend extrapolation, analogy, volumetric assessment, and material balance analysis. Techniques including review of production and pressure histories, analysis of electric logs and fluid tests, and interpretations of geologic and geophysical data also are involved in this estimation process. +The following table summarizes the trailing 12-month index prices used in the reserve estimates for 2016, 2015, and 2014. These prices are prior to adjustments for fixed and determinable amounts under provisions in existing contracts, location, grade and quality. +December 31, +2016 +2015 +2014 +Gas price per Mcf +$ +2.48 +$ +2.59 +$ +4.35 +Oil price per Bbl +$ +42.75 +$ +50.28 +$ +94.99 +NGL price per Bbl +$ +14.37 +$ +14.41 +$ +30.89 +80 +Table of Contents +The following reserve data represents estimates only and should not be construed as being exact. +Gas +Oil +NGL +Total +(MMcf) +(MBbl) +(MBbl) +(MMcfe) +Total proved reserves: +December 31, 2013 +1,293,500 +108,533 +92,044 +2,496,964 +Revisions of previous estimates +85,533 +(1,039) +4,262 +104,873 +Extensions and discoveries +420,442 +29,155 +36,424 +813,911 +Purchases of reserves +88,227 +1,383 +6,186 +133,641 +Production +(155,128) +(15,639) +(11,343) +(317,022) +Sales of properties +(65,841) +(3,401) +(2,300) +(100,044) +December 31, 2014 +1,666,733 +118,992 +125,273 +3,132,323 +Revisions of previous estimates +(154,390) +(14,633) +(5,668) +(276,192) +Extensions and discoveries +183,084 +22,859 +18,079 +428,714 +Purchases of reserves +15 +1 +1 +25 +Production +(168,987) +(18,663) +(13,063) +(359,343) +Sales of properties +(9,503) +(758) +(345) +(16,120) +December 31, 2015 +1,516,952 +107,798 +124,277 +2,909,407 +Revisions of previous estimates +5,888 +(4,357) +6,670 +19,761 +Extensions and discoveries +123,175 +19,419 +14,050 +323,987 +Purchases of reserves +959 +1 +— +965 +Production +(168,227) +(16,528) +(14,200) +(352,591) +Sales of properties +(7,327) +(455) +(164) +(11,042) +December 31, 2016 +1,471,420 +105,878 +130,633 +2,890,487 +Proved developed reserves: +December 31, 2013 +1,060,704 +86,665 +69,089 +1,995,233 +December 31, 2014 +1,263,957 +100,050 +89,630 +2,402,033 +December 31, 2015 +1,129,490 +89,189 +87,549 +2,189,920 +December 31, 2016 +1,144,720 +92,032 +99,176 +2,291,966 +Proved undeveloped reserves: +December 31, 2013 +232,796 +21,868 +22,955 +501,731 +December 31, 2014 +402,776 +18,942 +35,643 +730,290 +December 31, 2015 +387,462 +18,609 +36,728 +719,487 +December 31, 2016 +326,700 +13,846 +31,457 +598,521 +Year-end 2016 proved reserves declined by less than 1% from year-end 2015 proved reserves, to 2.89 Tcfe. Proved natural gas reserves were 1.47 Tcf, proved oil reserves were 0.64 Tcfe, and proved NGL reserves were 0.78 Tcfe. Our reserves in the Mid-Continent accounted for 63% of total proved reserves, with the majority of the remainder in the Permian Basin. +During 2016, we added 324.0 Bcfe of proved reserves through extensions and discoveries, primarily in the Mid-Continent and Permian Basin, where we added 121.6 Bcfe and 198.7 Bcfe, respectively. In addition, we had net positive revisions of 19.8 Bcfe. The revisions included increases of 126.2 Bcfe for net performance revisions and 138.5 Bcfe related to decreases in operating expenses, partially offset by negative revisions of 244.9 Bcfe due to lower commodity prices. The performance revisions resulted primarily from positive adjustments to previously booked PUD reserves (72.3 Bcfe) and better than expected performance from wells with initial production in late 2015. +During 2015, we added 428.7 Bcfe of proved reserves through extensions and discoveries, primarily in the Mid-Continent and Permian Basin, where we added 176.8 Bcfe and 251.1 Bcfe, respectively. During 2015, we had net negative reserve revisions of 276.2 Bcfe. The significant decrease in commodity prices seen in 2015 resulted in negative revisions of 398.8 Bcfe due to prices. In addition, 19.1 Bcfe of negative revisions were due to increases in operating expenses, which shortened the economic lives of properties. These decreases were partially offset by net positive performance revisions of 141.7 Bcfe, which included 47.4 Bcfe for better than expected performance of PUD reserves converted to proved developed reserves during the year and positive adjustments of 95.3 Bcfe to previously booked PUD reserves. +81 +Table of Contents +During 2014, we added 813.9 Bcfe of proved reserves through extensions and discoveries, primarily in the Mid-Continent and Permian Basin. In the Mid-Continent, we added 80.4 Bcfe from wells drilled and added 496.6 Bcfe of PUD reserves in our Cana area. In the Permian Basin, development drilling added 234.3 Bcfe. +During 2014, we had net positive reserve revisions of 104.9 Bcfe. Performance revisions were a net positive of approximately 113.4 Bcfe. This net increase was due to better than expected performance of PUD reserves converted to proved developed reserves during the year (124.7 Bcfe) and positive adjustments to previously booked PUD reserves (10.1 Bcfe), offset by 21.4 Bcfe of net negative revisions primarily attributed to Cana area wells impacted by infill drilling. Additionally, there were positive price revisions of 16.1 Bcfe, offset by negative revisions of 24.6 Bcfe due to increases in operating expenses, which shortened the economic lives of properties. +At December 31, 2016, we had PUD reserves of 598.5 Bcfe, down 121.0 Bcfe, or 17%, from 719.5 Bcfe of PUD reserves at December 31, 2015. Changes in our PUD reserves are summarized in the table below (in Bcfe). +PUD reserves at December 31, 2015 +719.5 +Converted to developed +(104.3) +Additions +35.6 +Net revisions +(52.3) +PUD reserves at December 31, 2016 +598.5 +During 2016, we invested $97.7 million to develop and convert 14% of our 2015 PUD reserves to proved developed reserves. Additionally, in 2016 we invested $11.1 million to develop 2015 PUD reserves that were waiting on completion at year-end and had not yet been converted to proved developed reserves. During 2015, we invested $246.5 million to develop PUD reserves, converting 24% of our 2014 PUD reserves to proved developed reserves. During 2014, we invested $503.5 million to develop PUD reserves, converting 56% of our 2013 PUD reserves to proved developed reserves. +All 35.6 Bcfe of our 2016 PUD reserve additions occurred in our western Oklahoma Cana area. At December 31, 2016, all of our PUD reserves are associated with this area. We have no PUD reserves that have remained undeveloped for five years or more after initial booking and we have no PUD reserves whose scheduled delay to initiation of development is beyond five years of initial booking. +During 2016, we had net negative PUD reserve revisions of 52.3 Bcfe. This included 127.3 Bcfe removed due to lower commodity prices partially offset by positive technical adjustments of 72.3 Bcfe to remaining previously booked PUD reserves. Further, negative additional price revisions of 7.8 Bcfe to remaining PUD reserves were more than offset by 10.5 Bcfe of positive revisions due to lower projected operating expenses. +82 +Table of Contents +Costs Incurred —The following table sets forth the capitalized costs incurred in our oil and gas production, exploration, and development activities. +Years Ended December 31, +(in thousands) +2016 +2015 +2014 +Costs incurred during the year: +Acquisition of properties +Proved +$ +2,678 +$ +30 +$ +138,508 +Unproved +67,961 +41,233 +277,099 +Exploration +5,814 +6,902 +50,271 +Development +672,842 +823,830 +1,664,877 +Oil and gas expenditures +749,295 +871,995 +2,130,755 +Property sales +(24,687) +(41,276) +(446,107) +724,608 +830,719 +1,684,648 +Asset retirement obligation, net +(7,950) +(4,818) +27,243 +$ +716,658 +$ +825,901 +$ +1,711,891 +Aggregate Capitalized Costs —The table below reflects the aggregate capitalized costs relating to our oil and gas producing activities at December 31, 2016. +(in thousands) +Proved properties +$ +16,225,495 +Unproved properties and properties under development, not being amortized +478,277 +16,703,772 +Less-accumulated depreciation, depletion, amortization, and impairments +(13,849,701) +Net oil and gas properties +$ +2,854,071 +Costs Not Being Amortized —The following table summarizes oil and gas property costs not being amortized at December 31, 2016, by year that the costs were incurred. +(in thousands) +2016 +$ +234,905 +2015 +42,808 +2014 +114,746 +2013 and prior +85,818 +$ +478,277 +Of the costs not being amortized, $173.5 million (36%) relates to unevaluated wells in progress and $48.5 million (10%) is capitalized interest. The remaining $256.3 million (54%) is for land and seismic expenditures, most of which were for costs invested in our Mid-Continent region ($136.9 million) and our Permian Basin region ($91.6 million). On a quarterly basis, we evaluate excluded costs for inclusion in the costs to be amortized. Significant unproved properties are evaluated individually. Unproved properties that are not considered individually significant are aggregated for evaluation purposes and related costs are transferred to the costs to be amortized quarterly based on the application of historical factors. We expect to include these costs in the amortization computation as we continue with our exploration and development plans. +83 +Table of Contents +Oil and Gas Operations —The following table contains direct revenue and cost information relating to our oil and gas exploration and production activities for the periods indicated. We have no long-term supply or purchase agreements with governments or authorities in which we act as producer. Income tax expense related to our oil and gas operations is computed using the effective tax rate for the period. +Years Ended December 31, +(in thousands, except per Mcfe) +2016 +2015 +2014 +Oil, gas and NGL revenues from production +$ +1,221,218 +$ +1,417,538 +$ +2,372,829 +Less operating costs and income taxes: +Impairment of oil and gas properties +719,142 +3,716,883 +— +Depletion +419,591 +736,583 +773,817 +Asset retirement obligation +7,828 +9,121 +10,082 +Production +232,002 +299,374 +342,304 +Transportation, processing and other operating +210,144 +183,134 +215,246 +Taxes other than income +61,946 +84,764 +128,793 +Income tax expense (benefit) +(148,155) +(1,311,634) +334,499 +1,502,498 +3,718,225 +1,804,741 +Results of operations from oil and gas producing activities +$ +(281,280) +$ +(2,300,687) +$ +568,088 +Depletion rate per Mcfe +$ +1.19 +$ +2.05 +$ +2.44 +Standardized Measure of Future Net Cash Flows —The “Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil and Gas Reserves” (Standardized Measure) is calculated in accordance with guidance provided by the FASB. The Standardized Measure does not purport, nor should it be interpreted, to present the fair value of a company’s proved oil and gas reserves. Fair value would require, among other things, consideration of expected future economic and operating conditions, varying price and cost assumptions, and risks inherent in reserve estimates. +Under the Standardized Measure, future cash inflows are based upon the forecasted future production of year-end proved reserves. Future cash inflows are then reduced by estimated future production and development costs to determine net pre-tax cash flow. Future income taxes are computed by applying the statutory tax rate to the excess of pre-tax cash flow over our tax basis in the associated oil and gas properties. Tax credits and permanent differences are also considered in the future income tax calculation. Future net cash flow after income taxes is discounted using a 10% annual discount rate to arrive at the Standardized Measure. +The following summary sets forth our Standardized Measure. +December 31, +(in thousands) +2016 +2015 +2014 +Cash inflows +$ +7,576,211 +$ +8,839,485 +$ +19,892,471 +Production costs +(2,970,891) +(3,521,881) +(5,777,710) +Development costs +(794,298) +(1,058,020) +(1,453,860) +Income tax expense +(507,145) +(728,029) +(3,768,780) +Net cash flow +3,303,877 +3,531,555 +8,892,121 +10% annual discount rate +(1,411,259) +(1,597,424) +(4,539,276) +Standardized measure of discounted future net cash flow +$ +1,892,618 +$ +1,934,131 +$ +4,352,845 +The estimates of cash flows and reserve quantities shown above are based upon the unweighted average 12 month first-day-of-the-month benchmark prices. See table above under Oil and Gas Reserve Information for prices used in determining the Standardized Measure. If future gas sales are covered by contracts at specified prices, the contract prices would be used. Prices are market driven and will fluctuate due to supply and demand factors, seasonality, and geopolitical and economic factors. +84 +Table of Contents +The following are the principal sources of change in the Standardized Measure. +December 31, +(in thousands) +2016 +2015 +2014 +Standardized Measure, beginning of period +$ +1,934,131 +$ +4,352,845 +$ +3,598,894 +Sales, net of production costs +(717,126) +(850,267) +(1,686,486) +Net change in sales prices, net of production costs +(429,956) +(4,262,261) +(176,200) +Extensions and discoveries, net of future production and development costs +517,702 +573,373 +1,633,285 +Changes in future development costs +167,387 +280,163 +23,025 +Previously estimated development costs incurred during the period +110,945 +214,749 +442,780 +Revision of quantity estimates +15,701 +(240,063) +230,673 +Accretion of discount +227,904 +638,948 +520,058 +Change in income taxes +115,609 +1,691,721 +(434,949) +Purchases of reserves in place +429 +20 +228,539 +Sales of properties +(9,440) +(26,225) +(185,326) +Change in production rates and other +(40,668) +(438,872) +158,552 +Standardized Measure, end of period +$ +1,892,618 +$ +1,934,131 +$ +4,352,845 +SUPPLEMENTAL QUARTERLY FINANCIAL DATA (UNAUDITED) +Quarter +2016 +First +Second +Third +Fourth +(in thousands, except for per share data) +Revenues +$ +240,600 +$ +298,873 +$ +335,717 +$ +382,155 +Expenses, net (1) +426,731 +569,163 +348,535 +343,965 +Net income (loss) +$ +(186,131) +$ +(270,290) +$ +(12,818) +$ +38,190 +Earnings (loss) per share to common stockholders: +Basic: +Distributed +$ +0.08 +$ +0.08 +$ +0.08 +$ +0.08 +Undistributed +(2.08) +(2.99) +(0.22) +0.32 +$ +(2.00) +$ +(2.91) +$ +(0.14) +$ +0.40 +Diluted: +Distributed +$ +0.08 +$ +0.08 +$ +0.08 +$ +0.08 +Undistributed +(2.08) +(2.99) +(0.22) +0.32 +$ +(2.00) +$ +(2.91) +$ +(0.14) +$ +0.40 +(1) +The 2016 quarterly expenses, net include non-cash impairments to our oil and gas properties of $230.1 million (or $1.57 per diluted share), $399.2 million (or $2.73 per diluted share), and $89.8 million (or $0.61 per diluted share) for the first quarter through the third quarter of 2016, respectively, as discussed in Note 1 to the Consolidated Financial Statements under Oil and Gas Properties . +85 +Table of Contents +Quarter +2015 +First +Second +Third +Fourth +(in thousands, except for per share data) +Revenues +$ +361,002 +$ +424,283 +$ +356,055 +$ +311,279 +Expenses, net (1) +775,943 +1,024,498 +1,119,339 +941,787 +Net loss +$ +(414,941) +$ +(600,215) +$ +(763,284) +$ +(630,508) +Earnings (loss) per share to common stockholders: +Basic: +Distributed +$ +0.16 +$ +0.16 +$ +0.16 +$ +0.16 +Undistributed +(5.00) +(6.63) +(8.37) +(6.94) +$ +(4.84) +$ +(6.47) +$ +(8.21) +$ +(6.78) +Diluted: +Distributed +$ +0.16 +$ +0.16 +$ +0.16 +$ +0.16 +Undistributed +(5.00) +(6.63) +(8.37) +(6.94) +$ +(4.84) +$ +(6.47) +$ +(8.21) +$ +(6.78) +(1) +The 2015 quarterly expenses, net include non-cash impairments to our oil and gas properties of $603.6 million (or $4.47 per diluted share), $967.3 million (or $6.62 per diluted share), $1.2 billion (or $8.07 per diluted share) and $965.3 million (or $6.60 per diluted share) for the first quarter through the fourth quarter of 2015, respectively, as discussed in Note 1 to the Consolidated Financial Statements under Oil and Gas Properties . +The sum of the individual quarterly net income per common share amounts does not agree with year-to-date net income per common share because each quarter’s computation is based on the number of shares outstanding at the end of the applicable quarter using the two-class method. +86 +Table of Contents +ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE +None. +ITEM 9A . CONTROLS AND PROCEDURES +EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES +Cimarex’s management, under the supervision and with the participation of the Chief Executive Officer (CEO) and Chief Financial Officer (CFO), have evaluated the effectiveness of Cimarex’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)) as of December 31, 2016. Based on that evaluation, the CEO and CFO concluded that the disclosure controls and procedures are effective in providing reasonable assurance that information required to be disclosed in reports filed with the SEC is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. The disclosure controls and procedures are designed to provide reasonable assurance that such information is accumulated and communicated to our management, including the CEO and CFO, as appropriate, to allow such persons to make timely decisions regarding required disclosures. +CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING +There was no change in our internal control over financial reporting that occurred during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. +MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING +Cimarex’s management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act). The company’s internal control over financial reporting is a process designed by, or under the supervision of, the CEO and CFO to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with generally accepted accounting principles. +Because of the inherent limitations of internal control over financial reporting, misstatements may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +As of December 31, 2016, management assessed the effectiveness of the company’s internal control over financial reporting based on the criteria established in “Internal Control-Integrated Framework (2013),” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that assessment, management concluded that the company’s internal control over financial reporting was effective as of December 31, 2016. +Our independent registered public accounting firm has audited, and reported on, the effectiveness of our internal control over financial reporting as of December 31, 2016, which follows this report. +87 +Table of Contents +Report of Independent Registered Public Accounting Firm +The Board of Directors and Stockholders +Cimarex Energy Co.: +We have audited Cimarex Energy Co. and subsidiaries’ internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Cimarex Energy Co. and subsidiaries’ management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on Cimarex Energy Co. and subsidiaries’ internal control over financial reporting based on our audit. +We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. +A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. +Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +In our opinion, Cimarex Energy Co. and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). +We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Cimarex Energy Co. and subsidiaries as of December 31, 2016 and 2015, and the related consolidated statements of operations and comprehensive income (loss), stockholders’ equity, and cash flows for each of the years in the three year period ended December 31, 2016, and our report dated February 24, 2016 expressed an unqualified opinion on those consolidated financial statements. +KPMG LLP +Denver, Colorado +February 24, 2017 +88 +Table of Contents +ITEM 9 B. OTHER INFORMATION +None. +89 +Table of Contents +PART II I +ITEM 10. DIRECTOR S, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE +Information concerning the directors of Cimarex required under this item is incorporated by reference from the Cimarex Energy Co. definitive Proxy Statement for the May 11, 2017 Annual Meeting of Shareholders. The Proxy Statement will be filed with the Securities and Exchange Commission no later than 120 days subsequent to December 31, 2016. The executive officers of Cimarex as of February 24, 2017 were: +Name +Age +Office +Thomas E. Jorden +59 +Chairman of the Board, Chief Executive Officer and President +Joseph R. Albi +58 +Executive Vice President – Operations, Chief Operating Officer +Stephen P. Bell +62 +Executive Vice President – Business Development +G. Mark Burford +49 +Vice President and Chief Financial Officer +Francis B. Barron +54 +Senior Vice President – General Counsel +John A. Lambuth +54 +Senior Vice President – Exploration +Gary R. Abbott +44 +Vice President – Corporate Engineering +Krista L. Johnson +46 +Vice President – Human Resources, Governmental Relations, and External Affairs +Timothy A. Ficker +49 +Vice President – Controller, Chief Accounting Officer, and Assistant Secretary +There are no family relationships by blood, marriage, or adoption among any of the above executive officers. All executive officers are elected annually by the board of directors to serve for one year or until a successor is elected and qualified. There is no arrangement or understanding between any of the officers and any other person pursuant to which he or she was selected as an executive officer. +THOMAS E. JORDEN was elected Chairman of the Board effective August 14, 2012 after being named President and Chief Executive Officer effective September 30, 2011. Since December 8, 2003, Mr. Jorden served as Executive Vice President of Exploration and had served in a similar capacity since September 30, 2002. Prior to September 2002, Mr. Jorden was with Key Production Company, Inc., where he served as Vice President of Exploration (October 1999 to September 2002) and Chief Geophysicist (November 1993 to September 1999). Prior to joining Key, Mr. Jorden was with Union Pacific Resources. +JOSEPH R. ALBI was named Executive Vice President and Chief Operating Officer effective September 30, 2011. Mr. Albi served as Executive Vice President of Operations since March 1, 2005. Since December 8, 2003, Mr. Albi served as Senior Vice President of Corporate Engineering. From September 30, 2002 to December 8, 2003, he served as Vice President of Engineering. From June 1994 to September 2002, Mr. Albi was with Key Production Company, Inc. where he served as Vice President of Engineering and Manager of Engineering. +STEPHEN P. BELL was named Executive Vice President, Business Development effective September 13, 2012. Since September 2002, Mr. Bell served as Senior Vice President of Business Development and Land. Prior to its merger with Cimarex, Mr. Bell was with Key Production Company, Inc. since February 1994. In September 1999, he was appointed Senior Vice President, Business Development and Land. From February 1994 to September 1999, he served as Vice President, Land. +G. MARK BURFORD was named Vice President and Chief Financial Officer in September 2015. He was appointed Vice President, Capital Markets and Planning in December 2010. Mr. Burford joined Cimarex in April 2005 as Director of Capital Markets. Prior to joining Cimarex, he was Director of Investor Relations for Whiting Petroleum and Tom Brown, Inc. His experience also includes equity research with Petrie Parkman & Co., an investment banking firm, and public accounting. +FRANCIS B. BARRON joined Cimarex as Senior Vice President, General Counsel in July 2013. From February 2004 until July 2013, Mr. Barron served in various capacities at Bill Barrett Corporation, a publicly traded, Denver-based +90 +Table of Contents +oil and gas exploration and development company, including as Executive Vice President, General Counsel and Secretary. He also served as Chief Financial Officer from November 2006 until March 2007. Prior to February 2004, Mr. Barron was a partner at the Denver, Colorado office of the law firm of Patton Boggs LLP as well as a partner at Bearman Talesnick & Clowdus Professional Corporation. Mr. Barron’s practice included corporate, securities and business law for publicly traded oil and gas companies. +JOHN LAMBUTH was named Senior Vice President of Exploration in December 2015. Prior to his promotion, he served as the Company’s Vice President of Exploration since September 2012 and Chief Geophysicist, a position he held since joining Cimarex in 2004. Mr. Lambuth began his career in 1985 with Shell Oil Co., where he held various positions in exploration and in research and development. Immediately prior to joining Cimarex, he spent three years as onshore Exploration Manager of El Paso Energy Company. +GARY R. ABBOTT was elected Vice President of Corporate Engineering March 1, 2005. Since January 2002, Mr. Abbott served as manager, Corporate Reservoir Engineering. From April 1999 to January 2002, Mr. Abbott was a reservoir engineer with Key Production Company, Inc. +KRISTA L. JOHNSON joined Cimarex as Vice President of Governmental and External Affairs in November 2014. Previously she served at Shell Oil Company since 2006, her last role as Vice President, International Organizations. Prior to joining Shell, she spent eight years with Western Gas Resources, most recently as Director of Government and Media Relations. Her experience also includes private practice in oil and gas law, client based energy advocacy in Washington, work in the Federal Relations Department of the American Petroleum Institute, and in the office of former U.S. Senator Conrad Burns. +TIMOTHY A. FICKER was appointed Vice President, Controller, Chief Accounting Officer, and Assistant Secretary in December 2016 to be effective in February 2017 and previously served as the Company’s Controller since September 2016. From February 2015 until September 2016, he served as Chief Financial Officer and Principal of Alcova Management LLC, a start-up oil and gas exploration and production company concentrating on the Powder River Basin of Wyoming. Mr. Ficker served as Chief Financial Officer of Venoco, Inc., and in other capacities from March 2007 to November 2014. From May 2005 to March 2007, he served as Vice President, Chief Financial Officer, Principal Accounting Officer and Secretary of Infinity Energy Resources Inc. Mr. Ficker previously served as an audit partner in KPMG LLP’s energy audit practice in Denver and as an audit partner for Arthur Andersen LLP, where he served clients primarily in the energy industry. His energy clients at KPMG and Arthur Andersen were principally domestic exploration and production companies. +ITEM 11. EXECUTIV E COMPENSATION +Information required under this item is incorporated by reference from the Cimarex Energy Co. definitive Proxy Statement for the May 11, 2017 Annual Meeting of Shareholders. The Proxy Statement will be filed with the Securities and Exchange Commission no later than 120 days subsequent to December 31, 2016. +ITEM 12. SECURITY OWNERSHI P OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS +Information required under this item is incorporated by reference from the Cimarex Energy Co. definitive Proxy Statement for the May 11, 2017 Annual Meeting of Shareholders. The Proxy Statement will be filed with the Securities and Exchange Commission no later than 120 days subsequent to December 31, 2016. +ITEM 13. CERTAI N RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE +Information required under this item is incorporated by reference from the Cimarex Energy Co. definitive Proxy Statement for the May 11, 2017 Annual Meeting of Shareholders. The Proxy Statement will be filed with the Securities and Exchange Commission no later than 120 days subsequent to December 31, 2016. +91 +Table of Contents +ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES +Information required under this item is incorporated by reference from the Cimarex Energy Co. definitive Proxy Statement for the May 11, 2017 Annual Meeting of Shareholders. The Proxy Statement will be filed with the Securities and Exchange Commission no later than 120 days subsequent to December 31, 2016. +92 +Table of Contents +PART I V +ITEM 15. EXHIBIT S, FINANCIAL STATEMENT SCHEDULES +Page +(a) (1) +The following financial statements are included in Item 8 to this 10-K: +Consolidated balance sheets as of December 31, 2016 and 2015 +58 +Consolidated statements of operations and comprehensive income (loss) for the years ended December 31, 2016, 2015, and 201 4 +59 +Consolidated statements of cash flows for the years ended December 31, 2016, 2015, and 2014 +60 +Consolidated statements of stockholders’ equity for the years ended December 31, 2016, 2015, and 2014 +61 +Notes to consolidated financial statements +62 +(2) +Financial statement schedules—None +(3) +Exhibits: +Exhibits not incorporated by reference to a prior filing are designated by an asterisk (*) and are filed herewith; all exhibits not so designated are incorporated by reference to a prior SEC filing as indicated. +Exhibit +Title +3.1 +Amended and Restated Certificate of Incorporation of Cimarex Energy Co. (filed as Exhibit 3.1 to Registrant’s Form 8-K (Commission File no. 001-31446) dated June 7, 2005 and incorporated herein by reference). +3.2 +Amended and Restated By-laws of Cimarex Energy Co. dated December 11, 2013 (filed on December 16, 2013 (Commission File No. 001-31446) and incorporated herein by reference). +3.3 +Amended and Restated By-laws of Cimarex Energy Co. dated November 11, 2015 (filed as Exhibits 3.1 and 3.2 to the Current Report on Form 8-K filed on November 12, 2015 (Commission File No. 001-31446) and incorporated herein by reference). +4.1 +Specimen Certificate of Cimarex Energy Co. common stock (filed as Exhibit 4.3 to Registration Statement on Form S-3 filed September 17, 2012 (Registration No. 333-183939) and incorporated herein by reference). +4.2 +Debt Securities Indenture dated as of April 5, 2012, by and among Cimarex Energy Co. and U.S. Bank National Association, as trustee included as Exhibit 4.1 to Registrant’s Current Report on Form 8-K filed on April 5, 2012 and incorporated herein by reference. +4.3 +First Supplemental Indenture dated as of April 5, 2012, by and among Cimarex Energy Co., the Subsidiary Guarantors party thereto and U.S. Bank National Association, as trustee included as Exhibit 4.2 to Registrant’s Current Report on Form 8-K filed on April 5, 2012 and incorporated herein by reference. +4.4 +Form of 5.875% Senior Notes due 2022 included in Exhibit 4.3 to the Registrant’s Current Report on Form 8-K filed on April 5, 2012 and incorporated herein by reference. +4.5 +Indenture dated as of June 4, 2014, by and between Cimarex Energy Co. and U.S. Bank National Association, as trustee included as Exhibit 4.1 to Registrant’s Current Report on Form 8-K filed on June 4, 2014 and incorporated herein by reference. +4.6 +First Supplemental Indenture dated as of June 4, 2014, by and among Cimarex Energy Co., the Subsidiary Guarantors party thereto and U.S. Bank National Association, as trustee included as Exhibit 4.2 to Registrant’s Current Report on Form 8-K filed on June 4, 2014 and incorporated herein by reference. +93 +Table of Contents +4.7 +Form of 4.375% Senior Notes due 2024 included in Exhibit 4.2 to the Registrant’s Current Report on Form 8-K filed on June 4, 2014 and incorporated herein by reference. +4.8 +Form of Indenture by and among Cimarex Energy Co. and U.S. Bank National Association, as trustee (filed as Exhibit 4.7 to Registration Statement on Form S-3 filed September 21, 2015 (Registration No. 333-183939) and incorporated herein by reference). +10.1 +Credit Agreement dated as of July 14, 2011, among Cimarex, the Administrative Agent, the Co-Syndication Agents, the Co-Documentation Agents and the Lenders filed on July 18, 2011 as Exhibit 10.l to the Registrant’s Current Report on Form 8-K and incorporated herein by reference. +10.2 +First Amendment to Credit Agreement dated as of July 19, 2012, among Cimarex, the Guarantors, the Administrative Agent, and the Lenders filed on May 5, 2014 as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K and incorporated herein by reference. +10.3 +Second Amendment to Credit Agreement dated as of May 1, 2014, among Cimarex, the Guarantors, the Administrative Agent, and the Lenders filed on May 5, 2014 as Exhibit 10.2 to the Registrant’s Current Report on Form 8-K and incorporated herein by reference. +10.4 +Employment Agreement, dated September 7, 1999, by and between Paul Korus and Key Production Company, Inc. (filed as Exhibit 10.6 to the Registration Statement on Form S-4 dated May 9, 2002 (Registration No. 333-87948) and incorporated herein by reference). +10.5 +Amendment to Employment Agreement effective January 1, 2009 between Cimarex Energy Co. and Paul Korus (filed as Exhibit 10.9 to the Annual Report on Form 10-K for the year ended December 31, 2008 filed on February 27, 2009 (Commission File No. 001-31446) and incorporated herein by reference). +10.6 +Employment Agreement, dated October 25, 1993, by and between Thomas E. Jorden and Key Production Company, Inc. (filed as Exhibit 10.7 to the Registration Statement on Form S-4 dated May 9, 2002 (Registration No. 333-87948) and incorporated herein by reference). +10.7 +Amendment to Employment Agreement effective January 1, 2009 between Cimarex Energy Co. and Thomas E. Jorden (filed as Exhibit 10.11 to the Annual Report on Form 10-K for the year ended December 31, 2008 filed on February 27, 2009 (Commission File No. 001-31446) and incorporated herein by reference). +10.8 +Employment Agreement, dated February 2, 1994, by and between Stephen P. Bell and Key Production Company, Inc. (filed as Exhibit 10.8 to the Registration Statement on Form S-4 dated May 9, 2002 (Registration No. 333-87948) and incorporated herein by reference). +10.9 +Amendment to Employment Agreement effective January 1, 2009 between Cimarex Energy Co. and Stephen P. Bell (filed as Exhibit 10.13 to the Annual Report on Form 10-K for the year ended December 31, 2008 filed on February 27, 2009 (Commission File No. 001-31446) and incorporated herein by reference). +10.10 +Employment Agreement, dated March 11, 1994, by and between Joseph R. Albi and Key Production Company, Inc. (filed as Exhibit 10.9 to the Registration Statement on Form S-4 dated May 9, 2002 (Registration No. 333-87948) and incorporated herein by reference). +10.11 +Amendment to Employment Agreement effective January 1, 2009 between Cimarex Energy Co. and Joseph R. Albi (filed as Exhibit 10.15 to the Annual Report on Form 10-K for the year ended December 31, 2008 filed on February 27, 2009 (Commission File No. 001-31446) and incorporated herein by reference). +10.12 +Amended and Restated 2002 Stock Incentive Plan of Cimarex Energy Co. effective January 1, 2009 (filed as Exhibit 10.16 to the Annual Report on Form 10-K for the year ended December 31, 2008 filed on February 27, 2009 (Commission File No. 001- 31446) and incorporated herein by reference). +94 +Table of Contents +10.13 +2011 Equity Incentive Plan adopted May 18, 2011 (filed as Appendix A to the Definitive Proxy Statement 14-A filed on March 23, 2011 (Commission File No. 001-31446) and incorporated herein by reference). +10.14 +Form of Notice of Grant of Award of Performance Stock and Award Agreement (filed as Exhibit 10.2 to Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2011 filed on August 4, 2011 (Commission File no. 001-31446) and incorporated herein by reference). +10.15 +Form of Notice of Grant of Restricted Stock and Award Agreement (filed as Exhibit 10.3 to Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2011 filed on August 4, 2011 (Commission File no. 001-31446) and incorporated herein by reference). +10.16 +Form of Notice of Grant of Nonqualified Stock Option and Award Agreement (filed as Exhibit 10.4 to Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2011 filed on August 4, 2011 (Commission File no. 001-31446) and incorporated herein by reference). +10.17 +Form of Notice of Grant and Award Agreement (Other Stock Award with performance conditions) (filed as Exhibit 10.15 to the Annual Report on Form 10-K for the year ended December 31, 2013 filed on February 26, 2014 (Commission File No. 001-31446) and incorporated herein by reference). +10.18 +2014 Equity Incentive Plan adopted May 15, 2014 (filed as Appendix A to the Definitive Proxy Statement 14-A filed on April 1, 2014 (Commission File No. 001-31446) and incorporated herein by reference. +10.19 +Form of Notice of Grant of Restricted Stock (Director) and Award Agreement (filed as Exhibit 10.1 to Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014 filed on August 6, 2014 (Commission File No. 001-31446) and incorporated herein by reference). +10.20 +Form of Notice of Grant of Nonqualified Stock Option and Award Agreement (filed as Exhibit 10.2 to Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014 filed on August 6, 2014 (Commission File No. 001-31446) and incorporated herein by reference). +10.21 +Form of Notice of Grant of Restricted Stock and Award Agreement (filed as Exhibit 10.3 to Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014 filed on August 6, 2014 (Commission File No. 001-31446) and incorporated herein by reference). +10.22 +Form of Notice of Grant of Restricted Stock and Award Agreement (Performance Award) (filed as Exhibit 10.4 to Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014 filed on August 6, 2014 (Commission File No. 001-31446) and incorporated herein by reference). +10.23 +Form of Notice of Grant of Restricted Stock and Award Agreement (Performance Award) (filed as Exhibit 10.23 to the Annual Report on Form 10-K for the year ended December 31, 2014 filed on February 25, 2015 (Commission File No. 001-31446) and incorporated herein by reference). +10.24 +Deferred Compensation Plan for Nonemployee Directors adopted May 19, 2004, as amended and restated effective January 1, 2009 (filed as Exhibit 10.18 to the Annual Report on Form 10-K for the year ended December 31, 2008 filed on February 27, 2009 (Commission File No. 001-31446) and incorporated herein by reference). +10.25 +Cimarex Energy Co. Supplemental Savings Plan (amended and restated, effective January 1, 2009) (filed as Exhibit 10.19 to the Annual Report on Form 10-K for the year ended December 31, 2008 filed on February 27, 2009 (Commission File No. 001- 31446) and incorporated herein by reference). +95 +Table of Contents +10.26 +Cimarex Energy Co. Change in Control Severance Plan dated effective April 1, 2005, amended and restated effective January 1, 2009 (filed as Exhibit 10.20 to the Annual Report on Form 10-K for the year ended December 31, 2008 filed on February 27, 2009 (Commission File No. 001-31446) and incorporated herein by reference). +10.27 +Amendment to Cimarex Energy Co. Change in Control Severance Plan dated effective March 19, 2013 (filed as Exhibit 10.1 to the Current Report on Form 8-K filed on March 20, 2013 (Commission File No. 001- 31446) and incorporated herein by reference). +10.28 +Form of Indemnification Agreement between Cimarex Energy Co. and each of its executive officers and directors (filed as Exhibit 10.20 to the Annual Report on Form 10-K for the year ended December 31, 2012 filed on February 26, 2013 (Commission File No. 001-31446) and incorporated herein by reference). +10.29 +Retention Agreement dated June 9, 2010 (filed as Exhibit 10.21 to the Annual Report on Form 10-K for the year ended December 31, 2013 filed on February 26, 2014 (Commission File No. 001-31446) and incorporated herein by reference). +10.30 +Credit Agreement Dated as of October 16, 2015, by and among Cimarex, the Administrative Agent, the Syndication Agent, the Documentation Agents and the Lenders (filed on October 19, 2015 as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (Commission File No. 001-31446) and incorporated herein by reference). +10.31 +Form of Notice of Grant of Restricted Stock (Director) and Award Agreement (filed as Exhibit 10.2 to Registrant’s Form 8-K (Commission File No. 001-31446) dated November 2, 2015 and incorporated herein by reference). +10.32 +Succession Agreement dated August 17, 2015 (filed as Exhibit 10.2 to Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2015 filed on November 4, 2015 (Commission File No. 001-31446) and incorporated herein by reference). +14.1 +Code of Ethics for Chief Executive Officer and Senior Financial Officers (filed as Exhibit 14.1 to the Annual Report on Form 10-K for the year ended December 31, 2003 filed on March 11, 2004 (Commission File No. 001-31446) and incorporated herein by reference). +14.2 +Revised Code of Business Conduct and Ethics for Directors, Officers and Employees dated August 30, 2016 (filed as Exhibit 14.1 and 14.2 to the Current Report on Form 8-K filed September 1, 2016 (Commission File No. 001-31446) and incorporated herein by reference). +21.1 +Significant Subsidiaries of the Registrant.* +23.1 +Consent of KPMG LLP.* +23.2 +Consent of DeGolyer and MacNaughton.* +24.1 +Power of Attorney of directors of the Registrant.* +31.1 +Certification of Thomas E. Jorden, Chief Executive Officer of Cimarex Energy Co., pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.* +31.2 +Certification of G. Mark Burford, Chief Financial Officer of Cimarex Energy Co., pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.* +32.1 +Certification of Thomas E. Jorden, Chief Executive Officer of Cimarex Energy Co., pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.* +96 +Table of Contents +32.2 +Certification of G. Mark Burford, Chief Financial Officer of Cimarex Energy Co., pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.* +99.1 +Letter dated January 16, 2017 from DeGolyer and MacNaughton, independent petroleum engineering consulting firm, reporting the results of its audit of Cimarex reserves as of December 31, 2016 of certain selected properties.* +101.INS +XBRL Instance Document. * +101.SCH +XBRL Taxonomy Extension Schema Document. * +101.CAL +XBRL Taxonomy Extension Calculation Linkbase Document. * +101.LAB +XBRL Taxonomy Extension Label Linkbase Document. * +101.PRE +XBRL Taxonomy Extension Presentation Linkbase Document. * +101.DEF +XBRL Taxonomy Extension Definition Linkbase Document. * +ITEM 16. FORM 10-K SUMMARY +None. +97 +Table of Contents +SIGNATURE +Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. +Date: February 24, 2017 +CIMAREX ENERGY CO. +By: +/s/ Thomas E. Jorden +Thomas E. Jorden +Chairman of the Board, Chief Executive Officer, +and President +Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. +Signature +Title +Date +/s/ Thomas E. Jorden +Chairman of the Board, Director, +Thomas E. Jorden +Chief Executive Officer, and President (Principal Executive Officer) +February 24, 2017 +* +Director, Executive Vice President – +Attorney-in-Fact +Operations, Chief Operating Officer +February 24, 2017 +Joseph R. Albi +/s/ G. Mark Burford +Vice President and Chief +G. Mark Burford +Financial Officer (Principal Financial Officer) +February 24, 2017 +/s/ Timothy A. Ficker +Vice President, Controller, Chief +Timothy A. Ficker +Accounting Officer (Principal Accounting Officer) +February 24, 2017 +* +Attorney-in-Fact +Director +February 24, 2017 +Hans Helmerich +* +Attorney-in-Fact +Director +February 24, 2017 +David A. Hentschel +* +Attorney-in-Fact +Director +February 24, 2017 +Harold R. Logan, Jr. +* +Attorney-in-Fact +Director +February 24, 2017 +Floyd R. Price +* +Attorney-in-Fact +Director +February 24, 2017 +Monroe W. Robertson +98 +Table of Contents +* +Attorney-in-Fact +Director +February 24, 2017 +Lisa A. Stewart +* +Attorney-in-Fact +Director +February 24, 2017 +Michael J. Sullivan +* +Attorney-in-Fact +Director +February 24, 2017 +L. Paul Teague +*By: +/s/ G. Mark Burford +Vice President and Chief +G. Mark Burford +Financial Officer (Principal Financial Officer) +February 24, 2017 +Attorney-in-Fact +99 \ No newline at end of file diff --git a/raw/filings/0001168054/2016/0001558370-17-000965/filing_metadata.csv b/raw/filings/0001168054/2016/0001558370-17-000965/filing_metadata.csv new file mode 100644 index 0000000000000000000000000000000000000000..5d6b7fbd511af27726e9d5b394fd450967badd85 --- /dev/null +++ b/raw/filings/0001168054/2016/0001558370-17-000965/filing_metadata.csv @@ -0,0 +1,2 @@ +cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing +0001168054,XEC,CIMAREX ENERGY CO,10-K,2017-02-24,2016-12-31,2017-02-24T17:30:23.000Z,0001558370-17-000965,xec-20161231x10k.htm,10-K,12718122,1,0,https://www.sec.gov/Archives/edgar/data/1168054/000155837017000965/xec-20161231x10k.htm,https://www.sec.gov/Archives/edgar/data/1168054/000155837017000965/,2016,2016,1 diff --git a/raw/filings/0001168054/2016/0001558370-17-000965/item1.txt b/raw/filings/0001168054/2016/0001558370-17-000965/item1.txt new file mode 100644 index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391 diff --git a/raw/filings/0001168054/2016/0001558370-17-000965/item13.txt b/raw/filings/0001168054/2016/0001558370-17-000965/item13.txt new file mode 100644 index 0000000000000000000000000000000000000000..d37c243b67957778594d2e2b4329c4c1e86f1b6c --- /dev/null +++ b/raw/filings/0001168054/2016/0001558370-17-000965/item13.txt @@ -0,0 +1,4 @@ +ITEM 13. CERTAI N RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE +Information required under this item is incorporated by reference from the Cimarex Energy Co. definitive Proxy Statement for the May 11, 2017 Annual Meeting of Shareholders. The Proxy Statement will be filed with the Securities and Exchange Commission no later than 120 days subsequent to December 31, 2016. +91 +Table of Contents \ No newline at end of file diff --git a/raw/filings/0001168054/2016/0001558370-17-000965/item9a.txt b/raw/filings/0001168054/2016/0001558370-17-000965/item9a.txt new file mode 100644 index 0000000000000000000000000000000000000000..cc409dda99408e91367921d9d69049b6df42380c --- /dev/null +++ b/raw/filings/0001168054/2016/0001558370-17-000965/item9a.txt @@ -0,0 +1,26 @@ +ITEM 9A . CONTROLS AND PROCEDURES +EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES +Cimarex’s management, under the supervision and with the participation of the Chief Executive Officer (CEO) and Chief Financial Officer (CFO), have evaluated the effectiveness of Cimarex’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)) as of December 31, 2016. Based on that evaluation, the CEO and CFO concluded that the disclosure controls and procedures are effective in providing reasonable assurance that information required to be disclosed in reports filed with the SEC is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. The disclosure controls and procedures are designed to provide reasonable assurance that such information is accumulated and communicated to our management, including the CEO and CFO, as appropriate, to allow such persons to make timely decisions regarding required disclosures. +CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING +There was no change in our internal control over financial reporting that occurred during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. +MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING +Cimarex’s management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act). The company’s internal control over financial reporting is a process designed by, or under the supervision of, the CEO and CFO to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with generally accepted accounting principles. +Because of the inherent limitations of internal control over financial reporting, misstatements may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +As of December 31, 2016, management assessed the effectiveness of the company’s internal control over financial reporting based on the criteria established in “Internal Control-Integrated Framework (2013),” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that assessment, management concluded that the company’s internal control over financial reporting was effective as of December 31, 2016. +Our independent registered public accounting firm has audited, and reported on, the effectiveness of our internal control over financial reporting as of December 31, 2016, which follows this report. +87 +Table of Contents +Report of Independent Registered Public Accounting Firm +The Board of Directors and Stockholders +Cimarex Energy Co.: +We have audited Cimarex Energy Co. and subsidiaries’ internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Cimarex Energy Co. and subsidiaries’ management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on Cimarex Energy Co. and subsidiaries’ internal control over financial reporting based on our audit. +We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. +A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. +Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +In our opinion, Cimarex Energy Co. and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). +We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Cimarex Energy Co. and subsidiaries as of December 31, 2016 and 2015, and the related consolidated statements of operations and comprehensive income (loss), stockholders’ equity, and cash flows for each of the years in the three year period ended December 31, 2016, and our report dated February 24, 2016 expressed an unqualified opinion on those consolidated financial statements. +KPMG LLP +Denver, Colorado +February 24, 2017 +88 +Table of Contents \ No newline at end of file diff --git a/raw/filings/0001168054/2016/0001558370-17-000965/rp_note.txt b/raw/filings/0001168054/2016/0001558370-17-000965/rp_note.txt new file mode 100644 index 0000000000000000000000000000000000000000..567698bf4f621c0f11b8606e7d95c0aaef28771c --- /dev/null +++ b/raw/filings/0001168054/2016/0001558370-17-000965/rp_note.txt @@ -0,0 +1,2 @@ +Note 11 – Related Party Transactions +79 \ No newline at end of file diff --git a/raw/filings/0001168054/2016/0001558370-17-000965/rpt_disclosure.txt b/raw/filings/0001168054/2016/0001558370-17-000965/rpt_disclosure.txt new file mode 100644 index 0000000000000000000000000000000000000000..285bc92c506c88f176aee93d8ef56b8ce0d4ec41 --- /dev/null +++ b/raw/filings/0001168054/2016/0001558370-17-000965/rpt_disclosure.txt @@ -0,0 +1,27 @@ +Review of related party transactions +Yes +20 +Table of Contents +Diverse Board skills and experience +Yes +Non-Hedging and non-pledging policies +Yes +Annual Board and Committee self-evaluations +Yes +Clawback policy +Yes +Periodic consultant review of Board skills +Yes +Management and Director stock ownership guidelines +Yes +Annual equity grants to Directors +Yes +Tax gross-ups +No +Annual Board education +Yes +Proxy Access +Yes +Shareholders may communicate with our Board by mail directed to our Corporate Secretary or by facsimile (720) 403-9383. All communications will be forwarded to the Lead Director for the Lead Director’s review. The Lead Director may take any action the Lead Director deems appropriate or necessary, including, without limitation, forwarding the information to the Board for consideration or, with the concurrence of the Board, retaining independent or outside counsel, accountants or other advisors to address the concern. +21 +Table of Contents \ No newline at end of file diff --git a/raw/filings/0001168054/2017/0001168054-18-000004/filing.txt b/raw/filings/0001168054/2017/0001168054-18-000004/filing.txt new file mode 100644 index 0000000000000000000000000000000000000000..7abd92d50d07efa3771afb8e3ce0b9e9dd3ab61f --- /dev/null +++ b/raw/filings/0001168054/2017/0001168054-18-000004/filing.txt @@ -0,0 +1,7118 @@ +10-K +1 +xec2017123110k.htm +10-K +Document +Table of Contents +UNITED STATES +SECURITIES AND EXCHANGE COMMISSION +Washington, D.C. 20549 +Form 10-K +(Mark One) +ý +ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 +For the fiscal year ended December 31, 2017 +OR +o +TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 +Commission file number 001-31446 +CIMAREX ENERGY CO. +(Exact name of registrant as specified in its charter) +Delaware +(State or other jurisdiction of +incorporation or organization) +45-0466694 +(I.R.S. Employer +Identification No.) +1700 Lincoln Street, Suite 3700, Denver, Colorado 80203 +(Address of principal executive offices) +(303) 295-3995 +(Registrant’s telephone number) +Securities Registered Pursuant to Section 12(b) of the Act: +Title of each class +Name of each exchange on which registered +Common Stock ($0.01 par value) +New York Stock Exchange +Securities Registered Pursuant to Section 12(g) of the Act: None +Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. +YES ý NO o +Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES o NO ý +Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES ý NO o +Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES ý NO o +Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o +Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. +Large accelerated filer ý +Accelerated filer o +Non-accelerated filer o +(Do not check if a +smaller reporting company) +Smaller reporting company o +Emerging growth company o +If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o +Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). YES o NO ý +Aggregate market value of the voting stock held by non-affiliates of Cimarex Energy Co. as of June 30, 2017 was approximately $8.82 billion. +Number of shares of Cimarex Energy Co. common stock outstanding as of January 31, 2018 was 95,438,121 . +Documents Incorporated by Reference: Portions of the Registrant’s Proxy Statement for its 2018 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K. +Table of Contents +TABLE OF CONTENTS +DESCRIPTION +Item +Page +Glossary +Part I +1. & 2. +Business and Properties +6 +1A. +Risk Factors +15 +1B. +Unresolved Staff Comments +30 +3. +Legal Proceedings +30 +4. +Mine Safety Disclosures +30 +Part II +5. +Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities +31 +6. +Selected Financial Data +33 +7. +Management’s Discussion and Analysis of Financial Condition and Results of Operations +34 +7A. +Quantitative and Qualitative Disclosures About Market Risk +56 +8. +Financial Statements and Supplementary Data +57 +9. +Changes In and Disagreements with Accountants on Accounting and Financial Disclosure +91 +9A. +Controls and Procedures +91 +9B. +Other Information +93 +Part III +10. +Directors, Executive Officers and Corporate Governance +94 +11. +Executive Compensation +95 +12. +Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters +95 +13. +Certain Relationships and Related Transactions, and Director Independence +95 +14. +Principal Accounting Fees and Services +95 +Part IV +15. +Exhibits, Financial Statement Schedules +96 +16. +Form 10-K Summary +100 +2 +Table of Contents +GLOSSARY +Bbl/d— Barrels (of oil or natural gas liquids) per day +Bbls— Barrels (of oil or natural gas liquids) +Bcf— Billion cubic feet +Bcfe— Billion cubic feet equivalent +Btu— British thermal unit +GAAP— Generally accepted accounting principles in the U.S. +Gross Acres or Gross Wells— The total acres or wells, as the case may be, in which a working interest is owned. +MBbls— Thousand barrels +Mcf— Thousand cubic feet (of natural gas) +Mcfe— Thousand cubic feet equivalent +MMBbls— Million barrels +MMBtu— Million British thermal units +MMcf— Million cubic feet +MMcf/d— Million cubic feet per day +MMcfe— Million cubic feet equivalent +MMcfe/d— Million cubic feet equivalent per day +Net Acres or Net Wells— The sum of the fractional working interest owned in gross acres or gross wells expressed in whole numbers and fractions of whole numbers. +Net Production— Gross production multiplied by net revenue interest +NGL or NGLs— Natural gas liquids +PUD— Proved undeveloped +Tcf— Trillion cubic feet +Tcfe— Trillion cubic feet equivalent +Energy equivalent is determined using the ratio of one barrel of crude oil, condensate, or NGL to six Mcf of natural gas. +3 +Table of Contents +PART I +CAUTIONARY INFORMATION ABOUT FORWARD-LOOKING STATEMENTS +Throughout this Form 10-K, we make statements that may be deemed “forward-looking” statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. In particular, in our Management’s Discussion and Analysis of Financial Condition and Results of Operations, we provide projections of our 2018 capital expenditures. All statements, other than statements of historical facts, that address activities, events, outcomes, and other matters that Cimarex plans, expects, intends, assumes, believes, budgets, predicts, forecasts, projects, estimates, or anticipates (and other similar expressions) will, should, or may occur in the future are forward-looking statements. These forward-looking statements are based on management’s current belief, based on currently available information, as to the outcome and timing of future events. When considering forward-looking statements, you should keep in mind the risk factors and other cautionary statements in this Form 10-K. Forward-looking statements include statements with respect to, among other things: +• +Fluctuations in the price we receive for our oil, gas, and NGL production; +• +Operating costs and other expenses; +• +Timing and amount of future production of oil, gas, and NGLs; +• +Reductions in the quantity of oil, gas, and NGLs sold due to decreased industrywide demand and/or curtailments in production from specific properties or areas due to mechanical, transportation, marketing, weather, or other problems; +• +Estimates of proved reserves, exploitation potential, or exploration prospect size; +• +The effectiveness of our internal control over financial reporting; +• +Cash flow and anticipated liquidity; +• +Amount, nature, and timing of capital expenditures; +• +Availability of financing and access to capital markets; +• +Administrative, legislative, and regulatory changes; +• +Operating and capital expenditures that are either significantly higher or lower than anticipated because the actual cost of identified projects varied from original estimates and/or from the number of exploration and development opportunities being greater or fewer than currently anticipated; +• +Exploration and development opportunities that we pursue may not result in economic, productive oil and gas properties; +• +Drilling of wells; +• +Increased financing costs due to a significant increase in interest rates; +• +De-risking of acreage; and +• +Full cost ceiling test impairments to the carrying values of our oil and gas properties. +We caution you that these forward-looking statements are subject to all of the risks and uncertainties, many of which are beyond our control, incident to the exploration for and development, production, and sale of oil, gas, and NGLs. +These risks include, but are not limited to, commodity price volatility, inflation, lack of availability of goods and services, environmental risks, drilling and other operating risks, regulatory changes, the uncertainty inherent in estimating proved oil and natural gas reserves and in projecting future rates of production and timing of development expenditures, and other risks described herein. +4 +Table of Contents +Reserve engineering is a subjective process of estimating underground accumulations of oil and natural gas that cannot be measured in an exact way. The accuracy of any reserve estimate depends on the quality of available data and the interpretation of such data by our engineers. As a result, estimates made by different engineers often vary from one another. In addition, the results of drilling, testing, and production activities may justify revisions of estimates that were made previously. If significant, such revisions could change the timing of future production and development drilling. Accordingly, reserve estimates are generally different from the quantities of oil and natural gas that are ultimately recovered. +Should one or more of the risks or uncertainties described above or elsewhere in this Form 10-K cause our underlying assumptions to be incorrect, our actual results and plans could differ materially from those expressed in any forward-looking statements. +All forward-looking statements, express or implied, included in this Form 10-K and attributable to Cimarex are qualified in their entirety by this cautionary statement. This cautionary statement should also be considered in connection with any subsequent written or oral forward-looking statements that Cimarex or persons acting on its behalf may issue. Cimarex does not undertake any obligation to update any forward-looking statements to reflect events or circumstances after the date of filing this Form 10-K with the Securities and Exchange Commission, except as required by law. +5 +Table of Contents +ITEMS 1 AND 2. BUSINESS AND PROPERTIES +General +Cimarex Energy Co., a Delaware corporation formed in 2002, is an independent oil and gas exploration and production company. Our operations are located mainly in Oklahoma, Texas, and New Mexico. On our website — www.cimarex.com — you will find our annual reports, proxy statements, and all of our Securities and Exchange Commission (“SEC”) filings. Throughout this Form 10-K we use the terms “Cimarex,” “company,” “we,” “our,” and “us” to refer to Cimarex Energy Co. and its subsidiaries. +Our principal business objective is to profitably grow proved reserves and production for the long-term benefit of our shareholders while seeking to minimize our impact on the communities in which we operate for the long-term. Our strategy centers on maximizing cash flow from producing properties to reinvest in exploration and development opportunities. We consider merger and acquisition opportunities that enhance our competitive position and we occasionally divest non-core assets. Key elements to our approach include: +• +Maintain a strong financial position; +• +Investment in a diversified portfolio of drilling opportunities; +• +Rate-of-return driven evaluation and ranking of investment decisions; +• +Tracking predicted versus actual results in a centralized exploration management system, providing feedback to improve results; +• +Attracting quality employees and maintaining integrated teams of geoscientists, landmen, and engineers; and +• +Maximizing profitability. +Conservative use of leverage has long been the key to our financial strategy. We believe that low leverage coupled with strong full-cycle returns enables us to better withstand volatility in commodity prices and provide competitive returns and growth to shareholders. See Item 5 Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities — Stock Performance Graph and Item 6 Selected Financial Data for additional financial and operating information for fiscal years 2013 - 2017. +Proved Oil and Gas Reserves +Our December 31, 2017 total proved reserves grew 16% from prior year-end. Proved undeveloped reserves as a percentage of total proved reserves decreased to 17% from 21% a year ago. We added 940.7 Bcfe of new reserves through extensions and discoveries. Net negative revisions totaled 59.7 Bcfe, which consisted primarily of a decrease of 248.8 Bcfe for the removal of PUD reserves whose development will likely be delayed beyond five years of initial disclosure, offset by an increase of 187.2 Bcfe related to improved commodity prices. The change in our proved reserves is as follows (in Bcfe): +Reserves at December 31, 2016 +2,890.5 +Revisions of previous estimates +(59.7 +) +Extensions and discoveries +940.7 +Purchases of reserves +1.4 +Production +(416.9 +) +Sales of reserves +(1.8 +) +Reserves at December 31, 2017 +3,354.2 +6 +Table of Contents +A breakdown by commodity of our proved oil and gas reserves follows: +December 31, +2017 +2016 +2015 +Proved reserves: +Gas (Bcf) +1,607.6 +1,471.4 +1,517.0 +Oil (MMBbls) +137.2 +105.9 +107.8 +NGL (MMBbls) +153.9 +130.6 +124.3 +Total (Bcfe) +3,354.2 +2,890.5 +2,909.4 +Percent developed +83 +% +79 +% +75 +% +At December 31, 2017 , 52% of our total proved reserves were located in the Mid-Continent region and 48% were in the Permian Basin. The following table summarizes our estimated proved oil and gas reserves by region as of December 31, 2017 . +Gas +(MMcf) +Oil +(MBbls) +NGL +(MBbls) +Total +(MMcfe) +% of +Total Proved +Reserves +Mid-Continent +1,032,695 +31,853 +85,292 +1,735,565 +52 +% +Permian Basin +573,757 +105,198 +68,530 +1,616,126 +48 +% +Other +1,183 +187 +38 +2,531 +— +% +1,607,635 +137,238 +153,860 +3,354,222 +100 +% +See SUPPLEMENTAL INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED) in Item 8 for further information regarding our reserves. +7 +Table of Contents +Production Volumes, Prices, and Costs +Our 2017 production volumes totaled 1,142 MMcfe per day, a 19% increase from 2016 , and were comprised of 45% gas, 30% oil, and 25% NGLs. The following tables show by region our total and average daily production volumes, the average commodity prices received, and production cost per unit of production. Separate data is also included for the Cana area, which comprises the majority of the production of our largest producing field, the Watonga-Chickasha in western Oklahoma. +Total Production Volumes +Average Daily Production Volumes +Gas +Oil +NGL +Total +Gas +Oil +NGL +Total +Years Ended December 31, +(MMcf) +(MBbls) +(MBbls) +(MMcfe) +(MMcf) +(MBbls) +(MBbls) +(MMcfe) +2017 +Permian Basin +79,521 +16,271 +8,858 +230,293 +217.9 +44.6 +24.3 +630.9 +Mid-Continent +107,463 +4,547 +8,503 +185,761 +294.4 +12.5 +23.3 +508.9 +Other +484 +43 +13 +821 +1.3 +0.1 +— +2.3 +Total company +187,468 +20,861 +17,374 +416,875 +513.6 +57.2 +47.6 +1,142.1 +Cana area +89,471 +4,168 +7,813 +161,354 +245.1 +11.4 +21.4 +442.1 +2016 +Permian Basin +65,191 +13,183 +6,677 +184,351 +178.1 +36.0 +18.2 +503.7 +Mid-Continent +102,501 +3,283 +7,508 +167,243 +280.1 +9.0 +20.5 +456.9 +Other +535 +62 +15 +997 +1.4 +0.2 +0.1 +2.8 +Total company +168,227 +16,528 +14,200 +352,591 +459.6 +45.2 +38.8 +963.4 +Cana area +82,423 +2,848 +6,855 +140,647 +225.2 +7.8 +18.7 +384.3 +2015 +Permian Basin +66,006 +15,719 +6,220 +197,644 +180.8 +43.1 +17.0 +541.5 +Mid-Continent +100,801 +2,746 +6,757 +157,821 +276.2 +7.5 +18.5 +432.4 +Other +2,180 +198 +86 +3,878 +6.0 +0.5 +0.3 +10.6 +Total company +168,987 +18,663 +13,063 +359,343 +463.0 +51.1 +35.8 +984.5 +Cana area +77,882 +2,206 +5,957 +126,865 +213.4 +6.0 +16.3 +347.6 +8 +Table of Contents +Average Realized Price +Production Cost (per Mcfe) +Years Ended December 31, +Gas +(per Mcf) +Oil +(per Bbl) +NGL +(per Bbl) +2017 +Permian Basin +$ +2.72 +$ +46.96 +$ +20.25 +$ +0.78 +Mid-Continent +$ +2.78 +$ +47.42 +$ +23.02 +$ +0.43 +Other +$ +2.74 +$ +46.53 +$ +23.11 +$ +1.51 +Total Company +$ +2.76 +$ +47.06 +$ +21.61 +$ +0.63 +Cana area +$ +2.76 +$ +47.44 +$ +23.27 +$ +0.28 +2016 +Permian Basin +$ +2.35 +$ +38.45 +$ +12.32 +$ +0.86 +Mid-Continent +$ +2.29 +$ +37.65 +$ +15.59 +$ +0.43 +Other +$ +2.00 +$ +38.86 +$ +14.80 +$ +1.59 +Total Company +$ +2.31 +$ +38.30 +$ +14.05 +$ +0.66 +Cana area +$ +2.28 +$ +37.73 +$ +15.80 +$ +0.23 +2015 +Permian Basin +$ +2.55 +$ +43.58 +$ +11.94 +$ +1.06 +Mid-Continent +$ +2.51 +$ +41.90 +$ +15.41 +$ +0.52 +Other +$ +3.16 +$ +48.01 +$ +14.72 +$ +1.72 +Total Company +$ +2.53 +$ +43.38 +$ +13.75 +$ +0.83 +Cana area +$ +2.51 +$ +41.54 +$ +15.59 +$ +0.26 +Acquisitions and Divestitures +In 2017 , we sold interests in various non-core oil and gas properties for cash proceeds of $12 million and made various oil and gas property acquisitions for $8 million . +Exploration and Development Overview +Cimarex has one reportable segment, exploration and production (“E&P”). Our E&P activities take place primarily in two areas: the Permian Basin and the Mid-Continent region. Almost all of our exploration and development (“E&D”) capital is allocated between these two areas. +9 +Table of Contents +A summary of our 2017 exploration and development activity by region is as follows: +E&D +Capital +Gross +Wells +Completed +Net +Wells +Completed +% +Completed +As Producers +(in millions) +Permian Basin +$ +760 +97 +55.2 +98 +% +Mid-Continent +500 +222 +42.8 +99 +% +Other +21 +— +— +— +% +$ +1,281 +319 +98.0 +98 +% +The Permian Basin encompasses west Texas and southeast New Mexico. Cimarex’s Permian Basin efforts are located in the western half of the Permian Basin known as the Delaware Basin. In 2017 , we focused on drilling horizontal wells that yielded oil and liquids-rich gas from the Wolfcamp shale and the Bone Spring formation. Cimarex saw improved results in its Wolfcamp shale wells, as measured by production and reserves, with the further implementation of long laterals and continued improvement in well completion design and in the Bone Spring wells via upsized well completions. +The Permian Basin produced 630.9 MMcfe per day in 2017 , which was 55% of our total company production. Total production from the region increased 25% in 2017 over 2016 . In 2017, we invested $760 million , or 59% of our total E&D investment, in the Permian Basin. +Our Mid-Continent region consists of Oklahoma and the Texas Panhandle. Our activity in 2017 in the Mid-Continent was focused in the Woodford shale and the Meramec horizon, both in Oklahoma. We continued to implement larger well completions in the Woodford shale and we applied those same techniques to delineate the Meramec horizon, located above the Woodford. Cimarex continues to evaluate the size and potential of the Meramec play. +During 2017 , production from the Mid-Continent averaged 508.9 MMcfe per day, or 45% of total company production. Total production from the region increased 11% in 2017 over 2016 . In 2017, we invested $500 million , or 39% of our total E&D investment, in the Mid-Continent. +Drilling Activity +In 2017 , we completed or participated in the completion of 319 gross ( 98.0 net) wells, of which we operated 118 gross ( 77.7 net) wells. At year-end, we were in the process of drilling or participating in 29 gross ( 13 net) wells and there were 91 gross ( 33.7 net) wells waiting on completion. +We completed the following number of developmental wells in the years indicated in the table below. During these years, we completed no exploratory wells. +Wells Completed +2017 +2016 +2015 +Gross +Net +Gross +Net +Gross +Net +Developmental +Productive +314 +96.4 +153 +61.0 +219 +98.7 +Dry +5 +1.6 +1 +— +3 +1.7 +Total +319 +98.0 +154 +61.0 +222 +100.4 +10 +Table of Contents +At December 31, 2017, we owned an interest in 10,373 gross ( 3,083 net) productive oil and gas wells. We had working interests in the following number of productive wells by region as of December 31, 2017 : +Gas +Oil +Gross +Net +Gross +Net +Mid-Continent +3,920 +1,501 +698 +181 +Permian Basin +760 +338 +4,885 +1,053 +Other +95 +8 +15 +2 +4,775 +1,847 +5,598 +1,236 +Significant Properties +All of our oil and gas assets are located in the United States. We have varying levels of ownership interests in our properties consisting of working, royalty, and overriding royalty interests. Operated wells account for approximately 80% of our proved reserves. In 2017 , proved reserves in the Cana area of the Watonga-Chickasha field were approximately 46% of Cimarex’s total proved reserves. No other field had 15% or more of our total proved reserves. +At December 31, 2017 , our ten largest fields by future net revenue discounted at 10% comprised 85% of our total proved reserves. Information regarding each of these fields is as follows: +Field +Region +% of +Total +Proved +Reserves +Average +Working +Interest% +Approximate +Average Depth +(feet) +Primary Formation +Watonga-Chickasha +Mid-Continent +46.5% +26.6% +13,000’ +Woodford +Ford, West +Permian Basin +12.4% +57.7% +9,500’ +Wolfcamp +Grisham +Permian Basin +8.0% +98.3% +11,000’ +Wolfcamp +Dixieland +Permian Basin +5.9% +96.0% +11,000’ +Wolfcamp +Lusk +Permian Basin +4.2% +53.5% +8,000’ - 11,000’ +Bone Spring/Avalon +Cottonwood Draw +Permian Basin +2.5% +62.9% +3,000’ - 10,000’ +Delaware/Wolfcamp +Phantom +Permian Basin +1.8% +39.1% +11,500’ +Bone Spring +Two Georges +Permian Basin +1.6% +90.9% +11,500’ +Bone Spring +Stateline +Permian Basin +1.4% +48.5% +7,500’ +Bone Spring +Quail Ridge +Permian Basin +1.0% +47.0% +8,000’ - 13,000’ +Bone Spring/Morrow +85.3% +11 +Table of Contents +Acreage +The following table sets forth the gross and net acres of both developed and undeveloped leases held by Cimarex as of December 31, 2017 . Gross acres are the total number of acres in which we own a working interest. Net acres are the gross acres multiplied by our working interest. +Acreage +Undeveloped +Developed +Total +Gross +Net +Gross +Net +Gross +Net +Mid-Continent +Kansas +18,231 +18,191 +— +— +18,231 +18,191 +Oklahoma +90,275 +60,230 +692,853 +302,409 +783,128 +362,639 +Texas +22,845 +12,101 +131,119 +55,796 +153,964 +67,897 +131,351 +90,522 +823,972 +358,205 +955,323 +448,727 +Permian Basin +New Mexico +77,297 +56,796 +173,756 +118,355 +251,053 +175,151 +Texas +79,453 +56,745 +210,873 +148,554 +290,326 +205,299 +156,750 +113,541 +384,629 +266,909 +541,379 +380,450 +Other +Arizona +2,097,201 +2,097,201 +17,847 +— +2,115,048 +2,097,201 +California +383,487 +383,487 +— +— +383,487 +383,487 +Colorado +40,488 +18,867 +41,384 +1,642 +81,872 +20,509 +Gulf of Mexico +25,000 +13,000 +28,848 +6,381 +53,848 +19,381 +Louisiana +12,112 +9,064 +2,875 +168 +14,987 +9,232 +Michigan +4,702 +4,624 +1,183 +1,183 +5,885 +5,807 +Montana +31,422 +7,687 +7,688 +1,721 +39,110 +9,408 +Nevada +1,007,167 +1,007,167 +440 +1 +1,007,607 +1,007,168 +New Mexico +1,641,206 +1,633,821 +18,371 +2,436 +1,659,577 +1,636,257 +Texas +10,476 +3,722 +27,115 +6,107 +37,591 +9,829 +Utah +80,527 +59,433 +32,552 +1,575 +113,079 +61,008 +Wyoming +96,837 +13,744 +43,826 +4,217 +140,663 +17,961 +Other +194,359 +171,191 +9,772 +3,499 +204,131 +174,690 +5,624,984 +5,423,008 +231,901 +28,930 +5,856,885 +5,451,938 +Total +5,913,085 +5,627,071 +1,440,502 +654,044 +7,353,587 +6,281,115 +The table below summarizes by year and region our undeveloped acreage expirations in the next five years. In most cases, the drilling of a commercial well will hold the acreage beyond the expiration. +Acreage +2018 +2019 +2020 +2021 +2022 +Gross +Net +Gross +Net +Gross +Net +Gross +Net +Gross +Net +Mid-Continent +5,608 +3,244 +4,869 +4,152 +5,878 +5,865 +667 +667 +220 +220 +Permian Basin +5,322 +4,563 +16,999 +16,837 +8,744 +6,584 +4,318 +4,318 +2,148 +2,148 +Other +31,869 +31,152 +64,652 +60,510 +34,811 +34,596 +7,392 +7,303 +29,223 +28,468 +42,799 +38,959 +86,520 +81,499 +49,433 +47,045 +12,377 +12,288 +31,591 +30,836 +% of undeveloped acreage +0.7 +0.7 +1.5 +1.4 +0.8 +0.8 +0.2 +0.2 +0.5 +0.5 +At December 31, 2017 , we had no proved undeveloped reserves scheduled for development beyond the expiration dates of our undeveloped acreage. +12 +Table of Contents +Marketing +Our oil and gas production is sold under short-term arrangements at market-responsive prices. We sell our oil at prices tied directly or indirectly to field postings. Our gas is sold under price mechanisms related to either monthly or daily index prices on pipelines where we deliver our gas. We sell our NGLs at prices tied to monthly index prices where we deliver our NGLs. +We sell our oil, gas, and NGLs to a broad portfolio of customers. Our major customers during 2017 were Energy Transfer Partners, L.P. and Plains All American Pipeline, L.P., which accounted for 21% and 13% , respectively, of our consolidated revenues. +If any one of our major customers were to stop purchasing our production, we believe there are a number of other purchasers to whom we could sell our production with some delay. If multiple significant customers were to discontinue purchasing our production, we believe there would be challenges initially, but ample markets to handle the disruption. +We regularly monitor the credit worthiness of all our customers and may require parent company guarantees, letters of credit, or prepayments when deemed necessary. +Corporate Headquarters and Employees +Our corporate headquarters is located at 1700 Lincoln St., Suite 3700, Denver, Colorado 80203. On December 31, 2017 and 2016 , Cimarex had 910 and 856 employees, respectively. None of our employees are subject to collective bargaining agreements. +Competition +The oil and gas industry is highly competitive, particularly for prospective undeveloped leases and purchases of proved reserves. There is also competition for rigs and related equipment used to drill for and produce oil and gas, however, to a lesser extent in the current market environment. Our competitive position also is highly dependent on our ability to recruit and retain geological, geophysical, and engineering expertise. We compete for prospects, proved reserves, oil-field services, and qualified oil and gas professionals with major and diversified energy companies and other independent operators that have larger financial, human, and technological resources than we do. +We compete with integrated, independent, and other energy companies for the sale and transportation of our oil, gas, and NGLs to marketing companies and end users. The oil and gas industry competes with other energy industries that supply fuel and power to industrial, commercial, and residential consumers. Many of these competitors have greater financial and human resources. The effect of these competitive factors cannot be predicted. +Proved Reserves Estimation Procedures +Proved oil and gas reserve quantities are based on estimates prepared by Cimarex in accordance with the SEC’s rules for reporting oil and gas reserves. Our reserve definitions conform with definitions of Rule 4-10(a) (1)-(32) of Regulation S-X of the SEC. All of our reserve estimates are maintained by our internal Corporate Reservoir Engineering group, which is comprised of reservoir engineers and engineering technicians. The objectives and management of this group are separate from and independent of the exploration and production functions of the company. The primary objective of our Corporate Reservoir Engineering group is to maintain accurate forecasts on all properties of the company through ongoing monitoring and timely updates of operating and economic parameters (production forecasts, prices and regional differentials, operating expenses, ownership, etc.) in accordance with guidelines established by the SEC. This separation of function and responsibility is a key internal control. +Cimarex engineers are responsible for estimates of proved reserves. Corporate engineers interact with the exploration and production departments to ensure all available engineering and geologic data is taken into account prior to establishing or revising an estimate. After preparing the reserves update, the corporate engineers review their recommendations with the Vice President of Corporate Engineering. After approval from the Vice President of Corporate Engineering, the revisions are entered into our reserves database by the engineering technician. +During the course of the year, the Vice President of Corporate Engineering presents summary reserves information to senior management and to our Board of Directors for their review. From time to time, the Vice President of Corporate Engineering also will confer with the Vice President of Exploration, Chief Operating Officer, and the Chief Executive Officer regarding specific reserves-related issues. In addition, Corporate Reservoir Engineering maintains a set of basic guidelines and procedures to ensure that critical checks and reviews of the reserves database are performed on a regular basis. +13 +Table of Contents +Together, these internal controls are designed to promote a comprehensive, objective, and accurate reserves estimation process. As an additional confirmation of the reasonableness of our internal estimates, DeGolyer and MacNaughton, an independent petroleum engineering consulting firm, reviewed reserves associated with greater than 80% of the total future net revenue discounted at 10% attributable to the total interests owned by Cimarex as of December 31, 2017 . The individual primarily responsible for overseeing the review is a Senior Vice President with DeGolyer and MacNaughton and a Registered Professional Engineer in the State of Texas with over 33 years of experience in oil and gas reservoir studies and reserves evaluations. +The technical employee primarily responsible for overseeing the oil and gas reserves estimation process is Cimarex’s Vice President of Corporate Engineering. This individual graduated from the Colorado School of Mines with a Bachelor of Science degree in Engineering and has more than 23 years of practical experience in oil and gas reservoir evaluation. He has been directly involved in the annual reserves reporting process of Cimarex since 2002 and has served in his current role for the past 13 years. +Title to Oil and Gas Properties +We undertake title examination and perform curative work at the time we lease undeveloped acreage, prepare for the drilling of a prospect, or acquire proved properties. We believe title to our properties is good and defensible, and is in accordance with industry standards. Nevertheless, we are involved in title disputes from time to time that result in litigation. Our oil and gas properties are subject to customary royalty interests, liens incidental to operating agreements, tax liens, and other burdens and minor encumbrances, easements, and restrictions. +Government Regulation +Oil and gas production and transportation is subject to extensive federal, state, and local laws and regulations. Compliance with existing laws often is difficult and costly, but has not had a significant adverse effect on our operations or financial condition. In recent years, we have been most directly impacted by federal and state environmental regulations and energy conservation rules. We are also impacted by federal and state regulation of pipelines and other oil and gas transportation systems. +The states in which we conduct operations establish requirements for drilling permits, the method of developing fields, the size of well spacing units, drilling density within productive formations and the unitization or pooling of properties. In addition, state conservation laws include requirements for waste prevention, establish limits on the maximum rate of production from wells, generally prohibit the venting or flaring of natural gas, and impose certain requirements regarding the ratability of production. +Environmental Regulation. Various federal, state, and local laws regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, directly impact oil and gas exploration, development, and production operations, which consequently impact our operations and costs. These laws and regulations govern, among other things, emissions into the atmosphere, discharges of pollutants into waters, underground injection of waste water, the generation, storage, transportation, and disposal of waste materials, and protection of public health, natural resources, and wildlife. These laws and regulations may impose substantial liabilities for noncompliance and for any contamination resulting from our operations and may require the suspension or cessation of operations in affected areas. +Cimarex is committed to environmental protection and believes we are in material compliance with applicable environmental laws and regulations. We obtain permits for our facilities and operations in accordance with the applicable laws and regulations. There are no known issues that have a significant adverse effect on the permitting process or permit compliance status of any of our facilities or operations. Expenditures are required to comply with environmental regulations. These costs are a normal, recurring expense of operations and not an extraordinary cost of compliance with current government regulations. +We do not anticipate that we will be required under current environmental laws and regulations to expend amounts that will have a material adverse effect on our financial position or operations. However, due to continuing changes in these laws and regulations, we are unable to predict with any reasonable degree of certainty any potential delays in development plans that could arise, or our future costs of complying with governmental requirements. We maintain levels of insurance customary in the industry to limit our financial exposure in the event of a substantial environmental claim resulting from sudden, unanticipated and accidental discharges of oil, produced water, or other substances as well as additional coverage for certain other pollution events. +Gas Gathering and Transportation. The Federal Energy Regulatory Commission (“FERC”) requires interstate gas pipelines to provide open access transportation. FERC also enforces the prohibition of market manipulation by any entity, and the facilitation of the sale or transportation of natural gas in interstate commerce. Interstate pipelines have implemented these requirements, providing us with additional market access and more fairly applied transportation services and rates. FERC continues to review and modify its open access and other regulations applicable to interstate pipelines. +14 +Table of Contents +Under the Natural Gas Policy Act (“NGPA”), natural gas gathering facilities are expressly exempt from FERC jurisdiction. What constitutes “gathering” under the NGPA has evolved through FERC decisions and judicial review of such decisions. We believe that our gathering systems meet the test for non-jurisdictional “gathering” systems under the NGPA and that our facilities are not subject to federal regulations. Although exempt from FERC oversight, our natural gas gathering systems and services may receive regulatory scrutiny by state and federal agencies regarding the safety and operating aspects of the transportation and storage activities of these facilities. +In addition to using our own gathering facilities, we may use third-party gathering services or interstate transmission facilities (owned and operated by interstate pipelines) to ship our gas to markets. +Additional proposals and proceedings that might affect the oil and gas industry are pending before the U.S. Congress, FERC, Bureau of Land Management (“BLM”), U.S. Environmental Protection Agency (“EPA”), state legislatures, state agencies, local governments, and the courts. We cannot predict when or whether any such proposals may become effective and what effect they will have on our operations. We do not anticipate that compliance with existing federal, state, and local laws, rules, or regulations will have a material adverse effect upon our capital expenditures, earnings, or competitive position. +Federal and State Income and Other Local Taxation +Cimarex and the petroleum industry in general are affected by both federal and state income tax laws, as well as other local tax regulations involving ad valorem, personal property, franchise, severance, and other excise taxes. We have considered the effects of these provisions on our operations and do not anticipate that there will be any material undisclosed impact on our capital expenditures, earnings, or competitive position. +Executive Officers of the Registrant +See Part III, Item 10, Directors, Executive Officers and Corporate Governance for information regarding our executive officers as of February 23, 2018 . +ITEM 1A. RISK FACTORS +The following risks and uncertainties, together with other information set forth in this Form 10-K, should be carefully considered by current and future investors in our securities. These risks and uncertainties are not the only ones we face. Additional risks and uncertainties presently unknown to us or currently deemed immaterial also may impair our business operations. The occurrence of one or more of these risks or uncertainties could materially and adversely affect our business, financial condition, and results of operations, which in turn could negatively impact the value of our securities. +Oil, gas, and NGL prices fluctuate due to a number of factors beyond our control, creating a component of uncertainty in our development plans and overall operations. Declines in prices adversely affect our financial results and rate of growth in proved reserves and production. +Oil and gas markets are volatile. We cannot predict future prices. The prices we receive for our production heavily influence our revenue, profitability, access to capital, and future rate of growth. The prices we receive depend on numerous factors beyond our control. These factors include, but are not limited to, changes in domestic and global supply and demand for oil and gas, the level of domestic and global oil and gas exploration and production activity, geopolitical instability, the actions of the Organization of Petroleum Exporting Countries, weather conditions, technological advances affecting energy consumption, governmental regulations and taxes, and the price and technological advancement of alternative fuels. +Our proved oil and gas reserves and production volumes will decrease unless those reserves are replaced with new discoveries or acquisitions. Accordingly, for the foreseeable future, we expect to make substantial capital investments for the exploration and development of new oil and gas reserves. Historically, we have paid for these types of capital expenditures with cash flow provided by our production operations, our revolving credit facility, and proceeds from the sale of senior notes or equity. Low prices reduce our cash flow and the amount of oil and gas that we can economically produce and may cause us to curtail, delay, or defer certain exploration and development projects. Moreover, low prices may impact our abilities to borrow under our revolving credit facility and to raise additional debt or equity capital to fund acquisitions. +15 +Table of Contents +If prices decrease, we may be required to take write-downs of the carrying values of our oil and gas properties and/or our goodwill. +Accounting rules require that we periodically review the carrying value of our oil and gas properties and goodwill for possible impairment. +In 2016 and 2015 , we recognized ceiling test impairments totaling $757.7 million ( $481.4 million , net of tax) and $4.03 billion ( $2.56 billion , net of tax), respectively. The impairments resulted primarily from the impact of decreases in the trailing twelve-month average prices for oil, gas, and NGLs utilized in determining the estimated future net cash flows from proved reserves. At December 31, 2017 , the calculated value of the ceiling limitation exceeded the carrying value of our oil and gas properties subject to the test, and no impairment was necessary. However, a decline of approximately 19% or more in the value of the ceiling limitation would have resulted in an impairment. Because the ceiling calculation uses trailing twelve-month average commodity prices, the effect of increases and decreases in period-over-period prices can significantly impact the ceiling limitation calculation. Impairment charges do not affect cash flow from operating activities, but do adversely affect our net income and various components of our balance sheet. +Ineffective internal controls could impact our business and financial results. +Our internal control over financial reporting may not prevent or detect misstatements because of its inherent limitations, including the possibility of human error, the circumvention or overriding of controls, or fraud. Even effective internal controls can provide only reasonable assurance with respect to the preparation and fair presentation of financial statements. If we fail to maintain the adequacy of our internal controls, including any failure to implement required new or improved controls, or if we experience difficulties in their implementation, our business and financial results could be harmed and we could fail to meet our financial reporting obligations. For example, at December 31, 2016 , management concluded that a deficiency in the design of our internal controls related to the full cost ceiling test calculation represented a material weakness in our internal control over financial reporting and, therefore, that we did not maintain effective internal control over financial reporting as of December 31, 2016 , as reported in our Form 10-K/A for that period. We have since remediated this material weakness, however, there is no guarantee that we won’t experience material weaknesses in our internal control over financial reporting in the future or that we will be able to implement new controls to address such material weaknesses as necessary, which may result in untimely or inaccurate reporting of our financial statements. +U.S. or global financial markets may impact our business and financial condition. +A credit crisis or other turmoil in the U.S. or global financial system may have a negative impact on our business and our financial condition. Our ability to access the capital markets may be restricted at a time when we would like, or need, to raise financing. This could have an impact on our flexibility to react to changing economic and business conditions. Deteriorating economic conditions could have a negative impact on our lenders, the purchasers of our oil and gas production, and the working interest owners in properties we operate, causing them to fail to meet their obligations to us. +Failure to economically replace oil and gas reserves could negatively affect our financial results and future rate of growth. +In order to replace the reserves depleted by production and to maintain or increase our total proved reserves and overall production levels, we must either locate and develop new oil and gas reserves or acquire producing properties from others. This requires significant capital expenditures and can impose reinvestment risk for us, as we may not be able to continue to replace our reserves economically. While we occasionally may seek to acquire proved reserves, our main business strategy is to grow through exploration and drilling. Without successful exploration and development, our reserves, production, and revenues could decline rapidly, which would negatively impact the results of our operations. +Exploration and development involves numerous risks, including new governmental regulations and the risk that we will not discover any commercially productive oil or gas reservoirs. Additionally, it can be unprofitable, not only from drilling dry holes, but also from drilling productive wells that do not return a profit because of insufficient reserves or declines in commodity prices. +Our drilling operations may be curtailed, delayed, or canceled for many reasons. Factors such as unforeseen poor drilling conditions, title problems, unexpected pressure irregularities, equipment failures, accidents, adverse weather conditions, compliance with environmental and other governmental requirements, bans, moratoria, or other restrictions implemented by local governments and the cost of, or shortages or delays in the availability of, drilling and completion services could negatively impact our drilling operations. +16 +Table of Contents +Our proved reserve estimates may be inaccurate and future net cash flows are uncertain. +Estimates of total proved oil and gas reserves (consisting of proved developed and proved undeveloped reserves) and associated future net cash flow depend on a number of variables and assumptions. Refer to CAUTIONARY INFORMATION ABOUT FORWARD-LOOKING STATEMENTS in Part I of this report. Among others, changes in any of the following factors may cause actual results to vary considerably from our estimates: +• +oil, gas, and NGL prices; +• +timing of development expenditures; +• +amount of required capital expenditures and associated economics; +• +recovery efficiencies, decline rates, drainage areas, and reservoir limits; +• +anticipated reservoir and production characteristics and interpretations of geologic and geophysical data; +• +production rates, reservoir pressure, unexpected water encroachment, and other subsurface conditions; +• +governmental regulation; +• +access to assets restricted by local government action; +• +operating costs; +• +property, severance, excise, and other taxes incidental to oil and gas operations; +• +workover and remediation costs; and +• +federal and state income taxes. +Our proved oil and gas reserve estimates are prepared by Cimarex engineers in accordance with guidelines established by the SEC. DeGolyer and MacNaughton, independent petroleum engineers, reviewed our reserve estimates for properties that comprised at least 80% of the discounted future net cash flows before income taxes, using a 10% discount rate, as of December 31, 2017 . +The cash flow amounts referred to in this filing should not be construed as the current market value of our proved reserves. In accordance with SEC guidelines, the estimated discounted net cash flow from proved reserves is based on the average of the previous twelve months’ first-day-of-the-month prices and costs as of the date of the estimate, whereas actual future prices and costs may be materially different. +Our business depends on oil and gas pipeline and transportation facilities, some of which are owned by others. +In addition to the existence of adequate markets, our oil and gas production depends in large part on the proximity and capacity of pipeline systems, as well as storage, transportation, processing and fractionation facilities, most of which are owned by third parties. The inability to transport one commodity, such as gas, could also impair our ability to produce and sell other commodities, such as oil and NGLs, produced from the same wells. The lack of availability or the lack of capacity on these systems and facilities could result in the curtailment of production or the delay or discontinuance of drilling plans. This is more likely in remote areas with less established infrastructure, such as our Delaware Basin area where we and competitors have significant development activities. The lack of availability of or capacity in these facilities or the loss of these facilities due to construction delays, weather, fire, or other reasons, for an extended period of time could negatively affect our revenues. +A limited number of companies purchase a majority of our oil, gas, and NGLs. The loss of a significant purchaser could have a material adverse effect on our ability to sell production. +Federal and state regulation of oil and gas, local government activity, adverse court rulings, tax and energy policies, changes in supply and demand, pipeline pressures, damage to or destruction of pipelines, and general economic conditions could adversely affect our ability to produce and market oil and natural gas. +17 +Table of Contents +Commodity price derivative transactions may limit our potential gains and involve other risks. +To limit our exposure to price risk, we enter into derivative agreements from time to time. Commodity price derivatives limit volatility and increase the predictability of a portion of our cash flow. These transactions also limit our potential gains when oil and gas prices exceed the prices established by the derivatives. +In certain circumstances, derivative transactions may expose us to the risk of financial loss, including instances in which: +• +the counterparties to our derivative agreements fail to perform; +• +there is a sudden unexpected event that materially increases oil and gas prices; or +• +there is a widening of price basis differentials between delivery points for our production and the delivery point assumed in the derivative agreement. +Because we account for derivative contracts under mark-to-market accounting, during periods we have derivative transactions in place we expect continued volatility in derivative gains and losses on our statement of operations as changes occur in the relevant price indexes. +The adoption of derivatives legislation could have an adverse effect on our ability to use derivative instruments as hedges against fluctuating commodity prices. +In July 2010, the Dodd-Frank Act was enacted, representing an extensive overhaul of the framework for regulation of U.S. financial markets. The Dodd-Frank Act called for various regulatory agencies, including the SEC and the Commodities Futures Trading Commission (“CFTC”), to establish regulations for implementation of many of its provisions. The Dodd-Frank Act contains significant derivatives regulations, including requirements that certain transactions be cleared on exchanges and that cash collateral (margin) be posted for such transactions. The Dodd-Frank Act provides for an exemption from the clearing and cash collateral requirements for commercial end-users, such as Cimarex, and it includes a number of defined terms used in determining how this exemption applies to particular derivative transactions and the parties to those transactions. +We have satisfied the requirements for the commercial end-user exception to the clearing requirement and intend to continue to engage in derivative transactions. In December 2015, the CFTC approved final rules on margin requirements that will have an impact on our derivative counterparties and an interim final rule exemption from the margin requirements for certain uncleared swaps with commercial end-users. The final rules did not impose additional requirements on commercial end-users. The ultimate effect of these new rules and any additional regulations is currently uncertain. New rules and regulations in this area may result in significant increased costs and disclosure obligations as well as decreased liquidity as entities that previously served as derivative counterparties exit the market. +We have been an early entrant into new or emerging resource plays. As a result, our drilling results in these areas are uncertain. The value of our undeveloped acreage may decline and we may incur impairment charges if drilling results are unsuccessful. +New or emerging oil and gas resource plays have limited or no production history. Consequently, in those areas it is difficult to predict our future drilling costs and results. Therefore, our cost of drilling, completing, and operating wells in these areas may be higher than initially expected. Similarly, our production may be lower than initially expected, and the value of our undeveloped acreage may decline if our results are unsuccessful. As a result, we may be required to impair the carrying value of our undeveloped acreage in new or emerging plays. +Furthermore, unless production is established during the primary term of certain of our undeveloped oil and gas leases, the leases will expire, and we will lose our right to develop those properties. +Competition in our industry is intense and many of our competitors have greater financial and technological resources. +We operate in the competitive area of oil and gas exploration and production. Many of our competitors are large, well-established companies that have larger operating staffs and greater capital resources. These competitors may be willing to pay more for exploratory prospects and productive oil and gas properties. They may also be able to define, evaluate, bid for, and purchase a greater number of properties and prospects than our financial or human resources permit. +18 +Table of Contents +Because our activity is also concentrated in areas of heavy industry competition, there is heightened demand for personnel, equipment, power, services, facilities, and resources, resulting in higher costs than in other areas. Such intense competition also could result in delays in securing, or the inability to secure, the personnel, equipment, power, services, resources, or facilities necessary for our development activities, which could negatively impact our production volumes. We also face higher costs in remote areas where vendors can charge higher rates due to that remoteness and the inability to attract employees to those areas, as well as the vendors’ ability to deploy their resources in easier-to-access areas. +We are subject to complex laws and regulations that can adversely affect the cost, manner, and feasibility of doing business. +Exploration, production, and the sale of oil and gas are subject to extensive laws and regulations, including those implemented to protect the environment, human health and safety, and wildlife. Federal, state, and local regulatory agencies frequently require permitting and impose conditions on our activities. During the permitting process, these regulatory agencies often exercise considerable discretion in both the timing and scope of the permits, and the public, including special interest groups, often has an opportunity to influence the timing and outcome of the process. The requirements or conditions imposed by these agencies can be costly and can delay the commencement of our operations. In addition, a number of initiatives had been put forth by the Obama administration in the form of Presidential or Secretarial Memoranda, which are still in effect, and have the potential to impact the cost of doing business or could result in substantial delays in permitting, drilling, and other oil and gas activities. +Failing to comply with any of the applicable laws and regulations, or Presidential initiatives, could result in the suspension or termination of our operations and subject us to administrative, civil, and criminal liabilities and penalties. Such costs could have a material adverse effect on both our financial condition and operations. +Environmental matters and costs can be significant. +As an owner, lessee, or operator of oil and gas properties, we are subject to various complex, stringent, and constantly evolving environmental laws and regulations. Our operations inherently create the risk of environmental liability to the government and private parties stemming from our use, generation, handling, and disposal of water and waste materials, as well as the release of hydrocarbons or other substances into the air, soil, or water. The environmental laws and regulations to which we are subject impose numerous obligations applicable to our operations, including: the acquisition of permits before conducting regulated activities associated with drilling for and producing oil and gas; the restriction of types, quantities, and concentration of materials that can be released into the environment; the limitation or prohibition of drilling activities on certain lands lying within wilderness, wetlands, waters of the United States, and other protected areas; the application of specific health and safety criteria addressing worker protection; and the imposition of substantial liabilities for pollution resulting from our operations. Numerous governmental authorities, such as the EPA and analogous state agencies have the power to enforce compliance with these laws and regulations and the permits issued under them. Such enforcement actions often involve taking difficult and costly compliance measures or corrective actions. Failure to comply with these laws and regulations may result in the assessment of sanctions, including administrative, civil, or criminal penalties, the imposition of investigatory or remedial obligations, and the issuance of orders limiting or prohibiting some or all of our operations. In addition, we may experience delays in obtaining, or be unable to obtain, required permits, which may delay or interrupt our operations and limit our growth and revenue. +Liabilities under certain environmental laws can be joint and several and may in some cases be imposed regardless of fault on our part such as where we own a working interest in a property operated by another party. We also could be held liable for damages or remediating lands or facilities previously owned or operated by others regardless of whether such contamination resulted from our own actions and regardless if we were in compliance with all applicable law at the time. Further, claims for damages to persons or property, including natural resources, may result from the environmental, health, and safety impacts of our operations. Because these environmental risks generally are not fully insurable and can result in substantial costs, such liabilities could have a material adverse effect on both our financial condition and operations. +19 +Table of Contents +Our financial condition and results of operations may be materially adversely affected if we incur costs and liabilities due to a failure to comply with environmental regulations or a release of hazardous substances into the environment. +Our operations are subject to environmental laws and regulations relating to the management and release of hazardous substances, pollutants, solid and hazardous wastes, and petroleum hydrocarbons. These laws generally regulate the generation, storage, treatment, discharge, transportation, and disposal of pollutants and solid and hazardous waste and may impose strict and, in some cases, joint and several liability for the investigation and remediation of affected areas where hazardous substances may have been released or disposed. The most significant of these environmental laws are as follows: +• +The Comprehensive Environmental Response, Compensation, and Liability Act, as amended, referred to as CERCLA or the Superfund law, and comparable state laws, which imposes liability on generators, transporters, and arrangers of hazardous substances at sites where hazardous substance releases have occurred or are threatening to occur; +• +The Oil Pollution Act of 1990 (“OPA”), under which owners and operators of onshore facilities and pipelines, lessees or permittees of an area in which an offshore facility is located, and owners and operators of vessels are liable for removal costs and damages that result from a discharge of oil into navigable waters of the United States; +• +The Resource Conservation and Recovery Act (“RCRA”), as amended, and comparable state statutes, which governs the treatment, storage, and disposal of solid waste; +• +The Federal Water Pollution Control Act, as amended, also known as the Clean Water Act (“CWA”), which governs the discharge of pollutants, including natural gas wastes, into federal and state waters; +• +The Safe Drinking Water Act (“SDWA”), which governs the disposal of wastewater in underground injection wells; and +• +The Clean Air Act (“CAA”) which governs the emission of pollutants into the air. +We believe we are in substantial compliance with the requirements of CERCLA, OPA, RCRA, CWA, SDWA, CAA and related state and local laws and regulations. We also believe we hold all necessary and up-to-date permits, registrations, and other authorizations required under such laws and regulations. Although the current costs of managing our wastes as they presently are classified are reflected in our budget, any legislative or regulatory reclassification of oil and gas exploration and production wastes could increase our costs to manage and dispose of such wastes and have a material adverse effect on our financial condition and operations. +Federal regulatory initiatives relating to the protection of threatened or endangered species could result in increased costs and additional operating restrictions or delays. +The Federal Endangered Species Act (“ESA”) was established to protect endangered and threatened species. Pursuant to the ESA, if a species is listed as threatened or endangered, restrictions may be imposed on activities adversely affecting that species’ habitat. The U.S. Fish and Wildlife Service (“FWS”) may designate critical habitat and suitable habitat areas it believes are necessary for survival of a threatened or endangered species. A critical habitat or suitable habitat designation could result in further material restrictions to federal land use and may materially delay or prohibit land access for oil and gas development. Similar protections are offered to migratory birds under the Migratory Bird Treaty Act. We conduct operations on federal oil and gas leases in areas where certain species are currently listed as threatened or endangered, or could be listed as such, under the ESA. Operations in areas where threatened or endangered species or their habitat are known to exist may require us to incur increased costs to implement mitigation or protective measures and also may restrict or preclude our drilling activities in those areas or during certain seasons, such as breeding and nesting seasons. On March 27, 2014, the FWS announced the listing of the lesser prairie chicken, whose habitat is over a five-state region, including Texas, New Mexico, and Oklahoma, where we conduct operations, as a threatened species under the ESA. Listing of the lesser prairie chicken as a threatened species imposes restrictions on disturbances to critical habitat by landowners and drilling companies that would harass, harm, or otherwise result in a “taking” of this species. However, the FWS also announced a final rule that will limit regulatory impacts on landowners and businesses from the listing if those landowners and businesses have entered into certain range-wide conservation planning agreements, such as those developed by the Western Association of Fish and Wildlife Agencies (“WAFWA”), pursuant to which such parties agreed to take steps to protect the lesser prairie chicken’s habitat and to pay a mitigation fee if its actions harm the lesser prairie chicken’s habitat. We entered into a voluntary Candidate Conservation Agreement (“CCA”) with the WAFWA, whereby we agreed to take certain actions and limit certain activities, such as limiting drilling on certain portions of our acreage during nesting seasons, in an effort to protect the lesser prairie chicken. On February 9, 2018, the FWS announced the listing of the Texas Hornshell, a fresh water mussel species in areas including New Mexico and Texas where we operate in the Permian Basin, as an endangered species. +20 +Table of Contents +We also intend to enter into a CCA concerning voluntary conservation actions with respect to the Texas Hornshell. Participating in CCAs could result in increased costs to us from species protection measures, time delays or limitations on drilling activities, which costs, delays or limitations may be significant. While a federal judge in Texas vacated the listing of the lesser prairie chicken in 2015, listing petitions continue to be filed with the FWS which could impact our operations. Many non-governmental organizations (“NGOs”) work closely with the FWS regarding the listing of many species, including species with broad and even nationwide ranges. The recent listing of the Mexican Long Nosed bat, whose habitat includes the Permian Basin where we operate, is an example of the NGOs’ influence on ESA listing decisions. The increase in endangered species listings may impact our ability to explore for or produce oil and gas in certain areas and increase our costs. +Our hydraulic fracturing activities are subject to risks that could negatively impact our operations and profitability. +We use hydraulic fracturing for the completion of almost all of our wells. Hydraulic fracturing is a process that involves pumping fluid and proppant at high pressure into a hydrocarbon bearing formation to create and hold open fractures. Those fractures enable gas or oil to move through the formation’s pores to the well bore. Typically, the fluid used in this process is primarily water. In plays where hydraulic fracturing is necessary for successful development, the demand for water may exceed the supply. A lack of readily available water or a significant increase in the cost of water could cause delays or increased completion costs. +While hydraulic fracturing historically has been regulated by state oil and gas commissions, the practice has become increasingly controversial in certain parts of the country, resulting in increased scrutiny and regulation from federal agencies. For example, the EPA has asserted federal regulatory authority over certain hydraulic fracturing activities under the SDWA involving the use of diesel fuels and published permitting guidance in February 2014 addressing the use of diesel in fracturing operations. Although the EPA has delegated the permitting authority for the SDWA’s Underground Injection Control Class II programs in Oklahoma, Texas, and New Mexico where we maintain operational acreage, the EPA is encouraging state programs to review and consider use of such draft guidance. +In addition, on March 26, 2015, the federal BLM published a final rule governing hydraulic fracturing on federal and Indian lands. The rule requires public disclosure of chemicals used in hydraulic fracturing on federal and Indian lands, confirmation that wells used in fracturing operations meet appropriate construction standards, development of appropriate plans for managing flowback water that returns to the surface, increased standards for interim storage of recovered waste fluids, and submission to the BLM of detailed information on the geology, depth, and location of preexisting wells. This rule originally was scheduled to take effect on June 24, 2015. However, the rule is the subject of several pending lawsuits filed by industry groups, two Indian tribes, and at least four states, alleging that federal law does not give the BLM authority to regulate hydraulic fracturing. The federal judge has enjoined the rule while the case is pending. The district court held that BLM did not have jurisdiction to promulgate the rule. The Obama Justice Department appealed and that appeal is pending. +There are also certain governmental reviews either underway or being proposed that focus on environmental aspects of hydraulic fracturing practices. The EPA prepared a study of the potential environmental effects of hydraulic fracturing on drinking water and groundwater. The EPA’s draft report was released on June 4, 2015. The findings of the report suggest that hydraulic fracturing does not pose a systemic risk to groundwater although there are risks to both groundwater and soils posed by inadequate water handling practices in certain situations. A public comment period on the report was open until August 28, 2015 and a series of public hearings were conducted by the EPA’s Scientific Advisory Board (“SAB”) throughout the fall of 2015. The EPA issued its final report and has reached two different topline conclusions, although the content of the study itself remains unchanged. Other governmental agencies, including the U.S. Department of Energy and the U.S. Department of the Interior, have evaluated or are evaluating various other aspects of hydraulic fracturing. These ongoing or proposed studies could spur initiatives to further regulate hydraulic fracturing. +Additionally, Congress from time to time has considered the adoption of legislation to provide for federal regulation of hydraulic fracturing and to require disclosure of the chemicals used in the hydraulic fracturing process. Most producing states, including Texas and Colorado, have adopted, and other states are considering adopting, regulations that could impose more stringent permitting, public disclosure, and well construction requirements on hydraulic fracturing operations or otherwise seek to ban fracturing activities altogether. +Any of the above factors could have a material adverse effect on our financial position, results of operations, or cash flows and could make it more difficult or costly for us to perform fracturing to stimulate production from dense subsurface rock formations and, in the event of local prohibitions against commercial production of natural gas, may preclude our ability to drill wells. In addition, our fracturing activities could become subject to additional permitting requirements and result in permitting delays as well as potential increases in costs. Restrictions on hydraulic fracturing could also reduce the amount of oil and gas that we are ultimately able to produce from our reserves. +21 +Table of Contents +The adoption of climate change legislation or regulations restricting emission of greenhouse gases, investor pressure concerning climate-related disclosures, and lawsuits could result in increased operating costs and reduced demand for the oil and gas we produce as well as reductions in availability of capital. +Studies have suggested that emission of certain gases, commonly referred to as greenhouse gases (“GHGs”), may be impacting the earth’s climate. Methane, a primary component of natural gas, and carbon dioxide, also present in natural gas as a secondary product, sometimes considered an impurity or a by-product of the burning of oil and natural gas, are examples of GHGs. The U.S. Congress and various states have been evaluating, and in some cases implementing, climate-related legislation and other regulatory initiatives that restrict emissions of GHGs. In December 2009, the EPA published its findings that emissions of GHGs present an endangerment to public health and the environment because emissions of such gases are contributing to the warming of the earth’s atmosphere and other climatic changes. Based on these findings, the EPA adopted regulations under existing provisions of the Federal Clean Air Act that establish Prevention of Significant Deterioration (“PSD”) and Title V permit reviews for GHG emissions from certain large stationary sources. Facilities required to obtain PSD and/or Title V permits under EPA’s GHG Tailoring Rule for their GHG emissions also may be required to meet “Best Available Control Technology” standards that will be established by the states or, in some cases, by the EPA on a case-by-case basis. The EPA has also adopted rules requiring the monitoring and reporting of GHG emissions from specified sources in the United States, including, among others, certain oil and gas production facilities on an annual basis, which includes certain of our operations. In recent proposed rulemaking, EPA is widening the scope of annual GHG reporting to include not only activities associated with completion and workover of gas wells with hydraulic fracturing and activities associated with oil and gas production operations, but also completions and workovers of oil wells with hydraulic fracturing, gathering and boosting systems, and transmission pipelines. +While Congress has from time to time considered legislation to reduce emissions of GHGs, there has not been significant activity in the form of adopted legislation to reduce GHG emissions at the federal level in recent years. In the absence of such federal climate legislation, a number of state and regional efforts have emerged that are aimed at tracking and/or reducing GHG emissions by means of cap and trade programs that typically require major sources of GHG emissions, such as electric power plants, to acquire and surrender emission allowances in return for emitting those GHGs. In January 2015, President Obama announced a series of administration actions to reduce methane emissions, including rulemaking by the EPA and the BLM as well as updating of standards by the Department of Transportation’s Pipeline and Hazardous Materials Administration. The previous administration intended to promulgate proposed climate change rulemaking aimed at reducing GHG emissions by 45% by 2025 compared to 2012 levels. These proposals target both new and existing sources. On January 22, 2016, the Department of the Interior announced its proposed emissions mandate on oil and gas producers who operate on federal and Indian lands. While this rule was finalized in November of 2016, it is currently being challenged by several states and industry. While we expect new legislation and regulations to increase the cost of business, at this time it is not possible to quantify the impact on our business. Any such future laws and final regulations that require reporting of GHGs or otherwise limit emissions of GHGs from our equipment and operations could require us to incur costs to develop and implement best management practices aimed at reducing GHG emissions, install and maintain emissions control technologies, as well as monitor and report on GHG emissions associated with our operations, which would increase our operating costs, and such requirements also could adversely affect demand for the oil and gas that we produce. +The following is a summary of potential climate-related risks that could adversely affect Cimarex: +Transition Risks. Transition risks are risks related to the transition to a lower-carbon economy and include policy, legal, technology, and market risks. +Policy and Legal Risks. Policy risks include policy actions that attempt to contract actions that contribute to adverse effects of climate change or policy actions that seek to promote adaptation to climate change. Examples include implementing carbon-pricing mechanisms to reduce GHG emissions (which would increase the costs of our doing business), shifting energy use toward lower emission sources (which could lower demand for our oil and gas production, resulting in lower prices and lower revenues), adopting energy-efficiency solutions (which also could lower demand for our oil and gas production, resulting in lower prices and lower revenues), encouraging greater water efficiency measures (which would increase our costs of production), and promoting more sustainable land-use practices (which also would increase our costs of production and could impact our ability to operate in certain areas). Policy actions also may include restrictions or bans on oil and gas activities, which could lead to write-downs or impairments of our assets. Legal and litigation risks include potential lawsuits claiming failure to mitigate impacts of climate change, failure to adapt to climate change, and the insufficiency of disclosure around material financial risks. +Technology Risk. Technological improvements or innovations that support the transition to a lower-carbon, more energy efficient economic system may have a significant impact on Cimarex. The development and use of emerging technologies such as renewable energy, battery storage, and energy efficiency may lower demand for oil and gas, resulting in lower prices and revenues, and increase our costs. +22 +Table of Contents +Market Risk. Markets could be affected by climate change through shifts in supply and demand for certain commodities, especially carbon-intensive commodities such as oil and gas and other products dependent on oil and gas, as climate-related risks and opportunities are increasingly taken into account. This could lower demand for our oil and gas production, resulting in lower prices and lower revenues. Market risk also may take the form of limited access to capital as investors shift investments to less carbon-intensive industries and alternative energy industries. +Reputation Risk. Climate change has been identified as a potential source of reputational risk tied to changing customer or community perceptions of an organization’s contribution to or detraction from the transition to a lower-carbon economy. This could lower demand for our oil and gas production, resulting in lower prices and lower revenues as consumers avoid carbon-intensive industries. This may also put pressure on investment managers to shift investments to less carbon-intensive industries and alternative energy industries, limiting our access to capital. +Physical Risks . Potential physical risks resulting from climate change may be event driven (including increased severity of extreme weather events, such as hurricanes or floods) or longer-term shifts in climate patterns that may cause sea level rise or chronic heat waves. Potential physical risks may cause direct damage to assets and indirect impacts such as supply chain disruption. Potential physical risks also include changes in water availability, sourcing, and quality, which could impact drilling and completions operations. These physical risks could cause increased costs, production disruptions, and lower revenues. +Legislation or regulatory initiatives intended to address seismic activity could restrict our ability to engage in hydraulic fracturing during completion operations and to dispose of saltwater produced in connection with our oil and gas production, which could limit our ability to produce oil and gas economically and have a material adverse effect on our business. +We dispose of large volumes of saltwater produced in connection with our drilling and production operations pursuant to permits issued to us or third-party operators of disposal wells by governmental authorities overseeing produced water disposal activities. While these permits are issued pursuant to existing laws and regulations, these legal requirements are subject to change, which could result in the imposition of more stringent operating constraints or new monitoring and reporting requirements, owing to, among other things, concerns of the public or governmental authorities regarding such gathering or disposal activities. +There exists a growing concern that hydraulic fracturing during well completion operations and the injection of produced water into underground disposal wells triggers seismic activity in certain areas, including Oklahoma and Texas, where we operate. In response to these concerns, regulators in some states are pursuing initiatives designed to impose additional requirements in connection with hydraulic fracturing and in the permitting of saltwater disposal wells or otherwise to assess any relationship between seismicity and these oil and gas operations. For example, in 2014, the Oklahoma Corporation Commission began adopting rules for operators of saltwater disposal wells in certain seismically-active areas, or Areas of Interest, in the Arbuckle formation, requiring operators to monitor and record well pressure and discharge volume on a daily basis and further requiring operators of wells permitted for disposal of 20,000 barrels per day or more of saltwater to conduct mechanical integrity testing. Throughout 2015 and 2016, the Oklahoma Corporation Commission’s Oil and Gas Conservation Division, or OGCD, issued a series of directives, expanding the areas of interest for induced seismicity and enhanced disposal restrictions and limiting the depths at which produced water could be injected or, in the alternative, reducing disposal volumes. Additional regulations and restrictions are possible as more is understood about this issue. In addition and separate from induced seismicity associated with injection, the OGCD has issued guidelines to operators to follow when engaged in well stimulation activities, which some studies now seem to correlate with a small number of low intensity seismic events. +In addition, in 2014 the Texas Railroad Commission, or TRC, published a new rule governing permitting or re-permitting of disposal wells in Texas that would require, among other things, the submission of information on seismic events occurring within a specified radius of the disposal well location, as well as logs, geologic cross sections, and structure maps relating to the disposal area in question. If a permittee or a prospective permittee fails to demonstrate that the saltwater or other fluids are confined to the disposal zone or if scientific data indicates such a disposal well is likely to be or determined to be contributing to seismic activity, then the TRC may deny, modify, suspend, or terminate the permit application or existing operating permit for that well. +The adoption and implementation of any new laws, regulations, or directives that restrict our ability to stimulate wells or to dispose of produced water, by changing the depths of disposal wells, reducing the volume of oil and gas wastewater disposed in such wells, restricting disposal well locations or otherwise, or by requiring us or third parties who dispose of our saltwater to shut down disposal wells, could increase disposal costs or require us to shut in a substantial number of our oil and gas wells or otherwise have a material adverse effect on our ability to produce oil and gas economically and, accordingly, could materially and adversely affect our business, financial condition, and results of operations. We could also face lawsuits alleging that seismic activity occurred as a result of completions or water disposal activities, resulting in damage to persons and property. +23 +Table of Contents +A substantial portion of our producing properties are located in limited geographic areas, making us vulnerable to risks associated with having geographically concentrated operations. +A substantial portion of our producing properties are geographically concentrated in the Permian Basin in Texas and New Mexico and our Cana area in the Mid-Continent region in Oklahoma, with these two areas comprising approximately 55% and 45% , respectively, of our oil, gas, and NGL production and approximately 62% and 38% , respectively, of our oil, gas, and NGL revenues for the year ended December 31, 2017 . Approximately 48% of our estimated proved reserves were located in the Permian Basin and approximately 52% of our estimated proved reserves were located in the Mid-Continent region as of December 31, 2017 . +Because of this concentration in limited geographic areas, the success and profitability of our operations may be disproportionately exposed to regional factors relative to our competitors that have more geographically dispersed operations. These factors include, among others: (i) the prices of oil and gas produced from wells in the regions and other regional supply and demand factors, including gathering, pipeline, and rail transportation capacity constraints; (ii) the availability of rigs, equipment, oil field services, supplies, and labor; (iii) the availability of processing and refining facilities; and (iv) infrastructure capacity. In addition, our operations in the Permian Basin and Mid-Continent region, as well as other areas, may be adversely affected by severe weather events such as floods, lightning, ice and other storms, and tornadoes, which can intensify competition for the items described above during months when drilling is possible and may result in periodic shortages. The concentration of our operations in limited geographic areas also increases our exposure to changes in local laws and regulations including concerning hydraulic fracturing and wastewater disposal as discussed above in “Legislation or regulatory initiatives intended to address seismic activity could restrict our ability to engage in hydraulic fracturing during completion operations and to dispose of saltwater produced in connection with our oil and gas production, which could limit our ability to produce oil and gas economically and have a material adverse effect on our business”, certain lease stipulations designed to protect wildlife, and unexpected events that may occur in the regions such as natural disasters, seismic events, industrial accidents, or labor difficulties. Any one of these events has the potential to cause producing wells to be shut-in, delay operations, decrease cash flows, increase operating and capital costs and prevent development of lease inventory before expiration. Any of the risks described above could have a material adverse effect on our financial condition, results of operations, and cash flows. +We use some of the latest available horizontal drilling and completion techniques, which involve risk and uncertainty in their application. +Our horizontal drilling operations utilize some of the latest drilling and completion techniques. The risks of such techniques include, but are not limited to, the following: +• +landing the wellbore in the desired drilling zone; +• +staying in the desired drilling zone while drilling horizontally through the formation; +• +running casing the entire length of the wellbore; +• +being able to run tools and other equipment consistently through the horizontal wellbore; +• +the ability to fracture stimulate the planned number of stages; +• +the ability to run tools the entire length of the wellbore during completion operations; and +• +the ability to successfully clean out the wellbore after completion of the final fracture stimulation stage. +Any of the above factors could have a material adverse effect on our financial position, results of operations, or cash flows. +Many of our properties are in areas that may have been partially depleted or drained by offset wells and certain of our wells may be adversely affected by actions other operators may take when drilling, completing, or operating wells that they own. +Many of our properties are in areas that may have already been partially depleted or drained by earlier offset drilling. The owners of leasehold interests adjoining any of our properties could take actions, such as drilling and completing additional wells, which could adversely affect our operations. When a new well is completed and produced, the pressure differential in the vicinity of the well causes the migration of reservoir fluids toward the new wellbore (and potentially away from existing wellbores). As a result, the drilling and production of these potential locations could cause a depletion of our proved reserves and may inhibit +24 +Table of Contents +our ability to further develop our proved reserves. In addition, completion operations and other activities conducted on adjacent or nearby wells could cause production from our wells to be shut in for indefinite periods of time, could result in increased lease operating expenses and could adversely affect the production and reserves from our wells after they re-commence production. We have no control over the operations or activities of offsetting operators. +We may be subject to information technology system failures, network disruptions, and breaches in data security and our business, financial position, results of operations, and cash flows could be negatively affected by such security threats and disruptions. +As an oil and gas producer, we face various security threats, including cybersecurity threats such as attempts to gain unauthorized access to sensitive information or to render data or systems unusable; threats to the security of our facilities and infrastructure or third-party facilities and infrastructure, such as gathering and processing facilities, pipelines and refineries; and threats from terrorist acts. Cybersecurity attacks are becoming more sophisticated and include, but are not limited to, malicious software, attempts to gain unauthorized access to data and systems, and other electronic security breaches that could lead to disruptions in critical systems, unauthorized release of confidential or otherwise protected information, and corruption of data, and “ransomware” attacks where data is locked unless a payment is made, any of which could have an adverse effect on our reputation, business, financial condition, results of operations, or cash flows. While we have not suffered any material losses relating to such attacks, there can be no assurance that we will not suffer such losses in the future. +We rely heavily on our information systems, and the availability and integrity of these systems are essential for us to conduct our business and operations. In addition to cybersecurity and data security threats, other information system failures and network disruptions could have a material adverse effect on our ability to conduct our business. We could experience system failures due to power or telecommunications failures, human error, natural disasters, fire, sabotage, hardware or software malfunction or defects, computer viruses, intentional acts of vandalism or terrorism and similar acts or occurrences. Such system failures could result in the unanticipated disruption of our operations, communications, or processing of transactions, as well as loss of, or damage to, sensitive information, facilities, infrastructure and systems essential to our business and operations, the failure to meet regulatory standards and the reporting of our financial results, and other disruptions to our operations, which, in turn, could have a material adverse effect on our business, financial position, results of operations, and cash flows. +A cyber attack involving our information systems and related infrastructure, or those of our business associates, could disrupt our business and negatively impact our operations in a variety of ways, including but not limited to: +• +unauthorized access to seismic data, reserves information, strategic information, or other sensitive or proprietary information could have a negative impact on our ability to compete for oil and gas resources; +• +data corruption or operational disruption of production-related infrastructure could result in a loss of production, or accidental discharge; +• +a cyber attack on a vendor or service provider could result in supply chain disruptions, which could delay or halt our major development projects; +• +a cyber attack on third-party gathering, pipeline, or rail transportation systems could delay or prevent us from transporting and marketing our production, resulting in a loss of revenues; and +• +a cyber attack on our accounting or accounts payable systems could expose us to liability to employees and third parties if their personal identifying information is obtained. +These events could damage our reputation and lead to financial losses from remedial actions, loss of business, or potential liability, which could have a material adverse effect on our financial condition, results of operations, or cash flows. +While management has taken steps to address these concerns by implementing network security and internal control measures to monitor and mitigate security threats and to increase security for our information, facilities, and infrastructure, our implementation of such procedures and controls may result in increased costs, and there can be no assurance that a system failure or data security breach will not occur and have a material adverse effect on our business, financial condition, and results of operations. In addition, as cybersecurity threats continue to evolve, we may be required to expend additional resources to continue to modify or enhance our protective measures or to investigate or remediate any cybersecurity or information technology infrastructure vulnerabilities. +25 +Table of Contents +Our limited ability to influence operations and associated costs on non-operated properties could result in economic losses that are partially beyond our control. +For the year ended December 31, 2017 , other companies operated approximately 19% of our net production. Our success in properties operated by others depends upon a number of factors outside of our control. These factors include timing and amount of capital expenditures, the operator’s expertise and financial resources, approval of other participants in drilling wells, selection of technology, and maintenance of safety and environmental standards. Our dependence on the operator and other working interest owners for these projects could prevent the realization of our targeted returns on capital in drilling or acquisition activities. +Our business involves many operating risks that may result in substantial losses for which insurance may be unavailable or inadequate. +Our operations are subject to hazards and risks inherent in drilling for oil and gas, such as fires, natural disasters, explosions, formations with abnormal pressures, casing collapses, uncontrollable flows of underground gas, blowouts, surface cratering, pipeline ruptures, or cement failures. Other such risks include theft, vandalism, and environmental hazards such as gas leaks, oil spills, and discharges of toxic gases. Any of these risks can cause substantial losses resulting from: +• +injury or loss of life; +• +damage to, loss of or destruction of, property, natural resources and equipment; +• +pollution and other environmental damages; +• +regulatory investigations, civil litigation, and penalties; +• +damage to our reputation; +• +suspension of our operations; and +• +costs related to repair and remediation. +In addition, our liability for environmental hazards may include conditions created by the previous owners of properties that we purchase or lease. +We maintain insurance coverage against some, but not all, potential losses. We do not believe that insurance coverage for all environmental damages that could occur is available at a reasonable cost. Losses could occur for uninsurable or uninsured risks, or in amounts in excess of existing insurance coverage. The occurrence of an event that is not fully covered by insurance could harm our financial condition and results of operation. +We may not be able to generate enough cash flow to meet our debt obligations. +At December 31, 2017 , our long-term debt consisted of $750 million of 4.375% senior notes due in 2024 and $750 million of 3.90% senior notes due in 2027 . In addition to interest expense and principal on our long-term debt, we have demands on our cash resources including, among others, capital expenditures, operating expenses, and contractual commitments. +Our ability to pay the principal and interest on our long-term debt and to satisfy our other liabilities will depend upon future performance and our ability to repay or refinance our debt as it becomes due. Our future operating performance and ability to refinance will be affected by economic and capital market conditions, results of operations, and other factors, many of which are beyond our control. Our ability to meet our debt service obligations also may be impacted by changes in prevailing interest rates, as borrowing under our existing revolving credit facility bears interest at floating rates. +26 +Table of Contents +We may not generate sufficient cash flow from operations. Without sufficient cash flow, there may not be adequate future sources of capital to enable us to service our indebtedness or to fund our other liquidity needs. If we are unable to service our indebtedness and fund our operating costs, we will be forced to adopt alternative strategies that may include: +• +reducing or delaying capital expenditures; +• +seeking additional debt financing or equity capital; +• +selling assets; or +• +restructuring or refinancing debt. +We may be unable to complete any such strategies on satisfactory terms, if at all. Our inability to generate sufficient cash flows to satisfy our debt obligations or contractual commitments, or to refinance our indebtedness on commercially reasonable terms, would materially and adversely affect our financial condition and results of operations. +The instruments governing our indebtedness contain various covenants limiting the discretion of our management in operating our business. +The indenture governing our senior notes and our credit agreement contain various restrictive covenants that may limit management’s discretion in certain respects. In particular, these agreements limit Cimarex’s and its subsidiaries’ ability to, among other things: +• +create certain liens; +• +consolidate, merge, or transfer all, or substantially all, of our assets and our restricted subsidiaries; or +• +enter into sale and leaseback transactions. +In addition, our revolving credit agreement requires us to maintain a total debt to capitalization ratio (as defined in the credit agreement) of not more than 65%. See Note 3 to the Consolidated Financial Statements for further information. +If we fail to comply with the restrictions in the indenture governing our senior notes or the agreement governing our credit facility or any other subsequent financing agreements, a default may allow the creditors, if the agreements so provide, to accelerate the related indebtedness as well as any other indebtedness to which a cross-acceleration or cross-default provision applies. In addition, lenders may be able to terminate any commitments they had made to make available further funds. +Our acquisition activities may not be successful, which may hinder our replacement of reserves and adversely affect our results of operations. +The successful acquisition of properties requires an assessment of several factors, including: +• +geological risks and recoverable reserves; +• +future oil and gas prices and their appropriate market differentials; +• +operating costs; and +• +potential environmental risks and other liabilities. +The accuracy of these assessments is inherently uncertain. In connection with these assessments, we perform a review of the subject properties we believe to be generally consistent with industry practices. Our review will not reveal all existing or potential problems nor will it permit us to become sufficiently familiar with the properties to fully assess their deficiencies and capabilities. Inspections will not likely be performed on every well or facility, and structural and environmental problems are not necessarily observable even when an inspection is undertaken. Furthermore, the seller may be unwilling or unable to provide effective contractual protection against all or part of the identified problems. +27 +Table of Contents +We may lose leases if production is not established within the time periods specified in the leases. +Unless production is established within the spacing units covering the undeveloped acres on which some of the locations are identified, the leases for such acreage will expire and the amounts spent for those leases will be lost. The combined net acreage expiring in the next three years represents approximately 3.0% of our total net undeveloped acreage at December 31, 2017 . At that date, we had leases representing 38,959 net acres expiring in 2018 , 81,499 net acres expiring in 2019 , and 47,045 net acres expiring in 2020 . Our actual drilling activities may materially differ from those presently identified, which could adversely affect our business. +Our disposition activities may be subject to factors beyond our control, and in certain cases we may retain unforeseen liabilities for certain matters . +We regularly sell non-core assets in order to increase capital resources available for other core assets and to create organizational and operational efficiencies. We also occasionally sell interests in core assets for the purpose of accelerating the development and increasing efficiencies in such core assets. Various factors could materially affect our ability to dispose of such assets, including the approvals of governmental agencies or third parties, and the availability of purchasers willing to acquire the assets with terms we deem acceptable. +Sellers at times retain certain liabilities or agree to indemnify buyers for certain matters related to the sold assets. The magnitude of any such retained liability or of the indemnification obligation is difficult to quantify at the time of the transaction and ultimately could be material. Also, as is typical in divestiture transactions, third parties may be unwilling to release the company from guarantees or other credit support provided prior to the sale of the divested assets. As a result, after a divestiture, the company may remain secondarily liable for the obligations guaranteed or supported to the extent that the buyer of the assets fails to perform these obligations. In addition, with respect to offshore assets, if purchasers declare bankruptcy, the United States Department of Interior may pursue former owners for decommissioning expenses, which can be substantial. See Note 8 to the Consolidated Financial Statements for further discussion regarding our asset retirement obligations. +Competition for experienced technical personnel may negatively impact our operations. +Our exploratory and development drilling success depends, in part, on our ability to attract and retain experienced professional personnel. The loss of any key executives or other key personnel could have a material adverse effect on our operations. As we continue to develop our asset base and the scope of our operations, our future profitability will depend on our ability to attract and retain qualified personnel, particularly individuals with a strong background in geology, geophysics, engineering, and operations. +We are involved in various legal proceedings, the outcome of which could have an adverse effect on our liquidity. +In the normal course of business, we are involved with various lawsuits and related disputed claims, including but not limited to claims concerning title, royalty payments, environmental issues, personal injuries, and contractual issues. Although we currently believe the resolution of these lawsuits and claims, individually or in the aggregate, would not have a material adverse effect on our financial condition or results of operations, our assessment of our current litigation and other legal proceedings could change in light of the discovery of facts with respect to legal actions or other proceedings pending against us not presently known to us or determinations by judges, juries, or other finders of fact that are not in accord with our evaluation of the possible liability or outcome of such proceedings. Therefore, there can be no assurance that outcomes of future legal proceedings would not have an adverse effect on our liquidity and capital resources. +Certain federal income tax deductions currently available with respect to oil and gas exploration and development may be limited or eliminated as a result of recently enacted or future legislation. +On December 22, 2017, the United States enacted H.R.1, commonly referred to as the Tax Cuts and Jobs Act or U.S. Tax Reform. H.R.1, among other things, includes changes to U.S. federal tax rates, imposes new limitations on the utilization of net operating losses and the deductibility of interest and executive compensation, allows for the expensing of capital expenditures, and eliminates the corporate Alternative Minimum Tax. In addition, various proposals have been made recommending the elimination of certain key U.S. federal income tax incentives currently available to oil and gas exploration and production companies. While the tax law changes approved in December 2017 did not eliminate any of these incentives, in the future legislation may be introduced in Congress which would implement many of these proposals. These changes include, but are not limited to: (i) the repeal of the percentage depletion allowance for oil and gas properties; (ii) the elimination of current deductions for intangible drilling and development costs; and (iii) an extension of the amortization period for certain geological and geophysical expenditures. It is unclear, however, whether any such changes will be enacted or how soon such changes could be effective. +28 +Table of Contents +The passage of this legislation or any other similar change in U.S. federal income tax law could eliminate or postpone certain tax deductions that are currently available with respect to oil and gas exploration and development, and any such change could have an adverse effect on our financial position, results of operations, and cash flows, including the payment of cash taxes earlier than expected. +29 +Table of Contents +ITEM 1B. UNRESOLVED STAFF COMMENTS +None. +ITEM 3. LEGAL PROCEEDINGS +The information set forth under the heading “Litigation” in Note 10 to the Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K, is incorporated by reference in response to this item. +ITEM 4. MINE SAFETY DISCLOSURES +Not applicable. +30 +Table of Contents +PART II +ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES +Our $0.01 par value common stock trades on the New York Stock Exchange (“NYSE”) under the symbol XEC. A cash dividend was paid to stockholders in each quarter of 2017 . Future dividend payments will depend on the company’s level of earnings, financial requirements, and other factors considered relevant by the Board of Directors. +Stock Prices and Dividends by Quarter +The following tables set forth, for the periods indicated, the high and low sales price per share of our common stock on the NYSE and the per share dividends declared during the period. +2017 +High +Low +Dividends +Declared Per +Share +First Quarter +$ +144.30 +$ +114.72 +$ +0.08 +Second Quarter +$ +123.92 +$ +91.22 +$ +0.08 +Third Quarter +$ +116.43 +$ +89.49 +$ +0.08 +Fourth Quarter +$ +127.89 +$ +109.55 +$ +0.08 +2016 +High +Low +Dividends +Declared Per +Share +First Quarter +$ +100.07 +$ +72.77 +$ +0.08 +Second Quarter +$ +123.48 +$ +93.21 +$ +0.08 +Third Quarter +$ +136.95 +$ +112.19 +$ +0.08 +Fourth Quarter +$ +146.96 +$ +118.59 +$ +0.08 +The closing price of Cimarex stock as reported on the NYSE on January 31, 2018 , was $112.20 . At January 31, 2018 , Cimarex’s 95,438,121 shares of outstanding common stock were held by approximately 1,655 stockholders of record. +Equity Compensation Plan Information +The following table sets forth information with respect to the equity compensation plans available to directors, officers, and employees of the company at December 31, 2017 : +Plan Category +(a) +Number of securities +to be issued upon +exercise of +outstanding options, +warrants, and rights +(b) +Weighted-average +exercise price of +outstanding options, +warrants, and rights +(c) +Number of securities +remaining available +for future issuance +under equity +compensation plans +(excluding securities reflected in column (a)) +Equity compensation plans approved by security holders +382,688 +$ +100.17 +1,991,731 +Equity compensation plans not approved by security holders +— +— +— +Total +382,688 +$ +100.17 +1,991,731 +31 +Table of Contents +Stock Performance Graph +The following graph compares the cumulative five-year total return attained by stockholders on Cimarex Energy Co.’s common stock relative to the cumulative total returns of the S&P 500 index, the Dow Jones US Exploration & Production index, and the S&P Oil & Gas Exploration & Production index. The graph tracks the performance of a $100 investment in our common stock and in each of the indexes (with the reinvestment of all dividends) from December 31, 2012 to December 31, 2017 . The stock price performance included in this graph is not necessarily indicative of future stock price performance. +COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN* +Among Cimarex Energy Co., the S&P 500 Index, +the Dow Jones US Exploration & Production Index, and the S&P Oil & Gas Exploration & Production Index +* $100 invested in 12/31/12 in stock or index, including reinvestment of dividends. Fiscal year ending December 31. +A tabular presentation of the data in the above graph is provided below. +2012 +2013 +2014 +2015 +2016 +2017 +Cimarex Energy Co. +$ +100.00 +$ +182.98 +$ +185.83 +$ +157.57 +$ +240.50 +$ +216.52 +S&P 500 +$ +100.00 +$ +132.39 +$ +150.51 +$ +152.59 +$ +170.84 +$ +208.14 +Dow Jones US Exploration & Production +$ +100.00 +$ +131.84 +$ +117.64 +$ +89.72 +$ +111.69 +$ +113.14 +S&P Oil & Gas Exploration & Production +$ +100.00 +$ +127.49 +$ +113.99 +$ +75.06 +$ +99.72 +$ +93.43 +32 +Table of Contents +ITEM 6. SELECTED FINANCIAL DATA +The selected financial data set forth below should be read in conjunction with the Consolidated Financial Statements and accompanying notes thereto provided in Item 8 of this report. +Years Ended December 31, +2017 +2016 +2015 +2014 +2013 +(in millions, except per share amounts) +Operating results: +Oil, gas, and NGL sales +$ +1,874 +$ +1,221 +$ +1,418 +$ +2,373 +$ +1,953 +Total revenues (1) +$ +1,918 +$ +1,257 +$ +1,453 +$ +2,424 +$ +1,998 +Net income (loss) (2) +$ +494 +$ +(409 +) +$ +(2,580 +) +$ +526 +$ +462 +Earnings (loss) per share to common stockholders: +Basic +$ +5.19 +$ +(4.38 +) +$ +(27.75 +) +$ +6.01 +$ +5.30 +Diluted +$ +5.19 +$ +(4.38 +) +$ +(27.75 +) +$ +6.00 +$ +5.29 +Cash dividends declared per share +$ +0.32 +$ +0.32 +$ +0.64 +$ +0.64 +$ +0.56 +Cash flow data: +Net cash provided by operating activities (3) +$ +1,097 +$ +626 +$ +726 +$ +1,633 +$ +1,334 +Net cash used by investing activities +$ +(1,266 +) +$ +(692 +) +$ +(1,009 +) +$ +(1,740 +) +$ +(1,531 +) +Net cash (used) provided by financing activities (3) +$ +(83 +) +$ +(60 +) +$ +656 +$ +508 +$ +132 +December 31, +2017 +2016 +2015 +2014 +2013 +(in millions, except proved reserves amounts) +Balance sheet data: +Cash and cash equivalents +$ +401 +$ +653 +$ +779 +$ +406 +$ +5 +Oil and gas properties, net (2) +$ +3,242 +$ +2,354 +$ +2,741 +$ +6,638 +$ +5,669 +Goodwill +$ +620 +$ +620 +$ +620 +$ +620 +$ +620 +Total assets (2) (4) +$ +5,043 +$ +4,238 +$ +4,708 +$ +8,443 +$ +6,947 +Deferred income tax liability (asset) +$ +102 +$ +(56 +) +$ +157 +$ +1,657 +$ +1,351 +Long-term obligations: +Long-term debt (principal) +$ +1,500 +$ +1,500 +$ +1,500 +$ +1,500 +$ +924 +Other +$ +206 +$ +184 +$ +197 +$ +194 +$ +164 +Stockholders’ equity +$ +2,568 +$ +2,043 +$ +2,458 +$ +4,332 +$ +3,834 +Proved Reserves: +Oil (MBbls) +137,238 +105,878 +107,798 +118,992 +108,533 +Gas (Bcf) +1,608 +1,471 +1,517 +1,667 +1,294 +NGL (MBbls) +153,860 +130,633 +124,277 +125,273 +92,044 +Total (Bcfe) +3,354 +2,890 +2,909 +3,132 +2,497 +________________________________________ +(1) +Prior to 2014 , our average realized prices for gas and NGLs were net of certain processing fees. Beginning in 2014 , these fees were no longer netted against realized prices, but were included in “Transportation, processing, and other operating” costs. The effect of this change in 2014 was that total revenue was $51.4 million higher with an offsetting increase in total transportation, processing, and other operating costs. This change had no effect on operating income. Periods prior to 2014 were not reclassified to reflect this change in accounting treatment as it was impracticable to do so. +(2) +During 2016 , 2015 , and 2013 , we recorded non-cash full cost ceiling test impairments of our oil and gas properties totaling $757.7 million ( $481.4 million , net of tax), $4.03 billion ( $2.56 billion , net of tax), and $190.2 million ( $120.8 million , net of tax), respectively. +33 +Table of Contents +(3) +We adopted Accounting Standards Update 2016-09, Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”) on January 1, 2017. Pursuant to ASU 2016-09, we adjusted the statements of cash flows for all prior periods presented. For the years ended December 31, 2016, 2015, 2014, and 2013, we decreased cash outflows for operating activities and cash inflows for financing activities by $26.6 million, $34.2 million, $13.6 million, and $10.1 million, respectively, for the payment of employee tax withholdings on the net settlement of equity-classified awards and for excess tax benefits, as applicable. See Note 6 to the Consolidated Financial Statements for further discussion regarding our adoption of ASU 2016-09. +(4) +At December 31, 2015 , we adopted new accounting guidance which requires debt issuance costs (except for those related to revolving credit facilities) to be presented in the balance sheet as a direct deduction from the carrying amount of the related debt liability rather than as an asset. Such costs were previously recorded as deferred assets. Prior periods have been adjusted to conform to this guidance. +ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS +The following discussion and analysis should be read in conjunction with our Consolidated Financial Statements included in Item 8 of this report and also with RISK FACTORS in Item 1A of this report. This discussion also includes forward-looking statements. Refer to CAUTIONARY INFORMATION ABOUT FORWARD-LOOKING STATEMENTS in Part I of this report for important information about these types of statements. +OVERVIEW +Cimarex is an independent oil and gas exploration and production company. Our operations are entirely located in the United States, mainly in Oklahoma, Texas, and New Mexico. Currently our operations are focused in two main areas: the Permian Basin and the Mid-Continent. Our Permian Basin region encompasses west Texas and southeast New Mexico. Our Mid-Continent region consists of Oklahoma and the Texas Panhandle. +Our principal business objective is to profitably grow proved reserves and production for the long-term benefit of our stockholders through a balanced and abundant drilling inventory while seeking to minimize our impact on the communities in which we operate for the long-term. Our strategy centers on maximizing cash flow from producing properties and profitably reinvesting that cash flow in exploration and development activities. We consider property acquisitions, dispositions, and occasional mergers to enhance our competitive position. +We believe that detailed technical analysis, operational focus, and a disciplined capital investment process mitigate risk and position us to continue to achieve profitable increases in proved reserves and production. Our drilling inventory and limited long-term commitments provide the flexibility to respond quickly to industry volatility. +Our investments are generally funded with cash flow provided by operating activities together with cash on hand, bank borrowings, sales of non-strategic assets, and occasional public financing based on our monitoring of capital markets and our balance sheet. Conservative use of leverage has long been a part of our financial strategy. We believe that maintaining a strong balance sheet mitigates financial risk and enables us to withstand unpredictable fluctuations in commodity prices. +Market Conditions +The oil and gas industry is cyclical and commodity prices can fluctuate significantly. Commodity prices are affected by many factors outside of our control, including changes in market supply and demand, inventory storage levels, weather conditions, and other factors. +Oil prices have improved from early 2016 ; however, they continue to be volatile and we expect this volatility to persist. During 2017 , average NYMEX oil and gas prices were $50.94 per barrel and $3.11 per Mcf, respectively, representing an increase of 18% and 26% , respectively, from the average NYMEX oil and gas prices for 2016 . Further, local market prices for oil and gas can be impacted by pipeline capacity constraints limiting takeaway and increasing basis differentials. The Permian Basin and Mid-Continent region gas production growth has resulted in higher differentials and if pipeline constraints remain, higher differentials will persist or potentially worsen. +34 +Table of Contents +Our revenue, profitability, and future growth are highly dependent on the prices we receive for our oil and gas production. Compared to 2016 , our realized oil price for 2017 increased 23% to $47.06 per barrel. Similarly, our realized gas price increased 19% to $2.76 per Mcf, while our realized NGL price increased 54% to $21.61 per barrel. See RESULTS OF OPERATIONS Revenues below for further information regarding our realized commodity prices. +2017 Summary of Operating and Financial Results +The following is a summary of certain 2017 operating and financial results: +• +Total daily production volumes increased 19% to 1,142.1 MMcfe per day. +• +Oil volumes increased 27% to 57.2 MBbls per day. +• +Gas volumes increased 12% to 513.6 MMcf per day. +• +NGL volumes increased 23% to 47.6 MBbls per day. +• +Total production revenue increased 53% to $1.87 billion . +• +Year-end proved reserves increased to 3.35 Tcfe, as compared to 2.89 Tcfe at year-end 2016 . +• +Exploration and development capital investments were $1.28 billion , as compared to $734.8 million in 2016 . +• +Cash flow provided by operating activities increased 75% to $1.10 billion . +• +Total debt at December 31, 2017 and 2016 consisted of $1.50 billion of senior notes. During the second quarter 2017 , we repaid our 5.875% $750 million notes due 2022 and issued 3.90% $750 million notes due 2027 . Our 4.375% $750 million notes are due 2024 . +• +Cash on hand at December 31, 2017 was $400.5 million . +For the year ended December 31, 2017 , we had net income of $494.3 million ( $5.19 per diluted share), as compared to a net loss of $408.8 million ( $4.38 per diluted share) in 2016 . Production revenue in 2017 was positively impacted by increased realized commodity prices and production volumes. Lower commodity prices negatively impacted 2016, including resulting in $757.7 million of impairments of our oil and gas properties in that year. Year-over-year changes are discussed further in the RESULTS OF OPERATIONS section that follows. +Proved Reserves +Our proved reserves by region at December 31, 2017 and 2016 were as follows: +December 31, 2017 +Gas +(MMcf) +Oil +(MBbls) +NGL +(MBbls) +Total +(MMcfe) +Permian Basin +573,757 +105,198 +68,530 +1,616,126 +Mid-Continent +1,032,695 +31,853 +85,292 +1,735,565 +Other +1,183 +187 +38 +2,531 +Total +1,607,635 +137,238 +153,860 +3,354,222 +December 31, 2016 +Gas +(MMcf) +Oil +(MBbls) +NGL +(MBbls) +Total +(MMcfe) +Permian Basin +372,371 +74,295 +40,977 +1,064,000 +Mid-Continent +1,095,194 +31,399 +89,615 +1,821,278 +Other +3,855 +184 +41 +5,209 +Total +1,471,420 +105,878 +130,633 +2,890,487 +35 +Table of Contents +Year-end 2017 proved reserves increased approximately 16% to 3.35 Tcfe, compared to 2.89 Tcfe at year-end 2016 . Proved gas reserves were 1.61 Tcf, proved oil reserves were 0.82 Tcfe, and proved NGL reserves were 0.92 Tcfe. Reserves in our Mid-Continent region accounted for 52% of total proved reserves with nearly all of the remainder in the Permian Basin. +During 2017 , we added 940.7 Bcfe of new reserves through extensions and discoveries. Net negative revisions totaled 59.7 Bcfe, which consisted primarily of a decrease of 248.8 Bcfe for the removal of PUD reserves whose development will likely be delayed beyond five years of initial disclosure, offset by an increase of 187.2 Bcfe related to improved commodity prices. See SUPPLEMENTAL INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED) in Item 8 for a more detailed discussion regarding year-over-year changes in our proved reserves. +The process of estimating quantities of oil, gas, and NGL reserves is complex. Significant decisions are required in the evaluation of all available geological, geophysical, engineering, and economic data. Although every reasonable effort is made to ensure that our reserve estimates represent the most accurate assessments possible, subjective decisions and available data for our various fields make these estimates generally less precise than other estimates included in financial statement disclosures. See Proved Reserves Estimation Procedures in Items 1 and 2 for a discussion of our reserve estimation process and Item 1A RISK FACTORS , which includes a discussion of factors that affect our proved reserves estimates. +RESULTS OF OPERATIONS +2017 Compared to 2016 +Revenue +Almost all our revenue is derived from sales of our oil, natural gas, and NGL production. Increases or decreases in our revenue, profitability, and future production growth are highly dependent on the commodity prices we receive. Prices are market driven and we expect that future prices will continue to fluctuate due to supply and demand factors, seasonality, geopolitical, and economic factors. See Item 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK for more information regarding the sensitivity of our revenues to price fluctuations. Realized prices and production volumes were higher in 2017 as compared to 2016 , which caused our revenue to increase by $652.8 million , or 53% , from the prior year. The following table shows our production revenue for the years indicated as well as the change in revenue due to changes in prices and volumes. +Years Ended +December 31, +Price / Volume Variance +Production Revenue (in thousands) +2017 +2016 +Variance Between +2017 / 2016 +Price +Volume +Total +Oil sales +$ +981,646 +$ +632,934 +$ +348,712 +55 +% +$ +182,742 +$ +165,970 +$ +348,712 +Gas sales +516,936 +388,786 +128,150 +33 +% +84,361 +43,789 +128,150 +NGL sales +375,421 +199,498 +175,923 +88 +% +131,347 +44,576 +175,923 +$ +1,874,003 +$ +1,221,218 +$ +652,785 +53 +% +$ +398,450 +$ +254,335 +$ +652,785 +The table below presents our production volumes by commodity, our average realized commodity prices, and certain major U.S. index prices. The sale of our Permian Basin oil production is typically tied to the WTI Midland benchmark price and the sale of our Mid-Continent oil production is typically tied to the WTI Cushing benchmark price. During 2017 and 2016 , 78% and 80% , respectively, of our oil production was in the Permian Basin and 22% and 20% , respectively, was in the Mid-Continent region. Our realized prices do not include settlements of commodity derivative contracts. +36 +Table of Contents +Years Ended +December 31, +Variance Between +2017 / 2016 +2017 +2016 +Oil +Total volume — MBbls +20,861 +16,528 +4,333 +26 +% +Total volume — MBbls per day +57.2 +45.2 +12.0 +27 +% +Percentage of total production +30 +% +28 +% +Average realized price — per barrel +$ +47.06 +$ +38.30 +$ +8.76 +23 +% +Average WTI Midland price — per barrel +$ +50.45 +$ +43.34 +$ +7.11 +16 +% +Average WTI Cushing price — per barrel +$ +50.94 +$ +43.32 +$ +7.62 +18 +% +Gas +Total volume — MMcf +187,468 +168,227 +19,241 +11 +% +Total volume — MMcf per day +513.6 +459.6 +54.0 +12 +% +Percentage of total production +45 +% +48 +% +Average realized price — per Mcf +$ +2.76 +$ +2.31 +$ +0.45 +19 +% +Average Henry Hub price — per Mcf +$ +3.11 +$ +2.46 +$ +0.65 +26 +% +NGL +Total volume — MBbls +17,374 +14,200 +3,174 +22 +% +Total volume — MBbls per day +47.6 +38.8 +8.8 +23 +% +Percentage of total production +25 +% +24 +% +Average realized price — per barrel +$ +21.61 +$ +14.05 +$ +7.56 +54 +% +Total +Total production — MMcfe +416,875 +352,591 +64,284 +18 +% +Total production — MMcfe per day +1,142.1 +963.4 +178.7 +19 +% +Average realized price — per Mcfe +$ +4.50 +$ +3.46 +$ +1.04 +30 +% +Our 2017 daily production volumes were 1,142.1 MMcfe, a 19% increase from 2016 . This increase is the result of increased drilling and completion activity during 2017 as compared to 2016. See Production Volumes, Prices, and Costs and Exploration and Development Overview in Items 1 and 2 of this report for production information by region and a discussion of our drilling activities. +Other Revenues +We transport, process, and market some third-party gas that is associated with our equity gas. We market and sell gas for other working interest owners under short term agreements and may earn a fee for such services. The table below reflects income from third-party gas gathering and processing and our net marketing margin for marketing third-party gas. +Years Ended December 31, +Variance +Between +2017 / 2016 +Gas Gathering and Marketing (in thousands): +2017 +2016 +Gas gathering and other +$ +43,751 +$ +36,033 +$ +7,718 +Gas marketing +$ +495 +$ +94 +$ +401 +Fluctuations in revenues from gas gathering and gas marketing activities are a function of increases and decreases in volumes, commodity prices, and gathering rate charges. The increases from 2016 are primarily due to an increase in prices. +37 +Table of Contents +Operating Costs and Expenses +Costs associated with producing oil and gas are substantial. Among other factors, some of these costs vary with commodity prices, some trend with the volume of production, others are a function of the number of wells we own, and some depend on the prices charged by service companies. +Total operating costs and expenses of $1.17 billion in 2017 were 36% lower than the $1.83 billion incurred in 2016 . Most of the decrease resulted from ceiling test impairments of our oil and gas properties of $757.7 million recorded in 2016; we recorded no ceiling test impairments in 2017. Also contributing to the decrease was the net gain on derivative instruments in 2017 compared to a net loss in 2016. Otherwise, all other categories of operating costs and expenses increased in 2017. The following table shows our operating costs and expenses for the years indicated and a discussion of year-over-year differences follows. +Years Ended December 31, +Variance +Between +2017 / 2016 +Per Mcfe +Operating Costs and Expenses (in thousands, except per Mcfe) +2017 +2016 +2017 +2016 +Impairment of oil and gas properties +$ +— +$ +757,670 +$ +(757,670 +) +N/A +N/A +Depreciation, depletion, and amortization +446,031 +392,348 +53,683 +$ +1.07 +$ +1.11 +Asset retirement obligation +15,624 +7,828 +7,796 +$ +0.04 +$ +0.02 +Production +262,180 +232,002 +30,178 +$ +0.63 +$ +0.66 +Transportation, processing, and other operating +231,640 +190,725 +40,915 +$ +0.56 +$ +0.54 +Gas gathering and other +35,840 +31,785 +4,055 +$ +0.09 +$ +0.09 +Taxes other than income +89,864 +61,946 +27,918 +$ +0.22 +$ +0.18 +General and administrative +79,996 +73,901 +6,095 +$ +0.19 +$ +0.21 +Stock compensation +26,256 +24,523 +1,733 +$ +0.06 +$ +0.07 +(Gain) loss on derivative instruments, net +(21,210 +) +55,749 +(76,959 +) +N/A +N/A +Other operating expense, net +1,314 +755 +559 +N/A +N/A +$ +1,167,535 +$ +1,829,232 +$ +(661,697 +) +Ceiling Test Impairment +We use the full cost method of accounting for our oil and gas operations. Accounting rules require us to perform a quarterly ceiling test calculation to test our capitalized oil and gas property costs for possible impairment. If the net capitalized cost of our oil and gas properties, as adjusted for income taxes, exceeds the ceiling limitation, the excess is charged to expense. The ceiling limitation is equal to the sum of: (i) the present value discounted at 10% of estimated future net revenues from proved reserves, (ii) the cost of properties not being amortized, and (iii) the lower of cost or estimated fair value of unproven properties included in the costs being amortized, as adjusted for income taxes. Estimated future net revenues are determined based on trailing twelve-month average commodity prices and estimated proved reserve quantities, operating costs, and capital expenditures. +At each quarter-end date during the year ended December 31, 2017 , the net capitalized cost of our oil and gas properties, as adjusted for income taxes, did not exceed the ceiling limitation, and, therefore, we did not recognize a ceiling test impairment during the year. The commodity prices used in the December 31, 2017 ceiling calculation, based on the required trailing twelve-month average prices, were $2.98 per Mcf of gas and $51.34 per barrel of oil. A decline of approximately 19% or more in the value of the ceiling limitation would have resulted in an impairment at December 31, 2017 . During the year ended December 31, 2016 , we recognized ceiling test impairments totaling $757.7 million ( $481.4 million , net of tax). These impairments were primarily the result of decreases in the trailing twelve-month average prices for oil, gas, and NGLs utilized in determining the estimated future net revenues from proved reserves. Because the ceiling calculation uses trailing twelve-month average commodity prices, the effect of increases and decreases in period-over-period prices can significantly impact the ceiling limitation calculation. In addition, other factors that impact the ceiling limitation calculation include, but are not limited to, incremental proved reserves that may be added each period, revisions to previous reserve estimates, capital expenditures, operating costs, depletion expense, and all related tax effects. Depending on fluctuations in these factors, including a decline in prices, we may incur full cost ceiling test impairments in future quarters. +The calculated ceiling limitation is not intended to be indicative of the fair market value of our proved reserves or future results. Impairment charges do not affect cash flow from operating activities, but do adversely affect our net income and various components of our balance sheet. Any impairment of oil and gas properties is not reversible at a later date. +38 +Table of Contents +Depreciation, Depletion, and Amortization +Depletion of our producing properties is computed using the units-of-production method. The economic life of each producing well depends upon the estimated proved reserves for that well, which in turn depend upon the assumed realized sales price for future production. Therefore, fluctuations in oil and gas prices will impact the level of proved reserves used in the calculation. Higher prices generally have the effect of increasing reserves, which reduces depletion expense. Conversely, lower prices generally have the effect of decreasing reserves, which increases depletion expense. The cost of replacing production also impacts our depletion expense. In addition, changes in estimates of reserve quantities, estimates of operating and future development costs, reclassifications of properties from unproved to proved, and impairments of oil and gas properties will also impact depletion expense. Depletion is calculated quarterly before the ceiling test impairment calculation. While prices have increased in 2017 from 2016, thus increasing our reserves, so too have our exploration and development expenditures and activities, thus increasing our proved oil and gas properties and future development costs, causing an overall increase in depletion expense. +Fixed assets consist primarily of gathering and plant facilities, vehicles, airplanes, office furniture, and computer equipment and software. These items are recorded at cost and are depreciated on the straight-line method based on expected lives of the individual assets, which range from 3 to 30 years. Depreciation, depletion, and amortization (“DD&A”) consisted of the following for the years indicated: +Years Ended December 31, +Variance +Between +2017 / 2016 +Per Mcfe +DD&A Expense (in thousands, except per Mcfe) +2017 +2016 +2017 +2016 +Depletion +$ +399,328 +$ +346,003 +$ +53,325 +$ +0.96 +$ +0.98 +Depreciation +46,703 +46,345 +358 +0.11 +0.13 +$ +446,031 +$ +392,348 +$ +53,683 +$ +1.07 +$ +1.11 +Asset Retirement Obligation +Asset retirement obligation expense is typically primarily comprised of accretion expense. In periods subsequent to the initial measurement of an asset retirement obligation liability at present value, a period-to-period increase in the carrying amount of the liability is recognized as accretion expense, which represents the effect of the passage of time on the amount of the liability. An equivalent amount is added to the carrying amount of the liability. Also included in asset retirement obligation expense are gains and losses recognized on the settlement of asset retirement obligation liabilities. +Asset retirement obligation expense includes $10.5 million in 2017 for the estimated liability to decommission two offshore properties in the Gulf of Mexico in which we were a prior lessee. In January 2018, the Bureau of Safety and Environmental Enforcement (“BSEE”) notified us and other prior lessees that the current lessee of the properties had filed a petition for relief under the bankruptcy code and, as a result, had defaulted on its obligation to decommission the properties. Consequently, BSEE ordered us and other prior lessees to decommission all wells, pipelines, platforms, and other facilities related to these properties. Our estimate of our liability may change as we refine our understanding of the extent of our obligations under the orders from BSEE and obtain additional information on decommissioning costs. +Production +Production expense generally consists of costs for labor, equipment, maintenance, saltwater disposal, compression, power, treating, and miscellaneous other costs (lease operating expense). Production expense also includes well workover activity necessary to maintain production from existing wells. Production expense consists of lease operating expense and workover expense as follows: +Years Ended December 31, +Variance +Between +2017 / 2016 +Per Mcfe +Production Expense (in thousands, except per Mcfe) +2017 +2016 +2017 +2016 +Lease operating expense +$ +215,148 +$ +189,291 +$ +25,857 +$ +0.52 +$ +0.54 +Workover expense +47,032 +42,711 +4,321 +0.11 +0.12 +$ +262,180 +$ +232,002 +$ +30,178 +$ +0.63 +$ +0.66 +39 +Table of Contents +Through efficiency gains and increasing daily production by 19% during 2017 as compared to 2016, we reduced our per unit lease operating expense by 4% between these two periods. On an absolute basis, lease operating expense in 2017 increased 14% , or $25.9 million , compared to 2016. The increase was primarily caused by: (i) increased saltwater disposal costs primarily attributed to the addition of new wells and recompleted wells; (ii) increased labor costs primarily due to additional employees and salary and bonus increases; (iii) increased equipment maintenance costs, primarily the result of the addition of new wells; (iv) increased gas lift and fuel compression costs; and (v) increased chemicals and treating costs. +Workover expense increased 10% , or $4.3 million , during 2017 as compared to 2016. During 2017, we had costlier major well workover projects than during 2016, which increased expense. This increase was partially offset by the receipt of partial insurance proceeds during 2017 related to a flooding event in 2015 and the subsequent remediation and repairs, the bulk of which took place in 2016. Generally, workover costs will fluctuate based on the amount of maintenance and remedial activity performed during the period. +Transportation, Processing, and Other Operating +Transportation, processing, and other operating costs principally consist of expenditures to prepare and transport production from the wellhead, including gathering, fuel, compression, and processing costs. Costs vary by region and will fluctuate with increases or decreases in production volumes, contractual fees, and changes in fuel and compression costs. +Transportation, processing, and other operating costs in 2017 were 21% , or $40.9 million , higher than in 2016. This increase was primarily due to increased production volumes and, to a lesser extent, increased transportation and processing rates in 2017 as compared to 2016. +Gas Gathering and Other +Gas gathering and other includes costs associated with operating our gas gathering and processing infrastructure, including product costs and operating and maintenance expenses. Gas gathering and other in 2017 was 13% , or $4.1 million , higher than in 2016. This increase was primarily due to higher product costs associated with processing third-party production due to higher commodity prices. These increased product costs were offset by increases in associated revenue. +Taxes Other than Income +Taxes other than income consist of production (or severance) taxes, ad valorem taxes, and other taxes. State and local taxing authorities assess these taxes, with production taxes being based on the volume or value of production and ad valorem taxes being based on the value of properties. Production taxes make up the majority of this expense for us, with revenue-based production taxes being the largest component of these taxes. In 2017, taxes other than income increased 45% , or $27.9 million , from 2016. These increases are primarily due to the increase in revenue seen between the comparable periods. Taxes other than income were 4.8% and 5.1% of production revenues for 2017 and 2016, respectively. The percentage has decreased from 2016 due to the approval of reduced tax rates on several of our high-cost gas wells in the State of Texas and, as part of this process, approved severance tax refunds of $9.1 million . +General and Administrative +General and administrative (“G&A”) expense consists primarily of salaries and related benefits, office rent, legal and consultant fees, systems costs, and other administrative costs incurred that are not directly associated with exploration, development, or production activities. Our G&A expense is reported net of amounts reimbursed to us by working interest owners of the oil and gas properties we operate and net of amounts capitalized pursuant to the full cost method of accounting. The amount of expense capitalized varies and depends on whether the cost incurred can be directly identified with acquisition, exploration, and development activities. The percentage of gross G&A capitalized was 49% and 50% during 2017 and 2016, respectively. The table below shows our G&A costs. +Years Ended December 31, +Variance +Between +2017 / 2016 +General and Administrative Expense (in thousands): +2017 +2016 +Gross G&A +$ +156,389 +$ +146,432 +$ +9,957 +Less amounts capitalized to oil and gas properties +(76,393 +) +(72,531 +) +(3,862 +) +G&A expense +$ +79,996 +$ +73,901 +$ +6,095 +40 +Table of Contents +G&A expense during 2017 was 8% , or $6.1 million , higher than during 2016. This increase is primarily due to the following increases: (i) other employee compensation, primarily due to increased incentive bonus expense; (ii) insurance; (iii) consulting; (iv) salaries and wages, due to additional employees and salary increases; and (v) charitable donations. These increases were partially offset by decreased severance expense due to a voluntary early retirement incentive program, which included severance pay, that was offered to certain employees during 2016. +Stock Compensation +Stock compensation expense consists of non-cash charges resulting from the amortization of the cost of restricted stock and stock option awards, net of amounts capitalized to oil and gas properties. We have recognized stock-based compensation cost as follows: +Years Ended December 31, +Variance +Between +2017 / 2016 +Stock Compensation Expense (in thousands): +2017 +2016 +Restricted stock awards: +Performance stock awards +$ +26,020 +$ +24,183 +$ +1,837 +Service-based stock awards +19,746 +18,391 +1,355 +45,766 +42,574 +3,192 +Stock option awards +2,599 +2,565 +34 +Total stock compensation cost +48,365 +45,139 +3,226 +Less amounts capitalized to oil and gas properties +(22,109 +) +(20,616 +) +(1,493 +) +Stock compensation expense +$ +26,256 +$ +24,523 +$ +1,733 +Periodic stock compensation expense will fluctuate based on the grant date fair value of awards, the number of awards, the requisite service period of the awards, employee forfeitures, and the timing of the awards. The increase in total stock compensation cost in 2017 as compared to 2016 is primarily due to awards granted either during or subsequent to 2016 . These increases were partially offset by awards vesting prior to or during 2017 . +We adopted Accounting Standards Update 2016-09, Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”) on January 1, 2017 pursuant to which we made an accounting policy election to account for forfeitures in compensation cost when they occur, rather than including an estimate of the number of awards that are expected to vest in our compensation cost. See Note 6 to the Consolidated Financial Statements for further discussion regarding our stock-based compensation, including our adoption of ASU 2016-09. +(Gain) Loss on Derivative Instruments, Net +Net gains and losses on our derivative instruments are a function of fluctuations in the underlying commodity index prices as compared to the contracted prices and the monthly cash settlements (if any) of the instruments. We have elected not to designate our derivatives as hedging instruments for accounting purposes and, therefore, we do not apply hedge accounting treatment to our derivative instruments. Consequently, changes in the fair value of our derivative instruments and cash settlements on the instruments are included as a component of operating costs and expenses as either a net gain or loss on derivative instruments. Cash settlements of our contracts are included in cash flows from operating activities in our statements of cash flows. The following table presents the components of (Gain) loss on derivative instruments, net for the periods indicated. See Note 4 to the Consolidated Financial Statements for additional information regarding our derivative instruments. +41 +Table of Contents +Years Ended December 31, +Variance +Between +2017 / 2016 +(Gain) Loss on Derivative Instruments (in thousands): +2017 +2016 +Change in fair value of derivative instruments, net: +Gas contracts +$ +(40,226 +) +$ +27,462 +$ +(67,688 +) +Oil contracts +17,383 +35,724 +(18,341 +) +(22,843 +) +63,186 +(86,029 +) +Cash (receipts) payments on derivative instruments, net: +Gas contracts +(4,557 +) +(6,467 +) +1,910 +Oil contracts +6,190 +(970 +) +7,160 +1,633 +(7,437 +) +9,070 +(Gain) loss on derivative instruments, net +$ +(21,210 +) +$ +55,749 +$ +(76,959 +) +Other Income and Expense +Years Ended December 31, +Variance +Between +2017 / 2016 +Other Income and Expense (in thousands): +2017 +2016 +Interest expense +$ +74,821 +$ +83,272 +$ +(8,451 +) +Capitalized interest +(22,948 +) +(21,248 +) +(1,700 +) +Loss on early extinguishment of debt +28,187 +— +28,187 +Other, net +(11,342 +) +(10,707 +) +(635 +) +$ +68,718 +$ +51,317 +$ +17,401 +The majority of our interest expense relates to interest on our senior unsecured notes. See LIQUIDITY AND CAPITAL RESOURCES Long-Term Debt below for further information regarding our debt. The decrease in interest expense in 2017 as compared to 2016 is due to the completion of a tender offer and redemption of $750 million 5.875% senior notes and the issuance of $750 million 3.90% senior notes, which occurred during the second quarter of 2017. The $28.2 million loss on early extinguishment of debt incurred during 2017 was also associated with the debt tender offer and redemption. The loss was composed primarily of tender and redemption premiums of $22.6 million and the write-off of $5.3 million of unamortized debt issuance costs. The original maturity date of the 5.875% notes was May 1, 2022. +We capitalize interest on non-producing leasehold costs, the in-progress costs of drilling and completing wells, and constructing qualified assets. Capitalized interest will fluctuate based on the rates applicable to borrowings outstanding during the period and the amount of costs on which interest is capitalized. There have been higher capitalized costs upon which to capitalize interest in 2017 as compared to 2016 due to our increased capitalized expenditures. However, the impact of this increase in capitalized interest has been largely offset by the lower interest rate on borrowings outstanding due to the replacement of our 5.875% notes with 3.90% notes in the second quarter of 2017. +Components of Other, net consist of miscellaneous income and expense items that will vary from period to period, including gain or loss related to the sale or value of oil and gas well equipment and supplies, gain or loss on miscellaneous asset sales, interest income, and income and expense associated with other non-operating activities. +Income Tax Expense (Benefit) +The components of our provision for income taxes are as follows: +Years Ended December 31, +Variance +Between +2017 / 2016 +Income Tax Expense (Benefit) (in thousands): +2017 +2016 +Current tax benefit +$ +(2,812 +) +$ +(1,115 +) +$ +(1,697 +) +Deferred tax expense (benefit) +190,479 +(213,286 +) +403,765 +$ +187,667 +$ +(214,401 +) +$ +402,068 +Combined federal and state effective income tax rate +27.5 +% +34.4 +% +42 +Table of Contents +On December 22, 2017, the United States enacted H.R.1, commonly referred to as the Tax Cuts and Jobs Act or U.S. Tax Reform. H.R.1, among other things, includes changes to U.S. federal tax rates, imposes new limitations on the utilization of net operating losses and the deductibility of interest and executive compensation, allows for the expensing of capital expenditures, and eliminates the corporate Alternative Minimum Tax. We remeasured the deferred tax assets and liabilities as of December 31, 2017 to reflect the reduction in the U.S. income tax rate from 35% to 21% for years after 2017 and, as a result of this remeasurement, we recorded an income tax benefit of $61.1 million and a corresponding $61.1 million decrease in the net deferred tax liabilities as of December 31, 2017. We believe the accounting for the effects of H.R.1 recognized in the December 31, 2017 financial statements is materially complete. However, evolving analyses and interpretations of the law may cause a change to the amounts presented. Any such changes that may arise will be recognized in the period determined, but no later than December 31, 2018. It is not expected any such change will be material to the financial statements. As a result of H.R.1, we expect our effective tax rate in future periods will be lower than in periods prior to enactment. In addition, the limitations on utilization of net operating losses and deductibility of interest and executive compensation may result in the payment of cash taxes earlier than expected. +Our combined federal and state effective tax rates differ from the statutory rate of 35% primarily due to state income taxes, non-deductible expenses, revisions, and the impact of changes in tax law. See Note 9 to the Consolidated Financial Statements for further information regarding our income taxes. +RESULTS OF OPERATIONS +2016 Compared to 2015 +Summary +For the year ended December 31, 2016 , we had a net loss of $408.8 million ( $4.38 per diluted share), down from a net loss of $2.58 billion ( $27.75 per diluted share) in 2015 . Production revenues in 2016 and 2015 were adversely affected by low realized commodity prices, which also brought about impairments of our oil and gas properties and net losses for each year. Although production revenue in 2016 was lower than in 2015 , the decrease was more than offset by lower impairment, DD&A, and other operating costs in 2016 . Year-over-year changes are discussed further as follows. Also refer to the “ 2017 Compared to 2016 ” section above for general information regarding various statement of operations line items. +Revenue +Our 2016 production revenue was 14% lower than that of 2015 . Lower realized prices and production volumes for oil and gas were only partially offset by higher realized prices and production volumes for NGLs. The following table shows our production revenue for the years indicated as well as the change in revenue due to changes in prices and volumes. +Years Ended +December 31, +Price / Volume Variance +Production Revenue (in thousands) +2016 +2015 +Variance Between +2016 / 2015 +Price +Volume +Total +Oil sales +$ +632,934 +$ +809,664 +$ +(176,730 +) +(22 +)% +$ +(83,962 +) +$ +(92,768 +) +$ +(176,730 +) +Gas sales +388,786 +428,227 +(39,441 +) +(9 +)% +(37,010 +) +(2,431 +) +(39,441 +) +NGL sales +199,498 +179,647 +19,851 +11 +% +4,260 +15,591 +19,851 +$ +1,221,218 +$ +1,417,538 +$ +(196,320 +) +(14 +)% +$ +(116,712 +) +$ +(79,608 +) +$ +(196,320 +) +The table below presents our production volumes by commodity, our average realized commodity prices, and certain major U.S. index prices. The sale of our Permian Basin oil production is typically tied to the WTI Midland benchmark price and the sale of our Mid-Continent oil production is typically tied to the WTI Cushing benchmark price. During 2016 and 2015 , 80% and 84% , respectively, of our oil production was in the Permian Basin and 20% and 15% , respectively, was in the Mid-Continent region. Our realized prices do not include settlements of commodity derivative contracts. +43 +Table of Contents +Years Ended +December 31, +Variance Between +2016 / 2015 +2016 +2015 +Oil +Total volume — MBbls +16,528 +18,663 +(2,135 +) +(11 +)% +Total volume — MBbls per day +45.2 +51.1 +(5.9 +) +(12 +)% +Percentage of total production +28 +% +31 +% +Average realized price — per barrel +$ +38.30 +$ +43.38 +$ +(5.08 +) +(12 +)% +Average WTI Midland price — per barrel +$ +43.34 +$ +48.39 +$ +(5.05 +) +(10 +)% +Average WTI Cushing price — per barrel +$ +43.32 +$ +48.80 +$ +(5.48 +) +(11 +)% +Gas +Total volume — MMcf +168,227 +168,987 +(760 +) +— +% +Total volume — MMcf per day +459.6 +463.0 +(3.4 +) +(1 +)% +Percentage of total production +48 +% +47 +% +Average realized price — per Mcf +$ +2.31 +$ +2.53 +$ +(0.22 +) +(9 +)% +Average Henry Hub price — per Mcf +$ +2.46 +$ +2.67 +$ +(0.21 +) +(8 +)% +NGL +Total volume — MBbls +14,200 +13,063 +1,137 +9 +% +Total volume — MBbls per day +38.8 +35.8 +3.0 +8 +% +Percentage of total production +24 +% +22 +% +Average realized price — per barrel +$ +14.05 +$ +13.75 +$ +0.30 +2 +% +Total +Total production — MMcfe +352,591 +359,343 +(6,752 +) +(2 +)% +Total production — MMcfe per day +963.4 +984.5 +(21.1 +) +(2 +)% +Average realized price — per Mcfe +$ +3.46 +$ +3.94 +$ +(0.48 +) +(12 +)% +Other Revenues +We transport, process, and market some third-party gas that is associated with our equity gas. We market and sell gas for other working interest owners under short term agreements and may earn a fee for such services. The table below reflects income from third-party gas gathering and processing and our net marketing margin for marketing third-party gas. +Years Ended December 31, +Variance +Between +2016 / 2015 +Gas Gathering and Marketing (in thousands): +2016 +2015 +Gas gathering and other +$ +36,033 +$ +34,688 +$ +1,345 +Gas marketing +$ +94 +$ +393 +$ +(299 +) +Fluctuations in revenues from gas gathering and gas marketing activities are a function of increases and decreases in volumes, commodity prices, and gathering rate charges. +Operating Costs and Expenses +Total operating costs and expenses of $1.83 billion in 2016 were 67% lower than the $5.46 billion incurred in 2015 . Most of the decrease resulted from lower ceiling test impairments of our oil and gas properties and lower DD&A expense. The following table shows our operating costs and expenses for the years indicated and a discussion of year-over-year differences follows. +44 +Table of Contents +Years Ended December 31, +Variance +Between +2016 / 2015 +Per Mcfe +Operating Costs and Expenses (in thousands, except per Mcfe) +2016 +2015 +2016 +2015 +Impairment of oil and gas properties +$ +757,670 +$ +4,033,295 +$ +(3,275,625 +) +N/A +N/A +Depreciation, depletion, and amortization +392,348 +731,460 +(339,112 +) +$ +1.11 +$ +2.04 +Asset retirement obligation +7,828 +9,121 +(1,293 +) +$ +0.02 +$ +0.03 +Production +232,002 +299,374 +(67,372 +) +$ +0.66 +$ +0.83 +Transportation, processing, and other operating +190,725 +182,362 +8,363 +$ +0.54 +$ +0.51 +Gas gathering and other +31,785 +38,138 +(6,353 +) +$ +0.09 +$ +0.11 +Taxes other than income +61,946 +84,764 +(22,818 +) +$ +0.18 +$ +0.24 +General and administrative +73,901 +74,688 +(787 +) +$ +0.21 +$ +0.21 +Stock compensation +24,523 +19,559 +4,964 +$ +0.07 +$ +0.05 +(Gain) loss on derivative instruments, net +55,749 +(11,246 +) +66,995 +N/A +N/A +Other operating expense, net +755 +856 +(101 +) +N/A +N/A +$ +1,829,232 +$ +5,462,371 +$ +(3,633,139 +) +Ceiling Test Impairment +During the first three quarters of 2016, we recognized ceiling test impairments totaling $757.7 million ( $481.4 million net of tax). We recognized ceiling test impairments in 2015 totaling $4.03 billion ( $2.56 billion net of tax). The impairments resulted primarily from the impact of decreases in the trailing twelve-month average prices for oil, gas, and NGLs utilized in determining the estimated future net revenues from proved reserves. At December 31, 2016, the calculated value of the ceiling limitation exceeded the carrying value of our oil and gas properties subject to the test, and no impairment was necessary. However, a decline of 7% or more in the value of the ceiling limitation would have resulted in an impairment. +Depreciation, Depletion, and Amortization +Depletion expense in 2016 decreased compared to 2015 due to the quarterly impairments of our oil and gas properties from the first quarter of 2015 through the third quarter of 2016. Depletion expense generally decreases following ceiling test impairments due to the decrease in the net proved properties balance. DD&A consisted of the following for the years indicated: +Years Ended December 31, +Variance +Between +2016 / 2015 +Per Mcfe +DD&A Expense (in thousands, except per Mcfe) +2016 +2015 +2016 +2015 +Depletion +$ +346,003 +$ +689,120 +$ +(343,117 +) +$ +0.98 +$ +1.92 +Depreciation +46,345 +42,340 +4,005 +0.13 +0.12 +$ +392,348 +$ +731,460 +$ +(339,112 +) +$ +1.11 +$ +2.04 +Production +Production costs consist of lease operating expense and workover expense as follows: +Years Ended December 31, +Variance +Between +2016 / 2015 +Per Mcfe +Production Expense (in thousands, except per Mcfe) +2016 +2015 +2016 +2015 +Lease operating expense +$ +189,291 +$ +249,744 +$ +(60,453 +) +$ +0.54 +$ +0.70 +Workover expense +42,711 +49,630 +(6,919 +) +0.12 +0.13 +$ +232,002 +$ +299,374 +$ +(67,372 +) +$ +0.66 +$ +0.83 +Lease operating expense in 2016 declined 24% compared to 2015 . In 2016 , we incurred lower saltwater disposal costs due to implementation of operational efficiencies as well as lower costs associated with labor, rental equipment, and property divestitures. +45 +Table of Contents +Workover expense decreased by 14% in 2016 compared to 2015 . Generally, these costs will fluctuate based on the amount of maintenance and remedial activity performed during the period. +Transportation, Processing, and Other Operating +Our 2016 transportation, processing, and other operating costs were 5%, or $8.4 million , higher than those of 2015 . These costs will vary by product type and region. The increase in 2016 is primarily a result of more gas production and higher fees associated with our Mid-Continent region. +Gas Gathering and Other +Gas gathering and other includes costs associated with operating our gas gathering and processing infrastructure, including product costs and operating and maintenance expenses. The 17%, or $6.4 million , year-over-year decrease is primarily attributable to higher repair and maintenance activities occurring in 2015 . +Taxes Other than Income +Taxes other than income are assessed by state and local taxing authorities on production, revenues, or the value of properties. Revenue-based production and severance taxes are the largest components of these taxes. The 27%, or $22.8 million , decrease in 2016 taxes is a result of lower production revenues due to lower realized commodity prices and lower production volumes. +General and Administrative +G&A costs consisted of the following for the years indicated: +Years Ended December 31, +Variance +Between +2016 / 2015 +General and Administrative Expense (in thousands): +2016 +2015 +Gross G&A +$ +146,432 +$ +133,020 +$ +13,412 +Less amounts capitalized to oil and gas properties +(72,531 +) +(58,332 +) +(14,199 +) +G&A expense +$ +73,901 +$ +74,688 +$ +(787 +) +G&A expense decreased slightly during 2016 as compared to 2015 . The percentage of gross G&A capitalized was 50% and 44% during 2016 and 2015, respectively. The increased capitalization in 2016 offset the increase in gross G&A costs, which increased due to a combination of higher accruals in 2016 for short-term incentive based compensation together with severance payments in connection with a voluntary early retirement incentive program. These increases were partially offset by lower salaries and wages and lower corporate contributions and consulting fees. +Stock Compensation +We have recognized stock-based compensation cost as follows: +Years Ended December 31, +Variance +Between +2016 / 2015 +Stock Compensation Expense (in thousands): +2016 +2015 +Restricted stock awards: +Performance stock awards +$ +24,183 +$ +18,991 +$ +5,192 +Service-based stock awards +18,391 +14,547 +3,844 +42,574 +33,538 +9,036 +Stock option awards +2,565 +2,803 +(238 +) +Total stock compensation cost +45,139 +36,341 +8,798 +Less amounts capitalized to oil and gas properties +(20,616 +) +(16,782 +) +(3,834 +) +Stock compensation expense +$ +24,523 +$ +19,559 +$ +4,964 +46 +Table of Contents +Periodic stock compensation expense will fluctuate based on the grant date fair value of awards, the number of awards, the requisite service period of the awards, employee forfeitures, and the timing of the awards. The increase in 2016 stock compensation is primarily related to performance awards granted in December 2015, a portion of which were amortized during 2016 , forfeiture rate adjustments on the service-based stock awards, and acceleration of expense on a portion of service-based awards for employees who participated in a voluntary early retirement incentive program. Historical amounts may not be representative of future amounts as the value of future awards may vary from historical amounts. +(Gain) Loss on Derivative Instruments, Net +The following table presents the components of (Gain) loss on derivative instruments, net for the periods indicated. See Note 4 to the Consolidated Financial Statements for additional information regarding our derivative instruments. +Years Ended December 31, +Variance +Between +2016 / 2015 +(Gain) Loss on Derivative Instruments (in thousands): +2016 +2015 +Change in fair value of derivative instruments, net: +Gas contracts +$ +27,462 +$ +(4,472 +) +$ +31,934 +Oil contracts +35,724 +(6,774 +) +42,498 +63,186 +(11,246 +) +74,432 +Cash (receipts) payments on derivative instruments, net: +Gas contracts +(6,467 +) +— +(6,467 +) +Oil contracts +(970 +) +— +(970 +) +(7,437 +) +— +(7,437 +) +(Gain) loss on derivative instruments, net +$ +55,749 +$ +(11,246 +) +$ +66,995 +Other Income and Expense +Years Ended December 31, +Variance +Between +2016 / 2015 +Other Income and Expense (in thousands): +2016 +2015 +Interest expense +$ +83,272 +$ +85,746 +$ +(2,474 +) +Capitalized interest +(21,248 +) +(30,589 +) +9,341 +Other, net +(10,707 +) +(13,576 +) +2,869 +$ +51,317 +$ +41,581 +$ +9,736 +The majority of our interest expense relates to interest on our senior unsecured notes. See LIQUIDITY AND CAPITAL RESOURCES Long-Term Debt below for further information regarding our debt. +We capitalize interest on non-producing leasehold costs, the in-progress costs of drilling and completing wells, and constructing qualified assets. Capitalized interest will fluctuate based on the rates applicable to borrowings outstanding during the period and the amount of costs on which interest is capitalized. The 31%, or $9.3 million , decrease in year-over-year capitalized interest expense resulted from lower average unproved property costs in 2016 . +Components of Other, net consist of miscellaneous income and expense items that will vary from period to period, including gain or loss related to the sale or value of oil and gas well equipment and supplies, gain or loss on miscellaneous asset sales, interest income, and income and expense associated with other non-operating activities. The 21%, or $2.9 million , decrease in 2016 income was primarily due to lower net gains on transactions related to oil and gas well equipment and supplies. +47 +Table of Contents +Income Tax Expense (Benefit) +The components of our provision for income taxes are as follows: +Years Ended December 31, +Variance +Between +2016 / 2015 +Income Tax Expense (Benefit) (in thousands): +2016 +2015 +Current tax (benefit) expense +$ +(1,115 +) +$ +14,710 +$ +(15,825 +) +Deferred tax benefit +(213,286 +) +(1,486,439 +) +1,273,153 +$ +(214,401 +) +$ +(1,471,729 +) +$ +1,257,328 +Combined federal and state effective income tax rate +34.4 +% +36.3 +% +Our combined federal and state effective tax rates differ from the statutory rate of 35% primarily due to state income taxes, non-deductible expenses, and revisions. See Note 9 to the Consolidated Financial Statements for further information regarding our income taxes. +LIQUIDITY AND CAPITAL RESOURCES +Overview +We strive to maintain an adequate liquidity level to address volatility and risk. Sources of liquidity include our cash flow from operations, cash on hand, available borrowing capacity under our revolving credit facility, proceeds from sales of non-core assets, and occasional public financings based on our monitoring of capital markets and our balance sheet. +Our liquidity is highly dependent on prices we receive for the oil, gas, and NGLs we produce. Prices we receive are determined by prevailing market conditions and greatly influence our revenue, cash flow, profitability, access to capital, and future rate of growth. See RESULTS OF OPERATIONS Revenue above for further information regarding the impact realized prices have had on our 2017 earnings. +We deal with volatility in commodity prices primarily by maintaining flexibility in our capital investment program. We have a balanced and abundant drilling inventory and limited long-term commitments, which enables us to respond quickly to industry volatility. Based on current economic conditions, our 2018 exploration and development (“E&D”) expenditures are projected to range from $1.6 billion to $1.7 billion . Investments in gathering, processing, and other infrastructure are expected to approximate an additional $80 million to $90 million for 2018. See Capital Expenditures below for information regarding our 2017 E&D activities. +We periodically use derivative instruments to mitigate volatility in commodity prices. At December 31, 2017 , we had derivative contracts covering a portion of our 2018 and 2019 production. Depending on changes in oil and gas futures markets and management’s view of underlying supply and demand trends, we may increase or decrease our derivative positions from current levels. See Note 4 to the Consolidated Financial Statements for information regarding our derivative instruments. +We believe our conservative use of leverage, strong balance sheet, and hedging activities will mitigate our exposure to lower prices. Cash and cash equivalents at December 31, 2017 were $400.5 million . At December 31, 2017 , our long-term debt consisted of $1.50 billion of senior unsecured notes, with $750 million 4.375% notes due in 2024 and $750 million 3.90% notes due in 2027. During the second quarter of 2017, we completed a tender offer and redemption of all of our $750 million 5.875% notes due in 2022 and issued the aforementioned 3.90% notes. At December 31, 2017 , we had no borrowings and $2.5 million in letters of credit outstanding under our credit facility, leaving an unused borrowing availability of $997.5 million . See Long-Term Debt below for more information regarding our debt. +Our debt to total capitalization ratio at December 31, 2017 was 37% , down from 42% at December 31, 2016 . This ratio is calculated by dividing the principal amount of long-term debt by the sum of (i) the principal amount of long-term debt and (ii) total stockholders’ equity, with all numbers coming directly from the Consolidated Balance Sheet. Management uses this ratio as one indicator of our financial condition and believes professional research analysts and rating agencies use this ratio for this purpose and to compare our financial condition to other companies’ financial conditions. Additionally, our credit facility includes a financial covenant for the maintenance of a defined total debt-to-capital ratio of no greater than 65%. +48 +Table of Contents +We expect our operating cash flow and other capital resources to be adequate to meet our needs for planned capital expenditures, working capital, debt service, and dividends declared in 2018 and beyond. +Analysis of Cash Flow Changes +The following table presents the totals of the major cash flow classification categories from our Consolidated Statements of Cash Flows for the periods indicated. +Years Ended December 31, +(in thousands) +2017 +2016 +2015 +Net cash provided by operating activities +$ +1,096,564 +$ +625,849 +$ +725,728 +Net cash used by investing activities +$ +(1,265,897 +) +$ +(692,410 +) +$ +(1,008,605 +) +Net cash (used) provided by financing activities +$ +(83,009 +) +$ +(59,945 +) +$ +656,397 +Net cash provided by operating activities in 2017 was $1.10 billion , up $470.7 million , or 75% , from $625.8 million for 2016 . The increase was primarily a result of higher revenue due to higher realized prices and production volumes in 2017 . This increase was partially offset by increased operating expenses and an increased investment in working capital. In 2016 , net cash provided by operating activities was $99.9 million , or 14% , lower than 2015 , resulting primarily from a decrease in revenue due to lower realized prices and production volumes in 2016 . This decrease was partially offset by lower operating costs and a decreased investment in working capital. See RESULTS OF OPERATIONS above for more information regarding year-over-year changes in revenue and operating expenses. +In 2017 , net cash used by investing activities was $1.27 billion , compared to $692.4 million and $1.01 billion in 2016 and 2015 , respectively. Prevailing commodity prices have a significant impact on the amount of cash flow available to invest in E&D activities, which comprise the majority of our cash used by investing activities. Our E&D capital expenditures, as reflected in the statements of cash flows, were $1.23 billion , $699.6 million , and $979.0 million in 2017, 2016, and 2015, respectively. Our other capital expenditures were $45.4 million , $22.2 million , and $70.6 million in 2017, 2016, and 2015, respectively. These other capital expenditures are primarily for our gathering facilities. Capital expenditures were partially offset by proceeds from asset sales of $12.6 million , $29.4 million , and $41.0 million in 2017, 2016, and 2015, respectively. From time-to-time we sell interests in various non-core assets. +Net cash used by financing activities in 2017 was $83.0 million and includes $772.9 million used for the early extinguishment of the $750 million 5.875% senior notes due 2022, which included $22.6 million of tender and redemption premiums. Additionally, the 2017 period includes $741.8 million proceeds, net of underwriters’ fees, discount, and issuance costs, that we received for the issuance of $750 million 3.90% senior notes due 2027. The other primary components of net cash used by financing activities in 2017 are the payment of dividends of $30.5 million (consisting of four quarterly $0.08 per share dividends) and the payment of $21.7 million of income tax withholdings made on behalf of our employees upon the net settlement of employee stock awards. Net cash used by financing activities in 2016 of $59.9 million consisted primarily of $38.0 million of dividends paid (consisting of one quarterly dividend of $0.16 per share and three quarterly dividends of $0.08 per share) and the payment of $26.6 million of income tax withholdings made on behalf of our employees upon the net settlement of employee stock awards. Net cash provided by financing activities in 2015 was $656.4 million , which was comprised primarily of $729.5 million of net proceeds from the sale of common stock and $8.5 million of proceeds from the exercise of stock options. These sources of cash were partially offset by $58.3 million of dividends paid (consisting of four quarterly dividends of $0.16 per share) and the payment of $21.2 million of income tax withholdings made on behalf of our employees upon the net settlement of employee stock awards. +49 +Table of Contents +Capital Expenditures +The following table reflects capitalized expenditures for oil and gas acquisitions, exploration, and development activities, net of property sales: +Years Ended December 31, +(in thousands) +2017 +2016 +2015 +Acquisitions: +Proved +$ +938 +$ +2,678 +$ +30 +Unproved +6,853 +11,865 +6,666 +Net purchase price adjustments (1) +— +— +(11,653 +) +7,791 +14,543 +(4,957 +) +Exploration and development: +Land and seismic +140,516 +61,870 +52,049 +Exploration +— +40 +1,073 +Development +1,140,548 +672,842 +823,830 +1,281,064 +734,752 +876,952 +Property sales +(11,680 +) +(24,687 +) +(41,276 +) +$ +1,277,175 +$ +724,608 +$ +830,719 +________________________________________ +(1) The 2015 net purchase price adjustments relate to acquisitions occurring prior to 2015. +Capital expenditures in the table above are presented on an accrual basis. Oil and gas capital expenditures and sales of oil and gas assets in the Consolidated Statements of Cash Flows reflect capital expenditures on a cash basis, when payments are made and proceeds received. +Because of higher commodity prices, we increased our 2017 E&D expenditures 74% to $1.28 billion compared to $734.8 million in 2016 . Approximately 59% of our 2017 E&D expenditures were in the Permian Basin and 39% were in our Mid-Continent region. During 2017 , we completed or participated in the completion of 319 gross ( 98.0 net) wells, of which we operated 118 gross ( 77.7 net) wells. See Items 1 and 2 of this report for further information regarding our oil and gas properties. +Approximately 70% of our planned 2018 E&D capital investment of $1.6 billion to $1.7 billion is expected to be invested in the Permian Basin and most of the remainder in the Mid-Continent region. +As has been our historical practice, we regularly review capital expenditures throughout the year and will adjust our investments based on increases or decreases in commodity prices, service costs, and drilling success. We have the flexibility to adjust our capital expenditures based upon market conditions. +We intend to fund our 2018 capital program with cash flow from our operating activities and cash on hand. Sales of non-core assets and borrowings under our Credit Facility may also be used to supplement funding of capital expenditures. The timing of capital expenditures and the receipt of cash flows do not necessarily match, which may cause us to borrow and repay funds under our Credit Facility from time-to-time. See Long-Term Debt — Bank Debt below for further information regarding our credit facility. +We have made, and will continue to make, expenditures to comply with environmental and safety regulations and requirements. These costs are considered a normal recurring cost of our ongoing operations. While we expect current pending legislation or regulations to increase the cost of business, we do not anticipate that we will be required to expend amounts that will have a material adverse effect on our financial position or operations, nor are we aware of any pending regulatory changes that would have a material impact, based on current laws and regulations. However, compliance with new legislation or regulations could increase our costs or adversely affect demand for oil or gas and result in a material adverse effect on our financial position or operations. See Item 1A RISK FACTORS for a description of risks related to current and potential future environmental and safety regulations and requirements that could adversely affect our operations and financial condition. +50 +Table of Contents +Long-Term Debt +Long-term debt at December 31, 2017 and 2016 consisted of the following: +December 31, 2017 +December 31, 2016 +(in thousands) +Principal +Unamortized Debt +Issuance Costs and Discount (1) +Long-term +Debt, net +Principal +Unamortized Debt +Issuance Costs +Long-term +Debt, net +5.875% Senior Notes +$ +— +$ +— +$ +— +$ +750,000 +$ +(5,691 +) +$ +744,309 +4.375% Senior Notes +750,000 +(5,383 +) +744,617 +750,000 +(6,370 +) +743,630 +3.90% Senior Notes +750,000 +(7,697 +) +742,303 +— +— +— +Total long-term debt +$ +1,500,000 +$ +(13,080 +) +$ +1,486,920 +$ +1,500,000 +$ +(12,061 +) +$ +1,487,939 +________________________________________ +(1) +At December 31, 2017 , the unamortized debt issuance costs and discount related to the 3.90% notes were $5.9 million and $1.8 million , respectively. The 4.375% notes were issued at par. +Bank Debt +In October 2015, we entered into a new senior unsecured revolving credit facility (“Credit Facility”) which matures October 16, 2020. The Credit Facility has aggregate commitments of $1.0 billion , with an option to increase aggregate commitments to $1.25 billion at any time. There is no borrowing base subject to the discretion of the lenders based on the value of our proved reserves under the Credit Facility. As of December 31, 2017 , we had no bank borrowings outstanding under the Credit Facility, but did have letters of credit of $2.5 million outstanding, leaving an unused borrowing availability of $997.5 million . +At our option, borrowings under the Credit Facility may bear interest at either (a) LIBOR plus 1.125 - 2.0% based on the credit rating for our senior unsecured long-term debt, or (b) a base rate (as defined in the credit agreement) plus 0.125 - 1.0% , based on the credit rating for our senior unsecured long-term debt. Unused borrowings are subject to a commitment fee of 0.125 - 0.35% , based on the credit rating for our senior unsecured long-term debt. +The Credit Facility contains representations, warranties, covenants, and events of default that are customary for investment grade, senior unsecured bank credit agreements, including a financial covenant for the maintenance of a defined total debt-to-capital ratio of no greater than 65% . As of December 31, 2017 , we were in compliance with all of the financial and non-financial covenants. +At December 31, 2017 and 2016 , we had $3.4 million and $4.5 million , respectively, of unamortized debt issuance costs associated with our Credit Facility that were recorded as deferred assets and included in Other assets, net in our balance sheets. The costs are being amortized to interest expense ratably over the life of the Credit Facility. +Senior Notes +On April 10, 2017, we completed a cash tender offer to purchase any of our 5.875% senior unsecured notes for cash consideration of $1,031.67 per $1,000 principal amount of notes, plus any accrued and unpaid interest up to, but not including, the settlement date, with $253.5 million aggregate principal amount of the notes validly tendered. We settled these tendered notes for $268.1 million , including accrued interest. On May 12, 2017, we completed a redemption of the 5.875% notes remaining outstanding for $1,029.38 per $1,000 principal amount of notes, plus any accrued and unpaid interest up to, but not including, the redemption date, settling the notes for $512.0 million , including accrued interest. We recognized a loss on early extinguishment of debt related to these transactions of $28.2 million , composed primarily of tender and redemption premiums of $22.6 million and the write-off of $5.3 million of unamortized debt issuance costs. The original maturity date of the 5.875% notes was May 1, 2022 . +On April 10, 2017, we issued $750 million aggregate principal amount of 3.90% senior unsecured notes due May 15, 2027 at 99.748% of par to yield 3.93% per annum. We received $741.8 million in net cash proceeds, after deducting underwriters’ fees, discount, and debt issuance costs. The notes bear an annual interest rate of 3.90% and interest is payable semiannually on May 15 and November 15, with the first payment occurring November 15, 2017. Along with cash on hand, we used the proceeds to fund the settlement of the tendered and redeemed 5.875% notes. +51 +Table of Contents +In June 2014, we issued $750 million aggregate principal amount of 4.375% senior unsecured notes at par. These notes are due June 1, 2024 and interest is payable semiannually on June 1 and December 1. +Each of our senior unsecured notes is governed by an indenture containing certain covenants, events of default, and other restrictive provisions with which we were in compliance as of December 31, 2017 . The effective interest rate on the 4.375% notes and the 3.90% notes, including the amortization of debt issuance costs and discount, as applicable, is 4.50% and 4.01% , respectively. +Working Capital Analysis +Our working capital fluctuates primarily as a result of our realized commodity prices, increases or decreases in our production volumes, changes in receivables and payables related to our operating and E&D activities, changes in our oil and gas well equipment and supplies, and changes in the carrying value of our derivative instruments. +At December 31, 2017 , we had working capital of $256.1 million , a decrease of $190.9 million , or 43% , compared to working capital of $447.0 million at December 31, 2016 . +Working capital decreases consisted primarily of the following: +• Cash and cash equivalents decreased $252.3 million . +• Operations-related accounts payable and accrued liabilities increased $131.1 million . +• +Accrued liabilities related to our E&D expenditures increased $33.4 million . +Decreases in working capital were partially offset by the following primary increases: +• Operations-related accounts receivable increased $185.6 million . +• Net derivative instrument current liability decreased $22.5 million . +• Oil and gas well equipment and supplies increased $16.4 million . +Cash on hand was used during 2017, along with cash flow from operations, primarily to fund our capital expenditures. Accounts receivable are a major component of our working capital and include a diverse group of companies comprised of major energy companies, pipeline companies, local distribution companies, and other end-users. Historically, losses associated with uncollectible receivables have not been significant. Our accounts receivable and operations-related accounts payable and accrued liabilities have increased primarily due to increased commodity prices and production volumes, as well as due to increased E&D activity. Our accrued liabilities related to our E&D expenditures also increased due to increased E&D activity. The fair value of derivative instruments fluctuates based on changes in the underlying price indices as compared to the contracted prices. +Dividends +A quarterly cash dividend has been paid to stockholders every quarter since the first quarter of 2006. In February 2016, the quarterly dividend declared was decreased to $0.08 per share, where it has remained through the fourth quarter of 2017, from $0.16 per share. Future dividend payments will depend on our level of earnings, financial requirements, and other factors considered relevant by our Board of Directors. See Note 2 to the Consolidated Financial Statements for further information regarding dividends. +Off-Balance Sheet Arrangements +We may enter into off-balance sheet arrangements and transactions that can give rise to material off-balance sheet obligations. As of December 31, 2017 , our material off-balance sheet arrangements consisted of operating lease agreements, which are included in the table below. +52 +Table of Contents +Contractual Obligations and Material Commitments +At December 31, 2017 , we had the following contractual obligations and material commitments: +Payments Due by Period +Contractual obligations (in thousands) : +Total +1 Year or Less +2-3 +Years +4-5 +Years +More than 5 Years +Long-term debt-principal (1) +$ +1,500,000 +$ +— +$ +— +$ +— +$ +1,500,000 +Long-term debt-interest (1) +491,075 +60,844 +124,125 +124,125 +181,981 +Operating leases (2) +94,676 +15,410 +24,346 +22,275 +32,645 +Unconditional purchase obligations (3) +38,269 +8,943 +9,469 +8,675 +11,182 +Derivative liabilities +46,334 +42,066 +4,268 +— +— +Asset retirement obligation (4) +169,469 +11,048 +— +(4) +— +(4) +— +(4) +Other long-term liabilities (5) +35,280 +1,844 +3,320 +2,855 +27,261 +$ +2,375,103 +$ +140,155 +$ +165,528 +$ +157,930 +$ +1,753,069 +________________________________________ +(1) +The interest payments presented above include the accrued interest payable on our long-term debt as of December 31, 2017 as well as future payments calculated using the long-term debt’s fixed rates and principal amounts outstanding as of December 31, 2017 . See Note 3 to the Consolidated Financial Statements for additional information regarding our debt. +(2) +Operating leases include various commitments for office space and compressor equipment. +(3) +Of the total Unconditional purchase obligations, $36.5 million represents obligations for firm transportation agreements for pipeline capacity. +(4) +We have excluded the presentation of the timing of the cash flows associated with our long-term asset retirement obligations because we cannot make a reasonably reliable estimate of the future period of cash settlement. The long-term asset retirement obligation is included in the total asset retirement obligation presented. +(5) +Other long-term liabilities include contractual obligations associated with our employee supplemental savings plan, gas balancing liabilities, and other miscellaneous liabilities. All of these liabilities are accrued on our Consolidated Balance Sheet. The current portion associated with these long-term liabilities is also presented in the table above in the “1 Year or Less” column. +The following discusses various commercial commitments that we have, which may include potential future cash payments if we fail to meet various performance obligations. These are not reflected in the table above. +At December 31, 2017 , we had estimated commitments of approximately: (i) $252.6 million to finish drilling, completing, or performing other work on wells and various other infrastructure projects in progress and (ii) $33.3 million to finish gathering system construction in progress. +At December 31, 2017 , we had firm sales contracts to deliver approximately 217.6 Bcf of natural gas over the next 7.1 years . If we do not deliver this gas, our estimated financial commitment, calculated using the January 2018 index price, would be approximately $476.7 million . The value of this commitment will fluctuate due to price volatility and actual volumes delivered. However, we believe no financial commitment will be due based on our current proved reserves and production levels from which we can fulfill these volumetric obligations. +In connection with gas gathering and processing agreements, we have volume commitments over the next 8.3 years . If we do not deliver the committed gas or NGLs, as the case may be, the estimated maximum amount that would be payable under these commitments, calculated as of December 31, 2017 , would be approximately $298.3 million . However, we believe no financial commitment will be due based on our current proved reserves and production levels from which we can fulfill these volumetric obligations. +We have minimum volume delivery commitments associated with agreements to reimburse connection costs to various pipelines. If we do not deliver this gas, the estimated maximum amount that would be payable under these commitments, calculated as of December 31, 2017 , would be approximately $11.4 million . However, we believe no financial commitment will be due based on our current proved reserves and production levels from which we can fulfill these volumetric obligations. +All of the noted commitments were routine and made in the ordinary course of our business. +53 +Table of Contents +Taking into account current commodity prices and anticipated levels of production, we believe that our net cash flow generated from operations and our other capital resources will be adequate to meet future obligations. +CRITICAL ACCOUNTING POLICIES AND ESTIMATES +Discussion and analysis of our financial condition and results of operation are based on our Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses. We analyze and base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Changes in facts and circumstances or additional information may result in revised estimates, and actual results may differ from these estimates. +Our significant accounting policies are described in Note 1 to our Consolidated Financial Statements. We have identified the following policies as being of particular importance to the portrayal of our financial position and results of operations and which require the application of significant judgment by management. +Oil and Gas Reserves +The process of estimating quantities of oil and gas reserves is complex, requiring significant decisions in the evaluation of all available geological, geophysical, engineering and economic data. The data for a given field may also change substantially over time due to numerous factors including, but not limited to, additional development activity, evolving production history and continual reassessment of the viability of production under varying economic conditions. As a result, material revisions to existing reserve estimates may occur from time to time. Although every reasonable effort is made to ensure that our reserve estimates represent the most accurate assessments possible, subjective decisions and available data for our various fields make these estimates generally less precise than other estimates included in financial statement disclosures. +At year-end 2017 , 17% of our total proved reserves are categorized as proved undeveloped reserves. Our reserve engineers review and revise these reserve estimates regularly, as new information becomes available. +We use the units-of-production method to amortize the cost associated with our oil and gas properties. Changes in estimates of reserve quantities and commodity prices will cause corresponding changes in depletion expense, or in some cases, a full cost ceiling impairment charge in the period of the revision. See Full Cost Accounting below for further information regarding the ceiling limitation calculation. See SUPPLEMENTAL INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED) in Item 8 for additional reserve data. +Full Cost Accounting +We use the full cost method of accounting for our oil and gas operations. All costs associated with property acquisition, exploration, and development activities are capitalized. Exploration and development costs include dry hole costs, geological and geophysical costs, direct overhead related to exploration and development activities, and other costs incurred for the purpose of finding oil and gas reserves. Salaries and benefits paid to employees directly involved in the acquisition, exploration, and development of properties, as well as other internal costs that can be directly identified with acquisition, exploration, and development activities, are also capitalized. Under the full cost method of accounting, no gain or loss is recognized upon the disposition of oil and gas properties unless such disposition would significantly alter the relationship between capitalized costs and proved reserves. Expenditures for maintenance and repairs are charged to production expense in the period incurred. +Under the full cost method of accounting, we are required to perform quarterly ceiling test calculations to test our oil and gas properties for possible impairment. If the net capitalized cost of our oil and gas properties, as adjusted for income taxes, exceeds the ceiling limitation, the excess is charged to expense. The ceiling limitation is equal to the sum of: (i) the present value discounted at 10% of estimated future net revenues from proved reserves, (ii) the cost of properties not being amortized, and (iii) the lower of cost or estimated fair value of unproven properties included in the costs being amortized, as adjusted for income taxes. We currently do not have any unproven properties that are being amortized. Estimated future net revenues are determined based on trailing twelve-month average commodity prices and estimated proved reserve quantities, operating costs, and capital expenditures. +54 +Table of Contents +The quarterly ceiling test is primarily impacted by commodity prices, changes in estimated reserve quantities, reserves produced, overall exploration and development costs, depletion expense, and deferred taxes. If pricing conditions decline, or if there is a negative impact on one or more of the other components of the calculation, we may incur full cost ceiling test impairments in future quarters. The calculated ceiling limitation is not intended to be indicative of the fair market value of our proved reserves or future results. Impairment charges do not affect cash flow from operating activities, but do adversely affect our net income and various components of our balance sheet. Any impairment of oil and gas properties is not reversible at a later date. +Depletion of proved oil and gas properties is computed on the units-of-production method, whereby capitalized costs, including future development costs and asset retirement costs, are amortized over total estimated proved reserves. Changes in our estimate of proved reserve quantities, commodity prices, and impairment of oil and gas properties will cause corresponding changes in depletion expense in periods subsequent to these changes. +The capitalized costs of unproved properties, including those in wells in progress, are excluded from the costs being amortized. We do not have major development projects that are excluded from costs being amortized. On a quarterly basis, we evaluate excluded costs for inclusion in the costs to be amortized. Significant unproved properties are evaluated individually. Unproved properties that are not considered individually significant are aggregated for evaluation purposes and related costs are transferred to the costs to be amortized quarterly based on the application of historical factors. +Income Taxes +Our oil and gas exploration and production operations are subject to taxation on income in numerous jurisdictions. We record deferred tax assets and liabilities to account for the expected future tax consequences of events that have been recognized in our financial statements and our tax returns. We routinely assess the realizability of our deferred tax assets. Numerous judgments and assumptions are inherent in this assessment, including the determination of future taxable income, which is affected by factors such as future operating conditions (particularly as related to prevailing oil and gas prices) and changing tax laws. If we conclude that it is more likely than not that some portion or all of the deferred tax assets will not be realized, the tax asset would be reduced by a valuation allowance. +We regularly assess and, if required, establish accruals for tax contingencies that could result from assessments of additional tax by taxing jurisdictions where the company operates. See Note 9 to the Consolidated Financial Statements for additional information regarding our income taxes. +Recently Issued Accounting Standards +See Note 1 to the Consolidated Financial Statements for a discussion of recent accounting pronouncements and their anticipated effect on our business. +55 +Table of Contents +ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK +We are exposed to market risk including the risk of loss arising from adverse changes in commodity prices and interest rates. +Price Fluctuations +Our major market risk is pricing applicable to our oil, gas, and NGL production. The prices we receive for our production are based on prevailing market conditions and are influenced by many factors that are beyond our control. Pricing for oil, gas, and NGL production has been volatile and unpredictable. During 2017, our total production revenue was comprised of 52% oil sales, 28% gas sales, and 20% NGL sales. The following table shows how hypothetical changes in the realized prices we receive for our commodity sales would have impacted revenue for the periods indicated. See MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS— Market Conditions for further information regarding prices. +Impact on Revenue +Change in Realized Price +Year Ended +December 31, 2017 +(in thousands) +Oil +± $1.00 +per barrel +± $20,861 +Gas +± $0.10 +per Mcf +± $18,747 +NGL +± $1.00 +per barrel +± $17,374 +± $56,982 +We periodically enter into derivative contracts to hedge a portion of our price risk associated with our future oil and gas production. At December 31, 2017 , we had oil and gas derivatives covering a portion of our 2018 and 2019 production, which were recorded as current and non-current assets and liabilities. At December 31, 2017, these derivatives had a gross asset fair value of $17.2 million and a gross liability fair value of $46.3 million . See Note 4 to the Consolidated Financial Statements for additional information regarding our derivative instruments. +While these contracts limit the downside risk of adverse price movements, they may also limit future cash flow from favorable price movements. The following table shows how hypothetical changes in the forward prices used to calculate the fair value of our derivatives would have impacted the fair value as of December 31, 2017 . +Impact on Fair Value +Change in Forward Price +December 31, 2017 +(in thousands) +Oil +-$1.00 +$ +7,288 +Oil ++$1.00 +$ +(7,528 +) +Gas +-$0.10 +$ +5,388 +Gas ++$0.10 +$ +(5,160 +) +Interest Rate Risk +At December 31, 2017 , our long-term debt consisted of $750 million of 4.375% senior unsecured notes that will mature on June 1, 2024 and $750 million of 3.90% senior unsecured notes that will mature on May 15, 2027. Because all of our outstanding long-term debt is at a fixed rate, we consider our interest rate exposure to be minimal. See Note 3 and Note 5 to the Consolidated Financial Statements for additional information regarding our debt. +56 +Table of Contents +ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA +CIMAREX ENERGY CO. +INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTAL SCHEDULES +Page +Report of Independent Registered Public Accounting Firm for the years ended December 31, 2017, 2016, and 2015 +58 +Consolidated Balance Sheets as of December 31, 2017 and 2016 +59 +Consolidated Statements of Operations and Comprehensive Income (Loss) for the years ended December 31, 2017, 2016, and 2015 +60 +Consolidated Statements of Cash Flows for the years ended December 31, 2017, 2016, and 2015 +61 +Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2017, 2016, and 2015 +62 +Notes to Consolidated Financial Statements +Note 1 — Basis of Presentation and Summary of Significant Accounting Policies +63 +Note 2 — Capital Stock +68 +Note 3 — Long-Term Debt +68 +Note 4 — Derivative Instruments +69 +Note 5 — Fair Value Measurements +74 +Note 6 — Stock-Based and Other Compensation +75 +Note 7 — Earnings (Loss) per Share +79 +Note 8 — Asset Retirement Obligations +79 +Note 9 — Income Taxes +80 +Note 10 — Commitments and Contingencies +81 +Note 11 — Related Party Transactions +83 +Note 12 — Supplemental Cash Flow Information +83 +Supplemental Information to Consolidated Financial Statements +Supplemental Information on Oil and Gas Producing Activities (Unaudited) +84 +Supplemental Quarterly Financial Data (Unaudited) +90 +All other supplemental information and schedules have been omitted because they are not applicable or the information required is shown in the consolidated financial statements or related notes thereto. +57 +Table of Contents +Report of Independent Registered Public Accounting Firm +To the Stockholders and Board of Directors +Cimarex Energy Co.: +Opinion on the Consolidated Financial Statements +We have audited the accompanying consolidated balance sheets of Cimarex Energy Co. and subsidiaries (the “Company”) as of December 31, 2017 and 2016, the related consolidated statements of operations and comprehensive income (loss), stockholders’ equity, and cash flows for each of the years in the three‑year period ended December 31, 2017, and the related notes (collectively, the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the years in the three‑year period ended December 31, 2017, in conformity with U.S. generally accepted accounting principles. +We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 23, 2018 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting. +Basis for Opinion +These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. +KPMG LLP +We have served as the Company’s auditor since 2002. +Denver, Colorado +February 23, 2018 +58 +Table of Contents +CIMAREX ENERGY CO. +CONSOLIDATED BALANCE SHEETS +(in thousands, except share and per share information) +December 31, +2017 +2016 +Assets +Current assets: +Cash and cash equivalents +$ +400,534 +$ +652,876 +Accounts receivable, net of allowance: +Trade +100,356 +42,287 +Oil and gas sales +344,552 +217,395 +Gas gathering, processing, and marketing +15,266 +14,888 +Oil and gas well equipment and supplies +49,722 +33,342 +Derivative instruments +15,151 +— +Prepaid expenses +8,518 +7,335 +Other current assets +1,536 +1,181 +Total current assets +935,635 +969,304 +Oil and gas properties at cost, using the full cost method of accounting: +Proved properties +17,513,460 +16,225,495 +Unproved properties and properties under development, not being amortized +476,903 +478,277 +17,990,363 +16,703,772 +Less—accumulated depreciation, depletion, amortization, and impairment +(14,748,833 +) +(14,349,505 +) +Net oil and gas properties +3,241,530 +2,354,267 +Fixed assets, net of accumulated depreciation of $290,114 and $246,901, respectively +210,922 +205,465 +Goodwill +620,232 +620,232 +Derivative instruments +2,086 +— +Deferred income taxes +— +55,835 +Other assets +32,234 +32,621 +$ +5,042,639 +$ +4,237,724 +Liabilities and Stockholders’ Equity +Current liabilities: +Accounts payable: +Trade +$ +68,883 +$ +49,163 +Gas gathering, processing, and marketing +29,503 +25,323 +Accrued liabilities: +Exploration and development +115,762 +82,320 +Taxes other than income +23,687 +18,766 +Other +212,400 +177,695 +Derivative instruments +42,066 +49,370 +Revenue payable +187,273 +119,715 +Total current liabilities +679,574 +522,352 +Long-term debt: +Principal +1,500,000 +1,500,000 +Less—unamortized debt issuance costs and discount +(13,080 +) +(12,061 +) +Long-term debt, net +1,486,920 +1,487,939 +Deferred income taxes +101,618 +— +Asset retirement obligation +158,421 +140,770 +Derivative instruments +4,268 +2,570 +Other liabilities +43,560 +41,104 +Total liabilities +2,474,361 +2,194,735 +Commitments and contingencies (Note 10) +Stockholders’ equity: +Preferred stock, $0.01 par value, 15,000,000 shares authorized, no shares issued +— +— +Common stock, $0.01 par value, 200,000,000 shares authorized, 95,437,434 and 95,123,525 shares issued, respectively +954 +951 +Additional paid-in capital +2,764,384 +2,763,452 +Retained earnings (accumulated deficit) +(199,259 +) +(722,359 +) +Accumulated other comprehensive income +2,199 +945 +Total stockholders’ equity +2,568,278 +2,042,989 +$ +5,042,639 +$ +4,237,724 +See accompanying notes to Consolidated Financial Statements. +59 +Table of Contents +CIMAREX ENERGY CO. +CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) +(in thousands, except per share data) +Years Ended December 31, +2017 +2016 +2015 +Revenues: +Oil sales +$ +981,646 +$ +632,934 +$ +809,664 +Gas sales +516,936 +388,786 +428,227 +NGL sales +375,421 +199,498 +179,647 +Gas gathering and other +43,751 +36,033 +34,688 +Gas marketing +495 +94 +393 +1,918,249 +1,257,345 +1,452,619 +Costs and expenses: +Impairment of oil and gas properties +— +757,670 +4,033,295 +Depreciation, depletion, and amortization +446,031 +392,348 +731,460 +Asset retirement obligation +15,624 +7,828 +9,121 +Production +262,180 +232,002 +299,374 +Transportation, processing, and other operating +231,640 +190,725 +182,362 +Gas gathering and other +35,840 +31,785 +38,138 +Taxes other than income +89,864 +61,946 +84,764 +General and administrative +79,996 +73,901 +74,688 +Stock compensation +26,256 +24,523 +19,559 +(Gain) loss on derivative instruments, net +(21,210 +) +55,749 +(11,246 +) +Other operating expense, net +1,314 +755 +856 +1,167,535 +1,829,232 +5,462,371 +Operating income (loss) +750,714 +(571,887 +) +(4,009,752 +) +Other (income) and expense: +Interest expense +74,821 +83,272 +85,746 +Capitalized interest +(22,948 +) +(21,248 +) +(30,589 +) +Loss on early extinguishment of debt +28,187 +— +— +Other, net +(11,342 +) +(10,707 +) +(13,576 +) +Income (loss) before income tax +681,996 +(623,204 +) +(4,051,333 +) +Income tax expense (benefit) +187,667 +(214,401 +) +(1,471,729 +) +Net income (loss) +$ +494,329 +$ +(408,803 +) +$ +(2,579,604 +) +Earnings (loss) per share to common stockholders: +Basic +$ +5.19 +$ +(4.38 +) +$ +(27.75 +) +Diluted +$ +5.19 +$ +(4.38 +) +$ +(27.75 +) +Dividends declared per share +$ +0.32 +$ +0.32 +$ +0.64 +Comprehensive income (loss): +Net income (loss) +$ +494,329 +$ +(408,803 +) +$ +(2,579,604 +) +Other comprehensive income (loss): +Change in fair value of investments, net of tax of $106, $289, and ($380), respectively +1,254 +504 +(661 +) +Total comprehensive income (loss) +$ +495,583 +$ +(408,299 +) +$ +(2,580,265 +) +See accompanying notes to Consolidated Financial Statements. +60 +Table of Contents +CIMAREX ENERGY CO. +CONSOLIDATED STATEMENTS OF CASH FLOWS +(in thousands) +Years Ended December 31, +2017 +2016 +2015 +Cash flows from operating activities: +Net income (loss) +$ +494,329 +$ +(408,803 +) +$ +(2,579,604 +) +Adjustments to reconcile net income (loss) to net cash provided by operating activities: +Impairment of oil and gas properties +— +757,670 +4,033,295 +Depreciation, depletion, and amortization +446,031 +392,348 +731,460 +Asset retirement obligation +15,624 +7,828 +9,121 +Deferred income taxes +190,479 +(213,286 +) +(1,486,439 +) +Stock compensation +26,256 +24,523 +19,559 +(Gain) loss on derivative instruments, net +(21,210 +) +55,749 +(11,246 +) +Settlements on derivative instruments +(1,633 +) +7,437 +— +Loss on early extinguishment of debt +28,187 +— +— +Changes in non-current assets and liabilities +1,891 +3,867 +23,230 +Other, net +5,677 +1,805 +4,206 +Changes in operating assets and liabilities: +Accounts receivable +(186,157 +) +(49,340 +) +186,699 +Other current assets +(17,931 +) +20,880 +37,954 +Accounts payable and other current liabilities +115,021 +25,171 +(242,507 +) +Net cash provided by operating activities +1,096,564 +625,849 +725,728 +Cash flows from investing activities: +Oil and gas capital expenditures +(1,233,126 +) +(699,558 +) +(979,044 +) +Other capital expenditures +(45,352 +) +(22,228 +) +(70,592 +) +Sales of oil and gas assets +11,680 +21,487 +39,853 +Sales of other assets +901 +7,889 +1,178 +Net cash used by investing activities +(1,265,897 +) +(692,410 +) +(1,008,605 +) +Cash flows from financing activities: +Borrowings of long-term debt +748,110 +— +— +Repayments of long-term debt +(750,000 +) +— +— +Proceeds from sale of common stock +— +— +752,100 +Financing and underwriting fees +(29,312 +) +(101 +) +(24,633 +) +Dividends paid +(30,532 +) +(38,024 +) +(58,281 +) +Employee withholding taxes paid upon the net settlement of equity-classified stock awards +(21,669 +) +(26,624 +) +(21,240 +) +Proceeds from exercise of stock options +394 +4,804 +8,451 +Net cash (used) provided by financing activities +(83,009 +) +(59,945 +) +656,397 +Net change in cash and cash equivalents +(252,342 +) +(126,506 +) +373,520 +Cash and cash equivalents at beginning of period +652,876 +779,382 +405,862 +Cash and cash equivalents at end of period +$ +400,534 +$ +652,876 +$ +779,382 +See accompanying notes to Consolidated Financial Statements. +61 +Table of Contents +CIMAREX ENERGY CO. +CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY +(in thousands) +Retained +Earnings (Accumulated Deficit) +Accumulated +Other Comprehensive Income (Loss) +Total Stockholders’ Equity +Common Stock +Additional Paid-in Capital +Shares +Amount +Balance, December 31, 2014 +87,592 +$ +876 +$ +1,997,080 +$ +2,332,909 +$ +1,102 +$ +4,331,967 +Dividends paid on stock awards subsequently forfeited +— +— +— +109 +— +109 +Dividends +— +— +— +(59,422 +) +— +(59,422 +) +Net loss +— +— +— +(2,579,604 +) +— +(2,579,604 +) +Unrealized change in fair value of investments, net of tax +— +— +— +— +(661 +) +(661 +) +Issuance of common stock +6,900 +69 +729,468 +— +— +729,537 +Issuance of restricted stock awards +471 +5 +(5 +) +— +— +— +Common stock reacquired and retired +(194 +) +(2 +) +(21,238 +) +— +— +(21,240 +) +Restricted stock forfeited and retired +(90 +) +(1 +) +1 +— +— +— +Exercise of stock options +142 +1 +8,450 +— +— +8,451 +Stock-based compensation +— +— +36,232 +— +— +36,232 +Stock-based compensation tax benefit +— +— +12,988 +— +— +12,988 +Balance, December 31, 2015 +94,821 +948 +2,762,976 +(306,008 +) +441 +2,458,357 +Dividends paid on stock awards subsequently forfeited +— +— +2 +35 +— +37 +Dividends +— +— +— +(7,583 +) +— +(7,583 +) +Dividends in excess of retained earnings +— +— +(22,805 +) +— +— +(22,805 +) +Net loss +— +— +— +(408,803 +) +— +(408,803 +) +Unrealized change in fair value of investments, net of tax +— +— +— +— +504 +504 +Issuance of restricted stock awards +479 +5 +(5 +) +— +— +— +Common stock reacquired and retired +(208 +) +(3 +) +(26,622 +) +— +— +(26,625 +) +Restricted stock forfeited and retired +(32 +) +— +— +— +— +— +Exercise of stock options +64 +1 +4,803 +— +— +4,804 +Stock-based compensation +— +— +45,103 +— +— +45,103 +Balance, December 31, 2016 +95,124 +951 +2,763,452 +(722,359 +) +945 +2,042,989 +Dividends paid on stock awards subsequently forfeited +— +— +11 +32 +— +43 +Dividends in excess of retained earnings +— +— +(30,489 +) +— +— +(30,489 +) +Net income +— +— +— +494,329 +— +494,329 +Unrealized change in fair value of investments, net of tax +— +— +— +— +1,254 +1,254 +Issuance of restricted stock awards +552 +5 +(5 +) +— +— +— +Common stock reacquired and retired +(204 +) +(2 +) +(21,667 +) +— +— +(21,669 +) +Restricted stock forfeited and retired +(41 +) +— +— +— +— +— +Exercise of stock options +6 +— +394 +— +— +394 +Stock-based compensation +— +— +48,321 +— +— +48,321 +Cumulative effect adjustment of adopting ASU 2016-09 (Note 6) +— +— +4,393 +28,739 +— +33,132 +Other +— +— +(26 +) +— +— +(26 +) +Balance, December 31, 2017 +95,437 +$ +954 +$ +2,764,384 +$ +(199,259 +) +$ +2,199 +$ +2,568,278 +See accompanying notes to Consolidated Financial Statements. +62 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES +Cimarex Energy Co., a Delaware corporation, is an independent oil and gas exploration and production company. Our operations are mainly located in Texas, Oklahoma, and New Mexico. +Basis of Presentation +Our Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP. Our significant accounting policies are discussed below. The accounts of Cimarex and its subsidiaries are presented in the accompanying Consolidated Financial Statements. All intercompany accounts and transactions were eliminated in consolidation. Certain amounts in the prior year financial statements have been reclassified to conform to the 2017 financial statement presentation. +Segment Information +We have determined that our business is comprised of only one segment because our gathering, processing, and marketing activities are ancillary to our production operations. +Use of Estimates +The preparation of our financial statements in conformity with GAAP requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses. Areas of significance requiring the use of management’s judgments include the estimation of proved oil and gas reserves used in calculating depletion, the estimation of future net revenues used in computing ceiling test limitations, the estimation of future abandonment obligations used in recording asset retirement obligations, and the assessment of goodwill. Estimates and judgments also are required in determining allowances for doubtful accounts, impairments of unproved properties and other assets, valuation of deferred tax assets, fair value measurements, and contingencies. We analyze our estimates and base them on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. +The process of estimating quantities of oil and gas reserves is complex, requiring significant decisions in the evaluation of all available geological, geophysical, engineering, and economic data. The data for a given field may also change substantially over time as a result of numerous factors including, but not limited to, additional development activity, evolving production history, and continual reassessment of the viability of production under varying economic conditions. As a result, material revisions to existing reserve estimates may occur from time to time. Although every reasonable effort is made to ensure that our reserve estimates represent the most accurate assessments possible, subjective decisions, and available data for our various fields make these estimates generally less precise than other estimates included in financial statement disclosures. +Cash and Cash Equivalents +Cash and cash equivalents consist of cash in banks and investments readily convertible into cash, which have original maturities of three months or less. Cash equivalents are stated at cost, which approximates market value. +Oil and Gas Well Equipment and Supplies +Our oil and gas well equipment and supplies are valued at the lower of cost and net realizable value, where net realizable value is estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Declines in the price of oil and gas well equipment and supplies in future periods could cause us to recognize impairments on these assets. An impairment would not affect cash flow from operating activities, but would adversely affect our net income and stockholders’ equity. +63 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +Oil and Gas Properties +We use the full cost method of accounting for our oil and gas operations. All costs associated with property acquisition, exploration, and development activities are capitalized. Exploration and development costs include dry hole costs, geological and geophysical costs, direct overhead related to exploration and development activities, and other costs incurred for the purpose of finding oil and gas reserves. Salaries and benefits paid to employees directly involved in the acquisition, exploration, and development of properties, as well as other internal costs that can be directly identified with acquisition, exploration and development activities, are also capitalized. Under the full cost method of accounting, no gain or loss is recognized upon the disposition of oil and gas properties unless such disposition would significantly alter the relationship between capitalized costs and proved reserves. Expenditures for maintenance and repairs are charged to production expense in the period incurred. +Under the full cost method of accounting, we are required to perform quarterly ceiling test calculations to test our oil and gas properties for possible impairment. If the net capitalized cost of our oil and gas properties, as adjusted for income taxes, exceeds the ceiling limitation, the excess is charged to expense. The ceiling limitation is equal to the sum of: (i) the present value discounted at 10% of estimated future net revenues from proved reserves, (ii) the cost of properties not being amortized, and (iii) the lower of cost or estimated fair value of unproven properties included in the costs being amortized, as adjusted for income taxes. We currently do not have any unproven properties that are being amortized. Estimated future net revenues are determined based on trailing twelve-month average commodity prices and estimated proved reserve quantities, operating costs, and capital expenditures. +At December 31, 2017 , the carrying value of our oil and gas properties subject to the test did not exceed the calculated value of the ceiling limitation and, therefore, we did not recognize an impairment. However, a decline of approximately 19% or more in the value of the ceiling limitation would have resulted in an impairment. For the years ended December 31, 2016 and 2015 , full year impairments totaled $757.7 million ( $481.4 million , net of tax) and $4.03 billion ( $2.56 billion , net of tax), respectively. These impairments resulted primarily from the impact of decreases in the trailing twelve-month average prices for oil, gas, and NGLs utilized in determining the future net revenues from proved reserves. The quarterly ceiling test is primarily impacted by commodity prices, changes in estimated reserve quantities, reserves produced, overall exploration and development costs, depletion expense, and deferred taxes. If pricing conditions decline, or if there is a negative impact on one or more of the other components of the calculation, we may incur full cost ceiling test impairments in future quarters. The calculated ceiling limitation is not intended to be indicative of the fair market value of our proved reserves or future results. Impairment charges do not affect cash flow from operating activities, but do adversely affect our net income and various components of our balance sheet. Any impairment of oil and gas properties is not reversible at a later date. +Depletion of proved oil and gas properties is computed on the units-of-production method, whereby capitalized costs, including future development costs and asset retirement costs, are amortized over total estimated proved reserves. Changes in our estimate of proved reserve quantities, commodity prices, and impairment of oil and gas properties will cause corresponding changes in depletion expense in periods subsequent to these changes. +The capitalized costs of unproved properties, including those in wells in progress, are excluded from the costs being amortized. We do not have major development projects that are excluded from costs being amortized. On a quarterly basis, we evaluate excluded costs for inclusion in the costs to be amortized. Significant unproved properties are evaluated individually. Unproved properties that are not considered individually significant are aggregated for evaluation purposes and related costs are transferred to the costs to be amortized quarterly based on the application of historical factors. +Fixed Assets +Fixed assets consist primarily of gathering and plant facilities, vehicles, airplanes, office furniture, and computer equipment and software. These items are recorded at cost and are depreciated on the straight-line method based on expected lives of the individual assets, which range from 3 to 30 years . +Goodwill +Goodwill represents the excess of the purchase price of business combinations over the fair value of the net assets acquired and is tested for impairment at least annually. In performing the goodwill test, we compare the fair value of our reporting unit with its carrying amount. If the carrying amount of the reporting unit were to exceed its fair value, an impairment charge would be recognized in the amount of this excess, limited to the total amount of goodwill allocated to that reporting unit. +64 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +We evaluate our goodwill for impairment in the fourth quarter of each year and whenever events or changes in circumstances indicate the possibility that goodwill may be impaired. We have historically tested goodwill for impairment as of December 31 each year; however, in 2017 we elected to change the date of our annual goodwill impairment test to October 31. We do not believe a change in the goodwill impairment testing date represents a material change to a method of applying an accounting principle because the change in impairment testing date does not have a material effect on our financial statements in light of the internal controls and requirements to assess goodwill impairment upon certain triggering events. Based upon our assessment as of October 31, 2017, goodwill was not impaired. It is possible that goodwill could become impaired in the future if commodity prices or other economic factors become unfavorable. +Revenue Recognition +Oil, Gas, and NGL Sales +Revenue is recognized from the sales of oil, gas, and NGLs when the product is delivered at a fixed or determinable price, title has transferred, and collectability is reasonably assured. There is a ready market for our products and sales occur soon after production. +Gas Gathering +When we transport and/or process third-party gas associated with our equity gas, we recognize revenue for the fees charged to third-parties for such services. +Gas Marketing +When we market and sell gas for working interest owners we act as agent under short-term sales and supply agreements and earn a fee for such services. Revenues from such services are recognized as gas is delivered. +Gas Imbalances +We use the sales method of accounting for gas imbalances. Revenue from the sale of gas is recorded on the basis of gas actually sold by us. If our aggregate sales volumes for a well are greater (or less) than our proportionate share of production from the well, a liability (or receivable) is established to the extent there are insufficient proved reserves available to make-up the overproduced (or underproduced) imbalance. Imbalances have not been significant in the periods presented. +General and Administrative Expenses +General and administrative expenses are reported net of amounts reimbursed by working interest owners of the oil and gas properties operated by Cimarex and net of amounts capitalized pursuant to the full cost method of accounting. +Derivatives +Our derivative contracts are recorded on the balance sheet at fair value. Our firm sales contracts qualify for the normal purchase and normal sale exception. Contracts that qualify for this treatment do not require mark-to-market accounting treatment. See Note 4 for additional information regarding our derivative instruments. +Income Taxes +We record deferred tax assets and liabilities to account for the expected future tax consequences of events that have been recognized in the financial statements and tax returns. We classify all deferred tax assets and liabilities as non-current. We routinely assess the realizability of our deferred tax assets. We routinely assess the realizability of our deferred tax assets. Numerous judgments and assumptions are inherent in this assessment, including the determination of future taxable income, which is affected by factors such as future operating conditions (particularly as related to prevailing oil and gas prices) and changing tax laws. If we conclude that it is more likely than not that some or all of the deferred tax assets will not be realized, the tax asset is reduced by a valuation allowance. We regularly assess and, if required, establish accruals for tax contingencies that could result from assessments of additional tax by taxing jurisdictions where the company operates. See Note 9 for additional information regarding +65 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +our income taxes, including the impact of H.R.1, commonly referred to as the Tax Cuts and Jobs Act, which the U.S. enacted on December 22, 2017. +Contingencies +A provision for contingencies is charged to expense when the loss is probable and the cost can be reasonably estimated. Determining when expenses should be recorded for these contingencies and the appropriate amounts for accrual is a complex estimation process that includes subjective judgment. In many cases, this judgment is based on interpretation of laws and regulations, which can be interpreted differently by regulators and/or courts of law. We closely monitor known and potential legal, environmental, and other contingencies and determine when we should record losses for these items based on information available to us. See Note 10 for additional information regarding our contingencies. +Asset Retirement Obligations +We recognize the present value of the fair value of liabilities for retirement obligations associated with tangible long-lived assets in the period in which there is a legal obligation associated with the retirement of such assets and the amount can be reasonably estimated. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. This liability includes costs related to the abandonment of wells, the removal of facilities and equipment, and site restorations. In periods subsequent to the initial measurement of an asset retirement obligation at present value, a period-to-period increase in the carrying amount of the liability is recognized as accretion expense, which represents the effect of the passage of time on the amount of the liability. An equivalent amount is added to the carrying amount of the liability. If the fair value of a recorded asset retirement obligation changes, a revision is recorded to both the asset retirement obligation and the asset retirement capitalized cost. Capitalized costs are included as a component of the DD&A calculations. The current portion of our asset retirement obligations is recorded in “Accrued liabilities — Other” in the accompanying consolidated balance sheets and cash payments for settlements of retirement obligations are classified as cash used in operating activities in the accompanying consolidated statements of cash flows. See Note 8 for additional information regarding our asset retirement obligations. +Stock-based Compensation +We recognize compensation cost related to all stock-based awards in the financial statements based on their estimated grant date fair value. We grant various types of stock-based awards including stock options, restricted stock (including awards with service-based vesting and market condition-based vesting provisions), and restricted stock units. The fair value of stock option awards is determined using the Black-Scholes option pricing model. Service-based restricted stock and units are valued using the market price of our common stock on the grant date. The fair value of the market condition-based restricted stock is based on the grant date market value of the award utilizing a statistical analysis. Compensation cost is recognized ratably over the applicable vesting period. To the extent compensation cost relates to employees directly involved in oil and gas acquisition, exploration, and development activities, such amounts are capitalized to oil and gas properties. Amounts not capitalized to oil and gas properties are recognized as stock compensation expense. See Note 6 for additional information regarding our stock-based compensation. +Earnings (Loss) per Share +We calculate earnings (loss) per share recognizing that unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents are “participating securities” and, therefore, should be included in computing earnings per share using the two-class earnings allocation method. The two-class method is an earnings allocation formula that determines earnings per share for each class of common stock and participating security according to dividends declared (or accumulated) and participation rights in undistributed earnings. Our unvested share-based payment awards, consisting of restricted stock and units, qualify as participating securities. See Note 7 for additional information regarding our earnings per share. +66 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +Recently Issued Accounting Standards +In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606) , which is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. The new revenue standard provides a five-step analysis of transactions to determine when and how revenue is recognized. The core principle of the guidance is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance in this update supersedes the revenue recognition requirements in Topic 605, Revenue Recognition , and most industry-specific guidance throughout the Industry Topics of the Codification. Entities can choose to adopt the standard using either the full retrospective approach or a modified retrospective approach. We will adopt the standard effective January 1, 2018, utilizing the modified retrospective approach, which will be applied to contracts that were not completed as of January 1, 2018. The new standard will not have an impact on net income (loss) or cash flows from operations; however, certain costs previously classified as Transportation, processing, and other operating expenses in the statement of operations will be reflected as deductions from revenue under the new standard. Had Topic 606 been in effect for the fourth quarter of 2017, Revenue and Transportation, processing and other operating expenses for the quarter would have each been reduced by an estimated range of $15.0 million to $16.0 million . +In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) . The key provision of this ASU is that a lessee must recognize (i) liabilities to make lease payments and (ii) right-of-use assets on its balance sheet. The ASU permits lessees to make a policy election to not recognize lease assets and liabilities for leases with terms of less than twelve months. Under current GAAP, a determination of whether a lease is a capital or operating lease is made at lease inception and no assets or liabilities are recognized for operating leases. Under this ASU, the determination to be made at the inception of a contract is whether the contract is, or contains, a lease. Leases convey the right to control the use of an identified asset in exchange for consideration. Only the lease components of a contract must be accounted for in accordance with this ASU. Non-lease components, such as activities that transfer a good or service to the customer, shall be accounted for under other applicable Topics. An entity may make a policy election to not separate lease and non-lease components and account for the non-lease components together with the lease components as a single lease component. This ASU retains a distinction between finance and operating leases concerning the recognition and presentation of the expense and payments related to leases in the statements of operations and comprehensive income and cash flows, however, both types of leases require the recognition of assets and liabilities on the balance sheet. This ASU is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years, with early adoption permitted. We are in the process of evaluating the potential impact of adopting this guidance, but believe the primary effect will be to record assets and liabilities for contracts currently accounted for as operating leases. We do not intend to adopt the standard early. +In January 2018, the FASB issued ASU 2018-01, Leases (Topic 842) Land Easement Practical Expedient for Transition to Topic 842 . This ASU provides an optional transition practical expedient to not evaluate under Topic 842 (discussed above) existing or expired land easements that were not previously accounted for as leases under the current leases guidance in Topic 840. An entity that elects this practical expedient should evaluate new or modified land easements under Topic 842 beginning at the date that the entity adopts Topic 842. Under the full cost method of accounting, we capitalize to oil and gas properties all property acquisition, exploration, and development costs, which include the costs of land easements. We plan to elect this practical expedient and continue to apply our current accounting policy to account for land easements that existed before our adoption of Topic 842 and will evaluate new or modified land easements under Topic 842 upon our adoption of Topic 842. We are in the process of evaluating the potential impact of adopting this guidance, and do not intend to adopt the standard early. +67 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +2. CAPITAL STOCK +Authorized capital stock consists of 200 million shares of common stock and 15 million shares of preferred stock. At December 31, 2017 , there were 95.4 million shares of common stock and no shares of preferred stock outstanding. See our Consolidated Statements of Stockholders’ Equity for detailed capital stock activity. +In May 2015, we completed an underwritten public offering of 6.9 million shares of common stock, which included 0.9 million shares of common stock issued pursuant to an overallotment option to purchase additional shares granted to the underwriters. The stock was sold to the public at $109.00 per share, with a par value of $0.01 , and we received net proceeds of $729.5 million from the sale, after deducting underwriting fees. +Dividends +A cash dividend has been paid to stockholders in every quarter since the first quarter of 2006. A quarterly dividend of $0.08 per share was declared in each quarter of 2017 and 2016 and a quarterly dividend of $0.16 per share was declared in each quarter of 2015. We typically declare dividends in one quarter and pay them in the next quarter. Dividends declared are recorded as a reduction of retained earnings to the extent retained earnings are available at the close of the period prior to the date of the declared dividend. Dividends in excess of retained earnings are recorded as a reduction of additional paid-in capital. Future dividend payments will depend on our level of earnings, financial requirements, and other factors considered relevant by our Board of Directors. +3. LONG-TERM DEBT +Long-term debt at December 31, 2017 and 2016 consisted of the following: +December 31, 2017 +December 31, 2016 +(in thousands) +Principal +Unamortized Debt +Issuance Costs and Discount (1) +Long-term +Debt, net +Principal +Unamortized Debt +Issuance Costs +Long-term +Debt, net +5.875% Senior Notes +$ +— +$ +— +$ +— +$ +750,000 +$ +(5,691 +) +$ +744,309 +4.375% Senior Notes +750,000 +(5,383 +) +744,617 +750,000 +(6,370 +) +743,630 +3.90% Senior Notes +750,000 +(7,697 +) +742,303 +— +— +— +Total long-term debt +$ +1,500,000 +$ +(13,080 +) +$ +1,486,920 +$ +1,500,000 +$ +(12,061 +) +$ +1,487,939 +________________________________________ +(1) +At December 31, 2017 , the unamortized debt issuance costs and discount related to the 3.90% notes were $5.9 million and $1.8 million , respectively. The 4.375% notes were issued at par. +Bank Debt +In October 2015, we entered into a new senior unsecured revolving credit facility (“Credit Facility”) which matures October 16, 2020. The Credit Facility has aggregate commitments of $1.0 billion , with an option to increase aggregate commitments to $1.25 billion at any time. There is no borrowing base subject to the discretion of the lenders based on the value of our proved reserves under the Credit Facility. As of December 31, 2017 , we had no bank borrowings outstanding under the Credit Facility, but did have letters of credit of $2.5 million outstanding, leaving an unused borrowing availability of $997.5 million . +At our option, borrowings under the Credit Facility may bear interest at either (a) LIBOR plus 1.125 - 2.0% based on the credit rating for our senior unsecured long-term debt, or (b) a base rate (as defined in the credit agreement) plus 0.125 - 1.0% , based on the credit rating for our senior unsecured long-term debt. Unused borrowings are subject to a commitment fee of 0.125 - 0.35% , based on the credit rating for our senior unsecured long-term debt. +The Credit Facility contains representations, warranties, covenants, and events of default that are customary for investment grade, senior unsecured bank credit agreements, including a financial covenant for the maintenance of a defined total debt-to-capital ratio of no greater than 65% . As of December 31, 2017 , we were in compliance with all of the financial covenants. +68 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +At December 31, 2017 and 2016 , we had $3.4 million and $4.5 million , respectively, of unamortized debt issuance costs associated with our Credit Facility which were recorded as deferred assets and included in Other assets, net in our balance sheets. The costs are being amortized to interest expense ratably over the life of the Credit Facility. +Senior Notes +On April 10, 2017, we completed a cash tender offer to purchase any of our 5.875% notes for cash consideration of $1,031.67 per $1,000 principal amount of notes, plus any accrued and unpaid interest up to, but not including, the settlement date, with $253.5 million aggregate principal amount of the notes validly tendered. We settled these tendered notes for $268.1 million , including accrued interest. On May 12, 2017, we completed a redemption of the 5.875% notes remaining outstanding for $1,029.38 per $1,000 principal amount of notes, plus any accrued and unpaid interest up to, but not including, the redemption date, settling the notes for $512.0 million , including accrued interest. We recognized a loss on early extinguishment of debt related to these transactions of $28.2 million , composed primarily of tender and redemption premiums of $22.6 million and the write-off of $5.3 million of unamortized debt issuance costs. The original maturity date of the 5.875% notes was May 1, 2022 . +On April 10, 2017, we issued $750 million aggregate principal amount of 3.90% senior unsecured notes due May 15, 2027 at 99.748% of par to yield 3.93% per annum. We received $741.8 million in net cash proceeds, after deducting underwriters’ fees, discount, and debt issuance costs. The notes bear an annual interest rate of 3.90% and interest is payable semiannually on May 15 and November 15, with the first payment occurring November 15, 2017. Along with cash on hand, we used the proceeds to fund the settlement of the tendered and redeemed 5.875% notes. +In June 2014, we issued $750 million aggregate principal amount of 4.375% senior unsecured notes at par. These notes are due June 1, 2024 and interest is payable semiannually on June 1 and December 1. +Each of our senior unsecured notes is governed by an indenture containing certain covenants, events of default, and other restrictive provisions with which we were in compliance as of December 31, 2017 . The effective interest rate on the 4.375% notes and the 3.90% notes, including the amortization of debt issuance costs and discount, as applicable, is 4.50% and 4.01% , respectively. +4. DERIVATIVE INSTRUMENTS +We periodically use derivative instruments to mitigate volatility in commodity prices. While the use of these instruments limits the downside risk of adverse price changes, their use may also limit future cash flow from favorable price changes. Depending on changes in oil and gas futures markets and management’s view of underlying supply and demand trends, we may increase or decrease our derivative positions from current levels. +As of December 31, 2017 , we have entered into oil and gas collars and oil basis swaps. Under our collars, we receive the difference between the published index price and a floor price if the index price is below the floor price or we pay the difference between the ceiling price and the index price if the index price is above the ceiling price. No amounts are paid or received if the index price is between the floor and the ceiling prices. By using a collar, we have fixed the minimum and maximum prices we can receive on the underlying production. Our basis swaps are settled based on the difference between a published index price minus a fixed differential and the applicable local index price under which the underlying production is sold. By using a basis swap, we have fixed the differential between the published index price and certain of our physical pricing points. For our Permian oil production, the basis swaps fix the price differential between the WTI NYMEX (Cushing Oklahoma) price and the WTI Midland price. For our Permian and Mid-Continent gas production, the contract prices in our collars are consistent with the index prices used to sell our production. The following tables summarize our outstanding derivative contracts as of December 31, 2017 : +69 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +Oil Collars: +First +Quarter +Second +Quarter +Third +Quarter +Fourth +Quarter +Total +2018: +WTI (1) +Volume (Bbls) +2,610,000 +2,093,000 +1,748,000 +1,196,000 +7,647,000 +Weighted Avg Price - Floor +$ +47.28 +$ +47.26 +$ +46.68 +$ +48.00 +$ +47.25 +Weighted Avg Price - Ceiling +$ +56.33 +$ +55.61 +$ +54.90 +$ +55.10 +$ +55.62 +2019: +WTI (1) +Volume (Bbls) +630,000 +637,000 +— +— +1,267,000 +Weighted Avg Price - Floor +$ +48.00 +$ +48.00 +$ +— +$ +— +$ +48.00 +Weighted Avg Price - Ceiling +$ +56.09 +$ +56.09 +$ +— +$ +— +$ +56.09 +________________________________________ +(1) +The index price for these collars is West Texas Intermediate (“WTI”) as quoted on the New York Mercantile Exchange (“NYMEX”). +Gas Collars: +First +Quarter +Second +Quarter +Third +Quarter +Fourth +Quarter +Total +2018: +PEPL (1) +Volume (MMBtu) +11,700,000 +9,100,000 +6,440,000 +3,680,000 +30,920,000 +Weighted Avg Price - Floor +$ +2.57 +$ +2.47 +$ +2.43 +$ +2.43 +$ +2.49 +Weighted Avg Price - Ceiling +$ +2.93 +$ +2.81 +$ +2.67 +$ +2.66 +$ +2.81 +Perm EP (2) +Volume (MMBtu) +8,100,000 +6,370,000 +4,600,000 +2,760,000 +21,830,000 +Weighted Avg Price - Floor +$ +2.52 +$ +2.39 +$ +2.34 +$ +2.33 +$ +2.42 +Weighted Avg Price - Ceiling +$ +2.84 +$ +2.67 +$ +2.53 +$ +2.52 +$ +2.68 +2019: +PEPL (1) +Volume (MMBtu) +2,700,000 +2,730,000 +— +— +5,430,000 +Weighted Avg Price - Floor +$ +2.40 +$ +2.40 +$ +— +$ +— +$ +2.40 +Weighted Avg Price - Ceiling +$ +2.67 +$ +2.67 +$ +— +$ +— +$ +2.67 +Perm EP (2) +Volume (MMBtu) +1,800,000 +1,820,000 +— +— +3,620,000 +Weighted Avg Price - Floor +$ +2.30 +$ +2.30 +$ +— +$ +— +$ +2.30 +Weighted Avg Price - Ceiling +$ +2.49 +$ +2.49 +$ +— +$ +— +$ +2.49 +________________________________________ +(1) +The index price for these collars is Panhandle Eastern Pipe Line, Tex/OK Mid-Continent Index (“PEPL”) as quoted in Platt’s Inside FERC. +(2) +The index price for these collars is El Paso Natural Gas Company, Permian Basin Index (“Perm EP”) as quoted in Platt’s Inside FERC. +70 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +Oil Basis Swaps: +First +Quarter +Second +Quarter +Third +Quarter +Fourth +Quarter +Total +2018: +WTI Midland (1) +Volume (Bbls) +1,170,000 +1,183,000 +1,196,000 +736,000 +4,285,000 +Weighted Avg Differential (2) +$ +(0.72 +) +$ +(0.72 +) +$ +(0.72 +) +$ +(0.58 +) +$ +(0.69 +) +2019: +WTI Midland (1) +Volume (Bbls) +450,000 +455,000 +— +— +905,000 +Weighted Avg Differential (2) +$ +(0.47 +) +$ +(0.47 +) +$ +— +$ +— +$ +(0.47 +) +________________________________________ +(1) +The index price we pay under these basis swaps is WTI Midland as quoted by Argus Americas Crude. +(2) +The index price we receive under these basis swaps is WTI as quoted on the NYMEX less the weighted average differential shown in the table. +The following tables summarize our derivative contracts entered into subsequent to December 31, 2017 through February 22, 2018: +Oil Collars: +First +Quarter +Second +Quarter +Third +Quarter +Fourth +Quarter +Total +2018: +WTI (1) +Volume (Bbls) +— +546,000 +552,000 +552,000 +1,650,000 +Weighted Avg Price - Floor +$ +— +$ +50.00 +$ +50.00 +$ +50.00 +$ +50.00 +Weighted Avg Price - Ceiling +$ +— +$ +66.82 +$ +66.82 +$ +66.82 +$ +66.82 +2019: +WTI (1) +Volume (Bbls) +540,000 +546,000 +552,000 +— +1,638,000 +Weighted Avg Price - Floor +$ +50.00 +$ +50.00 +$ +50.00 +$ +— +$ +50.00 +Weighted Avg Price - Ceiling +$ +66.82 +$ +66.82 +$ +66.82 +$ +— +$ +66.82 +________________________________________ +(1) +The index price for these collars is WTI as quoted on the NYMEX. +71 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +Gas Collars: +First +Quarter +Second +Quarter +Third +Quarter +Fourth +Quarter +Total +2018: +PEPL (1) +Volume (MMBtu) +— +1,820,000 +1,840,000 +1,840,000 +5,500,000 +Weighted Avg Price - Floor +$ +— +$ +1.98 +$ +1.98 +$ +1.98 +$ +1.98 +Weighted Avg Price - Ceiling +$ +— +$ +2.16 +$ +2.16 +$ +2.16 +$ +2.16 +Perm EP (2) +Volume (MMBtu) +— +1,820,000 +1,840,000 +1,840,000 +5,500,000 +Weighted Avg Price - Floor +$ +— +$ +1.65 +$ +1.65 +$ +1.65 +$ +1.65 +Weighted Avg Price - Ceiling +$ +— +$ +1.80 +$ +1.80 +$ +1.80 +$ +1.80 +2019: +PEPL (1) +Volume (MMBtu) +1,800,000 +1,820,000 +1,840,000 +— +5,460,000 +Weighted Avg Price - Floor +$ +1.98 +$ +1.98 +$ +1.98 +$ +— +$ +1.98 +Weighted Avg Price - Ceiling +$ +2.16 +$ +2.16 +$ +2.16 +$ +— +$ +2.16 +Perm EP (2) +Volume (MMBtu) +1,800,000 +1,820,000 +1,840,000 +— +5,460,000 +Weighted Avg Price - Floor +$ +1.65 +$ +1.65 +$ +1.65 +$ +— +$ +1.65 +Weighted Avg Price - Ceiling +$ +1.80 +$ +1.80 +$ +1.80 +$ +— +$ +1.80 +________________________________________ +(1) +The index price for these collars is PEPL as quoted in Platt’s Inside FERC. +(2) +The index price for these collars is Perm EP as quoted in Platt’s Inside FERC. +Oil Basis Swaps: +First +Quarter +Second +Quarter +Third +Quarter +Fourth +Quarter +Total +2018: +WTI Midland (1) +Volume (Bbls) +— +91,000 +92,000 +92,000 +275,000 +Weighted Avg Differential (2) +$ +— +$ +(0.70 +) +$ +(0.70 +) +$ +(0.70 +) +$ +(0.70 +) +2019: +WTI Midland (1) +Volume (Bbls) +90,000 +91,000 +92,000 +— +273,000 +Weighted Avg Differential (2) +$ +(0.70 +) +$ +(0.70 +) +$ +(0.70 +) +$ +— +$ +(0.70 +) +________________________________________ +(1) +The index price we pay under these basis swaps is WTI Midland as quoted by Argus Americas Crude. +(2) +The index price we receive under these basis swaps is WTI as quoted on the NYMEX less the weighted average differential shown in the table. +Derivative Gains and Losses +Net gains and losses on our derivative instruments are a function of fluctuations in the underlying commodity index prices as compared to the contracted prices and the monthly cash settlements (if any) of the instruments. We have elected not to designate our derivatives as hedging instruments for accounting purposes and, therefore, we do not apply hedge accounting treatment to our derivative instruments. Consequently, changes in the fair value of our derivative instruments and cash settlements on the instruments are included as a component of operating costs and expenses as either a net gain or loss on derivative instruments. Cash settlements of our contracts are included in cash flows from operating activities in our statements of cash flows. The following table presents the components of (Gain) loss on derivative instruments, net for the periods indicated. +72 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +Years Ended December 31, +(in thousands) +2017 +2016 +2015 +Change in fair value of derivative instruments, net: +Gas contracts +$ +(40,226 +) +$ +27,462 +$ +(4,472 +) +Oil contracts +17,383 +35,724 +(6,774 +) +(22,843 +) +63,186 +(11,246 +) +Cash (receipts) payments on derivative instruments, net: +Gas contracts +(4,557 +) +(6,467 +) +— +Oil contracts +6,190 +(970 +) +— +1,633 +(7,437 +) +— +(Gain) loss on derivative instruments, net +$ +(21,210 +) +$ +55,749 +$ +(11,246 +) +Derivative Fair Value +Our derivative contracts are carried at their fair value on our balance sheet using Level 2 inputs and are subject to enforceable master netting arrangements, which allow us to offset recognized asset and liability fair value amounts on contracts with the same counterparty. Our accounting policy is to not offset asset and liability positions in our balance sheets. +The following tables present the amounts and classifications of our derivative assets and liabilities as of December 31, 2017 and 2016 , as well as the potential effect of netting arrangements on our recognized derivative asset and liability amounts. +December 31, 2017 +(in thousands) +Balance Sheet Location +Asset +Liability +Gas contracts +Current assets — Derivative instruments +$ +15,151 +$ +— +Gas contracts +Non-current assets — Derivative instruments +2,086 +— +Oil contracts +Current liabilities — Derivative instruments +— +42,066 +Oil contracts +Non-current liabilities — Derivative instruments +— +4,268 +Total gross amounts presented in the balance sheet +17,237 +46,334 +Less: gross amounts not offset in the balance sheet +(17,237 +) +(17,237 +) +Net amount +$ +— +$ +29,097 +December 31, 2016 +(in thousands) +Balance Sheet Location +Asset +Liability +Oil contracts +Current liabilities — Derivative instruments +$ +— +$ +27,892 +Gas contracts +Current liabilities — Derivative instruments +— +21,478 +Oil contracts +Non-current liabilities — Derivative instruments +— +1,059 +Gas contracts +Non-current liabilities — Derivative instruments +— +1,511 +Total gross amounts presented in the balance sheet +— +51,940 +Less: gross amounts not offset in the balance sheet +— +— +Net amount +$ +— +$ +51,940 +We are exposed to financial risks associated with our derivative contracts from non-performance by our counterparties. We mitigate our exposure to any single counterparty by contracting with a number of financial institutions, each of which have a high credit rating and is a member of our bank credit facility. Our member banks do not require us to post collateral for our derivative liability positions. Because some of the member banks have discontinued derivative activities, in the future we may enter into derivative instruments with counterparties outside our bank group to obtain competitive terms and to spread counterparty risk. +73 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +5. FAIR VALUE MEASUREMENTS +Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The FASB has established a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. This hierarchy consists of three broad levels. Level 1 inputs are the highest priority and consist of unadjusted quoted prices in active markets for identical assets and liabilities. Level 2 are inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. Level 3 are unobservable inputs for an asset or liability. +The following table provides fair value measurement information for certain assets and liabilities as of December 31, 2017 and 2016 . +December 31, 2017 +December 31, 2016 +(in thousands) +Book Value +Fair Value +Book Value +Fair Value +Financial Assets (Liabilities): +5.875% Notes due 2022 +$ +— +$ +— +$ +(750,000 +) +$ +(782,835 +) +4.375% Notes due 2024 +$ +(750,000 +) +$ +(797,010 +) +$ +(750,000 +) +$ +(779,453 +) +3.90% Notes due 2027 +$ +(750,000 +) +$ +(767,813 +) +$ +— +$ +— +Derivative instruments — assets +$ +17,237 +$ +17,237 +$ +— +$ +— +Derivative instruments — liabilities +$ +(46,334 +) +$ +(46,334 +) +$ +(51,940 +) +$ +(51,940 +) +Assessing the significance of a particular input to the fair value measurement requires judgment, including the consideration of factors specific to the asset or liability. The fair value (Level 1) of our fixed rate notes was based on their last traded value before period end. The fair value of our derivative instruments (Level 2) was estimated using option pricing models. These models use certain variables including forward price and volatility curves and the strike prices for the instruments. The fair value estimates are adjusted relative to non-performance risk as appropriate. See Note 4 for further information on the fair value of our derivative instruments. +Other Financial Instruments +The carrying amounts of our cash, cash equivalents, accounts receivable, accounts payable, and accrued liabilities approximate fair value because of the short-term maturities and/or liquid nature of these assets and liabilities. Included in “Accrued liabilities — other” at December 31, 2017 are: (i) accrued operating expenses of approximately $61.3 million and (ii) accrued general and administrative, primarily payroll-related, costs of approximately $54.6 million . Included in “Accrued liabilities — other” at December 31, 2016 are: (i) accrued operating expenses of approximately $53.9 million and (ii) accrued general and administrative, primarily payroll-related, costs of approximately $43.5 million . +Most of our accounts receivable balances are uncollateralized and result from transactions with other companies in the oil and gas industry. Concentration of customers may impact our overall credit risk because our customers may be similarly affected by changes in economic or other conditions within the industry. +We conduct credit analyses prior to making any sales to new customers or increasing credit for existing customers and may require parent company guarantees, letters of credit, or prepayments when deemed necessary. +We routinely assess the recoverability of all material accounts receivable to determine their collectability. We accrue a reserve to the allowance for doubtful accounts when it is probable that a receivable will not be collected and the amount of the reserve may be reasonably estimated. At December 31, 2017 and 2016 , the allowance for doubtful accounts totaled $2.2 million and $1.6 million , respectively. +74 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +Major Customers +In 2017 , our major customers were Energy Transfer Partners, L.P. (“Energy Transfer Partners”) and Plains All American Pipeline, L.P. (“Plains All American”), which accounted for 21% and 13% , respectively, of our consolidated revenues that year. In 2017, the revenue totals for Energy Transfer Partners include revenue from Sunoco Logistics Partners L.P. (“Sunoco”) since the two entities merged in 2017. Sunoco was our major customer in 2016 , accounting for 20% of our consolidated revenues that year. In 2015 , our major customers were Sunoco and Enterprise Products Partners L.P., which accounted for 21% and 17% , respectively, of our consolidated revenues that year. +If any one of our major customers was to stop purchasing our production, we believe there are a number of other purchasers to whom we could sell our production with some delay. If multiple significant customers were to discontinue purchasing our production, we believe there would be challenges initially, but ample markets to handle the disruption. +6. STOCK-BASED AND OTHER COMPENSATION +Equity Incentive Plan +Our 2014 Equity Incentive Plan (the “2014 Plan”) was approved by stockholders in May 2014 and our previous plan was terminated at that time. Outstanding awards under the previous plan were not impacted. A total of 6.6 million shares of common stock may be issued under the 2014 Plan, including shares available from the previous plan. The 2014 Plan provides for grants of stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, performance units, dividend equivalents, and other stock-based awards. +Stock-based Compensation Cost +We have recognized non-cash stock-based compensation cost as shown below. Historical amounts may not be representative of future amounts as the value of future awards may vary from historical amounts. +Years Ended December 31, +(in thousands) +2017 +2016 +2015 +Restricted stock awards: +Performance stock awards +$ +26,020 +$ +24,183 +$ +18,991 +Service-based stock awards +19,746 +18,391 +14,547 +45,766 +42,574 +33,538 +Stock option awards +2,599 +2,565 +2,803 +Total stock compensation cost +48,365 +45,139 +36,341 +Less amounts capitalized to oil and gas properties +(22,109 +) +(20,616 +) +(16,782 +) +Stock compensation expense +$ +26,256 +$ +24,523 +$ +19,559 +Periodic stock compensation expense will fluctuate based on the grant date fair value of awards, the number of awards, the requisite service period of the awards, employee forfeitures, and the timing of the awards. The increase in total stock compensation cost in 2017 as compared to 2016 is primarily due to awards granted either during or subsequent to 2016 . These increases were partially offset by awards vesting prior to or during 2017 . +We adopted Accounting Standards Update 2016-09, Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”) on January 1, 2017. ASU 2016-09 simplifies the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, accounting for forfeitures, and classification on the statement of cash flows. Pursuant to ASU 2016-09, we made an accounting policy election to account for forfeitures in compensation cost when they occur, rather than including an estimate of the number of awards that are expected to vest in our compensation cost. The amendments within ASU 2016-09 related to the timing of when excess tax benefits and tax benefits on dividends on nonvested equity shares are recognized and accounting for forfeitures were adopted using a modified retrospective method. In accordance with this method, we recorded a cumulative-effect adjustment that increased beginning deferred income tax assets by $33.1 million , reduced beginning accumulated deficit by $28.7 million , and increased beginning additional paid-in capital by $4.4 million . The +75 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +amendments within ASU 2016-09 related to the presentation in the statement of cash flows of excess tax benefits and cash outflows attributable to the payment of employee tax withholdings on the net settlement of equity-classified awards were adopted using a retrospective method. In accordance with this method, we adjusted the statement of cash flows for the year ended December 31, 2016 by increasing both net cash provided by operating activities and net cash used by financing activities by $26.6 million for the payment of employee tax withholdings on the net settlement of equity-classified awards. There were no cash flows related to excess tax benefits during the year ended December 31, 2016 . For the year ended December 31, 2015 , we adjusted the statement of cash flows for the payment of employee tax withholdings on the net settlement of equity-classified awards as well as for the classification of excess tax benefits by increasing net cash provided by operating activities and decreasing net cash provided by financing activities by $34.2 million . +Restricted Stock +The following table provides information about restricted stock awards granted during the last three years. +Years Ended December 31, +2017 +2016 +2015 +Number +of Shares +Weighted +Average +Grant Date +Fair Value +Number +of Shares +Weighted +Average +Grant Date +Fair Value +Number +of Shares +Weighted +Average +Grant Date +Fair Value +Performance stock awards +300,525 +$ +89.46 +269,915 +$ +117.63 +263,939 +$ +87.12 +Service-based stock awards +251,312 +$ +94.04 +208,724 +$ +114.61 +207,180 +$ +114.80 +Total restricted stock awards +551,837 +$ +91.55 +478,639 +$ +116.31 +471,119 +$ +99.29 +Performance stock awards were granted to eligible executives and are subject to service and market condition-based vesting determined by our stock price performance relative to a defined peer group’s stock price performance. After three years of continued service, an executive will be entitled to vest in 50% to 100% of the award. In accordance with Internal Revenue Code Section 162(m), certain of the amounts awarded may not be deductible for tax purposes. Service-based stock awards granted to other eligible employees and non-employee directors have vesting schedules ranging from one to five years . The majority of our service-based stock awards cliff vest five years from the grant date. +Compensation cost for the performance stock awards is based on the grant date fair value of the award utilizing a Monte Carlo simulation model. Compensation cost for the service-based stock awards is based upon the grant date market value of the award. Such costs are recognized ratably over the applicable vesting period. +The following table provides information on restricted stock activity during the year. +Service-based +Performance +(subject to market conditions) +Number of +Shares +Weighted +Average +Grant Date +Fair Value +Number of +Shares +Weighted +Average +Grant Date +Fair Value +Outstanding as of January 1, 2017 +934,723 +$ +96.57 +809,270 +$ +96.41 +Vested +(234,468 +) +$ +63.49 +(275,416 +) +$ +84.50 +Granted +251,312 +$ +94.04 +300,525 +$ +89.46 +Forfeited +(41,316 +) +$ +105.83 +— +$ +— +Outstanding as of December 31, 2017 +910,251 +$ +103.98 +834,379 +$ +97.83 +The total fair value of restricted stock that vested was $54.4 million in 2017 , $67.9 million in 2016 , and $52.2 million in 2015 . +Unrecognized compensation cost related to unvested restricted stock at December 31, 2017 was $105.6 million . We expect to recognize that cost over a weighted average period of 2.8 years . +76 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +Restricted Units +As of December 31, 2017 and 2016 , we had 8,838 restricted units outstanding. These represent restricted units held by a non-employee director who has elected to defer payment of common stock represented by the units until termination of his service on the Board of Directors. +Stock Options +Options outstanding as of December 31, 2017 expire seven to ten years from the grant date and have service-based vesting whereby the awards vest in increments of one-third on each of the first three anniversary dates of the grant. The exercise price for an option under the 2014 Plan is the closing price of our common stock as reported by the New York Stock Exchange (“NYSE”) on the date of grant. The previous plans provided that all grants have an exercise price of the average of the high and low prices of our common stock as reported by the NYSE on the date of grant. +Compensation cost related to stock options is based on the grant date fair value of the award and is recognized ratably over the applicable vesting period. We estimate the fair value using the Black-Scholes option-pricing model. Expected volatilities are based on the historical volatility of our common stock. We also use historical data to estimate the expected years until exercise. We use U.S. Treasury bond rates in effect at the grant date for our risk-free interest rates. +The following summarizes information regarding options granted, including the assumptions used to determine the fair value of those options. +Years Ended December 31, +2017 +2016 +2015 +Options granted +96,100 +89,850 +69,000 +Weighted average grant date fair value +$ +28.37 +$ +33.38 +$ +37.56 +Weighted average exercise price +$ +92.37 +$ +114.07 +$ +115.28 +Total fair value (in thousands) +$ +2,727 +$ +2,999 +$ +2,592 +Expected years until exercise +4.5 +4.0 +5.0 +Expected stock volatility +35.0 +% +36.7 +% +36.6 +% +Dividend yield +0.3 +% +0.3 +% +0.6 +% +Risk-free interest rate +1.7 +% +1.0 +% +1.6 +% +Information about outstanding stock options is summarized below. +Number of Options +Weighted +Average +Exercise +Price +Weighted +Average +Remaining +Term +Aggregate +Intrinsic +Value +(in thousands) +Outstanding as of January 1, 2017 +307,810 +$ +101.72 +Exercised +(5,768 +) +$ +68.33 +Granted +96,100 +$ +92.37 +Canceled +(1,665 +) +$ +139.02 +Forfeited +(13,789 +) +$ +88.92 +Outstanding as of December 31, 2017 +382,688 +$ +100.17 +4.4 years +$ +9,553 +Exercisable as of December 31, 2017 +209,782 +$ +98.55 +3.2 years +$ +6,020 +77 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +The following table provides information regarding options exercised and the grant date fair value of options vested. +Years Ended December 31, +(in thousands) +2017 +2016 +2015 +Cash received from option exercises +$ +394 +$ +4,804 +$ +8,451 +Tax benefit from option exercises included in paid-in-capital +$ +— +$ +— +$ +4,442 +Intrinsic value of options exercised +$ +257 +$ +2,994 +$ +7,467 +Grant date fair value of options vested +$ +2,227 +$ +2,486 +$ +2,734 +The following summary reflects the status of non-vested stock options as of December 31, 2017 and changes during the year. +Number of Options +Weighted +Average +Grant Date +Fair Value +Weighted +Average +Exercise +Price +Non-vested as of January 1, 2017 +148,361 +$ +35.58 +$ +117.55 +Vested +(57,766 +) +$ +38.55 +$ +128.59 +Granted +96,100 +$ +28.37 +$ +92.37 +Forfeited +(13,789 +) +$ +29.41 +$ +88.92 +Non-vested as of December 31, 2017 +172,906 +$ +31.08 +$ +102.15 +As of December 31, 2017 , there was $4.1 million of unrecognized compensation cost related to non-vested stock options. We expect to recognize that cost over a weighted average period of 1.9 years . +Other Compensation +We maintain and sponsor a contributory 401(k) plan for our employees. Employer contributions related to the plan were $10.4 million , $6.7 million , and $6.4 million for 2017 , 2016 , and 2015 , respectively. Included in the 2017 amount are accrued employer discretionary contributions. No such employer discretionary contributions occurred in 2016 and 2015. +78 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +7. EARNINGS (LOSS) PER SHARE +The calculations of basic and diluted net earnings (loss) per common share under the two-class method are presented below. +Years Ended December 31, +(in thousands, except per share data) +2017 +2016 +2015 +Basic: +Net income (loss) +$ +494,329 +$ +(408,803 +) +$ +(2,579,604 +) +Participating securities’ share in earnings (1) +(8,551 +) +— +— +Net income (loss) available to common stockholders +$ +485,778 +$ +(408,803 +) +$ +(2,579,604 +) +Diluted: +Net income (loss) +$ +494,329 +$ +(408,803 +) +$ +(2,579,604 +) +Participating securities’ share in earnings (1) +(8,548 +) +— +— +Net income (loss) available to common stockholders +$ +485,781 +$ +(408,803 +) +$ +(2,579,604 +) +Shares: +Basic shares outstanding +93,466 +93,379 +92,992 +Dilutive effect of stock options (2) +43 +— +— +Fully diluted common stock +93,509 +93,379 +92,992 +Earnings (loss) per share to common stockholders (3): +Basic +$ +5.19 +$ +(4.38 +) +$ +(27.75 +) +Diluted +$ +5.19 +$ +(4.38 +) +$ +(27.75 +) +________________________________________ +(1) +Participating securities are not included in undistributed earnings when a loss exists. +(2) +Inclusion of certain shares would have an anti-dilutive effect; therefore, 302.9 thousand , 2.1 million , and 2.1 million shares were excluded from the calculations for the years ended December 31, 2017 , 2016 , and 2015 , respectively. +(3) +Earnings (loss) per share are based on actual figures rather than the rounded figures presented. +8. ASSET RETIREMENT OBLIGATIONS +The following table reflects the components of the change in the carrying amount of the asset retirement obligation for the years ended December 31, 2017 and 2016 . +(in thousands) +2017 +2016 +Asset retirement obligation at January 1, +$ +154,523 +$ +164,105 +Liabilities incurred +17,996 +3,914 +Liability settlements and disposals +(12,947 +) +(24,108 +) +Accretion expense +7,534 +7,595 +Revisions of estimated liabilities +2,363 +3,017 +Asset retirement obligation at December 31, +169,469 +154,523 +Less current obligation +11,048 +13,753 +Long-term asset retirement obligation +$ +158,421 +$ +140,770 +Liabilities incurred in 2017 includes $10.5 million for the estimated liability to decommission two offshore properties in the Gulf of Mexico in which we were a prior lessee. In January 2018, the Bureau of Safety and Environmental Enforcement (“BSEE”) notified us and other prior lessees that the current lessee of the properties had filed a petition for relief under the bankruptcy code and, as a result, had defaulted on its obligation to decommission the properties. Consequently, BSEE ordered us and other prior lessees to decommission all wells, pipelines, platforms, and other facilities related to these properties. Our estimate of our liability may change as we refine our understanding of the extent of our obligations under the orders from BSEE and obtain additional information on decommissioning costs. +79 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +During 2017 and 2016 , the liability settlements and disposals included $0.5 million and $14.9 million , respectively, related to properties that were sold. +9. INCOME TAXES +The components of the provision for income taxes are as follows: +Years Ended December 31, +(in thousands) +2017 +2016 +2015 +Current taxes: +Federal (benefit) expense +$ +(2,810 +) +$ +— +$ +14,417 +State (benefit) expense +(2 +) +(1,115 +) +293 +(2,812 +) +(1,115 +) +14,710 +Deferred taxes: +Federal expense (benefit) +173,859 +(201,529 +) +(1,386,086 +) +State expense (benefit) +16,620 +(11,757 +) +(100,353 +) +190,479 +(213,286 +) +(1,486,439 +) +$ +187,667 +$ +(214,401 +) +$ +(1,471,729 +) +Federal income tax expense (benefit) for the years presented differs from the amounts that would be provided by applying the U.S. federal income tax rate, primarily due to the effect of state income taxes, non-deductible expenses, revisions, and changes in tax laws and tax rates enacted in the period. Reconciliations of the income tax expense (benefit) calculated at the federal statutory rate of 35% to the total income tax expense (benefit) are as follows: +Years Ended December 31, +(in thousands) +2017 +2016 +2015 +Provision at statutory rate +$ +238,699 +$ +(218,122 +) +$ +(1,417,967 +) +Effect of state taxes +10,074 +(10,237 +) +(64,794 +) +Revision of previous balances +— +7,181 +5,997 +Tax credits and other permanent differences +5,442 +5,296 +5,035 +Change in valuation allowance, net +486 +1,481 +— +Stock-based compensation +(5,888 +) +— +— +Impact of reduction in federal statutory rate +(61,146 +) +— +— +Income tax expense (benefit) +$ +187,667 +$ +(214,401 +) +$ +(1,471,729 +) +The company recorded a $33.1 million increase to the net operating loss deferred tax asset and corresponding increase to retained earnings in the first quarter of 2017 upon adoption of ASU 2016-09 for deductions taken for employee stock awards on the company’s tax returns in excess of amounts expensed through the company’s statement of operations. Pursuant to ASU 2016-09, excess tax benefits for employee share-based payments of $5.9 million were recognized in income tax expense in 2017 . +As a result of the enactment of H.R.1 on December 22, 2017 , the company remeasured the deferred tax assets and liabilities as of December 31, 2017 to reflect the reduction in the U.S. income tax rate from 35% to 21% for years after 2017 . As a result of this remeasurement, we recorded an income tax benefit of $61.1 million and a corresponding $61.1 million decrease in net deferred tax liabilities as of December 31, 2017 . We believe the accounting for the effects of H.R.1 recognized in the December 31, 2017 financial statements is materially complete. However, evolving analyses and interpretations of the law may cause a change to the amounts presented. Any such changes that may arise will be recognized in the period determined, but no later than December 31, 2018 . As a result of H.R.1, we expect our effective tax rate in future periods will be lower than in periods prior to enactment. In addition, the limitations on utilization of net operating losses and deductibility of interest and executive compensation may result in the payment of cash taxes earlier than expected. +80 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +The components of net deferred taxes are as follows: +December 31, +(in thousands) +2017 +2016 +Assets: +Stock compensation and other accrued amounts +$ +31,044 +$ +58,306 +Net operating loss carryforward, net of valuation allowance +313,738 +399,912 +Credit carryforward +3,995 +6,016 +348,777 +464,234 +Liabilities: +Property, plant and equipment +(450,395 +) +(408,399 +) +Net deferred tax (liabilities) assets +$ +(101,618 +) +$ +55,835 +At December 31, 2017 , we had a U.S. net tax operating loss carryforward of approximately $1,377.7 million , which would expire in years 2031 through 2037 . We believe that the carryforward will be utilized before it expires. We recorded a $3.5 million increase to the net operating loss carryforward at December 31, 2017 , for certain state losses and a corresponding increase in the state net operating loss valuation allowance of $4.0 million . The net decrease in the state net operating losses after reduction for the valuation allowance was $0.5 million . The total valuation allowance on state net operating losses at December 31, 2017 was $103.7 million because it is not more likely than not that these additional state net operating losses will be utilized before they expire. There are no other valuation allowances. We also had an alternative minimum tax credit carryforward of approximately $3.0 million and enhanced oil recovery and marginal well credits of $0.9 million . +At December 31, 2017 and 2016 , we had no unrecognized tax benefits that would impact our effective rate and we have made no provisions for interest or penalties related to uncertain tax positions. The tax years 2014 through 2016 remain open to examination by the Internal Revenue Service of the United States. We file tax returns with various state taxing authorities which remain open to examination for tax years 2013 through 2016 . We do not anticipate the need for any significant income tax payments in the near term. +10. COMMITMENTS AND CONTINGENCIES +Lease Commitments +We have various commitments for office space under operating lease arrangements. During the years ended December 31, 2017 , 2016 , and 2015 , rent expense for these operating leases approximated $13.1 million , $12.9 million , and $13.2 million , respectively. +Shown below are future minimum cash payments required under these leases as of December 31, 2017 . +(in thousands) +2018 +$ +9,742 +2019 +10,702 +2020 +10,836 +2021 +11,053 +2022 +11,222 +Later years +32,645 +Total future minimum lease payments +$ +86,200 +We have various commitments for compressor equipment under operating lease arrangements totaling $8.5 million with lease terms expiring in the next 2 - 24 months . +81 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +Other Commitments +At December 31, 2017 , we had estimated commitments of approximately: (i) $252.6 million to finish drilling, completing, or performing other work on wells and various other infrastructure projects in progress and (ii) $33.3 million to finish gathering system construction in progress. +At December 31, 2017 , we had firm sales contracts to deliver approximately 217.6 Bcf of gas over the next 7.1 years . If we do not deliver this gas, our estimated financial commitment, calculated using the January 2018 index price, would be approximately $476.7 million . The value of this commitment will fluctuate due to price volatility and actual volumes delivered. However, we believe no financial commitment will be due based on our current proved reserves and production levels from which we can fulfill these volumetric obligations. +In connection with gas gathering and processing agreements, we have volume commitments over the next 8.3 years . If we do not deliver the committed gas or NGLs, as the case may be, the estimated maximum amount that would be payable under these commitments, calculated as of December 31, 2017 , would be approximately $298.3 million . However, we believe no financial commitment will be due based on our current proved reserves and production levels from which we can fulfill these volumetric obligations. +We have minimum volume delivery commitments associated with agreements to reimburse connection costs to various pipelines. If we do not deliver this gas, the estimated maximum amount that would be payable under these commitments, calculated as of December 31, 2017 , would be approximately $11.4 million . However, we believe no financial commitment will be due based on our current proved reserves and production levels from which we can fulfill these volumetric obligations. +At December 31, 2017 , we have various firm transportation agreements for pipeline capacity with end dates ranging from 2018 - 2025 under which we will have to pay an estimated $36.5 million over the remaining terms of the agreements. These agreements were entered into to support our residue marketing efforts, and we believe we have sufficient reserves that will utilize this firm transportation. +All of the noted commitments were routine and made in the normal course of our business. +Litigation +In the normal course of business, we are involved with various litigation matters. When a loss contingency exists, we assess whether it is probable that an asset has been impaired or a liability has been incurred and, if so, we determine if the amount of loss can be reasonably estimated, all in accordance with guidance established by the FASB, and adjust our accruals accordingly. Though some of the related claims may be significant, the resolution of them, we believe, individually or in the aggregate, would not have a material adverse effect on our financial condition or results of operations after consideration of current accruals. +H.B. Krug, et al. v. Helmerich & Payne, Inc. +In 2008, we recorded litigation expense of $119.6 million for the H.B. Krug, et al. v. Helmerich & Payne, Inc. trial court verdict, and began accruing additional post-judgment interest and costs for this case. +On December 31, 2013, the Oklahoma Supreme Court reversed the trial court’s $119.6 million verdict and affirmed an alternative jury verdict for $3.65 million . The Supreme Court also remanded the case back to the trial court for consideration of potential prejudgment interest, attorney’s fees, and cost awards. Accordingly, on December 31, 2013 we reduced the previously recognized litigation expense, which included related interest and costs, and the associated long-term liability by $142.8 million . +On April 1, 2014, Cimarex paid the Plaintiffs $15.8 million in satisfaction of the $3.65 million damages award, the post-judgment interest award, and the payment in lieu of bond, all of which are now final and not appealable. On June 24, 2014, the trial court ruled the Plaintiffs were not entitled to prejudgment interest but were entitled to attorney’s fees and costs, the amount of which will be determined at a subsequent hearing. On November 3, 2015, the Oklahoma Supreme Court affirmed the trial court’s denial of prejudgment interest. The only remaining issue is the amount of Plaintiffs’ award of attorney’s fees, which is subject to future trial, and appellate court proceedings and, therefore, cannot be determined at this time. +82 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +11. RELATED PARTY TRANSACTIONS +Helmerich & Payne, Inc. (“H&P”) provides contract drilling services to Cimarex. Cimarex incurred drilling costs of approximately $52.6 million , $18.3 million , and $7.9 million related to these services during the years ended December 31, 2017 , 2016 , and 2015 , respectively. Hans Helmerich, a director of Cimarex, is Chairman of the Board of Directors of H&P. +12. SUPPLEMENTAL CASH FLOW INFORMATION +Years Ended December 31, +(in thousands) +2017 +2016 +2015 +Cash paid during the period for: +Interest expense (net of capitalized amounts of $23,113, $20,308, and $28,819, respectively) +$ +52,245 +$ +59,282 +$ +51,966 +Income taxes +$ +3 +$ +13 +$ +558 +Cash received for income tax refunds +$ +111 +$ +1,450 +$ +1,503 +83 +Table of Contents +CIMAREX ENERGY CO. +SUPPLEMENTAL INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED) +Oil and Gas Reserve Information— Proved reserve quantities are based on estimates prepared by Cimarex in accordance with guidelines established by the Securities and Exchange Commission (“SEC”). +Reserve definitions comply with definitions of Rule 4-10(a) (1)-(32) of Regulation S-X of the SEC. All of our reserve estimates are maintained by our internal Corporate Reservoir Engineering group, which is comprised of reservoir engineers and engineering technicians. The objectives and management of this group are separate from and independent of the exploration and production functions of our company. The technical employee primarily responsible for overseeing the reserve estimation process is our company’s Vice President of Corporate Engineering. This individual graduated from the Colorado School of Mines with a Bachelor of Science degree in Engineering and has more than 23 years of practical experience in reserve evaluation. He has been directly involved in the annual reserve reporting process of Cimarex since 2002 and has served in his current role for the past 13 years. +DeGolyer and MacNaughton, an independent petroleum engineering consulting firm, reviewed reserves associated with greater than 80% of the total future net revenue discounted at 10% attributable to the total interests owned by Cimarex as of December 31, 2017 . The individual primarily responsible for overseeing the review is a Senior Vice President with DeGolyer and MacNaughton and a Registered Professional Engineer in the State of Texas with over 33 years of experience in oil and gas reservoir studies and reserves evaluations. +Proved reserves are those quantities of oil, gas, and NGLs which, by analysis of geosciences and engineering data, can be estimated with reasonable certainty to be economically producible—from a given date forward, from known reservoirs, and under existing economic conditions, operating methods, and government regulations—prior to the time at which contracts providing the right to operate expire, unless evidence indicates that renewal is reasonably certain, regardless of whether deterministic or probabilistic methods are used for the estimation. The project to extract the hydrocarbons must have commenced or the operator must be reasonably certain that it will commence the project within a reasonable time. +There are numerous uncertainties inherent in estimating quantities of proved reserves and projecting future rates of production and the timing of development expenditures. The estimation of our proved reserves employs one or more of the following: production trend extrapolation, analogy, volumetric assessment, and material balance analysis. Techniques including review of production and pressure histories, analysis of electric logs and fluid tests, and interpretations of geologic and geophysical data are also involved in this estimation process. +The following table summarizes the trailing twelve-month index prices used in the reserves estimates for 2017 , 2016 , and 2015 . These prices are prior to adjustments for fixed and determinable amounts under provisions in existing contracts, location, grade, and quality. +December 31, +2017 +2016 +2015 +Gas price per Mcf +$ +2.98 +$ +2.48 +$ +2.59 +Oil price per Bbl +$ +51.34 +$ +42.75 +$ +50.28 +NGL price per Bbl +$ +19.09 +$ +14.37 +$ +14.41 +84 +Table of Contents +CIMAREX ENERGY CO. +SUPPLEMENTAL INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED) +The following table sets forth our estimates of our proved, proved developed, and proved undeveloped oil, gas, and NGL reserves as of December 31, 2017 , 2016 , 2015 , and 2014 and changes in our proved reserves for the years ended December 31, 2017 , 2016 , and 2015 . All of our proved reserves are located entirely within the U.S. +Gas +(MMcf) +Oil +(MBbls) +NGL +(MBbls) +Total +(MMcfe) +Total proved reserves: +December 31, 2014 +1,666,733 +118,992 +125,273 +3,132,323 +Revisions of previous estimates +(154,390 +) +(14,633 +) +(5,668 +) +(276,192 +) +Extensions and discoveries +183,084 +22,859 +18,079 +428,714 +Purchases of reserves +15 +1 +1 +25 +Production +(168,987 +) +(18,663 +) +(13,063 +) +(359,343 +) +Sales of reserves +(9,503 +) +(758 +) +(345 +) +(16,120 +) +December 31, 2015 +1,516,952 +107,798 +124,277 +2,909,407 +Revisions of previous estimates +5,888 +(4,357 +) +6,670 +19,761 +Extensions and discoveries +123,175 +19,419 +14,050 +323,987 +Purchases of reserves +959 +1 +— +965 +Production +(168,227 +) +(16,528 +) +(14,200 +) +(352,591 +) +Sales of reserves +(7,327 +) +(455 +) +(164 +) +(11,042 +) +December 31, 2016 +1,471,420 +105,878 +130,633 +2,890,487 +Revisions of previous estimates +(39,749 +) +(1,225 +) +(2,099 +) +(59,706 +) +Extensions and discoveries +363,774 +53,464 +42,692 +940,714 +Purchases of reserves +642 +42 +78 +1,363 +Production +(187,468 +) +(20,861 +) +(17,374 +) +(416,875 +) +Sales of reserves +(984 +) +(60 +) +(70 +) +(1,761 +) +December 31, 2017 +1,607,635 +137,238 +153,860 +3,354,222 +Proved developed reserves: +December 31, 2014 +1,263,957 +100,050 +89,630 +2,402,033 +December 31, 2015 +1,129,490 +89,189 +87,549 +2,189,920 +December 31, 2016 +1,144,720 +92,032 +99,176 +2,291,966 +December 31, 2017 +1,334,510 +114,116 +126,227 +2,776,565 +Proved undeveloped reserves: +December 31, 2014 +402,776 +18,942 +35,643 +730,290 +December 31, 2015 +387,462 +18,609 +36,728 +719,487 +December 31, 2016 +326,700 +13,846 +31,457 +598,521 +December 31, 2017 +273,125 +23,122 +27,633 +577,657 +Year-end 2017 proved reserves increased approximately 16% from year-end 2016 proved reserves, to 3.35 Tcfe. Proved natural gas reserves were 1.61 Tcf, proved oil reserves were 0.82 Tcfe, and proved NGL reserves were 0.92 Tcfe. Our reserves in the Mid-Continent accounted for 52% of total proved reserves, with nearly all of the remainder in the Permian Basin. +During 2017 , we added 940.7 Bcfe of proved reserves through extensions and discoveries, primarily in the Mid-Continent and Permian Basin where we added 282.9 Bcfe and 657.8 Bcfe, respectively. In addition, we had net negative revisions of 59.7 Bcfe. The revisions included decreases of 248.8 Bcfe for the removal of PUD reserves whose development will likely be delayed beyond five years of initial disclosure and 43.9 Bcfe related to increases in operating expenses. These decreases were partially offset by increases of 187.2 Bcfe in price-related revisions and 45.8 Bcfe of net technical revisions related primarily to better than expected performance from wells with initial production in late 2016 . +85 +Table of Contents +CIMAREX ENERGY CO. +SUPPLEMENTAL INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED) +During 2016 , we added 324.0 Bcfe of proved reserves through extensions and discoveries, primarily in the Mid-Continent and Permian Basin where we added 121.6 Bcfe and 198.7 Bcfe, respectively. In addition, we had net positive revisions of 19.8 Bcfe. The revisions included increases of 126.2 Bcfe for net performance revisions and 138.5 Bcfe related to decreases in operating expenses, partially offset by negative revisions of 244.9 Bcfe due to lower commodity prices. The performance revisions resulted primarily from positive adjustments to previously booked PUD reserves ( 72.3 Bcfe) and better than expected performance from wells with initial production in late 2015 . +During 2015 , we added 428.7 Bcfe of proved reserves through extensions and discoveries, primarily in the Mid-Continent and Permian Basin, where we added 176.8 Bcfe and 251.1 Bcfe, respectively. During 2015 , we had net negative reserve revisions of 276.2 Bcfe. The significant decrease in commodity prices seen in 2015 resulted in negative revisions of 398.8 Bcfe due to prices. In addition, 19.1 Bcfe of negative revisions were due to increases in operating expenses, which shortened the economic lives of properties. These decreases were partially offset by net positive performance revisions of 141.7 Bcfe, which included 47.4 Bcfe for better than expected performance of PUD reserves converted to proved developed reserves during the year and positive adjustments of 95.3 Bcfe to previously booked PUD reserves. +At December 31, 2017 , we had PUD reserves of 577.7 Bcfe, down 20.8 Bcfe, or 3% , from 598.5 Bcfe of PUD reserves at December 31, 2016 . Changes in our PUD reserves are summarized in the table below (in Bcfe). +PUD reserves at December 31, 2016 +598.5 +Converted to developed +(61.1 +) +Additions +307.3 +Net revisions +(267.0 +) +PUD reserves at December 31, 2017 +577.7 +During 2017 , we invested $69.5 million to develop and convert 10% of our 2016 PUD reserves to proved developed reserves. During 2016 , we invested $108.8 million to develop PUD reserves, converting 14% of our 2015 PUD reserves to proved developed reserves. During 2015 , we invested $246.5 million to develop PUD reserves, converting 24% of our 2014 PUD reserves to proved developed reserves. +During 2017 , 234.4 Bcfe, or 76% , of our 307.3 Bcfe of PUD reserve additions occurred in the Permian Basin, while the remainder of the additions were in our western Oklahoma Cana area. At December 31, 2017 , 41% of our PUD reserves were in the Permian Basin, while the remainder were in our western Oklahoma Cana area. We have no PUD reserves that have remained undeveloped for five years or more after initial disclosure and we have no PUD reserves whose scheduled delay to initiation of development is beyond five years of initial disclosure. +During 2017 , we had net negative PUD reserve revisions of 267.0 Bcfe. Of this total, 248.8 Bcfe was for the removal of PUD reserves whose development will likely be delayed beyond five years of initial disclosure. The remaining 18.2 Bcfe of net negative adjustments was comprised of negative technical revisions of 20.1 Bcfe to remaining previously booked PUD reserves and 4.5 Bcfe of negative revisions from higher projected operating expenses that were partially offset by 6.4 Bcfe of positive price-related revisions. +86 +Table of Contents +CIMAREX ENERGY CO. +SUPPLEMENTAL INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED) +Costs Incurred— The following table sets forth the capitalized costs incurred in our oil and gas production, exploration, and development activities. +Years Ended December 31, +(in thousands) +2017 +2016 +2015 +Costs incurred during the year: +Acquisition of properties +Proved +$ +938 +$ +2,678 +$ +30 +Unproved +135,565 +67,961 +41,233 +Exploration +11,804 +5,814 +6,902 +Development +1,140,548 +672,842 +823,830 +Oil and gas expenditures +1,288,855 +749,295 +871,995 +Property sales +(11,680 +) +(24,687 +) +(41,276 +) +1,277,175 +724,608 +830,719 +Asset retirement obligation, net +9,416 +(7,950 +) +(4,818 +) +$ +1,286,591 +$ +716,658 +$ +825,901 +Aggregate Capitalized Costs— The table below reflects the aggregate capitalized costs relating to our oil and gas producing activities at December 31, 2017 . +(in thousands) +Proved properties +$ +17,513,460 +Unproved properties and properties under development, not being amortized +476,903 +17,990,363 +Less-accumulated depreciation, depletion, amortization, and impairments +(14,748,833 +) +Net oil and gas properties +$ +3,241,530 +Costs Not Being Amortized— The following table summarizes oil and gas property costs not being amortized at December 31, 2017 , by year that the costs were incurred. +(in thousands) +2017 +$ +266,124 +2016 +53,076 +2015 +32,592 +2014 and prior +125,111 +$ +476,903 +Of the costs not being amortized, $140.0 million ( 29% ) relates to unevaluated wells in progress and $47.7 million ( 10% ) is capitalized interest. The remaining $289.2 million ( 61% ) is for land and seismic expenditures, most of which were for costs invested in our Mid-Continent region ( $104.6 million ) and our Permian Basin region ( $169.1 million ). On a quarterly basis, we evaluate excluded costs for inclusion in the costs to be amortized. Significant unproved properties are evaluated individually. Unproved properties that are not considered individually significant are aggregated for evaluation purposes and related costs are transferred to the costs to be amortized quarterly based on the application of historical factors. We expect to include these costs in the amortization computation as we continue with our exploration and development plans. +87 +Table of Contents +CIMAREX ENERGY CO. +SUPPLEMENTAL INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED) +Oil and Gas Operations— The following table contains direct revenue and cost information relating to our oil and gas exploration and production activities for the periods indicated. We have no long-term supply or purchase agreements with governments or authorities in which we act as producer. Income tax expense related to our oil and gas operations is computed using the effective tax rate for the period, with the 2017 effective tax rate adjusted to remove the impact of the reduction in the federal statutory rate. +Years Ended December 31, +(in thousands, except per Mcfe) +2017 +2016 +2015 +Oil, gas, and NGL revenues from production +$ +1,874,003 +$ +1,221,218 +$ +1,417,538 +Less operating costs and income taxes: +Impairment of oil and gas properties +— +757,670 +4,033,295 +Depletion +399,328 +346,003 +689,120 +Asset retirement obligation +15,624 +7,828 +9,121 +Production +262,180 +232,002 +299,374 +Transportation, processing, and other operating +254,730 +210,144 +183,134 +Taxes other than income +89,864 +61,946 +84,764 +Income tax expense (benefit) +310,937 +(135,665 +) +(1,410,065 +) +1,332,663 +1,479,928 +3,888,743 +Results of operations from oil and gas producing activities +$ +541,340 +$ +(258,710 +) +$ +(2,471,205 +) +Depletion rate per Mcfe +$ +0.96 +$ +0.98 +$ +1.92 +Standardized Measure of Future Net Cash Flows— The Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil and Gas Reserves (“Standardized Measure”) is calculated in accordance with guidance provided by the FASB. The Standardized Measure does not purport, nor should it be interpreted, to present the fair value of a company’s proved oil and gas reserves. Fair value would require, among other things, consideration of expected future economic and operating conditions, varying price and cost assumptions, and risks inherent in reserve estimates. +Under the Standardized Measure, future cash inflows are based upon the forecasted future production of year-end proved reserves. Future cash inflows are then reduced by estimated future production and development costs to determine net pre-tax cash flow. Future income taxes are computed by applying the statutory tax rate to the excess of pre-tax cash flow over our tax basis in the associated oil and gas properties. Tax credits and permanent differences are also considered in the future income tax calculation. Future net cash flow after income taxes is discounted using a 10% annual discount rate to arrive at the Standardized Measure. +The following summary sets forth our Standardized Measure. +December 31, +(in thousands) +2017 +2016 +2015 +Future cash inflows +$ +11,967,325 +$ +7,576,211 +$ +8,839,485 +Future production costs +(4,360,599 +) +(2,970,891 +) +(3,521,881 +) +Future development costs +(948,735 +) +(794,298 +) +(1,058,020 +) +Future income tax expenses +(882,519 +) +(507,145 +) +(728,029 +) +Future net cash flows +5,775,472 +3,303,877 +3,531,555 +10% annual discount for estimated timing of cash flows +(2,490,471 +) +(1,411,259 +) +(1,597,424 +) +Standardized measure of discounted future net cash flows +$ +3,285,001 +$ +1,892,618 +$ +1,934,131 +88 +Table of Contents +CIMAREX ENERGY CO. +SUPPLEMENTAL INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED) +The estimates of cash flows shown above are based upon the unweighted trailing twelve-month average first-day-of-the-month benchmark prices. See table above under Oil and Gas Reserve Information for prices used in determining the Standardized Measure. If future gas sales are covered by contracts at specified prices, the contract prices would be used. Prices are market driven and will fluctuate due to supply and demand factors, seasonality, and geopolitical and economic factors. +The following are the principal sources of change in the Standardized Measure. +Years Ended December 31, +(in thousands) +2017 +2016 +2015 +Standardized Measure, beginning of period +$ +1,892,618 +$ +1,934,131 +$ +4,352,845 +Sales, net of production costs +(1,267,229 +) +(717,126 +) +(850,267 +) +Net change in sales prices, net of production costs +855,024 +(429,956 +) +(4,262,261 +) +Extensions and discoveries, net of future production and development costs +1,443,577 +517,702 +573,373 +Changes in future development costs +298,819 +167,387 +280,163 +Previously estimated development costs incurred during the period +78,398 +110,945 +214,749 +Revision of quantity estimates +(65,376 +) +15,701 +(240,063 +) +Accretion of discount +212,192 +227,904 +638,948 +Change in income taxes +(210,519 +) +115,609 +1,691,721 +Purchases of reserves in place +2,255 +429 +20 +Sales of reserves +(1,666 +) +(9,440 +) +(26,225 +) +Change in production rates and other +46,908 +(40,668 +) +(438,872 +) +Standardized Measure, end of period +$ +3,285,001 +$ +1,892,618 +$ +1,934,131 +89 +Table of Contents +CIMAREX ENERGY CO. +SUPPLEMENTAL QUARTERLY FINANCIAL DATA (UNAUDITED) +Quarter +2017 +First +Second +Third +Fourth +(in thousands, except per share data) +Revenues +$ +447,176 +$ +456,452 +$ +463,681 +$ +550,940 +Expenses, net +316,204 +359,190 +372,282 +376,244 +Net income +$ +130,972 +$ +97,262 +$ +91,399 +$ +174,696 +Earnings per share to common stockholders: +Basic +$ +1.38 +$ +1.02 +$ +0.96 +$ +1.83 +Diluted +$ +1.38 +$ +1.02 +$ +0.96 +$ +1.83 +Quarter +2016 +First +Second +Third +Fourth +(in thousands, except per share data) +Revenues +$ +240,600 +$ +298,873 +$ +335,717 +$ +382,155 +Expenses, net (1) +472,059 +513,327 +346,390 +334,372 +Net (loss) income +$ +(231,459 +) +$ +(214,454 +) +$ +(10,673 +) +$ +47,783 +Earnings (loss) per share to common stockholders: +Basic +$ +(2.49 +) +$ +(2.31 +) +$ +(0.12 +) +$ +0.50 +Diluted +$ +(2.49 +) +$ +(2.31 +) +$ +(0.12 +) +$ +0.50 +________________________________________ +(1) +The 2016 quarterly expenses, net include non-cash impairments to our oil and gas properties of $318.8 million (or $3.43 per diluted share), $333.3 million (or $3.58 per diluted share), and $105.6 million (or $1.13 per diluted share) for the first quarter through the third quarter of 2016, respectively, as discussed in Note 1 to the Consolidated Financial Statements under Oil and Gas Properties . +The sum of the individual quarterly earnings (loss) per common share amounts may not agree with year-to-date earnings (loss) per common share because each quarter’s computation is based on the number of shares outstanding at the end of the applicable quarter using the two-class method. +90 +Table of Contents +ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE +None. +ITEM 9A. CONTROLS AND PROCEDURES +EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES +Cimarex’s management, under the supervision and with the participation of the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), have evaluated the effectiveness of Cimarex’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (Exchange Act)) as of December 31, 2017 . Based on that evaluation, the CEO and CFO concluded that the disclosure controls and procedures are effective in providing reasonable assurance that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods required by the U.S. Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to management, including the CEO and CFO, to allow timely decisions regarding required disclosures. +MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING +Cimarex’s management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). The company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. Our internal control over financial reporting also includes those policies and procedures that: +(1) +pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets; +(2) +provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements for external purposes in accordance with generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of management and directors; and +(3) +provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of assets that could have a material effect on the consolidated financial statements. +Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of the effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +As of December 31, 2017 , Cimarex’s management assessed the effectiveness of internal control over financial reporting based on the criteria set forth in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on that assessment, management concluded that the internal control over financial reporting was effective as of December 31, 2017 . +Our independent registered public accounting firm, KPMG LLP, has audited the effectiveness of our internal control over financial reporting and has issued a report as of December 31, 2017 , which follows this report. +CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING +There was no change in our internal control over financial reporting that occurred during our most recent fiscal quarter ended December 31, 2017 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. +91 +Table of Contents +Report of Independent Registered Public Accounting Firm +To the Stockholders and Board of Directors +Cimarex Energy Co.: +Opinion on Internal Control Over Financial Reporting +We have audited Cimarex Energy Co. and subsidiaries’ (the “Company”) internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. +We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance sheets of the Company as of December 31, 2017 and 2016, the related consolidated statements of operations and comprehensive income (loss), stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2017, and the related notes (collectively, the consolidated financial statements), and our report dated February 23, 2018 expressed an unqualified opinion on those consolidated financial statements. +Basis for Opinion +The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. +Definition and Limitations of Internal Control Over Financial Reporting +A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. +Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +KPMG LLP +Denver, Colorado +February 23, 2018 +92 +Table of Contents +ITEM 9B. OTHER INFORMATION +None. +93 +Table of Contents +PART III +ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE +Information concerning the directors of Cimarex and the late filing of a Form 5 required under this item is incorporated by reference from the Cimarex Energy Co. definitive Proxy Statement for the May 10, 2018 Annual Meeting of Shareholders. The Proxy Statement will be filed with the Securities and Exchange Commission no later than 120 days subsequent to December 31, 2017 . The executive officers of Cimarex as of February 23, 2018 were: +Name +Age +Office +Thomas E. Jorden +60 +Chairman of the Board, Chief Executive Officer and President +Joseph R. Albi +59 +Executive Vice President — Operations, Chief Operating Officer +Stephen P. Bell +63 +Executive Vice President — Business Development +G. Mark Burford +50 +Vice President and Chief Financial Officer +Francis B. Barron +55 +Senior Vice President — General Counsel +John A. Lambuth +55 +Senior Vice President — Exploration +Gary R. Abbott +45 +Vice President — Corporate Engineering +Krista L. Johnson +47 +Vice President — Human Resources, Governmental Relations, and External Affairs +Timothy A. Ficker +50 +Vice President — Controller, Chief Accounting Officer, and Assistant Secretary +There are no family relationships by blood, marriage, or adoption among any of the above executive officers. All executive officers are elected annually by the board of directors to serve for one year or until a successor is elected and qualified. There is no arrangement or understanding between any of the officers and any other person pursuant to which he or she was selected as an executive officer. +THOMAS E. JORDEN was elected Chairman of the Board effective August 14, 2012 after being named President and Chief Executive Officer effective September 30, 2011. Since December 8, 2003, Mr. Jorden served as Executive Vice President of Exploration and had served in a similar capacity since September 30, 2002. Prior to September 2002, Mr. Jorden was with Key Production Company, Inc., where he served as Vice President of Exploration (October 1999 to September 2002) and Chief Geophysicist (November 1993 to September 1999). Prior to joining Key, Mr. Jorden was with Union Pacific Resources. +JOSEPH R. ALBI was named Executive Vice President and Chief Operating Officer effective September 30, 2011. Mr. Albi served as Executive Vice President of Operations since March 1, 2005. Since December 8, 2003, Mr. Albi served as Senior Vice President of Corporate Engineering. From September 30, 2002 to December 8, 2003, he served as Vice President of Engineering. From June 1994 to September 2002, Mr. Albi was with Key Production Company, Inc. where he served as Vice President of Engineering and Manager of Engineering. +STEPHEN P. BELL was named Executive Vice President, Business Development effective September 13, 2012. Since September 2002, Mr. Bell served as Senior Vice President of Business Development and Land. Prior to its merger with Cimarex, Mr. Bell was with Key Production Company, Inc. since February 1994. In September 1999, he was appointed Senior Vice President, Business Development and Land. From February 1994 to September 1999, he served as Vice President, Land. +G. MARK BURFORD was named Vice President and Chief Financial Officer in September 2015. He was appointed Vice President, Capital Markets and Planning in December 2010. Mr. Burford joined Cimarex in April 2005 as Director of Capital Markets. Prior to joining Cimarex, he was Director of Investor Relations for Whiting Petroleum and Tom Brown, Inc. His experience also includes equity research with Petrie Parkman & Co., an investment banking firm, and public accounting. +FRANCIS B. BARRON joined Cimarex as Senior Vice President, General Counsel in July 2013. From February 2004 until July 2013, Mr. Barron served in various capacities at Bill Barrett Corporation, a publicly traded, Denver-based oil and gas exploration and development company, including as Executive Vice President, General Counsel, and Secretary. He also served as Chief Financial Officer from November 2006 until March 2007. Prior to February 2004, Mr. Barron was a partner at the Denver, Colorado office of the law firm of Patton Boggs LLP as well as a partner at Bearman Talesnick & Clowdus Professional Corporation. Mr. Barron’s practice included corporate, securities, and business law for publicly traded oil and gas companies. +94 +Table of Contents +JOHN A. LAMBUTH was named Senior Vice President of Exploration in December 2015. Prior to his promotion, he served as the Company’s Vice President of Exploration since September 2012 and Chief Geophysicist, a position he held since joining Cimarex in 2004. Mr. Lambuth began his career in 1985 with Shell Oil Co., where he held various positions in exploration and in research and development. Immediately prior to joining Cimarex, he spent three years as onshore Exploration Manager of El Paso Energy Company. +GARY R. ABBOTT was elected Vice President of Corporate Engineering March 1, 2005. Since January 2002, Mr. Abbott served as manager, Corporate Reservoir Engineering. From April 1999 to January 2002, Mr. Abbott was a reservoir engineer with Key Production Company, Inc. +KRISTA L. JOHNSON joined Cimarex as Vice President of Governmental and External Affairs in November 2014. Previously she served at Shell Oil Company since 2006, her last role as Vice President, International Organizations. Prior to joining Shell, she spent eight years with Western Gas Resources, most recently as Director of Government and Media Relations. Her experience also includes private practice in oil and gas law, client based energy advocacy in Washington, work in the Federal Relations Department of the American Petroleum Institute, and in the office of former U.S. Senator Conrad Burns. +TIMOTHY A. FICKER was appointed Vice President, Controller, Chief Accounting Officer, and Assistant Secretary in December 2016 to be effective in February 2017 and previously served as the Company’s Controller since September 2016. From February 2015 until September 2016, he served as Chief Financial Officer and Principal of Alcova Management LLC, a start-up oil and gas exploration and production company concentrating on the Powder River Basin of Wyoming. Mr. Ficker served as Chief Financial Officer of Venoco, Inc., and in other capacities from March 2007 to November 2014. From May 2005 to March 2007, he served as Vice President, Chief Financial Officer, Principal Accounting Officer, and Secretary of Infinity Energy Resources Inc. Mr. Ficker previously served as an audit partner in KPMG LLP’s energy audit practice in Denver and as an audit partner for Arthur Andersen LLP, where he served clients primarily in the energy industry. His energy clients at KPMG and Arthur Andersen were principally domestic exploration and production companies. +ITEM 11. EXECUTIVE COMPENSATION +Information required under this item is incorporated by reference from the Cimarex Energy Co. definitive Proxy Statement for the May 10, 2018 Annual Meeting of Shareholders. The Proxy Statement will be filed with the Securities and Exchange Commission no later than 120 days subsequent to December 31, 2017 . +ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS +Information required under this item is incorporated by reference from the Cimarex Energy Co. definitive Proxy Statement for the May 10, 2018 Annual Meeting of Shareholders. The Proxy Statement will be filed with the Securities and Exchange Commission no later than 120 days subsequent to December 31, 2017 . +ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE +Information required under this item is incorporated by reference from the Cimarex Energy Co. definitive Proxy Statement for the May 10, 2018 Annual Meeting of Shareholders. The Proxy Statement will be filed with the Securities and Exchange Commission no later than 120 days subsequent to December 31, 2017 . +ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES +Information required under this item is incorporated by reference from the Cimarex Energy Co. definitive Proxy Statement for the May 10, 2018 Annual Meeting of Shareholders. The Proxy Statement will be filed with the Securities and Exchange Commission no later than 120 days subsequent to December 31, 2017 . +95 +Table of Contents +PART IV +ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES +Page +(a) (1) +The following financial statements are included in Item 8 to this 10-K: +Consolidated Balance Sheets as of December 31, 2017 and 2016 +59 +Consolidated Statements of Operations and Comprehensive Income (Loss) for the years ended December 31, 2017, 2016, and 2015 +60 +Consolidated Statements of Cash Flows for the years ended December 31, 2017, 2016, and 2015 +61 +Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2017, 2016, and 2015 +62 +Notes to Consolidated Financial Statements +63 +(2 +) +Financial statement schedules—None +(3 +) +Exhibits: +Exhibits not incorporated by reference to a prior filing are designated by an asterisk (*) and are filed herewith; all exhibits not so designated are incorporated by reference to a prior SEC filing as indicated. +Exhibit +Title +3.1 +Amended and Restated Certificate of Incorporation of Cimarex Energy Co. (filed as Exhibit 3.1 to Registrant’s Form 8-K (Commission File no. 001-31446) dated June 7, 2005 and incorporated herein by reference). +3.2 +Amended and Restated By-laws of Cimarex Energy Co. dated December 11, 2013 (filed on December 16, 2013 (Commission File No. 001-31446) and incorporated herein by reference). +3.3 +Amended and Restated By-laws of Cimarex Energy Co. dated November 11, 2015 (filed as Exhibits 3.1 and 3.2 to the Current Report on Form 8-K filed on November 12, 2015 (Commission File No. 001-31446) and incorporated herein by reference). +4.1 +Specimen Certificate of Cimarex Energy Co. common stock (filed as Exhibit 4.3 to Registration Statement on Form S-3 filed September 17, 2012 (Registration No. 333-183939) and incorporated herein by reference). +4.2 +Debt Securities Indenture dated as of April 5, 2012, by and among Cimarex Energy Co. and U.S. Bank National Association, as trustee included as Exhibit 4.1 to Registrant’s Current Report on Form 8-K filed on April 5, 2012 and incorporated herein by reference. +4.3 +First Supplemental Indenture dated as of April 5, 2012, by and among Cimarex Energy Co., the Subsidiary Guarantors party thereto and U.S. Bank National Association, as trustee included as Exhibit 4.2 to Registrant’s Current Report on Form 8-K filed on April 5, 2012 and incorporated herein by reference. +4.4 +Form of 5.875% Senior Notes due 2022 included in Exhibit 4.2 to the Registrant’s Current Report on Form 8-K filed on April 5, 2012 and incorporated herein by reference. +4.5 +Indenture dated as of June 4, 2014, by and between Cimarex Energy Co. and U.S. Bank National Association, as trustee included as Exhibit 4.1 to Registrant’s Current Report on Form 8-K filed on June 4, 2014 and incorporated herein by reference. +4.6 +First Supplemental Indenture dated as of June 4, 2014, by and among Cimarex Energy Co., the Subsidiary Guarantors party thereto and U.S. Bank National Association, as trustee included as Exhibit 4.2 to Registrant’s Current Report on Form 8-K filed on June 4, 2014 and incorporated herein by reference. +4.7 +Form of 4.375% Senior Notes due 2024 included in Exhibit 4.2 to the Registrant’s Current Report on Form 8-K filed on June 4, 2014 and incorporated herein by reference. +96 +Table of Contents +Exhibit +Title +4.8 +Form of Indenture by and among Cimarex Energy Co. and U.S. Bank National Association, as trustee (filed as Exhibit 4.7 to Registration Statement on Form S-3 filed September 21, 2015 (Registration No. 333-183939) and incorporated herein by reference). +4.9 +Indenture dated as of April 10, 2017, by and between Cimarex Energy Co. and U.S. Bank National Association, as trustee included as Exhibit 4.1 to Registrant’s Current Report on Form 8-K filed on April 10, 2017 and incorporated herein by reference. +4.10 +First Supplemental Indenture dated as of April 10, 2017, by and between Cimarex Energy Co. and U.S. Bank National Association, as trustee included as Exhibit 4.2 to Registrant’s Current Report on Form 8-K filed on April 10, 2017 and incorporated herein by reference. +4.11 +Form of 3.90% Senior Notes due 2027 included in Exhibit 4.2 to the Registrant’s Current Report on Form 8-K filed on April 10, 2017 and incorporated herein by reference. +10.1 +Credit Agreement dated as of July 14, 2011, among Cimarex, the Administrative Agent, the Co-Syndication Agents, the Co-Documentation Agents and the Lenders filed on July 18, 2011 as Exhibit 10.l to the Registrant’s Current Report on Form 8-K and incorporated herein by reference. +10.2 +First Amendment to Credit Agreement dated as of July 19, 2012, among Cimarex, the Guarantors, the Administrative Agent, and the Lenders filed on May 5, 2014 as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K and incorporated herein by reference. +10.3 +Second Amendment to Credit Agreement dated as of May 1, 2014, among Cimarex, the Guarantors, the Administrative Agent, and the Lenders filed on May 5, 2014 as Exhibit 10.2 to the Registrant’s Current Report on Form 8-K and incorporated herein by reference. +10.4 +Employment Agreement, dated September 7, 1999, by and between Paul Korus and Key Production Company, Inc. (filed as Exhibit 10.6 to the Registration Statement on Form S-4 dated May 9, 2002 (Registration No. 333-87948) and incorporated herein by reference). +10.5 +Amendment to Employment Agreement effective January 1, 2009 between Cimarex Energy Co. and Paul Korus (filed as Exhibit 10.9 to the Annual Report on Form 10-K for the year ended December 31, 2008 filed on February 27, 2009 (Commission File No. 001-31446) and incorporated herein by reference). +10.6 +Employment Agreement, dated October 25, 1993, by and between Thomas E. Jorden and Key Production Company, Inc. (filed as Exhibit 10.7 to the Registration Statement on Form S-4 dated May 9, 2002 (Registration No. 333-87948) and incorporated herein by reference). +10.7 +Amendment to Employment Agreement effective January 1, 2009 between Cimarex Energy Co. and Thomas E. Jorden (filed as Exhibit 10.11 to the Annual Report on Form 10-K for the year ended December 31, 2008 filed on February 27, 2009 (Commission File No. 001-31446) and incorporated herein by reference). +10.8 +Employment Agreement, dated February 2, 1994, by and between Stephen P. Bell and Key Production Company, Inc. (filed as Exhibit 10.8 to the Registration Statement on Form S-4 dated May 9, 2002 (Registration No. 333-87948) and incorporated herein by reference). +10.9 +Amendment to Employment Agreement effective January 1, 2009 between Cimarex Energy Co. and Stephen P. Bell (filed as Exhibit 10.13 to the Annual Report on Form 10-K for the year ended December 31, 2008 filed on February 27, 2009 (Commission File No. 001-31446) and incorporated herein by reference). +10.10 +Employment Agreement, dated March 11, 1994, by and between Joseph R. Albi and Key Production Company, Inc. (filed as Exhibit 10.9 to the Registration Statement on Form S-4 dated May 9, 2002 (Registration No. 333-87948) and incorporated herein by reference). +97 +Table of Contents +Exhibit +Title +10.11 +Amendment to Employment Agreement effective January 1, 2009 between Cimarex Energy Co. and Joseph R. Albi (filed as Exhibit 10.15 to the Annual Report on Form 10-K for the year ended December 31, 2008 filed on February 27, 2009 (Commission File No. 001-31446) and incorporated herein by reference). +10.12 +Amended and Restated 2002 Stock Incentive Plan of Cimarex Energy Co. effective January 1, 2009 (filed as Exhibit 10.16 to the Annual Report on Form 10-K for the year ended December 31, 2008 filed on February 27, 2009 (Commission File No. 001- 31446) and incorporated herein by reference). +10.13 +2011 Equity Incentive Plan adopted May 18, 2011 (filed as Appendix A to the Definitive Proxy Statement 14-A filed on March 23, 2011 (Commission File No. 001-31446) and incorporated herein by reference). +10.14 +Form of Notice of Grant of Award of Performance Stock and Award Agreement (filed as Exhibit 10.2 to Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2011 filed on August 4, 2011 (Commission File no. 001-31446) and incorporated herein by reference). +10.15 +Form of Notice of Grant of Restricted Stock and Award Agreement (filed as Exhibit 10.3 to Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2011 filed on August 4, 2011 (Commission File no. 001-31446) and incorporated herein by reference). +10.16 +Form of Notice of Grant of Nonqualified Stock Option and Award Agreement (filed as Exhibit 10.4 to Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2011 filed on August 4, 2011 (Commission File no. 001-31446) and incorporated herein by reference). +10.17 +Form of Notice of Grant and Award Agreement (Other Stock Award with performance conditions) (filed as Exhibit 10.15 to the Annual Report on Form 10-K for the year ended December 31, 2013 filed on February 26, 2014 (Commission File No. 001-31446) and incorporated herein by reference). +10.18 +2014 Equity Incentive Plan adopted May 15, 2014 (filed as Appendix A to the Definitive Proxy Statement 14-A filed on April 1, 2014 (Commission File No. 001-31446) and incorporated herein by reference. +10.19 +Form of Notice of Grant of Restricted Stock (Director) and Award Agreement (filed as Exhibit 10.1 to Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014 filed on August 6, 2014 (Commission File No. 001-31446) and incorporated herein by reference). +10.20 +Form of Notice of Grant of Nonqualified Stock Option and Award Agreement (filed as Exhibit 10.2 to Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014 filed on August 6, 2014 (Commission File No. 001-31446) and incorporated herein by reference). +10.21 +Form of Notice of Grant of Restricted Stock and Award Agreement (filed as Exhibit 10.3 to Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014 filed on August 6, 2014 (Commission File No. 001-31446) and incorporated herein by reference). +10.22 +Form of Notice of Grant of Restricted Stock and Award Agreement (Performance Award) (filed as Exhibit 10.4 to Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014 filed on August 6, 2014 (Commission File No. 001-31446) and incorporated herein by reference). +10.23 +Form of Notice of Grant of Restricted Stock and Award Agreement (Performance Award) (filed as Exhibit 10.23 to the Annual Report on Form 10-K for the year ended December 31, 2014 filed on February 25, 2015 (Commission File No. 001-31446) and incorporated herein by reference). +10.24 +Deferred Compensation Plan for Nonemployee Directors adopted May 19, 2004, as amended and restated effective January 1, 2009 (filed as Exhibit 10.18 to the Annual Report on Form 10-K for the year ended December 31, 2008 filed on February 27, 2009 (Commission File No. 001-31446) and incorporated herein by reference). +98 +Table of Contents +Exhibit +Title +10.25 +Cimarex Energy Co. Supplemental Savings Plan (amended and restated, effective January 1, 2009) (filed as Exhibit 10.19 to the Annual Report on Form 10-K for the year ended December 31, 2008 filed on February 27, 2009 (Commission File No. 001- 31446) and incorporated herein by reference). +10.26 +Cimarex Energy Co. Change in Control Severance Plan dated effective April 1, 2005, amended and restated effective January 1, 2009 (filed as Exhibit 10.20 to the Annual Report on Form 10-K for the year ended December 31, 2008 filed on February 27, 2009 (Commission File No. 001-31446) and incorporated herein by reference). +10.27 +Amendment to Cimarex Energy Co. Change in Control Severance Plan dated effective March 19, 2013 (filed as Exhibit 10.1 to the Current Report on Form 8-K filed on March 20, 2013 (Commission File No. 001- 31446) and incorporated herein by reference). +10.28 +Form of Indemnification Agreement between Cimarex Energy Co. and each of its executive officers and directors (filed as Exhibit 10.20 to the Annual Report on Form 10-K for the year ended December 31, 2012 filed on February 26, 2013 (Commission File No. 001-31446) and incorporated herein by reference). +10.29 +Retention Agreement dated June 9, 2010 (filed as Exhibit 10.21 to the Annual Report on Form 10-K for the year ended December 31, 2013 filed on February 26, 2014 (Commission File No. 001-31446) and incorporated herein by reference). +10.30 +Credit Agreement Dated as of October 16, 2015, by and among Cimarex, the Administrative Agent, the Syndication Agent, the Documentation Agents, and the Lenders (filed on October 19, 2015 as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (Commission File No. 001-31446) and incorporated herein by reference). +10.31 +Form of Notice of Grant of Restricted Stock (Director) and Award Agreement (filed as Exhibit 10.2 to Registrant’s Form 8-K (Commission File No. 001-31446) dated November 2, 2015 and incorporated herein by reference). +10.32 +Succession Agreement dated August 17, 2015 (filed as Exhibit 10.2 to Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2015 filed on November 4, 2015 (Commission File No. 001-31446) and incorporated herein by reference). +10.33 +Form of Notice of Grant of Restricted Stock (Director) and Award Agreement (filed as Exhibit 10.1 to Registrant’s Quarterly Report on Form 10-Q filed on August 9, 2017 and incorporated herein by reference). +14.1 +Code of Ethics for Chief Executive Officer and Senior Financial Officers (filed as Exhibit 14.1 to the Annual Report on Form 10-K for the year ended December 31, 2003 filed on March 11, 2004 (Commission File No. 001-31446) and incorporated herein by reference). +14.2 +Revised Code of Business Conduct and Ethics for Directors, Officers, and Employees dated August 30, 2016 (filed as Exhibit 14.1 and 14.2 to the Current Report on Form 8-K filed September 1, 2016 (Commission File No. 001-31446) and incorporated herein by reference). +21.1 +Significant subsidiaries of the Registrant.* +23.1 +Consent of KPMG LLP.* +23.2 +Consent of DeGolyer and MacNaughton.* +24.1 +Power of Attorney of directors of the Registrant.* +31.1 +Certification of Thomas E. Jorden, Chief Executive Officer of Cimarex Energy Co., pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.* +99 +Table of Contents +Exhibit +Title +31.2 +Certification of G. Mark Burford, Chief Financial Officer of Cimarex Energy Co., pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.* +32.1 +Certification of Thomas E. Jorden, Chief Executive Officer of Cimarex Energy Co., pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.* +32.2 +Certification of G. Mark Burford, Chief Financial Officer of Cimarex Energy Co., pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.* +99.1 +Letter dated January 16, 2018 from DeGolyer and MacNaughton, independent petroleum engineering consulting firm, reporting the results of its audit of Cimarex reserves as of December 31, 2017 of certain selected properties.* +101.INS +XBRL Instance Document. * +101.SCH +XBRL Taxonomy Extension Schema Document. * +101.CAL +XBRL Taxonomy Extension Calculation Linkbase Document. * +101.LAB +XBRL Taxonomy Extension Label Linkbase Document. * +101.PRE +XBRL Taxonomy Extension Presentation Linkbase Document. * +101.DEF +XBRL Taxonomy Extension Definition Linkbase Document. * +ITEM 16. FORM 10-K SUMMARY +None. +100 +Table of Contents +SIGNATURE +Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. +Date: February 23, 2018 +CIMAREX ENERGY CO. +By: +/s/ Thomas E. Jorden +Thomas E. Jorden +Chairman of the Board, Chief Executive Officer, and President +Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. +Signature +Title +Date +/s/ Thomas E. Jorden +Chairman of the Board, Director, +Thomas E. Jorden +Chief Executive Officer, and President (Principal Executive Officer) +February 23, 2018 +* +Director, Executive Vice President — +Attorney-in-Fact +Operations, Chief Operating Officer +February 23, 2018 +Joseph R. Albi +/s/ G. Mark Burford +Vice President and Chief +G. Mark Burford +Financial Officer (Principal Financial Officer) +February 23, 2018 +/s/ Timothy A. Ficker +Vice President, Controller, Chief +Timothy A. Ficker +Accounting Officer (Principal Accounting Officer) +February 23, 2018 +* +Attorney-in-Fact +Director +February 23, 2018 +Hans Helmerich +* +Attorney-in-Fact +Director +February 23, 2018 +David A. Hentschel +* +Attorney-in-Fact +Director +February 23, 2018 +Harold R. Logan, Jr. +* +Attorney-in-Fact +Director +February 23, 2018 +Floyd R. Price +* +Attorney-in-Fact +Director +February 23, 2018 +Monroe W. Robertson +* +Attorney-in-Fact +Director +February 23, 2018 +Lisa A. Stewart +* +Attorney-in-Fact +Director +February 23, 2018 +Michael J. Sullivan +* +Attorney-in-Fact +Director +February 23, 2018 +Frances M. Vallejo +*By: +/s/ G. Mark Burford +Vice President and Chief +G. Mark Burford Attorney-in-Fact +Financial Officer (Principal Financial Officer) +February 23, 2018 +101 \ No newline at end of file diff --git a/raw/filings/0001168054/2017/0001168054-18-000004/filing_metadata.csv b/raw/filings/0001168054/2017/0001168054-18-000004/filing_metadata.csv new file mode 100644 index 0000000000000000000000000000000000000000..c6dcb3cd96756d1f73a8db4969df8bdf6b8ea8c9 --- /dev/null +++ b/raw/filings/0001168054/2017/0001168054-18-000004/filing_metadata.csv @@ -0,0 +1,2 @@ +cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing +0001168054,XEC,CIMAREX ENERGY CO,10-K,2018-02-23,2017-12-31,2018-02-23T19:12:26.000Z,0001168054-18-000004,xec2017123110k.htm,10-K,12309407,1,0,https://www.sec.gov/Archives/edgar/data/1168054/000116805418000004/xec2017123110k.htm,https://www.sec.gov/Archives/edgar/data/1168054/000116805418000004/,2017,2017,1 diff --git a/raw/filings/0001168054/2017/0001168054-18-000004/item1.txt b/raw/filings/0001168054/2017/0001168054-18-000004/item1.txt new file mode 100644 index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391 diff --git a/raw/filings/0001168054/2017/0001168054-18-000004/item13.txt b/raw/filings/0001168054/2017/0001168054-18-000004/item13.txt new file mode 100644 index 0000000000000000000000000000000000000000..9854d5fc269e386b1e39f9aa169cf559f2e579c3 --- /dev/null +++ b/raw/filings/0001168054/2017/0001168054-18-000004/item13.txt @@ -0,0 +1,2 @@ +ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE +Information required under this item is incorporated by reference from the Cimarex Energy Co. definitive Proxy Statement for the May 10, 2018 Annual Meeting of Shareholders. The Proxy Statement will be filed with the Securities and Exchange Commission no later than 120 days subsequent to December 31, 2017 . \ No newline at end of file diff --git a/raw/filings/0001168054/2017/0001168054-18-000004/item9a.txt b/raw/filings/0001168054/2017/0001168054-18-000004/item9a.txt new file mode 100644 index 0000000000000000000000000000000000000000..2d75559257d97d920923603f2228ec5f4c626c3d --- /dev/null +++ b/raw/filings/0001168054/2017/0001168054-18-000004/item9a.txt @@ -0,0 +1,35 @@ +ITEM 9A. CONTROLS AND PROCEDURES +EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES +Cimarex’s management, under the supervision and with the participation of the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), have evaluated the effectiveness of Cimarex’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (Exchange Act)) as of December 31, 2017 . Based on that evaluation, the CEO and CFO concluded that the disclosure controls and procedures are effective in providing reasonable assurance that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods required by the U.S. Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to management, including the CEO and CFO, to allow timely decisions regarding required disclosures. +MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING +Cimarex’s management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). The company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. Our internal control over financial reporting also includes those policies and procedures that: +(1) +pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets; +(2) +provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements for external purposes in accordance with generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of management and directors; and +(3) +provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of assets that could have a material effect on the consolidated financial statements. +Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of the effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +As of December 31, 2017 , Cimarex’s management assessed the effectiveness of internal control over financial reporting based on the criteria set forth in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on that assessment, management concluded that the internal control over financial reporting was effective as of December 31, 2017 . +Our independent registered public accounting firm, KPMG LLP, has audited the effectiveness of our internal control over financial reporting and has issued a report as of December 31, 2017 , which follows this report. +CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING +There was no change in our internal control over financial reporting that occurred during our most recent fiscal quarter ended December 31, 2017 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. +91 +Table of Contents +Report of Independent Registered Public Accounting Firm +To the Stockholders and Board of Directors +Cimarex Energy Co.: +Opinion on Internal Control Over Financial Reporting +We have audited Cimarex Energy Co. and subsidiaries’ (the “Company”) internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. +We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance sheets of the Company as of December 31, 2017 and 2016, the related consolidated statements of operations and comprehensive income (loss), stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2017, and the related notes (collectively, the consolidated financial statements), and our report dated February 23, 2018 expressed an unqualified opinion on those consolidated financial statements. +Basis for Opinion +The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. +Definition and Limitations of Internal Control Over Financial Reporting +A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. +Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +KPMG LLP +Denver, Colorado +February 23, 2018 +92 +Table of Contents \ No newline at end of file diff --git a/raw/filings/0001168054/2017/0001168054-18-000004/rp_note.txt b/raw/filings/0001168054/2017/0001168054-18-000004/rp_note.txt new file mode 100644 index 0000000000000000000000000000000000000000..4b1653dc983dbb1d8773d7963bc2e46e71e4fe18 --- /dev/null +++ b/raw/filings/0001168054/2017/0001168054-18-000004/rp_note.txt @@ -0,0 +1,2 @@ +11. RELATED PARTY TRANSACTIONS +Helmerich & Payne, Inc. (“H&P”) provides contract drilling services to Cimarex. Cimarex incurred drilling costs of approximately $52.6 million , $18.3 million , and $7.9 million related to these services during the years ended December 31, 2017 , 2016 , and 2015 , respectively. Hans Helmerich, a director of Cimarex, is Chairman of the Board of Directors of H&P. \ No newline at end of file diff --git a/raw/filings/0001168054/2017/0001168054-18-000004/rpt_disclosure.txt b/raw/filings/0001168054/2017/0001168054-18-000004/rpt_disclosure.txt new file mode 100644 index 0000000000000000000000000000000000000000..5ea78c9df842f6e258f5b4a53b983eb6b6d11506 --- /dev/null +++ b/raw/filings/0001168054/2017/0001168054-18-000004/rpt_disclosure.txt @@ -0,0 +1,30 @@ +Review of related party transactions +Independent Lead Director +Non-hedging and non-pledging policies +Diverse Board skills and experience +Clawback policy +Annual Board and committee self-evaluations +Management and Director stock ownership guidelines +Periodic consultant review of Board skills +No tax gross-ups +Annual equity grants to Directors +Proxy access +Annual Board education +Active shareholder engagement +Shareholder Engagement +Cimarex's relationships with its shareholders are an important part of our corporate governance profile, and we recognize the value of taking +their views into account. Engagement with shareholders helps us understand the larger context and the impact of our operations, learn about expectations for our performance, assess emerging issues +that may affect our business or other aspects of our operations, and shape corporate and governance policies. +Consistent +with our commitment to seek and respond to shareholder input on corporate governance topics, we have considered and discussed with investors a wide variety of matters, +including: +§ Our executive compensation program and disclosures, as a result of which we previously +made changes in these areas; +§ The "proxy access" shareholder proposal acted upon in 2015; +§ A shareholder proposal concerning fugitive methane reporting that was made in December +2015 and subsequently withdrawn, as a result of which we added disclosures concerning methane emissions to our website; and +Cimarex +Energy +Co. +19 +Table of Contents \ No newline at end of file diff --git a/raw/filings/0001168054/2018/0001168054-19-000006/filing.txt b/raw/filings/0001168054/2018/0001168054-19-000006/filing.txt new file mode 100644 index 0000000000000000000000000000000000000000..c4b06970939ae0b3a8ba6e33c6d8ee000cbb3c04 --- /dev/null +++ b/raw/filings/0001168054/2018/0001168054-19-000006/filing.txt @@ -0,0 +1,7293 @@ +10-K +1 +a12311810kxec.htm +10-K +Document +Table of Contents +UNITED STATES +SECURITIES AND EXCHANGE COMMISSION +Washington, D.C. 20549 +Form 10-K +(Mark One) +ý +ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 +For the fiscal year ended December 31, 2018 +OR +o +TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 +Commission file number 001-31446 +CIMAREX ENERGY CO. +(Exact name of registrant as specified in its charter) +Delaware +(State or other jurisdiction of +incorporation or organization) +45-0466694 +(I.R.S. Employer +Identification No.) +1700 Lincoln Street, Suite 3700, Denver, Colorado 80203 +(Address of principal executive offices) +(303) 295-3995 +(Registrant’s telephone number) +Securities Registered Pursuant to Section 12(b) of the Act: +Title of each class +Name of each exchange on which registered +Common Stock ($0.01 par value) +New York Stock Exchange +Securities Registered Pursuant to Section 12(g) of the Act: None +Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. +YES ý NO o +Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES o NO ý +Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES ý NO o +Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). YES ý NO o +Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý +Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. +Large accelerated filer ý +Accelerated filer o +Non-accelerated filer o +Smaller reporting company o +Emerging growth company o +If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o +Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). YES o NO ý +Aggregate market value of the voting stock held by non-affiliates of Cimarex Energy Co. as of June 30, 2018 was approximately $9.54 billion . +Number of shares of Cimarex Energy Co. common stock outstanding as of January 31, 2019 was 95,755,298 . +Documents Incorporated by Reference: Portions of the Registrant’s Proxy Statement for its 2019 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K. +Table of Contents +TABLE OF CONTENTS +DESCRIPTION +Item +Page +Glossary +Part I +1. & 2. +Business and Properties +6 +1A. +Risk Factors +15 +1B. +Unresolved Staff Comments +33 +3. +Legal Proceedings +33 +4. +Mine Safety Disclosures +33 +Part II +5. +Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities +34 +6. +Selected Financial Data +36 +7. +Management’s Discussion and Analysis of Financial Condition and Results of Operations +37 +7A. +Quantitative and Qualitative Disclosures About Market Risk +61 +8. +Financial Statements and Supplementary Data +62 +9. +Changes In and Disagreements with Accountants on Accounting and Financial Disclosure +98 +9A. +Controls and Procedures +98 +9B. +Other Information +100 +Part III +10. +Directors, Executive Officers and Corporate Governance +101 +11. +Executive Compensation +102 +12. +Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters +102 +13. +Certain Relationships and Related Transactions, and Director Independence +102 +14. +Principal Accounting Fees and Services +102 +Part IV +15. +Exhibits, Financial Statement Schedules +103 +16. +Form 10-K Summary +108 +2 +Table of Contents +GLOSSARY +Bbls— Barrels (of oil or natural gas liquids) +Bcf— Billion cubic feet (of natural gas) +BOE— Barrels of oil equivalent +GAAP— Generally accepted accounting principles in the U.S. +Gross Acres or Gross Wells— The total acres or wells, as the case may be, in which a working interest is owned. +MBbls— Thousand barrels +MBOE— Thousand barrels of oil equivalent +Mcf— Thousand cubic feet +MMBbls— Million barrels +MMBtu— Million British thermal units +MMBOE— Million barrels of oil equivalent +MMcf— Million cubic feet +Net Acres or Net Wells— The sum of the fractional working interest owned in gross acres or gross wells expressed in whole numbers and fractions of whole numbers. +Net Production— Gross production multiplied by net revenue interest +NGL or NGLs— Natural gas liquids +PUD— Proved undeveloped +Tcf— Trillion cubic feet +Energy equivalent is determined using the ratio of one barrel of crude oil, condensate, or NGL to six Mcf of natural gas. +3 +Table of Contents +PART I +CAUTIONARY INFORMATION ABOUT FORWARD-LOOKING STATEMENTS +Throughout this Form 10-K, we make statements that may be deemed “forward-looking” statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. In particular, in our Management’s Discussion and Analysis of Financial Condition and Results of Operations, we provide projections of our 2019 capital expenditures. All statements, other than statements of historical facts, that address activities, events, outcomes, and other matters that Cimarex plans, expects, intends, assumes, believes, budgets, predicts, forecasts, projects, estimates, or anticipates (and other similar expressions) will, should, or may occur in the future are forward-looking statements. These forward-looking statements are based on management’s current belief, based on currently available information, as to the outcome and timing of future events. When considering forward-looking statements, you should keep in mind the risk factors and other cautionary statements in this Form 10-K. Forward-looking statements include statements with respect to, among other things: +• +Fluctuations in the price we receive for our oil, gas, and NGL production, including local market price differentials; +• +Operating costs and other expenses; +• +Timing and amount of future production of oil, gas, and NGLs; +• +Reductions in the quantity of oil, gas, and NGLs sold and prices received due to decreased industrywide demand and/or curtailments in production from specific properties or areas due to mechanical, transportation, marketing, weather, or other problems; +• +Estimates of proved reserves, exploitation potential, or exploration prospect size; +• +Our ability to complete our pending acquisition of Resolute Energy Corporation (“Resolute”) and to successfully integrate the business of Resolute; +• +Our hedging activities and viability of hedge counterparties; +• +The effectiveness of our internal control over financial reporting; +• +Cash flow and anticipated liquidity; +• +Amount, nature, and timing of capital expenditures; +• +Availability of financing and access to capital markets; +• +Administrative, legislative, and regulatory changes; +• +Operating and capital expenditures that are either significantly higher or lower than anticipated because the actual cost of identified projects varied from original estimates and/or from the number of exploration and development opportunities being greater or fewer than currently anticipated; +• +Exploration and development opportunities that we pursue may not result in economic, productive oil and gas properties; +• +Drilling of wells; +• +Increased financing costs due to a significant increase in interest rates; +• +Proving up undeveloped acreage; and +• +Full cost ceiling test impairments to the carrying values of our oil and gas properties. +4 +Table of Contents +We caution you that these forward-looking statements are subject to all of the risks and uncertainties, many of which are beyond our control, incident to the exploration for and development, production, and sale of oil, gas, and NGLs. +These risks include, but are not limited to, commodity price volatility, inflation, lack of availability of goods and services, environmental risks, drilling and other operating risks, regulatory changes, the uncertainty inherent in estimating proved oil and natural gas reserves and in projecting future rates of production, production type curves, well spacing, timing of development expenditures, and other risks described herein. +Reserve engineering is a subjective process of estimating underground accumulations of oil and natural gas that cannot be measured in an exact way. The accuracy of any reserve estimate depends on the quality of available data and the interpretation of such data by our engineers. As a result, estimates made by different engineers often vary from one another. In addition, the results of drilling, testing, and production activities may justify revisions of estimates that were made previously. If significant, such revisions could change the timing of future production and development drilling. Accordingly, reserve estimates are generally different from the quantities of oil and natural gas that are ultimately recovered. +Risk factors related to our pending acquisition of Resolute include, among others: the expected timing and likelihood of completion of the proposed transaction, the ability to successfully integrate the businesses, the occurrence of any event, change, or other circumstances that could give rise to the termination of the merger agreement, the possibility that stockholders of Resolute may not approve the merger agreement, the risk that the parties may not be able to satisfy the conditions to the proposed transaction in a timely manner or at all, risks related to disruption of management time from ongoing business operations due to the proposed transaction, the risk that any announcements relating to the proposed transaction could have adverse effects on the market price of Cimarex’s common stock or Resolute’s common stock, the risk of any unexpected costs or expenses resulting from the proposed transaction, the outcome of any litigation relating to the proposed transaction, the risk that the proposed transaction and its announcement could have an adverse effect on the ability of Cimarex and Resolute to retain customers and retain and hire key personnel and maintain relationships with their suppliers and customers and on their operating results and businesses generally, the risk the pending proposed transaction could distract management of both entities and they will incur substantial fees and costs, the risk that problems may arise in successfully integrating the businesses of the companies, which may result in the combined company not operating as effectively and efficiently as expected, the risk that the combined company may be unable to achieve synergies or other anticipated benefits of the proposed transaction or it may take longer than expected to achieve those synergies or benefits and other important factors, such as expenses related to integration, that could cause actual results to differ materially from those projected. The acquisition is subject to an agreement and plan of merger entered into November 18, 2018 among the parties. +Should one or more of the risks or uncertainties described above or elsewhere in this Form 10-K cause our underlying assumptions to be incorrect, our actual results and plans could differ materially from those expressed in any forward-looking statements. +All forward-looking statements, express or implied, included in this Form 10-K and attributable to Cimarex are qualified in their entirety by this cautionary statement. This cautionary statement should also be considered in connection with any subsequent written or oral forward-looking statements that Cimarex or persons acting on its behalf may issue. Cimarex does not undertake any obligation to update any forward-looking statements to reflect events or circumstances after the date of filing this Form 10-K with the Securities and Exchange Commission, except as required by law. +5 +Table of Contents +ITEMS 1 AND 2. BUSINESS AND PROPERTIES +General +Cimarex Energy Co., a Delaware corporation formed in 2002, is an independent oil and gas exploration and production company. Our operations are located mainly in Oklahoma, Texas, and New Mexico. On our website — www.cimarex.com — you will find our annual reports, proxy statements, and all of our Securities and Exchange Commission (“SEC”) filings, which we make available free of charge. Information contained on our website is not incorporated by reference into this Annual Report. Throughout this Form 10-K we use the terms “Cimarex,” “company,” “we,” “our,” and “us” to refer to Cimarex Energy Co. and its subsidiaries. +Our principal business objective is to increase shareholder value through the profitable long-term growth of our proved reserves and production while seeking to minimize our impact on the communities in which we operate for the long-term. Our strategy centers on maximizing cash flow from producing properties so that we can reinvest in exploration and development opportunities and provide cash returns to shareholders through increasing dividends. We consider merger and acquisition opportunities that enhance our competitive position and we occasionally divest non-core assets. Key elements to our approach include: +• +Maintain a strong financial position; +• +Invest in a diversified portfolio of drilling opportunities; +• +Evaluate projects based on rate-of-return and rank investment decisions; +• +Track predicted versus actual results in a centralized exploration management system to provide feedback to improve results; +• +Attract quality employees and maintain integrated teams of geoscientists, landmen, and engineers; and +• +Maximize profitability. +Conservative use of leverage has long been the key to our financial strategy. We believe that low leverage coupled with strong full-cycle returns enables us to better withstand volatility in commodity prices and provide competitive returns and growth to shareholders. See Item 5 Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities — Stock Performance Graph and Item 6 Selected Financial Data for additional financial and operating information for fiscal years 2014 - 2018. +Proved Oil and Gas Reserves +Our December 31, 2018 total proved reserves grew 6% from prior year-end. Proved undeveloped reserves as a percentage of total proved reserves decreased to 15% from 17% a year ago. We added 158.5 MMBOE of new reserves through extensions and discoveries. Net negative revisions totaled 22.7 MMBOE, which consisted primarily of a decrease of 38.6 MMBOE for the removal of PUD reserves whose development will likely be delayed beyond five years of initial disclosure, partially offset by an increase of 20.9 MMBOE for technical revisions. The change in our proved reserves is as follows: +Proved Reserves +(MBOE) +Reserves at December 31, 2017 +559,037 +Revisions of previous estimates +(22,667 +) +Extensions and discoveries +158,512 +Purchases of reserves +1 +Production +(81,010 +) +Sales of reserves +(22,678 +) +Reserves at December 31, 2018 +591,195 +6 +Table of Contents +A breakdown by commodity of our proved oil and gas reserves follows: +December 31, +2018 +2017 +2016 +Proved reserves: +Gas (MMcf) +1,591,321 +1,607,635 +1,471,420 +Oil (MBbls) +146,538 +137,238 +105,878 +NGL (MBbls) +179,436 +153,860 +130,633 +Total (MBOE) +591,195 +559,037 +481,748 +Percent developed +85 +% +83 +% +79 +% +The following table summarizes our estimated proved oil and gas reserves by region as of December 31, 2018 . +Gas +(MMcf) +Oil +(MBbls) +NGL +(MBbls) +Total +(MBOE) +% of +Total Proved +Reserves +Mid-Continent +861,440 +29,908 +82,826 +256,307 +43 +% +Permian Basin +727,985 +116,378 +96,533 +334,241 +57 +% +Other +1,896 +252 +77 +647 +— +% +1,591,321 +146,538 +179,436 +591,195 +100 +% +See SUPPLEMENTAL INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED) in Item 8 for further information regarding our reserves. +7 +Table of Contents +Production Volumes, Prices, and Costs +All of our oil and gas assets are located in the United States. We have varying levels of ownership interests in our properties consisting of working, royalty, and overriding royalty interests. Operated wells account for approximately 83% of our proved reserves. +Our 2018 production volumes totaled 221.9 MBOE per day, a 17% increase from 2017 , and were comprised of 42% gas, 31% oil, and 27% NGLs. The following table presents our total and average daily production volumes by region. +Total Production Volumes +Average Daily Production Volumes +Years Ended +December 31, +Gas +(MMcf) +Oil +(MBbls) +NGL +(MBbls) +Total +(MBOE) +Gas +(MMcf) +Oil +(MBbls) +NGL +(MBbls) +Total +(MBOE) +2018 +Permian Basin +92,593 +19,104 +11,499 +46,035 +253.7 +52.3 +31.5 +126.1 +Mid-Continent +112,697 +5,530 +10,474 +34,787 +308.8 +15.2 +28.7 +95.3 +Other +547 +76 +21 +188 +1.4 +0.2 +0.1 +0.5 +Total company +205,837 +24,710 +21,994 +81,010 +563.9 +67.7 +60.3 +221.9 +2017 +Permian Basin +79,521 +16,271 +8,858 +38,382 +217.9 +44.6 +24.3 +105.2 +Mid-Continent +107,463 +4,547 +8,503 +30,960 +294.4 +12.5 +23.3 +84.8 +Other +484 +43 +13 +137 +1.3 +0.1 +— +0.4 +Total company +187,468 +20,861 +17,374 +69,479 +513.6 +57.2 +47.6 +190.4 +2016 +Permian Basin +65,191 +13,183 +6,677 +30,725 +178.1 +36.0 +18.2 +83.9 +Mid-Continent +102,501 +3,283 +7,508 +27,874 +280.1 +9.0 +20.5 +76.2 +Other +535 +62 +15 +166 +1.4 +0.2 +0.1 +0.5 +Total company +168,227 +16,528 +14,200 +58,765 +459.6 +45.2 +38.8 +160.6 +At December 31, 2018 , we had two fields that contained 15% or more of our total proved reserves. These fields are the Watonga-Chickasha in the Cana area of the Mid-Continent, which contained approximately 39% of our total proved reserves, and the Ford West in the Permian Basin, which contained approximately 16% of our total proved reserves. At December 31, 2017 and 2016 , the Watonga-Chickasha was our only field that contained 15% or more of our total proved reserves. Production for these fields is presented in the following table. +Total Production Volumes +Average Daily Production Volumes +Years Ended December 31, +Gas +(MMcf) +Oil +(MBbls) +NGL +(MBbls) +Total +(MBOE) +Gas +(MMcf) +Oil +(MBbls) +NGL +(MBbls) +Total +(MBOE) +2018 +Watonga-Chickasha +96,373 +5,094 +9,774 +30,930 +264.0 +14.0 +26.8 +84.7 +Ford West +30,958 +3,748 +3,804 +12,711 +84.8 +10.3 +10.4 +34.8 +2017 +Watonga-Chickasha +88,557 +4,156 +7,829 +26,744 +242.6 +11.4 +21.4 +73.3 +Ford West +26,405 +3,370 +2,883 +10,654 +72.3 +9.2 +7.9 +29.2 +2016 +Watonga-Chickasha +81,757 +2,823 +6,764 +23,213 +223.4 +7.7 +18.5 +63.4 +Ford West +20,034 +2,258 +1,927 +7,525 +54.7 +6.2 +5.3 +20.6 +8 +Table of Contents +The following table presents the average commodity prices received and production cost per unit of production by region. +Average Realized Price +Production Cost (per BOE) +Years Ended December 31, +Gas +(per Mcf) +Oil +(per Bbl) +NGL +(per Bbl) +2018 +Permian Basin +$ +1.69 +$ +54.95 +$ +22.84 +$ +4.30 +Mid-Continent +$ +2.23 +$ +62.31 +$ +21.67 +$ +2.69 +Other +$ +2.97 +$ +58.40 +$ +26.46 +$ +7.63 +Total Company +$ +1.99 +$ +56.61 +$ +22.28 +$ +3.62 +2017 +Permian Basin +$ +2.72 +$ +46.96 +$ +20.25 +$ +4.70 +Mid-Continent +$ +2.78 +$ +47.42 +$ +23.02 +$ +2.60 +Other +$ +2.74 +$ +46.53 +$ +23.11 +$ +9.03 +Total Company +$ +2.76 +$ +47.06 +$ +21.61 +$ +3.77 +2016 +Permian Basin +$ +2.35 +$ +38.45 +$ +12.32 +$ +5.16 +Mid-Continent +$ +2.29 +$ +37.65 +$ +15.59 +$ +2.57 +Other +$ +2.00 +$ +38.86 +$ +14.80 +$ +9.56 +Total Company +$ +2.31 +$ +38.30 +$ +14.05 +$ +3.95 +Acquisitions and Divestitures +We consider property acquisitions, divestitures, and occasional mergers to enhance our competitive position. Moreover, sales of non-core assets are a source of liquidity that we can use to supplement funding of capital expenditures and acquisitions of core assets. +In 2018 , we sold interests in various non-core oil and gas properties for cash proceeds totaling $581 million . Included in these divestitures was a sale of oil and gas properties principally located in Ward County, Texas for which we have received, as of December 31, 2018 , $534.6 million in net cash proceeds. Final settlement, which will reflect customary post-closing adjustments, is scheduled to occur by the end of first quarter 2019. +In 2018 , we made various oil and gas property acquisitions for $26 million . Additionally, we entered into an agreement and plan of merger to acquire Resolute in a cash and stock transaction valued at a total purchase price of approximately $1.6 billion , including cash, stock, and the assumption of Resolute’s long-term debt. This pending acquisition will expand our footprint in Reeves County, Texas by 21,100 net acres that are complementary to our existing Reeves County position. The transaction, which is expected to be completed by the end of the first quarter 2019, is subject to the approval of Resolute shareholders and the satisfaction of certain regulatory approvals and other customary closing conditions. +Exploration and Development Overview +Cimarex has one reportable segment, exploration and production (“E&P”). Our E&P activities take place primarily in two areas: the Permian Basin and the Mid-Continent region. Almost all of our exploration and development (“E&D”) capital is allocated between these two areas. +9 +Table of Contents +A summary of our 2018 exploration and development activity by region is as follows: +E&D +Capital +Gross +Wells +Completed +Net +Wells +Completed +% +Completed +As Producers +(in millions) +Permian Basin +$ +1,092 +129 +79.9 +100 +% +Mid-Continent +472 +220 +42.2 +100 +% +Other +6 +— +— +— +% +$ +1,570 +349 +122.1 +100 +% +The Permian Basin encompasses west Texas and southeast New Mexico. Cimarex’s Permian Basin efforts are located in the western half of the Permian Basin known as the Delaware Basin. In 2018 , we focused on drilling horizontal wells that yielded oil and liquids-rich gas from the Wolfcamp shale and the Bone Spring formation. Cimarex saw improved results in its Wolfcamp shale wells, as measured by production and reserves, with the further implementation of long laterals and continued improvement in well completion design and in the Bone Spring wells via larger well completions. +The Permian Basin produced 126.1 MBOE per day in 2018 , which was 57% of our total company production. Total production from the region increased 20% in 2018 over 2017 . In 2018 , we invested $1.09 billion , or 70% of our total E&D investment, in the Permian Basin. +Our Mid-Continent region consists of Oklahoma and the Texas Panhandle. Our activity in 2018 in the Mid-Continent was focused in the Woodford shale and the Meramec horizon, both in Oklahoma. We continued to refine well completions and spacing in the Woodford shale and the Meramec horizon. +During 2018 , production from the Mid-Continent averaged 95.3 MBOE per day, or 43% of total company production. Total production from the region increased 12% in 2018 over 2017 . In 2018 , we invested $472 million , or 30% of our total E&D investment, in the Mid-Continent. +Drilling Activity +In 2018 , we completed or participated in the completion of 349 gross ( 122.1 net) wells, of which we operated 146 gross ( 105.8 net) wells. At year-end, we were in the process of drilling or participating in 40 gross ( 12.6 net) wells and there were 83 gross ( 28.3 net) wells waiting on completion. +10 +Table of Contents +We completed the following number of developmental wells in the years indicated in the table below. During these years, we completed no exploratory wells. +Wells Completed +2018 +2017 +2016 +Gross +Net +Gross +Net +Gross +Net +Developmental +Productive +349 +122.1 +314 +96.4 +153 +61.0 +Dry +— +— +5 +1.6 +1 +— +Total +349 +122.1 +319 +98.0 +154 +61.0 +At December 31, 2018 , we owned an interest in 10,362 gross ( 2,902 net) productive oil and gas wells. We had working interests in the following number of productive wells by region as of December 31, 2018 : +Gas +Oil +Gross +Net +Gross +Net +Mid-Continent +3,992 +1,513 +791 +197 +Permian Basin +769 +342 +4,702 +842 +Other +93 +6 +15 +2 +4,854 +1,861 +5,508 +1,041 +11 +Table of Contents +Acreage +The following table sets forth the gross and net acres of both developed and undeveloped leases held by Cimarex as of December 31, 2018 . Gross acres are the total number of acres in which we own a working interest. Net acres are the gross acres multiplied by our working interest. +Acreage +Undeveloped +Developed +Total +Gross +Net +Gross +Net +Gross +Net +Mid-Continent +Kansas +18,231 +18,191 +— +— +18,231 +18,191 +Oklahoma +97,203 +65,250 +687,246 +305,702 +784,449 +370,952 +Texas +17,975 +12,302 +128,956 +54,255 +146,931 +66,557 +133,409 +95,743 +816,202 +359,957 +949,611 +455,700 +Permian Basin +New Mexico +74,227 +54,657 +175,974 +119,892 +250,201 +174,549 +Texas +69,566 +50,852 +182,717 +121,933 +252,283 +172,785 +143,793 +105,509 +358,691 +241,825 +502,484 +347,334 +Other +Arizona +2,097,841 +2,097,841 +17,207 +— +2,115,048 +2,097,841 +California +383,487 +383,487 +— +— +383,487 +383,487 +Colorado +40,232 +18,867 +41,384 +1,642 +81,616 +20,509 +Gulf of Mexico +25,000 +13,000 +28,848 +6,381 +53,848 +19,381 +Louisiana +132,842 +129,792 +2,868 +168 +135,710 +129,960 +Michigan +234 +156 +587 +587 +821 +743 +Montana +30,755 +7,687 +7,688 +1,721 +38,443 +9,408 +Nevada +1,007,167 +1,007,167 +440 +1 +1,007,607 +1,007,168 +New Mexico +1,641,126 +1,633,819 +18,331 +2,436 +1,659,457 +1,636,255 +Texas +8,888 +2,696 +23,549 +4,784 +32,437 +7,480 +Utah +80,527 +59,433 +31,912 +1,495 +112,439 +60,928 +Wyoming +96,454 +13,944 +41,629 +3,829 +138,083 +17,773 +Other +168,034 +145,680 +9,627 +3,351 +177,661 +149,031 +5,712,587 +5,513,569 +224,070 +26,395 +5,936,657 +5,539,964 +Total +5,989,789 +5,714,821 +1,398,963 +628,177 +7,388,752 +6,342,998 +The table below summarizes by year and region our undeveloped acreage expirations in the next five years. In most cases, the drilling of a commercial well will hold the acreage beyond the expiration. +Acreage +2019 +2020 +2021 +2022 +2023 +Gross +Net +Gross +Net +Gross +Net +Gross +Net +Gross +Net +Mid-Continent +1,940 +1,543 +10,942 +10,923 +6,682 +6,682 +1,848 +1,848 +284 +284 +Permian Basin +15,224 +15,224 +10,154 +10,154 +4,290 +4,290 +2,148 +2,148 +960 +960 +Other +180,509 +176,413 +34,934 +34,901 +10,706 +10,626 +31,961 +30,940 +7,105 +6,963 +197,673 +193,180 +56,030 +55,978 +21,678 +21,598 +35,957 +34,936 +8,349 +8,207 +% of undeveloped acreage +3.3 +3.4 +0.9 +1.0 +0.4 +0.4 +0.6 +0.6 +0.1 +0.1 +At December 31, 2018 , we had no proved undeveloped reserves scheduled for development beyond the expiration dates of our undeveloped acreage. +12 +Table of Contents +Marketing +Our oil and gas production is sold under short-term arrangements at market-responsive prices. We sell our oil at prices tied directly or indirectly to field postings. Our gas is sold under price mechanisms related to either monthly or daily index prices on pipelines where we deliver our gas. We sell our NGLs at prices tied to monthly index prices where we deliver our NGLs. +We sell our oil, gas, and NGLs to a broad portfolio of customers, including major energy companies, pipeline companies, local distribution companies, and other end-users. In 2018 , we made sales to two customers that each amounted to 10% or more of our consolidated revenues for 2018. Sales to those two customers accounted for 23% and 21% , respectively, of our consolidated revenues for 2018. If any one of our major customers were to stop purchasing our production, we believe there are a number of other purchasers to whom we could sell our production with some delay. If multiple significant customers were to discontinue purchasing our production, we believe there would be challenges initially, but ample markets to handle the disruption. +We regularly monitor the credit worthiness of all our customers and may require parent company guarantees, letters of credit, or prepayments when deemed necessary. Historically, losses associated with uncollectible receivables have not been significant. +Corporate Headquarters and Employees +Our corporate headquarters is located at 1700 Lincoln St., Suite 3700, Denver, Colorado 80203. On December 31, 2018 and 2017 , Cimarex had 955 and 910 employees, respectively. None of our employees are subject to collective bargaining agreements. +Competition +The oil and gas industry is highly competitive, particularly for prospective undeveloped leases and purchases of proved reserves. There is also competition for rigs and related equipment used to drill for and produce oil and gas, however, to a lesser extent in the current market environment. Our competitive position also is highly dependent on our ability to recruit and retain geological, geophysical, and engineering expertise. We compete for prospects, proved reserves, oil-field services, and qualified oil and gas professionals with major and diversified energy companies and other independent operators that have larger financial, human, and technological resources than we do. +We compete with integrated, independent, and other energy companies for the sale and transportation of our oil, gas, and NGLs to marketing companies and end users. The oil and gas industry competes with other energy industries that supply fuel and power to industrial, commercial, and residential consumers. Many of these competitors have greater financial and human resources. The effect of these competitive factors cannot be predicted. +Proved Reserves Estimation Procedures +Proved oil and gas reserve quantities are based on estimates prepared by Cimarex in accordance with the SEC’s rules for reporting oil and gas reserves. Our reserve definitions conform with definitions of Rule 4-10(a) (1)-(32) of Regulation S-X of the SEC. All of our reserve estimates are maintained by our internal Corporate Reservoir Engineering group, which is comprised of reservoir engineers and engineering technicians. The objectives and management of this group are separate from and independent of the exploration and production functions of the company. The primary objective of our Corporate Reservoir Engineering group is to maintain accurate forecasts on all properties of the company through ongoing monitoring and timely updates of operating and economic parameters (production forecasts, prices and regional differentials, operating expenses, ownership, etc.) in accordance with guidelines established by the SEC. This separation of function and responsibility is a key internal control. +Cimarex engineers are responsible for estimates of proved reserves. Corporate engineers interact with the exploration and production departments to ensure all available engineering and geologic data is taken into account prior to establishing or revising an estimate. After preparing the reserves update, the corporate engineers review their recommendations with the Vice President of Corporate Engineering. After approval from the Vice President of Corporate Engineering, the revisions are entered into our reserves database by the engineering technician. +13 +Table of Contents +During the course of the year, the Vice President of Corporate Engineering presents summary reserves information to senior management and to our Board of Directors for their review. From time to time, the Vice President of Corporate Engineering also will confer with the Vice President of Exploration, Chief Operating Officer, and the Chief Executive Officer regarding specific reserves-related issues. In addition, Corporate Reservoir Engineering maintains a set of basic guidelines and procedures to ensure that critical checks and reviews of the reserves database are performed on a regular basis. +Together, these internal controls are designed to promote a comprehensive, objective, and accurate reserves estimation process. As an additional confirmation of the reasonableness of our internal estimates, DeGolyer and MacNaughton, an independent petroleum engineering consulting firm, performed an independent evaluation of our estimated net reserves representing greater than 80% of the total future net revenue discounted at 10% attributable to the total interests owned by Cimarex as of December 31, 2018 . The individual primarily responsible for overseeing the review is a Senior Vice President with DeGolyer and MacNaughton and a Registered Professional Engineer in the State of Texas with over 34 years of experience in oil and gas reservoir studies and reserves evaluations. +The technical employee primarily responsible for overseeing the oil and gas reserves estimation process is Cimarex’s Vice President of Corporate Engineering. This individual graduated from the Colorado School of Mines with a Bachelor of Science degree in Engineering and has more than 24 years of practical experience in oil and gas reservoir evaluation. He has been directly involved in the annual reserves reporting process of Cimarex since 2002 and has served in his current role for the past 14 years. +Title to Oil and Gas Properties +We undertake title examination and perform curative work at the time we lease undeveloped acreage, prepare for the drilling of a prospect, or acquire proved properties. We believe title to our properties is good and defensible, and is in accordance with industry standards. Nevertheless, we are involved in title disputes from time to time that result in litigation. Our oil and gas properties are subject to customary royalty interests, liens incidental to operating agreements, tax liens, and other burdens and minor encumbrances, easements, and restrictions. +Government Regulation +Oil and gas production and transportation is subject to extensive federal, state, and local laws and regulations. Compliance with existing laws often is difficult and costly, but has not had a significant adverse effect on our operations or financial condition. In recent years, we have been most directly impacted by federal and state environmental regulations and energy conservation rules. We are also impacted by federal and state regulation of pipelines and other oil and gas transportation systems. +The states in which we conduct operations establish requirements for drilling permits, the method of developing fields, the size of well spacing units, drilling density within productive formations and the unitization or pooling of properties. In addition, state conservation laws include requirements for waste prevention, establish limits on the maximum rate of production from wells, generally prohibit the venting or flaring of natural gas, and impose certain requirements regarding the ratability of production. +Environmental Regulation. Various federal, state, and local laws regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, directly impact oil and gas exploration, development, and production operations, which consequently impact our operations and costs. These laws and regulations govern, among other things, emissions into the atmosphere, discharges of pollutants into waters, underground injection of waste water, the generation, storage, transportation, and disposal of waste materials, and protection of public health, natural resources, and wildlife. These laws and regulations may impose substantial liabilities for noncompliance and for any contamination resulting from our operations and may require the suspension or cessation of operations in affected areas. +Cimarex is committed to environmental protection and believes we are in material compliance with applicable environmental laws and regulations. We obtain permits for our facilities and operations in accordance with the applicable laws and regulations. There are no known issues that have a significant adverse effect on the permitting process or permit compliance status of any of our facilities or operations. Expenditures are required to comply with environmental regulations. These costs are a normal, recurring expense of operations and not an extraordinary cost of compliance with current government regulations. +14 +Table of Contents +We do not anticipate that we will be required under current environmental laws and regulations to expend amounts that will have a material adverse effect on our financial position or operations. However, due to continuing changes in these laws and regulations, we are unable to predict with any reasonable degree of certainty any potential delays in development plans that could arise, or our future costs of complying with governmental requirements. We maintain levels of insurance customary in the industry to limit our financial exposure in the event of a substantial environmental claim resulting from sudden, unanticipated and accidental discharges of oil, produced water, or other substances as well as additional coverage for certain other pollution events. +Gas Gathering and Transportation. The Federal Energy Regulatory Commission (“FERC”) requires interstate gas pipelines to provide open access transportation. FERC also enforces the prohibition of market manipulation by any entity, and the facilitation of the sale or transportation of natural gas in interstate commerce. Interstate pipelines have implemented these requirements, providing us with additional market access and more fairly applied transportation services and rates. FERC continues to review and modify its open access and other regulations applicable to interstate pipelines. +Under the Natural Gas Policy Act (“NGPA”), natural gas gathering facilities are expressly exempt from FERC jurisdiction. What constitutes “gathering” under the NGPA has evolved through FERC decisions and judicial review of such decisions. We believe that our gathering systems meet the test for non-jurisdictional “gathering” systems under the NGPA and that our facilities are not subject to federal regulations. Although exempt from FERC oversight, our natural gas gathering systems and services may receive regulatory scrutiny by state and federal agencies regarding the safety and operating aspects of the transportation and storage activities of these facilities. +In addition to using our own gathering facilities, we may use third-party gathering services or interstate transmission facilities (owned and operated by interstate pipelines) to ship our gas to markets. +Additional proposals and proceedings that might affect the oil and gas industry are pending before the U.S. Congress, FERC, Bureau of Land Management (“BLM”), U.S. Environmental Protection Agency (“EPA”), state legislatures, state agencies, local governments, and the courts. We cannot predict when or whether any such proposals may become effective and what effect they will have on our operations. We do not anticipate that compliance with existing federal, state, and local laws, rules, or regulations will have a material adverse effect upon our capital expenditures, earnings, or competitive position. +Federal and State Income and Other Local Taxation +Cimarex and the petroleum industry in general are affected by both federal and state income tax laws, as well as other local tax regulations involving ad valorem, personal property, franchise, severance, and other excise taxes. We have considered the effects of these provisions on our operations and do not anticipate that there will be any material undisclosed impact on our capital expenditures, earnings, or competitive position. +Executive Officers of the Registrant +See Part III, Item 10, Directors, Executive Officers and Corporate Governance for information regarding our executive officers as of February 20, 2019 . +ITEM 1A. RISK FACTORS +The following risks and uncertainties, together with other information set forth in this Form 10-K, should be carefully considered by current and future investors in our securities. These risks and uncertainties are not the only ones we face. Additional risks and uncertainties presently unknown to us or currently deemed immaterial also may impair our business operations. The occurrence of one or more of these risks or uncertainties could materially and adversely affect our business, financial condition, and results of operations, which in turn could negatively impact the value of our securities. +15 +Table of Contents +Risks Concerning Cimarex and its Operations +Oil, gas, and NGL prices fluctuate due to a number of factors beyond our control, creating a component of uncertainty in our development plans and overall operations. Declines in prices adversely affect our financial results and rate of growth in proved reserves and production. +Oil and gas markets are volatile. We cannot predict future prices. The prices we receive for our production heavily influence our revenue, profitability, access to capital, and future rate of growth. The prices we receive depend on numerous factors beyond our control. These factors include, but are not limited to, changes in domestic and global supply and demand for oil and gas, the level of domestic and global oil and gas exploration and production activity, geopolitical instability, the actions of the Organization of Petroleum Exporting Countries, weather conditions, technological advances affecting energy consumption, governmental regulations and taxes, and the price and technological advancement of alternative fuels. +Our proved oil and gas reserves and production volumes will decrease unless those reserves are replaced with new discoveries or acquisitions. Accordingly, for the foreseeable future, we expect to make substantial capital investments for the exploration and development of new oil and gas reserves. Historically, we have paid for these types of capital expenditures with cash flow provided by our production operations, our revolving credit facility, and proceeds from the sale of senior notes or equity. Low prices reduce our cash flow and the amount of oil and gas that we can economically produce and may cause us to curtail, delay, or defer certain exploration and development projects. Moreover, low prices may impact our abilities to borrow under our revolving credit facility and to raise additional debt or equity capital to fund acquisitions. +If prices decrease, we may be required to take write-downs of the carrying values of our oil and gas properties and/or our goodwill. +Accounting rules require that we periodically review the carrying value of our oil and gas properties and goodwill for possible impairment. +In 2016 we recognized a ceiling test impairment totaling $757.7 million ( $481.4 million , net of tax). The impairment resulted primarily from the impact of decreases in the trailing twelve-month average prices for oil, gas, and NGLs utilized in determining the estimated future net cash flows from proved reserves. We did not recognize any ceiling test impairments in 2017 or 2018 since the calculated value of the ceiling limitation exceeded the carrying value of our oil and gas properties subject to the test. At December 31, 2018 , a decline of approximately 24% or more in the value of the ceiling limitation would have resulted in an impairment. Because the ceiling calculation uses trailing twelve-month average commodity prices, the effect of increases and decreases in period-over-period prices can significantly impact the ceiling limitation calculation. Impairment charges do not affect cash flow from operating activities, but do adversely affect our net income and various components of our balance sheet. +We evaluate our goodwill for impairment annually and whenever events or changes in circumstances indicate the possibility that goodwill may be impaired. We have had no goodwill impairments during the years ended December 31, 2018 , 2017, and 2016 . +Ineffective internal controls could impact our business and financial results. +Our internal control over financial reporting may not prevent or detect misstatements because of its inherent limitations, including the possibility of human error, the circumvention or overriding of controls, or fraud. Even effective internal controls can provide only reasonable assurance with respect to the preparation and fair presentation of financial statements. If we fail to maintain the adequacy of our internal controls, including any failure to implement required new or improved controls, or if we experience difficulties in their implementation, our business and financial results could be harmed and we could fail to meet our financial reporting obligations. For example, at December 31, 2016, management concluded that a deficiency in the design of our internal controls related to the full cost ceiling test calculation represented a material weakness in our internal control over financial reporting and, therefore, that we did not maintain effective internal control over financial reporting as of December 31, 2016, as reported in our Form 10-K/A for that period. We have since remediated this material weakness, however, there is no guarantee that we won’t experience material weaknesses in our internal control over financial reporting in the future or that we will be able to implement new controls to address such material weaknesses as necessary, which may result in untimely or inaccurate reporting of our financial statements. +16 +Table of Contents +U.S. or global financial markets may impact our business and financial condition. +A credit crisis or other turmoil in the U.S. or global financial system may have a negative impact on our business and our financial condition. Our ability to access the capital markets may be restricted at a time when we would like, or need, to raise financing. This could have an impact on our flexibility to react to changing economic and business conditions. Deteriorating economic conditions could have a negative impact on our lenders, the purchasers of our oil and gas production, and the working interest owners in properties we operate, causing them to fail to meet their obligations to us. +Failure to economically replace oil and gas reserves could negatively affect our financial results and future rate of growth. +In order to replace the reserves depleted by production and to maintain or increase our total proved reserves and overall production levels, we must either locate and develop new oil and gas reserves or acquire producing properties from others. This requires significant capital expenditures and can impose reinvestment risk for us, as we may not be able to continue to replace our reserves economically. While we occasionally may seek to acquire proved reserves, our main business strategy is to grow through exploration and drilling. Without successful exploration and development, our reserves, production, and revenues could decline rapidly, which would negatively impact the results of our operations. +Exploration and development involves numerous risks, including new governmental regulations and the risk that we will not discover any commercially productive oil or gas reservoirs. Additionally, it can be unprofitable, not only from drilling dry holes, but also from drilling productive wells that do not return a profit because of insufficient reserves or declines in commodity prices. +Our drilling operations may be curtailed, delayed, or canceled for many reasons. Factors such as unforeseen poor drilling conditions, title problems, unexpected pressure irregularities, equipment failures, accidents, adverse weather conditions, compliance with environmental and other governmental requirements, bans, moratoria, or other restrictions implemented by local governments and the cost of, or shortages or delays in the availability of, drilling and completion services could negatively impact our drilling operations. +Our proved reserve estimates may be inaccurate and future net cash flows are uncertain. +Estimates of total proved oil and gas reserves (consisting of proved developed and proved undeveloped reserves) and associated future net cash flow depend on a number of variables and assumptions. Refer to CAUTIONARY INFORMATION ABOUT FORWARD-LOOKING STATEMENTS in Part I of this report. Among others, changes in any of the following factors may cause actual results to vary considerably from our estimates: +• +oil, gas, and NGL prices; +• +timing of development expenditures; +• +amount of required capital expenditures and associated economics; +• +recovery efficiencies, decline rates, drainage areas, and reservoir limits; +• +anticipated reservoir and production characteristics and interpretations of geologic and geophysical data; +• +production rates, reservoir pressure, unexpected water encroachment, and other subsurface conditions; +• +governmental regulation; +• +access to assets restricted by local government action; +• +operating costs; +• +property, severance, excise, and other taxes incidental to oil and gas operations; +17 +Table of Contents +• +workover and remediation costs; and +• +federal and state income taxes. +Our proved oil and gas reserve estimates are prepared by Cimarex engineers in accordance with guidelines established by the SEC. DeGolyer and MacNaughton, independent petroleum engineers, performed an independent evaluation of our estimated net reserves representing greater than 80% of the total future net revenue discounted at 10%, as of December 31, 2018 . +The cash flow amounts referred to in this filing should not be construed as the current market value of our proved reserves. In accordance with SEC guidelines, the estimated discounted net cash flow from proved reserves is based on the average of the previous twelve months’ first-day-of-the-month prices and costs as of the date of the estimate, whereas actual future prices and costs may be materially different. +Our business depends on oil and gas pipeline and transportation facilities, some of which are owned by others. +In addition to the existence of adequate markets, our oil and gas production depends in large part on the proximity and capacity of pipeline systems, as well as storage, transportation, processing and fractionation facilities, most of which are owned by third parties. The inability to transport one commodity, such as gas, could also impair our ability to produce and sell other commodities, such as oil and NGLs, produced from the same wells. The lack of availability or the lack of capacity on these systems and facilities could result in the curtailment of production or the delay or discontinuance of drilling plans. This is more likely in remote areas with less established infrastructure, such as our Delaware Basin area where we and competitors have significant development activities. The lack of availability of or capacity in these facilities or the loss of these facilities due to construction delays, weather, fire, or other reasons, for an extended period of time could negatively affect our revenues. +A limited number of companies purchase a majority of our oil, gas, and NGLs. The loss of a significant purchaser could have a material adverse effect on our ability to sell production. +Federal and state regulation of oil and gas, local government activity, adverse court rulings, tax and energy policies, changes in supply and demand, pipeline pressures, damage to or destruction of pipelines, and general economic conditions could adversely affect our ability to produce and market oil and natural gas. +Commodity price derivative transactions may limit our potential gains and involve other risks. +To limit our exposure to price risk, we enter into derivative agreements from time to time. Commodity price derivatives limit volatility and increase the predictability of a portion of our cash flow. These transactions also limit our potential gains when oil and gas prices exceed the prices established by the derivatives. +In certain circumstances, derivative transactions may expose us to the risk of financial loss, including instances in which: +• +the counterparties to our derivative agreements fail to perform; +• +there is a sudden unexpected event that materially increases oil and gas prices; or +• +there is a widening of price basis differentials between delivery points for our production and the delivery point assumed in the derivative agreement. +Because we account for derivative contracts under mark-to-market accounting, during periods we have derivative transactions in place we expect continued volatility in derivative gains and losses on our statement of operations as changes occur in the relevant price indexes. +The adoption of derivatives legislation could have an adverse effect on our ability to use derivative instruments as hedges against fluctuating commodity prices. +In July 2010, the Dodd-Frank Act was enacted, representing an extensive overhaul of the framework for regulation of U.S. financial markets. The Dodd-Frank Act called for various regulatory agencies, including the SEC +18 +Table of Contents +and the Commodities Futures Trading Commission (“CFTC”), to establish regulations for implementation of many of its provisions. The Dodd-Frank Act contains significant derivatives regulations, including requirements that certain transactions be cleared on exchanges and that cash collateral (margin) be posted for such transactions. The Dodd-Frank Act provides for an exemption from the clearing and cash collateral requirements for commercial end-users, such as Cimarex, and it includes a number of defined terms used in determining how this exemption applies to particular derivative transactions and the parties to those transactions. +We have satisfied the requirements for the commercial end-user exception to the clearing requirement and intend to continue to engage in derivative transactions. In December 2015, the CFTC approved final rules on margin requirements that will have an impact on our derivative counterparties and an interim final rule exemption from the margin requirements for certain uncleared swaps with commercial end-users. The final rules did not impose additional requirements on commercial end-users. The ultimate effect of these new rules and any additional regulations is currently uncertain. New rules and regulations in this area may result in significant increased costs and disclosure obligations as well as decreased liquidity as entities that previously served as derivative counterparties exit the market. +We have been an early entrant into new or emerging resource plays. As a result, our drilling results in these areas are uncertain. The value of our undeveloped acreage may decline and we may incur impairment charges if drilling results are unsuccessful. +New or emerging oil and gas resource plays have limited or no production history. Consequently, in those areas it is difficult to predict our future drilling costs and results. Therefore, our cost of drilling, completing, and operating wells in these areas may be higher than initially expected. Similarly, our production may be lower than initially expected, and the value of our undeveloped acreage may decline if our results are unsuccessful. As a result, we may be required to impair the carrying value of our undeveloped acreage in new or emerging plays. +Furthermore, unless production is established during the primary term of certain of our undeveloped oil and gas leases, the leases will expire, and we will lose our right to develop those properties. +Competition in our industry is intense and many of our competitors have greater financial and technological resources. +We operate in the competitive area of oil and gas exploration and production. Many of our competitors are large, well-established companies that have larger operating staffs and greater capital resources. These competitors may be willing to pay more for exploratory prospects and productive oil and gas properties. They may also be able to define, evaluate, bid for, and purchase a greater number of properties and prospects than our financial or human resources permit. +Because our activity is also concentrated in areas of heavy industry competition, there is heightened demand for personnel, equipment, power, services, facilities, and resources, resulting in higher costs than in other areas. Such intense competition also could result in delays in securing, or the inability to secure, the personnel, equipment, power, services, resources, or facilities necessary for our development activities, which could negatively impact our production volumes. We also face higher costs in remote areas where vendors can charge higher rates due to that remoteness and the inability to attract employees to those areas, as well as the vendors’ ability to deploy their resources in easier-to-access areas. +We are subject to complex laws and regulations that can adversely affect the cost, manner, and feasibility of doing business. +Exploration, production, and the sale of oil and gas are subject to extensive laws and regulations, including those implemented to protect the environment, human health and safety, and wildlife. Federal, state, and local regulatory agencies frequently require permitting and impose conditions on our activities. During the permitting process, these regulatory agencies often exercise considerable discretion in both the timing and scope of the permits, and the public, including special interest groups, often has an opportunity to influence the timing and outcome of the process. The requirements or conditions imposed by these agencies can be costly and can delay the commencement of our operations. In addition, a number of initiatives were put forth by the Obama administration in the form of Presidential or Secretarial Memoranda, which are still in effect, and have the potential to impact the cost of doing business or could result in substantial delays in permitting, drilling, and other oil and gas activities. +19 +Table of Contents +Failing to comply with any of the applicable laws and regulations, or Presidential initiatives, could result in the suspension or termination of our operations and subject us to administrative, civil, and criminal liabilities and penalties. Such costs could have a material adverse effect on both our financial condition and operations. +Environmental matters and costs can be significant. +As an owner, lessee, or operator of oil and gas properties, we are subject to various complex, stringent, and constantly evolving environmental laws and regulations. Our operations inherently create the risk of environmental liability to the government and private parties stemming from our use, generation, handling, and disposal of water and waste materials, as well as the release of hydrocarbons or other substances into the air, soil, or water. The environmental laws and regulations to which we are subject impose numerous obligations applicable to our operations, including: the acquisition of permits before conducting regulated activities associated with drilling for and producing oil and gas; the restriction of types, quantities, and concentration of materials that can be released into the environment; the limitation or prohibition of drilling activities on certain lands lying within wilderness, wetlands, waters of the United States, and other protected areas; the application of specific health and safety criteria addressing worker protection; and the imposition of substantial liabilities for pollution resulting from our operations. Numerous governmental authorities, such as the EPA and analogous state agencies have the power to enforce compliance with these laws and regulations and the permits issued under them. Such enforcement actions often involve taking difficult and costly compliance measures or corrective actions. Failure to comply with these laws and regulations may result in the assessment of sanctions, including administrative, civil, or criminal penalties, the imposition of investigatory or remedial obligations, and the issuance of orders limiting or prohibiting some or all of our operations. In addition, we may experience delays in obtaining, or be unable to obtain, required permits, which may delay or interrupt our operations and limit our growth and revenue. +Liabilities under certain environmental laws can be joint and several and may in some cases be imposed regardless of fault on our part such as where we own a working interest in a property operated by another party. We also could be held liable for damages or remediating lands or facilities previously owned or operated by others regardless of whether such contamination resulted from our own actions and regardless if we were in compliance with all applicable law at the time. Further, claims for damages to persons or property, including natural resources, may result from the environmental, health, and safety impacts of our operations. Because these environmental risks generally are not fully insurable and can result in substantial costs, such liabilities could have a material adverse effect on both our financial condition and operations. +Our financial condition and results of operations may be materially adversely affected if we incur costs and liabilities due to a failure to comply with environmental regulations or a release of hazardous substances into the environment. +Our operations are subject to environmental laws and regulations relating to the management and release of hazardous substances, pollutants, solid and hazardous wastes, and petroleum hydrocarbons. These laws generally regulate the generation, storage, treatment, discharge, transportation, and disposal of pollutants and solid and hazardous waste and may impose strict and, in some cases, joint and several liability for the investigation and remediation of affected areas where hazardous substances may have been released or disposed. The most significant of these environmental laws are as follows: +• +The Comprehensive Environmental Response, Compensation, and Liability Act, as amended, referred to as CERCLA or the Superfund law, and comparable state laws, which imposes liability on generators, transporters, and arrangers of hazardous substances at sites where hazardous substance releases have occurred or are threatening to occur; +• +The Oil Pollution Act of 1990 (“OPA”), under which owners and operators of onshore facilities and pipelines, lessees or permittees of an area in which an offshore facility is located, and owners and operators of vessels are liable for removal costs and damages that result from a discharge of oil into navigable waters of the United States; +• +The Resource Conservation and Recovery Act (“RCRA”), as amended, and comparable state statutes, which governs the treatment, storage, and disposal of solid waste; +• +The Federal Water Pollution Control Act, as amended, also known as the Clean Water Act (“CWA”), which governs the discharge of pollutants, including natural gas wastes, into federal and state waters; +20 +Table of Contents +• +The Safe Drinking Water Act (“SDWA”), which governs the disposal of wastewater in underground injection wells; and +• +The Clean Air Act (“CAA”) which governs the emission of pollutants into the air. +We believe we are in substantial compliance with the requirements of CERCLA, OPA, RCRA, CWA, SDWA, CAA and related state and local laws and regulations. We also believe we hold all necessary and up-to-date permits, registrations, and other authorizations required under such laws and regulations. Although the current costs of managing our wastes as they presently are classified are reflected in our budget, any legislative or regulatory reclassification of oil and gas exploration and production wastes could increase our costs to manage and dispose of such wastes and have a material adverse effect on our financial condition and operations. +Federal regulatory initiatives relating to the protection of threatened or endangered species could result in increased costs and additional operating restrictions or delays. +The Federal Endangered Species Act (“ESA”) was established to protect endangered and threatened species. Pursuant to the ESA, if a species is listed as threatened or endangered, restrictions may be imposed on activities adversely affecting that species’ habitat. The U.S. Fish and Wildlife Service (“FWS”) may designate critical habitat and suitable habitat areas it believes are necessary for survival of a threatened or endangered species. A critical habitat or suitable habitat designation could result in further material restrictions to federal land use and may materially delay or prohibit land access for oil and gas development. Similar protections are offered to migratory birds under the Migratory Bird Treaty Act. We conduct operations on federal oil and gas leases in areas where certain species are currently listed as threatened or endangered, or could be listed as such, under the ESA. Operations in areas where threatened or endangered species or their habitat are known to exist may require us to incur increased costs to implement mitigation or protective measures and also may restrict or preclude our drilling activities in those areas or during certain seasons, such as breeding and nesting seasons. On March 27, 2014, the FWS announced the listing of the lesser prairie chicken, whose habitat is over a five-state region, including Texas, New Mexico, and Oklahoma, where we conduct operations, as a threatened species under the ESA. Listing of the lesser prairie chicken as a threatened species imposes restrictions on disturbances to critical habitat by landowners and drilling companies that would harass, harm, or otherwise result in a “taking” of this species. However, the FWS also announced a final rule that will limit regulatory impacts on landowners and businesses from the listing if those landowners and businesses have entered into certain range-wide conservation planning agreements, such as those developed by the Western Association of Fish and Wildlife Agencies (“WAFWA”), pursuant to which such parties agreed to take steps to protect the lesser prairie chicken’s habitat and to pay a mitigation fee if its actions harm the lesser prairie chicken’s habitat. We entered into a voluntary Candidate Conservation Agreement (“CCA”) with the WAFWA, whereby we agreed to take certain actions and limit certain activities, such as limiting drilling on certain portions of our acreage during nesting seasons, in an effort to protect the lesser prairie chicken. On February 9, 2018, the FWS announced the listing of the Texas Hornshell, a fresh water mussel species in areas including New Mexico and Texas where we operate in the Permian Basin, as an endangered species. We also intend to enter into a CCA concerning voluntary conservation actions with respect to the Texas Hornshell. Participating in CCAs could result in increased costs to us from species protection measures, time delays or limitations on drilling activities, which costs, delays or limitations may be significant. While a federal judge in Texas vacated the listing of the lesser prairie chicken in 2015, listing petitions continue to be filed with the FWS which could impact our operations. Many non-governmental organizations (“NGOs”) work closely with the FWS regarding the listing of many species, including species with broad and even nationwide ranges. The recent listing of the Mexican Long Nosed bat, whose habitat includes the Permian Basin where we operate, is an example of the NGOs’ influence on ESA listing decisions. The increase in endangered species listings may impact our ability to explore for or produce oil and gas in certain areas and increase our costs. +Our hydraulic fracturing activities are subject to risks that could negatively impact our operations and profitability. +We use hydraulic fracturing for the completion of almost all of our wells. Hydraulic fracturing is a process that involves pumping fluid and proppant at high pressure into a hydrocarbon bearing formation to create and hold open fractures. Those fractures enable gas or oil to move through the formation’s pores to the well bore. Typically, the fluid used in this process is primarily water. In plays where hydraulic fracturing is necessary for successful development, the demand for water may exceed the supply. A lack of readily available water or a significant increase in the cost of water could cause delays or increased completion costs. +21 +Table of Contents +While hydraulic fracturing historically has been regulated by state oil and gas commissions, the practice has become increasingly controversial in certain parts of the country, resulting in increased scrutiny and regulation from federal agencies. For example, the EPA has asserted federal regulatory authority over certain hydraulic fracturing activities under the SDWA involving the use of diesel fuels and published permitting guidance in February 2014 addressing the use of diesel in fracturing operations. Although the EPA has delegated the permitting authority for the SDWA’s Underground Injection Control Class II programs in Oklahoma, Texas, and New Mexico where we maintain operational acreage, the EPA is encouraging state programs to review and consider the use of such draft guidance. +In addition, on March 26, 2015, the federal BLM published a final rule governing hydraulic fracturing on federal and Indian lands. The rule requires public disclosure of chemicals used in hydraulic fracturing on federal and Indian lands, confirmation that wells used in fracturing operations meet appropriate construction standards, development of appropriate plans for managing flowback water that returns to the surface, increased standards for interim storage of recovered waste fluids, and submission to the BLM of detailed information on the geology, depth, and location of preexisting wells. This rule originally was scheduled to take effect on June 24, 2015. However, the rule is the subject of several pending lawsuits filed by industry groups, two Indian tribes, and at least four states, alleging that federal law does not give the BLM authority to regulate hydraulic fracturing. The federal judge has enjoined the rule while the case is pending. The district court held that BLM did not have jurisdiction to promulgate the rule. The Obama Justice Department appealed and that appeal is pending. +There are also certain governmental reviews either underway or being proposed that focus on environmental aspects of hydraulic fracturing practices. The EPA prepared a study of the potential environmental effects of hydraulic fracturing on drinking water and groundwater. The EPA’s draft report was released on June 4, 2015. The findings of the report suggest that hydraulic fracturing does not pose a systemic risk to groundwater although there are risks to both groundwater and soils posed by inadequate water handling practices in certain situations. A public comment period on the report was open until August 28, 2015, and a series of public hearings were conducted by the EPA’s Scientific Advisory Board (“SAB”) throughout the fall of 2015. The EPA issued its final report and has reached two different topline conclusions, although the content of the study itself remains unchanged. Other governmental agencies, including the U.S. Department of Energy and the U.S. Department of the Interior, have evaluated or are evaluating various other aspects of hydraulic fracturing. These ongoing or proposed studies could spur initiatives to further regulate hydraulic fracturing. +Additionally, Congress from time to time has considered the adoption of legislation to provide for federal regulation of hydraulic fracturing and to require disclosure of the chemicals used in the hydraulic fracturing process. Most producing states, including Texas and Colorado, have adopted, and other states are considering adopting, regulations that could impose more stringent permitting, public disclosure, and well construction requirements on hydraulic fracturing operations or otherwise seek to ban fracturing activities altogether. +Any of the above factors could have a material adverse effect on our financial position, results of operations, or cash flows and could make it more difficult or costly for us to perform fracturing to stimulate production from dense subsurface rock formations and, in the event of local prohibitions against commercial production of natural gas, may preclude our ability to drill wells. In addition, our fracturing activities could become subject to additional permitting requirements and result in permitting delays as well as potential increases in costs. Restrictions on hydraulic fracturing could also reduce the amount of oil and gas that we are ultimately able to produce from our reserves. +The adoption of climate change legislation or regulations restricting emission of greenhouse gases, investor pressure concerning climate-related disclosures, and lawsuits could result in increased operating costs and reduced demand for the oil and gas we produce as well as reductions in the availability of capital. +Studies have suggested that emission of certain gases, commonly referred to as greenhouse gases (“GHGs”), may be impacting the earth’s climate. Methane, a primary component of natural gas, and carbon dioxide, also present in natural gas as a secondary product, sometimes considered an impurity or a by-product of the burning of oil and natural gas, are examples of GHGs. The U.S. Congress and various states have been evaluating, and in some cases implementing, climate-related legislation and other regulatory initiatives that restrict emissions of GHGs. In December 2009, the EPA published its findings that emissions of GHGs present an endangerment to public health and the environment because emissions of such gases are contributing to the warming of the earth’s atmosphere and other climatic changes. Based on these findings, the EPA adopted regulations under existing provisions of the Federal Clean Air Act that establish Prevention of Significant Deterioration (“PSD”) and Title V permit reviews for GHG emissions from certain large stationary sources. Facilities required to obtain PSD and/or Title V permits under EPA’s GHG +22 +Table of Contents +Tailoring Rule for their GHG emissions also may be required to meet “Best Available Control Technology” standards that will be established by the states or, in some cases, by the EPA on a case-by-case basis. The EPA has also adopted rules requiring the monitoring and reporting of GHG emissions from specified sources in the United States, including, among others, certain oil and gas production facilities on an annual basis, which includes certain of our operations. In recent proposed rulemaking, EPA is widening the scope of annual GHG reporting to include not only activities associated with completion and workover of gas wells with hydraulic fracturing and activities associated with oil and gas production operations, but also completions and workovers of oil wells with hydraulic fracturing, gathering and boosting systems, and transmission pipelines. +While Congress has from time to time considered legislation to reduce emissions of GHGs, there has not been significant activity in the form of adopted legislation to reduce GHG emissions at the federal level in recent years. In the absence of such federal climate legislation, a number of state and regional efforts have emerged that are aimed at tracking and/or reducing GHG emissions by means of cap and trade programs that typically require major sources of GHG emissions, such as electric power plants, to acquire and surrender emission allowances in return for emitting those GHGs. In January 2015, President Obama announced a series of administration actions to reduce methane emissions, including rulemaking by the EPA and the BLM as well as updating of standards by the Department of Transportation’s Pipeline and Hazardous Materials Administration. The previous administration intended to promulgate proposed climate change rulemaking aimed at reducing GHG emissions by 45% by 2025 compared to 2012 levels. These proposals target both new and existing sources. On January 22, 2016, the Department of the Interior announced its proposed emissions mandate on oil and gas producers who operate on federal and Indian lands. While this rule was finalized in November of 2016, it is currently being challenged by several states and industry. While we expect new legislation and regulations to increase the cost of business, at this time it is not possible to quantify the impact on our business. Any such future laws and final regulations that require reporting of GHGs or otherwise limit emissions of GHGs from our equipment and operations could require us to incur costs to develop and implement best management practices aimed at reducing GHG emissions, install and maintain emissions control technologies, as well as monitor and report on GHG emissions associated with our operations, which would increase our operating costs, and such requirements also could adversely affect demand for the oil and gas that we produce. +The following is a summary of potential climate-related risks that could adversely affect Cimarex: +Transition Risks. Transition risks are risks related to the transition to a lower-carbon economy and include policy, legal, technology, and market risks. +Policy and Legal Risks. Policy risks include policy actions that attempt to contract actions that contribute to adverse effects of climate change or policy actions that seek to promote adaptation to climate change. Examples include implementing carbon-pricing mechanisms to reduce GHG emissions (which would increase the costs of our doing business), shifting energy use toward lower emission sources (which could lower demand for our oil and gas production, resulting in lower prices and lower revenues), adopting energy-efficiency solutions (which also could lower demand for our oil and gas production, resulting in lower prices and lower revenues), encouraging greater water efficiency measures (which would increase our costs of production), and promoting more sustainable land-use practices (which also would increase our costs of production and could impact our ability to operate in certain areas). Policy actions also may include restrictions or bans on oil and gas activities, which could lead to write-downs or impairments of our assets. Legal and litigation risks include potential lawsuits claiming failure to mitigate impacts of climate change, failure to adapt to climate change, and the insufficiency of disclosure around material financial risks. +Technology Risk. Technological improvements or innovations that support the transition to a lower-carbon, more energy efficient economic system may have a significant impact on Cimarex. The development and use of emerging technologies such as renewable energy, battery storage, and energy efficiency may lower demand for oil and gas, resulting in lower prices and revenues, and increase our costs. +Market Risk. Markets could be affected by climate change through shifts in supply and demand for certain commodities, especially carbon-intensive commodities such as oil and gas and other products dependent on oil and gas, as climate-related risks and opportunities are increasingly taken into account. This could lower demand for our oil and gas production, resulting in lower prices and lower revenues. Market risk also may take the form of limited access to capital as investors shift investments to less carbon-intensive industries and alternative energy industries. In addition, there have also been efforts in recent years to influence the investment community, including investment advisers and certain sovereign wealth, pension, and endowment funds promoting divestment of fossil fuel equities and pressuring lenders to limit funding to companies engaged in the extraction of fossil fuel reserves. Such environmental +23 +Table of Contents +activism and initiatives aimed at limiting climate change and reducing air pollution could interfere with our business activities, operations, and ability to access capital. Furthermore, claims have been made against certain energy companies alleging that GHG emissions from oil, NGL, and gas operations constitute a public nuisance under federal and/or state common law. As a result, private individuals or public entities may seek to enforce environmental laws and regulations against us and could allege personal injury, property damages, or other liabilities. While we are currently not a party to any such litigation, we could be named in actions making similar allegations. An unfavorable ruling in any such case could significantly impact our operations and could have an adverse impact on our financial condition. +Reputation Risk. Climate change has been identified as a potential source of reputational risk tied to changing customer or community perceptions of an organization’s contribution to or detraction from the transition to a lower-carbon economy. This could lower demand for our oil and gas production, resulting in lower prices and lower revenues as consumers avoid carbon-intensive industries. This may also put pressure on investment managers to shift investments to less carbon-intensive industries and alternative energy industries, limiting our access to capital. +Physical Risks . Potential physical risks resulting from climate change may be event driven (including increased severity of extreme weather events, such as hurricanes or floods) or longer-term shifts in climate patterns that may cause sea level rise or chronic heat waves. Potential physical risks may cause direct damage to assets and indirect impacts such as supply chain disruption. Potential physical risks also include changes in water availability, sourcing, and quality, which could impact drilling and completions operations. These physical risks could cause increased costs, production disruptions, and lower revenues. +Legislation or regulatory initiatives intended to address seismic activity could restrict our ability to engage in hydraulic fracturing during completion operations and to dispose of saltwater produced in connection with our oil and gas production, which could limit our ability to produce oil and gas economically and have a material adverse effect on our business. +We dispose of large volumes of saltwater produced in connection with our drilling and production operations pursuant to permits issued to us or third-party operators of disposal wells by governmental authorities overseeing produced water disposal activities. While these permits are issued pursuant to existing laws and regulations, these legal requirements are subject to change, which could result in the imposition of more stringent operating constraints or new monitoring and reporting requirements, owing to, among other things, concerns of the public or governmental authorities regarding such gathering or disposal activities. +There exists a growing concern that hydraulic fracturing during well completion operations and the injection of produced water into underground disposal wells triggers seismic activity in certain areas, including Oklahoma and Texas, where we operate. In response to these concerns, regulators in some states are pursuing initiatives designed to impose additional requirements in connection with hydraulic fracturing and in the permitting of saltwater disposal wells or otherwise to assess any relationship between seismicity and these oil and gas operations. For example, in 2014, the Oklahoma Corporation Commission began adopting rules for operators of saltwater disposal wells in certain seismically-active areas, or Areas of Interest, in the Arbuckle formation, requiring operators to monitor and record well pressure and discharge volume on a daily basis and further requiring operators of wells permitted for disposal of 20,000 barrels per day or more of saltwater to conduct mechanical integrity testing. Throughout 2015 and 2016, the Oklahoma Corporation Commission’s Oil and Gas Conservation Division, or OGCD, issued a series of directives, expanding the areas of interest for induced seismicity and enhanced disposal restrictions and limiting the depths at which produced water could be injected or, in the alternative, reducing disposal volumes. Additional regulations and restrictions are possible as more is understood about this issue. In addition to and separate from induced seismicity associated with injection, the OGCD has issued guidelines to operators to follow when engaged in well stimulation activities, which some studies now seem to correlate with a small number of low intensity seismic events. +In addition, in 2014 the Texas Railroad Commission, or TRC, published a new rule governing permitting or re-permitting of disposal wells in Texas that would require, among other things, the submission of information on seismic events occurring within a specified radius of the disposal well location, as well as logs, geologic cross sections, and structure maps relating to the disposal area in question. If a permittee or a prospective permittee fails to demonstrate that the saltwater or other fluids are confined to the disposal zone or if scientific data indicates such a disposal well is likely to be or determined to be contributing to seismic activity, then the TRC may deny, modify, suspend, or terminate the permit application or existing operating permit for that well. +24 +Table of Contents +The adoption and implementation of any new laws, regulations, or directives that restrict our ability to stimulate wells or to dispose of produced water, by changing the depths of disposal wells, reducing the volume of oil and gas wastewater disposed in such wells, restricting disposal well locations or otherwise, or by requiring us or third parties who dispose of our saltwater to shut down disposal wells, could increase disposal costs or require us to shut in a substantial number of our oil and gas wells or otherwise have a material adverse effect on our ability to produce oil and gas economically and, accordingly, could materially and adversely affect our business, financial condition, and results of operations. We could also face lawsuits alleging that seismic activity occurred as a result of completions or water disposal activities, resulting in damage to persons and property. +A substantial portion of our producing properties are located in limited geographic areas, making us vulnerable to risks associated with having geographically concentrated operations. +A substantial portion of our producing properties are geographically concentrated in the Permian Basin in Texas and New Mexico and our Cana area in the Mid-Continent region in Oklahoma, with these two areas comprising approximately 57% and 43% , respectively, of our oil, gas, and NGL production and approximately 64% and 36% , respectively, of our oil, gas, and NGL revenues for the year ended December 31, 2018 . Approximately 57% of our estimated proved reserves were located in the Permian Basin and approximately 43% of our estimated proved reserves were located in the Mid-Continent region as of December 31, 2018 . +Because of this concentration in limited geographic areas, the success and profitability of our operations may be disproportionately exposed to regional factors relative to our competitors that have more geographically dispersed operations. These factors include, among others: (i) the prices of oil and gas produced from wells in the regions and other regional supply and demand factors, including gathering, pipeline, and rail transportation capacity constraints; (ii) the availability of rigs, equipment, oil field services, supplies, and labor; (iii) the availability of processing and refining facilities; and (iv) infrastructure capacity. In addition, our operations in the Permian Basin and Mid-Continent region, as well as other areas, may be adversely affected by severe weather events such as floods, lightning, ice and other storms, and tornadoes, which can intensify competition for the items described above during months when drilling is possible and may result in periodic shortages. The concentration of our operations in limited geographic areas also increases our exposure to changes in local laws and regulations including concerning hydraulic fracturing and wastewater disposal as discussed above in “Legislation or regulatory initiatives intended to address seismic activity could restrict our ability to engage in hydraulic fracturing during completion operations and to dispose of saltwater produced in connection with our oil and gas production, which could limit our ability to produce oil and gas economically and have a material adverse effect on our business”, certain lease stipulations designed to protect wildlife, and unexpected events that may occur in the regions such as natural disasters, seismic events, industrial accidents, or labor difficulties. Any one of these events has the potential to cause producing wells to be shut-in, delay operations, decrease cash flows, increase operating and capital costs and prevent development of lease inventory before expiration. Any of the risks described above could have a material adverse effect on our financial condition, results of operations, and cash flows. +We use some of the latest available horizontal drilling and completion techniques, which involve risk and uncertainty in their application. +Our horizontal drilling operations utilize some of the latest drilling and completion techniques. The risks of such techniques include, but are not limited to, the following: +• +landing the wellbore in the desired drilling zone; +• +staying in the desired drilling zone while drilling horizontally through the formation; +• +running casing the entire length of the wellbore; +• +being able to run tools and other equipment consistently through the horizontal wellbore; +• +the ability to fracture stimulate the planned number of stages; +• +the ability to run tools the entire length of the wellbore during completion operations; and +• +the ability to successfully clean out the wellbore after completion of the final fracture stimulation stage. +25 +Table of Contents +Any of the above factors could have a material adverse effect on our financial position, results of operations, or cash flows. +Many of our properties are in areas that may have been partially depleted or drained by offset wells and certain of our wells may be adversely affected by actions other operators may take when drilling, completing, or operating wells that they own. +Many of our properties are in areas that may have already been partially depleted or drained by earlier offset drilling. The owners of leasehold interests adjoining any of our properties could take actions, such as drilling and completing additional wells, which could adversely affect our operations. When a new well is completed and produced, the pressure differential in the vicinity of the well causes the migration of reservoir fluids toward the new wellbore (and potentially away from existing wellbores). As a result, the drilling and production of these potential locations could cause a depletion of our proved reserves and may inhibit our ability to further develop our proved reserves. In addition, completion operations and other activities conducted on adjacent or nearby wells could cause production from our wells to be shut in for indefinite periods of time, could result in increased lease operating expenses and could adversely affect the production and reserves from our wells after they re-commence production. We have no control over the operations or activities of offsetting operators. +We may be subject to information technology system failures, network disruptions, and breaches in data security and our business, financial position, results of operations, and cash flows could be negatively affected by such security threats and disruptions. +As an oil and gas producer, we face various security threats, including cybersecurity threats such as attempts to gain unauthorized access to sensitive information or to render data or systems unusable; threats to the security of our facilities and infrastructure or third-party facilities and infrastructure, such as gathering and processing facilities, pipelines and refineries; and threats from terrorist acts. Cybersecurity attacks are becoming more sophisticated and include, but are not limited to, malicious software, attempts to gain unauthorized access to data and systems, and other electronic security breaches that could lead to disruptions in critical systems, unauthorized release of confidential or otherwise protected information, and corruption of data, and “ransomware” attacks where data is locked unless a payment is made, any of which could have an adverse effect on our reputation, business, financial condition, results of operations, or cash flows. While we have not suffered any material losses relating to such attacks, there can be no assurance that we will not suffer such losses in the future. +We rely heavily on our information systems, and the availability and integrity of these systems are essential for us to conduct our business and operations. In addition to cybersecurity and data security threats, other information system failures and network disruptions could have a material adverse effect on our ability to conduct our business. We could experience system failures due to power or telecommunications failures, human error, natural disasters, fire, sabotage, hardware or software malfunction or defects, computer viruses, intentional acts of vandalism or terrorism and similar acts or occurrences. Such system failures could result in the unanticipated disruption of our operations, communications, or processing of transactions, as well as loss of, or damage to, sensitive information, facilities, infrastructure and systems essential to our business and operations, the failure to meet regulatory standards and the reporting of our financial results, and other disruptions to our operations, which, in turn, could have a material adverse effect on our business, financial position, results of operations, and cash flows. +A cyber attack involving our information systems and related infrastructure, or those of our business associates, could disrupt our business and negatively impact our operations in a variety of ways, including but not limited to: +• +unauthorized access to seismic data, reserves information, strategic information, or other sensitive or proprietary information could have a negative impact on our ability to compete for oil and gas resources; +• +data corruption or operational disruption of production-related infrastructure could result in a loss of production, or accidental discharge; +• +a cyber attack on a vendor or service provider could result in supply chain disruptions, which could delay or halt our major development projects; +• +a cyber attack on third-party gathering, pipeline, or rail transportation systems could delay or prevent us from transporting and marketing our production, resulting in a loss of revenues; and +26 +Table of Contents +• +a cyber attack on our accounting or accounts payable systems could expose us to liability to employees and third parties if their personal identifying information is obtained. +These events could damage our reputation and lead to financial losses from remedial actions, loss of business, or potential liability, which could have a material adverse effect on our financial condition, results of operations, or cash flows. +While management has taken steps to address these concerns by implementing network security and internal control measures to monitor and mitigate security threats and to increase security for our information, facilities, and infrastructure, our implementation of such procedures and controls may result in increased costs, and there can be no assurance that a system failure or data security breach will not occur and have a material adverse effect on our business, financial condition, and results of operations. In addition, as cybersecurity threats continue to evolve, we may be required to expend additional resources to continue to modify or enhance our protective measures or to investigate or remediate any cybersecurity or information technology infrastructure vulnerabilities. +Our limited ability to influence operations and associated costs on non-operated properties could result in economic losses that are partially beyond our control. +For the year ended December 31, 2018 , other companies operated approximately 19% of our net production. Our success in properties operated by others depends upon a number of factors outside of our control. These factors include timing and amount of capital expenditures, the operator’s expertise and financial resources, approval of other participants in drilling wells, selection of technology, and maintenance of safety and environmental standards. Our dependence on the operator and other working interest owners for these projects could prevent the realization of our targeted returns on capital in drilling or acquisition activities. +Our business involves many operating risks that may result in substantial losses for which insurance may be unavailable or inadequate. +Our operations are subject to hazards and risks inherent in drilling for oil and gas, such as fires, natural disasters, explosions, formations with abnormal pressures, casing collapses, uncontrollable flows of underground gas, blowouts, surface cratering, pipeline ruptures, or cement failures. Other such risks include theft, vandalism, and environmental hazards such as gas leaks, oil spills, and discharges of toxic gases. Any of these risks can cause substantial losses resulting from: +• +injury or loss of life; +• +damage to, loss of or destruction of, property, natural resources and equipment; +• +pollution and other environmental damages; +• +regulatory investigations, civil litigation, and penalties; +• +damage to our reputation; +• +suspension of our operations; and +• +costs related to repair and remediation. +In addition, our liability for environmental hazards may include conditions created by the previous owners of properties that we purchase or lease. +We maintain insurance coverage against some, but not all, potential losses. We do not believe that insurance coverage for all environmental damages that could occur is available at a reasonable cost. Losses could occur for uninsurable or uninsured risks, or in amounts in excess of existing insurance coverage. The occurrence of an event that is not fully covered by insurance could harm our financial condition and results of operation. +27 +Table of Contents +We may not be able to generate enough cash flow to meet our debt obligations. +At December 31, 2018 , our long-term debt consisted of $750 million of 4.375% senior notes due in 2024 and $750 million of 3.90% senior notes due in 2027 . In addition to interest expense and principal on our long-term debt, we have demands on our cash resources including, among others, capital expenditures, operating expenses, and contractual commitments, as well as the pending anticipated closing of the acquisition of Resolute in the first quarter of 2019. +Our ability to pay the principal and interest on our long-term debt and to satisfy our other liabilities will depend upon future performance and our ability to repay or refinance our debt as it becomes due. Our future operating performance and ability to refinance will be affected by economic and capital market conditions, results of operations, and other factors, many of which are beyond our control. Our ability to meet our debt service obligations also may be impacted by changes in prevailing interest rates, as borrowing under our existing revolving credit facility bears interest at floating rates. +We may not generate sufficient cash flow from operations. Without sufficient cash flow, there may not be adequate future sources of capital to enable us to service our indebtedness or to fund our other liquidity needs. If we are unable to service our indebtedness and fund our operating costs, we will be forced to adopt alternative strategies that may include: +• +reducing or delaying capital expenditures; +• +seeking additional debt financing or equity capital; +• +selling assets; or +• +restructuring or refinancing debt. +We may be unable to complete any such strategies on satisfactory terms, if at all. Our inability to generate sufficient cash flows to satisfy our debt obligations or contractual commitments, or to refinance our indebtedness on commercially reasonable terms, would materially and adversely affect our financial condition and results of operations. +The instruments governing our indebtedness contain various covenants limiting the discretion of our management in operating our business. +The indenture governing our senior notes and our credit agreement contain various restrictive covenants that may limit management’s discretion in certain respects. In particular, these agreements limit Cimarex’s and its subsidiaries’ ability to, among other things: +• +create certain liens; +• +consolidate, merge, or transfer all, or substantially all, of our assets and our restricted subsidiaries; or +• +enter into sale and leaseback transactions. +In addition, our revolving credit agreement requires us to maintain a total debt to capitalization ratio (as defined in the credit agreement) of not more than 65%. See Note 3 to the Consolidated Financial Statements for further information. +If we fail to comply with the restrictions in the indenture governing our senior notes or the agreement governing our credit facility or any other subsequent financing agreements, a default may allow the creditors, if the agreements so provide, to accelerate the related indebtedness as well as any other indebtedness to which a cross-acceleration or cross-default provision applies. In addition, lenders may be able to terminate any commitments they had made to make available further funds. +28 +Table of Contents +Our acquisition activities may not be successful, which may hinder our replacement of reserves and adversely affect our results of operations. +The successful acquisition of properties requires an assessment of several factors, including: +• +geological risks and recoverable reserves; +• +future oil and gas prices and their appropriate market differentials; +• +operating costs; and +• +potential environmental risks and other liabilities. +The accuracy of these assessments is inherently uncertain. In connection with these assessments, we perform a review of the subject properties we believe to be generally consistent with industry practices. Our review will not reveal all existing or potential problems nor will it permit us to become sufficiently familiar with the properties to fully assess their deficiencies and capabilities. Inspections will not likely be performed on every well or facility, and structural and environmental problems are not necessarily observable even when an inspection is undertaken. Furthermore, the seller may be unwilling or unable, such as in a corporate acquisition such as our acquisition of Resolute, to provide effective contractual protection against all or part of the identified problems. For additional risks related to our pending acquisition of Resolute, see below “ Risks Concerning Cimarex’s Pending Merger with Resolute Energy Corporation .” +We may lose leases if production is not established within the time periods specified in the leases. +Unless production is established within the spacing units covering the undeveloped acres on which some of the locations are identified, the leases for such acreage will expire and the amounts spent for those leases will be lost. The combined net acreage expiring in the next three years represents approximately 4.7% of our total net undeveloped acreage at December 31, 2018 . At that date, we had leases representing 193,180 net acres expiring in 2019 , 55,978 net acres expiring in 2020 , and 21,598 net acres expiring in 2021 . Our actual drilling activities may materially differ from those presently identified, which could adversely affect our business. +Our disposition activities may be subject to factors beyond our control, and in certain cases we may retain unforeseen liabilities for certain matters . +We regularly sell non-core assets in order to increase capital resources available for other core assets and to create organizational and operational efficiencies. We also occasionally sell interests in core assets for the purpose of accelerating the development of and increasing efficiencies in such core assets. Various factors could materially affect our ability to dispose of such assets, including the approvals of governmental agencies or third parties, and the availability of purchasers willing to acquire the assets with terms we deem acceptable. +Sellers at times retain certain liabilities or agree to indemnify buyers for certain matters related to the sold assets. The magnitude of any such retained liability or indemnification obligation is difficult to quantify at the time of the transaction and ultimately could be material. Also, as is typical in divestiture transactions, third parties may be unwilling to release the company from guarantees or other credit support provided prior to the sale of the divested assets. As a result, after a divestiture, the company may remain secondarily liable for the obligations guaranteed or supported to the extent that the buyer of the assets fails to perform these obligations. In addition, with respect to offshore assets, if purchasers declare bankruptcy, the United States Department of Interior may pursue former owners for decommissioning expenses, which can be substantial. See Note 8 to the Consolidated Financial Statements for further discussion regarding our asset retirement obligations. +Competition for experienced technical personnel may negatively impact our operations. +Our exploratory and development drilling success depends, in part, on our ability to attract and retain experienced professional personnel. The loss of any key executives or other key personnel could have a material adverse effect on our operations. As we continue to develop our asset base and the scope of our operations, our future profitability will depend on our ability to attract and retain qualified personnel, particularly individuals with a strong background in geology, geophysics, engineering, and operations. +29 +Table of Contents +We are involved in various legal proceedings, the outcome of which could have an adverse effect on our liquidity. +In the normal course of business, we are involved with various lawsuits and related disputed claims, including but not limited to claims concerning title, royalty payments, environmental issues, personal injuries, and contractual issues. Although we currently believe the resolution of these lawsuits and claims, individually or in the aggregate, would not have a material adverse effect on our financial condition or results of operations, our assessment of our current litigation and other legal proceedings could change in light of the discovery of facts with respect to legal actions or other proceedings pending against us not presently known to us or determinations by judges, juries, or other finders of fact that are not in accord with our evaluation of the possible liability or outcome of such proceedings. Therefore, there can be no assurance that outcomes of future legal proceedings would not have an adverse effect on our liquidity and capital resources. For litigation risks related to our pending acquisition of Resolute, see below “ Risks Concerning Cimarex’s Pending Merger with Resolute Energy Corporation .” +Certain federal income tax deductions currently available with respect to oil and gas exploration and development may be limited or eliminated as a result of recently enacted or future legislation. +On December 22, 2017, the United States enacted H.R.1, commonly referred to as the Tax Cuts and Jobs Act or U.S. Tax Reform. H.R.1, among other things, includes changes to U.S. federal tax rates, imposes new limitations on the utilization of net operating losses and the deductibility of interest and executive compensation, temporarily allows for the expensing of capital expenditures, and eliminates the corporate Alternative Minimum Tax. Various proposed regulations have been issued regarding H.R.1. Until final regulations are issued the full impact of changes to the company is not known at this time. In addition, various proposals have been made recommending the elimination of certain key U.S. federal income tax incentives currently available to oil and gas exploration and production companies. Future legislation may be introduced in Congress which would implement many of these proposals. These changes include, but are not limited to: (i) the repeal of the percentage depletion allowance for oil and gas properties; (ii) the elimination of current deductions for intangible drilling and development costs; and (iii) an extension of the amortization period for certain geological and geophysical expenditures. It is unclear, however, whether any such changes will be enacted or how soon such changes could be effective. +The passage of this legislation or any other similar change in U.S. federal income tax law could eliminate or postpone certain tax deductions that are currently available with respect to oil and gas exploration and development, and any such change could have an adverse effect on our financial position, results of operations, and cash flows, including the payment of cash taxes earlier than expected. +Risks Concerning Cimarex’s Pending Merger with Resolute Energy Corporation +The merger is subject to conditions, including certain conditions that may not be satisfied, or completed on a timely basis, if at all. +The merger is subject to a number of other conditions beyond Cimarex’s and Resolute’s control that may prevent, delay, or otherwise materially adversely affect its completion, including the approval of the merger proposal by Resolute’s stockholders at its meeting currently scheduled for February 22, 2019. Neither Cimarex nor Resolute can predict whether and when these other conditions will be satisfied. Any delay in completing the merger could cause the combined company not to realize some or all of the synergies expected to be achieved if the merger is successfully completed within its expected time frame. +Cimarex and Resolute will incur substantial transaction fees and merger-related costs in connection with the merger. +Cimarex and Resolute have incurred and expect to continue to incur non-recurring transaction fees, which include legal and advisory fees and substantial merger-related costs associated with completing the merger, combining the operations of the two companies, and achieving desired synergies. Additional unanticipated costs may be incurred in the course of the integration of the businesses of Cimarex and Resolute. The companies cannot be certain that the realization of other benefits related to the integration of the two businesses will offset the transaction and merger-related costs in the near term, or at all. +30 +Table of Contents +Completion of the merger may trigger change in control or other provisions in certain agreements to which Resolute is a party. +The completion of the merger may trigger change in control or other provisions in certain agreements to which Resolute is a party. If Cimarex and Resolute are unable to negotiate waivers of those provisions, the counterparties may exercise their rights and remedies under the agreements, potentially terminating the agreements or seeking monetary damages. Even if Cimarex and Resolute are able to negotiate waivers, the counterparties may require a fee for such waivers or seek to renegotiate the agreements on terms less favorable to Resolute or the combined company. +Lawsuits have been filed against Resolute, the directors of Resolute, Cimarex, and the subsidiaries of Cimarex created to effect the acquisition of Resolute challenging the adequacy of the disclosures made in the proxy statement/prospectus concerning the merger and an adverse ruling in one or more of these lawsuits may prevent the merger from being completed. +As of January 25, 2019, Resolute, the directors of Resolute, and in two of the cases, Cimarex, Merger Sub 1, and Merger Sub 2, have been named as defendants in five purported stockholder class actions challenging the adequacy of the disclosures to Resolute stockholders made in the proxy statement/prospectus concerning the merger. Three complaints were filed in the U.S. District Court for the District of Delaware, one complaint was filed in the U.S. District Court for the Southern District of New York, and one complaint was filed in U.S. District Court for the District of Colorado. Additional lawsuits arising out of the merger may be filed in the future. There can be no assurance that defendants will be successful in the outcome of the pending or any potential future lawsuits. A preliminary injunction could delay or jeopardize the completion of the merger. +Risks Relating to the Combined Company Following the Merger +If completed, the merger may not achieve its intended results, and Cimarex and Resolute may be unable to successfully integrate their operations. +Cimarex and Resolute entered into the merger agreement with the expectation that the merger will result in various benefits, including, among other things, expanding Cimarex’s asset base and creating synergies. Achieving the anticipated benefits of the merger is subject to a number of uncertainties, including whether the businesses of Cimarex and Resolute can be integrated in an efficient and effective manner. +It is possible that the integration process could take longer than anticipated and could result in the loss of valuable employees, the disruption of each company’s ongoing businesses, processes, and systems or inconsistencies in standards, controls, procedures, practices, policies, and compensation arrangements, any of which could adversely affect the combined company’s ability to achieve the anticipated benefits of the merger. The combined company’s results of operations could also be adversely affected by any issues attributable to either company’s operations that arise from or are based on events or actions that occur prior to the closing of the merger. The companies may have difficulty addressing possible differences in corporate cultures and management philosophies. The integration process is subject to a number of uncertainties, and no assurance can be given whether anticipated benefits will be realized or, if realized, the timing of their realization. Failure to achieve these anticipated benefits could result in increased costs or decreases in the amount of expected revenues and could adversely affect the combined company’s future business, financial condition, operating results, and prospects. +The combined company is expected to incur expenses related to the integration of Cimarex and Resolute. +The combined company is expected to incur expenses in connection with the integration of Cimarex and Resolute. There are a large number of processes, policies, procedures, operations, technologies, and systems that must be integrated, including purchasing, accounting and finance, sales, billing, payroll, pricing, revenue management, maintenance, marketing, and benefits. While Cimarex and Resolute have assumed that a certain level of expenses will be incurred, there are many factors beyond their control that could affect the total amount or the timing of the integration expenses. Moreover, many of the expenses that will be incurred are, by their nature, difficult to estimate accurately. These integration expenses likely will result in the combined company taking charges against earnings following the completion of the merger, and the amount and timing of such charges are uncertain at present. +31 +Table of Contents +Uncertainties associated with the merger may cause a loss of management personnel and other key employees, which could adversely affect the future business and operations of the combined company. +Cimarex and Resolute are dependent on the experience and industry knowledge of their officers and other key employees to execute their business plans. Each company’s success until the merger and the combined company’s success after the merger will depend in part upon the ability of Cimarex and Resolute to retain key management personnel and other key employees. Current and prospective employees of Cimarex and Resolute may experience uncertainty about their roles within the combined company following the merger, which may have an adverse effect on the ability of Cimarex and Resolute to attract or retain key management and other key personnel. Accordingly, no assurance can be given that the combined company will be able to attract or retain key management personnel and other key employees of Cimarex and Resolute to the same extent that Cimarex and Resolute have previously been able to attract or retain their own employees. +32 +Table of Contents +ITEM 1B. UNRESOLVED STAFF COMMENTS +None. +ITEM 3. LEGAL PROCEEDINGS +The information set forth under the heading “Litigation” in Note 10 to the Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K, is incorporated by reference in response to this item. For information regarding litigation related to the pending acquisition of Resolute, which Cimarex believes is without merit and intends to defend vigorously, see “Risk Factors—Risks Concerning Cimarex’s Pending Merger with Resolute Energy Corporation.” Cimarex does not believe the ultimate resolution of the pending acquisition litigation will have a material adverse effect on our financial condition or results of operations. +ITEM 4. MINE SAFETY DISCLOSURES +Not applicable. +33 +Table of Contents +PART II +ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES +Our $0.01 par value common stock trades on the New York Stock Exchange (“NYSE”) under the symbol XEC. A cash dividend was paid to stockholders in each quarter of 2018 . Future dividend payments will depend on the company’s level of earnings, financial requirements, and other factors considered relevant by the Board of Directors. +The closing price of Cimarex stock as reported on the NYSE on January 31, 2019 , was $75.34 . At January 31, 2019 , Cimarex’s 95,755,298 shares of outstanding common stock were held by approximately 1,618 stockholders of record. +Issuer Purchases of Equity Securities +The following table sets forth information regarding repurchases of our common stock during the year ended December 31, 2018 . The shares repurchased represent shares of our common stock that employees elected to surrender to satisfy their tax withholding obligations upon the vesting of shares of restricted stock. Cimarex does not consider this a share buyback program. +Period +Total number of shares purchased +Average price paid per share +Total number of shares purchased as part of publicly announced plans or programs +Maximum number of shares that may yet be purchased under the plans or programs +January 1-31, 2018 +2,421 +$ +126.16 +— +— +April 1-30, 2018 +3,527 +98.86 +— +— +May 1-31, 2018 +2,970 +98.37 +— +— +July 1-31, 2018 +49,241 +99.80 +— +— +September 1-30, 2018 +6,123 +89.73 +— +— +November 1-30, 2018 +1,174 +91.37 +— +— +December 1-31, 2018 +74,790 +75.22 +— +— +Total +140,246 +$ +86.58 +— +— +34 +Table of Contents +Stock Performance Graph +The following graph shows the cumulative five-year total return on Cimarex Energy Co.’s common stock relative to the cumulative total returns of the S&P 500 index, the Dow Jones US Exploration & Production index, and the S&P Oil & Gas Exploration & Production index. The graph tracks the performance of a $100 investment in our common stock and in each of the indexes (with the reinvestment of all dividends) from December 31, 2013 to December 31, 2018 . The stock price performance included in this graph is not necessarily indicative of future stock price performance. +COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN* +Among Cimarex Energy Co., the S&P 500 Index, +the Dow Jones US Exploration & Production Index, and the S&P Oil & Gas Exploration & Production Index +* $100 invested in 12/31/13 in stock or index, including reinvestment of dividends. Fiscal year ending December 31. +A tabular presentation of the data in the above graph is provided below. +2013 +2014 +2015 +2016 +2017 +2018 +Cimarex Energy Co. +$ +100.00 +$ +101.56 +$ +86.11 +$ +131.44 +$ +118.33 +$ +60.17 +S&P 500 +$ +100.00 +$ +113.69 +$ +115.26 +$ +129.05 +$ +157.22 +$ +150.33 +Dow Jones US Exploration & Production +$ +100.00 +$ +89.23 +$ +68.05 +$ +84.71 +$ +85.81 +$ +70.57 +S&P Oil & Gas Exploration & Production +$ +100.00 +$ +89.41 +$ +58.87 +$ +78.22 +$ +73.29 +$ +58.99 +35 +Table of Contents +ITEM 6. SELECTED FINANCIAL DATA +The selected financial data set forth below should be read in conjunction with the Consolidated Financial Statements and accompanying notes thereto provided in Item 8 of this report. +Years Ended December 31, +2018 +2017 +2016 +2015 +2014 +(in thousands, except per share amounts) +Operating results: +Oil, gas, and NGL sales +$ +2,297,645 +$ +1,874,003 +$ +1,221,218 +$ +1,417,538 +$ +2,372,829 +Total revenues (1) +$ +2,339,017 +$ +1,918,249 +$ +1,257,345 +$ +1,452,619 +$ +2,424,176 +Net income (loss) (2) +$ +791,851 +$ +494,329 +$ +(408,803 +) +$ +(2,579,604 +) +$ +526,498 +Earnings (loss) per share to common stockholders: +Basic +$ +8.32 +$ +5.19 +$ +(4.38 +) +$ +(27.75 +) +$ +6.01 +Diluted +$ +8.32 +$ +5.19 +$ +(4.38 +) +$ +(27.75 +) +$ +6.00 +Cash dividends declared per share +$ +0.68 +$ +0.32 +$ +0.32 +$ +0.64 +$ +0.64 +Cash flow data: +Net cash provided by operating activities (3) +$ +1,550,994 +$ +1,096,564 +$ +625,849 +$ +725,728 +$ +1,632,925 +Net cash used by investing activities +$ +(1,085,618 +) +$ +(1,265,897 +) +$ +(692,410 +) +$ +(1,008,605 +) +$ +(1,740,467 +) +Net cash (used) provided by financing activities (3) +$ +(65,244 +) +$ +(83,009 +) +$ +(59,945 +) +$ +656,397 +$ +508,873 +December 31, +2018 +2017 +2016 +2015 +2014 +(in thousands, except proved reserves amounts) +Balance sheet data: +Cash and cash equivalents +$ +800,666 +$ +400,534 +$ +652,876 +$ +779,382 +$ +405,862 +Oil and gas properties, net (2) +$ +3,715,330 +$ +3,241,530 +$ +2,354,267 +$ +2,741,282 +$ +6,637,796 +Goodwill +$ +620,232 +$ +620,232 +$ +620,232 +$ +620,232 +$ +620,232 +Total assets (2) (4) +$ +6,062,084 +$ +5,042,639 +$ +4,237,724 +$ +4,708,422 +$ +8,442,554 +Deferred income tax liability (asset) +$ +334,473 +$ +101,618 +$ +(55,835 +) +$ +157,162 +$ +1,657,456 +Long-term obligations: +Long-term debt (principal) +$ +1,500,000 +$ +1,500,000 +$ +1,500,000 +$ +1,500,000 +$ +1,500,000 +Other +$ +200,564 +$ +206,249 +$ +184,444 +$ +197,216 +$ +193,629 +Stockholders’ equity +$ +3,329,786 +$ +2,568,278 +$ +2,042,989 +$ +2,458,357 +$ +4,331,966 +Proved Reserves: +Oil (MBbls) +146,538 +137,238 +105,878 +107,798 +118,992 +Gas (Bcf) +1,591 +1,608 +1,471 +1,517 +1,667 +NGL (MBbls) +179,436 +153,860 +130,633 +124,277 +125,273 +Total (MBOE) +591,195 +559,037 +481,748 +484,901 +522,054 +________________________________________ +(1) +Effective January 1, 2018, we adopted the provisions of Accounting Standards Codification 606, Revenue from Contracts with Customers (“ASC 606”), utilizing the modified retrospective approach. Because we utilized the modified retrospective approach, there was no impact to prior periods’ reported amounts. Application of ASC 606 has no impact on our net income or cash flows from operations; however, certain costs classified as Transportation, processing, and other operating in the statement of operations under prior accounting standards are now reflected +36 +Table of Contents +as deductions from revenue. The adoption of ASC 606 reduced revenue for the year ended December 31, 2018 by $44.8 million from what it would have been under prior accounting standards. +(2) +During 2016 and 2015, we recorded non-cash full cost ceiling test impairments of our oil and gas properties totaling $757.7 million ( $481.4 million , net of tax) and $4.03 billion ( $2.56 billion , net of tax), respectively. +(3) +We adopted Accounting Standards Update 2016-09, Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”) on January 1, 2017. Pursuant to ASU 2016-09, we adjusted the statements of cash flows for all prior periods presented. For the years ended December 31, 2016, 2015, and 2014, we decreased cash outflows for operating activities and cash inflows for financing activities by $26.6 million, $34.2 million, and $13.6 million, respectively, for the payment of employee tax withholdings on the net settlement of equity-classified awards and for excess tax benefits, as applicable. +(4) +At December 31, 2015, we adopted new accounting guidance which requires debt issuance costs (except for those related to revolving credit facilities) to be presented in the balance sheet as a direct deduction from the carrying amount of the related debt liability rather than as an asset. Such costs were previously recorded as deferred assets. Prior periods have been adjusted to conform to this guidance. +ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS +The following discussion and analysis should be read in conjunction with our Consolidated Financial Statements included in Item 8 of this report and also with RISK FACTORS in Item 1A of this report. This discussion also includes forward-looking statements. Refer to CAUTIONARY INFORMATION ABOUT FORWARD-LOOKING STATEMENTS in Part I of this report for important information about these types of statements. +OVERVIEW +Cimarex is an independent oil and gas exploration and production company. Our operations are entirely located in the United States, mainly in Oklahoma, Texas, and New Mexico. Currently our operations are focused in two main areas: the Permian Basin and the Mid-Continent. Our Permian Basin region encompasses west Texas and southeast New Mexico. Our Mid-Continent region consists of Oklahoma and the Texas Panhandle. +Our principal business objective is to increase shareholder value through the profitable long-term growth of our proved reserves and production while seeking to minimize our impact on the communities in which we operate for the long-term. Our strategy centers on maximizing cash flow from producing properties so that we can reinvest in exploration and development opportunities and provide cash returns to shareholders through increasing dividends. We consider merger and acquisition opportunities that enhance our competitive position and we occasionally divest non-core assets. +On August 31, 2018 , we closed on the divestiture of oil and gas properties principally located in Ward County, Texas for a sales price of $544.5 million , as adjusted to reflect the resolution of all asserted defects. As of December 31, 2018 , we have received $534.6 million in net cash proceeds as adjusted for customary closing adjustments to reflect an effective date of April 1, 2018 and transaction costs. Final settlement, which will reflect customary post-closing adjustments, is scheduled to occur by the end of first quarter 2019. This divestiture did not significantly alter the relationship between capitalized costs and proved reserves, therefore, in accordance with the full cost method of accounting, no gain or loss was recognized. This divestiture is part of our continuous portfolio optimization and high-grading of our investment opportunities. +On November 18, 2018, we entered into an agreement and plan of merger to acquire Resolute Energy Corporation (“Resolute”) in a cash and stock transaction valued at a total purchase price of approximately $1.6 billion , including the assumption of Resolute’s long-term debt, which was $710 million as of September 30, 2018. Under the terms of the agreement, Resolute shareholders will have the right to receive 0.3943 shares of Cimarex common stock, $35.00 per share in cash, or a combination of $14.00 per share in cash and 0.2366 shares of Cimarex common stock. The amount of stock and cash is subject to proration for a total stock and cash mix of 60% and 40% , respectively. This pending acquisition will expand Cimarex’s footprint in Reeves County, Texas by 21,100 net acres that are complementary to our existing Reeves County position. The transaction, which is expected to be completed by the end of the first quarter 2019, is subject to the approval of Resolute shareholders, which includes voting agreements with certain +37 +Table of Contents +shareholders that collectively beneficially own approximately 26% of the outstanding Resolute voting power and the satisfaction of certain regulatory approvals and other customary closing conditions. +We believe that detailed technical analysis, operational focus, and a disciplined capital investment process mitigate risk and position us to continue to achieve profitable increases in proved reserves and production. Our drilling inventory and limited long-term commitments provide the flexibility to respond quickly to industry volatility. +Our investments are generally funded with cash flow provided by operating activities together with cash on hand, bank borrowings, sales of non-strategic assets, and, from time to time, public financing based on our monitoring of capital markets and our balance sheet. Conservative use of leverage has long been a part of our financial strategy. We believe that maintaining a strong balance sheet mitigates financial risk and enables us to withstand unpredictable fluctuations in commodity prices. +Market Conditions +The oil and gas industry is cyclical and commodity prices can fluctuate significantly. We expect this volatility to persist. Commodity prices are affected by many factors outside of our control, including changes in market supply and demand, inventory storage levels, weather conditions, and other factors. +During 2018, as compared to 2017, market prices for oil have improved, while market prices for gas have declined. During 2018 , average NYMEX oil and gas prices were $64.77 per barrel and $3.09 per Mcf, respectively, representing an increase of 27% and a decrease of 1% , respectively, from the average NYMEX oil and gas prices for 2017 . Local market prices for oil and gas can be impacted by pipeline capacity constraints limiting takeaway and increasing basis differentials. Gas production growth and pipeline constraints in the Permian Basin and Mid-Continent region and oil production growth and pipeline constraints in the Permian Basin have resulted in higher basis differentials and, therefore, lower realized prices. The average prices per barrel of oil and Mcf of gas that we realized were less than the WTI Cushing and Henry Hub indices by the amounts shown in the table below for the periods indicated. +Average Price Differentials +2018 +Year +Fourth +Quarter +Third +Quarter +Second +Quarter +First +Quarter +Permian Basin oil +$ +9.82 +$ +11.64 +$ +14.34 +$ +8.05 +$ +3.12 +Mid-Continent oil +$ +2.46 +$ +2.33 +$ +1.08 +$ +2.18 +$ +2.34 +Permian Basin gas +$ +1.40 +$ +2.21 +$ +1.25 +$ +1.31 +$ +0.78 +Mid-Continent gas +$ +0.86 +$ +0.83 +$ +0.94 +$ +1.03 +$ +0.70 +2017 +Permian Basin oil +$ +3.98 +$ +3.99 +$ +4.06 +$ +4.14 +$ +3.96 +Mid-Continent oil +$ +3.52 +$ +2.65 +$ +2.99 +$ +4.19 +$ +5.10 +Permian Basin gas +$ +0.39 +$ +0.37 +$ +0.29 +$ +0.42 +$ +0.43 +Mid-Continent gas +$ +0.33 +$ +0.33 +$ +0.38 +$ +0.34 +$ +0.23 +Pipeline expansion projects in the Permian Basin are expected to ease capacity constraints as they come online over the next few years, which is reflected in the current futures markets that show narrowing differentials. However, if pipeline constraints remain, higher differentials will persist or potentially worsen. Our revenue, profitability, and future growth are highly dependent on the prices we receive for our oil and gas production. See RESULTS OF OPERATIONS Revenues below for further information regarding our realized commodity prices. +38 +Table of Contents +2018 Summary of Operating and Financial Results +• +Total daily production volumes increased 17% to 221.9 MBOE per day. +• +Oil volumes increased 18% to 67.7 MBbls per day. +• +Gas volumes increased 10% to 563.9 MMcf per day. +• +NGL volumes increased 27% to 60.3 MBbls per day. +• +Total production revenue increased 23% to $2.30 billion . +• +Year-end proved reserves increased 6% to 591.2 MMBOE, as compared to 559.0 MMBOE at year-end 2017 . +• +Exploration and development capital investments were $1.57 billion , as compared to $1.28 billion in 2017 . +• +Cash flow provided by operating activities increased 41% to $1.55 billion . +• +Cash on hand at December 31, 2018 was $800.7 million . +For the year ended December 31, 2018 , we had net income of $791.9 million ( $8.32 per diluted share) as compared to net income of $494.3 million ( $5.19 per diluted share) in 2017 . Production revenue in 2018 was positively impacted by increased production volumes across all products as well as increased realized oil and NGL commodity prices. Lower realized gas prices negatively impacted 2018. Year-over-year changes are discussed further in the RESULTS OF OPERATIONS section that follows. +Proved Reserves +Our proved reserves by region at December 31, 2018 and 2017 were as follows: +December 31, 2018 +Gas +(MMcf) +Oil +(MBbls) +NGL +(MBbls) +Total +(MBOE) +Permian Basin +727,985 +116,378 +96,533 +334,241 +Mid-Continent +861,440 +29,908 +82,826 +256,307 +Other +1,896 +252 +77 +647 +Total +1,591,321 +146,538 +179,436 +591,195 +December 31, 2017 +Gas +(MMcf) +Oil +(MBbls) +NGL +(MBbls) +Total +(MBOE) +Permian Basin +573,757 +105,198 +68,530 +269,354 +Mid-Continent +1,032,695 +31,853 +85,292 +289,261 +Other +1,183 +187 +38 +422 +Total +1,607,635 +137,238 +153,860 +559,037 +Year-end 2018 proved reserves increased approximately 6% to 591.2 MMBOE, compared to 559.0 MMBOE at year-end 2017 . Proved gas reserves were 1.59 Tcf, proved oil reserves were 146.5 MMBbls, and proved NGL reserves were 179.4 MMBbls. Reserves in the Permian Basin accounted for 57% of our total proved reserves with nearly all of the remainder in our Mid-Continent region. See SUPPLEMENTAL INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED) in Item 8 for a more detailed discussion regarding year-over-year changes in our proved reserves. +39 +Table of Contents +The process of estimating quantities of oil, gas, and NGL reserves is complex. Significant decisions are required in the evaluation of all available geological, geophysical, engineering, and economic data. Although every reasonable effort is made to ensure that our reserve estimates represent the most accurate assessments possible, subjective decisions and available data for our various fields make these estimates generally less precise than other estimates included in financial statement disclosures. See Proved Reserves Estimation Procedures in Items 1 and 2 for a discussion of our reserve estimation process and Item 1A RISK FACTORS , which includes a discussion of factors that affect our proved reserves estimates. +RESULTS OF OPERATIONS +Effective January 1, 2018, we adopted the provisions of Accounting Standards Codification 606, Revenue from Contracts with Customers (“ASC 606”), utilizing the modified retrospective approach, which we applied to contracts that were not completed as of that date. Because we utilized the modified retrospective approach, there was no impact to prior periods’ reported amounts. Application of ASC 606 has no impact on our net income or cash flows from operations; however, certain costs classified as Transportation, processing, and other operating in the statement of operations under prior accounting standards are now reflected as deductions from revenue under ASC 606. The following table presents the impact on our Oil sales, Gas sales, and NGL sales and on our Transportation, processing, and other operating costs from the application of ASC 606 in the current reporting period: +Years Ended December 31, +2018 +2017 +2016 +(in thousands) +Pre- +ASC 606 Adoption +Impact of +ASC 606 +Post- +ASC 606 Adoption +As Reported +As Reported +Oil sales +$ +1,398,813 +$ +— +$ +1,398,813 +$ +981,646 +$ +632,934 +Gas sales +425,233 +(16,482 +) +408,751 +516,936 +388,786 +NGL sales +518,410 +(28,329 +) +490,081 +375,421 +199,498 +Total oil, gas, and NGL sales +$ +2,342,456 +$ +(44,811 +) +$ +2,297,645 +$ +1,874,003 +$ +1,221,218 +Transportation, processing, and other operating costs +$ +245,613 +$ +(44,811 +) +$ +200,802 +$ +231,640 +$ +190,725 +Almost all our revenues are derived from sales of our oil, natural gas, and NGL production. Increases or decreases in our revenues, profitability, and future production growth are highly dependent on the commodity prices we receive. Prices are market driven and we expect that future prices will continue to fluctuate due to supply and demand factors, availability of transportation, seasonality, geopolitical, and economic factors. See Item 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK for more information regarding the sensitivity of our revenues to price fluctuations. +2018 Compared to 2017 +Revenues +A decrease in realized gas prices as well as the impact of ASC 606, as discussed above, negatively impacted our revenues in 2018 as compared to 2017. However, increases in production volumes and realized oil and NGL prices in 2018 as compared to 2017 more than offset declines in gas sales, causing our revenues to increase by $423.6 million , or 23% , from prior year. The following table shows our production revenues for 2018 and 2017 as well as the change in revenues due to changes in prices and volumes. +40 +Table of Contents +Years Ended +December 31, +Price / Volume Variance +Production Revenue (in thousands) +2018 +2017 +Variance Between +2018 / 2017 +Price +Volume +Total +Oil sales +$ +1,398,813 +$ +981,646 +$ +417,167 +42 +% +$ +235,981 +$ +181,186 +$ +417,167 +Gas sales +408,751 +516,936 +(108,185 +) +(21 +)% +(158,494 +) +50,309 +(108,185 +) +NGL sales +490,081 +375,421 +114,660 +31 +% +14,736 +99,924 +114,660 +$ +2,297,645 +$ +1,874,003 +$ +423,642 +23 +% +$ +92,223 +$ +331,419 +$ +423,642 +The table below presents our production volumes by commodity, our average realized commodity prices, and certain major U.S. index prices. The sale of our Permian Basin oil production is typically tied to the WTI Midland benchmark price and the sale of our Mid-Continent oil production is typically tied to the WTI Cushing benchmark price. During 2018 and 2017 , 77% and 78% , respectively, of our oil production was in the Permian Basin with the majority of the remainder in the Mid-Continent region. Our realized prices do not include settlements of commodity derivative contracts. +Years Ended +December 31, +Variance Between +2018 / 2017 +2018 +2017 +Oil +Total volume — MBbls +24,710 +20,861 +3,849 +18 +% +Total volume — MBbls per day +67.7 +57.2 +10.5 +18 +% +Percentage of total production +31 +% +30 +% +Average realized price — per barrel +$ +56.61 +$ +47.06 +$ +9.55 +20 +% +Average WTI Midland price — per barrel +$ +58.31 +$ +50.45 +$ +7.86 +16 +% +Average WTI Cushing price — per barrel +$ +64.77 +$ +50.94 +$ +13.83 +27 +% +Gas +Total volume — MMcf +205,837 +187,468 +18,369 +10 +% +Total volume — MMcf per day +563.9 +513.6 +50.3 +10 +% +Percentage of total production +42 +% +45 +% +Average realized price — per Mcf +$ +1.99 +(1) +$ +2.76 +$ +(0.77 +) +(28 +)% +Average Henry Hub price — per Mcf +$ +3.09 +$ +3.11 +$ +(0.02 +) +(1 +)% +NGL +Total volume — MBbls +21,994 +17,374 +4,620 +27 +% +Total volume — MBbls per day +60.3 +47.6 +12.7 +27 +% +Percentage of total production +27 +% +25 +% +Average realized price — per barrel +$ +22.28 +(2) +$ +21.61 +$ +0.67 +3 +% +Total +Total production — MBOE +81,010 +69,479 +11,531 +17 +% +Total production — MBOE per day +221.9 +190.4 +31.5 +17 +% +Average realized price — per BOE +$ +28.36 +(3) +$ +26.97 +$ +1.39 +5 +% +________________________________________ +(1) +ASC 606 reduced the average realized gas price by $0.08 per Mcf for the year ended December 31, 2018 . +(2) +ASC 606 reduced the average realized NGL price by $1.29 per barrel for the year ended December 31, 2018 . +(3) +ASC 606 reduced the average realized total price by $0.56 per BOE for the year ended December 31, 2018 . +Our 2018 daily production volumes were 221.9 MBOE, a 17% increase from 2017 . This increase is the result of increased drilling and completion activity during 2018 as compared to 2017 . See Production Volumes, Prices, and Costs and Exploration and Development Overview in Items 1 and 2 of this report for production information by region and a discussion of our drilling activities. +41 +Table of Contents +Other Revenues +We transport, process, and market some third-party gas that is associated with our equity gas. We market and sell gas for other working interest owners under short term agreements and may earn a fee for such services. The table below reflects income from third-party gas gathering and processing and our net marketing margin for marketing third-party gas. +Years Ended December 31, +Variance +Between +2018 / 2017 +Gas Gathering and Marketing (in thousands): +2018 +2017 +Gas gathering and other +$ +41,180 +$ +43,751 +$ +(2,571 +) +Gas marketing +$ +192 +$ +495 +$ +(303 +) +Fluctuations in revenues from gas gathering and gas marketing activities are a function of increases and decreases in volumes, commodity prices, and gathering rate charges. The decreases from 2017 are primarily due to lower rates and decreases in prices and volumes. +Operating Costs and Expenses +Costs associated with producing oil and gas are substantial. Among other factors, some of these costs vary with commodity prices, some trend with the volume of production, others are a function of the number of wells we own, some depend on the prices charged by service companies, and some fluctuate based on a combination of the foregoing. +Total operating costs and expenses of $1.29 billion in 2018 were 11% higher than the $1.17 billion incurred in 2017 . The primary drivers of the increase were depletion, taxes other than income, production expense, and other operating expense, with these being partially offset by lower transportation and processing and increased gains on derivative instruments. The following table shows our operating costs and expenses for the years indicated and a discussion of year-over-year differences follows. +Years Ended December 31, +Variance +Between +2018 / 2017 +Per BOE +Operating Costs and Expenses (in thousands, except per BOE) +2018 +2017 +2018 +2017 +Depreciation, depletion, and amortization +$ +590,473 +$ +446,031 +$ +144,442 +$ +7.29 +$ +6.42 +Asset retirement obligation +7,142 +15,624 +(8,482 +) +$ +0.09 +$ +0.22 +Production +293,213 +262,180 +31,033 +$ +3.62 +$ +3.77 +Transportation, processing, and other operating +200,802 +231,640 +(30,838 +) +$ +2.48 +$ +3.33 +Gas gathering and other +41,964 +35,840 +6,124 +$ +0.52 +$ +0.52 +Taxes other than income +125,169 +89,864 +35,305 +$ +1.55 +$ +1.29 +General and administrative +80,850 +79,996 +854 +$ +1.00 +$ +1.15 +Stock compensation +22,895 +26,256 +(3,361 +) +$ +0.28 +$ +0.38 +Gain on derivative instruments, net +(85,959 +) +(21,210 +) +(64,749 +) +N/A +N/A +Other operating expense, net +15,500 +1,314 +14,186 +N/A +N/A +$ +1,292,049 +$ +1,167,535 +$ +124,514 +Depreciation, Depletion, and Amortization +Depletion of our producing properties is computed using the units-of-production method. The economic life of each producing well depends upon the estimated proved reserves for that well, which in turn depend upon the assumed realized sales price for future production. Therefore, fluctuations in oil and gas prices will impact the level of proved reserves used in the calculation. Higher prices generally have the effect of increasing reserves, which reduces depletion expense. Conversely, lower prices generally have the effect of decreasing reserves, which increases depletion expense. The cost of replacing production also impacts our depletion expense. In addition, changes in estimates of reserve quantities, estimates of operating and future development costs, reclassifications of properties from unproved to proved, +42 +Table of Contents +and impairments of oil and gas properties will also impact depletion expense. While the increase in oil prices has more than offset the decrease in gas prices during 2018 as compared to 2017, thus increasing our reserves, the increase in production combined with our ongoing exploration and development capital expenditures throughout 2018 have resulted in an overall increase in depletion expense. +Fixed assets consist primarily of gathering and plant facilities, vehicles, airplanes, office furniture, and computer equipment and software. These items are recorded at cost and are depreciated on the straight-line method based on expected lives of the individual assets, which range from 3 to 30 years. Depreciation, depletion, and amortization (“DD&A”) consisted of the following for the years indicated: +Years Ended December 31, +Variance +Between +2018 / 2017 +Per BOE +DD&A Expense (in thousands, except per BOE) +2018 +2017 +2018 +2017 +Depletion +$ +538,919 +$ +399,328 +$ +139,591 +$ +6.65 +$ +5.75 +Depreciation +51,554 +46,703 +4,851 +0.64 +0.67 +$ +590,473 +$ +446,031 +$ +144,442 +$ +7.29 +$ +6.42 +Asset Retirement Obligation +Asset retirement obligation expense is typically primarily comprised of accretion expense. In periods subsequent to the initial measurement of an asset retirement obligation liability at present value, a period-to-period increase in the carrying amount of the liability is recognized as accretion expense, which represents the effect of the passage of time on the amount of the liability. An equivalent amount is added to the carrying amount of the liability. Also included in asset retirement obligation expense are gains and losses recognized on the settlement of asset retirement obligation liabilities. +Asset retirement obligation expense decreased 54% , or $8.5 million , compared to 2017. The expense in 2017 included $10.5 million for the estimated liability to decommission two offshore properties in the Gulf of Mexico in which we were a prior lessee. In January 2018, the Bureau of Safety and Environmental Enforcement (“BSEE”) notified us and other prior lessees that the current lessee of the properties had filed a petition for relief under the bankruptcy code and, as a result, had defaulted on its obligation to decommission the properties. Consequently, BSEE ordered us and other prior lessees to decommission all wells, pipelines, platforms, and other facilities related to these properties. Our estimate of our liability may change as we refine our understanding of the extent of our obligations under the orders from BSEE and obtain additional information on decommissioning costs. +Production +Production expense generally consists of costs for labor, equipment, maintenance, saltwater disposal, compression, power, treating, and miscellaneous other costs (lease operating expense). Production expense also includes well workover activity necessary to maintain production from existing wells. Production expense consists of lease operating expense and workover expense as follows: +Years Ended December 31, +Variance +Between +2018 / 2017 +Per BOE +Production Expense (in thousands, except per BOE) +2018 +2017 +2018 +2017 +Lease operating expense +$ +241,885 +$ +215,148 +$ +26,737 +$ +2.99 +$ +3.10 +Workover expense +51,328 +47,032 +4,296 +0.63 +0.67 +$ +293,213 +$ +262,180 +$ +31,033 +$ +3.62 +$ +3.77 +Through efficiency gains and increasing daily production by 17% during 2018 as compared to 2017 , we reduced our per unit lease operating expense by 4% between these two periods. On an absolute basis, lease operating expense in 2018 increased 12% , or $26.7 million , compared to 2017. The increase was primarily caused by increases in the following costs: (i) equipment rental, primarily additional compressors, (ii) saltwater disposal costs, due to increased water volumes, (iii) tank battery and processing equipment and maintenance, primarily due to the addition of new wells, (iv) contract pumpers, (v) environmental compliance, primarily emissions-related, (vi) electricity, primarily due to the addition of new wells, and (vii) chemicals and treating, due to increased water volumes. +43 +Table of Contents +Workover expense increased 9% , or $4.3 million , during 2018 as compared to 2017 . During 2018, we had more workover projects than we did in 2017. During 2018, we incurred the majority of our workover expense on major well workovers and artificial lift conversions, with artificial lift conversions being the largest increase from 2017. Partially offsetting the increase in expense on workover projects was the receipt of insurance proceeds during 2018 related to a previous flood and line rupture. Remediation and repairs for these events were charged to workover expense at the time incurred. Generally, workover costs will fluctuate based on the amount of maintenance and remedial activity required during the period. +Transportation, Processing, and Other Operating +Transportation, processing, and other operating costs principally consist of expenditures to prepare and transport production from the wellhead, including gathering, fuel, compression, and processing costs. Costs vary by region and will fluctuate with increases or decreases in production volumes, contractual fees, and changes in fuel and compression costs. +Transportation, processing, and other operating costs in 2018 were 13% , or $30.8 million , lower than in 2017 . This decrease is due to our adoption of ASC 606 effective January 1, 2018, whereby certain transportation and processing costs are now reclassified out of transportation, processing, and other operating costs and are treated as a deduction from revenue. The adoption of ASC 606 reduced Transportation, processing, and other operating costs by $44.8 million in 2018 . The reduction was partially offset by increased costs due to increased production volumes. See Note 1 to the Consolidated Financial Statements for additional information regarding the adoption of ASC 606. +Gas Gathering and Other +Gas gathering and other includes costs associated with operating our gas gathering and processing infrastructure, including product costs and operating and maintenance expenses. Gas gathering and other in 2018 was 17% , or $6.1 million , higher than in 2017 . The increase was primarily due to overall increases in operating costs partially offset by lower product costs associated with processing third-party production due to lower volumes and prices. +Taxes Other than Income +Taxes other than income consist of production (or severance) taxes, ad valorem taxes, and other taxes. State and local taxing authorities assess these taxes, with production taxes being based on the volume or value of production and ad valorem taxes being based on the value of properties. Production taxes make up the majority of this expense for us, with revenue-based production taxes being the largest component of these taxes. In 2018 , taxes other than income increased 39% , or $35.3 million , from 2017 . This increase is primarily due to the increase in revenue in 2018 as well as due to increased ad valorem taxes in 2018 due to higher assessed valuations and new wells. Both years include credits for tax refunds. We had $15.7 million in credits in 2018 , primarily for Texas marketing cost deduction refunds. We had $9.6 million in credits in 2017 , primarily for Texas high-cost gas well refunds. Taxes other than income were 5.4% and 4.8% of production revenues for 2018 and 2017 , respectively. +General and Administrative +General and administrative (“G&A”) expense consists primarily of salaries and related benefits, office rent, legal and consulting fees, systems costs, and other administrative costs incurred. Our G&A expense is reported net of amounts reimbursed to us by working interest owners of the oil and gas properties we operate and net of amounts capitalized pursuant to the full cost method of accounting. The amount of expense capitalized varies and depends on whether the cost incurred can be directly identified with acquisition, exploration, and development activities. The percentage of gross G&A capitalized was 47% and 49% during 2018 and 2017 , respectively. The table below shows our G&A costs. +Years Ended December 31, +Variance +Between +2018 / 2017 +General and Administrative Expense (in thousands): +2018 +2017 +Gross G&A +$ +152,827 +$ +156,389 +$ +(3,562 +) +Less amounts capitalized to oil and gas properties +(71,977 +) +(76,393 +) +4,416 +G&A expense +$ +80,850 +$ +79,996 +$ +854 +44 +Table of Contents +Stock Compensation +Stock compensation expense consists of non-cash charges resulting from the amortization of the cost of restricted stock and stock option awards, net of amounts capitalized to oil and gas properties. We have recognized stock-based compensation cost as follows: +Years Ended December 31, +Variance +Between +2018 / 2017 +Stock Compensation Expense (in thousands): +2018 +2017 +Restricted stock awards: +Performance stock awards +$ +23,083 +$ +26,020 +$ +(2,937 +) +Service-based stock awards +20,385 +19,746 +639 +43,468 +45,766 +(2,298 +) +Stock option awards +2,456 +2,599 +(143 +) +Total stock compensation cost +45,924 +48,365 +(2,441 +) +Less amounts capitalized to oil and gas properties +(23,029 +) +(22,109 +) +(920 +) +Stock compensation expense +$ +22,895 +$ +26,256 +$ +(3,361 +) +Periodic stock compensation expense will fluctuate based on the grant date fair value of awards, the number of awards, the requisite service period of the awards, employee forfeitures, and the timing of the awards. The decrease in total stock compensation cost in 2018 as compared to 2017 is primarily due to performance stock award forfeitures during the second quarter 2018 . Our accounting policy is to account for forfeitures in compensation cost when they occur, therefore, all the previously recognized expense on the forfeited award is reversed at the time of forfeiture. +Gain on Derivative Instruments, Net +Net gains and losses on our derivative instruments are a function of fluctuations in the underlying commodity index prices as compared to the contracted prices and the monthly cash settlements (if any) of the instruments. We have elected not to designate our derivatives as hedging instruments for accounting purposes and, therefore, we do not apply hedge accounting treatment to our derivative instruments. Consequently, changes in the fair value of our derivative instruments and cash settlements on the instruments are included as a component of operating costs and expenses as either a net gain or loss on derivative instruments. Cash settlements of our contracts are included in cash flows from operating activities in our statements of cash flows. The following table presents the components of Gain on derivative instruments, net for the years indicated. See Note 4 to the Consolidated Financial Statements for additional information regarding our derivative instruments. +Years Ended December 31, +Variance +Between +2018 / 2017 +Gain on Derivative Instruments, Net (in thousands): +2018 +2017 +Decrease (increase) in fair value of derivative instruments, net: +Gas contracts +$ +15,742 +$ +(40,226 +) +$ +55,968 +Oil contracts +(126,130 +) +17,383 +(143,513 +) +(110,388 +) +(22,843 +) +(87,545 +) +Cash (receipts) payments on derivative instruments, net: +Gas contracts +(13,794 +) +(4,557 +) +(9,237 +) +Oil contracts +38,223 +6,190 +32,033 +24,429 +1,633 +22,796 +Gain on derivative instruments, net +$ +(85,959 +) +$ +(21,210 +) +$ +(64,749 +) +Other Operating Expense, Net +Other operating expense, net increased $14.2 million in 2018 as compared to 2017. This expense is comprised primarily of litigation settlements and allowance for doubtful accounts adjustments. The increase in expense in 2018 is due to a $14.2 million increase in litigation settlements. +45 +Table of Contents +Other Income and Expense +Years Ended December 31, +Variance +Between +2018 / 2017 +Other Income and Expense (in thousands): +2018 +2017 +Interest expense +$ +68,224 +$ +74,821 +$ +(6,597 +) +Capitalized interest +(20,855 +) +(22,948 +) +2,093 +Loss on early extinguishment of debt +— +28,187 +(28,187 +) +Other, net +(22,908 +) +(11,342 +) +(11,566 +) +$ +24,461 +$ +68,718 +$ +(44,257 +) +The majority of our interest expense relates to interest on our senior unsecured notes. Also included in interest expense is the amortization of debt issuance costs and discount, as well as miscellaneous interest expense. See LIQUIDITY AND CAPITAL RESOURCES Long-Term Debt below for further information regarding our debt. The decrease in interest expense in 2018 as compared to 2017 is due to the completion of a tender offer and redemption of $750 million 5.875% senior notes and the issuance of $750 million 3.90% senior notes, both of which occurred during the second quarter of 2017. The $28.2 million loss on early extinguishment of debt incurred during 2017 was also associated with the debt tender offer and redemption. The loss was composed primarily of tender and redemption premiums of $22.6 million and the write-off of $5.3 million of unamortized debt issuance costs. The original maturity date of the 5.875% notes was May 1, 2022. +We capitalize interest on non-producing leasehold costs, the in-progress costs of drilling and completing wells, and constructing midstream assets. Capitalized interest will fluctuate based on the rates applicable to borrowings outstanding during the period and the amount of costs subject to interest capitalized. The amount of costs subject to interest capitalization was lower in 2018 as compared to 2017, thus reducing our capitalized interest in 2018. Also contributing to lower capitalized interest in 2018 was a lower average interest rate on borrowings outstanding due to the replacement of our 5.875% notes with 3.90% notes in the second quarter of 2017. +Other, net includes interest income of $11.1 million and $5.4 million in 2018 and 2017 , respectively. The increase in interest income in 2018 is primarily due to the cash proceeds we received from our Ward County property divestiture at the end of August 2018, which we subsequently invested the majority of in short-term interest-bearing accounts. Additionally, interest rates have increased throughout 2017 and 2018 . Other components of Other, net include miscellaneous income and expense items that vary from period to period, including gain or loss related to the sale or value of oil and gas well equipment and supplies, gain or loss on miscellaneous fixed asset sales, and income and expense associated with other non-operating activities. +Income Tax Expense (Benefit) +The components of our provision for income taxes are as follows: +Years Ended December 31, +Variance +Between +2018 / 2017 +Income Tax Expense (Benefit) (in thousands): +2018 +2017 +Current tax benefit +$ +(2,624 +) +$ +(2,812 +) +$ +188 +Deferred tax expense +233,280 +190,479 +42,801 +$ +230,656 +$ +187,667 +$ +42,989 +Combined federal and state effective income tax rate +22.6 +% +27.5 +% +On December 22, 2017, the United States enacted H.R.1 (Public Law 115-97), commonly referred to as the Tax Cuts and Jobs Act or U.S. Tax Reform. H.R.1, among other things, includes changes to U.S. federal tax rates, imposes new limitations on the utilization of net operating losses and the deductibility of interest and executive compensation, allows for the expensing of capital expenditures, and eliminates the corporate Alternative Minimum Tax. We remeasured the deferred tax assets and liabilities as of December 31, 2017 to reflect the reduction in the U.S. income tax rate from 35% to 21% for years after 2017 and, as a result of this remeasurement, we recorded an income tax benefit of $61.1 million and a corresponding $61.1 million decrease in the net deferred tax liabilities as of December 31, 2017. We believe the accounting for the effects of H.R.1 recognized in the December 31, 2017 financial statements is materially complete. During 2018, no other adjustments were made. As a result of H.R.1, we expect our effective +46 +Table of Contents +tax rate in future periods will be lower than in periods prior to enactment. In addition, the limitations on utilization of net operating losses and deductibility of interest and executive compensation may result in the payment of cash taxes earlier than expected. +Our combined federal and state effective tax rates, as shown above, differ from the statutory rate primarily due to state income taxes, non-deductible expenses, revisions, and the impact of changes in tax law. See Note 9 to the Consolidated Financial Statements for further information regarding our income taxes. +RESULTS OF OPERATIONS +2017 Compared to 2016 +Summary +For the year ended December 31, 2017 , we had net income of $494.3 million ( $5.19 per diluted share), up from a net loss of $408.8 million ( $4.38 per diluted share) in 2016 . Production revenue in 2017 was positively impacted by increased realized commodity prices and production volumes. Lower commodity prices negatively impacted 2016 , including resulting in $757.7 million of impairments of our oil and gas properties in that year. Year-over-year changes are discussed further as follows. Also refer to the “ 2018 Compared to 2017 ” section above for general information regarding various statement of operations line items. +Revenues +Realized prices and production volumes were higher in 2017 as compared to 2016 , which caused our revenues to increase by $652.8 million , or 53% , from the prior year. The following table shows our production revenue for the years indicated as well as the change in revenue due to changes in prices and volumes. +Years Ended +December 31, +Price / Volume Variance +Production Revenue (in thousands) +2017 +2016 +Variance Between +2017 / 2016 +Price +Volume +Total +Oil sales +$ +981,646 +$ +632,934 +$ +348,712 +55 +% +$ +182,742 +$ +165,970 +$ +348,712 +Gas sales +516,936 +388,786 +128,150 +33 +% +84,361 +43,789 +128,150 +NGL sales +375,421 +199,498 +175,923 +88 +% +131,347 +44,576 +175,923 +$ +1,874,003 +$ +1,221,218 +$ +652,785 +53 +% +$ +398,450 +$ +254,335 +$ +652,785 +The table below presents our production volumes by commodity, our average realized commodity prices, and certain major U.S. index prices. The sale of our Permian Basin oil production is typically tied to the WTI Midland benchmark price and the sale of our Mid-Continent oil production is typically tied to the WTI Cushing benchmark price. During 2017 and 2016 , 78% and 80% , respectively, of our oil production was in the Permian Basin with the majority of the remainder in the Mid-Continent region. Our realized prices do not include settlements of commodity derivative contracts. +47 +Table of Contents +Years Ended +December 31, +Variance Between +2017 / 2016 +2017 +2016 +Oil +Total volume — MBbls +20,861 +16,528 +4,333 +26 +% +Total volume — MBbls per day +57.2 +45.2 +12.0 +27 +% +Percentage of total production +30 +% +28 +% +Average realized price — per barrel +$ +47.06 +$ +38.30 +$ +8.76 +23 +% +Average WTI Midland price — per barrel +$ +50.45 +$ +43.34 +$ +7.11 +16 +% +Average WTI Cushing price — per barrel +$ +50.94 +$ +43.32 +$ +7.62 +18 +% +Gas +Total volume — MMcf +187,468 +168,227 +19,241 +11 +% +Total volume — MMcf per day +513.6 +459.6 +54.0 +12 +% +Percentage of total production +45 +% +48 +% +Average realized price — per Mcf +$ +2.76 +$ +2.31 +$ +0.45 +19 +% +Average Henry Hub price — per Mcf +$ +3.11 +$ +2.46 +$ +0.65 +26 +% +NGL +Total volume — MBbls +17,374 +14,200 +3,174 +22 +% +Total volume — MBbls per day +47.6 +38.8 +8.8 +23 +% +Percentage of total production +25 +% +24 +% +Average realized price — per barrel +$ +21.61 +$ +14.05 +$ +7.56 +54 +% +Total +Total production — MBOE +69,479 +58,765 +10,714 +18 +% +Total production — MBOE per day +190.4 +160.6 +29.8 +19 +% +Average realized price — per BOE +$ +26.97 +$ +20.78 +$ +6.19 +30 +% +Other Revenues +We transport, process, and market some third-party gas that is associated with our equity gas. We market and sell gas for other working interest owners under short term agreements and may earn a fee for such services. The table below reflects income from third-party gas gathering and processing and our net marketing margin for marketing third-party gas. +Years Ended December 31, +Variance +Between +2017 / 2016 +Gas Gathering and Marketing (in thousands): +2017 +2016 +Gas gathering and other +$ +43,751 +$ +36,033 +$ +7,718 +Gas marketing +$ +495 +$ +94 +$ +401 +Fluctuations in revenues from gas gathering and gas marketing activities are a function of increases and decreases in volumes, commodity prices, and gathering rate charges. The increases from 2016 are primarily due to an increase in prices. +48 +Table of Contents +Operating Costs and Expenses +Total operating costs and expenses of $1.17 billion in 2017 were 36% lower than the $1.83 billion incurred in 2016 . Most of the decrease resulted from ceiling test impairments of our oil and gas properties of $757.7 million recorded in 2016; we recorded no ceiling test impairments in 2017. Also contributing to the decrease was the net gain on derivative instruments in 2017 compared to a net loss in 2016. Otherwise, all other categories of operating costs and expenses increased in 2017. The following table shows our operating costs and expenses for the years indicated and a discussion of year-over-year differences follows. +Years Ended December 31, +Variance +Between +2017 / 2016 +Per BOE +Operating Costs and Expenses (in thousands, except per BOE) +2017 +2016 +2017 +2016 +Impairment of oil and gas properties +$ +— +$ +757,670 +$ +(757,670 +) +N/A +N/A +Depreciation, depletion, and amortization +446,031 +392,348 +53,683 +$ +6.42 +$ +6.68 +Asset retirement obligation +15,624 +7,828 +7,796 +$ +0.22 +$ +0.13 +Production +262,180 +232,002 +30,178 +$ +3.77 +$ +3.95 +Transportation, processing, and other operating +231,640 +190,725 +40,915 +$ +3.33 +$ +3.25 +Gas gathering and other +35,840 +31,785 +4,055 +$ +0.52 +$ +0.54 +Taxes other than income +89,864 +61,946 +27,918 +$ +1.29 +$ +1.05 +General and administrative +79,996 +73,901 +6,095 +$ +1.15 +$ +1.26 +Stock compensation +26,256 +24,523 +1,733 +$ +0.38 +$ +0.42 +(Gain) loss on derivative instruments, net +(21,210 +) +55,749 +(76,959 +) +N/A +N/A +Other operating expense, net +1,314 +755 +559 +N/A +N/A +$ +1,167,535 +$ +1,829,232 +$ +(661,697 +) +Ceiling Test Impairment +We use the full cost method of accounting for our oil and gas operations. Accounting rules require us to perform a quarterly ceiling test calculation to test our capitalized oil and gas property costs for possible impairment. If the net capitalized cost of our oil and gas properties, as adjusted for income taxes, exceeds the ceiling limitation, the excess is charged to expense. The ceiling limitation is equal to the sum of: (i) the present value discounted at 10% of estimated future net revenues from proved reserves, (ii) the cost of properties not being amortized, and (iii) the lower of cost or estimated fair value of unproven properties included in the costs being amortized, as adjusted for income taxes. Estimated future net revenues are determined based on trailing twelve-month average commodity prices and estimated proved reserve quantities, operating costs, and capital expenditures. +At each quarter-end date during the year ended December 31, 2017, the net capitalized cost of our oil and gas properties, as adjusted for income taxes, did not exceed the ceiling limitation, and, therefore, we did not recognize a ceiling test impairment during the year. The commodity prices used in the December 31, 2017 ceiling calculation, based on the required trailing twelve-month average prices, were $2.98 per Mcf of gas and $51.34 per barrel of oil. A decline of approximately 19% or more in the value of the ceiling limitation would have resulted in an impairment at December 31, 2017. During the year ended December 31, 2016, we recognized ceiling test impairments totaling $757.7 million ( $481.4 million , net of tax). These impairments were primarily the result of decreases in the trailing twelve-month average prices for oil, gas, and NGLs utilized in determining the estimated future net revenues from proved reserves. Because the ceiling calculation uses trailing twelve-month average commodity prices, the effect of increases and decreases in period-over-period prices can significantly impact the ceiling limitation calculation. In addition, other factors that impact the ceiling limitation calculation include, but are not limited to, incremental proved reserves that may be added each period, revisions to previous reserve estimates, capital expenditures, operating costs, depletion expense, and all related tax effects. Depending on fluctuations in these factors, including a decline in prices, we may incur full cost ceiling test impairments in future quarters. +The calculated ceiling limitation is not intended to be indicative of the fair market value of our proved reserves or future results. Impairment charges do not affect cash flow from operating activities, but do adversely affect our net income and various components of our balance sheet. Any impairment of oil and gas properties is not reversible at a later date. +49 +Table of Contents +Depreciation, Depletion, and Amortization +Depletion increased by $53.3 million , or 15% , during 2017 as compared to 2016. While prices increased in 2017 from 2016, thus increasing our reserves, so too did our exploration and development expenditures and activities, thus increasing our proved oil and gas properties and future development costs, causing an overall increase in depletion expense. DD&A consisted of the following for the years indicated: +Years Ended December 31, +Variance +Between +2017 / 2016 +Per BOE +DD&A Expense (in thousands, except per BOE) +2017 +2016 +2017 +2016 +Depletion +$ +399,328 +$ +346,003 +$ +53,325 +$ +5.75 +$ +5.89 +Depreciation +46,703 +46,345 +358 +0.67 +0.79 +$ +446,031 +$ +392,348 +$ +53,683 +$ +6.42 +$ +6.68 +Asset Retirement Obligation +Asset retirement obligation expense is typically primarily comprised of accretion expense. Asset retirement obligation expense includes $10.5 million in 2017 for the estimated liability to decommission two offshore properties in the Gulf of Mexico in which we were a prior lessee. See the “ 2018 Compared to 2017 ” section above for more information regarding this matter. +Production +Production costs consisted of lease operating expense and workover expense as follows: +Years Ended December 31, +Variance +Between +2017 / 2016 +Per BOE +Production Expense (in thousands, except per BOE) +2017 +2016 +2017 +2016 +Lease operating expense +$ +215,148 +$ +189,291 +$ +25,857 +$ +3.10 +$ +3.22 +Workover expense +47,032 +42,711 +4,321 +0.67 +0.73 +$ +262,180 +$ +232,002 +$ +30,178 +$ +3.77 +$ +3.95 +Due to increased daily production in 2017, we reduced our per unit lease operating expense by 4% from 2016. On an absolute basis, lease operating expense in 2017 increased 14% , or $25.9 million , compared to 2016 . The increase was primarily caused by: (i) increased saltwater disposal costs primarily attributed to the addition of new wells and recompleted wells, (ii) increased labor costs primarily due to additional employees and salary and bonus increases, (iii) increased equipment maintenance costs, primarily the result of the addition of new wells, (iv) increased gas lift and fuel compression costs, and (v) increased chemicals and treating costs. +Workover expense increased by 10% , or $4.3 million , during 2017 as compared to 2016 . During 2017, we had costlier major well workover projects than during 2016, which increased expense. This increase was partially offset by the receipt of partial insurance proceeds during 2017 related to a flooding event in 2015 and the subsequent remediation and repairs, the bulk of which took place in 2016. Generally, workover costs will fluctuate based on the amount of maintenance and remedial activity required during the period. +Transportation, Processing, and Other Operating +Transportation, processing, and other operating costs in 2017 were 21% , or $40.9 million , higher than in 2016 . This increase was primarily due to increased production volumes and, to a lesser extent, increased transportation and processing rates in 2017 as compared to 2016. +Gas Gathering and Other +Gas gathering and other in 2017 was 13% , or $4.1 million , higher than in 2016 . This increase was primarily due to higher product costs associated with processing third-party production due to higher commodity prices. These increased product costs were offset by increases in associated revenue. +50 +Table of Contents +Taxes Other than Income +In 2017 , taxes other than income increased 45% , or $27.9 million , from 2016 . This increase was primarily due to the increase in revenue seen between the comparable periods. Taxes other than income were 4.8% and 5.1% of production revenues for 2017 and 2016, respectively. The percentage decreased from 2016 due to the approval of reduced tax rates on several of our high-cost gas wells in Texas and, as part of that process, approved severance tax refunds of $9.1 million. +General and Administrative +G&A costs consisted of the following: +Years Ended December 31, +Variance +Between +2017 / 2016 +General and Administrative Expense (in thousands): +2017 +2016 +Gross G&A +$ +156,389 +$ +146,432 +$ +9,957 +Less amounts capitalized to oil and gas properties +(76,393 +) +(72,531 +) +(3,862 +) +G&A expense +$ +79,996 +$ +73,901 +$ +6,095 +The percentage of gross G&A capitalized was 49% and 50% during 2017 and 2016 , respectively. G&A expense during 2017 was 8% , or $6.1 million , higher than during 2016 . This increase is primarily due to the following increases: (i) other employee compensation, primarily due to increased incentive bonus expense, (ii) insurance, (iii) consulting, (iv) salaries and wages, due to additional employees and salary increases, and (v) charitable donations. These increases were partially offset by decreased severance expense due to a voluntary early retirement incentive program, which included severance pay, that was offered to certain employees during 2016. +Stock Compensation +We recognized stock-based compensation cost as follows: +Years Ended December 31, +Variance +Between +2017 / 2016 +Stock Compensation Expense (in thousands): +2017 +2016 +Restricted stock awards: +Performance stock awards +$ +26,020 +$ +24,183 +$ +1,837 +Service-based stock awards +19,746 +18,391 +1,355 +45,766 +42,574 +3,192 +Stock option awards +2,599 +2,565 +34 +Total stock compensation cost +48,365 +45,139 +3,226 +Less amounts capitalized to oil and gas properties +(22,109 +) +(20,616 +) +(1,493 +) +Stock compensation expense +$ +26,256 +$ +24,523 +$ +1,733 +Periodic stock compensation expense will fluctuate based on the grant date fair value of awards, the number of awards, the requisite service period of the awards, employee forfeitures, and the timing of the awards. The increase in total stock compensation cost in 2017 as compared to 2016 is primarily due to awards granted either during or subsequent to 2016. These increases were partially offset by awards vesting prior to or during 2017. +51 +Table of Contents +(Gain) Loss on Derivative Instruments, Net +The following table presents the components of (Gain) loss on derivative instruments, net for the periods indicated. See Note 4 to the Consolidated Financial Statements for additional information regarding our derivative instruments. +Years Ended December 31, +Variance +Between +2017 / 2016 +(Gain) Loss on Derivative Instruments, Net (in thousands): +2017 +2016 +Decrease (increase) in fair value of derivative instruments, net: +Gas contracts +$ +(40,226 +) +$ +27,462 +$ +(67,688 +) +Oil contracts +17,383 +35,724 +(18,341 +) +(22,843 +) +63,186 +(86,029 +) +Cash (receipts) payments on derivative instruments, net: +Gas contracts +(4,557 +) +(6,467 +) +1,910 +Oil contracts +6,190 +(970 +) +7,160 +1,633 +(7,437 +) +9,070 +(Gain) loss on derivative instruments, net +$ +(21,210 +) +$ +55,749 +$ +(76,959 +) +Other Income and Expense +Years Ended December 31, +Variance +Between +2017 / 2016 +Other Income and Expense (in thousands): +2017 +2016 +Interest expense +$ +74,821 +$ +83,272 +$ +(8,451 +) +Capitalized interest +(22,948 +) +(21,248 +) +(1,700 +) +Loss on early extinguishment of debt +28,187 +— +28,187 +Other, net +(11,342 +) +(10,707 +) +(635 +) +$ +68,718 +$ +51,317 +$ +17,401 +The decrease in interest expense in 2017 as compared to 2016 was due to the completion of a tender offer and redemption of $750 million 5.875% senior notes and the issuance of $750 million 3.90% senior notes, which occurred during the second quarter of 2017. The $28.2 million loss on early extinguishment of debt incurred during 2017 was also associated with the debt tender offer and redemption. The loss was composed primarily of tender and redemption premiums of $22.6 million and the write-off of $5.3 million of unamortized debt issuance costs. The original maturity date of the 5.875% notes was May 1, 2022. +There were higher capitalized costs subject to interest capitalization in 2017 as compared to 2016 due to our increased capitalized expenditures. However, the impact of the increase in capitalized interest was largely offset by the lower interest rate on borrowings outstanding due to the replacement of our 5.875% notes with 3.90% notes in the second quarter of 2017. +Other, net includes interest income of $5.4 million and $3.7 million in 2017 and 2016, respectively. Interest rates were raised once at the end of 2016 and three times in 2017, increasing our interest income earned on our short-term investments. Other components of Other, net consist of miscellaneous income and expense items that vary from period to period, including gain or loss related to the sale or value of oil and gas well equipment and supplies, gain or loss on miscellaneous asset sales, and income and expense associated with other non-operating activities. +52 +Table of Contents +Income Tax Expense (Benefit) +The components of Income Tax Expense (Benefit) were as follows: +Years Ended December 31, +Variance +Between +2017 / 2016 +Income Tax Expense (Benefit) (in thousands): +2017 +2016 +Current tax benefit +$ +(2,812 +) +$ +(1,115 +) +$ +(1,697 +) +Deferred tax expense (benefit) +190,479 +(213,286 +) +403,765 +$ +187,667 +$ +(214,401 +) +$ +402,068 +Combined federal and state effective income tax rate +27.5 +% +34.4 +% +On December 22, 2017, the United States enacted H.R.1 (Public Law 115-97), commonly referred to as the Tax Cuts and Jobs Act or U.S. Tax Reform. We remeasured the deferred tax assets and liabilities as of December 31, 2017 to reflect the reduction in the U.S. income tax rate from 35% to 21% for years after 2017 and, as a result of this remeasurement, we recorded an income tax benefit of $61.1 million and a corresponding $61.1 million decrease in the net deferred tax liabilities as of December 31, 2017. See the “ 2018 Compared to 2017 ” section above for more information regarding this matter. +Our combined federal and state effective tax rates, as shown above, differed from the statutory rate at the time of 35% primarily due to state income taxes, non-deductible expenses, revisions, and the impact of changes in tax law. See Note 9 to the Consolidated Financial Statements for further information regarding our income taxes. +LIQUIDITY AND CAPITAL RESOURCES +Overview +We strive to maintain an adequate liquidity level to address volatility and risk. Sources of liquidity include our cash flow from operations, cash on hand, available borrowing capacity under our revolving credit facility, proceeds from sales of non-core assets, including our Ward County asset sale that closed in August 2018, and, from time to time, public financings based on our monitoring of capital markets and our balance sheet. +Our liquidity is highly dependent on prices we receive for the oil, gas, and NGLs we produce. Prices we receive are determined by prevailing market conditions and greatly influence our revenue, cash flow, profitability, access to capital, and future rate of growth. See RESULTS OF OPERATIONS Revenues above for further information regarding the impact realized prices have had on our 2018 earnings. +In connection with the expected closing of our acquisition of Resolute, we anticipate utilizing cash on hand to fund the cash portion of the merger consideration, acquisition fees and expenses, and the repayment of the outstanding balance on Resolute’s revolving credit facility, all of which we estimate will be between $600 million and $630 million . In addition, we intend to redeem and repay the $600 million senior notes of Resolute. This transaction is expected to close in the first quarter of 2019. +We deal with volatility in commodity prices primarily by maintaining flexibility in our capital investment program. We have a balanced and abundant drilling inventory and limited long-term commitments, which enables us to respond quickly to industry volatility. Based on current economic conditions, and assuming the successful acquisition of Resolute, our 2019 exploration and development (“E&D”) expenditures are projected to range from $1.35 billion to $1.45 billion . Investments in gathering, processing, and other infrastructure are expected to be an additional $60 million to $70 million for 2019 . See Capital Expenditures below for information regarding our 2018 E&D activities. +We periodically use derivative instruments to mitigate volatility in commodity prices. At December 31, 2018 , we had derivative contracts covering a portion of our 2019 and 2020 production. Depending on changes in oil and gas futures markets and management’s view of underlying supply and demand trends, we may increase or decrease our derivative positions from current levels. See Note 4 to the Consolidated Financial Statements for information regarding our derivative instruments. +53 +Table of Contents +We believe our conservative use of leverage, strong balance sheet, and hedging activities will mitigate our exposure to lower prices. Cash and cash equivalents at December 31, 2018 were $800.7 million . At December 31, 2018 , our long-term debt consisted of $1.50 billion of senior unsecured notes, with $750 million 4.375% notes due in 2024 and $750 million 3.90% notes due in 2027. At December 31, 2018 , we had no borrowings and $2.5 million in letters of credit outstanding under our credit facility, leaving an unused borrowing availability of $997.5 million . See Long-Term Debt below for more information regarding our debt. +Our debt to total capitalization ratio at December 31, 2018 was 31% , down from 37% at December 31, 2017 . This ratio is calculated by dividing the principal amount of long-term debt by the sum of (i) the principal amount of long-term debt and (ii) total stockholders’ equity, with all numbers coming directly from the Consolidated Balance Sheet. Management uses this ratio as one indicator of our financial condition and believes professional research analysts and rating agencies use this ratio for this purpose and to compare our financial condition to other companies’ financial conditions. +We expect our operating cash flow and other capital resources to be adequate to meet our needs for planned capital expenditures, working capital, debt service, and dividends declared for the next twelve months. +Analysis of Cash Flow Changes +The following table presents the totals of the major cash flow classification categories from our Consolidated Statements of Cash Flows for the periods indicated. +Years Ended December 31, +(in thousands) +2018 +2017 +2016 +Net cash provided by operating activities +$ +1,550,994 +$ +1,096,564 +$ +625,849 +Net cash used by investing activities +$ +(1,085,618 +) +$ +(1,265,897 +) +$ +(692,410 +) +Net cash used by financing activities +$ +(65,244 +) +$ +(83,009 +) +$ +(59,945 +) +Net cash provided by operating activities in 2018 was $1.55 billion , up $454.4 million , or 41% , from $1.10 billion in 2017 . The increase was primarily a result of higher revenues due to higher production volumes and realized oil and NGL prices in 2018 . Also contributing to the increase was a decreased investment in working capital, primarily caused by the timing of cash receipts of accounts receivable. These increases were partially offset by increased net operating expenses, primarily production expense and taxes other than income, and increased cash outflows for settlements of derivative instruments. Net cash provided by operating activities in 2017 was $1.10 billion , up $470.7 million , or 75% , from $625.8 million in 2016. The increase was primarily a result of higher revenue due to higher realized prices and production volumes in 2017. This increase was partially offset by increased operating expenses and an increased investment in working capital. See RESULTS OF OPERATIONS above for more information regarding year-over-year changes in revenue and operating expenses. +In 2018 , net cash used by investing activities was $1.09 billion , compared to $1.27 billion and $692.4 million in 2017 and 2016 , respectively. The majority of our cash flows used by investing activities are for E&D capital expenditures, which, as reflected in the statements of cash flows, were $1.57 billion , $1.23 billion , and $699.6 million in 2018 , 2017 , and 2016 , respectively. Our other capital expenditures, which are primarily for our midstream assets, were $103.5 million , $45.4 million , and $22.2 million in 2018 , 2017 , and 2016 , respectively. In 2018, cash outflows for capital expenditures were partially offset by proceeds from asset sales of $584.4 million , which includes $534.6 million in net cash proceeds from the August 2018 divestiture of oil and gas properties principally located in Ward County, Texas for which the final cash settlement, which will reflect customary post-closing adjustments, is scheduled to occur by the end of first quarter 2019. Net cash proceeds from other asset sales totaled $49.9 million , $12.6 million , and $29.4 million in 2018 , 2017 , and 2016 , respectively. These asset sales are primarily for the divestiture of non-core oil and gas properties. +Net cash used by financing activities was $65.2 million , $83.0 million , and $59.9 million in 2018, 2017, and 2016, respectively. All years include the payment of dividends, the payment of income tax withholdings made on behalf of our employees upon the net settlement of employee stock awards, and the receipt of proceeds from stock option exercises. Dividends paid were $55.2 million , $30.5 million , and $38.0 million in 2018, 2017, and 2016, respectively. During the years presented, we have declared cash dividends quarterly, paying them in the following quarter. We paid dividends totaling $0.58 per share, $0.32 per share, and $0.40 per share in 2018, 2017, and 2016, respectively. We paid employee income tax withholdings on the net settlement of stock awards totaling $12.1 million , +54 +Table of Contents +$21.7 million , and $26.6 million in 2018, 2017, and 2016, respectively. Cash proceeds received from stock option exercises were $2.2 million , $0.4 million , and $4.8 million , in 2018, 2017, and 2016, respectively. Additionally, 2017 included: (i) the early extinguishment of $750 million 5.875% senior notes, which included $22.6 million of tender and redemption premiums and (ii) the issuance of $750 million 3.90% senior notes at 99.748% of par for proceeds of $748.1 million , paying $6.3 million in underwriting, financing, and other costs. +Capital Expenditures +The following table reflects capitalized expenditures for oil and gas acquisitions, exploration, and development activities, net of property sales: +Years Ended December 31, +(in thousands) +2018 +2017 +2016 +Acquisitions: +Proved +$ +62 +$ +938 +$ +2,678 +Unproved +26,216 +6,853 +11,865 +26,278 +7,791 +14,543 +Exploration and development: +Land and seismic +82,791 +140,516 +61,870 +Exploration and development +1,487,453 +1,140,548 +672,882 +1,570,244 +1,281,064 +734,752 +Property sales +(581,799 +) +(11,680 +) +(24,687 +) +$ +1,014,723 +$ +1,277,175 +$ +724,608 +Amounts in the table above are presented on an accrual basis. Oil and gas capital expenditures and sales of oil and gas assets in the Consolidated Statements of Cash Flows reflect capital expenditures on a cash basis, when payments are made and proceeds received. +We increased our 2018 E&D expenditures 23% to $1.57 billion compared to $1.28 billion in 2017 . Approximately 70% of our 2018 E&D expenditures were in the Permian Basin and 30% were in the Mid-Continent. During 2018 , we completed or participated in the completion of 349 gross ( 122.1 net) wells, of which we operated 146 gross ( 105.8 net) wells. See Items 1 and 2 of this report for further information regarding our oil and gas properties. +Approximately 85% of our planned 2019 E&D capital investment of $1.35 billion to $1.45 billion is expected to be invested in the Permian Basin and most of the remainder in the Mid-Continent. +As has been our historical practice, we regularly review our capital expenditures throughout the year and will adjust our investments based on increases or decreases in commodity prices, service costs, and drilling success. We have the flexibility to adjust our capital expenditures based upon market conditions. +We intend to fund our 2019 capital program and the acquisition of Resolute with cash flow from our operating activities, cash on hand, and borrowings under our credit facility. Sales of non-core assets and possible capital markets transactions may also be used to supplement funding of capital expenditures and acquisitions. The timing of capital expenditures and the receipt of cash flows do not necessarily match, which may cause us to borrow and repay funds under our credit facility from time-to-time. See Long-Term Debt — Bank Debt below for further information regarding our credit facility. +On November 18, 2018, we entered into an agreement and plan of merger to acquire Resolute in a cash and stock transaction valued at a total purchase price of approximately $1.6 billion , including the assumption of Resolute’s long-term debt, which was $710 million as of September 30, 2018. Under the terms of the agreement, Resolute shareholders will have the right to receive 0.3943 shares of Cimarex common stock, $35.00 per share in cash, or a combination of $14.00 per share in cash and 0.2366 shares of Cimarex common stock. The amount of stock and cash is subject to proration for a total stock and cash mix of 60% and 40% , respectively. Assuming completion of the acquisition, Resolute’s former stockholders will own approximately 6.4% of our outstanding common stock based on shares outstanding for both companies as of January 18, 2019. The cash portion of the merger consideration, acquisition fees and expenses, and the repayment of the outstanding balance on Resolute’s revolving credit facility, all of which +55 +Table of Contents +are estimated to be between $600 million and $630 million , are expected to be funded through cash on hand. In addition, we intend to redeem and repay the $600 million senior notes of Resolute. This acquisition will expand Cimarex’s footprint in Reeves County, Texas by 21,100 net acres that are complementary to our existing Reeves County position. The transaction, which is expected to be completed by the end of the first quarter 2019, is subject to the approval of Resolute shareholders and the satisfaction of certain regulatory approvals and other customary closing conditions. +We have made, and will continue to make, expenditures to comply with environmental and safety regulations and requirements. These costs are considered a normal recurring cost of our ongoing operations. While we expect current pending legislation or regulations to increase the cost of business, we do not anticipate that we will be required to expend amounts that will have a material adverse effect on our financial position or operations, nor are we aware of any pending regulatory changes that would have a material impact, based on current laws and regulations. However, compliance with new legislation or regulations could increase our costs or adversely affect demand for oil or gas and result in a material adverse effect on our financial position or operations. See Item 1A RISK FACTORS for a description of risks related to current and potential future environmental and safety regulations and requirements that could adversely affect our operations and financial condition. +Long-Term Debt +Long-term debt at December 31, 2018 and 2017 consisted of the following: +December 31, 2018 +December 31, 2017 +(in thousands) +Principal +Unamortized Debt +Issuance Costs and Discount (1) +Long-term +Debt, net +Principal +Unamortized Debt +Issuance Costs and Discount (1) +Long-term +Debt, net +4.375% Senior Notes +$ +750,000 +$ +(4,439 +) +$ +745,561 +$ +750,000 +$ +(5,383 +) +$ +744,617 +3.90% Senior Notes +750,000 +(7,007 +) +742,993 +750,000 +(7,697 +) +742,303 +Total long-term debt +$ +1,500,000 +$ +(11,446 +) +$ +1,488,554 +$ +1,500,000 +$ +(13,080 +) +$ +1,486,920 +________________________________________ +(1) +At December 31, 2018 , the unamortized debt issuance costs and discount related to the 3.90% notes were $5.4 million and $1.6 million , respectively. At December 31, 2017 , the unamortized debt issuance costs and discount related to the 3.90% notes were $5.9 million and $1.8 million , respectively. The 4.375% notes were issued at par. +Bank Debt +In October 2015, we entered into a senior unsecured revolving credit facility (“Credit Facility”) with an aggregate commitment of $1.0 billion , which matures October 16, 2020. There is no borrowing base subject to the discretion of the lenders based on the value of our proved reserves under the Credit Facility. As of December 31, 2018 , we had no bank borrowings outstanding under the Credit Facility, but did have letters of credit of $2.5 million outstanding, leaving an unused borrowing availability of $997.5 million . +At our option, borrowings under the Credit Facility may bear interest at either (a) LIBOR plus 1.125 - 2.0% based on the credit rating for our senior unsecured long-term debt, or (b) a base rate (as defined in the credit agreement) plus 0.125 - 1.0% , based on the credit rating for our senior unsecured long-term debt. Unused borrowings are subject to a commitment fee of 0.125 - 0.35% , based on the credit rating for our senior unsecured long-term debt. +The Credit Facility contains representations, warranties, covenants, and events of default that are customary for investment grade, senior unsecured bank credit agreements, including a financial covenant for the maintenance of a defined total debt-to-capital ratio of no greater than 65% . As of December 31, 2018 , we were in compliance with all of the financial and non-financial covenants. +At December 31, 2018 and 2017 , we had $2.2 million and $3.4 million , respectively, of unamortized debt issuance costs associated with our Credit Facility that were recorded as deferred assets and included in “Other assets” in our balance sheets. The costs are being amortized to interest expense ratably over the life of the Credit Facility. +56 +Table of Contents +On February 5, 2019 , we entered into an Amended and Restated Credit Agreement. Among other things, the amended and restated credit facility increases the aggregate commitment to $1.25 billion with an option to increase the commitment to $1.5 billion , and extends the maturity date to February 5, 2024 . +Senior Notes +On April 10, 2017, we completed a cash tender offer to purchase any of our 5.875% senior unsecured notes for cash consideration of $1,031.67 per $1,000 principal amount of notes, plus any accrued and unpaid interest up to, but not including, the settlement date, with $253.5 million aggregate principal amount of the notes validly tendered. We settled these tendered notes for $268.1 million , including accrued interest. On May 12, 2017, we completed a redemption of the 5.875% notes remaining outstanding for $1,029.38 per $1,000 principal amount of notes, plus any accrued and unpaid interest up to, but not including, the redemption date, settling the notes for $512.0 million , including accrued interest. We recognized a loss on early extinguishment of debt related to these transactions of $28.2 million , composed primarily of tender and redemption premiums of $22.6 million and the write-off of $5.3 million of unamortized debt issuance costs. The original maturity date of the 5.875% notes was May 1, 2022 . +On April 10, 2017, we issued $750 million aggregate principal amount of 3.90% senior unsecured notes due May 15, 2027 at 99.748% of par to yield 3.93% per annum. We received $741.8 million in net cash proceeds, after deducting underwriters’ fees, discount, and debt issuance costs. The notes bear an annual interest rate of 3.90% and interest is payable semiannually on May 15 and November 15, with the first payment occurring November 15, 2017. Along with cash on hand, we used the proceeds to fund the settlement of the tendered and redeemed 5.875% notes. +In June 2014, we issued $750 million aggregate principal amount of 4.375% senior unsecured notes at par. These notes are due June 1, 2024 and interest is payable semiannually on June 1 and December 1. +Each of our senior unsecured notes is governed by an indenture containing certain covenants, events of default, and other restrictive provisions with which we were in compliance as of December 31, 2018 . The effective interest rate on the 4.375% notes and the 3.90% notes, including the amortization of debt issuance costs and discount, as applicable, is 4.50% and 4.01% , respectively. +Working Capital Analysis +Our working capital fluctuates primarily as a result of our realized commodity prices, increases or decreases in our production volumes, changes in receivables and payables related to our operating and E&D activities, changes in our oil and gas well equipment and supplies, and changes in the carrying value of our derivative instruments. +At December 31, 2018 , we had working capital of $715.4 million , an increase of $459.4 million , or 179% , compared to working capital of $256.1 million at December 31, 2017 . +Working capital increases consisted primarily of the following: +• +Cash and cash equivalents increased $400.1 million . This is primarily due to the receipt of $534.6 million in net cash proceeds from the August 2018 divestiture of oil and gas properties principally located in Ward County, Texas. +• +Our net current derivative instruments increased in value by $101.2 million from a net current liability at December 31, 2017 to a net current asset at December 31, 2018 . +Working capital decreases consisted primarily of the following: +• Operations-related accounts payable and accrued liabilities increased $33.6 million . +• +Accrued liabilities related to our E&D expenditures increased $8.9 million . +57 +Table of Contents +Dividends +A quarterly cash dividend has been paid to stockholders every quarter since the first quarter of 2006. In February 2016, the quarterly dividend declared was decreased from $0.16 per share to $0.08 per share, where it remained through the fourth quarter of 2017. In the first and second quarters of 2018, we declared dividends of $0.16 per share and in the third and fourth quarters of 2018, we declared dividends of $0.18 per share. Future dividend payments will depend on our level of earnings, financial requirements, and other factors considered relevant by our Board of Directors. See Note 2 to the Consolidated Financial Statements for further information regarding dividends. +Off-Balance Sheet Arrangements +We may enter into off-balance sheet arrangements and transactions that can give rise to material off-balance sheet obligations. As of December 31, 2018 , our material off-balance sheet arrangements consisted of operating lease agreements, which are included in the table below. +Contractual Obligations and Material Commitments +At December 31, 2018 , we had the following contractual obligations and material commitments: +Payments Due by Period +Contractual obligations (in thousands) : +Total +1/1/19 - 12/31/19 +1/1/20 - 12/31/21 +1/1/22 - 12/31/23 +1/1/24 and Thereafter +Long-term debt-principal (1) +$ +1,500,000 +$ +— +$ +— +$ +— +$ +1,500,000 +Long-term debt-interest (1) +429,094 +60,844 +124,125 +124,125 +120,000 +Operating leases (2) +109,832 +23,007 +43,431 +22,563 +20,831 +Unconditional purchase obligations (3) +64,593 +24,263 +27,967 +6,900 +5,463 +Derivative liabilities +29,894 +27,627 +2,267 +— +— +Asset retirement obligation (4) +166,904 +14,146 +— +(4) +— +(4) +— +(4) +Other long-term liabilities (5) +36,926 +1,390 +2,903 +5,048 +27,585 +$ +2,337,243 +$ +151,277 +$ +200,693 +$ +158,636 +$ +1,673,879 +________________________________________ +(1) +The interest payments presented above include the accrued interest payable on our long-term debt as of December 31, 2018 as well as future payments calculated using the long-term debt’s fixed rates, stated maturity dates, and principal amounts outstanding as of December 31, 2018 . See Note 3 to the Consolidated Financial Statements for additional information regarding our debt. +(2) +Operating leases include various lease commitments for commercial real estate, which consists primarily of office space, and compressor equipment. +(3) +Of the total Unconditional purchase obligations, $36.0 million represents obligations for the purchase of sand for well completions and $27.8 million represents obligations for firm transportation agreements for gas pipeline capacity. +(4) +We have excluded the presentation of the timing of the cash flows associated with our long-term asset retirement obligations because we cannot make a reasonably reliable estimate of the future period of cash settlement. The long-term asset retirement obligation is included in the total asset retirement obligation presented. +(5) +Other long-term liabilities include contractual obligations associated with our employee supplemental savings plan, gas balancing liabilities, and other miscellaneous liabilities. All of these liabilities are accrued on our Consolidated Balance Sheet. The current portion associated with these long-term liabilities is also presented in the table above. +The following discusses various commercial commitments that we have made that may include potential future cash payments if we fail to meet various performance obligations. These are not reflected in the table above. +At December 31, 2018 , we had estimated commitments of approximately: (i) $498.3 million to finish drilling, completing, or performing other work on wells and various other infrastructure projects in progress and (ii) $24.9 million to finish gathering system construction in progress. +58 +Table of Contents +At December 31, 2018 , we had firm sales contracts to deliver approximately 316.9 Bcf of natural gas over the next 6.1 years . If we do not deliver this gas, our estimated financial commitment, calculated using the January 2019 index price, would be approximately $814.7 million . The value of this commitment will fluctuate due to price volatility and actual volumes delivered. However, we believe no financial commitment will be due based on our current proved reserves and production levels from which we can fulfill these volumetric obligations. +In connection with gas gathering and processing agreements, we have volume commitments over the next 9.0 years . If we do not deliver the committed gas or NGLs, as the case may be, the estimated maximum amount that would be payable under these commitments, calculated as of December 31, 2018 , would be approximately $336.0 million . However, we believe no financial commitment will be due based on our current proved reserves and production levels from which we can fulfill these volumetric obligations. +We have minimum volume delivery commitments associated with agreements to reimburse connection costs to various pipelines. If we do not deliver this gas, the estimated maximum amount that would be payable under these commitments, calculated as of December 31, 2018 , would be approximately $57.3 million . Of this total, we have accrued a liability of $2.5 million representing the estimated amount we will have to pay due to insufficient forecasted volumes at particular connection points. +All of the noted commitments were routine and made in the ordinary course of our business. +Taking into account current commodity prices and anticipated levels of production, we believe that our net cash flow generated from operations and our other capital resources will be adequate to meet future obligations. +CRITICAL ACCOUNTING POLICIES AND ESTIMATES +Discussion and analysis of our financial condition and results of operation are based on our Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses. We analyze and base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Changes in facts and circumstances or additional information may result in revised estimates, and actual results may differ from these estimates. +Our significant accounting policies are described in Note 1 to our Consolidated Financial Statements. We have identified the following policies as being of particular importance to the portrayal of our financial position and results of operations and which require the application of significant judgment by management. +Oil and Gas Reserves +The process of estimating quantities of oil and gas reserves is complex, requiring significant decisions in the evaluation of all available geological, geophysical, engineering and economic data. The data for a given field may also change substantially over time due to numerous factors including, but not limited to, additional development activity, evolving production history and continual reassessment of the viability of production under varying economic conditions. As a result, material revisions to existing reserve estimates may occur from time to time. Although every reasonable effort is made to ensure that our reserve estimates represent the most accurate assessments possible, subjective decisions and available data for our various fields make these estimates generally less precise than other estimates included in financial statement disclosures. +At year-end 2018 , 15% of our total proved reserves are categorized as proved undeveloped reserves. Our reserve engineers review and revise these reserve estimates regularly, as new information becomes available. +We use the units-of-production method to amortize the cost associated with our oil and gas properties. Changes in estimates of reserve quantities and commodity prices will cause corresponding changes in depletion expense, or in some cases, a full cost ceiling impairment charge in the period of the revision. See Full Cost Accounting below for further information regarding the ceiling limitation calculation. See SUPPLEMENTAL INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED) in Item 8 for additional reserve data. +59 +Table of Contents +Full Cost Accounting +We use the full cost method of accounting for our oil and gas operations. All costs associated with property acquisition, exploration, and development activities are capitalized. Exploration and development costs include dry hole costs, geological and geophysical costs, direct overhead related to exploration and development activities, and other costs incurred for the purpose of finding oil and gas reserves. Salaries and benefits paid to employees directly involved in the acquisition, exploration, and development of properties, as well as other internal costs that can be directly identified with acquisition, exploration, and development activities, are also capitalized. Under the full cost method of accounting, no gain or loss is recognized upon the disposition of oil and gas properties unless such disposition would significantly alter the relationship between capitalized costs and proved reserves. Expenditures for maintenance and repairs are charged to production expense in the period incurred. +Under the full cost method of accounting, we are required to perform quarterly ceiling test calculations to test our oil and gas properties for possible impairment. If the net capitalized cost of our oil and gas properties, as adjusted for income taxes, exceeds the ceiling limitation, the excess is charged to expense. The ceiling limitation is equal to the sum of: (i) the present value discounted at 10% of estimated future net revenues from proved reserves, (ii) the cost of properties not being amortized, and (iii) the lower of cost or estimated fair value of unproven properties included in the costs being amortized, as adjusted for income taxes. We currently do not have any unproven properties that are being amortized. Estimated future net revenues are determined based on trailing twelve-month average commodity prices and estimated proved reserve quantities, operating costs, and capital expenditures. +The quarterly ceiling test is primarily impacted by commodity prices, changes in estimated reserve quantities, reserves produced, overall exploration and development costs, depletion expense, and deferred taxes. If pricing conditions decline, or if there is a negative impact on one or more of the other components of the calculation, we may incur full cost ceiling test impairments in future quarters. The calculated ceiling limitation is not intended to be indicative of the fair market value of our proved reserves or future results. Impairment charges do not affect cash flow from operating activities, but do adversely affect our net income and various components of our balance sheet. Any impairment of oil and gas properties is not reversible at a later date. +Depletion of proved oil and gas properties is computed on the units-of-production method, whereby capitalized costs, including future development costs and asset retirement costs, are amortized over total estimated proved reserves. Changes in our estimate of proved reserve quantities, commodity prices, and impairment of oil and gas properties will cause corresponding changes in depletion expense in periods subsequent to these changes. +The capitalized costs of unproved properties, including those in wells in progress, are excluded from the costs being amortized. We do not have major development projects that are excluded from costs being amortized. On a quarterly basis, we evaluate excluded costs for inclusion in the costs to be amortized. Significant unproved properties are evaluated individually. Unproved properties that are not considered individually significant are aggregated for evaluation purposes and related costs are transferred to the costs to be amortized quarterly based on the application of historical factors. +Income Taxes +Our oil and gas exploration and production operations are subject to taxation on income in numerous jurisdictions. We record deferred tax assets and liabilities to account for the expected future tax consequences of events that have been recognized in our financial statements and our tax returns. We routinely assess the realizability of our deferred tax assets. Numerous judgments and assumptions are inherent in this assessment, including the determination of future taxable income, which is affected by factors such as future operating conditions (particularly as related to prevailing oil and gas prices) and changing tax laws. If we conclude that it is more likely than not that some portion or all of the deferred tax assets will not be realized, the tax asset would be reduced by a valuation allowance. +We regularly assess and, if required, establish accruals for tax contingencies that could result from assessments of additional tax by taxing jurisdictions where the company operates. See Note 9 to the Consolidated Financial Statements for additional information regarding our income taxes. +60 +Table of Contents +Recently Issued Accounting Standards +See Note 1 to the Consolidated Financial Statements for a discussion of recent accounting pronouncements and their anticipated effect on our business. +ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK +We are exposed to market risk including the risk of loss arising from adverse changes in commodity prices and interest rates. +Price Fluctuations +Our major market risk is pricing applicable to our oil, gas, and NGL production. The prices we receive for our production are based on prevailing market conditions and are influenced by many factors that are beyond our control. Pricing for oil, gas, and NGL production has been volatile and unpredictable. During 2018 , our total production revenue was comprised of 61% oil sales, 18% gas sales, and 21% NGL sales. The following table shows how hypothetical changes in the realized prices we receive for our commodity sales would have impacted revenue for the periods indicated. See MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS— Market Conditions for further information regarding prices. +Impact on Revenue +Change in Realized Price +Year Ended +December 31, 2018 +(in thousands) +Oil +± $1.00 +per barrel +± $24,710 +Gas +± $0.10 +per Mcf +± $20,584 +NGL +± $1.00 +per barrel +± $21,994 +± $67,288 +We periodically enter into derivative contracts to hedge a portion of our price risk associated with our future oil and gas production. At December 31, 2018 , we had oil and gas derivatives covering a portion of our 2019 and 2020 production, which were recorded as current and non-current assets and liabilities. At December 31, 2018 , these derivatives had a gross asset fair value of $111.2 million and a gross liability fair value of $29.9 million . See Note 4 to the Consolidated Financial Statements for additional information regarding our derivative instruments. +While these contracts limit the downside risk of adverse price movements, they may also limit future cash flow from favorable price movements. The following table shows how hypothetical changes in the forward prices used to calculate the fair value of our derivatives would have impacted the fair value as of December 31, 2018 . +Impact on Fair Value +Change in Forward Price +December 31, 2018 +(in thousands) +Oil +-$1.00 +$ +7,718 +Oil ++$1.00 +$ +(7,539 +) +Gas +-$0.10 +$ +5,670 +Gas ++$0.10 +$ +(5,606 +) +Interest Rate Risk +At December 31, 2018 , our long-term debt consisted of $750 million of 4.375% senior unsecured notes that will mature on June 1, 2024 and $750 million of 3.90% senior unsecured notes that will mature on May 15, 2027. Because all of our outstanding long-term debt is at a fixed rate, we consider our interest rate exposure to be minimal. See Note 3 and Note 5 to the Consolidated Financial Statements for additional information regarding our debt. +61 +Table of Contents +ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA +CIMAREX ENERGY CO. +INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTAL SCHEDULES +Page +Report of Independent Registered Public Accounting Firm for the years ended December 31, 2018, 2017, and 2016 +63 +Consolidated Balance Sheets as of December 31, 2018 and 2017 +64 +Consolidated Statements of Operations and Comprehensive Income (Loss) for the years ended December 31, 2018, 2017, and 2016 +65 +Consolidated Statements of Cash Flows for the years ended December 31, 2018, 2017, and 2016 +66 +Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2018, 2017, and 2016 +67 +Notes to Consolidated Financial Statements +Note 1 — Basis of Presentation and Summary of Significant Accounting Policies +68 +Note 2 — Capital Stock +73 +Note 3 — Long-Term Debt +73 +Note 4 — Derivative Instruments +75 +Note 5 — Fair Value Measurements +79 +Note 6 — Stock-Based and Other Compensation +80 +Note 7 — Earnings (Loss) per Share +85 +Note 8 — Asset Retirement Obligations +86 +Note 9 — Income Taxes +86 +Note 10 — Commitments and Contingencies +88 +Note 11 — Related Party Transactions +89 +Note 12 — Supplemental Cash Flow Information +89 +Note 13 — Acquisitions and Divestitures +90 +Supplemental Information to Consolidated Financial Statements +Supplemental Information on Oil and Gas Producing Activities (Unaudited) +91 +Supplemental Quarterly Financial Data (Unaudited) +97 +All other supplemental information and schedules have been omitted because they are not applicable or the information required is shown in the consolidated financial statements or related notes thereto. +62 +Table of Contents +Report of Independent Registered Public Accounting Firm +The Stockholders and Board of Directors +Cimarex Energy Co.: +Opinion on the Consolidated Financial Statements +We have audited the accompanying consolidated balance sheets of Cimarex Energy Co. and subsidiaries (“the Company”) as of December 31, 2018 and 2017 , the related consolidated statements of operations and comprehensive income (loss), stockholders’ equity, and cash flows for each of the years in the three‑year period ended December 31, 2018 , and the related notes (collectively, “the consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017 , and the results of its operations and its cash flows for each of the years in the three‑year period ended December 31, 2018 , in conformity with U.S. generally accepted accounting principles. +We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2018 , based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 20, 2019 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting. +Basis for Opinion +These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. +KPMG LLP +We have served as the Company’s auditor since 2002. +Denver, Colorado +February 20, 2019 +63 +Table of Contents +CIMAREX ENERGY CO. +CONSOLIDATED BALANCE SHEETS +(in thousands, except share and per share information) +December 31, +2018 +2017 +Assets +Current assets: +Cash and cash equivalents +$ +800,666 +$ +400,534 +Accounts receivable, net of allowance: +Trade +122,065 +100,356 +Oil and gas sales +315,063 +344,552 +Gas gathering, processing, and marketing +17,072 +15,266 +Oil and gas well equipment and supplies +55,553 +49,722 +Derivative instruments +101,939 +15,151 +Prepaid expenses +7,554 +8,518 +Other current assets +4,227 +1,536 +Total current assets +1,424,139 +935,635 +Oil and gas properties at cost, using the full cost method of accounting: +Proved properties +18,566,757 +17,513,460 +Unproved properties and properties under development, not being amortized +436,325 +476,903 +19,003,082 +17,990,363 +Less—accumulated depreciation, depletion, amortization, and impairment +(15,287,752 +) +(14,748,833 +) +Net oil and gas properties +3,715,330 +3,241,530 +Fixed assets, net of accumulated depreciation of $324,631 and $290,114, respectively +257,686 +210,922 +Goodwill +620,232 +620,232 +Derivative instruments +9,246 +2,086 +Other assets +35,451 +32,234 +$ +6,062,084 +$ +5,042,639 +Liabilities and Stockholders’ Equity +Current liabilities: +Accounts payable: +Trade +$ +76,927 +$ +68,883 +Gas gathering, processing, and marketing +29,887 +29,503 +Accrued liabilities: +Exploration and development +124,674 +115,762 +Taxes other than income +33,622 +23,687 +Other +221,159 +212,400 +Derivative instruments +27,627 +42,066 +Revenue payable +194,811 +187,273 +Total current liabilities +708,707 +679,574 +Long-term debt: +Principal +1,500,000 +1,500,000 +Less—unamortized debt issuance costs and discount +(11,446 +) +(13,080 +) +Long-term debt, net +1,488,554 +1,486,920 +Deferred income taxes +334,473 +101,618 +Asset retirement obligation +152,758 +158,421 +Derivative instruments +2,267 +4,268 +Other liabilities +45,539 +43,560 +Total liabilities +2,732,298 +2,474,361 +Commitments and contingencies (Note 10) +Stockholders’ equity: +Preferred stock, $0.01 par value, 15,000,000 shares authorized, no shares issued +— +— +Common stock, $0.01 par value, 200,000,000 shares authorized, 95,755,797 and 95,437,434 shares issued, respectively +958 +954 +Additional paid-in capital +2,785,188 +2,764,384 +Retained earnings (accumulated deficit) +542,885 +(199,259 +) +Accumulated other comprehensive income +755 +2,199 +Total stockholders’ equity +3,329,786 +2,568,278 +$ +6,062,084 +$ +5,042,639 +See accompanying notes to Consolidated Financial Statements. +64 +Table of Contents +CIMAREX ENERGY CO. +CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) +(in thousands, except per share information) +Years Ended December 31, +2018 +2017 +2016 +Revenues: +Oil sales +$ +1,398,813 +$ +981,646 +$ +632,934 +Gas and NGL sales +898,832 +892,357 +588,284 +Gas gathering and other +41,180 +43,751 +36,033 +Gas marketing +192 +495 +94 +2,339,017 +1,918,249 +1,257,345 +Costs and expenses: +Impairment of oil and gas properties +— +— +757,670 +Depreciation, depletion, and amortization +590,473 +446,031 +392,348 +Asset retirement obligation +7,142 +15,624 +7,828 +Production +293,213 +262,180 +232,002 +Transportation, processing, and other operating +200,802 +231,640 +190,725 +Gas gathering and other +41,964 +35,840 +31,785 +Taxes other than income +125,169 +89,864 +61,946 +General and administrative +80,850 +79,996 +73,901 +Stock compensation +22,895 +26,256 +24,523 +(Gain) loss on derivative instruments, net +(85,959 +) +(21,210 +) +55,749 +Other operating expense, net +15,500 +1,314 +755 +1,292,049 +1,167,535 +1,829,232 +Operating income (loss) +1,046,968 +750,714 +(571,887 +) +Other (income) and expense: +Interest expense +68,224 +74,821 +83,272 +Capitalized interest +(20,855 +) +(22,948 +) +(21,248 +) +Loss on early extinguishment of debt +— +28,187 +— +Other, net +(22,908 +) +(11,342 +) +(10,707 +) +Income (loss) before income tax +1,022,507 +681,996 +(623,204 +) +Income tax expense (benefit) +230,656 +187,667 +(214,401 +) +Net income (loss) +$ +791,851 +$ +494,329 +$ +(408,803 +) +Earnings (loss) per share to common stockholders: +Basic +$ +8.32 +$ +5.19 +$ +(4.38 +) +Diluted +$ +8.32 +$ +5.19 +$ +(4.38 +) +Comprehensive income (loss): +Net income (loss) +$ +791,851 +$ +494,329 +$ +(408,803 +) +Other comprehensive income (loss): +Change in fair value of investments, net of tax of $(425), $106, and $289, respectively +(1,444 +) +1,254 +504 +Total comprehensive income (loss) +$ +790,407 +$ +495,583 +$ +(408,299 +) +See accompanying notes to Consolidated Financial Statements. +65 +Table of Contents +CIMAREX ENERGY CO. +CONSOLIDATED STATEMENTS OF CASH FLOWS +(in thousands) +Years Ended December 31, +2018 +2017 +2016 +Cash flows from operating activities: +Net income (loss) +$ +791,851 +$ +494,329 +$ +(408,803 +) +Adjustments to reconcile net income (loss) to net cash provided by operating activities: +Impairment of oil and gas properties +— +— +757,670 +Depreciation, depletion, and amortization +590,473 +446,031 +392,348 +Asset retirement obligation +7,142 +15,624 +7,828 +Deferred income taxes +233,280 +190,479 +(213,286 +) +Stock compensation +22,895 +26,256 +24,523 +(Gain) loss on derivative instruments, net +(85,959 +) +(21,210 +) +55,749 +Settlements on derivative instruments +(24,429 +) +(1,633 +) +7,437 +Loss on early extinguishment of debt +— +28,187 +— +Changes in non-current assets and liabilities +(1,779 +) +1,891 +3,867 +Other, net +105 +5,677 +1,805 +Changes in operating assets and liabilities: +Accounts receivable +5,421 +(186,157 +) +(49,340 +) +Other current assets +(1,957 +) +(17,931 +) +20,880 +Accounts payable and other current liabilities +13,951 +115,021 +25,171 +Net cash provided by operating activities +1,550,994 +1,096,564 +625,849 +Cash flows from investing activities: +Oil and gas capital expenditures +(1,566,583 +) +(1,233,126 +) +(699,558 +) +Other capital expenditures +(103,459 +) +(45,352 +) +(22,228 +) +Sales of oil and gas assets +580,652 +11,680 +21,487 +Sales of other assets +3,772 +901 +7,889 +Net cash used by investing activities +(1,085,618 +) +(1,265,897 +) +(692,410 +) +Cash flows from financing activities: +Borrowings of long-term debt +— +748,110 +— +Repayments of long-term debt +— +(750,000 +) +— +Call premium, financing, and underwriting fees +(100 +) +(29,312 +) +(101 +) +Dividends paid +(55,243 +) +(30,532 +) +(38,024 +) +Employee withholding taxes paid upon the net settlement of equity-classified stock awards +(12,142 +) +(21,669 +) +(26,624 +) +Proceeds from exercise of stock options +2,241 +394 +4,804 +Net cash used by financing activities +(65,244 +) +(83,009 +) +(59,945 +) +Net change in cash and cash equivalents +400,132 +(252,342 +) +(126,506 +) +Cash and cash equivalents at beginning of period +400,534 +652,876 +779,382 +Cash and cash equivalents at end of period +$ +800,666 +$ +400,534 +$ +652,876 +See accompanying notes to Consolidated Financial Statements. +66 +Table of Contents +CIMAREX ENERGY CO. +CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY +(in thousands) +Retained +Earnings (Accumulated Deficit) +Accumulated +Other Comprehensive Income (Loss) +Total Stockholders’ Equity +Common Stock +Additional Paid-in Capital +Shares +Amount +Balance, December 31, 2015 +94,821 +$ +948 +$ +2,762,976 +$ +(306,008 +) +$ +441 +$ +2,458,357 +Dividends paid on stock awards subsequently forfeited +— +— +2 +35 +— +37 +Dividends declared ($0.32 per share) +— +— +(22,805 +) +(7,583 +) +— +(30,388 +) +Net loss +— +— +— +(408,803 +) +— +(408,803 +) +Unrealized change in fair value of investments, net of tax +— +— +— +— +504 +504 +Issuance of restricted stock awards +479 +5 +(5 +) +— +— +— +Common stock reacquired and retired +(208 +) +(3 +) +(26,622 +) +— +— +(26,625 +) +Restricted stock forfeited and retired +(32 +) +— +— +— +— +— +Exercise of stock options +64 +1 +4,803 +— +— +4,804 +Stock-based compensation +— +— +45,103 +— +— +45,103 +Balance, December 31, 2016 +95,124 +951 +2,763,452 +(722,359 +) +945 +2,042,989 +Dividends paid on stock awards subsequently forfeited +— +— +11 +32 +— +43 +Dividends declared ($0.32 per share) +— +— +(30,489 +) +— +— +(30,489 +) +Net income +— +— +— +494,329 +— +494,329 +Unrealized change in fair value of investments, net of tax +— +— +— +— +1,254 +1,254 +Issuance of restricted stock awards +552 +5 +(5 +) +— +— +— +Common stock reacquired and retired +(204 +) +(2 +) +(21,667 +) +— +— +(21,669 +) +Restricted stock forfeited and retired +(41 +) +— +— +— +— +— +Exercise of stock options +6 +— +394 +— +— +394 +Stock-based compensation +— +— +48,321 +— +— +48,321 +Cumulative effect adjustment of adopting ASU 2016-09 (Note 6) +— +— +4,393 +28,739 +— +33,132 +Other +— +— +(26 +) +— +— +(26 +) +Balance, December 31, 2017 +95,437 +954 +2,764,384 +(199,259 +) +2,199 +2,568,278 +Dividends paid on stock awards subsequently forfeited +— +— +34 +18 +— +52 +Dividends declared ($0.68 per share) +— +— +(15,196 +) +(49,725 +) +— +(64,921 +) +Net income +— +— +— +791,851 +— +791,851 +Unrealized change in fair value of investments, net of tax +— +— +— +— +(1,444 +) +(1,444 +) +Issuance of restricted stock awards +593 +6 +(6 +) +— +— +— +Common stock reacquired and retired +(139 +) +— +(12,142 +) +— +— +(12,142 +) +Restricted stock forfeited or canceled and retired +(168 +) +(2 +) +2 +— +— +— +Exercise of stock options +33 +— +2,241 +— +— +2,241 +Stock-based compensation +— +— +45,871 +— +— +45,871 +Balance, December 31, 2018 +95,756 +$ +958 +$ +2,785,188 +$ +542,885 +$ +755 +$ +3,329,786 +See accompanying notes to Consolidated Financial Statements. +67 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES +Cimarex Energy Co., a Delaware corporation, is an independent oil and gas exploration and production company. Our operations are mainly located in Texas, Oklahoma, and New Mexico. +Basis of Presentation +Our Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP. Our significant accounting policies are discussed below. The accounts of Cimarex and its subsidiaries are presented in the accompanying Consolidated Financial Statements. All intercompany accounts and transactions were eliminated in consolidation. Certain amounts in the prior year financial statements have been reclassified to conform to the 2018 financial statement presentation. +Segment Information +We have determined that our business is comprised of only one segment because our gathering, processing, and marketing activities are ancillary to our production operations. +Use of Estimates +The preparation of our financial statements in conformity with GAAP requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses. Areas of significance requiring the use of management’s judgments include the estimation of proved oil and gas reserves used in calculating depletion, the estimation of future net revenues used in computing ceiling test limitations, the estimation of future abandonment obligations used in recording asset retirement obligations, and the assessment of goodwill. Estimates and judgments also are required in determining allowances for doubtful accounts, impairments of unproved properties and other assets, valuation of deferred tax assets, fair value measurements, and contingencies. We analyze our estimates and base them on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. +The process of estimating quantities of oil and gas reserves is complex, requiring significant decisions in the evaluation of all available geological, geophysical, engineering, and economic data. The data for a given field may also change substantially over time as a result of numerous factors including, but not limited to, additional development activity, evolving production history, and continual reassessment of the viability of production under varying economic conditions. As a result, material revisions to existing reserve estimates may occur from time to time. Although every reasonable effort is made to ensure that our reserve estimates represent the most accurate assessments possible, subjective decisions, and available data for our various fields make these estimates generally less precise than other estimates included in financial statement disclosures. +Cash and Cash Equivalents +Cash and cash equivalents consist of cash in banks and investments readily convertible into cash, which have original maturities of three months or less. Cash equivalents are stated at cost, which approximates market value. +Oil and Gas Well Equipment and Supplies +Our oil and gas well equipment and supplies are valued at the lower of cost and net realizable value, where net realizable value is based on estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Declines in the price of oil and gas well equipment and supplies in future periods could cause us to recognize impairments on these assets. An impairment would not affect cash flow from operating activities, but would adversely affect our net income and stockholders’ equity. +68 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +Oil and Gas Properties +We use the full cost method of accounting for our oil and gas operations. All costs associated with property acquisition, exploration, and development activities are capitalized. Exploration and development costs include dry hole costs, geological and geophysical costs, direct overhead related to exploration and development activities, and other costs incurred for the purpose of finding oil and gas reserves. Salaries and benefits paid to employees directly involved in the acquisition, exploration, and development of properties, as well as other internal costs that can be directly identified with acquisition, exploration and development activities, are also capitalized. Under the full cost method of accounting, no gain or loss is recognized upon the disposition of oil and gas properties unless such disposition would significantly alter the relationship between capitalized costs and proved reserves. Expenditures for maintenance and repairs are charged to production expense in the period incurred. +Under the full cost method of accounting, we are required to perform quarterly ceiling test calculations to test our oil and gas properties for possible impairment. If the net capitalized cost of our oil and gas properties, as adjusted for income taxes, exceeds the ceiling limitation, the excess is charged to expense. The ceiling limitation is equal to the sum of: (i) the present value discounted at 10% of estimated future net revenues from proved reserves, (ii) the cost of properties not being amortized, and (iii) the lower of cost or estimated fair value of unproven properties included in the costs being amortized, as adjusted for income taxes. We currently do not have any unproven properties that are being amortized. Estimated future net revenues are determined based on trailing twelve-month average commodity prices and estimated proved reserve quantities, operating costs, and capital expenditures. +We did not recognize a ceiling test impairment during the years ended December 31, 2018 and 2017 because the net capitalized cost of our oil and gas properties, as adjusted for income taxes, did not exceed the ceiling limitation. At December 31, 2018 , a decline in the value of the ceiling limitation of approximately 24% or more would have resulted in an impairment. For the year ended December 31, 2016 , full year impairments totaled $757.7 million ( $481.4 million , net of tax). These impairments resulted primarily from the impact of decreases in the trailing twelve-month average prices for oil, gas, and NGLs utilized in determining the future net revenues from proved reserves. The quarterly ceiling test is primarily impacted by commodity prices, changes in estimated reserve quantities, reserves produced, overall exploration and development costs, depletion expense, and deferred taxes. If pricing conditions decline, or if there is a negative impact on one or more of the other components of the calculation, we may incur full cost ceiling test impairments in future quarters. The calculated ceiling limitation is not intended to be indicative of the fair market value of our proved reserves or future results. Impairment charges do not affect cash flow from operating activities, but do adversely affect our net income and various components of our balance sheet. Any impairment of oil and gas properties is not reversible at a later date. +Depletion of proved oil and gas properties is computed on the units-of-production method, whereby capitalized costs, including future development costs and asset retirement costs, are amortized over total estimated proved reserves. Changes in our estimate of proved reserve quantities, commodity prices, and impairment of oil and gas properties will cause corresponding changes in depletion expense in periods subsequent to these changes. +The capitalized costs of unproved properties, including those in wells in progress, are excluded from the costs being amortized. We do not have major development projects that are excluded from costs being amortized. On a quarterly basis, we evaluate excluded costs for inclusion in the costs to be amortized. Significant unproved properties are evaluated individually. Unproved properties that are not considered individually significant are aggregated for evaluation purposes and related costs are transferred to the costs to be amortized quarterly based on the application of historical factors. +Fixed Assets +Fixed assets consist primarily of gathering and plant facilities, vehicles, airplanes, office furniture, and computer equipment and software. These items are recorded at cost and are depreciated on the straight-line method based on expected lives of the individual assets, which range from 3 to 30 years . +69 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +Goodwill +Goodwill represents the excess of the purchase price of business combinations over the fair value of the net assets acquired and is tested for impairment at least annually. In performing the goodwill test, we compare the fair value of our reporting unit with its carrying amount. If the carrying amount of the reporting unit were to exceed its fair value, an impairment charge would be recognized in the amount of this excess, limited to the total amount of goodwill allocated to that reporting unit. We evaluate our goodwill for impairment in the fourth quarter of each year and whenever events or changes in circumstances indicate the possibility that goodwill may be impaired. Based upon our assessment as of October 31, 2018, goodwill was not impaired. It is possible that goodwill could become impaired in the future if commodity prices or other economic factors become unfavorable. +Revenue Recognition +Oil, Gas, and NGL Sales +Effective January 1, 2018, we adopted the provisions of Accounting Standards Codification 606, Revenue from Contracts with Customers (“ASC 606”), utilizing the modified retrospective approach, which we applied to contracts that were not completed as of that date. Because we utilized the modified retrospective approach, there was no impact to prior periods’ reported amounts. Application of ASC 606 has no impact on our net income or cash flows from operations; however, certain costs classified as Transportation, processing, and other operating in the statement of operations under prior accounting standards are now reflected as deductions from revenue under ASC 606. The following table presents the impact on our Oil sales, Gas sales, and NGL sales and on our Transportation, processing, and other operating costs from the application of ASC 606 in the current reporting period: +Years Ended December 31, +2018 +2017 +2016 +(in thousands) +Pre- +ASC 606 Adoption +Impact of +ASC 606 +Post- +ASC 606 Adoption +As Reported +As Reported +Oil sales +$ +1,398,813 +$ +— +$ +1,398,813 +$ +981,646 +$ +632,934 +Gas sales +425,233 +(16,482 +) +408,751 +516,936 +388,786 +NGL sales +518,410 +(28,329 +) +490,081 +375,421 +199,498 +Total oil, gas, and NGL sales +$ +2,342,456 +$ +(44,811 +) +$ +2,297,645 +$ +1,874,003 +$ +1,221,218 +Transportation, processing, and other operating costs +$ +245,613 +$ +(44,811 +) +$ +200,802 +$ +231,640 +$ +190,725 +Revenue is recognized from the sales of oil, gas, and NGLs when the customer obtains control of the product, when we have no further obligations to perform related to the sale, and when collectability is probable. All of our sales of oil, gas, and NGLs are made under contracts with customers, which typically include variable consideration based on monthly pricing tied to local indices and monthly volumes delivered. The nature of our contracts with customers does not require us to constrain that variable consideration or to estimate the amount of transaction price attributable to future performance obligations for accounting purposes. As of December 31, 2018 , we had open contracts with customers with terms of one month to multiple years, as well as “evergreen” contracts that renew on a periodic basis if not canceled by us or the customer. Performance obligations under our contracts with customers are typically satisfied at a point-in-time through monthly delivery of oil, gas, and/or NGLs. Our contracts with customers typically require payment within one month of delivery. +Our gas and NGLs are sold under a limited number of contract structure types common in our industry. Under these contracts the gas and its components, including NGLs, may be sold to a single purchaser or the residue gas and NGLs may be sold to separate purchasers. Regardless of the contract structure type, the terms of these contracts compensate us for the value of the residue gas and NGLs at current market prices for each product, and are disaggregated in the tables above on that basis. Our oil typically is sold at specific delivery points under contract terms that also are common in our industry. +70 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +Gas Gathering +When we transport and/or process third-party gas associated with our equity gas, we recognize revenue for the fees charged to third-parties for such services. +Gas Marketing +When we market and sell gas for working interest owners, we act as agent under short-term sales and supply agreements and may earn a fee for such services. Revenues from such services are recognized as gas is delivered. +Gas Imbalances +Revenue from the sale of gas is recorded on the basis of gas actually sold by us. If our aggregate sales volumes for a well are greater (or less) than our proportionate share of production from the well, a liability (or receivable) is established to the extent there are insufficient proved reserves available to make-up the overproduced (or underproduced) imbalance. Imbalances have not been significant in the periods presented. +General and Administrative Expenses +General and administrative expenses are reported net of amounts reimbursed by working interest owners of the oil and gas properties operated by Cimarex and net of amounts capitalized pursuant to the full cost method of accounting. +Derivatives +Our derivative contracts are recorded on the balance sheet at fair value. Our firm sales contracts qualify for the normal purchase and normal sale exception. Contracts that qualify for this treatment do not require mark-to-market accounting treatment. See Note 4 for additional information regarding our derivative instruments. +Income Taxes +We record deferred tax assets and liabilities to account for the expected future tax consequences of events that have been recognized in the financial statements and tax returns. We classify all deferred tax assets and liabilities as non-current. We routinely assess the realizability of our deferred tax assets. We routinely assess the realizability of our deferred tax assets. Numerous judgments and assumptions are inherent in this assessment, including the determination of future taxable income, which is affected by factors such as future operating conditions (particularly as related to prevailing oil and gas prices) and changing tax laws. If we conclude that it is more likely than not that some or all of the deferred tax assets will not be realized, the tax asset is reduced by a valuation allowance. We regularly assess and, if required, establish accruals for tax contingencies that could result from assessments of additional tax by taxing jurisdictions where the company operates. See Note 9 for additional information regarding our income taxes. +Contingencies +A provision for contingencies is charged to expense when the loss is probable and the cost can be reasonably estimated. Determining when expenses should be recorded for these contingencies and the appropriate amounts for accrual is a complex estimation process that includes subjective judgment. In many cases, this judgment is based on interpretation of laws and regulations, which can be interpreted differently by regulators and/or courts of law. We closely monitor known and potential legal, environmental, and other contingencies and determine when we should record losses for these items based on information available to us. See Note 10 for additional information regarding our contingencies. +Asset Retirement Obligations +We recognize the present value of the fair value of liabilities for retirement obligations associated with tangible long-lived assets in the period in which there is a legal obligation associated with the retirement of such assets and the amount can be reasonably estimated. The associated asset retirement costs are capitalized as part of the carrying amount +71 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +of the long-lived asset. This liability includes costs related to the abandonment of wells, the removal of facilities and equipment, and site restorations. In periods subsequent to the initial measurement of an asset retirement obligation at present value, a period-to-period increase in the carrying amount of the liability is recognized as accretion expense, which represents the effect of the passage of time on the amount of the liability. An equivalent amount is added to the carrying amount of the liability. If the fair value of a recorded asset retirement obligation changes, a revision is recorded to both the asset retirement obligation and the asset retirement capitalized cost. Capitalized costs are included as a component of the DD&A calculations. The current portion of our asset retirement obligations is recorded in “Accrued liabilities — Other” in the accompanying consolidated balance sheets and cash payments for settlements of retirement obligations are classified as cash used in operating activities in the accompanying consolidated statements of cash flows. See Note 8 for additional information regarding our asset retirement obligations. +Stock-based Compensation +We recognize compensation cost related to all stock-based awards in the financial statements based on their estimated grant date fair value. We grant various types of stock-based awards including stock options, restricted stock (including awards with service-based vesting and market condition-based vesting provisions), and restricted stock units. The fair value of stock option awards is determined using the Black-Scholes option pricing model. Service-based restricted stock and units are valued using the market price of our common stock on the grant date. The fair value of the market condition-based restricted stock is based on the grant date market value of the award utilizing a statistical analysis. Compensation cost is recognized ratably over the applicable vesting period. To the extent compensation cost relates to employees directly involved in oil and gas acquisition, exploration, and development activities, such amounts are capitalized to oil and gas properties. Amounts not capitalized to oil and gas properties are recognized as stock compensation expense. See Note 6 for additional information regarding our stock-based compensation. +Earnings (Loss) per Share +We calculate earnings (loss) per share recognizing that unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents are “participating securities” and, therefore, should be included in computing earnings per share using the two-class earnings allocation method. The two-class method is an earnings allocation formula that determines earnings per share for each class of common stock and participating security according to dividends declared (or accumulated) and participation rights in undistributed earnings. Our unvested share-based payment awards, consisting of restricted stock and units, qualify as participating securities. See Note 7 for additional information regarding our earnings per share. +Recently Issued Accounting Standards +In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) . The key provision of Topic 842 is that a lessee must recognize (i) liabilities to make lease payments and (ii) right-of-use assets on its balance sheet. The ASU permits lessees to make a policy election to not recognize lease assets and liabilities for leases with terms of less than twelve months. Under current GAAP, a determination of whether a lease is a capital or operating lease is made at lease inception and no assets or liabilities are recognized for operating leases. Under Topic 842, the determination to be made at the inception of a contract is whether the contract is, or contains, a lease. Leases convey the right to control the use of an identified asset in exchange for consideration. Only the lease components of a contract must be accounted for in accordance with Topic 842. Non-lease components, such as activities that transfer a good or service to the customer, shall be accounted for under other applicable Topics. An entity may make a policy election to not separate lease and non-lease components and account for the non-lease components together with the lease components as a single lease component. Topic 842 retains a distinction between finance and operating leases concerning the recognition and presentation of the expense and payments related to leases in the statements of operations and comprehensive income and cash flows, however, both types of leases require the recognition of assets and liabilities on the balance sheet. Topic 842 is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years, with early adoption permitted. We will adopt Topic 842 effective January 1, 2019, recognizing a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The primary effect of adoption will be to record assets and liabilities for contracts currently accounted for as operating leases, such as leases for office space, compressors, and other equipment. +72 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +In January 2018, the FASB issued ASU 2018-01, Leases (Topic 842) Land Easement Practical Expedient for Transition to Topic 842 . This ASU provides an optional transition practical expedient to not evaluate under Topic 842 (discussed above) existing or expired land easements that were not previously accounted for as leases under the current leases guidance in Topic 840. An entity that elects this practical expedient should evaluate new or modified land easements under Topic 842 beginning at the date that the entity adopts Topic 842. Under the full cost method of accounting, we capitalize to oil and gas properties all property acquisition, exploration, and development costs, which include the costs of land easements. We plan to elect this practical expedient and continue to apply our current accounting policy to account for land easements that existed before our adoption of Topic 842 and will evaluate new or modified land easements under Topic 842 upon our adoption of Topic 842. +2. CAPITAL STOCK +Authorized capital stock consists of 200 million shares of common stock and 15 million shares of preferred stock. At December 31, 2018 , there were 95.8 million shares of common stock and no shares of preferred stock outstanding. See our Consolidated Statements of Stockholders’ Equity for detailed capital stock activity. +Dividends +A cash dividend has been paid to stockholders in every quarter since the first quarter of 2006. A dividend of $0.18 per share was declared in both the third and fourth quarters of 2018 while a dividend of $0.16 per share was declared in the first and second quarters of 2018. In each quarter of 2017 and 2016 an $0.08 per share dividend was declared. We typically declare dividends in one quarter and pay them in the next quarter. At December 31, 2018 , we had dividends payable of $17.3 million that was included in “Accrued liabilities — other”. Dividends declared are recorded as a reduction of retained earnings to the extent retained earnings are available at the close of the period prior to the date of the declared dividend. Dividends in excess of retained earnings are recorded as a reduction of additional paid-in capital. During 2018, the dividend declared during the first quarter was recorded as a reduction of additional paid-in capital, while the remaining three dividends declared were recorded as a reduction of retained earnings. All dividends declared during 2017 and 2016 were recorded as a reduction of additional paid-in capital. Nonforfeitable dividends paid on stock awards that subsequently forfeit are reclassified out of retained earnings or additional paid-in capital, as applicable, to compensation expense in the period in which the forfeitures occur. Future dividend payments will depend on our level of earnings, financial requirements, and other factors considered relevant by our Board of Directors. +3. LONG-TERM DEBT +Long-term debt at December 31, 2018 and 2017 consisted of the following: +December 31, 2018 +December 31, 2017 +(in thousands) +Principal +Unamortized Debt +Issuance Costs and Discount (1) +Long-term +Debt, net +Principal +Unamortized Debt +Issuance Costs and Discount (1) +Long-term +Debt, net +4.375% Senior Notes +$ +750,000 +$ +(4,439 +) +$ +745,561 +$ +750,000 +$ +(5,383 +) +$ +744,617 +3.90% Senior Notes +750,000 +(7,007 +) +742,993 +750,000 +(7,697 +) +742,303 +Total long-term debt +$ +1,500,000 +$ +(11,446 +) +$ +1,488,554 +$ +1,500,000 +$ +(13,080 +) +$ +1,486,920 +________________________________________ +(1) +At December 31, 2018 , the unamortized debt issuance costs and discount related to the 3.90% notes were $5.4 million and $1.6 million , respectively. At December 31, 2017 , the unamortized debt issuance costs and discount related to the 3.90% notes were $5.9 million and $1.8 million , respectively. The 4.375% notes were issued at par. +Bank Debt +In October 2015, we entered into a Credit Agreement for a senior unsecured revolving credit facility (“Credit Facility”) with an aggregate commitment of $1.0 billion , which matures October 16, 2020. There is no borrowing base subject to the discretion of the lenders based on the value of our proved reserves under the Credit Facility. As of +73 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +December 31, 2018 , we had no bank borrowings outstanding under the Credit Facility, but did have letters of credit of $2.5 million outstanding, leaving an unused borrowing availability of $997.5 million . +At our option, borrowings under the Credit Facility may bear interest at either (a) LIBOR plus 1.125 - 2.0% based on the credit rating for our senior unsecured long-term debt, or (b) a base rate (as defined in the credit agreement) plus 0.125 - 1.0% , based on the credit rating for our senior unsecured long-term debt. Unused borrowings are subject to a commitment fee of 0.125 - 0.35% , based on the credit rating for our senior unsecured long-term debt. +The Credit Facility contains representations, warranties, covenants, and events of default that are customary for investment grade, senior unsecured bank credit agreements, including a financial covenant for the maintenance of a defined total debt-to-capital ratio of no greater than 65% . As of December 31, 2018 , we were in compliance with all of the financial covenants. +At December 31, 2018 and 2017 , we had $2.2 million and $3.4 million , respectively, of unamortized debt issuance costs associated with our Credit Facility which were recorded as deferred assets and included in “Other assets” in our balance sheets. The costs are being amortized to interest expense ratably over the life of the Credit Facility. +Subsequent Event +On February 5, 2019 , we entered into an Amended and Restated Credit Agreement. Among other things, the amended and restated credit facility increases the aggregate commitment to $1.25 billion with an option to increase the commitment to $1.5 billion , and extends the maturity date to February 5, 2024 . +Senior Notes +On April 10, 2017, we completed a cash tender offer to purchase any of our 5.875% notes for cash consideration of $1,031.67 per $1,000 principal amount of notes, plus any accrued and unpaid interest up to, but not including, the settlement date, with $253.5 million aggregate principal amount of the notes validly tendered. We settled these tendered notes for $268.1 million , including accrued interest. On May 12, 2017, we completed a redemption of the 5.875% notes remaining outstanding for $1,029.38 per $1,000 principal amount of notes, plus any accrued and unpaid interest up to, but not including, the redemption date, settling the notes for $512.0 million , including accrued interest. We recognized a loss on early extinguishment of debt related to these transactions of $28.2 million , composed primarily of tender and redemption premiums of $22.6 million and the write-off of $5.3 million of unamortized debt issuance costs. The original maturity date of the 5.875% notes was May 1, 2022 . +On April 10, 2017, we issued $750 million aggregate principal amount of 3.90% senior unsecured notes due May 15, 2027 at 99.748% of par to yield 3.93% per annum. We received $741.8 million in net cash proceeds, after deducting underwriters’ fees, discount, and debt issuance costs. The notes bear an annual interest rate of 3.90% and interest is payable semiannually on May 15 and November 15, with the first payment occurring November 15, 2017. Along with cash on hand, we used the proceeds to fund the settlement of the tendered and redeemed 5.875% notes. +In June 2014, we issued $750 million aggregate principal amount of 4.375% senior unsecured notes at par. These notes are due June 1, 2024 and interest is payable semiannually on June 1 and December 1. +Each of our senior unsecured notes is governed by an indenture containing certain covenants, events of default, and other restrictive provisions with which we were in compliance as of December 31, 2018 . The effective interest rate on the 4.375% notes and the 3.90% notes, including the amortization of debt issuance costs and discount, as applicable, is 4.50% and 4.01% , respectively. At December 31, 2018 , we had accrued interest related to our notes of $6.4 million that was included in “Accrued liabilities — other”. +74 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +4. DERIVATIVE INSTRUMENTS +We periodically use derivative instruments to mitigate volatility in commodity prices. While the use of these instruments limits the downside risk of adverse price changes, their use may also limit future cash flow from favorable price changes. Depending on changes in oil and gas futures markets and management’s view of underlying supply and demand trends, we may increase or decrease our derivative positions from current levels. +As of December 31, 2018 , we have entered into oil and gas collars and oil basis swaps. Under our collars, we receive the difference between the published index price and a floor price if the index price is below the floor price or we pay the difference between the ceiling price and the index price if the index price is above the ceiling price. No amounts are paid or received if the index price is between the floor and the ceiling prices. By using a collar, we have fixed the minimum and maximum prices we can receive on the underlying production. Our basis swaps are settled based on the difference between a published index price minus a fixed differential and the applicable local index price under which the underlying production is sold. By using a basis swap, we have fixed the differential between the published index price and certain of our physical pricing points. For our Permian oil production, the basis swaps fix the price differential between the WTI NYMEX (Cushing Oklahoma) price and the WTI Midland price. For our Permian and Mid-Continent gas production, the contract prices in our collars are consistent with the index prices used to sell our production. The following tables summarize our outstanding derivative contracts as of December 31, 2018 : +Oil Collars +First +Quarter +Second +Quarter +Third +Quarter +Fourth +Quarter +Total +2019: +WTI (1) +Volume (Bbls) +2,790,000 +2,821,000 +2,208,000 +1,472,000 +9,291,000 +Weighted Avg Price - Floor +$ +53.94 +$ +53.94 +$ +55.67 +$ +58.50 +$ +55.07 +Weighted Avg Price - Ceiling +$ +66.88 +$ +66.88 +$ +70.03 +$ +71.94 +$ +68.43 +2020: +WTI (1) +Volume (Bbls) +728,000 +— +— +— +728,000 +Weighted Avg Price - Floor +$ +60.00 +$ +— +$ +— +$ +— +$ +60.00 +Weighted Avg Price - Ceiling +$ +75.85 +$ +— +$ +— +$ +— +$ +75.85 +________________________________________ +(1) +The index price for these collars is West Texas Intermediate (“WTI”) as quoted on the New York Mercantile Exchange (“NYMEX”). +75 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +Gas Collars +First +Quarter +Second +Quarter +Third +Quarter +Fourth +Quarter +Total +2019: +PEPL (1) +Volume (MMBtu) +10,800,000 +10,920,000 +8,280,000 +5,520,000 +35,520,000 +Weighted Avg Price - Floor +$ +2.05 +$ +2.05 +$ +1.93 +$ +1.93 +$ +2.00 +Weighted Avg Price - Ceiling +$ +2.42 +$ +2.42 +$ +2.34 +$ +2.42 +$ +2.40 +Perm EP (2) +Volume (MMBtu) +7,200,000 +7,280,000 +5,520,000 +2,760,000 +22,760,000 +Weighted Avg Price - Floor +$ +1.69 +$ +1.69 +$ +1.48 +$ +1.37 +$ +1.60 +Weighted Avg Price - Ceiling +$ +1.92 +$ +1.92 +$ +1.74 +$ +1.60 +$ +1.84 +Waha (3) +Volume (MMBtu) +2,700,000 +2,730,000 +2,760,000 +2,760,000 +10,950,000 +Weighted Avg Price - Floor +$ +1.38 +$ +1.38 +$ +1.38 +$ +1.38 +$ +1.38 +Weighted Avg Price - Ceiling +$ +1.67 +$ +1.67 +$ +1.67 +$ +1.67 +$ +1.67 +2020: +PEPL (1) +Volume (MMBtu) +2,730,000 +— +— +— +2,730,000 +Weighted Avg Price - Floor +$ +1.97 +$ +— +$ +— +$ +— +$ +1.97 +Weighted Avg Price - Ceiling +$ +2.51 +$ +— +$ +— +$ +— +$ +2.51 +Perm EP (2) +Volume (MMBtu) +910,000 +— +— +— +910,000 +Weighted Avg Price - Floor +$ +1.40 +$ +— +$ +— +$ +— +$ +1.40 +Weighted Avg Price - Ceiling +$ +1.70 +$ +— +$ +— +$ +— +$ +1.70 +Waha (3) +Volume (MMBtu) +1,820,000 +— +— +— +1,820,000 +Weighted Avg Price - Floor +$ +1.40 +$ +— +$ +— +$ +— +$ +1.40 +Weighted Avg Price - Ceiling +$ +1.73 +$ +— +$ +— +$ +— +$ +1.73 +________________________________________ +(1) +The index price for these collars is Panhandle Eastern Pipe Line, Tex/OK Mid-Continent Index (“PEPL”) as quoted in Platt’s Inside FERC. +(2) +The index price for these collars is El Paso Natural Gas Company, Permian Basin Index (“Perm EP”) as quoted in Platt’s Inside FERC. +(3) +The index price for these collars is Waha West Texas Natural Gas Index (“Waha”) as quoted in Platt’s Inside FERC. +Oil Basis Swaps +First +Quarter +Second +Quarter +Third +Quarter +Fourth +Quarter +Total +2019: +WTI Midland (1) +Volume (Bbls) +2,610,000 +2,639,000 +2,208,000 +1,472,000 +8,929,000 +Weighted Avg Differential (2) +$ +(5.46 +) +$ +(5.46 +) +$ +(6.50 +) +$ +(7.79 +) +$ +(6.10 +) +2020: +WTI Midland (1) +Volume (Bbls) +637,000 +637,000 +— +— +1,274,000 +Weighted Avg Differential (2) +$ +(0.40 +) +$ +(0.40 +) +$ +— +$ +— +$ +(0.40 +) +________________________________________ +(1) +The index price we pay under these basis swaps is WTI Midland as quoted by Argus Americas Crude. +(2) +The index price we receive under these basis swaps is WTI as quoted on the NYMEX less the weighted average differential shown in the table. +76 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +The following tables summarize our derivative contracts entered into subsequent to December 31, 2018 through February 15, 2019: +Oil Collars +First +Quarter +Second +Quarter +Third +Quarter +Fourth +Quarter +Total +2019: +WTI (1) +Volume (Bbls) +62,000 +182,000 +184,000 +184,000 +612,000 +Weighted Avg Price - Floor +$ +50.00 +$ +50.00 +$ +50.00 +$ +50.00 +$ +50.00 +Weighted Avg Price - Ceiling +$ +62.60 +$ +62.60 +$ +62.60 +$ +62.60 +$ +62.60 +2020: +WTI (1) +Volume (Bbls) +182,000 +182,000 +— +— +364,000 +Weighted Avg Price - Floor +$ +50.00 +$ +50.00 +$ +— +$ +— +$ +50.00 +Weighted Avg Price - Ceiling +$ +62.60 +$ +62.60 +$ +— +$ +— +$ +62.60 +________________________________________ +(1) +The index price for these collars is WTI as quoted on the NYMEX. +Gas Collars +First +Quarter +Second +Quarter +Third +Quarter +Fourth +Quarter +Total +2019: +PEPL (1) +Volume (MMBtu) +1,770,000 +2,730,000 +2,760,000 +2,760,000 +10,020,000 +Weighted Avg Price - Floor +$ +1.95 +$ +1.95 +$ +1.95 +$ +1.95 +$ +1.95 +Weighted Avg Price - Ceiling +$ +2.26 +$ +2.26 +$ +2.26 +$ +2.26 +$ +2.26 +Perm EP (2) +Volume (MMBtu) +590,000 +910,000 +920,000 +920,000 +3,340,000 +Weighted Avg Price - Floor +$ +1.50 +$ +1.50 +$ +1.50 +$ +1.50 +$ +1.50 +Weighted Avg Price - Ceiling +$ +2.13 +$ +2.13 +$ +2.13 +$ +2.13 +$ +2.13 +Waha (3) +Volume (MMBtu) +590,000 +910,000 +920,000 +920,000 +3,340,000 +Weighted Avg Price - Floor +$ +1.50 +$ +1.50 +$ +1.50 +$ +1.50 +$ +1.50 +Weighted Avg Price - Ceiling +$ +1.90 +$ +1.90 +$ +1.90 +$ +1.90 +$ +1.90 +2020: +PEPL (1) +Volume (MMBtu) +2,730,000 +2,730,000 +— +— +5,460,000 +Weighted Avg Price - Floor +$ +1.95 +$ +1.95 +$ +— +$ +— +$ +1.95 +Weighted Avg Price - Ceiling +$ +2.26 +$ +2.26 +$ +— +$ +— +$ +2.26 +Perm EP (2) +Volume (MMBtu) +910,000 +910,000 +— +— +1,820,000 +Weighted Avg Price - Floor +$ +1.50 +$ +1.50 +$ +— +$ +— +$ +1.50 +Weighted Avg Price - Ceiling +$ +2.13 +$ +2.13 +$ +— +$ +— +$ +2.13 +Waha (3) +Volume (MMBtu) +910,000 +910,000 +— +— +1,820,000 +Weighted Avg Price - Floor +$ +1.50 +$ +1.50 +$ +— +$ +— +$ +1.50 +Weighted Avg Price - Ceiling +$ +1.90 +$ +1.90 +$ +— +$ +— +$ +1.90 +________________________________________ +(1) +The index price for these collars is PEPL as quoted in Platt’s Inside FERC. +(2) +The index price for these collars is Perm EP as quoted in Platt’s Inside FERC. +(3) +The index price for these collars is Waha as quoted in Platt’s Inside FERC. +77 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +Derivative Gains and Losses +Net gains and losses on our derivative instruments are a function of fluctuations in the underlying commodity index prices as compared to the contracted prices and the monthly cash settlements (if any) of the instruments. We have elected not to designate our derivatives as hedging instruments for accounting purposes and, therefore, we do not apply hedge accounting treatment to our derivative instruments. Consequently, changes in the fair value of our derivative instruments and cash settlements on the instruments are included as a component of operating costs and expenses as either a net gain or loss on derivative instruments. Cash settlements of our contracts are included in cash flows from operating activities in our statements of cash flows. The following table presents the components of (Gain) loss on derivative instruments, net for the periods indicated. +Years Ended December 31, +(in thousands) +2018 +2017 +2016 +Decrease (increase) in fair value of derivative instruments, net: +Gas contracts +$ +15,742 +$ +(40,226 +) +$ +27,462 +Oil contracts +(126,130 +) +17,383 +35,724 +(110,388 +) +(22,843 +) +63,186 +Cash (receipts) payments on derivative instruments, net: +Gas contracts +(13,794 +) +(4,557 +) +(6,467 +) +Oil contracts +38,223 +6,190 +(970 +) +24,429 +1,633 +(7,437 +) +(Gain) loss on derivative instruments, net +$ +(85,959 +) +$ +(21,210 +) +$ +55,749 +Derivative Fair Value +Our derivative contracts are carried at their fair value on our balance sheet using Level 2 inputs and are subject to master netting arrangements, which allow us to offset recognized asset and liability fair value amounts on contracts with the same counterparty. Our accounting policy is to not offset asset and liability positions in our balance sheets. +The following tables present the amounts and classifications of our derivative assets and liabilities as of December 31, 2018 and 2017 , as well as the potential effect of netting arrangements on our recognized derivative asset and liability amounts. +December 31, 2018 +(in thousands) +Balance Sheet Location +Asset +Liability +Oil contracts +Current assets — Derivative instruments +$ +94,240 +$ +— +Gas contracts +Current assets — Derivative instruments +7,699 +— +Oil contracts +Non-current assets — Derivative instruments +9,246 +— +Oil contracts +Current liabilities — Derivative instruments +— +23,378 +Gas contracts +Current liabilities — Derivative instruments +— +4,249 +Oil contracts +Non-current liabilities — Derivative instruments +— +311 +Gas contracts +Non-current liabilities — Derivative instruments +— +1,956 +Total gross amounts presented in the balance sheet +111,185 +29,894 +Less: gross amounts not offset in the balance sheet +(29,894 +) +(29,894 +) +Net amount +$ +81,291 +$ +— +78 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +December 31, 2017 +(in thousands) +Balance Sheet Location +Asset +Liability +Gas contracts +Current assets — Derivative instruments +$ +15,151 +$ +— +Gas contracts +Non-current assets — Derivative instruments +2,086 +— +Oil contracts +Current liabilities — Derivative instruments +— +42,066 +Oil contracts +Non-current liabilities — Derivative instruments +— +4,268 +Total gross amounts presented in the balance sheet +17,237 +46,334 +Less: gross amounts not offset in the balance sheet +(17,237 +) +(17,237 +) +Net amount +$ +— +$ +29,097 +We are exposed to financial risks associated with our derivative contracts from non-performance by our counterparties. We mitigate our exposure to any single counterparty by contracting with a number of financial institutions, each of which have a high credit rating and is a member of our bank credit facility. Our member banks do not require us to post collateral for our derivative liability positions, nor do we require our counterparties to post collateral for our benefit. In the future we may enter into derivative instruments with counterparties outside our bank group to obtain competitive terms and to spread counterparty risk. +5. FAIR VALUE MEASUREMENTS +Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The FASB has established a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. This hierarchy consists of three broad levels. Level 1 inputs are the highest priority and consist of unadjusted quoted prices in active markets for identical assets and liabilities. Level 2 are inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. Level 3 are unobservable inputs for an asset or liability. +The following table provides fair value measurement information for certain assets and liabilities as of December 31, 2018 and 2017 . +December 31, 2018 +December 31, 2017 +(in thousands) +Book Value +Fair Value +Book Value +Fair Value +Financial Assets (Liabilities): +4.375% Notes due 2024 +$ +(750,000 +) +$ +(744,578 +) +$ +(750,000 +) +$ +(797,010 +) +3.90% Notes due 2027 +$ +(750,000 +) +$ +(701,273 +) +$ +(750,000 +) +$ +(767,813 +) +Derivative instruments — assets +$ +111,185 +$ +111,185 +$ +17,237 +$ +17,237 +Derivative instruments — liabilities +$ +(29,894 +) +$ +(29,894 +) +$ +(46,334 +) +$ +(46,334 +) +Assessing the significance of a particular input to the fair value measurement requires judgment, including the consideration of factors specific to the asset or liability. The fair value (Level 1) of our fixed rate notes was based on their last traded value before period end. The fair value of our derivative instruments (Level 2) was estimated using option pricing models. These models use certain variables including forward price and volatility curves and the strike prices for the instruments. The fair value estimates are adjusted relative to non-performance risk as appropriate. See Note 4 for further information on the fair value of our derivative instruments. +Other Financial Instruments +The carrying amounts of our cash, cash equivalents, accounts receivable, accounts payable, and accrued liabilities approximate fair value because of the short-term maturities and/or liquid nature of these assets and liabilities. Included in “Accrued liabilities — other” at December 31, 2018 are: (i) accrued operating expenses (e.g. production, transportation, and gathering expenses) of approximately $69.1 million , (ii) accrued general and administrative, primarily payroll-related, costs of approximately $47.4 million , and (iii) an accrual of approximately $35.8 million representing the amount by which checks issued, but not yet presented to our banks, exceeded balances inapplicable +79 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +bank accounts. Included in “Accrued liabilities — other” at December 31, 2017 are: (i) accrued operating expenses (e.g. production, transportation, and gathering expenses) of approximately $61.3 million and (ii) accrued general and administrative, primarily payroll-related, costs of approximately $54.6 million . +Most of our accounts receivable balances are uncollateralized and result from transactions with other companies in the oil and gas industry. Concentration of customers may impact our overall credit risk because our customers may be similarly affected by changes in economic or other conditions within the industry. +We conduct credit analyses prior to making any sales to new customers or increasing credit for existing customers and may require parent company guarantees, letters of credit, or prepayments when deemed necessary. +We routinely assess the recoverability of all material accounts receivable to determine their collectability. We accrue a reserve to the allowance for doubtful accounts when it is probable that a receivable will not be collected and the amount of the reserve may be reasonably estimated. At December 31, 2018 and 2017 , the allowance for doubtful accounts totaled $2.7 million and $2.2 million , respectively. +Major Customers +In each of the years ended December 31, 2018 and 2017 , we made sales to two customers that each amounted to 10% or more of our consolidated revenues for the respective year. Sales to those two customers accounted for 23% and 21% , respectively, of our consolidated revenues in 2018 and 21% and 13% , respectively, of our consolidated revenues in 2017. In 2016, we made sales to one customer that amounted to 10% or more of our consolidated revenues that year. Sales to that customer accounted for 20% of our consolidated revenues in 2016. +If any one of our major customers was to stop purchasing our production, we believe there are a number of other purchasers to whom we could sell our production with some delay. If multiple significant customers were to discontinue purchasing our production, we believe there would be challenges initially, but ample markets to handle the disruption. +6. STOCK-BASED AND OTHER COMPENSATION +Equity Incentive Plan +Our 2014 Equity Incentive Plan (the “2014 Plan”) was approved by stockholders in May 2014 and our previous plan was terminated at that time. Outstanding awards under the previous plan were not impacted. A total of 6.6 million shares of common stock may be issued under the 2014 Plan, including shares available from the previous plan. The 2014 Plan provides for grants of stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, performance units, dividend equivalents, and other stock-based awards. +80 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +Stock-based Compensation Cost +We have recognized non-cash stock-based compensation cost as shown below. Historical amounts may not be representative of future amounts as the value of future awards may vary from historical amounts. +Years Ended December 31, +(in thousands) +2018 +2017 +2016 +Restricted stock awards: +Performance stock awards +$ +23,083 +$ +26,020 +$ +24,183 +Service-based stock awards +20,385 +19,746 +18,391 +43,468 +45,766 +42,574 +Stock option awards +2,456 +2,599 +2,565 +Total stock compensation cost +45,924 +48,365 +45,139 +Less amounts capitalized to oil and gas properties +(23,029 +) +(22,109 +) +(20,616 +) +Stock compensation expense +$ +22,895 +$ +26,256 +$ +24,523 +Periodic stock compensation expense will fluctuate based on the grant date fair value of awards, the number of awards, the requisite service period of the awards, employee forfeitures, and the timing of the awards. The decrease in total stock compensation cost in 2018 as compared to 2017 is primarily due to performance stock award forfeitures during the second quarter 2018 . Our accounting policy is to account for forfeitures in compensation cost when they occur. +We adopted Accounting Standards Update 2016-09, Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”) on January 1, 2017. The amendments within ASU 2016-09 related to the timing of when excess tax benefits and tax benefits on dividends on nonvested equity shares are recognized and accounting for forfeitures were adopted using a modified retrospective method. In accordance with this method, we recorded a cumulative-effect adjustment that increased beginning deferred income tax assets by $33.1 million , reduced beginning accumulated deficit by $28.7 million , and increased beginning additional paid-in capital by $4.4 million . The amendments within ASU 2016-09 related to the presentation in the statement of cash flows of excess tax benefits and cash outflows attributable to the payment of employee tax withholdings on the net settlement of equity-classified awards were adopted using a retrospective method. In accordance with this method, we adjusted the statement of cash flows for the year ended December 31, 2016 by increasing both net cash provided by operating activities and net cash used by financing activities by $26.6 million for the payment of employee tax withholdings on the net settlement of equity-classified awards. There were no cash flows related to excess tax benefits during the year ended December 31, 2016 . +Restricted Stock +The following table provides information about restricted stock awards granted during the last three years. +Years Ended December 31, +2018 +2017 +2016 +Number +of Shares +Weighted +Average +Grant Date +Fair Value +Number +of Shares +Weighted +Average +Grant Date +Fair Value +Number +of Shares +Weighted +Average +Grant Date +Fair Value +Performance stock awards +123,533 +$ +90.26 +300,525 +$ +89.46 +269,915 +$ +117.63 +Service-based stock awards +469,438 +$ +81.29 +251,312 +$ +94.04 +208,724 +$ +114.61 +Total restricted stock awards +592,971 +$ +83.16 +551,837 +$ +91.55 +478,639 +$ +116.31 +Performance stock awards were granted to eligible executives and are subject to service and market condition-based vesting determined by our stock price performance relative to a defined peer group’s stock price performance. For awards granted prior to 2018, after three years of continued service, an executive will be entitled to vest in 50% to +81 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +100% of the award. For awards granted in 2018, after three years of continued service, an executive will be entitled to vest in 0% to 200% of the award. In accordance with Internal Revenue Code Section 162(m), certain of the amounts awarded may not be deductible for tax purposes. Service-based stock awards granted to other eligible employees and non-employee directors have vesting schedules ranging from one to five years . The majority of our service-based stock awards cliff vest five years from the grant date. +Compensation cost for the performance stock awards is based on the grant date fair value of the award utilizing a Monte Carlo simulation model. Compensation cost for the service-based stock awards is based upon the grant date market value of the award. Such costs are recognized ratably over the applicable vesting period. +The following table provides information on restricted stock activity during the year. +Service-based +Performance +(subject to market conditions) +Number of +Shares +Weighted +Average +Grant Date +Fair Value +Number of +Shares +Weighted +Average +Grant Date +Fair Value +Outstanding as of January 1, 2018 +910,251 +$ +103.98 +834,379 +$ +97.83 +Vested +(213,983 +) +$ +80.17 +(170,045 +) +$ +87.12 +Granted +469,438 +$ +81.29 +123,533 +$ +90.26 +Canceled (1) +— +$ +— +(75,533 +) +$ +87.13 +Forfeited +(29,824 +) +$ +102.35 +(62,238 +) +$ +98.01 +Outstanding as of December 31, 2018 +1,135,882 +$ +99.12 +650,096 +$ +100.42 +________________________________________ +(1) +These performance shares were canceled since the market condition was not satisfied as of the end of the performance period. +The total vest date market value of restricted stock that vested was $34.1 million in 2018 , $54.4 million in 2017 , and $67.9 million in 2016 . +Unrecognized compensation cost related to unvested restricted stock at December 31, 2018 was $102.3 million . We expect to recognize that cost over a weighted average period of 2.9 years . +Restricted Units +As of December 31, 2018 and 2017 , we had 8,838 restricted units outstanding. These represent restricted units held by a non-employee director who has elected to defer payment of common stock represented by the units until termination of his service on the Board of Directors. +Stock Options +Options outstanding as of December 31, 2018 expire seven to ten years from the grant date and have service-based vesting whereby the awards vest in increments of one-third on each of the first three anniversary dates of the grant. The exercise price for an option under the 2014 Plan is the closing price of our common stock as reported by the New York Stock Exchange (“NYSE”) on the date of grant. The previous plans provided that all grants have an exercise price of the average of the high and low prices of our common stock as reported by the NYSE on the date of grant. +Compensation cost related to stock options is based on the grant date fair value of the award and is recognized ratably over the applicable vesting period. We estimate the fair value using the Black-Scholes option-pricing model. Expected volatilities are based on the historical volatility of our common stock. We also use historical data to estimate the expected years until exercise. We use U.S. Treasury bond rates in effect at the grant date for our risk-free interest rates. +82 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +The following summarizes information regarding options granted, including the assumptions used to determine the fair value of those options. +Years Ended December 31, +2018 +2017 +2016 +Options granted +92,050 +96,100 +89,850 +Weighted average grant date fair value +$ +26.71 +$ +28.37 +$ +33.38 +Weighted average exercise price +$ +83.28 +$ +92.37 +$ +114.07 +Total fair value (in thousands) +$ +2,458 +$ +2,727 +$ +2,999 +Expected years until exercise +5.0 +4.5 +4.0 +Expected stock volatility +34.7 +% +35.0 +% +36.7 +% +Dividend yield +0.9 +% +0.3 +% +0.3 +% +Risk-free interest rate +2.7 +% +1.7 +% +1.0 +% +Information about outstanding stock options is summarized below. +Number of Options +Weighted +Average +Exercise +Price +Weighted +Average +Remaining +Term +Aggregate +Intrinsic +Value +(in thousands) +Outstanding as of January 1, 2018 +382,688 +$ +100.17 +Exercised +(33,233 +) +$ +67.44 +Granted +92,050 +$ +83.28 +Canceled +(5,345 +) +$ +117.27 +Forfeited +(15,828 +) +$ +95.70 +Outstanding as of December 31, 2018 +420,332 +$ +99.01 +4.2 years +$ +526 +Exercisable as of December 31, 2018 +250,091 +$ +104.43 +3.1 years +$ +526 +The following table provides information regarding options exercised and the grant date fair value of options vested. +Years Ended December 31, +(in thousands) +2018 +2017 +2016 +Cash received from option exercises +$ +2,241 +$ +394 +$ +4,804 +Intrinsic value of options exercised +$ +1,030 +$ +257 +$ +2,994 +Grant date fair value of options vested +$ +2,547 +$ +2,227 +$ +2,486 +The following summary reflects the status of non-vested stock options as of December 31, 2018 and changes during the year. +Number of Options +Weighted +Average +Grant Date +Fair Value +Weighted +Average +Exercise +Price +Non-vested as of January 1, 2018 +172,906 +$ +31.08 +$ +102.15 +Vested +(78,887 +) +$ +32.28 +$ +105.37 +Granted +92,050 +$ +26.71 +$ +83.28 +Forfeited +(15,828 +) +$ +29.61 +$ +95.70 +Non-vested as of December 31, 2018 +170,241 +$ +28.29 +$ +91.05 +83 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +As of December 31, 2018 , there was $3.6 million of unrecognized compensation cost related to non-vested stock options. We expect to recognize that cost over a weighted average period of 1.4 years . +Other Compensation +We maintain and sponsor a contributory 401(k) plan for our employees. Employer contributions related to the plan were $13.1 million , $10.4 million , and $6.7 million for 2018 , 2017 , and 2016 , respectively. Included in the 2018 and 2017 amounts are accrued employer discretionary contributions. No such employer discretionary contributions occurred in 2016. +84 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +7. EARNINGS (LOSS) PER SHARE +The calculations of basic and diluted net earnings (loss) per common share under the two-class method are presented below. Earnings (loss) per share are based on actual figures rather than the rounded figures presented. +Year Ended December 31, 2018 +(in thousands, except per share information) +Income (Numerator) +Shares (Denominator) +Per-Share Amount +Net income +$ +791,851 +Less: net income attributable to participating securities +(11,087 +) +Basic earnings per share +Income available to common stockholders +780,764 +93,793 +$ +8.32 +Effects of dilutive securities +Options (1) +3 +27 +Diluted earnings per share +Income available to common stockholders and assumed conversions +$ +780,767 +93,820 +$ +8.32 +Year Ended December 31, 2017 +(in thousands, except per share information) +Income (Numerator) +Shares (Denominator) +Per-Share Amount +Net income +$ +494,329 +Less: net income attributable to participating securities +(8,551 +) +Basic earnings per share +Income available to common stockholders +485,778 +93,466 +$ +5.19 +Effects of dilutive securities +Options (1) +3 +43 +Diluted earnings per share +Income available to common stockholders and assumed conversions +$ +485,781 +93,509 +$ +5.19 +Year Ended December 31, 2016 +(in thousands, except per share information) +Income (Numerator) +Shares (Denominator) +Per-Share Amount +Net loss +$ +(408,803 +) +Less: net loss attributable to participating securities (2) +— +Basic loss per share +Loss available to common stockholders +(408,803 +) +93,379 +$ +(4.38 +) +Effects of dilutive securities +Options (1) +— +— +Diluted loss per share +Loss available to common stockholders and assumed conversions +$ +(408,803 +) +93,379 +$ +(4.38 +) +________________________________________ +(1) +Inclusion of certain shares would have an anti-dilutive effect; therefore, 387.7 thousand , 302.9 thousand , and 2.1 million shares were excluded from the calculations for the years ended December 31, 2018 , 2017 , and 2016 , respectively. +(2) +Participating securities do not participate in losses. +85 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +8. ASSET RETIREMENT OBLIGATIONS +The following table reflects the components of the change in the carrying amount of the asset retirement obligation for the years ended December 31, 2018 and 2017 . +(in thousands) +2018 +2017 +Asset retirement obligation at January 1, +$ +169,469 +$ +154,523 +Liabilities incurred +9,899 +17,996 +Liability settlements and disposals +(21,550 +) +(12,947 +) +Accretion expense +7,318 +7,534 +Revisions of estimated liabilities +1,768 +2,363 +Asset retirement obligation at December 31, +166,904 +169,469 +Less current obligation +14,146 +11,048 +Long-term asset retirement obligation +$ +152,758 +$ +158,421 +Liabilities incurred in 2017 includes $10.5 million for the estimated liability to decommission two offshore properties in the Gulf of Mexico in which we were a prior lessee. In January 2018, the Bureau of Safety and Environmental Enforcement (“BSEE”) notified us and other prior lessees that the current lessee of the properties had filed a petition for relief under the bankruptcy code and, as a result, had defaulted on its obligation to decommission the properties. Consequently, BSEE ordered us and other prior lessees to decommission all wells, pipelines, platforms, and other facilities related to these properties. Our estimate of our liability may change as we refine our understanding of the extent of our obligations under the orders from BSEE and obtain additional information on decommissioning costs. +During 2018 and 2017 , the liability settlements and disposals included $13.7 million and $0.5 million , respectively, related to properties that were sold. +9. INCOME TAXES +The components of the provision for income taxes are as follows: +Years Ended December 31, +(in thousands) +2018 +2017 +2016 +Current taxes: +Federal benefit +$ +(3,007 +) +$ +(2,810 +) +$ +— +State expense (benefit) +383 +(2 +) +(1,115 +) +(2,624 +) +(2,812 +) +(1,115 +) +Deferred taxes: +Federal expense (benefit) +211,717 +173,859 +(201,529 +) +State expense (benefit) +21,563 +16,620 +(11,757 +) +233,280 +190,479 +(213,286 +) +$ +230,656 +$ +187,667 +$ +(214,401 +) +86 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +Federal income tax expense (benefit) for the years presented differs from the amounts that would be provided by applying the U.S. federal income tax rate, primarily due to the effect of state income taxes, non-deductible expenses, revisions, and changes in tax laws and tax rates enacted in the period. Reconciliations of the income tax expense (benefit) calculated at the federal statutory rate of 21% for 2018 and 35% for 2017 and 2016 to the total income tax expense (benefit) are as follows: +Years Ended December 31, +(in thousands) +2018 +2017 +2016 +Provision at statutory rate +$ +214,726 +$ +238,699 +$ +(218,122 +) +Effect of state taxes +18,795 +10,074 +(10,237 +) +Revision of previous balances +— +— +7,181 +Tax credits and other permanent differences +1,583 +5,442 +5,296 +Change in valuation allowance, net +(1,376 +) +486 +1,481 +Stock-based compensation +(3,072 +) +(5,888 +) +— +Impact of reduction in federal statutory rate +— +(61,146 +) +— +Income tax expense (benefit) +$ +230,656 +$ +187,667 +$ +(214,401 +) +As a result of the enactment of H.R.1 (Public Law 115-97) on December 22, 2017 , the company remeasured the deferred tax assets and liabilities as of December 31, 2017 to reflect the reduction in the U.S. income tax rate from 35% to 21% for years after 2018 . As a result of this remeasurement, we recorded an income tax benefit of $61.1 million and a corresponding $61.1 million decrease in net deferred tax liabilities as of December 31, 2017 . We believe the accounting for the effects of H.R.1 recognized in the December 31, 2017 financial statements is materially complete. During 2018, no other adjustments were made. As a result of H.R.1, we expect our effective tax rate in future periods will be lower than in periods prior to enactment. In addition, the limitations on utilization of net operating losses and deductibility of interest and executive compensation may result in the payment of cash taxes earlier than expected. +The components of net deferred taxes are as follows: +December 31, +(in thousands) +2018 +2017 +Assets: +Stock compensation and other accrued amounts +$ +8,229 +$ +31,044 +Net operating loss carryforward, net of valuation allowance +266,011 +313,738 +Credit carryforward +3,513 +3,995 +277,753 +348,777 +Liabilities: +Property, plant and equipment +(612,226 +) +(450,395 +) +Net deferred tax liabilities +$ +(334,473 +) +$ +(101,618 +) +At December 31, 2018 , we had a U.S. net tax operating loss carryforward of approximately $1.16 billion , which would expire in years 2032 through 2037 . We believe that the carryforward will be utilized before it expires. We recorded a $7.0 million increase to the net operating loss carryforward at December 31, 2018 and a corresponding $5.6 million increase to the valuation allowance related to state net operating losses. The total valuation allowance on state net operating losses at December 31, 2018 was $109.3 million since it is not more likely than not that these additional state net operating losses will be utilized before they expire. There are no other valuation allowances. We also had enhanced oil recovery and marginal well credits of $3.5 million at December 31, 2018 . +At December 31, 2018 and 2017 , we had no unrecognized tax benefits that would impact our effective rate and we have made no provisions for interest or penalties related to uncertain tax positions. The tax years 2015 through 2017 remain open to examination by the Internal Revenue Service of the United States. We file tax returns with various +87 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +state taxing authorities which remain open to examination for tax years 2014 through 2017 . We do not anticipate the need for any significant income tax payments in the near term. +10. COMMITMENTS AND CONTINGENCIES +Lease Commitments +We have various commitments for office space under operating lease arrangements. During the years ended December 31, 2018 , 2017 , and 2016 , rent expense for these operating leases approximated $13.2 million , $13.1 million , and $12.9 million , respectively. +Shown below are future minimum cash payments required under these leases as of December 31, 2018 . +(in thousands) +2019 +$ +9,849 +2020 +10,790 +2021 +11,000 +2022 +11,130 +2023 +11,433 +Later years +20,831 +Total future minimum lease payments +$ +75,033 +We have various commitments for compressor equipment under operating lease arrangements totaling $34.8 million with lease terms expiring in the next 1 - 35 months . +Other Commitments +At December 31, 2018 , we had estimated commitments of approximately: (i) $498.3 million to finish drilling, completing, or performing other work on wells and various other infrastructure projects in progress and (ii) $24.9 million to finish gathering system construction in progress. +At December 31, 2018 , we had firm sales contracts to deliver approximately 316.9 Bcf of gas over the next 6.1 years . If we do not deliver this gas, our estimated financial commitment, calculated using the January 2019 index price, would be approximately $814.7 million . The value of this commitment will fluctuate due to price volatility and actual volumes delivered. However, we believe no financial commitment will be due based on our current proved reserves and production levels from which we can fulfill these volumetric obligations. +In connection with gas gathering and processing agreements, we have volume commitments over the next 9.0 years . If we do not deliver the committed gas or NGLs, as the case may be, the estimated maximum amount that would be payable under these commitments, calculated as of December 31, 2018 , would be approximately $336.0 million . However, we believe no financial commitment will be due based on our current proved reserves and production levels from which we can fulfill these volumetric obligations. +We have minimum volume delivery commitments associated with agreements to reimburse connection costs to various pipelines. If we do not deliver this gas, the estimated maximum amount that would be payable under these commitments, calculated as of December 31, 2018 , would be approximately $57.3 million . Of this total, we have accrued a liability of $2.5 million representing the estimated amount we will have to pay due to insufficient forecasted volumes at particular connection points. +At December 31, 2018 , we have various firm transportation agreements for gas pipeline capacity with end dates ranging from 2019 - 2025 under which we will have to pay an estimated $27.8 million over the remaining terms of the agreements. These agreements were entered into to support our residue marketing efforts, and we believe we have sufficient reserves that will utilize this firm transportation. +88 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +All of the noted commitments were routine and made in the ordinary course of our business. +Litigation +In the ordinary course of business, we are involved with various litigation matters. When a loss contingency exists, we assess whether it is probable that an asset has been impaired or a liability has been incurred and, if so, we determine if the amount of loss can be reasonably estimated, all in accordance with guidance established by the FASB, and adjust our accruals accordingly. Though some of the related claims may be significant, the resolution of them, we believe, individually or in the aggregate, would not have a material adverse effect on our financial condition or results of operations after consideration of current accruals. +11. RELATED PARTY TRANSACTIONS +Helmerich & Payne, Inc. (“H&P”) provides contract drilling services to Cimarex. Cimarex incurred drilling costs of approximately $80.1 million , $52.6 million , and $18.3 million related to these services during the years ended December 31, 2018 , 2017 , and 2016 , respectively. Hans Helmerich, a director of Cimarex, is Chairman of the Board of Directors of H&P. +12. SUPPLEMENTAL CASH FLOW INFORMATION +Years Ended December 31, +(in thousands) +2018 +2017 +2016 +Cash paid during the period for: +Interest expense (net of capitalized amounts of $19,969, $23,113, and $20,308, respectively) +$ +45,357 +$ +52,245 +$ +59,282 +Income taxes +$ +— +$ +3 +$ +13 +Cash received for income tax refunds +$ +760 +$ +111 +$ +1,450 +89 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +13. +ACQUISITIONS AND DIVESTITURES +On August 31, 2018 , we closed on the divestiture of oil and gas properties principally located in Ward County, Texas for a sales price of $544.5 million , as adjusted to reflect the resolution of all asserted defects. As of December 31, 2018 , we have received $534.6 million in net cash proceeds as adjusted for customary closing adjustments to reflect an effective date of April 1, 2018 and transaction costs. Final settlement, which will reflect customary post-closing adjustments, is scheduled to occur by the end of first quarter 2019. This divestiture did not significantly alter the relationship between capitalized costs and proved reserves, therefore, in accordance with the full cost method of accounting, no gain or loss was recognized. +On November 18, 2018, we entered into an Agreement and Plan of Merger to acquire Resolute Energy Corporation (“Resolute”) in a cash and stock transaction valued at a total purchase price of approximately $1.6 billion , including the assumption of Resolute’s long-term debt, which had an outstanding principal balance of $710.0 million as of September 30, 2018. Under the terms of the agreement, Resolute shareholders will have the right to receive 0.3943 shares of Cimarex common stock, $35.00 per share in cash, or a combination of $14.00 per share in cash and 0.2366 shares of Cimarex common stock. The amount of stock and cash is subject to proration for a total stock and cash mix of 60% and 40% , respectively. The transaction, which is expected to be completed by the end of the first quarter 2019, is subject to the approval of Resolute shareholders and the satisfaction of certain regulatory approvals and other customary closing conditions. +90 +Table of Contents +CIMAREX ENERGY CO. +SUPPLEMENTAL INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED) +Oil and Gas Reserve Information— Proved reserve quantities are based on estimates prepared by Cimarex in accordance with guidelines established by the Securities and Exchange Commission (“SEC”). +Reserve definitions comply with definitions of Rule 4-10(a) (1)-(32) of Regulation S-X of the SEC. All of our reserve estimates are maintained by our internal Corporate Reservoir Engineering group, which is comprised of reservoir engineers and engineering technicians. The objectives and management of this group are separate from and independent of the exploration and production functions of our company. The technical employee primarily responsible for overseeing the reserve estimation process is our Vice President of Corporate Engineering. This individual graduated from the Colorado School of Mines with a Bachelor of Science degree in Engineering and has more than 24 years of practical experience in reserve evaluation. He has been directly involved in the annual reserve reporting process of Cimarex since 2002 and has served in his current role for the past 14 years. +DeGolyer and MacNaughton, an independent petroleum engineering consulting firm, performed an independent evaluation of our estimated net reserves representing greater than 80% of the total future net revenue discounted at 10% attributable to the total interests owned by Cimarex as of December 31, 2018 . The individual primarily responsible for overseeing the evaluation is a Senior Vice President with DeGolyer and MacNaughton and a Registered Professional Engineer in the State of Texas with over 34 years of experience in oil and gas reservoir studies and reserves evaluations. +Proved reserves are those quantities of oil, gas, and NGLs which, by analysis of geosciences and engineering data, can be estimated with reasonable certainty to be economically producible—from a given date forward, from known reservoirs, and under existing economic conditions, operating methods, and government regulations—prior to the time at which contracts providing the right to operate expire, unless evidence indicates that renewal is reasonably certain, regardless of whether deterministic or probabilistic methods are used for the estimation. The project to extract the hydrocarbons must have commenced or the operator must be reasonably certain that it will commence the project within a reasonable time. +There are numerous uncertainties inherent in estimating quantities of proved reserves and projecting future rates of production and the timing of development expenditures. The estimation of our proved reserves employs one or more of the following: production trend extrapolation, analogy, volumetric assessment, and material balance analysis. Techniques including review of production and pressure histories, analysis of electric logs and fluid tests, and interpretations of geologic and geophysical data are also involved in this estimation process. +The following table summarizes the trailing twelve-month index prices used in the reserves estimates for 2018 , 2017 , and 2016 . These prices are prior to adjustments for fixed and determinable amounts under provisions in existing contracts, location, grade, and quality. +December 31, +2018 +2017 +2016 +Gas price per Mcf +$ +3.10 +$ +2.98 +$ +2.48 +Oil price per Bbl +$ +65.56 +$ +51.34 +$ +42.75 +NGL price per Bbl +$ +21.03 +$ +19.09 +$ +14.37 +91 +Table of Contents +CIMAREX ENERGY CO. +SUPPLEMENTAL INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED) +The following table sets forth our estimates of our proved, proved developed, and proved undeveloped oil, gas, and NGL reserves as of December 31, 2018 , 2017 , 2016 , and 2015 and changes in our proved reserves for the years ended December 31, 2018 , 2017 , and 2016 . All of our proved reserves are located entirely within the U.S. +Gas +(MMcf) +Oil +(MBbls) +NGL +(MBbls) +Total +(MBOE) +Total proved reserves: +December 31, 2015 +1,516,952 +107,798 +124,277 +484,901 +Revisions of previous estimates +5,888 +(4,357 +) +6,670 +3,293 +Extensions and discoveries +123,175 +19,419 +14,050 +53,998 +Purchases of reserves +959 +1 +— +161 +Production +(168,227 +) +(16,528 +) +(14,200 +) +(58,765 +) +Sales of reserves +(7,327 +) +(455 +) +(164 +) +(1,840 +) +December 31, 2016 +1,471,420 +105,878 +130,633 +481,748 +Revisions of previous estimates +(39,749 +) +(1,225 +) +(2,099 +) +(9,951 +) +Extensions and discoveries +363,774 +53,464 +42,692 +156,786 +Purchases of reserves +642 +42 +78 +227 +Production +(187,468 +) +(20,861 +) +(17,374 +) +(69,479 +) +Sales of reserves +(984 +) +(60 +) +(70 +) +(294 +) +December 31, 2017 +1,607,635 +137,238 +153,860 +559,037 +Revisions of previous estimates +(132,577 +) +(4,348 +) +3,777 +(22,667 +) +Extensions and discoveries +342,810 +53,763 +47,614 +158,512 +Purchases of reserves +3 +— +— +1 +Production +(205,837 +) +(24,710 +) +(21,994 +) +(81,010 +) +Sales of reserves +(20,713 +) +(15,405 +) +(3,821 +) +(22,678 +) +December 31, 2018 +1,591,321 +146,538 +179,436 +591,195 +Proved developed reserves: +December 31, 2015 +1,129,490 +89,189 +87,549 +364,987 +December 31, 2016 +1,144,720 +92,032 +99,176 +381,994 +December 31, 2017 +1,334,510 +114,116 +126,227 +462,761 +December 31, 2018 +1,398,729 +116,339 +151,566 +501,027 +Proved undeveloped reserves: +December 31, 2015 +387,462 +18,609 +36,728 +119,914 +December 31, 2016 +326,700 +13,846 +31,457 +99,754 +December 31, 2017 +273,125 +23,122 +27,633 +96,276 +December 31, 2018 +192,592 +30,199 +27,870 +90,168 +Year-end 2018 proved reserves increased approximately 6% from year-end 2017 proved reserves, to 591.2 MMBOE. Proved gas reserves were 1.59 Tcf, proved oil reserves were 146.5 MMBbls, and proved NGL reserves were 179.4 MMBbls. Our reserves in the Permian Basin accounted for 57% of total proved reserves, with nearly all of the remainder in the Mid-Continent. +During 2018 , we added 158.5 MMBOE of proved reserves through extensions and discoveries, primarily in the Permian Basin and Mid-Continent where we added 120.3 MMBOE and 38.0 MMBOE, respectively. In addition, we had net negative revisions of 22.7 MMBOE. The revisions included decreases of 38.6 MMBOE for the removal of PUD reserves whose development will likely be delayed beyond five years of initial disclosure and 7.7 MMBOE related to increases in operating expenses. These decreases were partially offset by increases of 2.7 MMBOE in price-related revisions and 20.9 MMBOE of net technical revisions. The majority of the technical revisions were related to better than expected performance from wells with initial production in late 2017 and positive adjustments to PUD reserves converted to proved developed reserves during 2018. +92 +Table of Contents +CIMAREX ENERGY CO. +SUPPLEMENTAL INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED) +During 2017 , we added 156.8 MMBOE of proved reserves through extensions and discoveries, primarily in Permian Basin and Mid-Continent where we added 109.6 MMBOE and 47.2 MMBOE, respectively. In addition, we had net negative revisions of 10.0 MMBOE. The revisions included decreases of 41.5 MMBOE for the removal of PUD reserves whose development will likely be delayed beyond five years of initial disclosure and 7.3 MMBOE related to increases in operating expenses. These decreases were partially offset by increases of 31.2 MMBOE in price-related revisions and 7.6 MMBOE of net technical revisions related primarily to better than expected performance from wells with initial production in late 2016. +During 2016 , we added 54.0 MMBOE of proved reserves through extensions and discoveries, primarily in Permian Basin and Mid-Continent, where we added 33.1 MMBOE and 20.3 MMBOE, respectively. In addition, we had net positive revisions of 3.3 MMBOE. The revisions included increases of 21.0 MMBOE for net performance revisions and 23.1 MMBOE related to decreases in operating expenses, partially offset by negative revisions of 40.8 MMBOE due to lower commodity prices. The performance revisions resulted primarily from positive adjustments to previously booked PUD reserves ( 12.1 MMBOE) and better than expected performance from wells with initial production in late 2015. +At December 31, 2018 , we had PUD reserves of 90.2 MMBOE, down 6.1 MMBOE, or 6% , from 96.3 MMBOE of PUD reserves at December 31, 2017 . Changes in our PUD reserves are summarized in the table below. +PUD Reserves +(MMBOE) +PUD reserves at December 31, 2017 +96.3 +Converted to developed +(28.9 +) +Additions +53.8 +Net revisions +(31.0 +) +PUD reserves at December 31, 2018 +90.2 +During 2018 , we invested $264.5 million to develop and convert 30% of our 2017 PUD reserves to proved developed reserves. During 2017 , we invested $69.5 million to develop and convert 10% of our 2016 PUD reserves to proved developed reserves. During 2016 , we invested $108.8 million to develop and convert 14% of our 2015 PUD reserves to proved developed reserves. +During 2018 , 50.9 MMBOE, or 95% , of our 53.8 MMBOE of PUD reserve additions occurred in the Permian Basin, while the remainder of the additions were in our western Oklahoma Cana area. At December 31, 2018 , 78% of our PUD reserves were in the Permian Basin, while the remainder were in our western Oklahoma Cana area. We have no PUD reserves that have remained undeveloped for five years or more after initial disclosure and we have no PUD reserves whose scheduled development is beyond five years of initial disclosure. +During 2018 , we had net negative PUD reserve revisions of 31.0 MMBOE. Of this total, 38.6 MMBOE was for the removal of PUD reserves whose development will likely be delayed beyond five years of initial disclosure. Partially offsetting this were 7.6 MMBOE of positive revisions related primarily to refinement of ownership and adjustments to hydrocarbon type curves based on recent development results. +93 +Table of Contents +CIMAREX ENERGY CO. +SUPPLEMENTAL INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED) +Costs Incurred— The following table sets forth the capitalized costs incurred in our oil and gas production, exploration, and development activities. +Years Ended December 31, +(in thousands) +2018 +2017 +2016 +Costs incurred during the year: +Acquisition of properties +Proved +$ +62 +$ +938 +$ +2,678 +Unproved +102,666 +135,565 +67,961 +Exploration +6,341 +11,804 +5,814 +Development +1,487,453 +1,140,548 +672,842 +Oil and gas expenditures +1,596,522 +1,288,855 +749,295 +Property sales +(581,799 +) +(11,680 +) +(24,687 +) +1,014,723 +1,277,175 +724,608 +Asset retirement obligation, net +(2,004 +) +9,416 +(7,950 +) +$ +1,012,719 +$ +1,286,591 +$ +716,658 +Aggregate Capitalized Costs— The table below reflects the aggregate capitalized costs relating to our oil and gas producing activities at December 31, 2018 . +(in thousands) +Proved properties +$ +18,566,757 +Unproved properties and properties under development, not being amortized +436,325 +19,003,082 +Less-accumulated depreciation, depletion, amortization, and impairments +(15,287,752 +) +Net oil and gas properties +$ +3,715,330 +Costs Not Being Amortized— The following table summarizes oil and gas property costs not being amortized at December 31, 2018 , by year that the costs were incurred. +(in thousands) +2018 +$ +198,949 +2017 +102,258 +2016 +39,846 +2015 and prior +95,272 +$ +436,325 +Of the costs not being amortized, $110.1 million ( 25% ) relates to unevaluated wells in progress and $46.3 million ( 11% ) is capitalized interest. The remaining $279.9 million ( 64% ) is for land and seismic expenditures, most of which were for costs invested in Permian Basin ( $197.0 million ) and Mid-Continent ( $75.4 million ). On a quarterly basis, we evaluate excluded costs for inclusion in the costs to be amortized. Significant unproved properties are evaluated individually. Unproved properties that are not considered individually significant are aggregated for evaluation purposes and related costs are transferred to the costs to be amortized quarterly based on the application of historical factors. We expect to include these costs in the amortization computation as we continue with our exploration and development plans. +94 +Table of Contents +CIMAREX ENERGY CO. +SUPPLEMENTAL INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED) +Oil and Gas Operations— The following table contains direct revenue and cost information relating to our oil and gas exploration and production activities for the periods indicated. We have no long-term supply or purchase agreements with governments or authorities in which we act as producer. Income tax expense related to our oil and gas operations is computed using the effective tax rate for the period, with the 2017 effective tax rate adjusted to remove the impact of the reduction in the federal statutory rate. +Years Ended December 31, +(in thousands, except per BOE) +2018 +2017 +2016 +Oil, gas, and NGL revenues from production +$ +2,297,645 +$ +1,874,003 +$ +1,221,218 +Less operating costs and income taxes: +Impairment of oil and gas properties +— +— +757,670 +Depletion +538,919 +399,328 +346,003 +Asset retirement obligation +7,142 +15,624 +7,828 +Production +293,213 +262,180 +232,002 +Transportation, processing, and other operating +218,614 +254,730 +210,144 +Taxes other than income +125,169 +89,864 +61,946 +Income tax expense (benefit) +251,897 +310,937 +(135,665 +) +1,434,954 +1,332,663 +1,479,928 +Results of operations from oil and gas producing activities +$ +862,691 +$ +541,340 +$ +(258,710 +) +Depletion rate per BOE +$ +6.65 +$ +5.75 +$ +5.89 +Standardized Measure of Future Net Cash Flows— The Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil and Gas Reserves (“Standardized Measure”) is calculated in accordance with guidance provided by the FASB. The Standardized Measure does not purport, nor should it be interpreted, to present the fair value of a company’s proved oil and gas reserves. Fair value would require, among other things, consideration of expected future economic and operating conditions, varying price and cost assumptions, and risks inherent in reserve estimates. +Under the Standardized Measure, future cash inflows are based upon the forecasted future production of year-end proved reserves. Future cash inflows are then reduced by estimated future production and development costs to determine net pre-tax cash flow. Future income taxes are computed by applying the statutory tax rate to the excess of pre-tax cash flow over our tax basis in the associated oil and gas properties. Tax credits and permanent differences are also considered in the future income tax calculation. Future net cash flow after income taxes is discounted using a 10% annual discount rate to arrive at the Standardized Measure. +The following summary sets forth our Standardized Measure. +December 31, +(in thousands) +2018 +2017 +2016 +Future cash inflows +$ +14,050,367 +$ +11,967,325 +$ +7,576,211 +Future production costs +(4,889,601 +) +(4,360,599 +) +(2,970,891 +) +Future development costs +(1,017,318 +) +(948,735 +) +(794,298 +) +Future income tax expenses +(1,303,762 +) +(882,519 +) +(507,145 +) +Future net cash flows +6,839,686 +5,775,472 +3,303,877 +10% annual discount for estimated timing of cash flows +(2,824,499 +) +(2,490,471 +) +(1,411,259 +) +Standardized measure of discounted future net cash flows +$ +4,015,187 +$ +3,285,001 +$ +1,892,618 +95 +Table of Contents +CIMAREX ENERGY CO. +SUPPLEMENTAL INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED) +The estimates of cash flows shown above are based upon the unweighted trailing twelve-month average first-day-of-the-month benchmark prices. See table above under Oil and Gas Reserve Information for prices used in determining the Standardized Measure. If future gas sales are covered by contracts at specified prices, the contract prices would be used. Prices are market driven and will fluctuate due to supply and demand factors, seasonality, and geopolitical and economic factors. +The following are the principal sources of change in the Standardized Measure. +Years Ended December 31, +(in thousands) +2018 +2017 +2016 +Standardized Measure, beginning of period +$ +3,285,001 +$ +1,892,618 +$ +1,934,131 +Sales, net of production costs +(1,660,649 +) +(1,267,229 +) +(717,126 +) +Net change in sales prices, net of production costs +377,178 +855,024 +(429,956 +) +Extensions and discoveries, net of future production and development costs +1,738,993 +1,443,577 +517,702 +Changes in future development costs +194,523 +298,819 +167,387 +Previously estimated development costs incurred during the period +335,954 +78,398 +110,945 +Revision of quantity estimates +96,783 +(65,376 +) +15,701 +Accretion of discount +372,482 +212,192 +227,904 +Change in income taxes +(284,186 +) +(210,519 +) +115,609 +Purchases of reserves in place +— +2,255 +429 +Sales of reserves +(300,592 +) +(1,666 +) +(9,440 +) +Change in production rates and other +(140,300 +) +46,908 +(40,668 +) +Standardized Measure, end of period +$ +4,015,187 +$ +3,285,001 +$ +1,892,618 +96 +Table of Contents +CIMAREX ENERGY CO. +SUPPLEMENTAL QUARTERLY FINANCIAL DATA (UNAUDITED) +Quarter +2018 +First +Second +Third +Fourth +(in thousands, except per share data) +Revenues +$ +567,134 +$ +556,274 +$ +591,488 +$ +624,121 +Expenses, net +380,816 +415,277 +443,134 +307,939 +Net income +$ +186,318 +$ +140,997 +$ +148,354 +$ +316,182 +Earnings per share to common stockholders: +Basic +$ +1.96 +$ +1.48 +$ +1.56 +$ +3.32 +Diluted +$ +1.96 +$ +1.48 +$ +1.56 +$ +3.32 +Quarter +2017 +First +Second +Third +Fourth +(in thousands, except per share data) +Revenues +$ +447,176 +$ +456,452 +$ +463,681 +$ +550,940 +Expenses, net +316,204 +359,190 +372,282 +376,244 +Net income +$ +130,972 +$ +97,262 +$ +91,399 +$ +174,696 +Earnings per share to common stockholders: +Basic +$ +1.38 +$ +1.02 +$ +0.96 +$ +1.83 +Diluted +$ +1.38 +$ +1.02 +$ +0.96 +$ +1.83 +The sum of the individual quarterly earnings per common share amounts may not agree with year-to-date earnings per common share because each quarter’s computation is based on the number of shares outstanding at the end of the applicable quarter using the two-class method. +97 +Table of Contents +ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE +None. +ITEM 9A. CONTROLS AND PROCEDURES +EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES +Cimarex’s management, under the supervision and with the participation of the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), have evaluated the effectiveness of Cimarex’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (Exchange Act)) as of December 31, 2018 . Based on that evaluation, the CEO and CFO concluded that the disclosure controls and procedures are effective in providing reasonable assurance that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods required by the U.S. Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to management, including the CEO and CFO, to allow timely decisions regarding required disclosures. +MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING +Cimarex’s management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). The company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. Our internal control over financial reporting also includes those policies and procedures that: +(1) +pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets; +(2) +provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements for external purposes in accordance with generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of management and directors; and +(3) +provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of assets that could have a material effect on the consolidated financial statements. +Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of the effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +As of December 31, 2018 , Cimarex’s management assessed the effectiveness of internal control over financial reporting based on the criteria set forth in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on that assessment, management concluded that the internal control over financial reporting was effective as of December 31, 2018 . +Our independent registered public accounting firm, KPMG LLP, has audited the effectiveness of our internal control over financial reporting and has issued a report as of December 31, 2018 , which follows this report. +CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING +There was no change in our internal control over financial reporting that occurred during our most recent fiscal quarter ended December 31, 2018 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. +98 +Table of Contents +Report of Independent Registered Public Accounting Firm +The Stockholders and Board of Directors +Cimarex Energy Co.: +Opinion on Internal Control over Financial Reporting +We have audited Cimarex Energy Co. and subsidiaries’ (the “Company”) internal control over financial reporting as of December 31, 2018 , based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018 , based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. +We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance sheets of the Company as of December 31, 2018 and 2017 , the related consolidated statements of operations and comprehensive income (loss), stockholders’ equity, and cash flows for each of the years in the three‑year period ended December 31, 2018 , and the related notes (collectively, the consolidated financial statements), and our report dated February 20, 2019 expressed an unqualified opinion on those consolidated financial statements. +Basis for Opinion +The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. +Definition and Limitations of Internal Control Over Financial Reporting +A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. +Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +KPMG LLP +Denver, Colorado +February 20, 2019 +99 +Table of Contents +ITEM 9B. OTHER INFORMATION +None. +100 +Table of Contents +PART III +ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE +Information concerning the directors of Cimarex required under this item is incorporated by reference from the Cimarex Energy Co. definitive Proxy Statement for the May 8, 2019 Annual Meeting of Shareholders. The Proxy Statement will be filed with the Securities and Exchange Commission no later than 120 days subsequent to December 31, 2018 . The executive officers of Cimarex as of February 20, 2019 were: +Name +Age +Office +Thomas E. Jorden +61 +Chairman of the Board, Chief Executive Officer and President +Joseph R. Albi +60 +Executive Vice President — Operations, Chief Operating Officer +Stephen P. Bell +64 +Executive Vice President — Business Development +G. Mark Burford +51 +Vice President and Chief Financial Officer +Francis B. Barron +56 +Senior Vice President — General Counsel +John A. Lambuth +56 +Senior Vice President — Exploration +Gary R. Abbott +46 +Vice President — Corporate Engineering +Timothy A. Ficker +51 +Vice President — Controller, Chief Accounting Officer, and Assistant Secretary +There are no family relationships by blood, marriage, or adoption among any of the above executive officers. All executive officers are elected annually by the board of directors to serve for one year or until a successor is elected and qualified. There is no arrangement or understanding between any of the officers and any other person pursuant to which he or she was selected as an executive officer. +THOMAS E. JORDEN was elected Chairman of the Board effective August 14, 2012 after being named President and Chief Executive Officer effective September 30, 2011. Since December 8, 2003, Mr. Jorden served as Executive Vice President of Exploration and had served in a similar capacity since September 30, 2002. Prior to September 2002, Mr. Jorden was with Key Production Company, Inc., where he served as Vice President of Exploration (October 1999 to September 2002) and Chief Geophysicist (November 1993 to September 1999). Prior to joining Key, Mr. Jorden was with Union Pacific Resources. +JOSEPH R. ALBI was named Executive Vice President and Chief Operating Officer effective September 30, 2011. Mr. Albi served as Executive Vice President of Operations since March 1, 2005. Since December 8, 2003, Mr. Albi served as Senior Vice President of Corporate Engineering. From September 30, 2002 to December 8, 2003, he served as Vice President of Engineering. From June 1994 to September 2002, Mr. Albi was with Key Production Company, Inc. where he served as Vice President of Engineering and Manager of Engineering. +STEPHEN P. BELL was named Executive Vice President, Business Development effective September 13, 2012. Since September 2002, Mr. Bell served as Senior Vice President of Business Development and Land. Prior to its merger with Cimarex, Mr. Bell was with Key Production Company, Inc. since February 1994. In September 1999, he was appointed Senior Vice President, Business Development and Land. From February 1994 to September 1999, he served as Vice President, Land. +G. MARK BURFORD was named Vice President and Chief Financial Officer in September 2015. He was appointed Vice President, Capital Markets and Planning in December 2010. Mr. Burford joined Cimarex in April 2005 as Director of Capital Markets. Prior to joining Cimarex, he was Director of Investor Relations for Whiting Petroleum and Tom Brown, Inc. His experience also includes equity research with Petrie Parkman & Co., an investment banking firm, and public accounting. +FRANCIS B. BARRON joined Cimarex as Senior Vice President, General Counsel in July 2013. From February 2004 until July 2013, Mr. Barron served in various capacities at Bill Barrett Corporation, a publicly traded, Denver-based oil and gas exploration and development company, including as Executive Vice President, General Counsel, and Secretary. He also served as Chief Financial Officer from November 2006 until March 2007. Prior to February 2004, Mr. Barron was a partner at the Denver, Colorado office of the law firm of Patton Boggs LLP as well as a partner at Bearman Talesnick & Clowdus Professional Corporation. Mr. Barron’s practice included corporate, securities, and business law for publicly traded oil and gas companies. +101 +Table of Contents +JOHN A. LAMBUTH was named Senior Vice President of Exploration in December 2015. Prior to his promotion, he served as the Company’s Vice President of Exploration since September 2012 and Chief Geophysicist, a position he held since joining Cimarex in 2004. Mr. Lambuth began his career in 1985 with Shell Oil Co., where he held various positions in exploration and in research and development. Immediately prior to joining Cimarex, he spent three years as onshore Exploration Manager of El Paso Energy Company. +GARY R. ABBOTT was elected Vice President of Corporate Engineering March 1, 2005. Since January 2002, Mr. Abbott served as manager, Corporate Reservoir Engineering. From April 1999 to January 2002, Mr. Abbott was a reservoir engineer with Key Production Company, Inc. +TIMOTHY A. FICKER was appointed Vice President, Controller, Chief Accounting Officer, and Assistant Secretary in December 2016 to be effective in February 2017 and previously served as the Company’s Controller since September 2016. Prior to joining Cimarex, he was the Chief Financial Officer of Alcova Management LLC, Venoco, Inc., and Infinity Energy Resources Inc. Mr. Ficker previously served as an audit partner in KPMG LLP’s energy audit practice in Denver and as an audit partner for Arthur Andersen LLP, where he served clients primarily in the energy industry. +ITEM 11. EXECUTIVE COMPENSATION +Information required under this item is incorporated by reference from the Cimarex Energy Co. definitive Proxy Statement for the May 8, 2019 Annual Meeting of Shareholders. The Proxy Statement will be filed with the Securities and Exchange Commission no later than 120 days subsequent to December 31, 2018 . +ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS +The following table sets forth information with respect to the equity compensation plans available to directors, officers, and employees of the company at December 31, 2018 : +Plan Category +(a) +Number of securities +to be issued upon +exercise of +outstanding options, +warrants, and rights +(b) +Weighted-average +exercise price of +outstanding options, +warrants, and rights +(c) +Number of securities +remaining available +for future issuance +under equity +compensation plans +(excluding securities reflected in column (a)) +Equity compensation plans approved by security holders +420,332 +$ +99.01 +908,278 +Equity compensation plans not approved by security holders +— +— +— +Total +420,332 +$ +99.01 +908,278 +The remaining information required under this item is incorporated by reference from the Cimarex Energy Co. definitive Proxy Statement for the May 8, 2019 Annual Meeting of Shareholders. The Proxy Statement will be filed with the Securities and Exchange Commission no later than 120 days subsequent to December 31, 2018 . +ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE +Information required under this item is incorporated by reference from the Cimarex Energy Co. definitive Proxy Statement for the May 8, 2019 Annual Meeting of Shareholders. The Proxy Statement will be filed with the Securities and Exchange Commission no later than 120 days subsequent to December 31, 2018 . +ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES +Information required under this item is incorporated by reference from the Cimarex Energy Co. definitive Proxy Statement for the May 8, 2019 Annual Meeting of Shareholders. The Proxy Statement will be filed with the Securities and Exchange Commission no later than 120 days subsequent to December 31, 2018 . +102 +Table of Contents +PART IV +ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES +Page +(a) (1) +The following financial statements are included in Item 8 to this 10-K: +Consolidated Balance Sheets as of December 31, 2018 and 2017 +64 +Consolidated Statements of Operations and Comprehensive Income (Loss) for the years ended December 31, 2018, 2017, and 2016 +65 +Consolidated Statements of Cash Flows for the years ended December 31, 2018, 2017, and 2016 +66 +Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2018, 2017, and 2016 +67 +Notes to Consolidated Financial Statements +68 +(2 +) +Financial statement schedules—None +(3 +) +Exhibits: +Exhibits not incorporated by reference to a prior filing are designated by an asterisk (*) and are filed herewith; all exhibits not so designated are incorporated by reference to a prior SEC filing as indicated. All management contracts or compensatory plans or arrangements are designated by a plus sign (+). +Exhibit +Title +2.1 +Agreement and Plan of Merger dated as of November 18, 2018, by and among Cimarex Energy Co., CR Sub 1 Inc., CR Sub 2 LLC and Resolute Energy Corporation (filed as Exhibit 2.1 to Registrant’s Form 8-K (Commission File No. 001-31446) dated November 20, 2018 and incorporated herein by reference). +3.1 +Amended and Restated Certificate of Incorporation of Cimarex Energy Co. (filed as Exhibit 3.1 to Registrant’s Form 8-K (Commission File No. 001-31446) dated June 7, 2005 and incorporated herein by reference). +3.2 +Amended and Restated By-laws of Cimarex Energy Co. dated November 11, 2015 (filed as Exhibits 3.1 and 3.2 to the Current Report on Form 8-K filed on November 12, 2015 (Commission File No. 001-31446) and incorporated herein by reference). +4.1 +Specimen Certificate of Cimarex Energy Co. common stock (filed as Exhibit 4.3 to Registration Statement on Form S-3 filed September 17, 2012 (Registration No. 333-183939) and incorporated herein by reference). +4.2 +Debt Securities Indenture dated as of April 5, 2012, by and among Cimarex Energy Co. and U.S. Bank National Association, as trustee included as Exhibit 4.1 to Registrant’s Current Report on Form 8-K filed on April 5, 2012 (Commission File No. 001-31446) and incorporated herein by reference. +4.3 +First Supplemental Indenture dated as of April 5, 2012, by and among Cimarex Energy Co., the Subsidiary Guarantors party thereto and U.S. Bank National Association, as trustee included as Exhibit 4.2 to Registrant’s Current Report on Form 8-K filed on April 5, 2012 (Commission File No. 001-31446) and incorporated herein by reference. +4.4 +Form of 5.875% Senior Notes due 2022 included in Exhibit 4.2 to the Registrant’s Current Report on Form 8-K filed on April 5, 2012 (Commission File No. 001-31446) and incorporated herein by reference. +4.5 +Indenture dated as of June 4, 2014, by and between Cimarex Energy Co. and U.S. Bank National Association, as trustee included as Exhibit 4.1 to Registrant’s Current Report on Form 8-K filed on June 4, 2014 (Commission File No. 001-31446) and incorporated herein by reference. +103 +Table of Contents +Exhibit +Title +4.6 +First Supplemental Indenture dated as of June 4, 2014, by and among Cimarex Energy Co., the Subsidiary Guarantors party thereto and U.S. Bank National Association, as trustee included as Exhibit 4.2 to Registrant’s Current Report on Form 8-K filed on June 4, 2014 (Commission File No. 001-31446) and incorporated herein by reference. +4.7 +Form of 4.375% Senior Notes due 2024 included in Exhibit 4.2 to the Registrant’s Current Report on Form 8-K filed on June 4, 2014 (Commission File No. 001-31446) and incorporated herein by reference. +4.8 +Form of Indenture by and among Cimarex Energy Co. and U.S. Bank National Association, as trustee (filed as Exhibit 4.7 to Registration Statement on Form S-3 filed September 21, 2015 (Registration No. 333-183939) and incorporated herein by reference). +4.9 +Indenture dated as of April 10, 2017, by and between Cimarex Energy Co. and U.S. Bank National Association, as trustee included as Exhibit 4.1 to Registrant’s Current Report on Form 8-K filed on April 10, 2017 (Commission File No. 001-31446) and incorporated herein by reference. +4.10 +First Supplemental Indenture dated as of April 10, 2017, by and between Cimarex Energy Co. and U.S. Bank National Association, as trustee included as Exhibit 4.2 to Registrant’s Current Report on Form 8-K filed on April 10, 2017 (Commission File No. 001-31446) and incorporated herein by reference. +4.11 +Form of 3.90% Senior Notes due 2027 included in Exhibit 4.2 to the Registrant’s Current Report on Form 8-K filed on April 10, 2017 (Commission File No. 001-31446) and incorporated herein by reference. +10.1 +Credit Agreement dated as of July 14, 2011, among Cimarex, the Administrative Agent, the Co-Syndication Agents, the Co-Documentation Agents and the Lenders filed on July 18, 2011 (Commission File No. 001-31446) as Exhibit 10.l to the Registrant’s Current Report on Form 8-K and incorporated herein by reference. +10.2 +First Amendment to Credit Agreement dated as of July 19, 2012, among Cimarex, the Guarantors, the Administrative Agent, and the Lenders filed on May 5, 2014 (Commission File No. 001-31446) as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K and incorporated herein by reference. +10.3 +Second Amendment to Credit Agreement dated as of May 1, 2014, among Cimarex, the Guarantors, the Administrative Agent, and the Lenders filed on May 5, 2014 (Commission File No. 001-31446) as Exhibit 10.2 to the Registrant’s Current Report on Form 8-K and incorporated herein by reference. +10.4 +Employment Agreement, dated October 25, 1993, by and between Thomas E. Jorden and Key Production Company, Inc. (filed as Exhibit 10.7 to the Registration Statement on Form S-4 dated May 9, 2002 (Registration No. 333-87948) and incorporated herein by reference). + +10.5 +Amendment to Employment Agreement effective January 1, 2009 between Cimarex Energy Co. and Thomas E. Jorden (filed as Exhibit 10.11 to the Annual Report on Form 10-K for the year ended December 31, 2008 filed on February 27, 2009 (Commission File No. 001-31446) and incorporated herein by reference). + +10.6 +Employment Agreement, dated February 2, 1994, by and between Stephen P. Bell and Key Production Company, Inc. (filed as Exhibit 10.8 to the Registration Statement on Form S-4 dated May 9, 2002 (Registration No. 333-87948) and incorporated herein by reference). + +10.7 +Amendment to Employment Agreement effective January 1, 2009 between Cimarex Energy Co. and Stephen P. Bell (filed as Exhibit 10.13 to the Annual Report on Form 10-K for the year ended December 31, 2008 filed on February 27, 2009 (Commission File No. 001-31446) and incorporated herein by reference). + +104 +Table of Contents +Exhibit +Title +10.8 +Employment Agreement, dated March 11, 1994, by and between Joseph R. Albi and Key Production Company, Inc. (filed as Exhibit 10.9 to the Registration Statement on Form S-4 dated May 9, 2002 (Registration No. 333-87948) and incorporated herein by reference). + +10.9 +Amendment to Employment Agreement effective January 1, 2009 between Cimarex Energy Co. and Joseph R. Albi (filed as Exhibit 10.15 to the Annual Report on Form 10-K for the year ended December 31, 2008 filed on February 27, 2009 (Commission File No. 001-31446) and incorporated herein by reference). + +10.10 +Amended and Restated 2002 Stock Incentive Plan of Cimarex Energy Co. effective January 1, 2009 (filed as Exhibit 10.16 to the Annual Report on Form 10-K for the year ended December 31, 2008 filed on February 27, 2009 (Commission File No. 001- 31446) and incorporated herein by reference). + +10.11 +2011 Equity Incentive Plan adopted May 18, 2011 (filed as Appendix A to the Definitive Proxy Statement 14-A filed on March 23, 2011 (Commission File No. 001-31446) and incorporated herein by reference). + +10.12 +Form of Notice of Grant of Award of Performance Stock and Award Agreement (filed as Exhibit 10.2 to Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2011 filed on August 4, 2011 (Commission File no. 001-31446) and incorporated herein by reference). + +10.13 +Form of Notice of Grant of Restricted Stock and Award Agreement (filed as Exhibit 10.3 to Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2011 filed on August 4, 2011 (Commission File no. 001-31446) and incorporated herein by reference). + +10.14 +Form of Notice of Grant of Nonqualified Stock Option and Award Agreement (filed as Exhibit 10.4 to Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2011 filed on August 4, 2011 (Commission File no. 001-31446) and incorporated herein by reference). + +10.15 +Form of Notice of Grant and Award Agreement (Other Stock Award with performance conditions) (filed as Exhibit 10.15 to the Annual Report on Form 10-K for the year ended December 31, 2013 filed on February 26, 2014 (Commission File No. 001-31446) and incorporated herein by reference). + +10.16 +2014 Equity Incentive Plan adopted May 15, 2014 (filed as Appendix A to the Definitive Proxy Statement 14-A filed on April 1, 2014 (Commission File No. 001-31446) and incorporated herein by reference. + +10.17 +Form of Notice of Grant of Restricted Stock (Director) and Award Agreement (filed as Exhibit 10.1 to Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014 filed on August 6, 2014 (Commission File No. 001-31446) and incorporated herein by reference). + +10.18 +Form of Notice of Grant of Nonqualified Stock Option and Award Agreement (filed as Exhibit 10.2 to Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014 filed on August 6, 2014 (Commission File No. 001-31446) and incorporated herein by reference). + +10.19 +Form of Notice of Grant of Restricted Stock and Award Agreement (filed as Exhibit 10.3 to Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014 filed on August 6, 2014 (Commission File No. 001-31446) and incorporated herein by reference). + +10.20 +Form of Notice of Grant of Restricted Stock and Award Agreement (Performance Award) (filed as Exhibit 10.4 to Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014 filed on August 6, 2014 (Commission File No. 001-31446) and incorporated herein by reference). + +10.21 +Form of Notice of Grant of Restricted Stock and Award Agreement (Performance Award) (filed as Exhibit 10.23 to the Annual Report on Form 10-K for the year ended December 31, 2014 filed on February 25, 2015 (Commission File No. 001-31446) and incorporated herein by reference). + +105 +Table of Contents +Exhibit +Title +10.22 +Deferred Compensation Plan for Nonemployee Directors adopted May 19, 2004, as amended and restated effective January 1, 2009 (filed as Exhibit 10.18 to the Annual Report on Form 10-K for the year ended December 31, 2008 filed on February 27, 2009 (Commission File No. 001-31446) and incorporated herein by reference). + +10.23 +Cimarex Energy Co. Supplemental Savings Plan (amended and restated, effective January 1, 2009) (filed as Exhibit 10.19 to the Annual Report on Form 10-K for the year ended December 31, 2008 filed on February 27, 2009 (Commission File No. 001- 31446) and incorporated herein by reference). + +10.24 +Cimarex Energy Co. Change in Control Severance Plan dated effective April 1, 2005, amended and restated effective January 1, 2009 (filed as Exhibit 10.20 to the Annual Report on Form 10-K for the year ended December 31, 2008 filed on February 27, 2009 (Commission File No. 001-31446) and incorporated herein by reference). + +10.25 +Amendment to Cimarex Energy Co. Change in Control Severance Plan dated effective March 19, 2013 (filed as Exhibit 10.1 to the Current Report on Form 8-K filed on March 20, 2013 (Commission File No. 001- 31446) and incorporated herein by reference). + +10.26 +Form of Indemnification Agreement between Cimarex Energy Co. and each of its executive officers and directors (filed as Exhibit 10.20 to the Annual Report on Form 10-K for the year ended December 31, 2012 filed on February 26, 2013 (Commission File No. 001-31446) and incorporated herein by reference). + +10.27 +Credit Agreement Dated as of October 16, 2015, by and among Cimarex, the Administrative Agent, the Syndication Agent, the Documentation Agents, and the Lenders (filed on October 19, 2015 as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (Commission File No. 001-31446) and incorporated herein by reference). +10.28 +Form of Notice of Grant of Restricted Stock (Director) and Award Agreement (filed as Exhibit 10.2 to Registrant’s Form 8-K (Commission File No. 001-31446) dated November 2, 2015 and incorporated herein by reference). + +10.29 +Form of Notice of Grant of Restricted Stock (Director) and Award Agreement (filed as Exhibit 10.1 to Registrant’s Quarterly Report on Form 10-Q filed on August 9, 2017 (Commission File No. 001-31446) and incorporated herein by reference). + +10.30 +Purchase and Sale Agreement dated May 23, 2018 between Cimarex Energy Co., Prize Energy Resources, Inc., and Magnum Hunter Production, Inc. (collectively, as “Seller”) and Callon Petroleum Operating Company as Buyer (filed as Exhibit 10.1 to Registrant’s Current Report on Form 8-K filed on May 24, 2018 (Commission File No. 001-31446) and incorporated herein by reference). +10.31 +Form of Notice of Grant of Restricted Stock and Award Agreement (Performance Award). * + +10.32 +Amended and Restated Credit Agreement Dated as of February 5, 2019, by and among Cimarex, as Borrower, the Administrative Agent, the Syndication Agent, the Co-Documentation Agents, the Lenders, and the Lead Arrangers and Bookrunners (filed on February 7, 2019 as Exhibit 10.1 to the Current Report on Form 8-K (Commission File No. 001-31446) and incorporated herein by reference). +10.33 +Voting Agreement, dated as of November 18, 2018, by and among Cimarex Energy Co. and Monarch Alternative Capital LP, MDRA GP LP and Monarch GP LLC (filed as Exhibit 10.1 to Registrant’s Form 8-K (Commission File No. 001-31446) dated November 20, 2018 and incorporated herein by reference). +10.34 +Voting Agreement, dated as of November 18, 2018, by and among Cimarex Energy Co., John C. Goff and certain other related entities thereto (filed as Exhibit 10.2 to Registrant’s Form 8-K (Commission File No. 001-31446) dated November 20, 2018 and incorporated herein by reference). +106 +Table of Contents +Exhibit +Title +10.35 +Voting Agreement, dated as of November 18, 2018, by and among Cimarex Energy Co. and RR Advisors, LLC (filed as Exhibit 10.3 to Registrant’s Form 8-K (Commission File No. 001-31446) dated November 20, 2018 and incorporated herein by reference). +10.36 +Voting Agreement, dated as of November 18, 2018, by and among Cimarex Energy Co. and Richard Betz (filed as Exhibit 10.4 to Registrant’s Form 8-K (Commission File No. 001-31446) dated November 20, 2018 and incorporated herein by reference). +10.37 +Voting Agreement, dated as of November 18, 2018, by and among Cimarex Energy Co. and Nicholas J. Sutton (filed as Exhibit 10.5 to Registrant’s Form 8-K (Commission File No. 001-31446) dated November 20, 2018 and incorporated herein by reference). +10.38 +Voting Agreement, dated as of November 18, 2018, by and among Cimarex Energy Co. and Theodore Gazulis (filed as Exhibit 10.6 to Registrant’s Form 8-K (Commission File No. 001-31446) dated November 20, 2018 and incorporated herein by reference). +14.1 +Revised Code of Business Conduct and Ethics for Directors, Officers, and Employees dated August 30, 2016 (filed as Exhibit 14.1 and 14.2 to the Current Report on Form 8-K filed September 1, 2016 (Commission File No. 001-31446) and incorporated herein by reference). +21.1 +Significant subsidiaries of the Registrant. * +23.1 +Consent of KPMG LLP. * +23.2 +Consent of DeGolyer and MacNaughton. * +24.1 +Power of Attorney of directors of the Registrant. * +31.1 +Certification of Thomas E. Jorden, Chief Executive Officer of Cimarex Energy Co., pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. * +31.2 +Certification of G. Mark Burford, Chief Financial Officer of Cimarex Energy Co., pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. * +32.1 +Certification of Thomas E. Jorden, Chief Executive Officer of Cimarex Energy Co., pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. * +32.2 +Certification of G. Mark Burford, Chief Financial Officer of Cimarex Energy Co., pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. * +99.1 +Letter dated January 21, 2019 from DeGolyer and MacNaughton, independent petroleum engineering consulting firm, reporting the results of its audit of Cimarex reserves as of December 31, 2018 of certain selected properties. * +101.INS +XBRL Instance Document. * +101.SCH +XBRL Taxonomy Extension Schema Document. * +101.CAL +XBRL Taxonomy Extension Calculation Linkbase Document. * +101.LAB +XBRL Taxonomy Extension Label Linkbase Document. * +107 +Table of Contents +Exhibit +Title +101.PRE +XBRL Taxonomy Extension Presentation Linkbase Document. * +101.DEF +XBRL Taxonomy Extension Definition Linkbase Document. * +ITEM 16. FORM 10-K SUMMARY +None. +108 +Table of Contents +SIGNATURE +Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. +Date: February 20, 2019 +CIMAREX ENERGY CO. +By: +/s/ Thomas E. Jorden +Thomas E. Jorden +Chairman of the Board, Chief Executive Officer, and President +Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. +Signature +Title +Date +/s/ Thomas E. Jorden +Chairman of the Board, Director, Chief Executive Officer, +Thomas E. Jorden +and President (Principal Executive Officer) +February 20, 2019 +* +Director, Executive Vice President — Operations, +Attorney-in-Fact +Chief Operating Officer +February 20, 2019 +Joseph R. Albi +/s/ G. Mark Burford +Vice President and Chief Financial Officer +G. Mark Burford +(Principal Financial Officer) +February 20, 2019 +/s/ Timothy A. Ficker +Vice President, Controller, Chief Accounting Officer +Timothy A. Ficker +(Principal Accounting Officer) +February 20, 2019 +* +Attorney-in-Fact +Director +February 20, 2019 +Hans Helmerich +* +Attorney-in-Fact +Director +February 20, 2019 +David A. Hentschel +* +Attorney-in-Fact +Director +February 20, 2019 +Harold R. Logan, Jr. +* +Attorney-in-Fact +Director +February 20, 2019 +Floyd R. Price +* +Attorney-in-Fact +Director +February 20, 2019 +Monroe W. Robertson +* +Attorney-in-Fact +Director +February 20, 2019 +Lisa A. Stewart +* +Attorney-in-Fact +Director +February 20, 2019 +Michael J. Sullivan +* +Attorney-in-Fact +Director +February 20, 2019 +Frances M. Vallejo +*By: +/s/ G. Mark Burford +Vice President and Chief Financial Officer +G. Mark Burford Attorney-in-Fact +(Principal Financial Officer) +February 20, 2019 +109 \ No newline at end of file diff --git a/raw/filings/0001168054/2018/0001168054-19-000006/filing_metadata.csv b/raw/filings/0001168054/2018/0001168054-19-000006/filing_metadata.csv new file mode 100644 index 0000000000000000000000000000000000000000..b1ec1235ad4a469cb39de9e25d150e0d0cf95a3e --- /dev/null +++ b/raw/filings/0001168054/2018/0001168054-19-000006/filing_metadata.csv @@ -0,0 +1,2 @@ +cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing +0001168054,XEC,CIMAREX ENERGY CO,10-K,2019-02-20,2018-12-31,2019-02-20T22:30:48.000Z,0001168054-19-000006,a12311810kxec.htm,10-K,13256520,1,0,https://www.sec.gov/Archives/edgar/data/1168054/000116805419000006/a12311810kxec.htm,https://www.sec.gov/Archives/edgar/data/1168054/000116805419000006/,2018,2018,1 diff --git a/raw/filings/0001168054/2018/0001168054-19-000006/item1.txt b/raw/filings/0001168054/2018/0001168054-19-000006/item1.txt new file mode 100644 index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391 diff --git a/raw/filings/0001168054/2018/0001168054-19-000006/item13.txt b/raw/filings/0001168054/2018/0001168054-19-000006/item13.txt new file mode 100644 index 0000000000000000000000000000000000000000..a853b8391d24a61c8bb98ce4b756c7af2dc9cad7 --- /dev/null +++ b/raw/filings/0001168054/2018/0001168054-19-000006/item13.txt @@ -0,0 +1,2 @@ +ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE +Information required under this item is incorporated by reference from the Cimarex Energy Co. definitive Proxy Statement for the May 8, 2019 Annual Meeting of Shareholders. The Proxy Statement will be filed with the Securities and Exchange Commission no later than 120 days subsequent to December 31, 2018 . \ No newline at end of file diff --git a/raw/filings/0001168054/2018/0001168054-19-000006/item9a.txt b/raw/filings/0001168054/2018/0001168054-19-000006/item9a.txt new file mode 100644 index 0000000000000000000000000000000000000000..e8f5ad2387e383b524e143bfbd38f701e40f4fae --- /dev/null +++ b/raw/filings/0001168054/2018/0001168054-19-000006/item9a.txt @@ -0,0 +1,35 @@ +ITEM 9A. CONTROLS AND PROCEDURES +EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES +Cimarex’s management, under the supervision and with the participation of the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), have evaluated the effectiveness of Cimarex’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (Exchange Act)) as of December 31, 2018 . Based on that evaluation, the CEO and CFO concluded that the disclosure controls and procedures are effective in providing reasonable assurance that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods required by the U.S. Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to management, including the CEO and CFO, to allow timely decisions regarding required disclosures. +MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING +Cimarex’s management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). The company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. Our internal control over financial reporting also includes those policies and procedures that: +(1) +pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets; +(2) +provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements for external purposes in accordance with generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of management and directors; and +(3) +provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of assets that could have a material effect on the consolidated financial statements. +Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of the effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +As of December 31, 2018 , Cimarex’s management assessed the effectiveness of internal control over financial reporting based on the criteria set forth in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on that assessment, management concluded that the internal control over financial reporting was effective as of December 31, 2018 . +Our independent registered public accounting firm, KPMG LLP, has audited the effectiveness of our internal control over financial reporting and has issued a report as of December 31, 2018 , which follows this report. +CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING +There was no change in our internal control over financial reporting that occurred during our most recent fiscal quarter ended December 31, 2018 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. +98 +Table of Contents +Report of Independent Registered Public Accounting Firm +The Stockholders and Board of Directors +Cimarex Energy Co.: +Opinion on Internal Control over Financial Reporting +We have audited Cimarex Energy Co. and subsidiaries’ (the “Company”) internal control over financial reporting as of December 31, 2018 , based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018 , based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. +We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance sheets of the Company as of December 31, 2018 and 2017 , the related consolidated statements of operations and comprehensive income (loss), stockholders’ equity, and cash flows for each of the years in the three‑year period ended December 31, 2018 , and the related notes (collectively, the consolidated financial statements), and our report dated February 20, 2019 expressed an unqualified opinion on those consolidated financial statements. +Basis for Opinion +The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. +Definition and Limitations of Internal Control Over Financial Reporting +A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. +Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +KPMG LLP +Denver, Colorado +February 20, 2019 +99 +Table of Contents \ No newline at end of file diff --git a/raw/filings/0001168054/2018/0001168054-19-000006/rp_note.txt b/raw/filings/0001168054/2018/0001168054-19-000006/rp_note.txt new file mode 100644 index 0000000000000000000000000000000000000000..aeb7388d684bb218089dfd4912a1d387baed9651 --- /dev/null +++ b/raw/filings/0001168054/2018/0001168054-19-000006/rp_note.txt @@ -0,0 +1,2 @@ +11. RELATED PARTY TRANSACTIONS +Helmerich & Payne, Inc. (“H&P”) provides contract drilling services to Cimarex. Cimarex incurred drilling costs of approximately $80.1 million , $52.6 million , and $18.3 million related to these services during the years ended December 31, 2018 , 2017 , and 2016 , respectively. Hans Helmerich, a director of Cimarex, is Chairman of the Board of Directors of H&P. \ No newline at end of file diff --git a/raw/filings/0001168054/2018/0001168054-19-000006/rpt_disclosure.txt b/raw/filings/0001168054/2018/0001168054-19-000006/rpt_disclosure.txt new file mode 100644 index 0000000000000000000000000000000000000000..1656e42f4975c6698f31b0deded1825aca11705e --- /dev/null +++ b/raw/filings/0001168054/2018/0001168054-19-000006/rpt_disclosure.txt @@ -0,0 +1,29 @@ +Review of related party transactions +Independent Lead Director +Non-hedging and non-pledging policies +Diverse Board skills and experience +Clawback policy +Annual Board and committee self-evaluations +Management and Director stock ownership guidelines +Periodic consultant review of Board skills +No tax gross-ups +Annual equity grants to Directors +Proxy access +Annual Board education +Active shareholder engagement +Shareholder Engagement +Cimarex's relationships with its shareholders are an important part of our corporate governance profile, and we recognize the value of taking +their views into account. Engagement with shareholders helps us understand the larger context and the impact of our operations, learn about expectations for our performance, assess emerging issues +that may affect our business or other aspects of our operations, and shape corporate and governance policies. +In +April and May 2019, we reached out to 29 of our top shareholders who collectively held approximately 66% of our shares to hold calls to discuss our compensation programs and disclosure and ESG +issues. Six shareholders, who collectively held 23% of our shares, accepted our invitations. In these calls, our Senior Vice President—General Counsel and Secretary and our Vice +President—Investor +Relations asked the shareholders their views on pay for performance alignment, the structure of our compensation programs and other concerns. The results of these calls were shared with our +Compensation Committee and the full Board of Directors. While these shareholders generally believed we had alignment with our pay for performance, they had suggestions concerning our short-term and +long-term compensation programs and ESG matters. 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Employer +Identification No.) +1700 Lincoln Street, Suite 3700 +Denver +Colorado +80203 +(Address of principal executive offices) +(Zip Code) +( 303 ) 295-3995 +(Registrant’s telephone number) +Securities registered pursuant to Section 12(b) of the Act: +Title of each class +Trading Symbol(s) +Name of each exchange on which registered +Common Stock ($0.01 par value) +XEC +New York Stock Exchange +Securities Registered Pursuant to Section 12(g) of the Act: None +Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. +Yes ☒ No ☐ +Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒ +Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐ +Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐ +Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. +Large accelerated filer +☒ +Accelerated filer +☐ +Non-accelerated filer +☐ +Smaller reporting company +☐ +Emerging Growth Company +☐ +If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ +Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒ +Aggregate market value of the voting stock held by non-affiliates of Cimarex Energy Co. as of June 30, 2019 was approximately $ 5.92 billion . +Number of shares of Cimarex Energy Co. common stock outstanding as of January 31, 2020 was 102,135,577 . +Documents Incorporated by Reference: Portions of the Registrant’s Proxy Statement for its 2020 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K. +Table of Contents +TABLE OF CONTENTS +DESCRIPTION +Item +Page +Glossary +Part I +1. & 2. +Business and Properties +6 +1A. +Risk Factors +17 +1B. +Unresolved Staff Comments +34 +3. +Legal Proceedings +34 +4. +Mine Safety Disclosures +34 +Part II +5. +Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities +35 +6. +Selected Financial Data +37 +7. +Management’s Discussion and Analysis of Financial Condition and Results of Operations +38 +7A. +Quantitative and Qualitative Disclosures About Market Risk +60 +8. +Financial Statements and Supplementary Data +62 +9. +Changes In and Disagreements with Accountants on Accounting and Financial Disclosure +108 +9A. +Controls and Procedures +108 +9B. +Other Information +111 +Part III +10. +Directors, Executive Officers and Corporate Governance +112 +11. +Executive Compensation +114 +12. +Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters +114 +13. +Certain Relationships and Related Transactions, and Director Independence +114 +14. +Principal Accounting Fees and Services +114 +Part IV +15. +Exhibits, Financial Statement Schedules +115 +16. +Form 10-K Summary +121 +2 +Table of Contents +GLOSSARY +Bbls— Barrels (of oil or natural gas liquids) +Bcf— Billion cubic feet (of natural gas) +BOE— Barrels of oil equivalent +GAAP— Generally accepted accounting principles in the U.S. +Gross Acres or Gross Wells— The total acres or wells, as the case may be, in which a working interest is owned. +MBbls— Thousand barrels +MBOE— Thousand barrels of oil equivalent +Mcf— Thousand cubic feet +MMBbls— Million barrels +MMBtu— Million British thermal units +MMBOE— Million barrels of oil equivalent +MMcf— Million cubic feet +Net Acres or Net Wells— The sum of the fractional working interest owned in gross acres or gross wells expressed in whole numbers and fractions of whole numbers. +Net Production— Gross production multiplied by net revenue interest +NGL or NGLs— Natural gas liquids +PUD— Proved undeveloped +Tcf— Trillion cubic feet +Energy equivalent is determined using the ratio of one barrel of crude oil, condensate, or NGL to six Mcf of natural gas. +3 +Table of Contents +PART I +CAUTIONARY INFORMATION ABOUT FORWARD-LOOKING STATEMENTS +Throughout this Form 10-K, we make statements that may be deemed “forward-looking” statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. In particular, in our Management’s Discussion and Analysis of Financial Condition and Results of Operations, we provide projections of our 2020 capital expenditures. All statements, other than statements of historical facts, that address activities, events, outcomes, and other matters that Cimarex plans, expects, intends, assumes, believes, budgets, predicts, forecasts, projects, estimates, or anticipates (and other similar expressions) will, should, or may occur in the future are forward-looking statements. These forward-looking statements are based on management’s current belief, based on currently available information, as to the outcome and timing of future events. When considering forward-looking statements, you should keep in mind the risk factors and other cautionary statements in this Form 10-K. Forward-looking statements include statements with respect to, among other things: +• +Fluctuations in the price we receive for our oil, gas, and NGL production, including local market price differentials; +• +Operating costs and other expenses; +• +Timing and amount of future production of oil, gas, and NGLs; +• +Reductions in the quantity of oil, gas, and NGLs sold and prices received due to decreased industrywide demand and/or curtailments in production from specific properties or areas due to mechanical, transportation, marketing, weather, or other problems; +• +Estimates of proved reserves, exploitation potential, or exploration prospect size; +• +Our ability to successfully integrate the business acquired from Resolute Energy Corporation (“Resolute”); +• +Unknown liabilities related to Resolute; +• +Our hedging activities and viability of hedge counterparties; +• +The effectiveness of our internal control over financial reporting and our ability to remediate a material weakness in our internal control over financial reporting; +• +Cash flow and anticipated liquidity; +• +Amount, nature, and timing of capital expenditures; +• +Availability of financing and access to capital markets; +• +Administrative, legislative, and regulatory changes; +• +Operating and capital expenditures that are either significantly higher or lower than anticipated because the actual cost of identified projects varied from original estimates and/or from the number of exploration and development opportunities being greater or fewer than currently anticipated; +• +Exploration and development opportunities that we pursue may not result in economic, productive oil and gas properties; +4 +Table of Contents +• +Drilling of wells; +• +Increased financing costs due to a significant increase in interest rates; +• +Proving up undeveloped acreage; and +• +Full cost ceiling test impairments to the carrying values of our oil and gas properties. +We caution you that these forward-looking statements are subject to all of the risks and uncertainties, many of which are beyond our control, incident to the exploration for and development, production, and sale of oil, gas, and NGLs. +These risks include, but are not limited to, commodity price volatility, inflation, lack of availability of goods and services, environmental risks, drilling and other operating risks, regulatory changes, the uncertainty inherent in estimating proved oil and natural gas reserves and in projecting future rates of production, production type curves, well spacing, timing of development expenditures, and other risks described herein. +Reserve engineering is a subjective process of estimating underground accumulations of oil and natural gas that cannot be measured in an exact way. The accuracy of any reserve estimate depends on the quality of available data and the interpretation of such data by our engineers. As a result, estimates made by different engineers often vary from one another. In addition, the results of drilling, testing, and production activities may justify revisions of estimates that were made previously. If significant, such revisions could change the timing of future production and development drilling. Accordingly, reserve estimates are generally different from the quantities of oil and natural gas that are ultimately recovered. +Risk factors related to our acquisition of Resolute include, among others: the risk that problems may arise in successfully integrating the businesses of the companies, which may result in the combined company not operating as effectively and efficiently as expected, the risk that the combined company may be unable to achieve synergies or other anticipated benefits of the transaction or it may take longer than expected to achieve those synergies or benefits, and other important factors, such as expenses related to integration, that could cause actual results to differ materially from those projected. +Should one or more of the risks or uncertainties described above or elsewhere in this Form 10-K cause our underlying assumptions to be incorrect, our actual results and plans could differ materially from those expressed in any forward-looking statements. +All forward-looking statements, express or implied, included in this Form 10-K and attributable to Cimarex are qualified in their entirety by this cautionary statement. This cautionary statement should also be considered in connection with any subsequent written or oral forward-looking statements that Cimarex or persons acting on its behalf may issue. Cimarex does not undertake any obligation to update any forward-looking statements to reflect events or circumstances after the date of filing this Form 10-K with the Securities and Exchange Commission, except as required by law. +5 +Table of Contents +ITEMS 1 AND 2. BUSINESS AND PROPERTIES +General +Cimarex Energy Co., a Delaware corporation formed in 2002, is an independent oil and gas exploration and production company. Our operations are located mainly in Texas, New Mexico, and Oklahoma. Currently our operations are focused in two main areas: the Permian Basin and the Mid-Continent. Our Permian Basin region encompasses west Texas and southeast New Mexico. Our Mid-Continent region consists of Oklahoma and the Texas Panhandle. On our website — www.cimarex.com — you will find our annual reports, proxy statements, and all of our Securities and Exchange Commission (“SEC”) filings, which we make available free of charge. Information contained on our website is not incorporated by reference into this Annual Report. Throughout this Form 10-K we use the terms “Cimarex,” “company,” “we,” “our,” and “us” to refer to Cimarex Energy Co. and its subsidiaries. +Our principal business objective is to increase shareholder value through the profitable long-term growth of our proved reserves and production while seeking to minimize our impact on the communities in which we operate for the long-term. Our strategy centers on maximizing cash flow from producing properties so that we can reinvest in exploration and development opportunities and provide cash returns to shareholders through dividends. We consider merger and acquisition opportunities that enhance our competitive position and we occasionally divest non-strategic assets. Key elements to our approach include: +• +Maintaining a strong financial position; +• +Investing in a diversified portfolio of drilling opportunities; +• +Evaluating projects based on rate-of-return and rank investment decisions; +• +Tracking predicted versus actual results in a centralized exploration management system to provide feedback to improve results; +• +Attracting quality employees and maintaining integrated teams of geoscientists, landmen, and engineers; and +• +Maximizing profitability. +Conservative use of leverage has long been the key to our financial strategy. We believe that low leverage coupled with strong full-cycle returns enables us to better withstand volatility in commodity prices and provide competitive returns and growth to shareholders. See Item 5 Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities — Stock Performance Graph and Item 6 Selected Financial Data for additional financial and operating information for fiscal years 2015 - 2019. +6 +Table of Contents +Proved Oil and Gas Reserves +Our December 31, 2019 total proved reserves grew 5% from prior year-end. Proved undeveloped reserves as a percentage of total proved reserves decreased to 14% from 15% a year ago. We added 119.3 MMBOE of new reserves through extensions and discoveries. Net negative revisions totaled 50.7 MMBOE, which consisted primarily of 47.2 MMBOE in downward price revisions. The change in our proved reserves is as follows: +Proved Reserves +(MBOE) +Reserves at December 31, 2018 +591,195 +Revisions of previous estimates +(50,661 +) +Extensions and discoveries +119,261 +Purchases of reserves +63,019 +Production +(101,645 +) +Sales of reserves +(1,574 +) +Reserves at December 31, 2019 +619,595 +A breakdown by commodity of our proved oil and gas reserves follows: +December 31, +2019 +2018 +2017 +Proved reserves: +Gas (MMcf) +1,532,145 +1,591,321 +1,607,635 +Oil (MBbls) +169,770 +146,538 +137,238 +NGL (MBbls) +194,468 +179,436 +153,860 +Total (MBOE) +619,595 +591,195 +559,037 +Percent developed +86 +% +85 +% +83 +% +The following table summarizes our estimated proved oil and gas reserves by region as of December 31, 2019 . +Gas +(MMcf) +Oil +(MBbls) +NGL +(MBbls) +Total +(MBOE) +% of +Total Proved +Reserves +Mid-Continent +660,161 +21,848 +64,377 +196,252 +32 +% +Permian Basin +870,208 +147,662 +130,007 +422,703 +68 +% +Other +1,776 +260 +84 +640 +— +% +1,532,145 +169,770 +194,468 +619,595 +100 +% +See SUPPLEMENTAL INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED) in Item 8 for further information regarding our reserves. +7 +Table of Contents +Production Volumes, Prices, and Costs +All of our oil and gas assets are located in the United States. We have varying levels of ownership interests in our properties consisting of working, royalty, and overriding royalty interests. Operated wells account for approximately 87% of our proved reserves. +Our 2019 production volumes totaled 278.5 MBOE per day, a 25% increase from 2018 , and were comprised of 41% gas, 31% oil, and 28% NGLs. The following table presents our total and average daily production volumes by region. +Total Production Volumes +Average Daily Production Volumes +Years Ended December 31, +Gas +(MMcf) +Oil +(MBbls) +NGL +(MBbls) +Total +(MBOE) +Gas +(MMcf) +Oil +(MBbls) +NGL +(MBbls) +Total +(MBOE) +2019 +Permian Basin +145,612 +26,376 +18,973 +69,618 +398.9 +72.3 +52.0 +190.8 +Mid-Continent +105,515 +5,033 +9,263 +31,882 +289.1 +13.8 +25.4 +87.3 +Other +440 +54 +18 +145 +1.2 +0.1 +— +0.4 +Total company +251,567 +31,463 +28,254 +101,645 +689.2 +86.2 +77.4 +278.5 +2018 +Permian Basin +92,593 +19,104 +11,499 +46,035 +253.7 +52.3 +31.5 +126.1 +Mid-Continent +112,697 +5,530 +10,474 +34,787 +308.8 +15.2 +28.7 +95.3 +Other +547 +76 +21 +188 +1.4 +0.2 +0.1 +0.5 +Total company +205,837 +24,710 +21,994 +81,010 +563.9 +67.7 +60.3 +221.9 +2017 +Permian Basin +79,521 +16,271 +8,858 +38,382 +217.9 +44.6 +24.3 +105.2 +Mid-Continent +107,463 +4,547 +8,503 +30,960 +294.4 +12.5 +23.3 +84.8 +Other +484 +43 +13 +137 +1.3 +0.1 +— +0.4 +Total company +187,468 +20,861 +17,374 +69,479 +513.6 +57.2 +47.6 +190.4 +8 +Table of Contents +At December 31, 2019 , we had three fields that contained 15% or more of our total proved reserves. These fields are: (i) Watonga-Chickasha in the Cana area of the Mid-Continent, which contained approximately 29% of our total proved reserves; (ii) Dixieland in the Permian Basin in Reeves County Texas, which contained approximately 21% of our total proved reserves; and (iii) Ford West in the Permian Basin in Culberson County Texas, which contained approximately 17% of our total proved reserves. At December 31, 2018 , we had two fields that contained 15% or more of our total proved reserves, Watonga-Chickasha and Ford West. At December 31, 2017 , the only field that contained 15% or more of our total proved reserves was Watonga-Chickasha. Production for these fields is presented in the following table. +Total Production Volumes +Average Daily Production Volumes +Years Ended December 31, +Gas +(MMcf) +Oil +(MBbls) +NGL +(MBbls) +Total +(MBOE) +Gas +(MMcf) +Oil +(MBbls) +NGL +(MBbls) +Total +(MBOE) +2019 +Watonga-Chickasha +89,564 +4,588 +8,688 +28,203 +245.4 +12.6 +23.8 +77.3 +Dixieland +42,570 +8,890 +5,911 +21,897 +116.6 +24.4 +16.2 +60.0 +Ford West +40,843 +5,006 +5,180 +16,993 +111.9 +13.7 +14.2 +46.6 +2018 +Watonga-Chickasha +96,373 +5,094 +9,774 +30,930 +264.0 +14.0 +26.8 +84.7 +Dixieland +10,285 +2,510 +1,328 +5,552 +28.2 +6.9 +3.6 +15.2 +Ford West +30,958 +3,748 +3,804 +12,711 +84.8 +10.3 +10.4 +34.8 +2017 +Watonga-Chickasha +88,557 +4,156 +7,829 +26,744 +242.6 +11.4 +21.4 +73.3 +Dixieland +9,668 +2,279 +1,032 +4,922 +26.5 +6.2 +2.8 +13.5 +Ford West +26,405 +3,370 +2,883 +10,654 +72.3 +9.2 +7.9 +29.2 +9 +Table of Contents +The following table presents the average commodity prices received and production cost per unit of production by region. +Average Realized Price +Production Cost (per BOE) +Years Ended December 31, +Gas +(per Mcf) +Oil +(per Bbl) +NGL +(per Bbl) +2019 +Permian Basin +$ +0.49 +$ +52.55 +$ +12.62 +$ +3.47 +Mid-Continent +$ +1.95 +$ +53.89 +$ +15.47 +$ +3.04 +Other +$ +2.44 +$ +56.52 +$ +15.70 +$ +9.59 +Total Company +$ +1.11 +$ +52.77 +$ +13.55 +$ +3.34 +2018 +Permian Basin +$ +1.69 +$ +54.95 +$ +22.84 +$ +4.37 +Mid-Continent +$ +2.23 +$ +62.31 +$ +21.67 +$ +2.69 +Other +$ +2.97 +$ +58.40 +$ +26.46 +$ +7.63 +Total Company +$ +1.99 +$ +56.61 +$ +22.28 +$ +3.66 +2017 +Permian Basin +$ +2.72 +$ +46.96 +$ +20.25 +$ +4.73 +Mid-Continent +$ +2.78 +$ +47.42 +$ +23.02 +$ +2.60 +Other +$ +2.74 +$ +46.53 +$ +23.11 +$ +9.03 +Total Company +$ +2.76 +$ +47.06 +$ +21.61 +$ +3.79 +Acquisitions and Divestitures +We consider property acquisitions, divestitures, and occasional mergers to enhance our competitive position. Moreover, sales of non-strategic assets are a source of liquidity that we can use to supplement funding of capital expenditures and acquisitions of strategic assets. +On March 1, 2019 , we completed the acquisition of Resolute Energy Corporation (“Resolute”), an independent oil and gas company focused on the acquisition and development of unconventional oil and gas properties in the Delaware Basin area of the Permian Basin of west Texas. This acquisition expanded our footprint in Reeves County, Texas on acreage complementary to our existing Reeves County position. The principal factors considered by management in making this acquisition included: (i) our expectation that Resolute’s assets’ attractive returns are competitive with those in our existing portfolio, (ii) the opportunity to apply our experience and learnings from already operating in this area to generating productivity gains from Resolute’s properties, (iii) the ability to increase our acreage position in the Delaware Basin, and (iv) the expectation that the acquisition will be financially accretive. We paid $325.7 million in cash and issued common and preferred stock valued at an aggregate of $494.6 million , for total consideration transferred of $820.3 million . In addition, we assumed $870.0 million of Resolute’s long-term debt, which we immediately repaid. See Note 13 to the Consolidated Financial Statements for further information. +In 2019 , we sold interests in various non-strategic oil and gas properties for cash proceeds totaling $29 million . +10 +Table of Contents +Exploration and Development Overview +Cimarex has one reportable segment, exploration and production (“E&P”). Our E&P activities take place primarily in two areas: the Permian Basin and the Mid-Continent region. Almost all of our exploration and development (“E&D”) capital is allocated between these two areas. +A summary of our 2019 exploration and development activity by region is as follows: +E&D +Capital +Gross +Wells +Completed +Net +Wells +Completed +(in millions) +Permian Basin +$ +1,048 +131 +75.5 +Mid-Continent +193 +160 +16.6 +Other +1 +— +— +$ +1,242 +291 +92.1 +The Permian Basin encompasses west Texas and southeast New Mexico. Cimarex’s Permian Basin efforts are located in the western half of the Permian Basin known as the Delaware Basin. In 2019 , we began infill development of our Wolfcamp shale assets in the Delaware Basin. Development was focused on the oil-rich Upper Wolfcamp shale in Culberson and Reeves Counties in Texas. The Upper Wolfcamp is being developed with horizontal wells using primarily two-mile laterals. +The Permian Basin produced 190.8 MBOE per day in 2019 , which was 68% of our total company production. Total production from the region increased 51% in 2019 over 2018 . In 2019 , we invested $1.05 billion , or 84% of our total E&D investment, in the Permian Basin and acquired Resolute, as discussed above in Acquisitions and Divestitures . +Our Mid-Continent region consists of Oklahoma and the Texas Panhandle. Our activity in 2019 in the Mid-Continent was focused in the Woodford shale and the Meramec horizon, both in Oklahoma. We focused our efforts on oil development and we continued to refine well completion and spacing in these formations. +11 +Table of Contents +During 2019 , production from the Mid-Continent averaged 87.3 MBOE per day, or 31% of total company production. Total production from the region decreased 8% in 2019 as compared to 2018 . In 2019 , we invested $193 million , or 16% of our total E&D investment, in the Mid-Continent. +Drilling Activity +In 2019 , we completed or participated in the completion of 291 gross ( 92.1 net) wells, of which we operated 119 gross ( 85.3 net) wells. At year-end, we were in the process of drilling or participating in 15 gross ( 5.3 net) wells and there were 95 gross ( 32.4 net) wells waiting on completion. +We completed the following number of developmental wells in the years indicated in the table below. During these years, we completed no exploratory wells. +Wells Completed +2019 +2018 +2017 +Gross +Net +Gross +Net +Gross +Net +Developmental +Productive +289 +90.2 +349 +122.1 +314 +96.4 +Dry +2 +1.9 +— +— +5 +1.6 +Total +291 +92.1 +349 +122.1 +319 +98.0 +At December 31, 2019 , we owned an interest in 9,864 gross ( 2,782 net) productive oil and gas wells. We had working interests in the following number of productive wells by region as of December 31, 2019 : +Gas +Oil +Gross +Net +Gross +Net +Mid-Continent +3,792 +1,435 +729 +186 +Permian Basin +745 +331 +4,469 +823 +Other +112 +5 +17 +2 +4,649 +1,771 +5,215 +1,011 +12 +Table of Contents +Acreage +The following table sets forth the gross and net acres of both developed and undeveloped leases held by Cimarex as of December 31, 2019 . Gross acres are the total number of acres in which we own a working interest. Net acres are the gross acres multiplied by our working interest. +Acreage +Undeveloped +Developed +Total +Gross +Net +Gross +Net +Gross +Net +Mid-Continent +Kansas +18,231 +18,191 +— +— +18,231 +18,191 +Oklahoma +90,502 +60,611 +653,827 +304,570 +744,329 +365,181 +Texas +14,272 +9,356 +123,135 +51,338 +137,407 +60,694 +123,005 +88,158 +776,962 +355,908 +899,967 +444,066 +Permian Basin +New Mexico +68,103 +50,296 +174,320 +119,318 +242,423 +169,614 +Texas +58,632 +39,496 +193,932 +135,636 +252,564 +175,132 +126,735 +89,792 +368,252 +254,954 +494,987 +344,746 +Other +Arizona +2,097,841 +2,097,841 +— +— +2,097,841 +2,097,841 +California +383,487 +383,487 +— +— +383,487 +383,487 +Colorado +30,346 +18,867 +8,950 +1,642 +39,296 +20,509 +Gulf of Mexico +20,000 +11,000 +18,853 +6,381 +38,853 +17,381 +Louisiana +132,808 +129,759 +2,868 +168 +135,676 +129,927 +Michigan +234 +156 +587 +587 +821 +743 +Montana +29,359 +7,698 +7,004 +1,037 +36,363 +8,735 +Nevada +1,007,167 +1,007,167 +440 +1 +1,007,607 +1,007,168 +New Mexico +1,640,646 +1,633,819 +14,282 +2,436 +1,654,928 +1,636,255 +Texas +8,800 +2,695 +23,375 +4,784 +32,175 +7,479 +Utah +79,947 +59,473 +17,078 +1,485 +97,025 +60,958 +Wyoming +90,586 +11,923 +24,447 +4,711 +115,033 +16,634 +Other +100,839 +84,484 +7,362 +3,408 +108,201 +87,892 +5,622,060 +5,448,369 +125,246 +26,640 +5,747,306 +5,475,009 +Total +5,871,800 +5,626,319 +1,270,460 +637,502 +7,142,260 +6,263,821 +13 +Table of Contents +The table below summarizes by year and region our undeveloped acreage expirations in the next five years. In most cases, the drilling of a commercial well will hold the acreage beyond the expiration. +Acreage +2020 +2021 +2022 +2023 +2024 +Gross +Net +Gross +Net +Gross +Net +Gross +Net +Gross +Net +Mid-Continent +10,939 +10,902 +6,235 +6,235 +1,860 +1,860 +284 +284 +— +— +Permian Basin +5,732 +5,732 +4,136 +4,136 +1,641 +1,641 +960 +960 +40 +40 +Other +149,623 +149,593 +10,935 +10,855 +32,977 +31,956 +5,709 +5,594 +904 +648 +166,294 +166,227 +21,306 +21,226 +36,478 +35,457 +6,953 +6,838 +944 +688 +% of undeveloped acreage +2.8 +3.0 +0.4 +0.4 +0.6 +0.6 +0.1 +0.1 +— +— +At December 31, 2019 , we had no proved undeveloped reserves booked on undeveloped acreage that were scheduled for development beyond the expiration dates of the undeveloped acreage. +Marketing +Our oil and gas production is sold under short-term arrangements at market-responsive prices. We sell our oil at prices tied directly or indirectly to field postings. Our gas is sold under price mechanisms related to either monthly or daily index prices on pipelines where we deliver our gas. We sell our NGLs at prices tied to monthly index prices where we deliver our NGLs. +We sell our oil, gas, and NGLs to a broad portfolio of customers, including major energy companies, pipeline companies, local distribution companies, and other end-users. In 2019 , we made sales to two customers that each amounted to 10% or more of our consolidated revenues for 2019 . Sales to those two customers accounted for 29% and 25% , respectively, of our consolidated revenues for 2019 . If any one of our major customers were to stop purchasing our production, we believe there are a number of other purchasers to whom we could sell our production with some delay. If multiple significant customers were to discontinue purchasing our production, we believe there would be challenges initially, but ample markets to handle the disruption. +We regularly monitor the credit worthiness of all our customers and may require parent company guarantees, letters of credit, or prepayments when deemed necessary. Historically, losses associated with uncollectible receivables have not been significant. +Corporate Headquarters and Employees +Our corporate headquarters is located at 1700 Lincoln St., Suite 3700, Denver, Colorado 80203. On December 31, 2019 and 2018 , Cimarex had 987 and 955 employees, respectively. None of our employees are subject to collective bargaining agreements. +Competition +The oil and gas industry is highly competitive, particularly for prospective undeveloped leases and purchases of proved reserves. There is also competition for rigs and related equipment used to drill for and produce oil and gas, however, to a lesser extent in the current market environment. Our competitive position also is highly dependent on our ability to recruit and retain geological, geophysical, and engineering expertise. We compete for prospects, proved reserves, oil-field services, and qualified oil and gas professionals with major and diversified energy companies and other independent operators that have larger financial, human, and technological resources than we do. +14 +Table of Contents +We compete with integrated, independent, and other energy companies for the sale and transportation of our oil, gas, and NGLs to marketing companies and end users. The oil and gas industry competes with other energy industries that supply fuel and power to industrial, commercial, and residential consumers. Many of these competitors have greater financial and human resources than we do. The effect of these competitive factors cannot be predicted. +Proved Reserves Estimation Procedures +Proved oil and gas reserve quantities are based on estimates prepared by Cimarex in accordance with the SEC’s rules for reporting oil and gas reserves. Our reserve definitions conform with definitions of Rule 4-10(a) (1)-(32) of Regulation S-X of the SEC. All of our reserve estimates are maintained by our internal Corporate Reservoir Engineering group, which is comprised of engineers and engineering technicians. The objectives and management of this group are separate from and independent of the exploration and production functions of the company. The primary objective of our Corporate Reservoir Engineering group is to maintain accurate forecasts on all properties of the company through ongoing monitoring and timely updates of operating and economic parameters (production forecasts, prices and regional differentials, operating expenses, ownership, etc.) in accordance with guidelines established by the SEC. This separation of function and responsibility is a key internal control. +Cimarex engineers are responsible for estimates of proved reserves. Corporate engineers interact with the exploration and production departments to ensure all available engineering and geologic data is taken into account prior to establishing or revising an estimate. After preparing the reserves update, the corporate engineers review their recommendations with the Vice President of Corporate Engineering. After approval from the Vice President of Corporate Engineering, the revisions are entered into our reserves database by the engineering technician. +During the course of the year, the Vice President of Corporate Engineering presents summary reserves information to senior management and to our Board of Directors for their review. From time to time, the Vice President of Corporate Engineering also will confer with the Vice President of Exploration, Chief Operating Officer, and the Chief Executive Officer regarding specific reserves-related issues. In addition, Corporate Reservoir Engineering maintains a set of basic guidelines and procedures to ensure that critical checks and reviews of the reserves database are performed on a regular basis. +Together, these internal controls are designed to promote a comprehensive, objective, and accurate reserves estimation process. As an additional confirmation of the reasonableness of our internal estimates, DeGolyer and MacNaughton, an independent petroleum engineering consulting firm, performed an independent evaluation of our estimated net reserves representing greater than 80% of the total future net revenue discounted at 10% attributable to the total interests owned by Cimarex as of December 31, 2019 . The individual primarily responsible for overseeing the review is a Senior Vice President with DeGolyer and MacNaughton and a Registered Professional Engineer in the State of Texas with over 35 years of experience in oil and gas reservoir studies and reserves evaluations. +The technical employee primarily responsible for overseeing the oil and gas reserves estimation process is Cimarex’s Vice President of Corporate Engineering. This individual graduated from the Colorado School of Mines with a Bachelor of Science degree in Engineering and has more than 25 years of practical experience in oil and gas reservoir evaluation. He has been directly involved in the annual reserves reporting process of Cimarex since 2002 and has served in his current role for the past 15 years. +Title to Oil and Gas Properties +We undertake title examination and perform curative work at the time we lease undeveloped acreage, prepare for the drilling of a prospect, or acquire proved properties. We believe title to our properties is good and defensible, and is in accordance with industry standards. Nevertheless, we are involved in title disputes from time to time that result in litigation. Our oil and gas properties are subject to customary royalty interests, liens incidental to operating agreements, tax liens, and other burdens and minor encumbrances, easements, and restrictions. +15 +Table of Contents +Government Regulation +Oil and gas production and transportation is subject to extensive federal, state, and local laws and regulations. Compliance with existing laws often is difficult and costly, but has not had a significant adverse effect on our operations or financial condition. In recent years, we have been most directly impacted by federal and state environmental regulations and energy conservation rules. We are also impacted by federal and state regulation of pipelines and other oil and gas transportation systems. +The states in which we conduct operations establish requirements for drilling permits, the method of developing fields, the size of well spacing units, drilling density within productive formations and the unitization or pooling of properties. In addition, state conservation laws include requirements for waste prevention, establish limits on the maximum rate of production from wells, generally prohibit the venting or flaring of natural gas, and impose certain requirements regarding the ratability of production. +Environmental Regulation. Various federal, state, and local laws regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, directly impact oil and gas exploration, development, and production operations, which consequently impact our operations and costs. These laws and regulations govern, among other things, emissions into the atmosphere, discharges of pollutants into waters, underground injection of waste water, the generation, storage, transportation, and disposal of waste materials, and protection of public health, natural resources, and wildlife. These laws and regulations may impose substantial liabilities for noncompliance and for any contamination resulting from our operations and may require the suspension or cessation of operations in affected areas. +Cimarex is committed to environmental protection and believes we are in material compliance with applicable environmental laws and regulations. We obtain permits for our facilities and operations in accordance with the applicable laws and regulations. There are no known issues that have a significant adverse effect on the permitting process or permit compliance status of any of our facilities or operations. Expenditures are required to comply with environmental regulations. These costs are a normal, recurring expense of operations and not an extraordinary cost of compliance with current government regulations. +We do not anticipate that we will be required under current environmental laws and regulations to expend amounts that will have a material adverse effect on our financial position or operations. However, due to continuing changes in these laws and regulations, we are unable to predict with any reasonable degree of certainty any potential delays in development plans that could arise, or our future costs of complying with governmental requirements. We maintain levels of insurance customary in the industry to limit our financial exposure in the event of a substantial environmental claim resulting from sudden, unanticipated and accidental discharges of oil, produced water, or other substances as well as additional coverage for certain other pollution events. +Gas Gathering and Transportation. The Federal Energy Regulatory Commission (“FERC”) requires interstate gas pipelines to provide open access transportation. FERC also enforces the prohibition of market manipulation by any entity, and the facilitation of the sale or transportation of natural gas in interstate commerce. Interstate pipelines have implemented these requirements, providing us with additional market access and more fairly applied transportation services and rates. FERC continues to review and modify its open access and other regulations applicable to interstate pipelines. +Under the Natural Gas Policy Act (“NGPA”), natural gas gathering facilities are expressly exempt from FERC jurisdiction. What constitutes “gathering” under the NGPA has evolved through FERC decisions and judicial review of such decisions. We believe that our gathering systems meet the test for non-jurisdictional “gathering” systems under the NGPA and that our facilities are not subject to federal regulations. Although exempt from FERC oversight, our natural gas gathering systems and services may receive regulatory scrutiny by state and federal agencies regarding the safety and operating aspects of the transportation and storage activities of these facilities. +16 +Table of Contents +In addition to using our own gathering facilities, we may use third-party gathering services or interstate transmission facilities (owned and operated by interstate pipelines) to ship our gas to markets. +Additional proposals and proceedings that might affect the oil and gas industry are pending before the U.S. Congress, FERC, Bureau of Land Management (“BLM”), U.S. Environmental Protection Agency (“EPA”), state legislatures, state agencies, local governments, and the courts. We cannot predict when or whether any such proposals may become effective and what effect they will have on our operations. We do not anticipate that compliance with existing federal, state, and local laws, rules, or regulations will have a material adverse effect upon our capital expenditures, earnings, or competitive position. +Federal and State Income and Other Local Taxation +Cimarex and the petroleum industry in general are affected by both federal and state income tax laws, as well as other local tax regulations involving ad valorem, personal property, franchise, severance, and other excise taxes. We have considered the effects of these provisions on our operations and do not anticipate that they will cause any material undisclosed impact on our capital expenditures, earnings, or competitive position. +Executive Officers of the Registrant +See Part III, Item 10, Directors, Executive Officers and Corporate Governance for information regarding our executive officers as of February 26, 2020 . +ITEM 1A. RISK FACTORS +The following risks and uncertainties, together with other information set forth in this Form 10-K, should be carefully considered by current and future investors in our securities. These risks and uncertainties are not the only ones we face. Additional risks and uncertainties presently unknown to us or currently deemed immaterial also may impair our business operations. The occurrence of one or more of these risks or uncertainties could materially and adversely affect our business, financial condition, and results of operations, which in turn could negatively impact the value of our securities. +Risks Concerning Cimarex and its Operations +Oil, gas, and NGL prices fluctuate due to a number of factors beyond our control, creating a component of uncertainty in our development plans and overall operations. Declines in prices adversely affect our financial results and rate of growth in proved reserves and production. +Oil and gas markets are volatile. We cannot predict future prices. The prices we receive for our production heavily influence our revenue, profitability, access to capital, and future rate of growth. The prices we receive depend on numerous factors beyond our control. These factors include, but are not limited to, changes in domestic and global supply and demand for oil and gas, the level of domestic and global oil and gas exploration and production activity, pipeline capacity constraints limiting takeaway and increasing basis differentials, geopolitical instability, the actions of the Organization of Petroleum Exporting Countries, weather conditions, technological advances affecting energy consumption, governmental regulations and taxes, and the price and technological advancement of alternative fuels. +Our proved oil and gas reserves and production volumes will decrease unless those reserves are replaced with new discoveries or acquisitions. Accordingly, for the foreseeable future, we expect to make substantial capital investments for the exploration and development of new oil and gas reserves. Historically, we have paid for these types of capital expenditures with cash flow provided by our production operations, our revolving credit facility, and proceeds from the sale of senior notes or equity. Low prices reduce our cash flow and the amount of oil and gas that we can economically produce and may cause us to curtail, delay, or defer certain exploration and development projects. +17 +Table of Contents +Moreover, low prices may impact our abilities to borrow under our revolving credit facility and to raise additional debt or equity capital to fund acquisitions. +If prices decrease, we may be required to take write-downs of the carrying values of our oil and gas properties and/or our goodwill. +Accounting rules require that we periodically review the carrying value of our oil and gas properties and goodwill for possible impairment. +In 2019 , we recognized a ceiling test impairment of $618.7 million . The impairment resulted primarily from the impact of decreases in the trailing twelve-month average prices for oil, gas, and NGLs utilized in determining the estimated future net cash flows from proved reserves. We did not recognize any ceiling test impairments in 2018 or 2017 because the calculated value of the ceiling limitation exceeded the carrying value of our oil and gas properties subject to the test. Because the ceiling calculation uses trailing twelve-month average commodity prices, the effect of increases and decreases in period-over-period prices can significantly impact the ceiling limitation calculation. Impairment charges do not affect cash flow from operating activities, but do adversely affect our net income and various components of our balance sheet. +We evaluate our goodwill for impairment annually and whenever events or changes in circumstances indicate the possibility that goodwill may be impaired. We have had no goodwill impairments during the years ended December 31, 2019 , 2018, and 2017 . +Ineffective internal controls could impact our business and financial results. +Our internal control over financial reporting may not prevent or detect misstatements because of its inherent limitations, including the possibility of human error, the circumvention or overriding of controls, or fraud. Even effective internal controls can provide only reasonable assurance with respect to the preparation and fair presentation of financial statements. If we fail to maintain the adequacy of our internal controls, including any failure to implement required new or improved controls, or if we experience difficulties in their implementation, our business and financial results could be harmed and we could fail to meet our financial reporting obligations. For example, at December 31, 2016, management concluded that a deficiency in the design of our internal controls related to the full cost ceiling test calculation represented a material weakness in our internal control over financial reporting and, therefore, that we did not maintain effective internal control over financial reporting as of December 31, 2016, as reported in our Form 10-K/A for that period. We have since remediated this material weakness. However, in connection with the preparation of this Form 10-K, management evaluated the effectiveness of our internal control over financial reporting as of December 31, 2019 and concluded that we did not have an effective process and control in place to periodically evaluate the quantitative effect associated with the inclusion or exclusion of certain inputs, such as skim oil and drip liquids, in the Company’s oil and gas reserve database used in the ceiling test impairment calculations, depletion calculations, and the preparation of the related disclosures included in the supplemental information on oil and gas producing activities (unaudited), which represents a material weakness in our internal control over financial reporting and, therefore, that we did not maintain effective internal control over financial reporting as of December 31, 2019 . For a description of the material weakness identified by management and the remediation efforts being implemented for that material weakness, see “Part II, Item 9A — Controls and Procedures.” If the new controls implemented to address the material weakness and to strengthen the overall internal control related to the reserve reporting process are not designed or do not operate effectively, if we are unsuccessful in implementing or following these new controls, or we are otherwise unable to remediate this material weakness, this may result in untimely or inaccurate reporting of our financial statements. +U.S. or global financial markets may impact our business and financial condition. +A credit crisis or other turmoil in the U.S. or global financial system may have a negative impact on our business and our financial condition. Our ability to access the capital markets may be restricted at a time when we would like, or need, to raise financing. This could have an impact on our flexibility to react to changing economic and +18 +Table of Contents +business conditions. Deteriorating economic conditions could have a negative impact on our lenders, the purchasers of our oil and gas production, and the working interest owners in properties we operate, causing them to fail to meet their obligations to us. +Failure to economically replace oil and gas reserves could negatively affect our financial results and future rate of growth; exploration and development involves numerous risks. +In order to replace the reserves depleted by production and to maintain or increase our total proved reserves and overall production levels, we must either locate and develop new oil and gas reserves or acquire proved reserves from others. This requires significant capital expenditures and can impose reinvestment risk for us, as we may not be able to continue to replace our reserves economically. While we occasionally may seek to acquire proved reserves, our main business strategy is to grow through exploration and drilling. Without successful exploration and development, our reserves, production, and revenues could decline rapidly, which would negatively impact the results of our operations. +Exploration and development involves numerous risks, including new governmental regulations and the risk that we will not discover any commercially productive oil or gas reservoirs. Additionally, it can be unprofitable, not only from drilling dry holes but also from drilling productive wells that do not return a profit because of insufficient reserves or declines in commodity prices. +Our drilling operations may be curtailed, delayed, or canceled for many reasons. Factors such as unforeseen poor drilling conditions, title problems, unexpected pressure irregularities, equipment failures, accidents, adverse weather conditions, compliance with environmental and other governmental requirements, bans, moratoria, or other restrictions implemented by local governments and the cost of, or shortages or delays in the availability of, drilling and completion services could negatively impact our drilling operations. +Our proved reserve estimates may be inaccurate and future net cash flows are uncertain. +Estimates of total proved oil and gas reserves (consisting of proved developed and proved undeveloped reserves) and associated future net cash flow depend on a number of variables and assumptions. Refer to CAUTIONARY INFORMATION ABOUT FORWARD-LOOKING STATEMENTS in Part I of this report. Among others, changes in any of the following factors may cause actual results to vary considerably from our estimates: +• +oil, gas, and NGL prices; +• +timing of development expenditures; +• +amount of required capital expenditures and associated economics; +• +recovery efficiencies, decline rates, drainage areas, and reservoir limits; +• +anticipated reservoir and production characteristics and interpretations of geologic and geophysical data; +• +production rates, reservoir pressure, unexpected water encroachment, and other subsurface conditions; +• +governmental regulation; +• +access to assets restricted by local government action; +• +operating costs; +• +property, severance, excise, and other taxes incidental to oil and gas operations; +19 +Table of Contents +• +workover and remediation costs; and +• +federal and state income taxes. +Our proved oil and gas reserve estimates are prepared by Cimarex engineers in accordance with guidelines established by the SEC. DeGolyer and MacNaughton, an independent petroleum engineering consulting firm, performed an independent evaluation of our estimated net reserves representing greater than 80% of the total future net revenue discounted at 10%, as of December 31, 2019 . +The cash flow amounts referred to in this filing should not be construed as the current market value of our proved reserves. In accordance with SEC guidelines, the estimated discounted net cash flow from proved reserves is based on the average of the previous twelve months’ first-day-of-the-month prices and costs as of the date of the estimate, whereas actual future prices and costs may be materially different. +Our business depends on oil and gas pipeline and transportation facilities, some of which are owned by others. +In addition to the existence of adequate markets, our oil and gas production depends in large part on the proximity and capacity of pipeline systems, as well as storage, transportation, processing and fractionation facilities, most of which are owned by third parties. The inability to transport one commodity, such as gas, could also impair our ability to produce and sell other commodities, such as oil and NGLs, produced from the same wells. The lack of availability or the lack of capacity on these systems and facilities could result in the curtailment of production or the delay or discontinuance of drilling plans. This is more likely in remote areas with less established infrastructure, such as our Delaware Basin area where we and competitors have significant development activities. The lack of availability of or capacity in these facilities or the loss of these facilities due to construction delays, weather, fire, or other reasons, for an extended period of time could negatively affect our revenues. +Commodity price derivative transactions may limit our potential gains and involve other risks. +To limit our exposure to price risk, we enter into derivative agreements from time to time. Commodity price derivatives limit volatility and increase the predictability of a portion of our cash flow. These transactions also limit our potential gains when oil and gas prices exceed the prices established by the derivatives. +In certain circumstances, derivative transactions may expose us to the risk of financial loss, including instances in which: +• +the counterparties to our derivative agreements fail to perform; +• +there is a sudden unexpected event that materially increases oil and gas prices; or +• +there is a widening of price basis differentials between delivery points for our production and the delivery point assumed in the derivative agreement. +Because we account for derivative contracts under mark-to-market accounting, during periods we have derivative transactions in place we expect continued volatility in derivative gains and losses on our statement of operations as changes occur in the relevant price indexes. +20 +Table of Contents +We have been an early entrant into new or emerging resource plays. As a result, our drilling results in these areas are uncertain. The value of our undeveloped acreage may decline and we may incur impairment charges if drilling results are unsuccessful. +New or emerging oil and gas resource plays have limited or no production history. Consequently, in those areas it is difficult to predict our future drilling costs and results. Therefore, our cost of drilling, completing, and operating wells in these areas may be higher than initially expected. Similarly, our production may be lower than initially expected, and the value of our undeveloped acreage may decline if our results are unsuccessful. As a result, we may be required to impair the carrying value of our undeveloped acreage in new or emerging plays. +Furthermore, unless production is established during the primary term of certain of our undeveloped oil and gas leases, the leases will expire, and we will lose our right to develop those properties. +Competition in our industry is intense and many of our competitors have greater financial and technological resources. +We operate in the competitive area of oil and gas exploration and production. Many of our competitors are large, well-established companies that have larger operating staffs and greater capital resources. These competitors may be willing to pay more for exploratory prospects and productive oil and gas properties. They may also be able to define, evaluate, bid for, and purchase a greater number of properties and prospects than our financial or human resources permit. +Because our activity is also concentrated in areas of heavy industry competition, there is heightened demand for personnel, equipment, power, services, facilities, and resources, resulting in higher costs than in other areas. Such intense competition also could result in delays in securing, or the inability to secure, the personnel, equipment, power, services, resources, or facilities necessary for our development activities, which could negatively impact our production volumes. We also face higher costs in remote areas where vendors can charge higher rates due to that remoteness and the inability to attract employees to those areas, as well as the vendors’ ability to deploy their resources in easier-to-access areas. +We are subject to complex laws and regulations that can adversely affect the cost, manner, and feasibility of doing business. +Exploration, production, and the sale of oil and gas are subject to extensive laws and regulations, including those implemented to protect the environment, human health and safety, and wildlife. Federal, state, and local regulatory agencies frequently require permitting and impose conditions on our activities. During the permitting process, these regulatory agencies often exercise considerable discretion in both the timing and scope of the permits, and the public, including special interest groups, often has an opportunity to influence the timing and outcome of the process. The requirements or conditions imposed by these agencies can be costly and can delay the commencement of our operations. In addition, a number of initiatives were put forth by the Obama administration in the form of Presidential or Secretarial Memoranda, which are still in effect, and have the potential to impact the cost of doing business or could result in substantial delays in permitting, drilling, and other oil and gas activities. +Failing to comply with any of the applicable laws and regulations, or Presidential initiatives, could result in the suspension or termination of our operations and subject us to administrative, civil, and criminal liabilities and penalties. Such costs could have a material adverse effect on both our financial condition and operations. +Environmental matters and costs can be significant. +As an owner, lessee, or operator of oil and gas properties, we are subject to various complex, stringent, and constantly evolving environmental laws and regulations. Our operations inherently create the risk of environmental liability to the government and private parties stemming from our use, generation, handling, and disposal of water and +21 +Table of Contents +waste materials, as well as the release of hydrocarbons or other substances into the air, soil, or water. The environmental laws and regulations to which we are subject impose numerous obligations applicable to our operations, including: the acquisition of permits before conducting regulated activities associated with drilling for and producing oil and gas; the restriction of types, quantities, and concentration of materials that can be released into the environment; the limitation or prohibition of drilling activities on certain lands lying within wilderness, wetlands, waters of the United States, and other protected areas; the application of specific health and safety criteria addressing worker protection; and the imposition of substantial liabilities for pollution resulting from our operations. Numerous governmental authorities, such as the EPA and analogous state agencies have the power to enforce compliance with these laws and regulations and the permits issued under them. Such enforcement actions often involve taking difficult and costly compliance measures or corrective actions. Failure to comply with these laws and regulations may result in the assessment of sanctions, including administrative, civil, or criminal penalties, the imposition of investigatory or remedial obligations, and the issuance of orders limiting or prohibiting some or all of our operations. In addition, we may experience delays in obtaining, or be unable to obtain, required permits, which may delay or interrupt our operations and limit our growth and revenue. +Liabilities under certain environmental laws can be joint and several and may in some cases be imposed regardless of fault on our part such as where we own a working interest in a property operated by another party. We also could be held liable for damages or remediating lands or facilities previously owned or operated by others regardless of whether such contamination resulted from our own actions and regardless if we were in compliance with all applicable law at the time. Further, claims for damages to persons or property, including natural resources, may result from the environmental, health, and safety impacts of our operations. Because these environmental risks generally are not fully insurable and can result in substantial costs, such liabilities could have a material adverse effect on both our financial condition and operations. +Our financial condition and results of operations may be materially adversely affected if we incur costs and liabilities due to a failure to comply with environmental regulations or a release of hazardous substances into the environment. +Our operations are subject to environmental laws and regulations relating to the management and release of hazardous substances, pollutants, solid and hazardous wastes, and petroleum hydrocarbons. These laws generally regulate the generation, storage, treatment, discharge, transportation, and disposal of pollutants and solid and hazardous waste and may impose strict and, in some cases, joint and several liability for the investigation and remediation of affected areas where hazardous substances may have been released or disposed. The most significant of these environmental laws are as follows: +• +The Comprehensive Environmental Response, Compensation, and Liability Act, as amended, referred to as CERCLA or the Superfund law, and comparable state laws, which imposes liability on generators, transporters, and arrangers of hazardous substances at sites where hazardous substance releases have occurred or are threatening to occur; +• +The Oil Pollution Act of 1990 (“OPA”), under which owners and operators of onshore facilities and pipelines, lessees or permittees of an area in which an offshore facility is located, and owners and operators of vessels are liable for removal costs and damages that result from a discharge of oil into navigable waters of the United States; +• +The Resource Conservation and Recovery Act (“RCRA”), as amended, and comparable state statutes, which governs the treatment, storage, and disposal of solid waste; +• +The Federal Water Pollution Control Act, as amended, also known as the Clean Water Act (“CWA”), which governs the discharge of pollutants, including natural gas wastes, into federal and state waters; +• +The Safe Drinking Water Act (“SDWA”), which governs the disposal of wastewater in underground injection wells; and +22 +Table of Contents +• +The Clean Air Act (“CAA”) which governs the emission of pollutants into the air. +We believe we are in substantial compliance with the requirements of CERCLA, OPA, RCRA, CWA, SDWA, CAA and related state and local laws and regulations. We also believe we hold all necessary and up-to-date permits, registrations, and other authorizations required under such laws and regulations. Although the current costs of managing our wastes as they presently are classified are reflected in our budget, any legislative or regulatory reclassification of oil and gas exploration and production wastes could increase our costs to manage and dispose of such wastes and have a material adverse effect on our financial condition and operations. +Federal regulatory initiatives relating to the protection of threatened or endangered species could result in increased costs and additional operating restrictions or delays. +The Federal Endangered Species Act (“ESA”) was established to protect endangered and threatened species. Pursuant to the ESA, if a species is listed as threatened or endangered, restrictions may be imposed on activities adversely affecting that species’ habitat. The U.S. Fish and Wildlife Service (“FWS”) may designate critical habitat and suitable habitat areas it believes are necessary for survival of a threatened or endangered species. A critical habitat or suitable habitat designation could result in further material restrictions to federal land use and may materially delay or prohibit land access for oil and gas development. Similar protections are offered to migratory birds under the Migratory Bird Treaty Act. We conduct operations on federal oil and gas leases in areas where certain species are currently listed as threatened or endangered, or could be listed as such, under the ESA. Operations in areas where threatened or endangered species or their habitat are known to exist may require us to incur increased costs to implement mitigation or protective measures and also may restrict or preclude our drilling activities in those areas or during certain seasons, such as breeding and nesting seasons. On March 27, 2014, the FWS announced the listing of the lesser prairie chicken, whose habitat is over a five-state region, including Texas, New Mexico, and Oklahoma, where we conduct operations, as a threatened species under the ESA. Listing of the lesser prairie chicken as a threatened species imposes restrictions on disturbances to critical habitat by landowners and drilling companies that would harass, harm, or otherwise result in a “taking” of this species. However, the FWS also announced a final rule that will limit regulatory impacts on landowners and businesses from the listing if those landowners and businesses have entered into certain range-wide conservation planning agreements, such as those developed by the Western Association of Fish and Wildlife Agencies (“WAFWA”), pursuant to which such parties agreed to take steps to protect the lesser prairie chicken’s habitat and to pay a mitigation fee if its actions harm the lesser prairie chicken’s habitat. We entered into a voluntary Candidate Conservation Agreement (“CCA”) with the WAFWA, whereby we agreed to take certain actions and limit certain activities, such as limiting drilling on certain portions of our acreage during nesting seasons, in an effort to protect the lesser prairie chicken. On February 9, 2018, the FWS announced the listing of the Texas Hornshell, a fresh water mussel species in areas including New Mexico and Texas where we operate in the Permian Basin, as an endangered species. In March 2018, we entered into a CCA concerning voluntary conservation actions with respect to the Texas Hornshell. Participating in CCAs could result in increased costs to us from species protection measures, time delays or limitations on drilling activities, which costs, delays or limitations may be significant. Listing petitions continue to be filed with the FWS which could impact our operations. Many non-governmental organizations (“NGOs”) work closely with the FWS regarding the listing of many species, including species with broad and even nationwide ranges. The recent listing of the Mexican Long Nosed bat, whose habitat includes the Permian Basin where we operate, and the Dunes Sagebrush Lizard in the Permian Basin, are examples of the NGOs’ influence on ESA listing decisions. The increase in endangered species listings may impact our ability to explore for or produce oil and gas in certain areas and increase our costs. +Our hydraulic fracturing activities are subject to risks that could negatively impact our operations and profitability. +We use hydraulic fracturing for the completion of almost all of our wells. Hydraulic fracturing is a process that involves pumping fluid and proppant at high pressure into a hydrocarbon bearing formation to create and hold open fractures. Those fractures enable gas or oil to move through the formation’s pores to the well bore. Typically, the fluid used in this process is primarily water. In plays where hydraulic fracturing is necessary for successful development, the demand for water may exceed the supply. A lack of readily available water or a significant increase in the cost of water could cause delays or increased completion costs. +23 +Table of Contents +Certain federal agencies have asserted regulatory authority over aspects of the hydraulic fracturing process. The EPA, for example, has issued regulations under the federal Clean Air Act establishing performance standards for oil and gas activities, including standards for the capture of air emissions released during hydraulic fracturing. In 2016, the EPA finalized regulations that prohibit the discharge of wastewater from hydraulic fracturing operations to publicly owned wastewater treatment plants and issued a report finding that certain aspects of hydraulic fracturing, such as water withdrawals and wastewater management practices, could impact water resources. The BLM previously finalized regulations to regulate hydraulic fracturing on federal lands but subsequently issued a repeal of those regulations in 2017. States in which we operate also have adopted, or stated intentions to adopt, laws or regulations that mandate further restrictions on hydraulic fracturing, such as imposing more stringent permitting, disclosure and well-construction requirements on hydraulic fracturing operations and establishing standards for the capture of air emissions released during hydraulic fracturing. In addition to state laws, local land use restrictions, such as city ordinances, may restrict drilling in general or hydraulic fracturing in particular. +Moreover, policy makers, regulatory agencies and political candidates at the federal, state and local levels have proposed implementing stricter restrictions on hydraulic fracturing, including banning the process outright. For example, certain 2020 candidates for President of the United States have pledged to impose a ban on hydraulic fracturing. It is possible such restrictions could target industry activity on federal lands, which could adversely impact our operations in the Delaware Basin, as well as other areas where we operate under federal leases. As of December 31, 2019, approximately 3% of our total net leasehold resides on federal lands, and approximately 43% of our total net leasehold in the Delaware Basin is located on federal lands. Although it is not possible at this time to predict the outcome of these or other proposals, any new restrictions on hydraulic fracturing that may be imposed in areas in which we conduct business could potentially result in increased compliance costs, delays or cessation in development or other restrictions on our operations. +Any of the above factors could have a material adverse effect on our financial position, results of operations, or cash flows and could make it more difficult, costly or impossible for us to perform hydraulic fracturing to stimulate production from future wells. Restrictions on hydraulic fracturing also could reduce the amount of oil and gas that we are ultimately able to produce from our reserves. +The adoption of climate change legislation or regulations restricting emission of greenhouse gases, investor pressure concerning climate-related disclosures, and lawsuits could result in increased operating costs and reduced demand for the oil and gas we produce as well as reductions in the availability of capital. +Studies have found that emission of certain gases, commonly referred to as greenhouse gases (“GHGs”), impact the earth’s climate. Methane, a primary component of natural gas, and carbon dioxide, also present in natural gas as a secondary product, sometimes considered an impurity or a by-product of the burning of oil and natural gas, are examples of GHGs. The U.S. Congress and various states have been evaluating, and in some cases implementing, climate-related legislation and other regulatory initiatives that restrict emissions of GHGs. In December 2009, the EPA published its findings that emissions of GHGs present an endangerment to public health and the environment because emissions of such gases are contributing to the warming of the earth’s atmosphere and other climatic changes. Based on these findings, the EPA adopted regulations under existing provisions of the Federal Clean Air Act that establish Prevention of Significant Deterioration (“PSD”) and Title V permit reviews for GHG emissions from certain large stationary sources. Facilities required to obtain PSD and/or Title V permits under EPA’s GHG Tailoring Rule for their GHG emissions also may be required to meet “Best Available Control Technology” standards that will be established by the states or, in some cases, by the EPA on a case-by-case basis. The EPA has also adopted rules requiring the monitoring and reporting of GHG emissions from specified sources in the United States, including, among others, certain oil and gas production facilities on an annual basis, which includes certain of our operations. In recent proposed rulemaking, EPA is widening the scope of annual GHG reporting to include not only activities associated with completion and workover of gas wells with hydraulic fracturing and activities associated with oil and gas production operations, but also completions and workovers of oil wells with hydraulic fracturing, gathering and boosting systems, and transmission pipelines. +24 +Table of Contents +While Congress has from time to time considered legislation to reduce emissions of GHGs, there has not been significant activity in the form of adopted legislation to reduce GHG emissions at the federal level in recent years. In the absence of such federal climate legislation, a number of state and regional efforts have emerged that are aimed at tracking and/or reducing GHG emissions by means of cap and trade programs that typically require major sources of GHG emissions, such as electric power plants, to acquire and surrender emission allowances in return for emitting those GHGs. While we expect new legislation and regulations to increase the cost of business, at this time it is not possible to quantify the impact on our business. Any such future laws and final regulations that require reporting of GHGs or otherwise limit emissions of GHGs from our equipment and operations could require us to incur costs to develop and implement best management practices aimed at reducing GHG emissions, install and maintain emissions control technologies, as well as monitor and report on GHG emissions associated with our operations, which would increase our operating costs, and such requirements also could adversely affect demand for the oil and gas that we produce. +With respect to more comprehensive regulation, policy makers and political candidates have made, or expressed support for, a variety of proposals, such as the development of cap-and-trade or carbon tax programs, as well as the more sweeping “green new deal” resolutions introduced in Congress in early 2019. As generally proposed, a cap-and-trade program would cap overall greenhouse gas emissions on an economy-wide basis and require major sources of greenhouse gas emissions or major fuel producers to acquire and surrender emission allowances, while a carbon tax could impose taxes based on emissions from our operations and downstream uses of our products. The “green new deal” resolutions call for a 10-year national mobilization effort to, among other things, transition 100% of power demand in the U.S. to zero-emission sources and overhaul transportation systems in the U.S. to remove greenhouse gas emissions as much as is technologically feasible. +The following is a summary of potential climate-related risks that could adversely affect Cimarex: +Transition Risks. Transition risks are risks related to the transition to a lower-carbon economy and include policy, legal, technology, and market risks. +Policy and Legal Risks. Policy risks include policy actions that attempt to contract actions that contribute to adverse effects of climate change or policy actions that seek to promote adaptation to climate change. Examples include implementing carbon-pricing mechanisms to reduce GHG emissions (which would increase the costs of our doing business), shifting energy use toward lower emission sources (which could lower demand for our oil and gas production, resulting in lower prices and lower revenues), adopting energy-efficiency solutions (which also could lower demand for our oil and gas production, resulting in lower prices and lower revenues), encouraging greater water efficiency measures (which would increase our costs of production), and promoting more sustainable land-use practices (which also would increase our costs of production and could impact our ability to operate in certain areas). Policy actions also may include restrictions or bans on oil and gas activities, including bans on hydraulic fracturing proposed by Democratic presidential candidates, which could lead to write-downs or impairments of our assets. Legal and litigation risks include potential lawsuits claiming failure to mitigate impacts of climate change, failure to adapt to climate change, and the insufficiency of disclosure around material financial risks. +Technology Risk. Technological improvements or innovations that support the transition to a lower-carbon, more energy efficient economic system may have a significant impact on Cimarex. The development and use of emerging technologies such as renewable energy, battery storage, and energy efficiency may lower demand for oil and gas, resulting in lower prices and revenues, and increase our costs. +Market Risk. Markets could be affected by climate change through shifts in supply and demand for certain commodities, especially carbon-intensive commodities such as oil and gas and other products dependent on oil and gas, as climate-related risks and opportunities are increasingly taken into account. This could lower demand for our oil and gas production, resulting in lower prices and lower revenues. Market risk also may take the form of limited access to capital as investors shift investments to less carbon-intensive industries and alternative energy industries. In +25 +Table of Contents +addition, there have also been efforts in recent years to influence the investment community, including investment advisers and certain sovereign wealth, pension, and endowment funds promoting divestment of fossil fuel equities and pressuring lenders to limit funding to companies engaged in the extraction of fossil fuel reserves. Such environmental activism and initiatives aimed at limiting climate change and reducing air pollution could interfere with our business activities, operations, and ability to access capital. Furthermore, claims have been made against certain energy companies alleging that GHG emissions from oil, NGL, and gas operations constitute a public nuisance under federal and/or state common law. As a result, private individuals or public entities may seek to enforce environmental laws and regulations against us and could allege personal injury, property damages, or other liabilities. While we are currently not a party to any such litigation, we could be named in actions making similar allegations. An unfavorable ruling in any such case could significantly impact our operations and could have an adverse impact on our financial condition. +Reputation Risk. Climate change has been identified as a potential source of reputational risk tied to changing customer or community perceptions of an organization’s contribution to or detraction from the transition to a lower-carbon economy. This could lower demand for our oil and gas production, resulting in lower prices and lower revenues as consumers avoid carbon-intensive industries. This may also put pressure on investment managers to shift investments to less carbon-intensive industries and alternative energy industries, limiting our access to capital. +Physical Risks . Potential physical risks resulting from climate change may be event driven (including increased severity of extreme weather events, such as hurricanes or floods) or longer-term shifts in climate patterns that may cause sea level rise or chronic heat waves. Potential physical risks may cause direct damage to assets and indirect impacts such as supply chain disruption. Potential physical risks also include changes in water availability, sourcing, and quality, which could impact drilling and completions operations. These physical risks could cause increased costs, production disruptions, and lower revenues, and also could substantially increase the cost or limit the availability of insurance. +Legislation or regulatory initiatives intended to address seismic activity could restrict our ability to engage in hydraulic fracturing during completion operations and to dispose of saltwater produced in connection with our oil and gas production, which could limit our ability to produce oil and gas economically and have a material adverse effect on our business. +We dispose of large volumes of saltwater produced in connection with our drilling and production operations pursuant to permits issued to us or third-party operators of disposal wells by governmental authorities overseeing produced water disposal activities. While these permits are issued pursuant to existing laws and regulations, these legal requirements are subject to change, which could result in the imposition of more stringent operating constraints or new monitoring and reporting requirements, owing to, among other things, concerns of the public or governmental authorities regarding such gathering or disposal activities. +There exists a growing concern that hydraulic fracturing during well completion operations and the injection of produced water into underground disposal wells triggers seismic activity in certain areas, including Oklahoma and Texas, where we operate. In response to these concerns, regulators in some states are pursuing initiatives designed to impose additional requirements in connection with hydraulic fracturing and in the permitting of saltwater disposal wells or otherwise to assess any relationship between seismicity and these oil and gas operations. For example, in 2014, the Oklahoma Corporation Commission (“OCC”) began adopting rules for operators of saltwater disposal wells in certain seismically-active areas, or Areas of Interest, in the Arbuckle formation, requiring operators to monitor and record well pressure and discharge volume on a daily basis and further requiring operators of wells permitted for disposal of 20,000 barrels per day or more of saltwater to conduct mechanical integrity testing. Throughout 2015 and 2016, the Oklahoma Corporation Commission’s Oil and Gas Conservation Division (“OGCD”), issued a series of directives, expanding the areas of interest for induced seismicity and enhanced disposal restrictions and limiting the depths at which produced water could be injected or, in the alternative, reducing disposal volumes. Additional regulations and restrictions are possible as more is understood about this issue. In addition to and separate from induced seismicity associated with injection, the OGCD has issued guidelines to operators to follow when engaged in well stimulation activities, which some studies now seem to correlate with a small number of low intensity seismic events, and the OCC required operators +26 +Table of Contents +of saltwater injection wells, including Cimarex, that were within 10 miles of saltwater disposal wells operated by third parties that were experiencing leaks to be shut in until the leaks in the third party wells were repaired or those third party wells were plugged. Shutting in our saltwater disposal wells increased our disposal costs. +In addition, in 2014 the Texas Railroad Commission, or TRC, published a new rule governing permitting or re-permitting of disposal wells in Texas that would require, among other things, the submission of information on seismic events occurring within a specified radius of the disposal well location, as well as logs, geologic cross sections, and structure maps relating to the disposal area in question. If a permittee or a prospective permittee fails to demonstrate that the saltwater or other fluids are confined to the disposal zone or if scientific data indicates such a disposal well is likely to be or determined to be contributing to seismic activity, then the TRC may deny, modify, suspend, or terminate the permit application or existing operating permit for that well. +The adoption and implementation of any new laws, regulations, or directives that restrict our ability to stimulate wells or to dispose of produced water, by changing the depths of disposal wells, reducing the volume of oil and gas wastewater disposed in such wells, restricting disposal well locations or otherwise, or by requiring us or third parties who dispose of our saltwater to shut down disposal wells, could increase disposal costs or require us to shut in a substantial number of our oil and gas wells or otherwise have a material adverse effect on our ability to produce oil and gas economically and, accordingly, could materially and adversely affect our business, financial condition, and results of operations. We could also face lawsuits alleging that seismic activity occurred as a result of completions or water disposal activities, resulting in damage to persons and property. +A substantial portion of our producing properties are located in limited geographic areas, making us vulnerable to risks associated with having geographically concentrated operations. +A substantial portion of our producing properties are geographically concentrated in the Permian Basin in Texas and New Mexico and our Cana area in the Mid-Continent region in Oklahoma, with these two areas comprising approximately 68% and 31% , respectively, of our oil, gas, and NGL production and approximately 73% and 27% , respectively, of our oil, gas, and NGL revenues for the year ended December 31, 2019 . Approximately 68% and 32% of our estimated proved reserves were located in the Permian Basin and the Mid-Continent region, respectively, as of December 31, 2019 . +Because of this concentration in limited geographic areas, the success and profitability of our operations may be disproportionately exposed to regional factors relative to our competitors that have more geographically dispersed operations. These factors include, among others: (i) the prices of oil and gas produced from wells in the regions and other regional supply and demand factors, including gathering, pipeline, and rail transportation capacity constraints; (ii) the availability of rigs, equipment, oil field services, supplies, and labor; (iii) the availability of processing and refining facilities; and (iv) infrastructure capacity. In addition, our operations in the Permian Basin and Mid-Continent region, as well as other areas, may be adversely affected by severe weather events such as floods, lightning, ice and other storms, and tornadoes, which can intensify competition for the items described above during months when drilling is possible and may result in periodic shortages. The concentration of our operations in limited geographic areas also increases our exposure to changes in local laws and regulations including concerning hydraulic fracturing and wastewater disposal as discussed above in “Legislation or regulatory initiatives intended to address seismic activity could restrict our ability to engage in hydraulic fracturing during completion operations and to dispose of saltwater produced in connection with our oil and gas production, which could limit our ability to produce oil and gas economically and have a material adverse effect on our business”, certain lease stipulations designed to protect wildlife, and unexpected events that may occur in the regions such as natural disasters, seismic events, industrial accidents, or labor difficulties. Any one of these events has the potential to cause producing wells to be shut-in, delay operations, decrease cash flows, increase operating and capital costs and prevent development of lease inventory before expiration. Any of the risks described above could have a material adverse effect on our financial condition, results of operations, and cash flows. +27 +Table of Contents +We use some of the latest available horizontal drilling and completion techniques, which involve risk and uncertainty in their application. +Our horizontal drilling operations utilize some of the latest drilling and completion techniques. The risks of such techniques include, but are not limited to, the following: +• +landing the wellbore in the desired drilling zone; +• +staying in the desired drilling zone while drilling horizontally through the formation; +• +running casing the entire length of the wellbore; +• +being able to run tools and other equipment consistently through the horizontal wellbore; +• +the ability to fracture stimulate the planned number of stages; +• +the ability to run tools the entire length of the wellbore during completion operations; and +• +the ability to successfully clean out the wellbore after completion of the final fracture stimulation stage. +Any of the above factors could have a material adverse effect on our financial position, results of operations, or cash flows. +Many of our properties are in areas that may have been partially depleted or drained by offset wells and certain of our wells may be adversely affected by actions other operators may take when drilling, completing, or operating wells that they own. +Many of our properties are in areas that may have already been partially depleted or drained by earlier offset drilling. The owners of leasehold interests adjoining any of our properties could take actions, such as drilling and completing additional wells, which could adversely affect our operations. When a new well is completed and produced, the pressure differential in the vicinity of the well causes the migration of reservoir fluids toward the new wellbore (and potentially away from existing wellbores). As a result, the drilling and production of these potential locations could cause a depletion of our proved reserves and may inhibit our ability to further develop our proved reserves. In addition, completion operations and other activities conducted on adjacent or nearby wells could cause production from our wells to be shut in for indefinite periods of time, could result in increased lease operating expenses and could adversely affect the production and reserves from our wells after they re-commence production. We have no control over the operations or activities of offsetting operators. +We may be subject to information technology system failures, network disruptions, and breaches in data security and our business, financial position, results of operations, and cash flows could be negatively affected by such security threats and disruptions. +As an oil and gas producer, we face various security threats, including cybersecurity threats such as attempts to gain unauthorized access to sensitive information or to render data or systems unusable; threats to the security of our facilities and infrastructure or third-party facilities and infrastructure, such as gathering and processing facilities, pipelines and refineries; and threats from terrorist acts. Cybersecurity attacks are becoming more sophisticated and include, but are not limited to, malicious software, attempts to gain unauthorized access to data and systems, and other electronic security breaches that could lead to disruptions in critical systems, unauthorized release of confidential or otherwise protected information, and corruption of data, and “ransomware” attacks where data is locked unless a payment is made, any of which could have an adverse effect on our reputation, business, financial condition, results of operations, or cash flows. While we have not suffered any material losses relating to such attacks, there can be no assurance that we will not suffer such losses in the future. +28 +Table of Contents +We rely heavily on our information systems, and the availability and integrity of these systems are essential for us to conduct our business and operations. In addition to cybersecurity and data security threats, other information system failures and network disruptions could have a material adverse effect on our ability to conduct our business. We could experience system failures due to power or telecommunications failures, human error, natural disasters, fire, sabotage, hardware or software malfunction or defects, computer viruses, intentional acts of vandalism or terrorism and similar acts or occurrences. Such system failures could result in the unanticipated disruption of our operations, communications, or processing of transactions, as well as loss of, or damage to, sensitive information, facilities, infrastructure and systems essential to our business and operations, the failure to meet regulatory standards and the reporting of our financial results, and other disruptions to our operations, which, in turn, could have a material adverse effect on our business, financial position, results of operations, and cash flows. +A cyber attack involving our information systems and related infrastructure, or those of our business associates, could disrupt our business and negatively impact our operations in a variety of ways, including but not limited to: +• +unauthorized access to seismic data, reserves information, strategic information, or other sensitive or proprietary information could have a negative impact on our ability to compete for oil and gas resources; +• +data corruption or operational disruption of production-related infrastructure could result in a loss of production, or accidental discharge; +• +a cyber attack on a vendor or service provider could result in supply chain disruptions, which could delay or halt our major development projects; +• +a cyber attack on third-party gathering, pipeline, or rail transportation systems could delay or prevent us from transporting and marketing our production, resulting in a loss of revenues; and +• +a cyber attack on our accounting or accounts payable systems could expose us to liability to employees and third parties if their personal identifying information is obtained. +These events could damage our reputation and lead to financial losses from remedial actions, loss of business, or potential liability, which could have a material adverse effect on our financial condition, results of operations, or cash flows. +While management has taken steps to address these concerns by implementing network security and internal control measures to monitor and mitigate security threats and to increase security for our information, facilities, and infrastructure, our implementation of such procedures and controls may result in increased costs, and there can be no assurance that a system failure or data security breach will not occur and have a material adverse effect on our business, financial condition, and results of operations. In addition, as cybersecurity threats continue to evolve, we may be required to expend additional resources to continue to modify or enhance our protective measures or to investigate or remediate any cybersecurity or information technology infrastructure vulnerabilities. +Our limited ability to influence operations and associated costs on non-operated properties could result in economic losses that are partially beyond our control. +For the year ended December 31, 2019 , other companies operated approximately 13% of our net production. Our success in properties operated by others depends upon a number of factors outside of our control. These factors include timing and amount of capital expenditures, the operator’s expertise and financial resources, approval of other participants in drilling wells, selection of technology, and maintenance of safety and environmental standards. Our dependence on the operator and other working interest owners for these projects could prevent the realization of our targeted returns on capital in drilling or acquisition activities. +29 +Table of Contents +Our business involves many operating risks that may result in substantial losses for which insurance may be unavailable or inadequate. +Our operations are subject to hazards and risks inherent in drilling for oil and gas, such as fires, natural disasters, explosions, formations with abnormal pressures, casing collapses, uncontrollable flows of underground gas, blowouts, surface cratering, pipeline ruptures, or cement failures. Other such risks include theft, vandalism, and environmental hazards such as gas leaks, oil spills, and discharges of toxic gases. Any of these risks can cause substantial losses resulting from: +• +injury or loss of life; +• +damage to, loss of or destruction of, property, natural resources and equipment; +• +pollution and other environmental damages; +• +regulatory investigations, civil litigation, and penalties; +• +damage to our reputation; +• +suspension of our operations; and +• +costs related to repair and remediation. +In addition, our liability for environmental hazards may include conditions created by the previous owners of properties that we purchase or lease. +We maintain insurance coverage against some, but not all, potential losses. We do not believe that insurance coverage for all environmental damages that could occur is available at a reasonable cost. Losses could occur for uninsurable or uninsured risks, or in amounts in excess of existing insurance coverage. The occurrence of an event that is not fully covered by insurance could harm our financial condition and results of operation. The cost of insurance may increase, and the availability of insurance may decrease, as a result of climate change. +We may not be able to generate enough cash flow to meet our debt obligations. +At December 31, 2019 , our long-term debt consisted of $750 million of 4.375% senior notes due in 2024 , $750 million of 3.90% senior notes due in 2027 , and $500 million of 4.375% senior notes due in 2029 . In addition to interest expense and principal on our long-term debt, we have demands on our cash resources including, among others, capital expenditures, operating expenses, and contractual commitments. +Our ability to pay the principal and interest on our long-term debt and to satisfy our other liabilities will depend upon future performance and our ability to repay or refinance our debt as it becomes due. Our future operating performance and ability to refinance will be affected by economic and capital market conditions, results of operations, and other factors, many of which are beyond our control. Our ability to meet our debt service obligations also may be impacted by changes in prevailing interest rates, as borrowing under our existing revolving credit facility bears interest at floating rates. +30 +Table of Contents +We may not generate sufficient cash flow from operations. Without sufficient cash flow, there may not be adequate future sources of capital to enable us to service our indebtedness or to fund our other liquidity needs. If we are unable to service our indebtedness and fund our operating costs, we will be forced to adopt alternative strategies that may include: +• +reducing or delaying capital expenditures; +• +seeking additional debt financing or equity capital; +• +selling assets; or +• +restructuring or refinancing debt. +We may be unable to complete any such strategies on satisfactory terms, if at all. Our inability to generate sufficient cash flows to satisfy our debt obligations or contractual commitments, or to refinance our indebtedness on commercially reasonable terms, would materially and adversely affect our financial condition and results of operations. +The instruments governing our indebtedness contain various covenants limiting the discretion of our management in operating our business. +The indenture governing our senior notes and our credit agreement contain various restrictive covenants that may limit management’s discretion in certain respects. In particular, these agreements limit Cimarex’s and its subsidiaries’ ability to, among other things: +• +create certain liens; +• +consolidate, merge, or transfer all, or substantially all, of our assets and our restricted subsidiaries; or +• +enter into sale and leaseback transactions. +In addition, our revolving credit agreement requires us to maintain a total debt to capitalization ratio (as defined in the credit agreement) of not more than 65%. See Note 3 to the Consolidated Financial Statements for further information. +If we fail to comply with the restrictions in the indenture governing our senior notes or the agreement governing our credit facility or any other subsequent financing agreements, a default may allow the creditors, if the agreements so provide, to accelerate the related indebtedness as well as any other indebtedness to which a cross-acceleration or cross-default provision applies. In addition, lenders may be able to terminate any commitments they had made to make available further funds. +Our acquisition activities may not be successful, which may hinder our replacement of reserves and adversely affect our results of operations. +The successful acquisition of properties requires an assessment of several factors, including: +• +geological risks and recoverable reserves; +• +future oil and gas prices and their appropriate market differentials; +• +operating costs; and +• +potential environmental risks and other liabilities. +31 +Table of Contents +The accuracy of these assessments is inherently uncertain. In connection with these assessments, we perform a review of the subject properties we believe to be generally consistent with industry practices. Our review will not reveal all existing or potential problems nor will it permit us to become sufficiently familiar with the properties to fully assess their deficiencies and capabilities. Inspections will not likely be performed on every well or facility, and structural and environmental problems are not necessarily observable even when an inspection is undertaken. Furthermore, the seller may be unwilling or unable, such as in a corporate acquisition such as our acquisition of Resolute, to provide effective contractual protection against all or part of the identified problems. +On March 1, 2019, we completed the acquisition of Resolute. There can be no assurance that we will be able to successfully integrate Resolute’s assets or otherwise realize the expected benefits of the acquisition of Resolute. In addition, our business may be negatively impacted if we are unable to effectively manage our expanded operations going forward. The integration has required and will continue to require significant time and focus from management and could disrupt current plans and operations, which could delay the achievement of our strategic objectives. +For additional risks related to our acquisition of Resolute, see below “ Risks Concerning Cimarex’s Merger with Resolute Energy Corporation ”. +We may lose leases if production is not established within the time periods specified in the leases. +Unless production is established within the spacing units covering the undeveloped acres on which some of the locations are identified, the leases for such acreage will expire and the amounts spent for those leases will be lost. The combined net acreage expiring in the next three years represents approximately 4.0% of our total net undeveloped acreage at December 31, 2019 . At that date, we had leases representing 166,227 net acres expiring in 2020 , 21,226 net acres expiring in 2021 , and 35,457 net acres expiring in 2022 . Our actual drilling activities may materially differ from those presently identified, which could adversely affect our business. +Our disposition activities may be subject to factors beyond our control, and in certain cases we may retain unforeseen liabilities for certain matters . +We regularly sell non-strategic assets in order to increase capital resources available for other strategic assets and to create organizational and operational efficiencies. We also occasionally sell interests in strategic assets for the purpose of accelerating the development of and increasing efficiencies in such strategic assets. Various factors could materially affect our ability to dispose of such assets, including the approvals of governmental agencies or third parties, and the availability of purchasers willing to acquire the assets with terms we deem acceptable. +Sellers at times retain certain liabilities or agree to indemnify buyers for certain matters related to the sold assets. The magnitude of any such retained liability or indemnification obligation is difficult to quantify at the time of the transaction and ultimately could be material. Also, as is typical in divestiture transactions, third parties may be unwilling to release the company from guarantees or other credit support provided prior to the sale of the divested assets. As a result, after a divestiture, the company may remain secondarily liable for the obligations guaranteed or supported to the extent that the buyer of the assets fails to perform these obligations. In addition, with respect to offshore assets, if purchasers declare bankruptcy, the United States Department of Interior may pursue former owners for decommissioning expenses, which can be substantial. See Note 8 to the Consolidated Financial Statements for further discussion regarding our asset retirement obligations. +Competition for experienced technical personnel may negatively impact our operations. +Our exploratory and development drilling success depends, in part, on our ability to attract and retain experienced professional personnel. The loss of any key executives or other key personnel could have a material adverse effect on our operations. As we continue to develop our asset base and the scope of our operations, our future profitability will depend on our ability to attract and retain qualified personnel, particularly individuals with a strong background in geology, geophysics, engineering, and operations. +32 +Table of Contents +We are involved in various legal proceedings, the outcome of which could have an adverse effect on our liquidity. +In the normal course of business, we are involved with various lawsuits and related disputed claims, including but not limited to claims concerning title, royalty payments, environmental issues, personal injuries, and contractual issues. Although we currently believe the resolution of these lawsuits and claims, individually or in the aggregate, would not have a material adverse effect on our financial condition or results of operations, our assessment of our current litigation and other legal proceedings could change in light of the discovery of facts with respect to legal actions or other proceedings pending against us not presently known to us or determinations by judges, juries, or other finders of fact that are not in accord with our evaluation of the possible liability or outcome of such proceedings. Therefore, there can be no assurance that outcomes of future legal proceedings would not have an adverse effect on our liquidity and capital resources. +Certain federal income tax deductions currently available with respect to oil and gas exploration and development may be limited or eliminated as a result of recently enacted or future legislation. +On December 22, 2017, the United States enacted H.R.1, commonly referred to as the Tax Cuts and Jobs Act or U.S. Tax Reform. H.R.1, among other things, includes changes to U.S. federal tax rates, imposes new limitations on the utilization of net operating losses and the deductibility of interest and executive compensation, temporarily allows for the expensing of capital expenditures, and eliminates the corporate Alternative Minimum Tax. Various proposed regulations have been issued regarding H.R.1. Until final regulations are issued the full impact of changes to the company is not known at this time. From time to time, various proposals are made recommending the elimination of certain key U.S. federal income tax incentives currently available to oil and gas exploration and production companies. Future legislation may be introduced in Congress which would implement many of these proposals. These changes include, but are not limited to: (i) the repeal of the percentage depletion allowance for oil and gas properties; (ii) the elimination of current deductions for intangible drilling and development costs; and (iii) an extension of the amortization period for certain geological and geophysical expenditures. It is unclear, however, whether any such changes will be enacted or how soon such changes could be effective. +The passage of this legislation or any other similar change in U.S. federal income tax law could eliminate or postpone certain tax deductions that are currently available with respect to oil and gas exploration and development, and any such change could have an adverse effect on our financial position, results of operations, and cash flows, including the payment of cash taxes earlier than expected. +Risks Concerning Cimarex’s Merger with Resolute Energy Corporation +Cimarex’s merger with Resolute may not achieve its intended results, and Cimarex and Resolute may be unable to successfully integrate their operations. +Cimarex and Resolute entered into the merger agreement with the expectation that the merger will result in various benefits, including, among other things, expanding Cimarex’s asset base and creating synergies. Achieving the anticipated benefits of the merger is subject to a number of uncertainties, including whether the businesses of Cimarex and Resolute can be integrated in an efficient and effective manner. +The combined company’s results of operations could also be adversely affected by any issues attributable to either company’s operations that arise from or are based on events or actions that occurred prior to the closing of the merger, including unknown liabilities of Resolute or its subsidiaries or liabilities of Resolute or its subsidiaries related to properties sold by Resolute prior to the merger. The integration process is subject to a number of uncertainties, and no assurance can be given whether anticipated benefits will be realized or, if realized, the timing of their realization. Failure to achieve these anticipated benefits could result in increased costs or decreases in the amount of expected revenues and could adversely affect the combined company’s future business, financial condition, operating results, and prospects. +33 +Table of Contents +ITEM 1B. UNRESOLVED STAFF COMMENTS +None. +ITEM 3. LEGAL PROCEEDINGS +The information set forth under the heading “Litigation” in Note 10 to the Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K, is incorporated by reference in response to this item. +ITEM 4. MINE SAFETY DISCLOSURES +Not applicable. +34 +Table of Contents +PART II +ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES +Our $0.01 par value common stock trades on the New York Stock Exchange (“NYSE”) under the symbol XEC. A cash dividend was paid to our common stockholders in each quarter of 2019 . Future dividend payments will depend on the company’s level of earnings, financial requirements, and other factors considered relevant by the Board of Directors. +The closing price of Cimarex stock as reported on the NYSE on January 31, 2020 , was $43.89 . At January 31, 2020 , Cimarex’s 102,135,577 shares of outstanding common stock were held by approximately 1,388 stockholders of record. +Issuer Purchases of Equity Securities +The following table sets forth information regarding repurchases of our common stock during the year ended December 31, 2019 . The shares repurchased represent shares of our common stock that employees elected to surrender to satisfy their tax withholding obligations upon the vesting of shares of restricted stock. Cimarex does not consider this a share buyback program. +Period +Total number of shares purchased +Average price paid per share +Total number of shares purchased as part of publicly announced plans or programs +Maximum number of shares that may yet be purchased under the plans or programs +January 1-31, 2019 +1,162 +$ +70.46 +— +— +February 1-28, 2019 +— +— +— +— +March 1-31, 2019 +8,393 +68.16 +— +— +April 1-30, 2019 +— +— +— +— +May 1-31, 2019 +— +— +— +— +June 1-30, 2019 +— +— +— +— +July 1-31, 2019 +34,607 +50.67 +— +— +August 1-31, 2019 +— +— +— +— +September 1-30, 2019 +— +— +— +— +October 1-31, 2019 +— +— +— +— +November 1-30, 2019 +— +— +— +— +December 1-31, 2019 +61,374 +45.97 +— +— +Total +105,536 +$ +49.55 +— +— +35 +Table of Contents +Stock Performance Graph +The following graph shows the cumulative five-year total return on Cimarex Energy Co.’s common stock relative to the cumulative total returns of the S&P 500 index, the Dow Jones US Exploration & Production index, and the S&P Oil & Gas Exploration & Production index. The graph tracks the performance of a $100 investment in our common stock and in each of the indexes (with the reinvestment of all dividends) from December 31, 2014 to December 31, 2019 . The stock price performance included in this graph is not necessarily indicative of future stock price performance. +COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN* +Among Cimarex Energy Co., the S&P 500 Index, +the Dow Jones US Exploration & Production Index, and the S&P Oil & Gas Exploration & Production Index +* $100 invested on 12/31/14 in stock or index, including reinvestment of dividends. Fiscal year ending December 31. +A tabular presentation of the data in the above graph is provided below. +2014 +2015 +2016 +2017 +2018 +2019 +Cimarex Energy Co. +$ +100.00 +$ +84.79 +$ +129.42 +$ +116.52 +$ +59.25 +$ +51.21 +S&P 500 +$ +100.00 +$ +101.38 +$ +113.51 +$ +138.29 +$ +132.23 +$ +173.86 +Dow Jones US Exploration & Production +$ +100.00 +$ +76.27 +$ +94.94 +$ +96.18 +$ +79.09 +$ +88.10 +S&P Oil & Gas Exploration & Production +$ +100.00 +$ +65.85 +$ +87.48 +$ +81.96 +$ +65.98 +$ +73.91 +36 +Table of Contents +ITEM 6. SELECTED FINANCIAL DATA +The selected financial data set forth below should be read in conjunction with the Consolidated Financial Statements and accompanying notes thereto provided in Item 8 of this report. +Years Ended December 31, +2019 +2018 +2017 +2016 +2015 +(in thousands, except per share amounts) +Operating results: +Oil, gas, and NGL sales +$ +2,321,921 +$ +2,297,645 +$ +1,874,003 +$ +1,221,218 +$ +1,417,538 +Total revenues (1) +$ +2,362,969 +$ +2,339,017 +$ +1,918,249 +$ +1,257,345 +$ +1,452,619 +Net (loss) income (2) +$ +(124,619 +) +$ +791,851 +$ +494,329 +$ +(408,803 +) +$ +(2,579,604 +) +Earnings (loss) per common share: +Basic +$ +(1.33 +) +$ +8.32 +$ +5.19 +$ +(4.38 +) +$ +(27.75 +) +Diluted +$ +(1.33 +) +$ +8.32 +$ +5.19 +$ +(4.38 +) +$ +(27.75 +) +Cash dividends declared per common share +$ +0.80 +$ +0.68 +$ +0.32 +$ +0.32 +$ +0.64 +Cash flow data: +Net cash provided by operating activities +$ +1,343,966 +$ +1,550,994 +$ +1,096,564 +$ +625,849 +$ +725,728 +Net cash used by investing activities +$ +(1,577,882 +) +$ +(1,085,618 +) +$ +(1,265,897 +) +$ +(692,410 +) +$ +(1,008,605 +) +Net cash (used) provided by financing activities +$ +(472,028 +) +$ +(65,244 +) +$ +(83,009 +) +$ +(59,945 +) +$ +656,397 +December 31, +2019 +2018 +2017 +2016 +2015 +(in thousands, except proved reserves amounts) +Balance sheet data: +Cash and cash equivalents (3) +$ +94,722 +$ +800,666 +$ +400,534 +$ +652,876 +$ +779,382 +Oil and gas properties, net (2) (3) +$ +5,210,698 +$ +3,715,330 +$ +3,241,530 +$ +2,354,267 +$ +2,741,282 +Goodwill (3) +$ +716,865 +$ +620,232 +$ +620,232 +$ +620,232 +$ +620,232 +Total assets (2) +$ +7,140,029 +$ +6,062,084 +$ +5,042,639 +$ +4,237,724 +$ +4,708,422 +Deferred income tax liability (asset) +$ +338,424 +$ +334,473 +$ +101,618 +$ +(55,835 +) +$ +157,162 +Long-term obligations: +Long-term debt (principal) (4) +$ +2,000,000 +$ +1,500,000 +$ +1,500,000 +$ +1,500,000 +$ +1,500,000 +Operating and finance leases (5) +$ +202,921 +$ +— +$ +— +$ +— +$ +— +Other +$ +197,056 +$ +200,564 +$ +206,249 +$ +184,444 +$ +197,216 +Redeemable preferred stock (3) +$ +81,620 +$ +— +$ +— +$ +— +$ +— +Stockholders’ equity +$ +3,576,141 +$ +3,329,786 +$ +2,568,278 +$ +2,042,989 +$ +2,458,357 +Proved Reserves: +Oil (MBbls) +169,770 +146,538 +137,238 +105,878 +107,798 +Gas (Bcf) +1,532 +1,591 +1,608 +1,471 +1,517 +NGL (MBbls) +194,468 +179,436 +153,860 +130,633 +124,277 +Total (MBOE) +619,595 +591,195 +559,037 +481,748 +484,901 +37 +Table of Contents +________________________________________ +(1) +Effective January 1, 2018, we adopted the provisions of Accounting Standards Codification 606, Revenue from Contracts with Customers (“ASC 606”), utilizing the modified retrospective approach. Because we utilized the modified retrospective approach, there was no impact to prior periods’ reported amounts. Application of ASC 606 has no impact on our net income or cash flows from operations; however, certain costs classified as Transportation, processing, and other operating in the Consolidated Statements of Operations and Comprehensive Income (Loss) under prior accounting standards are now reflected as deductions from revenue. +(2) +During 2019, 2016, and 2015, we recorded non-cash full cost ceiling test impairments of our oil and gas properties totaling $618.7 million , $757.7 million , and $4.03 billion , respectively. +(3) +We acquired Resolute Energy Corporation on March 1, 2019. Consideration for this acquisition included $284.4 million in cash, net of cash acquired, and $81.6 million in redeemable preferred stock. The preliminary purchase price allocation included $1.72 billion to oil and gas properties and $96.6 million to goodwill. See Notes 2 and 13 to the Consolidated Financial Statements for further information regarding the redeemable preferred stock and acquisition. +(4) +On March 8, 2019 , we issued $500.0 million aggregate principal amount of 4.375% senior unsecured notes due March 15, 2029 at 99.862% of par to yield 4.392% per annum. See Note 3 to the Consolidated Financial Statements for further information regarding our debt. +(5) +Effective January 1, 2019, we began accounting for leases in accordance with Accounting Standards Update 2016-02, Leases (“Topic 842”), which requires lessees to recognize lease liabilities and right-of-use assets on the balance sheet for contracts that provide lessees with the right to control the use of identified assets for periods of greater than 12 months. Prior to January 1, 2019, we accounted for leases in accordance with ASC Topic 840, Leases , under which operating leases were not recorded on the balance sheet. See Note 10 to the Consolidated Financial Statements for further information regarding our adoption of Topic 842. +ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS +The following discussion and analysis should be read in conjunction with our Consolidated Financial Statements included in Item 8 of this report and also with RISK FACTORS in Item 1A of this report. This discussion also includes forward-looking statements. Refer to CAUTIONARY INFORMATION ABOUT FORWARD-LOOKING STATEMENTS in Part I of this report for important information about these types of statements. Discussion and analysis regarding 2019 and 2018 is provided below. For discussion and analysis regarding 2017 , see Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2018 as previously filed with the SEC. +OVERVIEW +Cimarex is an independent oil and gas exploration and production company. Our operations are entirely located in the United States, mainly in Texas, New Mexico, and Oklahoma. Currently our operations are focused in two main areas: the Permian Basin and the Mid-Continent. Our Permian Basin region encompasses west Texas and southeast New Mexico. Our Mid-Continent region consists of Oklahoma and the Texas Panhandle. +Our principal business objective is to increase shareholder value through the profitable long-term growth of our proved reserves and production while seeking to minimize our impact on the communities in which we operate for the long-term. Our strategy centers on maximizing cash flow from producing properties so that we can reinvest in exploration and development opportunities and provide cash returns to shareholders through dividends. We consider merger and acquisition opportunities that enhance our competitive position and we occasionally divest non-strategic assets. +On March 1, 2019, we completed the acquisition of Resolute Energy Corporation (“Resolute”), an independent oil and gas company focused on the acquisition and development of unconventional oil and gas properties in the Delaware Basin area of the Permian Basin of west Texas. The principal factors considered by management in making +38 +Table of Contents +this acquisition included: (i) our expectation that Resolute’s assets’ attractive returns are competitive with those in our existing portfolio, (ii) the opportunity to apply our experience and learnings from already operating in this area to generating productivity gains from Resolute’s properties, (iii) the ability to increase our acreage position in the Delaware Basin, and (iv) the expectation that the acquisition will be financially accretive. The acquisition date fair value of the consideration transferred totaled $820.3 million , which consisted of cash, common stock, and preferred stock (see Note 13 to the Consolidated Financial Statements for more information on the acquisition). +We believe that detailed technical analysis, operational focus, and a disciplined capital investment process mitigate risk and position us to continue to achieve profitable increases in proved reserves and production. Our drilling inventory and limited long-term commitments provide the flexibility to respond quickly to industry volatility. Our investments are generally funded with cash flow provided by operating activities together with cash on hand, bank borrowings, sales of non-strategic assets, and, from time to time, public financing based on our monitoring of capital markets and our balance sheet. +Market Conditions +The oil and gas industry is cyclical and commodity prices can fluctuate significantly. We expect this volatility to persist. Commodity prices are affected by many factors outside of our control, including changes in market supply and demand, inventory storage levels, weather conditions, and other factors. Local market prices for oil and gas can be impacted by pipeline capacity constraints limiting takeaway and increasing basis differentials. +As demonstrated in the table below, our company-wide average realized prices for 2019 as compared to 2018 have declined for all products. In the case of oil sales, these decreases result from a combination of declining NYMEX prices, partially offset by improving differentials. In the case of gas sales, these decreases are driven by declining NYMEX prices and widening differentials. +Years Ended December 31, +Variance Between +2019 / 2018 +2019 +2018 +Average NYMEX price +Oil — per barrel +$ +57.03 +$ +64.77 +(12)% +Gas — per Mcf +$ +2.63 +$ +3.09 +(15)% +Average realized price +Oil — per barrel +$ +52.77 +$ +56.61 +(7)% +Gas — per Mcf +$ +1.11 +$ +1.99 +(44)% +NGL — per barrel +$ +13.55 +$ +22.28 +(39)% +Average price differential +Oil — per barrel +$ +(4.26 +) +$ +(8.16 +) +48% +Gas — per Mcf +$ +(1.52 +) +$ +(1.10 +) +(38)% +39 +Table of Contents +The average price differentials that we realized in our two primary areas of operation are shown in the table below for the periods indicated. +Average Price Differentials +Year +Fourth +Quarter +Third +Quarter +Second +Quarter +First +Quarter +2019 +Oil +Permian Basin +$ +(4.48 +) +$ +(2.18 +) +$ +(3.76 +) +$ +(5.80 +) +$ +(6.90 +) +Mid-Continent +$ +(3.14 +) +$ +(2.05 +) +$ +(3.72 +) +$ +(4.39 +) +$ +(2.17 +) +Total Company +$ +(4.26 +) +$ +(2.16 +) +$ +(3.74 +) +$ +(5.58 +) +$ +(6.03 +) +Gas +Permian Basin +$ +(2.14 +) +$ +(1.67 +) +$ +(1.83 +) +$ +(3.10 +) +$ +(1.91 +) +Mid-Continent +$ +(0.68 +) +$ +(0.74 +) +$ +(0.66 +) +$ +(0.86 +) +$ +(0.46 +) +Total Company +$ +(1.52 +) +$ +(1.31 +) +$ +(1.35 +) +$ +(2.14 +) +$ +(1.24 +) +2018 +Oil +Permian Basin +$ +(9.82 +) +$ +(11.64 +) +$ +(14.34 +) +$ +(8.05 +) +$ +(3.12 +) +Mid-Continent +$ +(2.46 +) +$ +(2.33 +) +$ +(1.08 +) +$ +(2.18 +) +$ +(2.34 +) +Total Company +$ +(8.16 +) +$ +(9.51 +) +$ +(11.25 +) +$ +(6.89 +) +$ +(2.94 +) +Gas +Permian Basin +$ +(1.40 +) +$ +(2.21 +) +$ +(1.25 +) +$ +(1.31 +) +$ +(0.78 +) +Mid-Continent +$ +(0.86 +) +$ +(0.83 +) +$ +(0.94 +) +$ +(1.03 +) +$ +(0.70 +) +Total Company +$ +(1.10 +) +$ +(1.49 +) +$ +(1.07 +) +$ +(1.15 +) +$ +(0.73 +) +Pipeline expansion projects in the Permian Basin are expected to ease capacity constraints as they come online over the next few years, which is reflected in the current futures markets that show narrowing differentials. However, if pipeline constraints remain because expansion projects are delayed or canceled, production increases faster than capacity increases, pipeline disruptions, or other reasons, higher differentials will persist or potentially worsen. Our revenue, profitability, and future growth are highly dependent on the prices we receive for our oil and gas production and can be adversely affected by realized price decreases. See RESULTS OF OPERATIONS Revenues below for further information regarding our realized commodity prices. +40 +Table of Contents +Summary of Operating and Financial Results for the year ended December 31, 2019 as compared to the year ended December 31, 2018 +• +Completed the acquisition of Resolute Energy Corporation. Resolute’s results are included in our financial statements since the March 1, 2019 closing date. +• +Total daily production volumes increased 25% to 278.5 MBOE per day. +• +Oil volumes increased 27% to 86.2 MBbls per day. +• +Gas volumes increased 22% to 689.2 MMcf per day. +• +NGL volumes increased 28% to 77.4 MBbls per day. +• +Total production revenue increased 1% to $2.32 billion . +• +Year-end proved reserves increased 5% to 619.6 MMBOE, as compared to 591.2 MMBOE at year-end 2018 . +• +Exploration and development capital investments were $1.24 billion , as compared to $1.57 billion in 2018 . +• +Cash flow provided by operating activities decreased 13% to $1.34 billion . +• +Generated a net loss of $124.6 million ( $1.33 per diluted share) as compared to net income of $791.9 million ( $8.32 per diluted share) in 2018 . +Further discussion of these results is provided below. +Proved Reserves +Our proved reserves by region at December 31, 2019 and 2018 were as follows: +December 31, 2019 +Gas +(MMcf) +Oil +(MBbls) +NGL +(MBbls) +Total +(MBOE) +Permian Basin +870,208 +147,662 +130,007 +422,703 +Mid-Continent +660,161 +21,848 +64,377 +196,252 +Other +1,776 +260 +84 +640 +Total +1,532,145 +169,770 +194,468 +619,595 +December 31, 2018 +Gas +(MMcf) +Oil +(MBbls) +NGL +(MBbls) +Total +(MBOE) +Permian Basin +727,985 +116,378 +96,533 +334,241 +Mid-Continent +861,440 +29,908 +82,826 +256,307 +Other +1,896 +252 +77 +647 +Total +1,591,321 +146,538 +179,436 +591,195 +41 +Table of Contents +Year-end 2019 proved reserves increased approximately 5% to 619.6 MMBOE, compared to 591.2 MMBOE at year-end 2018 . Proved gas reserves were 1.53 Tcf, proved oil reserves were 169.8 MMBbls, and proved NGL reserves were 194.5 MMBbls. Reserves in the Permian Basin accounted for 68% of our total proved reserves with nearly all of the remainder in our Mid-Continent region. See SUPPLEMENTAL INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED) in Item 8 for a more detailed discussion regarding year-over-year changes in our proved reserves. +The process of estimating quantities of oil, gas, and NGL reserves is complex. Significant decisions are required in the evaluation of all available geological, geophysical, engineering, and economic data. Although every reasonable effort is made to ensure that our reserve estimates represent the most accurate assessments possible, subjective decisions and available data for our various fields make these estimates generally less precise than other estimates included in financial statement disclosures. See Proved Reserves Estimation Procedures in Items 1 and 2 for a discussion of our reserve estimation process and Item 1A RISK FACTORS , which includes a discussion of factors that affect our proved reserves estimates. +RESULTS OF OPERATIONS +Revenues +Our revenues are derived from sales of our oil, gas, and NGL production. Increases or decreases in our revenues, profitability, and future production growth are highly dependent on the commodity prices we receive. Prices are market driven and we expect that future prices will continue to fluctuate due to supply and demand factors, availability of transportation, seasonality, geopolitical, and economic factors. See Item 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK for more information regarding the sensitivity of our revenues to price fluctuations. +Production volumes were higher for all products during the year ended December 31, 2019 as compared to the year ended December 31, 2018 , while realized prices were lower. Our acquisition of Resolute and ongoing completion of new wells have increased our volumes. Lower market prices, which are out of our control, have negatively impacted our realized prices. The increase in production volumes, as well as the increase in our fourth quarter 2019 realized oil prices due to narrowing basis differentials, was enough to overcome the lower annual realized prices, particularly gas and NGL prices, to cause our overall production revenues to increase by $24.3 million , or 1% , from prior year. The following table shows our production revenues for 2019 and 2018 as well as the change in revenues due to changes in prices and volumes. +Years Ended +December 31, +Price / Volume Variance +Production Revenue (in thousands) +2019 +2018 +Variance Between +2019 / 2018 +Price +Volume +Total +Oil sales +$ +1,660,210 +$ +1,398,813 +$ +261,397 +19 +% +$ +(120,819 +) +$ +382,216 +$ +261,397 +Gas sales +278,776 +408,751 +(129,975 +) +(32 +)% +(221,379 +) +91,404 +(129,975 +) +NGL sales +382,935 +490,081 +(107,146 +) +(22 +)% +(246,658 +) +139,512 +(107,146 +) +$ +2,321,921 +$ +2,297,645 +$ +24,276 +1 +% +$ +(588,856 +) +$ +613,132 +$ +24,276 +42 +Table of Contents +The table below presents our production volumes by commodity, our average realized commodity prices, and certain major U.S. index prices. The sale of our Permian Basin oil production is typically tied to the WTI Midland benchmark price and the sale of our Mid-Continent oil production is typically tied to the WTI Cushing benchmark price. During 2019 and 2018 , 84% and 77% , respectively, of our oil production was in the Permian Basin with the majority of the remainder in the Mid-Continent region. Our realized prices do not include settlements of commodity derivative contracts. +Years Ended +December 31, +Variance Between +2019 / 2018 +2019 +2018 +Oil +Total volume — MBbls +31,463 +24,710 +6,753 +27 +% +Total volume — MBbls per day +86.2 +67.7 +18.5 +27 +% +Percentage of total production +31 +% +31 +% +Average realized price — per barrel +$ +52.77 +$ +56.61 +$ +(3.84 +) +(7 +)% +Average WTI Midland price — per barrel +$ +55.53 +$ +58.31 +$ +(2.78 +) +(5 +)% +Average WTI Cushing price — per barrel +$ +57.03 +$ +64.77 +$ +(7.74 +) +(12 +)% +Gas +Total volume — MMcf +251,567 +205,837 +45,730 +22 +% +Total volume — MMcf per day +689.2 +563.9 +125.3 +22 +% +Percentage of total production +41 +% +42 +% +Average realized price — per Mcf +$ +1.11 +$ +1.99 +$ +(0.88 +) +(44 +)% +Average Henry Hub price — per Mcf +$ +2.63 +$ +3.09 +$ +(0.46 +) +(15 +)% +NGL +Total volume — MBbls +28,254 +21,994 +6,260 +28 +% +Total volume — MBbls per day +77.4 +60.3 +17.1 +28 +% +Percentage of total production +28 +% +27 +% +Average realized price — per barrel +$ +13.55 +$ +22.28 +$ +(8.73 +) +(39 +)% +Total +Total production — MBOE +101,645 +81,010 +20,635 +25 +% +Total production — MBOE per day +278.5 +221.9 +56.6 +25 +% +Average realized price — per BOE +$ +22.84 +$ +28.36 +$ +(5.52 +) +(19 +)% +Our 2019 daily production volumes were 278.5 MBOE, a 25% increase from 2018 . This increase is the result of the Resolute acquisition as well as drilling and completion activity during 2019 . See Production Volumes, Prices, and Costs and Exploration and Development Overview in Items 1 and 2 of this report for production information by region and a discussion of our drilling activities. +43 +Table of Contents +Other Revenues +We transport, process, and market some third-party gas that is associated with our equity gas. We market and sell gas for other working interest owners under short term agreements and may earn a fee for such services. The table below reflects revenues from third-party gas gathering and processing and our net marketing margin for marketing third-party gas. +Years Ended December 31, +Variance +Between +2019 / 2018 +Gas Gathering and Marketing Revenues (in thousands): +2019 +2018 +Gas gathering and other +$ +42,454 +$ +41,180 +$ +1,274 +Gas marketing +$ +(1,406 +) +$ +192 +$ +(1,598 +) +Fluctuations in revenues from gas gathering and gas marketing activities are a function of increases and decreases in volumes, commodity prices, and gathering rate charges. +Operating Costs and Expenses +Costs associated with producing oil and gas are substantial. Among other factors, some of these costs vary with commodity prices, some trend with the volume of production, some are a function of the number of wells we own, some depend on the prices charged by service companies, and some fluctuate based on a combination of the foregoing. +Total operating costs and expenses of $2.48 billion in 2019 were 92% higher than the $1.29 billion incurred in 2018 . The primary reasons for the increase were : (i) the $618.7 million ceiling test impairment incurred in 2019, (ii) the $291.7 million increase in depreciation, depletion, and amortization, and (iii) the $162.8 million increase in losses on derivative instruments. The following table shows our operating costs and expenses for the years indicated and a discussion of year-over-year differences follows. +Years Ended December 31, +Variance +Between +2019 / 2018 +Per BOE +Operating Costs and Expenses (in thousands, except per BOE) +2019 +2018 +2019 +2018 +Impairment of oil and gas properties +$ +618,693 +$ +— +$ +618,693 +N/A +N/A +Depreciation, depletion, and amortization +882,173 +590,473 +291,700 +$ +8.68 +$ +7.29 +Asset retirement obligation +8,586 +7,142 +1,444 +$ +0.08 +$ +0.09 +Production (1) +339,941 +296,189 +43,752 +$ +3.34 +$ +3.66 +Transportation, processing, and other operating (1) +238,259 +211,463 +26,796 +$ +2.34 +$ +2.61 +Gas gathering and other (1) +23,294 +28,327 +(5,033 +) +$ +0.23 +$ +0.35 +Taxes other than income +148,953 +125,169 +23,784 +$ +1.47 +$ +1.55 +General and administrative +95,843 +77,843 +18,000 +$ +0.94 +$ +0.96 +Stock compensation +26,398 +22,895 +3,503 +$ +0.26 +$ +0.28 +Loss (gain) on derivative instruments, net +76,850 +(85,959 +) +162,809 +N/A +N/A +Other operating expense, net +19,305 +18,507 +798 +N/A +N/A +$ +2,478,295 +$ +1,292,049 +$ +1,186,246 +________________________________________ +(1) +In order to conform with the 2019 presentation, the 2018 amount presented reflects the reclassification of certain Gas gathering and other expenses to Transportation, processing, and other operating expenses and Production expense. These reclassifications were made to reflect an allocation of the costs incurred to operate our gas gathering facilities as a cost to transport our equity share of gas produced and operate our wells. See Note 1 to the Consolidated Financial Statements for further information regarding these prior year reclassifications. +44 +Table of Contents +Impairment of Oil and Gas Properties +We use the full cost method of accounting for our oil and gas operations. Under this method, we are required to perform quarterly ceiling test calculations to test our oil and gas properties for possible impairment. If the net capitalized cost of our oil and gas properties, as adjusted for income taxes, exceeds the ceiling limitation, the excess is charged to expense. The ceiling limitation is equal to the sum of: (i) the present value discounted at 10% of estimated future net revenues from proved reserves, (ii) the cost of properties not being amortized, and (iii) the lower of cost or estimated fair value of unproven properties included in the costs being amortized, as adjusted for income taxes. We currently do not have any unproven properties that are being amortized. Estimated future net revenues are determined based on trailing twelve-month average commodity prices and estimated proved reserve quantities, operating costs, and capital expenditures. +The quarterly ceiling test is primarily impacted by commodity prices, changes in estimated reserve quantities, reserves produced, overall exploration and development costs, depletion expense, and deferred taxes. If pricing conditions decline, or if there is a negative impact on one or more of the other components of the calculation, we may incur a full cost ceiling test impairment. The calculated ceiling limitation is not intended to be indicative of the fair market value of our proved reserves or future results. Impairment charges do not affect cash flow from operating activities, but do adversely affect our net income and various components of our balance sheet. Any impairment of oil and gas properties is not reversible at a later date. +During 2019 , we recognized a ceiling test impairment of $618.7 million . The impairment resulted primarily from the impact of decreases in the 12-month average trailing prices for oil, natural gas, and NGLs as well as significant basis differentials utilized in determining the estimated future net cash flows from proved reserves. It is likely that we will incur another ceiling test impairment in the first quarter 2020 and we may recognize additional ceiling test impairments in the future. +Depreciation, Depletion, and Amortization +Depletion of our producing properties is computed using the units-of-production method. The economic life of each producing well depends upon the estimated proved reserves for that well, which in turn depend upon the assumed realized sales price for future production. Therefore, fluctuations in oil and gas prices will impact the level of proved reserves used in the calculation. Higher prices generally have the effect of increasing reserves, which reduces depletion expense. Conversely, lower prices generally have the effect of decreasing reserves, which increases depletion expense. The cost of replacing production also impacts our depletion expense. In addition, changes in estimates of reserve quantities, estimates of operating and future development costs, reclassifications of properties from unproved to proved, and impairments of oil and gas properties will also impact depletion expense. Our net proved properties, production, and reserves have increased during 2019 as compared to 2018 due to our ongoing exploration and development activities as well as due to our acquisition of Resolute. The increase in net properties and production resulted in an overall increase in depletion expense, while the increase in reserves partially offset the increased expense. +45 +Table of Contents +Fixed assets consist primarily of gathering and plant facilities, vehicles, airplanes, office furniture, and computer equipment and software. These items are recorded at cost and are depreciated on the straight-line method based on expected lives of the individual assets, which range from 3 to 30 years. Additionally, with the adoption of Topic 842, we depreciate our right-of-use assets, with the depreciation of our finance lease gathering system right-of-use asset being included in our depreciation expense. The increase in depreciation expense during 2019 as compared to 2018 is primarily due to: (i) increased depreciation on our gathering and plant facilities due to ongoing expenditures on this infrastructure and (ii) the depreciation on our gathering system right-of-use asset. Depreciation, depletion, and amortization (“DD&A”) consisted of the following for the periods indicated: +Years Ended December 31, +Variance +Between +2019 / 2018 +Per BOE +DD&A Expense (in thousands, except per BOE) +2019 +2018 +2019 +2018 +Depletion +$ +817,099 +$ +538,919 +$ +278,180 +$ +8.04 +$ +6.65 +Depreciation +65,074 +51,554 +13,520 +0.64 +0.64 +$ +882,173 +$ +590,473 +$ +291,700 +$ +8.68 +$ +7.29 +Asset Retirement Obligation +Asset retirement obligation expense is typically primarily comprised of accretion expense. In periods subsequent to the initial measurement of an asset retirement obligation liability at present value, a period-to-period increase in the carrying amount of the liability is recognized as accretion expense, which represents the effect of the passage of time on the amount of the liability. An equivalent amount is added to the carrying amount of the liability. Also included in asset retirement obligation expense are gains and losses recognized on the settlement of asset retirement obligation liabilities. +Production +Production expense generally consists of costs for labor, equipment, maintenance, saltwater disposal, compression, power, treating, and miscellaneous other costs (lease operating expense). Production expense also includes well workover activity necessary to maintain production from existing wells. Production expense consisted of lease operating expense and workover expense as follows: +Years Ended December 31, +Variance +Between +2019 / 2018 +Per BOE +Production Expense (in thousands, except per BOE) +2019 +2018 +2019 +2018 +Lease operating expense +$ +273,092 +$ +244,861 +$ +28,231 +$ +2.68 +$ +3.03 +Workover expense +66,849 +51,328 +15,521 +0.66 +0.63 +$ +339,941 +$ +296,189 +$ +43,752 +$ +3.34 +$ +3.66 +On an absolute dollar basis, lease operating expense increased 12% , or $28.2 million , in 2019 compared to 2018 . The increases have primarily stemmed from the Resolute acquisition and the addition of new wells as a result of our ongoing exploration and development activities. These increases were partially offset by expense reductions related to the sale of non-strategic properties principally located in Ward County, Texas in August 2018. The majority of the increase in lease operating expense is due to increases in water disposal and electricity costs. On a per BOE basis, lease operating expense decreased 12% as a result of our production growing at a faster rate than increases in our lease operating expense. +Workover expense increased 30% , or $15.5 million , during 2019 as compared to 2018 . We had an increased number of workover projects contributing to our workover expense during 2019 as compared to 2018 . The following types of expenses have been the primary drivers of increased expense in 2019 as compared to 2018 : (i) surface equipment maintenance and repair, (ii) lift, which includes changing lift types or repairing/replacing lift equipment, and (iii) major +46 +Table of Contents +well work, which can include replacing tubing, casing repair, cleanouts, and fishing. During 2018 , our workover expense was reduced due to receiving approximately $4.0 million in insurance proceeds related to the remediation and repairs incurred as a result of a 2015 flooding event. +Transportation, Processing, and Other Operating +Transportation, processing, and other operating costs principally consist of expenditures to prepare and transport production from the wellhead, including gathering, fuel, compression, and processing costs. Costs vary by region and will fluctuate with increases or decreases in production volumes, contractual fees, and changes in fuel and compression costs. +If the sales contract transfers control of the product at the wellhead, transportation and processing costs are included as a reduction in the revenue we record and are not included in transportation, processing, and other operating costs. The largest sales contract that we acquired with Resolute is structured this way and sales volumes under legacy Cimarex contracts structured this way have increased, therefore, our transportation and processing costs have not increased commensurate with production volume increases. Transportation, processing, and other operating costs in 2019 were 13% , or $26.8 million , higher than in 2018 ; however, on a per BOE basis, such costs have decreased 10% to $2.34 in 2019 from $2.61 in 2018 . +Gas Gathering and Other +Gas gathering and other includes costs associated with operating our gas gathering and processing infrastructure, including product costs and operating and maintenance expenses. A portion of these costs are reclassified to Transportation, processing, and other expense and Production expense in order to reflect an allocation of the costs incurred to operate our gas gathering facilities as a cost of transporting our equity share of gas produced and operating our wells. Gas gathering and other in 2019 was 18% , or $5.0 million , lower than in 2018 . The decrease was primarily due to an increase in compression costs in 2019 offset by a lower amount reclassified to Transportation, processing, and other expense in 2018. +Taxes Other than Income +Taxes other than income consist of production (or severance) taxes, ad valorem taxes, and other taxes. State and local taxing authorities assess these taxes, with production taxes being based on the volume or value of production and ad valorem taxes being based on the value of properties. +Years Ended December 31, +Variance +Between +2019 / 2018 +Taxes Other than Income (in thousands) +2019 +2018 +Production +$ +111,819 +$ +105,014 +$ +6,805 +Ad valorem +36,291 +19,459 +16,832 +Other +843 +696 +147 +$ +148,953 +$ +125,169 +$ +23,784 +Taxes other than income as a percentage of production revenue +6.4 +% +5.4 +% +Taxes other than income increased 19% , or $23.8 million , in 2019 as compared to 2018 . Production taxes make up the majority of our taxes other than income and they increased primarily due to: (i) decreased refunds, which are generally for high-cost gas wells in Texas, but also include marketing cost deduction refunds and (ii) increased production volumes. The largest increase in our taxes other than income was due to increased ad valorem taxes primarily as a result of the Resolute acquisition and increased assessed values. Other taxes other than income are comprised of franchise and consumer use and sales taxes. +47 +Table of Contents +General and Administrative +General and administrative (“G&A”) expense consists primarily of salaries and related benefits, office rent, legal and consulting fees, systems costs, and other administrative costs incurred. Our G&A expense is reported net of amounts reimbursed to us by working interest owners of the oil and gas properties we operate and net of amounts capitalized pursuant to the full cost method of accounting. The amount of expense capitalized varies and depends on whether the cost incurred can be directly identified with acquisition, exploration, and development activities. The percentage of gross G&A capitalized was 44% and 48% during 2019 and 2018 , respectively. The table below shows our G&A costs. +Years Ended December 31, +Variance +Between +2019 / 2018 +General and Administrative Expense (in thousands): +2019 +2018 +Gross G&A +$ +170,757 +$ +149,820 +$ +20,937 +Less amounts capitalized to oil and gas properties +(74,914 +) +(71,977 +) +(2,937 +) +G&A expense +$ +95,843 +$ +77,843 +$ +18,000 +G&A expense increased 23% , or $18.0 million , in 2019 as compared to 2018 primarily due to increased employee-related costs such as salaries and wages, other compensation, and benefits. Included in 2019 was $3.1 million of severance expense related to former Resolute employees who performed transition work at Cimarex and were subsequently terminated. During the first quarter of 2020, we accepted volunteers to participate in an early retirement incentive program. As a result of this program, we expect to incur an aggregate of approximately $10.5 million in severance expense over the course of 2020 into early 2021. Going forward, these departures are expected to result in lower employee-related G&A costs. +Stock Compensation +Stock compensation expense consists of non-cash charges resulting from the amortization of the cost of restricted stock and stock option awards, net of amounts capitalized to oil and gas properties. We have recognized stock-based compensation cost as follows: +Years Ended December 31, +Variance +Between +2019 / 2018 +Stock Compensation Expense (in thousands): +2019 +2018 +Restricted stock awards: +Performance stock awards +$ +21,590 +$ +23,083 +$ +(1,493 +) +Service-based stock awards +25,611 +20,385 +5,226 +47,201 +43,468 +3,733 +Stock option awards +1,903 +2,456 +(553 +) +Total stock compensation cost +49,104 +45,924 +3,180 +Less amounts capitalized to oil and gas properties +(22,706 +) +(23,029 +) +323 +Stock compensation expense +$ +26,398 +$ +22,895 +$ +3,503 +Periodic stock compensation expense will fluctuate based on the grant date fair value of awards, the number of awards, the requisite service period of the awards, employee forfeitures, and the timing of the awards. The increase in total stock compensation cost in 2019 as compared to 2018 is primarily due to performance stock award forfeitures that occurred during 2018 as well as due to expense on awards granted during the periods more than offsetting the expense on awards that vested during the periods . Our accounting policy is to account for forfeitures in compensation cost when they occur, therefore, all the previously recognized expense on the forfeited award is reversed at the time of forfeiture. During the first quarter of 2020, we accepted volunteers to participate in an early retirement incentive +48 +Table of Contents +program, which includes the cash settlement of certain service-based stock awards and accelerated vesting of certain stock option awards. At this time, the effect of this program on future stock compensation expense is not determinable. +Loss (Gain) on Derivative Instruments, Net +Net gains and losses on our derivative instruments are a function of fluctuations in the underlying commodity index prices as compared to the contracted prices and the monthly cash settlements (if any) of the instruments. We have elected not to designate our derivatives as hedging instruments for accounting purposes and, therefore, we do not apply hedge accounting treatment to our derivative instruments. Consequently, changes in the fair value of our derivative instruments and cash settlements on the instruments are included as a component of operating costs and expenses as either a net gain or loss on derivative instruments. Cash settlements of our contracts are included in cash flows from operating activities in our statements of cash flows. The following table presents the components of Loss (gain) on derivative instruments, net for the years indicated. See Note 4 to the Consolidated Financial Statements for additional information regarding our derivative instruments. +Years Ended December 31, +Variance +Between +2019 / 2018 +Loss (Gain) on Derivative Instruments, Net (in thousands): +2019 +2018 +Decrease (increase) in fair value of derivative instruments, net: +Gas contracts +$ +(13,114 +) +$ +15,742 +$ +(28,856 +) +Oil contracts +76,833 +(126,130 +) +202,963 +63,719 +(110,388 +) +174,107 +Cash payments (receipts) on derivative instruments, net: +Gas contracts +(40,114 +) +(13,794 +) +(26,320 +) +Oil contracts +53,245 +38,223 +15,022 +13,131 +24,429 +(11,298 +) +Loss (gain) on derivative instruments, net +$ +76,850 +$ +(85,959 +) +$ +162,809 +Other Operating Expense, Net +Other operating expense, net increased $0.8 million in 2019 as compared to 2018 . This expense is comprised primarily of litigation settlements, acquisition-related costs, and allowance for doubtful accounts adjustments. Other operating expense, net in 2019 and 2018 included $10.0 million and $14.9 million , respectively in litigation settlements. Other operating expense, net in 2019 and 2018 included $8.4 million and $3.0 million , respectively, in acquisition-related costs incurred to effect the Resolute acquisition. The acquisition-related costs consisted primarily of advisory and legal fees. +49 +Table of Contents +Other Income and Expense +Years Ended December 31, +Variance +Between +2019 / 2018 +Other Income and Expense (in thousands): +2019 +2018 +Interest expense +$ +93,386 +$ +68,224 +$ +25,162 +Capitalized interest +(56,232 +) +(20,855 +) +(35,377 +) +Loss on early extinguishment of debt +4,250 +— +4,250 +Other, net +(5,741 +) +(22,908 +) +17,167 +$ +35,663 +$ +24,461 +$ +11,202 +The majority of our interest expense relates to interest on our senior unsecured notes. Also included in interest expense is interest expense on our Credit Facility borrowings, the amortization of debt issuance costs and discounts, and miscellaneous interest expense. See LIQUIDITY AND CAPITAL RESOURCES Long-Term Debt below for further information regarding our debt. The increase in interest expense in 2019 as compared to 2018 is primarily due to (i) the March 8, 2019 issuance of $500 million aggregate principal amount of 4.375% senior unsecured notes due March 15, 2029 at 99.862% of par to yield 4.392% per annum, (ii) borrowings on our Credit Facility in 2019 to help fund the Resolute acquisition and thereafter to meet cash requirements as needed (we did not borrow on our Credit Facility in 2018), (iii) miscellaneous interest expense (primarily interest on revenues released from suspense), and (iv) interest expense on our finance lease. The $4.3 million loss on early extinguishment of debt incurred during 2019 was associated with the $600 million of 8.5% senior notes we acquired with Resolute and elected to immediately repay. The maturity date of the Resolute notes was May 1, 2020. +We capitalize interest on non-producing leasehold costs, the in-progress costs of drilling and completing wells, and constructing midstream assets. Capitalized interest will fluctuate based primarily on the amount of costs subject to interest capitalization and based on the rates applicable to borrowings outstanding during the period. The amount of costs subject to interest capitalization was higher in 2019 as compared to 2018 , primarily due to the Resolute acquisition. Included in the preliminary purchase price allocation of the Resolute acquisition was non-producing leasehold costs of $1.02 billion . +Other, net includes interest income of $3.3 million and $11.1 million in 2019 and 2018 , respectively. The decrease in interest income in 2019 is primarily due to the cash expended for the Resolute acquisition, which included $325.7 million in cash consideration and the repayment of $870.0 million in principal amount of Resolute’s long-term debt existing at the acquisition date. This decreased our investable cash balance post-acquisition, thus lowering our interest income. Other components of Other, net include miscellaneous income and expense items that vary from period to period, including gain or loss related to the sale or value of oil and gas well equipment and supplies, gain or loss on miscellaneous fixed asset sales, and income and expense associated with other non-operating activities. +50 +Table of Contents +Income Tax (Benefit) Expense +The components of our provision for income taxes and our combined federal and state effective income tax rates were as follows: +Years Ended December 31, +Variance +Between +2019 / 2018 +Income Tax (Benefit) Expense (in thousands): +2019 +2018 +Current tax expense (benefit) +$ +532 +$ +(2,624 +) +$ +3,156 +Deferred tax (benefit) expense +(26,902 +) +233,280 +(260,182 +) +$ +(26,370 +) +$ +230,656 +$ +(257,026 +) +Combined federal and state effective income tax rate +17.5 +% +22.6 +% +Our combined federal and state effective tax rates, as shown above, differ from the statutory rate primarily due to state income taxes and non-deductible expenses. See Note 9 to the Consolidated Financial Statements for further information regarding our income taxes. +LIQUIDITY AND CAPITAL RESOURCES +Overview +We strive to maintain an adequate liquidity level to address volatility and risk. Sources of liquidity include our cash flow from operations, cash on hand, available borrowing capacity under our revolving credit facility, proceeds from sales of non-strategic assets, and, from time to time, public financings based on our monitoring of capital markets and our balance sheet. +Our liquidity is highly dependent on prices we receive for the oil, gas, and NGLs we produce. Prices we receive are determined by prevailing market conditions and greatly influence our revenue, cash flow, profitability, access to capital, and future rate of growth. See RESULTS OF OPERATIONS Revenues above for further information regarding the impact realized prices have had on our 2019 earnings. +We address volatility in commodity prices primarily by maintaining flexibility in our capital investment program. We have a balanced and abundant drilling inventory and limited long-term commitments, which enables us to respond quickly to industry volatility. Based on current economic conditions, our 2020 total capital expenditures are projected to range from $1.25 billion to $1.35 billion . See Capital Expenditures below for information regarding our 2019 capital expenditures and our projected 2020 expenditures. +We periodically use derivative instruments to mitigate volatility in commodity prices. At December 31, 2019 , we had derivative contracts covering a portion of our 2020 and 2021 production. Depending on changes in oil and gas futures markets and management’s view of underlying supply and demand trends, we may increase or decrease our derivative positions from current levels. See Note 4 to the Consolidated Financial Statements for information regarding our derivative instruments. +Cash and cash equivalents at December 31, 2019 were $94.7 million . At December 31, 2019 , our long-term debt consisted of $2.00 billion of senior unsecured notes, with $750 million 4.375% notes due in 2024, $750 million 3.90% notes due in 2027, and $500 million 4.375% due in 2029 . At December 31, 2019 , we had no borrowings and $2.5 million in letters of credit outstanding under our credit facility, leaving an unused borrowing availability of $1.248 billion . See Long-Term Debt below for more information regarding our debt. +51 +Table of Contents +Our debt to total capitalization ratio at December 31, 2019 was 37% , up from 31% at December 31, 2018 . This ratio is calculated by dividing the sum of (i) the principal amount of long-term debt and (ii) redeemable preferred stock by the sum of (i) the principal amount of long-term debt, (ii) redeemable preferred stock, and (iii) total stockholders’ equity, with all numbers coming directly from the Consolidated Balance Sheet. Management uses this ratio as one indicator of our financial condition and believes professional research analysts and rating agencies use this ratio for this purpose and to compare our financial condition to other companies’ financial conditions. +We may, from time to time, seek to repurchase our outstanding redeemable preferred stock through cash repurchases and/or exchanges for equity securities, privately negotiated transactions, or otherwise. Such activities, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions, and other factors. See Note 2 to the Consolidated Financial Statements for information regarding our redeemable preferred stock. +We expect our operating cash flow and other capital resources to be adequate to meet our needs for planned capital expenditures, working capital, debt service, and dividends declared for the next twelve months. +Analysis of Cash Flow Changes +The following table presents the totals of the major cash flow classification categories from our Consolidated Statements of Cash Flows for the periods indicated. +Years Ended December 31, +(in thousands) +2019 +2018 +Net cash provided by operating activities +$ +1,343,966 +$ +1,550,994 +Net cash used by investing activities +$ +(1,577,882 +) +$ +(1,085,618 +) +Net cash used by financing activities +$ +(472,028 +) +$ +(65,244 +) +Net cash provided by operating activities in 2019 was $1.34 billion , down $207.0 million , or 13% , from $1.55 billion in 2018 . The decrease resulted primarily from an increased investment in working capital, primarily related to the repayment of liabilities assumed from Resolute, and increased operating expenses in 2019 as compared to 2018. Partially offsetting this decrease in operating cash flows was an increase due to increased revenues, primarily due to increased production volumes, and a decrease in cash outflows for settlements of derivative instruments. See RESULTS OF OPERATIONS above for more information regarding the changes in revenue and operating expenses. +Net cash used by investing activities was $1.58 billion and $1.09 billion in 2019 and 2018 , respectively. The majority of our cash flows used by investing activities are for oil and gas capital expenditures, which, as reflected in the statements of cash flows, were $1.25 billion and $1.57 billion in 2019 and 2018 , respectively. Net cash used by investing activities in 2019 included the $325.7 million cash portion of the consideration paid for the Resolute acquisition, net of the $41.2 million in cash acquired with Resolute. Net cash used by investing activities in 2018 included $534.6 million in net cash proceeds from the sale of oil and gas properties principally located in Ward County, Texas. Net cash proceeds from other asset sales in 2019 and 2018 totaled $30.0 million and $49.9 million , respectively. These asset sales are primarily for the divestiture of non-strategic oil and gas properties. Our other capital expenditures, which are primarily for our midstream assets, were $73.7 million and $103.5 million in 2019 and 2018 , respectively. +Net cash used by financing activities was $472.0 million and $65.2 million in 2019 and 2018 , respectively. During 2019 , we issued $500 million aggregate principal amount of 4.375% senior unsecured notes due March 15, 2029 at 99.862% of par for proceeds of $499.3 million , paying $4.6 million in underwriting fees and financing costs. Additionally, we borrowed and repaid an aggregate of $2.12 billion on our credit facility during 2019 to assist in funding the Resolute acquisition and thereafter to meet cash requirements as needed. In connection with the acquisition of Resolute, we assumed $870.0 million in principal amount of long-term debt that we immediately repaid, incurring a redemption fee of $4.3 million . During 2019 , we amended our credit facility, paying $3.0 million in financing costs. +52 +Table of Contents +We had no long-term debt-related financing cash flows during 2018 . Net cash used by financing activities during both years included: (i) the payment of dividends, (ii) the payment of income tax withholdings made on behalf of our employees upon the net settlement of employee stock awards, and (iii) the receipt of proceeds from exercises of stock options. During 2019 and 2018 , we declared cash dividends on our common stock quarterly, paying them in the quarter following declaration. Additionally, during 2019 , we declared cash dividends on our preferred stock quarterly, also paying them in the quarter following declaration. During 2019 , we paid one $0.18 per common share dividend, three $0.20 per common share dividends, and three $20.3125 per preferred share dividends, totaling $81.7 million . During 2018 , we paid one $0.08 per common share dividend, two $0.16 per common share dividends, and one $0.18 per common share dividend, totaling $55.2 million . Future dividend payments will depend on our level of earnings, financial requirements, and other factors considered relevant by our Board of Directors. We paid employee income tax withholdings on the net settlement of stock awards totaling $5.2 million and $12.1 million , in 2019 and 2018 , respectively. Cash proceeds received from stock option exercises were $1.3 million and $2.2 million in 2019 and 2018 , respectively. +Capital Expenditures +The following table presents capitalized expenditures for oil and gas acquisition, exploration, and development activities. The table also presents the amounts removed from our oil and gas properties balance, net of applicable purchase price adjustments, due to property sales. +Years Ended December 31, +(in thousands) +2019 +2018 +Acquisitions: +Proved +$ +695,450 +$ +62 +Unproved +1,025,376 +26,216 +1,720,826 +26,278 +Exploration and development: +Land and seismic +60,175 +82,791 +Exploration and development +1,181,605 +1,487,453 +1,241,780 +1,570,244 +Property sales +(35,320 +) +(581,799 +) +$ +2,927,286 +$ +1,014,723 +Amounts in the table above are presented on an accrual basis. Oil and gas capital expenditures and sales of oil and gas assets in the Consolidated Statements of Cash Flows reflect capital expenditures and proceeds from property sales on a cash basis, when payments are made and proceeds received. +On March 1, 2019 , we completed the acquisition of Resolute Energy Corporation, an independent oil and gas company focused on the acquisition and development of unconventional oil and gas properties in the Delaware Basin area of the Permian Basin of west Texas. The fair value of the proved and unproved properties recorded in the preliminary purchase price allocation for this acquisition was $692.6 million and $1.02 billion , respectively. +We decreased our 2019 E&D expenditures 21% to $1.24 billion compared to $1.57 billion in 2018 . Approximately 84% of our 2019 E&D expenditures were in the Permian Basin and 16% were in the Mid-Continent. During 2019 , we completed or participated in the completion of 291 gross ( 92.1 net) wells, of which we operated 119 gross ( 85.3 net) wells. See Items 1 and 2 of this report for further information regarding our oil and gas properties. +53 +Table of Contents +Based on current economic conditions, our 2020 total capital expenditures are projected to range from $1.25 billion to $1.35 billion . This includes drilling and completion capital of approximately $950 million to $1.05 billion , investments in midstream and water infrastructure of approximately $100 million , and investments in other, including capitalized G&A and non-producing leasehold, of approximately $200 million . Approximately 90% of our planned 2020 drilling and completion capital investment is expected to be invested in the Permian Basin, with the remainder in the Mid-Continent. As has been our historical practice, we regularly review our capital expenditures throughout the year and will adjust our investments based on increases or decreases in commodity prices, service costs, and drilling success. We have the flexibility to adjust our capital expenditures based upon market conditions. We intend to fund our 2020 capital investment program with cash flow from our operating activities, cash on hand, and borrowings under our credit facility. Sales of non-strategic assets and possible capital markets transactions may also be used to supplement funding of capital expenditures and acquisitions. The timing of capital expenditures and the receipt of cash flows do not necessarily match, which may cause us to borrow and repay funds under our credit facility from time-to-time. See Long-Term Debt — Bank Debt below for further information regarding our credit facility. +We have made, and will continue to make, expenditures to comply with environmental and safety regulations and requirements. These costs are considered a normal recurring cost of our ongoing operations. While we expect current pending legislation or regulations to increase the cost of business, we do not anticipate that we will be required to expend amounts that will have a material adverse effect on our financial position or operations, nor are we aware of any pending regulatory changes that would have a material impact, based on current laws and regulations. However, compliance with new legislation or regulations could increase our costs or adversely affect demand for oil or gas and result in a material adverse effect on our financial position or operations. See Item 1A RISK FACTORS for a description of risks related to current and potential future environmental and safety regulations and requirements that could adversely affect our operations and financial condition. +Long-Term Debt +Long-term debt at December 31, 2019 and 2018 consisted of the following: +December 31, 2019 +December 31, 2018 +(in thousands) +Principal +Unamortized Debt +Issuance Costs and Discounts (1) +Long-term +Debt, net +Principal +Unamortized Debt +Issuance Costs and Discount (1) +Long-term +Debt, net +4.375% notes due 2024 +$ +750,000 +$ +(3,535 +) +$ +746,465 +$ +750,000 +$ +(4,439 +) +$ +745,561 +3.90% notes due 2027 +750,000 +(6,289 +) +743,711 +750,000 +(7,007 +) +742,993 +4.375% notes due 2029 +500,000 +(4,930 +) +495,070 +— +— +— +Total long-term debt +$ +2,000,000 +$ +(14,754 +) +$ +1,985,246 +$ +1,500,000 +$ +(11,446 +) +$ +1,488,554 +________________________________________ +(1) +The 4.375% notes due 2024 were issued at par, therefore, the amounts shown in the table are for unamortized debt issuance costs only. At December 31, 2019 , the unamortized debt issuance costs and discount related to the 3.90% notes were $4.8 million and $1.5 million , respectively. At December 31, 2019 , the unamortized debt issuance costs and discount related to the 4.375% notes due 2029 were $4.3 million and $0.6 million , respectively. At December 31, 2018 , the unamortized debt issuance costs and discount related to the 3.90% notes were $5.4 million and $1.6 million , respectively. +54 +Table of Contents +Bank Debt +On February 5, 2019 , we entered into an Amended and Restated Credit Agreement for our senior unsecured revolving credit facility (“Credit Facility”). Among other things, the amended and restated credit facility increased the aggregate commitments to $1.25 billion with an option for us to increase the aggregate commitments to $1.5 billion , and extended the maturity date to February 5, 2024 . There is no borrowing base subject to the discretion of the lenders based on the value of our proved reserves under the Credit Facility. As of December 31, 2019 , we had no bank borrowings outstanding under the Credit Facility, but did have letters of credit of $2.5 million outstanding, leaving an unused borrowing availability of $1.248 billion . During the year ended December 31, 2019 , we borrowed and repaid an aggregate of $2.12 billion , on the Credit Facility to meet cash requirements as needed. +At our option, borrowings under the Credit Facility may bear interest at either (a) LIBOR (or an alternate rate determined by the administrative agent for the Credit Facility in accordance with the Credit Facility when LIBOR is no longer available) plus 1.125 - 2.0% based on the credit rating for our senior unsecured long-term debt, or (b) a base rate (as defined in the credit agreement) plus 0.125 - 1.0% , based on the credit rating for our senior unsecured long-term debt. Unused borrowings are subject to a commitment fee of 0.125 - 0.35% , based on the credit rating for our senior unsecured long-term debt. +The Credit Facility contains representations, warranties, covenants, and events of default that are customary for investment grade, senior unsecured bank credit agreements, including a financial covenant for the maintenance of a defined total debt-to-capital ratio of no greater than 65% . As of December 31, 2019 , we were in compliance with all of the financial and non-financial covenants. +At December 31, 2019 and 2018 , we had $4.0 million and $2.2 million , respectively, of unamortized debt issuance costs associated with our Credit Facility, which were recorded as assets and included in “Other assets” in our balance sheets. The costs are being amortized to interest expense ratably over the life of the Credit Facility. We incurred $3.0 million in additional debt issuance costs in amending our Credit Facility. +Senior Notes +On March 8, 2019 , we issued $500.0 million aggregate principal amount of 4.375% senior unsecured notes due March 15, 2029 at 99.862% of par to yield 4.392% per annum. We received $494.7 million in net cash proceeds, after deducting underwriters’ fees, discount, and debt issuance costs. The notes bear an annual interest rate of 4.375% and interest is payable semiannually on March 15 and September 15 , with the first payment made on September 15, 2019 . We used the net proceeds to repay borrowings under our Credit Facility that were used to help fund the Resolute acquisition on March 1, 2019. The effective interest rate on these notes, including the amortization of debt issuance costs and discount, is 4.50% . +In April 2017, we issued $750 million aggregate principal amount of 3.90% senior unsecured at 99.748% of par to yield 3.93% per annum. These notes are due May 15, 2027 and interest is payable semiannually on May 15 and November 15. The effective interest rate on these notes, including the amortization of debt issuance costs and discount, is 4.01% . +In June 2014, we issued $750 million aggregate principal amount of 4.375% senior unsecured notes at par. These notes are due June 1, 2024 and interest is payable semiannually on June 1 and December 1. The effective interest rate on these notes, including the amortization of debt issuance costs, is 4.50% . +Each of our senior unsecured notes is governed by an indenture containing certain covenants, events of default, and other restrictive provisions with which we were in compliance as of December 31, 2019 . +55 +Table of Contents +Working Capital Analysis +At December 31, 2019 , we had a working capital deficit of $137.1 million , a decrease of $852.6 million , or 119% from a working capital surplus of $715.4 million at December 31, 2018 . Our working capital decreased primarily due to the decrease in Cash and cash equivalents of $705.9 million , which was a result of cash consideration paid for our acquisition of Resolute and subsequent repayment of long-term debt and other liabilities acquired with Resolute. See Note 13 to the Consolidated Financial Statements for more information regarding the acquisition. In addition to the decrease in cash, other significant changes to working capital consisted primarily of the following: +• +Our net current asset derivative instrument position decreased by $73.0 million . The fair value of derivative instruments fluctuates based on changes in the underlying price indices as compared to the contracted prices included in the derivative instruments. +• +The January 1, 2019 adoption of Topic 842 increased our current liabilities by $73.3 million at December 31, 2019 . This amount represents the estimated current future lease payments, primarily for office space, well-head compressors, pipeline compressors, and artificial lift mechanisms. See Note 10 to the Consolidated Financial Statements for more information regarding our lease liabilities and the adoption of Topic 842. +Accounts receivable are a major component of our working capital and include amounts due from a diverse group of companies comprised of major energy companies, pipeline companies, local distribution companies, and other end-users. Historically, losses associated with uncollectible receivables have not been significant. +Dividends +A quarterly cash dividend has been paid on our common stock every quarter since the first quarter of 2006. During 2019, our Board of Directors declared four $0.20 per common share cash dividends, totaling $81.4 million . In March 2019, in conjunction with the Resolute acquisition, we issued 62.5 thousand shares of 8.125% Series A Cumulative Perpetual Convertible Preferred Stock, par value $0.01 per share. During 2019, our Board of Directors declared four cash dividends of $20.3125 per preferred share, totaling $5.1 million . Future dividend payments will depend on our level of earnings, financial requirements, and other factors considered relevant by our Board of Directors. See Note 2 to the Consolidated Financial Statements for further information regarding our stock and Note 13 to the Consolidated Financial Statements for further information regarding the Resolute acquisition. +Off-Balance Sheet Arrangements +We may enter into off-balance sheet arrangements and transactions that can give rise to material off-balance sheet obligations. As of December 31, 2019 , our material off-balance sheet arrangements consisted of operating lease agreements with lease terms at commencement of 12 months or less. As an accounting policy, we have elected not to apply the recognition requirements of Topic 842 to these leases. As such, we have not recorded any lease liabilities associated with these leases. +56 +Table of Contents +Contractual Obligations and Material Commitments +At December 31, 2019 , we had the following contractual obligations and material commitments: +Payments Due by Period +Contractual obligations (in thousands) : +Total +1/1/20 - 12/31/20 +1/1/21 - 12/31/22 +1/1/23 - 12/31/24 +1/1/25 and Thereafter +Long-term debt-principal (1) +$ +2,000,000 +$ +— +$ +— +$ +750,000 +$ +1,250,000 +Long-term debt-interest (1) +574,905 +81,868 +167,875 +151,469 +173,693 +Operating leases (2) +108,451 +26,950 +32,488 +24,708 +24,305 +Unconditional purchase obligations (3) +84,436 +21,567 +21,381 +18,542 +22,946 +Derivative liabilities +17,699 +16,681 +1,018 +— +— +Asset retirement obligation (4) +181,869 +27,824 +— +(4) +— +(4) +— +(4) +Other long-term liabilities (5) +42,493 +1,564 +5,862 +2,991 +32,076 +$ +3,009,853 +$ +176,454 +$ +228,624 +$ +947,710 +$ +1,503,020 +________________________________________ +(1) +The interest payments presented above include the accrued interest payable on our long-term debt as of December 31, 2019 as well as future payments calculated using the long-term debt’s fixed rates, stated maturity dates, and principal amounts outstanding as of December 31, 2019 . See Note 3 to the Consolidated Financial Statements for additional information regarding our debt. +(2) +Operating leases include the estimated remaining contractual payments under lease agreements as of December 31, 2019 . These lease agreements are primarily comprised of leases for commercial real estate, which consists primarily of office space, and compressor equipment. +(3) +Of the total unconditional purchase obligations, $20.2 million represents obligations for the purchase of sand for well completions and $64.0 million represents obligations for firm transportation agreements for gas and oil pipeline capacity. +(4) +We have excluded the presentation of the timing of the cash flows associated with our long-term asset retirement obligations because we cannot make a reasonably reliable estimate of the future period of cash settlement. The long-term asset retirement obligation is included in the total asset retirement obligation presented. +(5) +Other long-term liabilities include contractual obligations associated with our employee supplemental savings plan, gas balancing liabilities, and other miscellaneous liabilities. All of these liabilities are accrued on our Consolidated Balance Sheet. The current portion associated with these long-term liabilities is also presented in the table above. +The following discusses various commercial commitments that we have made that may include potential future cash payments if we fail to meet various performance obligations. These are not reflected in the table above, unless otherwise noted. +At December 31, 2019 , we had estimated commitments of approximately: (i) $321.7 million to finish drilling, completing, or performing other work on wells and various other infrastructure projects in progress and (ii) $6.6 million to finish gathering system construction in progress. +At December 31, 2019 , we had firm sales contracts to deliver approximately 703.7 Bcf of gas over the next 11.5 years . If we do not deliver this gas, our estimated financial commitment, calculated using the January 2020 index prices, would be approximately $1.03 billion . The value of this commitment will fluctuate due to price volatility and actual volumes delivered. However, we believe no financial commitment will be due based on our current proved reserves and production levels from which we can fulfill these volumetric obligations. +57 +Table of Contents +In connection with gas gathering and processing agreements, we have volume commitments over the next 9.0 years . If we do not deliver the committed gas or NGLs, as the case may be, the estimated maximum amount that would be payable under these commitments, calculated as of December 31, 2019 , would be approximately $697.2 million . However, we believe no financial commitment will be due based on our current proved reserves and production levels from which we can fulfill these volumetric obligations. +We have minimum volume delivery commitments associated with agreements to reimburse connection costs to various pipelines. If we do not deliver this gas, or oil, as the case may be, the estimated maximum amount that would be payable under these commitments, calculated as of December 31, 2019 , would be approximately $117.6 million . Of this total, we have accrued a liability of $4.5 million representing the estimated amount we will have to pay due to insufficient forecasted volumes at particular connection points. This accrual is reflected in the table above in Other long-term liabilities. +All of the noted commitments were routine and made in the ordinary course of our business. +Taking into account current commodity prices and anticipated levels of production, we believe that our net cash flow generated from operations and our other capital resources will be adequate to meet future obligations. +CRITICAL ACCOUNTING POLICIES AND ESTIMATES +Discussion and analysis of our financial condition and results of operation are based on our Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses. We analyze and base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Changes in facts and circumstances or additional information may result in revised estimates, and actual results may differ from these estimates. +Our significant accounting policies are described in Note 1 to our Consolidated Financial Statements. We have identified the following policies as being of particular importance to the portrayal of our financial position and results of operations and which require the application of significant judgment by management. +Oil and Gas Reserves +The process of estimating quantities of oil and gas reserves is complex, requiring significant decisions in the evaluation of all available geological, geophysical, engineering and economic data. The data for a given field may also change substantially over time due to numerous factors including, but not limited to, additional development activity, evolving production history and continual reassessment of the viability of production under varying economic conditions. As a result, material revisions to existing reserve estimates may occur from time to time. Although every reasonable effort is made to ensure that our reserve estimates represent the most accurate assessments possible, subjective decisions and available data for our various fields make these estimates generally less precise than other estimates included in financial statement disclosures. +At year-end 2019 , 14% of our total proved reserves are categorized as proved undeveloped reserves. Our engineers review and revise these reserve estimates regularly, as new information becomes available. +We use the units-of-production method to amortize the cost associated with our oil and gas properties. Changes in estimates of reserve quantities and commodity prices will cause corresponding changes in depletion expense, or in some cases, a full cost ceiling impairment charge in the period of the revision. See Full Cost Accounting below for further information regarding the ceiling limitation calculation. See SUPPLEMENTAL INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED) in Item 8 for additional reserve data. +58 +Table of Contents +Full Cost Accounting +We use the full cost method of accounting for our oil and gas operations. All costs associated with property acquisition, exploration, and development activities are capitalized. Exploration and development costs include dry hole costs, geological and geophysical costs, direct overhead related to exploration and development activities, and other costs incurred for the purpose of finding oil and gas reserves. Salaries and benefits paid to employees directly involved in the acquisition, exploration, and development of properties, as well as other internal costs that can be directly identified with acquisition, exploration, and development activities, are also capitalized. Under the full cost method of accounting, no gain or loss is recognized upon the disposition of oil and gas properties unless such disposition would significantly alter the relationship between capitalized costs and proved reserves. Expenditures for maintenance and repairs are charged to production expense in the period incurred. +Under the full cost method of accounting, we are required to perform quarterly ceiling test calculations to test our oil and gas properties for possible impairment. If the net capitalized cost of our oil and gas properties, as adjusted for income taxes, exceeds the ceiling limitation, the excess is charged to expense. The ceiling limitation is equal to the sum of: (i) the present value discounted at 10% of estimated future net revenues from proved reserves, (ii) the cost of properties not being amortized, and (iii) the lower of cost or estimated fair value of unproven properties included in the costs being amortized, as adjusted for income taxes. We currently do not have any unproven properties that are being amortized. Estimated future net revenues are determined based on trailing twelve-month average commodity prices and estimated proved reserve quantities, operating costs, and capital expenditures. +The quarterly ceiling test is primarily impacted by commodity prices, changes in estimated reserve quantities, reserves produced, overall exploration and development costs, depletion expense, and deferred taxes. If pricing conditions decline, or if there is a negative impact on one or more of the other components of the calculation, we may incur a full cost ceiling test impairment. The calculated ceiling limitation is not intended to be indicative of the fair market value of our proved reserves or future results. Impairment charges do not affect cash flow from operating activities, but do adversely affect our net income and various components of our balance sheet. Any impairment of oil and gas properties is not reversible at a later date. +Depletion of proved oil and gas properties is computed on the units-of-production method, whereby capitalized costs, including future development costs and asset retirement costs, are amortized over total estimated proved reserves. Changes in our estimate of proved reserve quantities and impairment of oil and gas properties will cause corresponding changes in depletion expense in periods subsequent to these changes. +The capitalized costs of unproved properties, including those in wells in progress, are excluded from the costs being amortized. We do not have major development projects that are excluded from costs being amortized. On a quarterly basis, we evaluate excluded costs for inclusion in the costs to be amortized. Significant unproved properties are evaluated individually. Unproved properties that are not considered individually significant are aggregated for evaluation purposes and related costs are transferred to the costs to be amortized quarterly based on the application of historical factors. +Income Taxes +Our oil and gas exploration and production operations are subject to taxation on income in numerous jurisdictions. We record deferred tax assets and liabilities to account for the expected future tax consequences of events that have been recognized in our financial statements and our tax returns. We routinely assess the realizability of our deferred tax assets. Numerous judgments and assumptions are inherent in this assessment, including the determination of future taxable income, which is affected by factors such as future operating conditions (particularly as related to prevailing oil and gas prices) and changing tax laws. If we conclude that it is more likely than not that some portion or all of the deferred tax assets will not be realized, the tax asset would be reduced by a valuation allowance. +59 +Table of Contents +We regularly assess and, if required, establish accruals for tax contingencies that could result from assessments of additional tax by taxing jurisdictions where the company operates. See Note 9 to the Consolidated Financial Statements for additional information regarding our income taxes. +ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK +We are exposed to market risk including the risk of loss arising from adverse changes in commodity prices and interest rates. +Price Fluctuations +Our major market risk is pricing applicable to our oil, gas, and NGL production. The prices we receive for our production are based on prevailing market conditions and are influenced by many factors that are beyond our control. Pricing for oil, gas, and NGL production has been volatile and unpredictable. During 2019 , our total production revenue was comprised of 72% oil sales, 12% gas sales, and 16% NGL sales. The following table shows how hypothetical changes in the realized prices we receive for our commodity sales may have impacted revenue for the periods indicated. See MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS— Market Conditions for further information regarding prices. +Impact on Revenue +Change in Realized Price +Year Ended +December 31, 2019 +(in thousands) +Oil +± $1.00 +per barrel +± $31,463 +Gas +± $0.10 +per Mcf +± $25,157 +NGL +± $1.00 +per barrel +± $28,254 +± $84,874 +We periodically enter into derivative contracts to hedge a portion of our price risk associated with our future oil and gas production. At December 31, 2019 , we had oil and gas derivatives covering a portion of our 2020 and 2021 production, which were recorded as current and non-current assets and liabilities. At December 31, 2019 , our oil and gas derivatives had a gross asset fair value of $18.5 million and a gross liability fair value of $17.7 million . See Note 4 to the Consolidated Financial Statements for additional information regarding our derivative instruments. +While these contracts limit the downside risk of adverse price movements, they may also limit future cash flow from favorable price movements. The following table shows how hypothetical changes in the forward prices used to calculate the fair value of our derivatives may have impacted the fair value as of December 31, 2019 . +Impact on Fair Value +Change in Forward Price +December 31, 2019 +(in thousands) +Oil +-$1.00 +$ +7,726 +Oil ++$1.00 +$ +(8,115 +) +Gas +-$0.10 +$ +3,276 +Gas ++$0.10 +$ +(3,118 +) +60 +Table of Contents +Interest Rate Risk +At December 31, 2019 , our long-term debt consisted of $750 million of 4.375% senior unsecured notes that mature on June 1, 2024 , $750 million of 3.90% senior unsecured notes that mature on May 15, 2027 , and $500 million of 4.375% that mature on March 15, 2029 . Because all of our outstanding long-term debt is at a fixed rate, we consider our interest rate exposure to be minimal. See Note 3 and Note 5 to the Consolidated Financial Statements for additional information regarding our debt. +61 +Table of Contents +ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA +CIMAREX ENERGY CO. +INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTAL SCHEDULES +Page +Report of Independent Registered Public Accounting Firm for the years ended December 31, 2019, 2018, and 2017 +63 +Consolidated Balance Sheets as of December 31, 2019 and 2018 +66 +Consolidated Statements of Operations and Comprehensive Income (Loss) for the years ended December 31, 2019, 2018, and 2017 +67 +Consolidated Statements of Cash Flows for the years ended December 31, 2019, 2018, and 2017 +68 +Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2019, 2018, and 2017 +69 +Notes to Consolidated Financial Statements +Note 1 — Basis of Presentation and Summary of Significant Accounting Policies +70 +Note 2 — Capital Stock +76 +Note 3 — Long-Term Debt +77 +Note 4 — Derivative Instruments +79 +Note 5 — Fair Value Measurements +83 +Note 6 — Stock-Based and Other Compensation +84 +Note 7 — Earnings (Loss) per Share +88 +Note 8 — Asset Retirement Obligations +89 +Note 9 — Income Taxes +90 +Note 10 — Commitments and Contingencies +92 +Note 11 — Related Party Transactions +97 +Note 12 — Supplemental Cash Flow Information +97 +Note 13 — Acquisitions and Divestitures +98 +Supplemental Information to Consolidated Financial Statements +Supplemental Information on Oil and Gas Producing Activities (Unaudited) +101 +Supplemental Quarterly Financial Data (Unaudited) +107 +All other supplemental information and schedules have been omitted because they are not applicable or the information required is shown in the consolidated financial statements or related notes thereto. +62 +Table of Contents +Report of Independent Registered Public Accounting Firm +To the Stockholders and Board of Directors +Cimarex Energy Co.: +Opinion on the Consolidated Financial Statements +We have audited the accompanying consolidated balance sheets of Cimarex Energy Co. and subsidiaries (the Company) as of December 31, 2019 and 2018, the related consolidated statements of operations and comprehensive income (loss), stockholders’ equity, and cash flows for each of the years in the three‑year period ended December 31, 2019, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the years in the three‑year period ended December 31, 2019, in conformity with U.S. generally accepted accounting principles. +We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 26, 2020 expressed an adverse opinion on the effectiveness of the Company’s internal control over financial reporting. +Change in Accounting Principle +As discussed in Note 1 to the consolidated financial statements, the Company has changed its method of accounting for leases as of January 1, 2019 due to the adoption of Financial Accounting Standards Board Accounting Standards Codification Topic 842, Leases. +Basis for Opinion +These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. +Critical Audit Matters +The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. +63 +Table of Contents +Assessment of the effect of estimated oil and gas reserves related to proved oil and gas properties on depletion expense and the ceiling test calculation +As discussed in Note 1 to the consolidated financial statements, the Company calculates depletion expense related to proved oil and gas properties using the units-of-production method. Under such method, capitalized costs, including future estimated development costs and asset retirement costs, are amortized over total estimated proved oil and gas reserves. For the year ended December 31, 2019, the Company recorded depletion expense related to proved oil and gas properties of $817.1 million . The Company recorded a ceiling test impairment of $618.7 million for the year ended December 31, 2019 due to the net capitalized cost of the oil and gas properties exceeding the ceiling limitation. The Company is required to perform a ceiling test calculation on a quarterly basis, and the applicable ceiling limitation is equal to the sum of: (1) the present value discounted at 10% of estimated future net revenues from proved reserves, (2) the cost of properties not being amortized, and (3) the lower of cost or estimated fair value of unproven properties included in the costs being amortized. The Company’s internal Corporate Reservoir Engineering group estimates proved oil and gas reserves. The Company also engages an independent petroleum engineering consulting firm to perform an independent evaluation of a portion of those proved oil and gas reserve estimates. +We identified the assessment of the effect of estimated oil and gas reserves related to proved oil and gas properties on both depletion expense and the ceiling test calculation as a critical audit matter. Complex auditor judgment was required in evaluating the Company’s estimate of proved oil and gas reserves. Auditor judgment was also required to evaluate the assumptions used by the Company related to forecasted production, estimated future operating costs, and oil and gas prices inclusive of market differentials because changes to these assumptions could have a significant impact on the estimated oil and gas reserves. +The primary procedures we performed to address this critical audit matter included the following. We tested certain internal controls over the Company’s depletion calculation and ceiling test calculation processes, including certain controls related to the estimation of proved oil and gas reserves used in the respective calculations. We evaluated the competence, capabilities, and objectivity of the Corporate Reservoir Engineering personnel who estimated the proved oil and gas reserves and the independent petroleum engineering consulting firm engaged by the Company. We assessed the methodology used by the Company’s internal Corporate Reservoir Engineering group to estimate proved oil and gas reserves and the methodology used by the independent petroleum engineering consulting firm to evaluate those reserve estimates for compliance with industry and regulatory standards. We evaluated the forecasted production and estimated future operating costs assumptions used by the Company’s internal Corporate Reservoir Engineering group by comparing them to the Company’s historical and current actual results. We evaluated the oil and gas prices used by the Company’s internal Corporate Reservoir Engineering group by comparing them to publicly available prices and tested the relevant market differentials. We read and considered the report of the Company’s independent petroleum engineering consulting firm in connection with our evaluation of the Company’s reserve estimates. We analyzed the depletion expense calculation for compliance with regulatory standards and recalculated it. We also analyzed the ceiling test calculation for compliance with regulatory standards, and recalculated it. +Evaluation of the fair value of oil and gas properties acquired in the Resolute business combination +As discussed in Note 13 to the consolidated financial statements, on March 1, 2019, the Company acquired Resolute Energy Corporation (Resolute) in a business combination. As a result of the transaction, the Company acquired both proved and unproved oil and gas properties. The acquisition-date fair value for the oil and gas properties acquired was $1.7 billion . +We identified the evaluation of the fair value of the oil and gas properties acquired in the Resolute business combination as a critical audit matter. Complex auditor judgment was required in evaluating the results of the discounted cash flow model used to determine the fair value of the proved oil and gas properties. The discounted cash flow model included the following significant assumptions: estimated future oil and gas prices, reserve category risk adjustment factors, forecasted production, estimated future operating costs and weighted-average cost of capital (WACC). In addition, complex auditor judgment was required in evaluating the results of the market based transactions used to determine the fair value of the unproved oil and gas properties. +64 +Table of Contents +The primary procedures we performed to address this critical audit matter included the following. We tested certain internal controls over the Company’s acquisition-date valuation process to determine the fair value of the acquired oil and gas properties, including controls over the development of the significant assumptions used in the discounted cash flow model for proved oil and gas properties and the assessment of market based transaction for unproved oil and gas properties. We evaluated the Company’s estimated future oil and gas prices by comparing them to relevant publicly available market price forecasts. We evaluated reserve category risk adjustment factors by comparing them against publicly available industry information. We evaluated the Company’s forecasted production and estimated future operating costs by comparing them to historical actual results of similar Cimarex oil and gas properties. In addition, we involved valuation professionals with specialized skills and knowledge, who assisted in evaluating the Company’s fair value as it relates to proved oil and gas properties by comparing the WACC to a range of WACCs of comparable peers that were independently developed using publicly available market information. As it relates to unproved oil and gas properties, the valuation professionals compared the Company’s estimated fair values by asset group to a range of indicated values of recent similar market transactions that were independently developed using publicly available market information. +KPMG LLP +We have served as the Company’s auditor since 2002. +Denver, Colorado +February 26, 2020 +65 +Table of Contents +CIMAREX ENERGY CO. +CONSOLIDATED BALANCE SHEETS +(in thousands, except share and per share information) +December 31, +2019 +2018 +Assets +Current assets: +Cash and cash equivalents +$ +94,722 +$ +800,666 +Accounts receivable, net of allowance: +Trade +57,879 +122,065 +Oil and gas sales +384,707 +315,063 +Gas gathering, processing, and marketing +5,998 +17,072 +Oil and gas well equipment and supplies +47,893 +55,553 +Derivative instruments +17,944 +101,939 +Prepaid expenses +10,759 +7,554 +Other current assets +1,584 +4,227 +Total current assets +621,486 +1,424,139 +Oil and gas properties at cost, using the full cost method of accounting: +Proved properties +20,678,334 +18,566,757 +Unproved properties and properties under development, not being amortized +1,255,908 +436,325 +21,934,242 +19,003,082 +Less—accumulated depreciation, depletion, amortization, and impairment +( 16,723,544 +) +( 15,287,752 +) +Net oil and gas properties +5,210,698 +3,715,330 +Fixed assets, net of accumulated depreciation of $389,458 and $324,631, respectively +519,291 +257,686 +Goodwill +716,865 +620,232 +Derivative instruments +580 +9,246 +Other assets +71,109 +35,451 +$ +7,140,029 +$ +6,062,084 +Liabilities, Redeemable Preferred Stock, and Stockholders’ Equity +Current liabilities: +Accounts payable: +Trade +$ +36,280 +$ +76,927 +Gas gathering, processing, and marketing +12,740 +29,887 +Accrued liabilities: +Exploration and development +112,228 +124,674 +Taxes other than income +54,446 +33,622 +Other +252,304 +221,159 +Derivative instruments +16,681 +27,627 +Revenue payable +207,939 +194,811 +Operating leases +66,003 +— +Total current liabilities +758,621 +708,707 +Long-term debt: +Principal +2,000,000 +1,500,000 +Less—unamortized debt issuance costs and discounts +( 14,754 +) +( 11,446 +) +Long-term debt, net +1,985,246 +1,488,554 +Deferred income taxes +338,424 +334,473 +Asset retirement obligation +154,045 +152,758 +Derivative instruments +1,018 +2,267 +Operating leases +184,172 +— +Other liabilities +60,742 +45,539 +Total liabilities +3,482,268 +2,732,298 +Commitments and contingencies (Note 10) +Redeemable preferred stock - 8.125% Series A Cumulative Perpetual Convertible Preferred Stock, $0.01 par value, 62,500 shares authorized and issued and no shares authorized and issued, respectively (Note 2) +81,620 +— +Stockholders’ equity: +Common stock, $0.01 par value, 200,000,000 shares authorized, 102,144,577 and 95,755,797 shares issued, respectively +1,021 +958 +Additional paid-in capital +3,243,325 +2,785,188 +Retained earnings +331,795 +542,885 +Accumulated other comprehensive income +— +755 +Total stockholders’ equity +3,576,141 +3,329,786 +$ +7,140,029 +$ +6,062,084 +See accompanying notes to Consolidated Financial Statements. +66 +Table of Contents +CIMAREX ENERGY CO. +CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) +(in thousands, except per share information) +Years Ended December 31, +2019 +2018 +2017 +Revenues: +Oil sales +$ +1,660,210 +$ +1,398,813 +$ +981,646 +Gas and NGL sales +661,711 +898,832 +892,357 +Gas gathering and other +42,454 +41,180 +43,751 +Gas marketing +( 1,406 +) +192 +495 +2,362,969 +2,339,017 +1,918,249 +Costs and expenses: +Impairment of oil and gas properties +618,693 +— +— +Depreciation, depletion, and amortization +882,173 +590,473 +446,031 +Asset retirement obligation +8,586 +7,142 +15,624 +Production +339,941 +296,189 +263,349 +Transportation, processing, and other operating +238,259 +211,463 +248,124 +Gas gathering and other +23,294 +28,327 +18,187 +Taxes other than income +148,953 +125,169 +89,864 +General and administrative +95,843 +77,843 +79,996 +Stock compensation +26,398 +22,895 +26,256 +Loss (gain) on derivative instruments, net +76,850 +( 85,959 +) +( 21,210 +) +Other operating expense, net +19,305 +18,507 +1,314 +2,478,295 +1,292,049 +1,167,535 +Operating (loss) income +( 115,326 +) +1,046,968 +750,714 +Other (income) and expense: +Interest expense +93,386 +68,224 +74,821 +Capitalized interest +( 56,232 +) +( 20,855 +) +( 22,948 +) +Loss on early extinguishment of debt +4,250 +— +28,187 +Other, net +( 5,741 +) +( 22,908 +) +( 11,342 +) +(Loss) income before income tax +( 150,989 +) +1,022,507 +681,996 +Income tax (benefit) expense +( 26,370 +) +230,656 +187,667 +Net (loss) income +$ +( 124,619 +) +$ +791,851 +$ +494,329 +Earnings (loss) per share to common stockholders: +Basic +$ +( 1.33 +) +$ +8.32 +$ +5.19 +Diluted +$ +( 1.33 +) +$ +8.32 +$ +5.19 +Comprehensive (loss) income: +Net (loss) income +$ +( 124,619 +) +$ +791,851 +$ +494,329 +Other comprehensive (loss) income: +Change in fair value of investments, net of tax of $(222), $(425), and $106, respectively +( 755 +) +( 1,444 +) +1,254 +Total comprehensive (loss) income +$ +( 125,374 +) +$ +790,407 +$ +495,583 +See accompanying notes to Consolidated Financial Statements. +67 +Table of Contents +CIMAREX ENERGY CO. +CONSOLIDATED STATEMENTS OF CASH FLOWS +(in thousands) +Years Ended December 31, +2019 +2018 +2017 +Cash flows from operating activities: +Net (loss) income +$ +( 124,619 +) +$ +791,851 +$ +494,329 +Adjustments to reconcile net (loss) income to net cash provided by operating activities: +Impairment of oil and gas properties +618,693 +— +— +Depreciation, depletion, and amortization +882,173 +590,473 +446,031 +Asset retirement obligation +8,586 +7,142 +15,624 +Deferred income taxes +( 26,902 +) +233,280 +190,479 +Stock compensation +26,398 +22,895 +26,256 +Loss (gain) on derivative instruments, net +76,850 +( 85,959 +) +( 21,210 +) +Settlements on derivative instruments +( 13,131 +) +( 24,429 +) +( 1,633 +) +Loss on early extinguishment of debt +4,250 +— +28,187 +Changes in non-current assets and liabilities +( 2,797 +) +( 1,779 +) +1,891 +Other, net +14,639 +105 +5,677 +Changes in operating assets and liabilities: +Accounts receivable +65,128 +5,421 +( 186,157 +) +Other current assets +( 739 +) +( 1,957 +) +( 17,931 +) +Accounts payable and other current liabilities +( 184,563 +) +13,951 +115,021 +Net cash provided by operating activities +1,343,966 +1,550,994 +1,096,564 +Cash flows from investing activities: +Oil and gas capital expenditures +( 1,249,797 +) +( 1,566,583 +) +( 1,233,126 +) +Acquisition of Resolute Energy, net of cash acquired (Note 13) +( 284,441 +) +— +— +Other capital expenditures +( 73,693 +) +( 103,459 +) +( 45,352 +) +Sales of oil and gas assets +28,945 +580,652 +11,680 +Sales of other assets +1,104 +3,772 +901 +Net cash used by investing activities +( 1,577,882 +) +( 1,085,618 +) +( 1,265,897 +) +Cash flows from financing activities: +Borrowings of long-term debt +2,619,310 +— +748,110 +Repayments of long-term debt +( 2,990,000 +) +— +( 750,000 +) +Financing, underwriting, and debt redemption fees +( 11,798 +) +( 100 +) +( 29,312 +) +Finance lease payments +( 3,869 +) +— +— +Dividends paid +( 81,709 +) +( 55,243 +) +( 30,532 +) +Employee withholding taxes paid upon the net settlement of equity-classified stock awards +( 5,229 +) +( 12,142 +) +( 21,669 +) +Proceeds from exercise of stock options +1,267 +2,241 +394 +Net cash used by financing activities +( 472,028 +) +( 65,244 +) +( 83,009 +) +Net change in cash and cash equivalents +( 705,944 +) +400,132 +( 252,342 +) +Cash and cash equivalents at beginning of period +800,666 +400,534 +652,876 +Cash and cash equivalents at end of period +$ +94,722 +$ +800,666 +$ +400,534 +See accompanying notes to Consolidated Financial Statements. +68 +Table of Contents +CIMAREX ENERGY CO. +CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY +(in thousands, except per share information) +Retained +Earnings (Accumulated Deficit) +Accumulated +Other Comprehensive Income (Loss) +Total Stockholders’ Equity +Common Stock +Additional Paid-in Capital +Shares +Amount +Balance, December 31, 2016 +95,124 +$ +951 +$ +2,763,452 +$ +( 722,359 +) +$ +945 +$ +2,042,989 +Dividends paid on stock awards subsequently forfeited +— +— +11 +32 +— +43 +Dividends declared ($0.32 per share) +— +— +( 30,489 +) +— +— +( 30,489 +) +Net income +— +— +— +494,329 +— +494,329 +Unrealized change in fair value of investments, net of tax +— +— +— +— +1,254 +1,254 +Issuance of restricted stock awards +552 +5 +( 5 +) +— +— +— +Common stock reacquired and retired +( 204 +) +( 2 +) +( 21,667 +) +— +— +( 21,669 +) +Restricted stock forfeited and retired +( 41 +) +— +— +— +— +— +Exercise of stock options +6 +— +394 +— +— +394 +Stock-based compensation +— +— +48,321 +— +— +48,321 +Cumulative effect adjustment of adopting ASU 2016-09 (Note 6) +— +— +4,393 +28,739 +— +33,132 +Other +— +— +( 26 +) +— +— +( 26 +) +Balance, December 31, 2017 +95,437 +954 +2,764,384 +( 199,259 +) +2,199 +2,568,278 +Dividends paid on stock awards subsequently forfeited +— +— +34 +18 +— +52 +Dividends declared ($0.68 per share) +— +— +( 15,196 +) +( 49,725 +) +— +( 64,921 +) +Net income +— +— +— +791,851 +— +791,851 +Unrealized change in fair value of investments, net of tax +— +— +— +— +( 1,444 +) +( 1,444 +) +Issuance of restricted stock awards +593 +6 +( 6 +) +— +— +— +Common stock reacquired and retired +( 139 +) +— +( 12,142 +) +— +— +( 12,142 +) +Restricted stock forfeited or canceled and retired +( 168 +) +( 2 +) +2 +— +— +— +Exercise of stock options +33 +— +2,241 +— +— +2,241 +Stock-based compensation +— +— +45,871 +— +— +45,871 +Balance, December 31, 2018 +95,756 +958 +2,785,188 +542,885 +755 +3,329,786 +Dividends paid on stock awards subsequently forfeited +— +— +8 +18 +— +26 +Dividends declared on common stock ($0.80 per share) +— +— +61 +( 81,411 +) +— +( 81,350 +) +Dividends declared on redeemable preferred stock ($81.25 per share) +— +— +— +( 5,078 +) +— +( 5,078 +) +Net loss +— +— +— +( 124,619 +) +— +( 124,619 +) +Issuance of stock for Resolute Energy acquisition (Note 13) +5,652 +56 +412,959 +— +— +413,015 +Unrealized change in fair value of investments, net of tax +— +— +— +— +( 755 +) +( 755 +) +Issuance of restricted stock awards +946 +9 +( 9 +) +— +— +— +Common stock reacquired and retired +( 105 +) +( 1 +) +( 5,228 +) +— +— +( 5,229 +) +Restricted stock forfeited or canceled and retired +( 133 +) +( 1 +) +1 +— +— +— +Exercise of stock options +29 +— +1,267 +— +— +1,267 +Stock-based compensation +— +— +49,078 +— +— +49,078 +Balance, December 31, 2019 +102,145 +$ +1,021 +$ +3,243,325 +$ +331,795 +$ +— +$ +3,576,141 +See accompanying notes to Consolidated Financial Statements. +69 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES +Cimarex Energy Co., a Delaware corporation, is an independent oil and gas exploration and production company. Our operations are mainly located in Texas, Oklahoma, and New Mexico. +Basis of Presentation +Our Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP. Our significant accounting policies are discussed below. The accounts of Cimarex and its subsidiaries are presented in the accompanying Consolidated Financial Statements. All intercompany accounts and transactions were eliminated in consolidation. +Segment Information +We have determined that our business is comprised of only one segment because our gathering, processing, and marketing activities are ancillary to our oil and gas production operations. +Use of Estimates +The preparation of our financial statements in conformity with GAAP requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses. Areas of significance requiring the use of management’s judgments include the estimation of proved oil and gas reserves used in calculating depletion, the estimation of future net revenues used in computing ceiling test limitations, the estimation of future abandonment obligations used in recording asset retirement obligations, and the assessment of goodwill. Estimates and judgments also are required in determining allowances for doubtful accounts, impairments of unproved properties and other assets, valuation of deferred tax assets, fair value measurements, lease liabilities, and contingencies. We analyze our estimates and base them on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. +The process of estimating quantities of oil and gas reserves is complex, requiring significant decisions in the evaluation of all available geological, geophysical, engineering, and economic data. The data for a given field may also change substantially over time as a result of numerous factors including, but not limited to, additional development activity, evolving production history, and continual reassessment of the viability of production under varying economic conditions. As a result, material revisions to existing reserve estimates may occur from time to time. Although every reasonable effort is made to ensure that our reserve estimates represent the most accurate assessments possible, subjective decisions, and available data for our various fields make these estimates generally less precise than other estimates included in financial statement disclosures. +70 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +Prior Year Reclassifications +Certain amounts in the prior year financial statements have been reclassified to conform to the 2019 financial statement presentation. These reclassifications include reclassifying certain Gas gathering and other expenses to Transportation, processing, and other operating expense and Production expense. These reclassifications were made to reflect an allocation of the costs incurred to operate our gas gathering facilities as a cost to transport our equity share of gas produced and operate our wells. The following table shows the reclassifications made: +Years Ended December 31, +2018 +2017 +(in thousands) +Prior +Year Presentation +Current +Year Reclassifications +Current Year Presentation +Prior +Year Presentation +Current +Year Reclassifications +Current Year Presentation +Production +$ +293,213 +$ +2,976 +$ +296,189 +$ +262,180 +$ +1,169 +$ +263,349 +Transportation, processing, and other operating +$ +200,802 +10,661 +$ +211,463 +$ +231,640 +16,484 +$ +248,124 +Gas gathering and other +$ +41,964 +( 13,637 +) +$ +28,327 +$ +35,840 +( 17,653 +) +$ +18,187 +$ +— +$ +— +Cash and Cash Equivalents +Cash and cash equivalents consist of cash in banks and investments readily convertible into cash, which have original maturities of three months or less. Cash equivalents are stated at cost, which approximates market value. +Oil and Gas Well Equipment and Supplies +Our oil and gas well equipment and supplies are valued at the lower of cost and net realizable value, where net realizable value is based on estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Declines in the price of oil and gas well equipment and supplies in future periods could cause us to recognize impairments on these assets. An impairment would not affect cash flow from operating activities, but would adversely affect our net income and stockholders’ equity. +Oil and Gas Properties +We use the full cost method of accounting for our oil and gas operations. All costs associated with property acquisition, exploration, and development activities are capitalized. Exploration and development costs include dry hole costs, geological and geophysical costs, direct overhead related to exploration and development activities, and other costs incurred for the purpose of finding oil and gas reserves. Salaries and benefits paid to employees directly involved in the acquisition, exploration, and development of properties, as well as other internal costs that can be directly identified with acquisition, exploration and development activities, are also capitalized. Under the full cost method of accounting, no gain or loss is recognized upon the disposition of oil and gas properties unless such disposition would significantly alter the relationship between capitalized costs and proved reserves. Expenditures for maintenance and repairs are charged to production expense in the period incurred. +Under the full cost method of accounting, we are required to perform quarterly ceiling test calculations to test our oil and gas properties for possible impairment. If the net capitalized cost of our oil and gas properties, as adjusted for income taxes, exceeds the ceiling limitation, the excess is charged to expense. The ceiling limitation is equal to the sum of: (i) the present value discounted at 10 % of estimated future net revenues from proved reserves, (ii) the cost of properties not being amortized, and (iii) the lower of cost or estimated fair value of unproven properties included in the costs being amortized, as adjusted for income taxes. We currently do not have any unproven properties that are +71 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +being amortized. Estimated future net revenues are determined based on trailing twelve-month average commodity prices and estimated proved reserve quantities, operating costs, and capital expenditures. +For the year ended December 31, 2019 , we recognized a ceiling test impairment of $ 618.7 million , all of which was recognized in the fourth quarter. The impairment resulted primarily from the impact of decreases in the 12-month average trailing prices for oil, natural gas, and NGLs as well as significant basis differentials utilized in determining the estimated future net cash flows from proved reserves. We did not recognize a ceiling test impairment during the years ended December 31, 2018 and 2017 because the net capitalized cost of our oil and gas properties, as adjusted for income taxes, did not exceed the ceiling limitation. The quarterly ceiling test is primarily impacted by commodity prices, changes in estimated reserve quantities, reserves produced, overall exploration and development costs, depletion expense, and deferred taxes. If pricing conditions decline, or if there is a negative impact on one or more of the other components of the calculation, we may incur full cost ceiling test impairments in future quarters. The calculated ceiling limitation is not intended to be indicative of the fair market value of our proved reserves or future results. Impairment charges do not affect cash flow from operating activities, but do adversely affect our net income and various components of our balance sheet. Any impairment of oil and gas properties is not reversible at a later date. +Depletion of proved oil and gas properties is computed on the units-of-production method, whereby capitalized costs, including future development costs and asset retirement costs, are amortized over total estimated proved reserves. Changes in our estimate of proved reserve quantities and impairment of oil and gas properties will cause corresponding changes in depletion expense in periods subsequent to these changes. +The capitalized costs of unproved properties, including those in wells in progress, are excluded from the costs being amortized. We do not have major development projects that are excluded from costs being amortized. On a quarterly basis, we evaluate excluded costs for inclusion in the costs to be amortized. Significant unproved properties are evaluated individually. Unproved properties that are not considered individually significant are aggregated for evaluation purposes and related costs are transferred to the costs to be amortized quarterly based on the application of historical factors. +Fixed Assets +Fixed assets consist primarily of gathering and plant facilities, vehicles, airplanes, office furniture, and computer equipment and software. These items are recorded at cost and are depreciated on the straight-line method based on expected lives of the individual assets, which range from 3 to 30 years . Also included in Fixed assets are operating lease right-of-use assets. See Note 10 for additional information regarding our leases. +Goodwill +Goodwill represents the excess of the purchase price of business combinations over the fair value of the net assets acquired and is tested for impairment at least annually. In performing the goodwill test, we compare the fair value of our reporting unit with its carrying amount. If the carrying amount of the reporting unit were to exceed its fair value, an impairment charge would be recognized in the amount of this excess, limited to the total amount of goodwill allocated to that reporting unit. We evaluate our goodwill for impairment in the fourth quarter of each year and whenever events or changes in circumstances indicate the possibility that goodwill may be impaired. Based upon our assessment as of October 31, 2019, goodwill was not impaired. It is possible that goodwill could become impaired in the future if commodity prices or other economic factors become unfavorable. +72 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +Revenue Recognition +Oil, Gas, and NGL Sales +Effective January 1, 2018, we adopted the provisions of Accounting Standards Codification 606, Revenue from Contracts with Customers (“Topic 606”), utilizing the modified retrospective approach, which we applied to contracts that were not completed as of that date. Because we utilized the modified retrospective approach, there was no impact to prior periods’ reported amounts. Application of Topic 606 has no impact on our net income or cash flows from operations; however, certain costs classified as Transportation, processing, and other operating in the Consolidated Statements of Operations and Comprehensive Income (Loss) under prior accounting standards are now reflected as deductions from revenue under Topic 606. +Revenue is recognized from the sales of oil, gas, and NGLs when the customer obtains control of the product, when we have no further obligations to perform related to the sale, and when collectability is probable. All of our sales of oil, gas, and NGLs are made under contracts with customers, which typically include variable consideration based on monthly pricing tied to local indices and monthly volumes delivered. The nature of our contracts with customers does not require us to constrain that variable consideration or to estimate the amount of transaction price attributable to future performance obligations for accounting purposes. As of December 31, 2019 , we had open contracts with customers with terms of one month to multiple years, as well as “evergreen” contracts that renew on a periodic basis if not canceled by us or the customer. Performance obligations under our contracts with customers are typically satisfied at a point-in-time through monthly delivery of oil, gas, and/or NGLs. Our contracts with customers typically require payment within one month of delivery. +Our gas and NGLs are sold under a limited number of contract structure types common in our industry. Under these contracts the gas and its components, including NGLs, may be sold to a single purchaser or the residue gas and NGLs may be sold to separate purchasers. Regardless of the contract structure type, the terms of these contracts compensate us for the value of the residue gas and NGLs at current market prices for each product. However, depending on the contract structure type, certain transportation, processing, and other charges may be deducted against the prices received for the product. Our oil typically is sold at specific delivery points under contract terms that also are common in our industry. +Gas Gathering +When we transport and/or process third-party gas associated with our equity gas, we recognize revenue for the fees charged to third-parties for such services. +Gas Marketing +When we market and sell gas for working interest owners, we act as agent under short-term sales and supply agreements and may earn a fee for such services. Revenues from such services are recognized as gas is delivered. +Gas Imbalances +Revenue from the sale of gas is recorded on the basis of gas actually sold by us. If our aggregate sales volumes for a well are greater (or less) than our proportionate share of production from the well, a liability (or receivable) is established to the extent there are insufficient proved reserves available to make-up the overproduced (or underproduced) imbalance. Imbalances have not been significant in the periods presented. +73 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +General and Administrative Expenses +General and administrative expenses are reported net of amounts reimbursed by working interest owners of the oil and gas properties operated by Cimarex and net of amounts capitalized pursuant to the full cost method of accounting. +Derivatives +Our derivative contracts are recorded on the balance sheet at fair value. Our firm sales contracts qualify for the normal purchase and normal sale exception. Contracts that qualify for this treatment do not require mark-to-market accounting treatment. See Note 4 for additional information regarding our derivative instruments. +Income Taxes +We record deferred tax assets and liabilities to account for the expected future tax consequences of events that have been recognized in the financial statements and tax returns. We classify all deferred tax assets and liabilities as non-current. We routinely assess the realizability of our deferred tax assets. Numerous judgments and assumptions are inherent in this assessment, including the determination of future taxable income, which is affected by factors such as future operating conditions (particularly as related to prevailing oil and gas prices) and changing tax laws. If we conclude that it is more likely than not that some or all of the deferred tax assets will not be realized, the tax asset is reduced by a valuation allowance. We regularly assess and, if required, establish accruals for tax contingencies that could result from assessments of additional tax by taxing jurisdictions where the company operates. See Note 9 for additional information regarding our income taxes. +Contingencies +A provision for contingencies is charged to expense when the loss is probable and the cost can be reasonably estimated. Determining when expenses should be recorded for these contingencies and the appropriate amounts for accrual is a complex estimation process that includes subjective judgment. In many cases, this judgment is based on interpretation of laws and regulations, which can be interpreted differently by regulators and/or courts of law. We closely monitor known and potential legal, environmental, and other contingencies and determine when we should record losses for these items based on information available to us. See Note 10 for additional information regarding our contingencies. +Asset Retirement Obligations +We recognize the present value of the fair value of liabilities for retirement obligations associated with tangible long-lived assets in the period in which there is a legal obligation associated with the retirement of such assets and the amount can be reasonably estimated. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. This liability includes costs related to the abandonment of wells, the removal of facilities and equipment, and site restorations. In periods subsequent to the initial measurement of an asset retirement obligation at present value, a period-to-period increase in the carrying amount of the liability is recognized as accretion expense, which represents the effect of the passage of time on the amount of the liability. An equivalent amount is added to the carrying amount of the liability. If the fair value of a recorded asset retirement obligation changes, a revision is recorded to both the asset retirement obligation and the asset retirement capitalized cost. Capitalized costs are included as a component of the DD&A calculations. The current portion of our asset retirement obligations is recorded in “Accrued liabilities — Other” in the accompanying Consolidated Balance Sheets and cash payments for settlements of retirement obligations are classified as cash used in operating activities in the accompanying Consolidated Statements of Cash Flows. See Note 8 for additional information regarding our asset retirement obligations. +74 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +Stock-based Compensation +We recognize compensation cost related to all stock-based awards in the financial statements based on their estimated grant date fair value. We grant various types of stock-based awards including stock options, restricted stock (including awards with service-based vesting and market condition-based vesting provisions), and restricted stock units. The grant date fair value of stock option awards is determined using the Black-Scholes option pricing model. Service-based restricted stock and units are valued using the market price of our common stock on the grant date. The grant date fair value of the market condition-based restricted stock incorporates the effect of the market condition using valuation techniques that take into consideration various share-price paths. Compensation cost is recognized ratably over the applicable vesting period. To the extent compensation cost relates to employees directly involved in oil and gas acquisition, exploration, and development activities, such amounts are capitalized to oil and gas properties. Amounts not capitalized to oil and gas properties are recognized as stock compensation expense. See Note 6 for additional information regarding our stock-based compensation. +Earnings (Loss) per Share +We calculate earnings (loss) per share recognizing that unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents are “participating securities” and, therefore, should be included in computing earnings per share using the two-class earnings allocation method. The two-class method is an earnings allocation formula that determines earnings per share for each class of common stock and participating security according to dividends declared (or accumulated) and participation rights in undistributed earnings. Our unvested share-based payment awards, consisting of restricted stock and units, qualify as participating securities. See Note 7 for additional information regarding our earnings per share. +Lease Accounting +In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, Leases (“Topic 842”). The FASB subsequently issued various ASUs that provided additional implementation guidance. Topic 842 requires lessees to recognize lease liabilities and right-of-use assets on the balance sheet for contracts that provide lessees with the right to control the use of identified assets for a period of time. The scope of Topic 842 excludes leases to explore for or use minerals, oil, natural gas, and similar nonregenerative resources. We adopted Topic 842 effective January 1, 2019, using the modified retrospective method applied to all leases that existed on that date, which resulted in the recognition of lease liabilities of $ 276.9 million and right-of-use assets of $ 265.0 million . In connection with adoption we made use of the following practical expedients, which are provided in Topic 842: +• +a package of practical expedients to not reassess: 1) whether expired or existing contracts are or contain a lease, 2) lease classification for expired or existing leases, and 3) initial direct costs for existing leases; +• +an election not to apply the recognition requirements in Topic 842 to short-term leases (a lease that at commencement date has a lease term of 12 months or less and does not contain a purchase option that the company is reasonably certain to exercise); +• +a practical expedient that permits combining lease and nonlease components in a contract and accounting for the combination as a lease (elected by asset class); and +• +a practical expedient to not reassess certain land easements in existence prior to January 1, 2019. +75 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +2. CAPITAL STOCK +Authorized capital stock consists of 200 million shares of common stock and 15 million shares of preferred stock. At December 31, 2019 , there were 102.1 million shares of common stock and 62.5 thousand shares of preferred stock outstanding. +Redeemable Preferred Stocks +In February 2019, our Board of Directors created a new series of preferred stock, par value $ 0.01 per share, designated as 8.125 % Series A Cumulative Perpetual Convertible Preferred Stock (the “Convertible Preferred Stock”) and authorized 62.5 thousand shares. In March 2019, in conjunction with the Resolute acquisition (see Note 13), we issued all of these shares of Convertible Preferred Stock. Prior to this issuance, we had not issued any preferred stock. Holders of the Convertible Preferred Stock are entitled to receive, when, as, and if declared by the Board out of funds of Cimarex legally available for payment, cumulative cash dividends at the annual rate of 8.125 % of each share’s liquidation preference of $ 1,000 . Dividends on the preferred stock are payable quarterly in arrears and accumulate from the most recent date as to which dividends have been paid. In the event of any liquidation, winding up, or dissolution of Cimarex, whether voluntary or involuntary, each holder will be entitled to receive in respect of its shares and to be paid out of the assets of Cimarex legally available for distribution to its stockholders, after satisfaction of liabilities to Cimarex’s creditors and any senior stock (of which there is currently none) and before any payment or distribution is made to holders of junior stock (including common stock), the liquidation preference of $ 1,000 per share, with the total liquidation preference being $ 62.5 million in the aggregate. Each holder has the right at any time, at its option, to convert any or all of such holder’s shares of Convertible Preferred Stock at an initial conversion rate of 8.0421 shares of fully paid and nonassessable shares of our common stock and $ 471.40 in cash per share of Convertible Preferred Stock. The initial conversion rate of 8.0421 adjusts upon the occurrence of certain events, including the payment of cash dividends to common shareholders, and is 8.13828 as of December 31, 2019 . Additionally, at any time on or after October 15, 2021, we shall have the right, at our option, if the closing sale price of our common stock meets certain criteria, to elect to cause all, and not part, of the outstanding shares of Convertible Preferred Stock to be automatically converted into that number of shares of Cimarex common stock for each share of Convertible Preferred Stock equal to the conversion rate in effect on the mandatory conversion date as such terms are defined in the Certificate of Designations for the Convertible Preferred Stock and $ 471.40 in cash per share of Convertible Preferred Stock. As a result of the cash redemption features included in the Convertible Preferred Stock conversion option, with such conversion not solely within our control, the instruments are classified as Redeemable preferred stock in temporary equity on the Consolidated Balance Sheet. +Dividends +Common Stock +A quarterly cash dividend has been paid on our common stock every quarter since the first quarter of 2006. In each quarter of 2019 a $ 0.20 per common share dividend was declared. A dividend of $ 0.18 per common share was declared in both the third and fourth quarters of 2018 while a dividend of $ 0.16 per common share was declared in the first and second quarters of 2018. In each quarter of 2017 an $ 0.08 per common share dividend was declared. We typically declare dividends in one quarter and pay them in the following quarter. At December 31, 2019 , we had dividends payable to common stock of $ 20.5 million that was included in “Accrued liabilities — Other”. Dividends declared are recorded as a reduction of retained earnings to the extent retained earnings are available at the close of the period prior to the date of the declared dividend. Dividends in excess of retained earnings are recorded as a reduction of additional paid-in capital. All dividends declared during 2019 were recorded as a reduction of retained earnings. During 2018, the dividend declared during the first quarter was recorded as a reduction of additional paid-in capital, while the remaining three dividends declared were recorded as a reduction of retained earnings. All dividends declared during 2017 were recorded as a reduction of additional paid-in capital. Nonforfeitable dividends paid on stock awards that subsequently forfeit are reclassified out of retained earnings or additional paid-in capital, as applicable, to compensation expense in the period in which the forfeitures occur. Dividends accrued and unpaid on performance +76 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +stock awards that are canceled upon completion of the vesting period due to the performance criteria not being met, are reversed out of retained earnings or additional paid-in capital, as applicable, in the period in which the cancellations occur. Future dividend payments will depend on our level of earnings, financial requirements, and other factors considered relevant by our Board of Directors. +Preferred Stock +In each quarter of 2019 our Board of Directors declared a cash dividend of $ 20.3125 per share of Convertible Preferred Stock. All dividends declared during 2019 were recorded as a reduction of retained earnings. At December 31, 2019 , we had dividends payable to preferred stock of $ 1.3 million that was included in “Accrued liabilities — Other”. +3. LONG-TERM DEBT +Long-term debt at December 31, 2019 and 2018 consisted of the following: +December 31, 2019 +December 31, 2018 +(in thousands) +Principal +Unamortized +Debt +Issuance Costs and Discounts (1) +Long-term +Debt, net +Principal +Unamortized +Debt +Issuance Costs and Discount (1) +Long-term +Debt, net +4.375% notes due 2024 +$ +750,000 +$ +( 3,535 +) +$ +746,465 +$ +750,000 +$ +( 4,439 +) +$ +745,561 +3.90% notes due 2027 +750,000 +( 6,289 +) +743,711 +750,000 +( 7,007 +) +742,993 +4.375% notes due 2029 +500,000 +( 4,930 +) +495,070 +— +— +— +Total long-term debt +$ +2,000,000 +$ +( 14,754 +) +$ +1,985,246 +$ +1,500,000 +$ +( 11,446 +) +$ +1,488,554 +________________________________________ +(1) +The 4.375 % notes due 2024 were issued at par , therefore, the amounts shown in the table are for unamortized debt issuance costs only. At December 31, 2019 , the unamortized debt issuance costs and discount related to the 3.90 % notes were $ 4.8 million and $ 1.5 million , respectively. At December 31, 2019 , the unamortized debt issuance costs and discount related to the 4.375 % notes due 2029 were $ 4.3 million and $ 0.6 million , respectively. At December 31, 2018 , the unamortized debt issuance costs and discount related to the 3.90 % notes were $ 5.4 million and $ 1.6 million , respectively. +Bank Debt +On February 5, 2019 , we entered into an Amended and Restated Credit Agreement for our senior unsecured revolving credit facility (“Credit Facility”). Among other things, the amended and restated credit facility increased the aggregate commitments to $ 1.25 billion with an option for us to increase the aggregate commitments to $ 1.5 billion , and extended the maturity date to February 5, 2024 . There is no borrowing base subject to the discretion of the lenders based on the value of our proved reserves under the Credit Facility. As of December 31, 2019 , we had no bank borrowings outstanding under the Credit Facility, but did have letters of credit of $ 2.5 million outstanding, leaving an unused borrowing availability of $ 1.248 billion . During the year ended December 31, 2019 , we borrowed and repaid an aggregate of $ 2.12 billion , on the Credit Facility to meet cash requirements as needed. +At our option, borrowings under the Credit Facility may bear interest at either (a) LIBOR (or an alternate rate determined by the administrative agent for the Credit Facility in accordance with the Credit Facility when LIBOR is no longer available) plus 1.125 - 2.0 % based on the credit rating for our senior unsecured long-term debt, or (b) a base rate (as defined in the credit agreement) plus 0.125 - 1.0 % , based on the credit rating for our senior unsecured long-term debt. Unused borrowings are subject to a commitment fee of 0.125 - 0.35 % , based on the credit rating for our senior unsecured long-term debt. +77 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +The Credit Facility contains representations, warranties, covenants, and events of default that are customary for investment grade, senior unsecured bank credit agreements, including a financial covenant for the maintenance of a defined total debt-to-capital ratio of no greater than 65 % . As of December 31, 2019 , we were in compliance with all of the financial covenants. +At December 31, 2019 and 2018 , we had $ 4.0 million and $ 2.2 million , respectively, of unamortized debt issuance costs associated with our Credit Facility, which were recorded as assets and included in “Other assets” in our balance sheets. The costs are being amortized to interest expense ratably over the life of the Credit Facility. We incurred $ 3.0 million in additional debt issuance costs in amending our Credit Facility. +Senior Notes +On March 8, 2019 , we issued $ 500.0 million aggregate principal amount of 4.375 % senior unsecured notes due March 15, 2029 at 99.862 % of par to yield 4.392 % per annum. We received $ 494.7 million in net cash proceeds, after deducting underwriters’ fees, discount, and debt issuance costs. The notes bear an annual interest rate of 4.375 % and interest is payable semiannually on March 15 and September 15 , with the first payment made on September 15, 2019 . We used the net proceeds to repay borrowings under our Credit Facility that were used to help fund the Resolute acquisition on March 1, 2019 . The effective interest rate on these notes, including the amortization of debt issuance costs and discount, is 4.50 % . +On April 10, 2017, we issued $ 750 million aggregate principal amount of 3.90 % senior unsecured notes due May 15, 2027 at 99.748 % of par to yield 3.93 % per annum. We received $ 741.8 million in net cash proceeds, after deducting underwriters’ fees, discount, and debt issuance costs. The notes bear an annual interest rate of 3.90 % and interest is payable semiannually on May 15 and November 15. The effective interest rate on these notes, including the amortization of debt issuance costs and discount, is 4.01 % . Along with cash on hand, we used the proceeds to fund the early extinguishment of $ 750 million aggregate principal amount of 5.875 % notes whose original maturity date was May 1, 2022 . During the year ended December 31, 2017 , we recognized a loss on early extinguishment of debt related to these transactions of $ 28.2 million , composed primarily of tender and redemption premiums of $ 22.6 million and the write-off of $ 5.3 million of unamortized debt issuance costs. +In June 2014, we issued $ 750 million aggregate principal amount of 4.375 % senior unsecured notes at par. These notes are due June 1, 2024 and interest is payable semiannually on June 1 and December 1. The effective interest rate on these notes, including the amortization of debt issuance costs, is 4.50 % . +Each of our senior unsecured notes is governed by an indenture containing certain covenants, events of default, and other restrictive provisions with which we were in compliance as of December 31, 2019 . At December 31, 2019 , we had accrued interest related to our notes of $ 12.8 million that was included in “Accrued liabilities — Other”. +78 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +4. DERIVATIVE INSTRUMENTS +We periodically use derivative instruments to mitigate volatility in commodity prices. While the use of these instruments limits the downside risk of adverse price changes, their use may also limit future cash flow from favorable price changes. Depending on changes in oil and gas futures markets and management’s view of underlying supply and demand trends, we may increase or decrease our derivative positions from current levels. +As of December 31, 2019 , we have entered into oil and gas collars and oil basis swaps. Under our collars, we receive the difference between the published index price and a floor price if the index price is below the floor price or we pay the difference between the ceiling price and the index price if the index price is above the ceiling price. No amounts are paid or received if the index price is between the floor and the ceiling prices. By using a collar, we have fixed the minimum and maximum prices we can receive on the underlying production. Our basis swaps are settled based on the difference between a published index price plus a fixed differential and the applicable local index price under which the underlying production is sold. By using a basis swap, we have fixed the differential between the published index price and certain of our physical pricing points. For our Permian oil production, the basis swaps fix the price differential between the WTI NYMEX (Cushing Oklahoma) price and the WTI Midland price. For our Permian and Mid-Continent gas production, the contract prices in our collars are consistent with the index prices used to sell our production. The following tables summarize our outstanding derivative contracts as of December 31, 2019 : +Oil Collars +First +Quarter +Second +Quarter +Third +Quarter +Fourth +Quarter +Total +2020: +WTI (1) +Volume (Bbls) +3,549,000 +2,821,000 +2,116,000 +2,116,000 +10,602,000 +Weighted Avg Price - Floor +$ +52.40 +$ +50.43 +$ +49.80 +$ +49.80 +$ +50.84 +Weighted Avg Price - Ceiling +$ +64.48 +$ +61.55 +$ +60.59 +$ +60.59 +$ +62.15 +2021: +WTI (1) +Volume (Bbls) +1,350,000 +455,000 +— +— +1,805,000 +Weighted Avg Price - Floor +$ +49.70 +$ +50.00 +$ +— +$ +— +$ +49.77 +Weighted Avg Price - Ceiling +$ +59.41 +$ +60.14 +$ +— +$ +— +$ +59.59 +________________________________________ +(1) +The index price for these collars is West Texas Intermediate (“WTI”) as quoted on the New York Mercantile Exchange (“NYMEX”). +79 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +Gas Collars +First +Quarter +Second +Quarter +Third +Quarter +Fourth +Quarter +Total +2020: +PEPL (1) +Volume (MMBtu) +8,190,000 +5,460,000 +2,760,000 +2,760,000 +19,170,000 +Weighted Avg Price - Floor +$ +1.92 +$ +1.90 +$ +1.85 +$ +1.85 +$ +1.90 +Weighted Avg Price - Ceiling +$ +2.36 +$ +2.28 +$ +2.31 +$ +2.31 +$ +2.32 +Perm EP (2) +Volume (MMBtu) +3,640,000 +2,730,000 +1,840,000 +1,840,000 +10,050,000 +Weighted Avg Price - Floor +$ +1.40 +$ +1.40 +$ +1.35 +$ +1.35 +$ +1.38 +Weighted Avg Price - Ceiling +$ +1.79 +$ +1.82 +$ +1.66 +$ +1.66 +$ +1.75 +Waha (3) +Volume (MMBtu) +4,550,000 +2,730,000 +— +— +7,280,000 +Weighted Avg Price - Floor +$ +1.50 +$ +1.57 +$ +— +$ +— +$ +1.53 +Weighted Avg Price - Ceiling +$ +1.87 +$ +1.97 +$ +— +$ +— +$ +1.91 +2021: +PEPL (1) +Volume (MMBtu) +900,000 +— +— +— +900,000 +Weighted Avg Price - Floor +$ +1.85 +$ +— +$ +— +$ +— +$ +1.85 +Weighted Avg Price - Ceiling +$ +2.31 +$ +— +$ +— +$ +— +$ +2.31 +________________________________________ +(1) +The index price for these collars is Panhandle Eastern Pipe Line, Tex/OK Mid-Continent Index (“PEPL”) as quoted in Platt’s Inside FERC. +(2) +The index price for these collars is El Paso Natural Gas Company, Permian Basin Index (“Perm EP”) as quoted in Platt’s Inside FERC. +(3) +The index price for these collars is Waha West Texas Natural Gas Index (“Waha”) as quoted in Platt’s Inside FERC. +Oil Basis Swaps +First +Quarter +Second +Quarter +Third +Quarter +Fourth +Quarter +Total +2020: +WTI Midland (1) +Volume (Bbls) +2,639,000 +1,911,000 +1,288,000 +1,288,000 +7,126,000 +Weighted Avg Differential (2) +$ +0.25 +$ +0.30 +$ +0.65 +$ +0.65 +$ +0.40 +2021: +WTI Midland (1) +Volume (Bbls) +540,000 +— +— +— +540,000 +Weighted Avg Differential (2) +$ +0.56 +$ +— +$ +— +$ +— +$ +0.56 +________________________________________ +(1) +The index price we pay under these basis swaps is WTI Midland as quoted by Argus Americas Crude. +(2) +The index price we receive under these basis swaps is WTI as quoted on the NYMEX plus the weighted average differential shown in the table. +80 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +The following table summarizes our derivative contracts entered into subsequent to December 31, 2019 through February 19, 2020: +Oil Basis Swaps +First +Quarter +Second +Quarter +Third +Quarter +Fourth +Quarter +Total +2020: +WTI Midland (1) +Volume (Bbls) +300,000 +455,000 +460,000 +460,000 +1,675,000 +Weighted Avg Differential (2) +$ +1.02 +$ +1.02 +$ +1.02 +$ +1.02 +$ +1.02 +2021: +WTI Midland (1) +Volume (Bbls) +450,000 +455,000 +— +— +905,000 +Weighted Avg Differential (2) +$ +1.02 +$ +1.02 +$ +— +$ +— +$ +1.02 +________________________________________ +(1) +The index price we pay under these basis swaps is WTI Midland as quoted by Argus Americas Crude. +(2) +The index price we receive under these basis swaps is WTI as quoted on the NYMEX less the weighted average differential shown in the table. +Derivative Gains and Losses +Net gains and losses on our derivative instruments are a function of fluctuations in the underlying commodity index prices as compared to the contracted prices and the monthly cash settlements (if any) of the instruments. We have elected not to designate our derivatives as hedging instruments for accounting purposes and, therefore, we do not apply hedge accounting treatment to our derivative instruments. Consequently, changes in the fair value of our derivative instruments and cash settlements on the instruments are included as a component of operating costs and expenses as either a net gain or loss on derivative instruments. Cash settlements of our contracts are included in cash flows from operating activities in our statements of cash flows. The following table presents the components of Loss (gain) on derivative instruments, net for the periods indicated. +Years Ended December 31, +(in thousands) +2019 +2018 +2017 +Decrease (increase) in fair value of derivative instruments, net: +Gas contracts +$ +( 13,114 +) +$ +15,742 +$ +( 40,226 +) +Oil contracts +76,833 +( 126,130 +) +17,383 +63,719 +( 110,388 +) +( 22,843 +) +Cash payments (receipts) on derivative instruments, net: +Gas contracts +( 40,114 +) +( 13,794 +) +( 4,557 +) +Oil contracts +53,245 +38,223 +6,190 +13,131 +24,429 +1,633 +Loss (gain) on derivative instruments, net +$ +76,850 +$ +( 85,959 +) +$ +( 21,210 +) +81 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +Derivative Fair Value +Our derivative contracts are carried at their fair value on our balance sheet using Level 2 inputs and are subject to master netting arrangements, which allow us to offset recognized asset and liability fair value amounts on contracts with the same counterparty. Our accounting policy is to not offset asset and liability positions in our balance sheets. +The following tables present the amounts and classifications of our derivative assets and liabilities as of December 31, 2019 and 2018 , as well as the potential effect of netting arrangements on our recognized derivative asset and liability amounts. +December 31, 2019 +(in thousands) +Balance Sheet Location +Asset +Liability +Oil contracts +Current assets — Derivative instruments +$ +1,624 +$ +— +Gas contracts +Current assets — Derivative instruments +16,320 +— +Oil contracts +Non-current assets — Derivative instruments +580 +— +Oil contracts +Current liabilities — Derivative instruments +— +16,681 +Oil contracts +Non-current liabilities — Derivative instruments +— +824 +Gas contracts +Non-current liabilities — Derivative instruments +— +194 +Total gross amounts presented in the balance sheet +18,524 +17,699 +Less: gross amounts not offset in the balance sheet +( 9,865 +) +( 9,865 +) +Net amount +$ +8,659 +$ +7,834 +December 31, 2018 +(in thousands) +Balance Sheet Location +Asset +Liability +Oil contracts +Current assets — Derivative instruments +$ +94,240 +$ +— +Gas contracts +Current assets — Derivative instruments +7,699 +— +Oil contracts +Non-current assets — Derivative instruments +9,246 +— +Oil contracts +Current liabilities — Derivative instruments +— +23,378 +Gas contracts +Current liabilities — Derivative instruments +— +4,249 +Oil contracts +Non-current liabilities — Derivative instruments +— +311 +Gas contracts +Non-current liabilities — Derivative instruments +— +1,956 +Total gross amounts presented in the balance sheet +111,185 +29,894 +Less: gross amounts not offset in the balance sheet +( 29,894 +) +( 29,894 +) +Net amount +$ +81,291 +$ +— +We are exposed to financial risks associated with our derivative contracts from non-performance by our counterparties. We mitigate our exposure to any single counterparty by contracting with a number of financial institutions, each of which has a high credit rating and is a member of our bank credit facility. Our member banks do not require us to post collateral for our derivative liability positions, nor do we require our counterparties to post collateral for our benefit. In the future we may enter into derivative instruments with counterparties outside our bank group to obtain competitive terms and to spread counterparty risk. +82 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +5. FAIR VALUE MEASUREMENTS +Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The FASB has established a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. This hierarchy consists of three broad levels. Level 1 inputs are the highest priority and consist of unadjusted quoted prices in active markets for identical assets and liabilities. Level 2 are inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. Level 3 are unobservable inputs for an asset or liability. +The following table provides fair value measurement information for certain assets and liabilities as of December 31, 2019 and 2018 . +December 31, 2019 +December 31, 2018 +(in thousands) +Book Value +Fair Value +Book Value +Fair Value +Financial Assets (Liabilities): +4.375% Notes due 2024 +$ +( 750,000 +) +$ +( 792,225 +) +$ +( 750,000 +) +$ +( 744,578 +) +3.90% Notes due 2027 +$ +( 750,000 +) +$ +( 778,050 +) +$ +( 750,000 +) +$ +( 701,273 +) +4.375% Notes due 2029 +$ +( 500,000 +) +$ +( 530,400 +) +$ +— +$ +— +Derivative instruments — assets +$ +18,524 +$ +18,524 +$ +111,185 +$ +111,185 +Derivative instruments — liabilities +$ +( 17,699 +) +$ +( 17,699 +) +$ +( 29,894 +) +$ +( 29,894 +) +Assessing the significance of a particular input to the fair value measurement requires judgment, including the consideration of factors specific to the asset or liability. The fair value (Level 1) of our fixed rate notes was based on quoted market prices. The fair value of our derivative instruments (Level 2) was estimated using discounted cash flow and option pricing models. These models use certain observable variables including forward prices, volatility curves, interest rates, and credit ratings and spreads. The fair value estimates are adjusted relative to non-performance risk as appropriate. See Note 4 for further information on the fair value of our derivative instruments. +Other Financial Instruments +The carrying amounts of our cash, cash equivalents, accounts receivable, accounts payable, and accrued liabilities approximate fair value because of the short-term maturities and/or liquid nature of these assets and liabilities. Included in “Accrued liabilities — Other” at December 31, 2019 are: (i) accrued operating expenses (e.g. production, transportation, and gathering expenses) of approximately $ 74.7 million and (ii) accrued general and administrative, primarily payroll-related, costs of approximately $ 43.3 million . Included in “Accrued liabilities — Other” at December 31, 2018 are: (i) accrued operating expenses (e.g. production, transportation, and gathering expenses) of approximately $ 69.1 million , (ii) accrued general and administrative, primarily payroll-related, costs of approximately $ 47.4 million , and (iii) an accrual of approximately $ 35.8 million representing the amount by which checks issued, but not yet presented to our banks, exceeded balances in applicable bank accounts. +Most of our accounts receivable balances are uncollateralized and result from transactions with other companies in the oil and gas industry. Concentration of customers may impact our overall credit risk because our customers may be similarly affected by changes in economic or other conditions within the industry. +We conduct credit analyses prior to making any sales to new customers or increasing credit for existing customers and may require parent company guarantees, letters of credit, or prepayments when deemed necessary. +We routinely assess the recoverability of all material accounts receivable to determine their collectability. We accrue a reserve to the allowance for doubtful accounts when it is probable that a receivable will not be collected and +83 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +the amount of the reserve may be reasonably estimated. At December 31, 2019 and 2018 , the allowance for doubtful accounts totaled $ 3.6 million and $ 2.7 million , respectively. +Major Customers +In each of the years ended December 31, 2019 , 2018 , and 2017 , we made sales to two customers that each amounted to 10% or more of our consolidated revenues for the respective year. Sales to those two customers accounted for 29 % and 25 % , respectively, of our consolidated revenues in 2019 , 21 % and 23 % , respectively, of our consolidated revenues in 2018 , and 13 % and 21 % , respectively, of our consolidated revenues in 2017 . +If any one of our major customers was to stop purchasing our production, we believe there are a number of other purchasers to whom we could sell our production with some delay. If multiple significant customers were to discontinue purchasing our production, we believe there would be challenges initially, but ample markets to handle the disruption. +6. STOCK-BASED AND OTHER COMPENSATION +Equity Incentive Plan +Our 2019 Equity Incentive Plan (the “2019 Plan”) was approved by stockholders in May 2019 and no awards will be made under our previous plans. Outstanding awards under the previous plans were not impacted. A total of 6.3 million shares of common stock may be issued under the 2019 Plan, including shares available from the previous plans. The 2019 Plan provides for grants of options, stock appreciation rights, restricted stock, restricted stock units, performance stock units, cash awards, and other stock-based awards. +Stock-based Compensation Cost +We have recognized non-cash stock-based compensation cost as shown below. Historical amounts may not be representative of future amounts as the value of future awards may vary from historical amounts. +Years Ended December 31, +(in thousands) +2019 +2018 +2017 +Restricted stock awards: +Performance stock awards +$ +21,590 +$ +23,083 +$ +26,020 +Service-based stock awards +25,611 +20,385 +19,746 +47,201 +43,468 +45,766 +Stock option awards +1,903 +2,456 +2,599 +Total stock compensation cost +49,104 +45,924 +48,365 +Less amounts capitalized to oil and gas properties +( 22,706 +) +( 23,029 +) +( 22,109 +) +Stock compensation expense +$ +26,398 +$ +22,895 +$ +26,256 +Periodic stock compensation expense will fluctuate based on the grant date fair value of awards, the number of awards, the requisite service period of the awards, employee forfeitures, and the timing of the awards. The increase in total stock compensation cost in 2019 as compared to 2018 is primarily due to performance stock award forfeitures that occurred during 2018 as well as due to expense on awards granted during the periods more than offsetting the expense on awards that vested during the periods. Our a ccounting policy is to account for forfeitures in compensation cost when they occur. +84 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +We adopted Accounting Standards Update 2016-09, Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”) on January 1, 2017. The amendments within ASU 2016-09 related to the timing of when excess tax benefits and tax benefits on dividends on nonvested equity shares are recognized and accounting for forfeitures were adopted using a modified retrospective method. In accordance with this method, we recorded a cumulative-effect adjustment that increased beginning deferred income tax assets by $ 33.1 million , reduced beginning accumulated deficit by $ 28.7 million , and increased beginning additional paid-in capital by $ 4.4 million . +Restricted Stock +The following table provides information about restricted stock awards granted during the last three years. +Years Ended December 31, +2019 +2018 +2017 +Number +of Shares +Weighted +Average +Grant Date +Fair Value +Number +of Shares +Weighted +Average +Grant Date +Fair Value +Number +of Shares +Weighted +Average +Grant Date +Fair Value +Performance stock awards +264,393 +$ +47.66 +123,533 +$ +90.26 +300,525 +$ +89.46 +Service-based stock awards +681,988 +$ +45.88 +469,438 +$ +81.29 +251,312 +$ +94.04 +Total restricted stock awards +946,381 +$ +46.38 +592,971 +$ +83.16 +551,837 +$ +91.55 +Performance stock awards are granted to eligible executives and are subject to service and market condition-based vesting determined by our stock price performance relative to defined peer groups’ stock price performance. For awards granted prior to 2018, after three years of continued service, an executive will be entitled to vest in 50 % to 100 % of the award depending on the stock price performance. For awards granted in 2018 and 2019, after three years of continued service, an executive will be entitled to vest in 0 % to 200 % of the award depending on the stock price performance. In accordance with Internal Revenue Code Section 162(m), certain of the amounts awarded may not be deductible for tax purposes. Service-based stock awards are granted to eligible employees and non-employee directors and have vesting schedules ranging from one to five years . The majority of our service-based stock awards cliff vest five years from the grant date. +Compensation cost for the performance stock awards is based on the grant date fair value of the award utilizing a Monte Carlo simulation model. Compensation cost for the service-based stock awards is based upon the grant date market value of the award. Such costs are recognized ratably over the applicable vesting period. +The following table provides information on restricted stock activity during the year. +Service-based +Performance +(subject to market conditions) +Number of +Shares +Weighted +Average +Grant Date +Fair Value +Number of +Shares +Weighted +Average +Grant Date +Fair Value +Outstanding as of January 1, 2019 +1,135,882 +$ +99.12 +650,096 +$ +100.42 +Vested +( 155,751 +) +$ +126.20 +( 139,723 +) +$ +117.63 +Granted +681,988 +$ +45.88 +264,393 +$ +47.66 +Canceled (1) +— +$ +— +( 109,789 +) +$ +117.63 +Forfeited +( 23,050 +) +$ +90.97 +— +$ +— +Outstanding as of December 31, 2019 +1,639,069 +$ +74.51 +664,977 +$ +72.99 +85 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +________________________________________ +(1) +These performance shares were canceled since the market condition was not satisfied as of the end of the performance period. +The total vest date market value of restricted stock that vested during the years ended December 31, 2019 , 2018 , and 2017 was $ 15.1 million , $ 34.1 million , and $ 54.4 million , respectively. +Unrecognized compensation cost related to unvested restricted stock at December 31, 2019 was $ 96.9 million . We expect to recognize that cost over a weighted average period of 2.6 years . +Restricted Units +As of December 31, 2019 and 2018 , we had 8,838 restricted units outstanding. These represent restricted units held by a non-employee director who has elected to defer payment of common stock represented by the units until termination of his service on the Board of Directors. +Stock Options +Options outstanding as of December 31, 2019 expire seven to ten years from the grant date and have service-based vesting whereby the awards vest in increments of one-third on each of the first three anniversary dates of the grant. The exercise price for an option under the 2019 Plan and the plan in effect immediately prior to the 2019 Plan, is at least equal to the closing price of our common stock as reported by the New York Stock Exchange (“NYSE”) on the date of grant. The previous plans provided that all grants have an exercise price of the average of the high and low prices of our common stock as reported by the NYSE on the date of grant. +Compensation cost related to stock options is based on the grant date fair value of the award and is recognized ratably over the applicable vesting period. We estimate the fair value using the Black-Scholes option-pricing model. Expected volatilities are based on the historical volatility of our common stock. We also use historical data to estimate the expected years until exercise. We use U.S. Treasury bond rates in effect at the grant date for our risk-free interest rates. +The following summarizes information regarding options granted, including the assumptions used to determine the fair value of those options. +Years Ended December 31, +2019 +2018 +2017 +Options granted +132,900 +92,050 +96,100 +Weighted average grant date fair value +$ +12.14 +$ +26.71 +$ +28.37 +Weighted average exercise price +$ +42.78 +$ +83.28 +$ +92.37 +Total fair value (in thousands) +$ +1,613 +$ +2,458 +$ +2,727 +Expected years until exercise +4.9 +5.0 +4.5 +Expected stock volatility +37.1 +% +34.7 +% +35.0 +% +Dividend yield +1.9 +% +0.9 +% +0.3 +% +Risk-free interest rate +1.4 +% +2.7 +% +1.7 +% +86 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +Information about outstanding stock options is summarized below. +Number of Options +Weighted +Average +Exercise +Price +Weighted +Average +Remaining +Term +Aggregate +Intrinsic +Value +(in thousands) +Outstanding as of January 1, 2019 +420,332 +$ +99.01 +Exercised +( 29,222 +) +$ +43.37 +Granted +132,900 +$ +42.78 +Canceled +( 10,661 +) +$ +115.06 +Forfeited +( 17,811 +) +$ +90.66 +Outstanding as of December 31, 2019 +495,538 +$ +87.17 +4.3 years +$ +1,201 +Exercisable as of December 31, 2019 +287,283 +$ +107.97 +2.9 years +$ +— +The following table provides information regarding options exercised and the grant date fair value of options vested. +Years Ended December 31, +(in thousands) +2019 +2018 +2017 +Cash received from option exercises +$ +1,267 +$ +2,241 +$ +394 +Intrinsic value of options exercised +$ +425 +$ +1,030 +$ +257 +Grant date fair value of options vested +$ +2,262 +$ +2,547 +$ +2,227 +The following summary reflects the status of non-vested stock options as of December 31, 2019 and changes during the year. +Number of Options +Weighted +Average +Grant Date +Fair Value +Weighted +Average +Exercise +Price +Non-vested as of January 1, 2019 +170,241 +$ +28.29 +$ +91.05 +Vested +( 77,075 +) +$ +29.35 +$ +95.94 +Granted +132,900 +$ +12.14 +$ +42.78 +Forfeited +( 17,811 +) +$ +28.19 +$ +90.66 +Non-vested as of December 31, 2019 +208,255 +$ +17.60 +$ +58.47 +As of December 31, 2019 , there was $ 2.8 million of unrecognized compensation cost related to non-vested stock options. We expect to recognize that cost over a weighted average period of 2.1 years . +Other Compensation +We maintain and sponsor a contributory 401(k) plan for our employees. Employer contributions related to the plan were $ 8.7 million , $ 13.1 million , and $ 10.4 million for 2019 , 2018 , and 2017 , respectively. Included in the 2018 and 2017 amounts were accrued employer discretionary contributions. No such employer discretionary contributions were accrued for 2019. +87 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +7. EARNINGS (LOSS) PER SHARE +The calculations of basic and diluted net earnings (loss) per common share under the two-class method are presented below. Earnings (loss) per share are based on actual figures rather than the rounded figures presented. +Year Ended December 31, 2019 +(in thousands, except per share information) +Income (Numerator) +Shares (Denominator) +Per-Share Amount +Net loss +$ +( 124,619 +) +Less: dividends attributable to participating securities (1) +( 1,519 +) +Less: preferred stock dividends +( 5,078 +) +Basic loss per share +Loss available to common stockholders +( 131,216 +) +98,789 +$ +( 1.33 +) +Effects of dilutive securities +Options (2) +— +— +Diluted loss per share +Loss available to common stockholders and assumed conversions +$ +( 131,216 +) +98,789 +$ +( 1.33 +) +Year Ended December 31, 2018 +(in thousands, except per share information) +Income (Numerator) +Shares (Denominator) +Per-Share Amount +Net income +$ +791,851 +Less: dividends and net income attributable to participating securities +( 11,087 +) +Basic earnings per share +Income available to common stockholders +780,764 +93,793 +$ +8.32 +Effects of dilutive securities +Options (2) +3 +27 +Diluted earnings per share +Income available to common stockholders and assumed conversions +$ +780,767 +93,820 +$ +8.32 +Year Ended December 31, 2017 +(in thousands, except per share information) +Income (Numerator) +Shares (Denominator) +Per-Share Amount +Net income +$ +494,329 +Less: dividends and net income attributable to participating securities +( 8,551 +) +Basic earnings per share +Income available to common stockholders +485,778 +93,466 +$ +5.19 +Effects of dilutive securities +Options (2) +3 +43 +Diluted earnings per share +Income available to common stockholders and assumed conversions +$ +485,781 +93,509 +$ +5.19 +88 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +________________________________________ +(1) +Participating securities do not have a contractual obligation to share in the losses of the entity, therefore, net losses are not attributable to participating securities. +(2) +Inclusion of certain potential common shares would have an anti-dilutive effect, therefore, these shares were excluded from the calculations of diluted earnings per share. Excluded from the calculation for the year ended December 31, 2019 were 495.5 thousand potential common shares from the assumed exercise of employee stock options, 508.6 thousand potential common shares from the assumed conversion of the Convertible Preferred Stock, and 37.4 thousand potential common shares from the assumed vesting of incremental shares of unvested restricted stock awards. Excluded from the calculations for the years ended December 31, 2018 and 2017 were potential common shares from the assumed exercise of employee stock options of 387.7 thousand and 302.9 thousand , respectively. See Note 2 for further information regarding our Convertible Preferred Stock and Note 6 for further information regarding our stock awards. +8. ASSET RETIREMENT OBLIGATIONS +The following table reflects the components of the change in the carrying amount of the asset retirement obligation for the years ended December 31, 2019 and 2018 . +(in thousands) +2019 +2018 +Asset retirement obligation at January 1, +$ +166,904 +$ +169,469 +Liabilities incurred +21,511 +9,899 +Liability settlements and disposals +( 19,595 +) +( 21,550 +) +Accretion expense +7,499 +7,318 +Revisions of estimated liabilities +5,550 +1,768 +Asset retirement obligation at December 31, +181,869 +166,904 +Less current obligation +27,824 +14,146 +Long-term asset retirement obligation +$ +154,045 +$ +152,758 +For the year ended December 31, 2019 , liabilities incurred included $ 9.4 million for the Resolute acquisition. For the years ended, December 31, 2019 and 2018 , the liability settlements and disposals included $ 9.3 million and $ 13.7 million , respectively, related to properties that were sold. +89 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +9. INCOME TAXES +The components of the provision for income taxes are as follows: +Years Ended December 31, +(in thousands) +2019 +2018 +2017 +Current taxes: +Federal benefit +$ +— +$ +( 3,007 +) +$ +( 2,810 +) +State expense (benefit) +532 +383 +( 2 +) +532 +( 2,624 +) +( 2,812 +) +Deferred taxes: +Federal (benefit) expense +( 24,055 +) +211,717 +173,859 +State (benefit) expense +( 2,847 +) +21,563 +16,620 +( 26,902 +) +233,280 +190,479 +$ +( 26,370 +) +$ +230,656 +$ +187,667 +Federal income tax expense (benefit) for the years presented differs from the amounts that would be provided by applying the U.S. federal income tax rate, primarily due to the effect of state income taxes, non-deductible expenses, and changes in tax laws and tax rates enacted in the period. Reconciliations of the income tax expense (benefit) calculated at the federal statutory rate of 21% for 2019 and 2018 and 35% for 2017 to the total income tax expense (benefit) are as follows: +Years Ended December 31, +(in thousands) +2019 +2018 +2017 +Provision at statutory rate +$ +( 31,708 +) +$ +214,726 +$ +238,699 +Effect of state taxes +( 1,717 +) +18,795 +10,074 +Acquisition-related costs +1,318 +— +— +Tax credits and other permanent differences +2,548 +1,583 +5,442 +Change in valuation allowance, net +— +( 1,376 +) +486 +Stock-based compensation +3,189 +( 3,072 +) +( 5,888 +) +Impact of reduction in federal statutory rate +— +— +( 61,146 +) +Income tax (benefit) expense +$ +( 26,370 +) +$ +230,656 +$ +187,667 +90 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +As a result of the enactment of H.R.1 (Public Law 115-97) on December 22, 2017, we remeasured our deferred tax assets and liabilities as of December 31, 2017 to reflect the reduction in the U.S. income tax rate from 35% to 21% for years after 2017. As a result of this remeasurement, we recorded an income tax benefit of $ 61.1 million and a corresponding $ 61.1 million decrease in net deferred tax liabilities as of December 31, 2017. +The components of net deferred taxes are as follows: +December 31, +(in thousands) +2019 +2018 +Assets: +Stock compensation and other accrued amounts +$ +31,521 +$ +8,229 +Net operating loss and other carryforwards, net of valuation allowance +454,743 +266,011 +Credit carryforward, net of valuation allowance +3,936 +3,513 +490,200 +277,753 +Liabilities: +Property, plant and equipment +( 828,624 +) +( 612,226 +) +Net deferred tax liabilities +$ +( 338,424 +) +$ +( 334,473 +) +On March 1, 2019, we completed the acquisition of Resolute. For federal income tax purposes, the acquisition was a tax-free merger whereby Cimarex acquired carryover tax basis in Resolute’s tax assets and liabilities. As of December 31, 2019, we recorded a net deferred tax liability of $ 31.1 million to reflect the difference between the fair value of Resolute’s assets and liabilities recorded in the acquisition and the income tax basis of the assets and liabilities assumed. See Note 13 for more information regarding the preliminary purchase price allocation and subsequent adjustments made to it. The deferred tax liability includes certain deferred tax assets net of valuation allowances. +Because the acquisition resulted in a greater than 50 % ownership change in Resolute, the tax attributes Cimarex acquired from Resolute are subject to limitation pursuant to Section 382 of the Internal Revenue Code. Our ability to use the Resolute net operating losses (“NOLs”) and credits acquired is limited to an annual amount plus any built-in gains recognized within five years of the ownership change. The annual limitation amount is $ 19.6 million and the net unrealized built-in gain is projected to be $ 253.9 million . The acquired Resolute federal NOLs of $ 746.3 million have been reduced by a $ 57.6 million valuation allowance. Additionally, a full valuation allowance was recorded on an acquired capital loss carryforward of $ 67.7 million and enhanced oil recovery credit carryforwards of $ 4.0 million to reflect the expected tax effect of the Section 382 limitation. The Resolute federal NOLs will begin to expire in 2032. +At December 31, 2019 , we had a U.S. net tax operating loss carryforward (including Resolute) of approximately $ 1.93 billion , which would expire in years 2032 through 2039 . We believe that the carryforward, net of valuation allowance, will be utilized before it expires. We recorded a $ 9.7 million increase to the net operating loss carryforward at December 31, 2019 and a corresponding $ 9.7 million increase to the valuation allowance related to state net operating losses. The total valuation allowance on state net operating losses at December 31, 2019 was $ 119.0 million since it is not more likely than not that these additional state net operating losses will be utilized before they expire. We also had enhanced oil recovery and marginal well credits of $ 3.9 million at December 31, 2019 . +At December 31, 2019 and 2018 , we had no unrecognized tax benefits that would impact our effective rate and we have made no provisions for interest or penalties related to uncertain tax positions. The tax years 2016 through 2018 remain open to examination by the Internal Revenue Service of the United States. We file tax returns with various state taxing authorities which remain open to examination for tax years 2015 through 2018 . We do not anticipate the need for any significant income tax payments in the near term. +91 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +10. COMMITMENTS AND CONTINGENCIES +Lease Commitments +Effective January 1, 2019, we began accounting for leases in accordance with Topic 842, which requires lessees to recognize lease liabilities and right-of-use assets on the balance sheet for contracts that provide lessees with the right to control the use of identified assets for periods of greater than 12 months. Prior to January 1, 2019, we accounted for leases in accordance with ASC Topic 840, Leases , under which operating leases were not recorded on the balance sheet. +Real Estate Leases +We have operating leases for office space in various locations that provide us the right to control the use of the specified office space over the term of the contract. These leases require us to make monthly “base rent” payments, as well as “additional payments” for our share of operating expenses and taxes incurred by the landlord. At our option, the terms of these leases can be renewed for varying periods, and in some cases may be terminated early at our option. As of December 31, 2019 , these leases had remaining lease terms ranging from 4.4 to 6.7 years. These leases do not contain residual value guarantees, options to purchase the underlying office space, or terms or covenants that impose restrictions on our ability to pay dividends, incur debt, or enter into additional leases. We have no subleases of office space. +Lease liabilities associated with our real estate leases were recorded at the present value of the estimated future lease payments, after considering the following: +• +“Base rent” payments are considered fixed lease payments, while “additional payments” are considered variable lease payments. +• +At commencement of each real estate lease we were not reasonably certain to exercise the option to renew or terminate such lease. +• +The discount rate used to calculate each lease liability was based on our incremental borrowing rate, which was estimated utilizing trading metrics for our senior unsecured notes as adjusted using relevant market factors to develop a synthetic secured yield curve. +• +As an accounting policy we have elected not to separate nonlease components from lease components for our real estate class of assets. +• +Where applicable, we determined that the effect of accounting for the right to use land separately from other lease components would be insignificant. +Production-Related Leases +We have operating leases for equipment used in connection with our oil and gas production operations, including well-head compressors, pipeline compressors, and artificial lift mechanisms. These leases provide us the right to control the use of explicitly or implicitly identified equipment during the term of the contract. These leases often include an “evergreen” provision that allows the contract term to continue on a month-to-month basis following expiration of the initial term stated in the contract. As of December 31, 2019 , these leases had remaining lease terms ranging from one month to 10.6 years. These leases require us to make monthly payments of fixed amounts, which cover the cost of renting the equipment and, in some cases, the cost of maintaining the leased equipment. These leases do not typically require us to make variable lease payments. These leases do not contain residual value guarantees, options to purchase the underlying equipment, or terms or covenants that impose restrictions on our ability to pay dividends, incur debt, or enter into additional leases. We have no subleases of production-related equipment. +92 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +Lease liabilities associated with our production-related operating leases were recorded at the present value of the estimated future lease payments, after considering the following: +• +For leases with an evergreen provision, the term of the lease was determined to be the noncancellable period in the contract plus the period beyond the noncancellable period that we believe it is reasonably certain we will need the equipment for operational purposes, limited to the point in time at which both we and the lessor each have the right to terminate the lease without permission from the other party with no more than an insignificant penalty. +• +The discount rate used to calculate each lease liability was based on our incremental borrowing rate, which was estimated utilizing trading metrics for our senior unsecured notes as adjusted using relevant market factors to develop a synthetic secured yield curve. +• +As an accounting policy, we have elected not to separate nonlease components from lease components for our production-related class of assets. +We have one finance lease, which results from a gathering agreement (the “Gathering Agreement”) on a gathering system. Under terms of the Gathering Agreement, we have the option to acquire a portion of the underlying gathering system upon termination of the Gathering Agreement. We make monthly payments under the Gathering Agreement based on the volume of oil gathered and a gathering rate per barrel, which is adjusted periodically. As of December 31, 2019 , this lease had a remaining term of 5.9 years. +Exploration and Development-Related Leases +We have operating leases for equipment used in connection with our exploration and development activities, including drilling rigs, pressure pumping equipment, directional drilling tools, well-control devices, and various pieces of support equipment. These leases provide us the right to control the use of explicitly or implicitly identified equipment during the term of the contract. As of December 31, 2019 , these leases had remaining lease terms of 12 months or less. These leases typically require us to make payments in amounts based on the usage of the underlying equipment. These leases do not contain residual value guarantees, options to purchase the underlying equipment, or terms or covenants that impose restrictions on our ability to pay dividends, incur debt, or enter into additional leases. We have no subleases of exploration and development-related equipment. +As an accounting policy, we have elected not to apply the recognition requirements of Topic 842 to our exploration and development-related class of assets with lease terms at commencement of 12 months or less. As such, we have not recorded any lease liabilities associated with our exploration and development-related leases. In addition, as an accounting policy we have elected not to separate nonlease components from lease components for our exploration and development-related class of assets. +93 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +Balance Sheet Presentation +The following tables present the amounts and classifications of our right-of-use assets and estimated lease liabilities as of December 31, 2019 : +(in thousands) +Balance Sheet Location +December 31, 2019 +Operating lease right-of-use assets +Non-current assets — Fixed assets, net +$ +240,263 +Finance lease right-of-use asset +Non-current assets — Other assets +24,849 +Total right-of-use assets +$ +265,112 +(in thousands) +Balance Sheet Location +December 31, 2019 +Operating lease liabilities — current +Current liabilities — Operating leases +$ 66,003 +Operating lease liabilities — non-current +Non-current liabilities — Operating leases +184,172 +Finance lease liability — current +Current liabilities — Accrued liabilities-Other +7,328 +Finance lease liability — non-current +Non-current liabilities — Other liabilities +18,749 +Total lease liabilities +$ 276,252 +Lease Cost and Cash Flows +The following table summarizes estimated total lease cost, which includes amounts recognized in income and amounts capitalized for the indicated period: +(in thousands) +Year Ended December 31, 2019 +Finance lease cost: +Amortization of right-of-use asset +$ +4,385 +Interest on lease liability +1,719 +Operating lease cost: (1) +Production expense +20,965 +Transportation, processing, and other operating +17,264 +Gas gathering and other expense +5,607 +General and administrative expense (2) +12,421 +Short-term lease cost (3) +539,110 +Total lease cost +$ +601,471 +________________________________________ +(1) +Operating lease cost in the table above is composed of costs incurred under real estate and production-related leases. These costs are included in the indicated captions on the Consolidated Statements of Operations and Comprehensive Income (Loss). +(2) +Includes variable lease costs of $ 3.1 million . +(3) +Short-term lease cost in the table above is composed of costs incurred under leases with terms of 12 months or less for right-of-use assets used in exploration and development activities. Payments under such leases are typically based on usage of the underlying right-of-use asset and, therefore, are also variable lease payments. These costs are capitalized as part of proved properties on the Consolidated Balance Sheet. +94 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +The following table summarizes estimated cash paid for our leases for the indicated period: +(in thousands) +Year Ended +December 31, 2019 +Cash paid for amounts included in the measurement of lease liabilities: +Financing cash outflows from finance lease +$ +3,869 +Operating cash outflows from operating leases +$ +54,044 +Cash paid for short-term leases and variable lease payments: +Operating cash outflows from operating leases +$ +3,103 +Investing cash outflows from operating leases +$ +551,325 +During the year ended December 31, 2019 , we recognized $ 91.7 million in right-of-use assets in connection with new operating leases entered into during the period. +Lease Liability Maturity Analysis +The following table presents the weighted-average remaining lease terms and discount rates of our leases as of the indicated date: +December 31, 2019 +Weighted-average remaining lease term (in years): +Finance lease +5.9 +Operating leases +4.1 +Weighted-average discount rate: +Finance lease +5.7 +% +Operating leases +3.9 +% +The following table reflects the undiscounted future cash flows utilized in the calculation of the lease liabilities recorded at December 31, 2019 : +December 31, 2019 +(in thousands) +Operating Leases +Finance Lease +January 1, 2020 — December 31, 2020 +$ +75,102 +$ +5,944 +January 1, 2021 — December 31, 2021 +67,027 +5,687 +January 1, 2022 — December 31, 2022 +60,686 +5,429 +January 1, 2023 — December 31, 2023 +38,128 +5,171 +January 1, 2024 — December 31, 2024 +17,851 +4,913 +Remaining periods +12,426 +3,132 +Total undiscounted future cash flows +271,220 +30,276 +Less effects of discounting +( 21,045 +) +( 4,199 +) +Lease liabilities recognized +$ +250,175 +$ +26,077 +95 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +As of December 31, 2018 , the following future minimum cash payments were required under leases for office space: +(in thousands) +December 31, 2018 +2019 +$ +9,849 +2020 +10,790 +2021 +11,000 +2022 +11,130 +2023 +11,433 +Remaining periods +20,831 +Total future minimum lease payments +$ +75,033 +In addition, as of December 31, 2018 , we had various contractual commitments for compressor equipment under operating lease arrangements totaling $ 34.8 million with lease terms expiring from 1 - 35 months after December 31, 2018 . +Other Commitments +At December 31, 2019 , we had estimated commitments of approximately: (i) $ 321.7 million to finish drilling, completing, or performing other work on wells and various other infrastructure projects in progress and (ii) $ 6.6 million to finish gathering system construction in progress. +At December 31, 2019 , we had firm sales contracts to deliver approximately 703.7 Bcf of gas over the next 11.5 years . If we do not deliver this gas, our estimated financial commitment, calculated using the January 2020 index price, would be approximately $ 1.03 billion . The value of this commitment will fluctuate due to price volatility and actual volumes delivered. However, we believe no financial commitment will be due based on our current proved reserves and production levels from which we can fulfill these volumetric obligations. +In connection with gas gathering and processing agreements, we have volume commitments over the next 9.0 years . If we do not deliver the committed gas or NGLs, as the case may be, the estimated maximum amount that would be payable under these commitments, calculated as of December 31, 2019 , would be approximately $ 697.2 million . However, we believe no financial commitment will be due based on our current proved reserves and production levels from which we can fulfill these volumetric obligations. +We have minimum volume delivery commitments associated with agreements to reimburse connection costs to various pipelines. If we do not deliver this gas, or oil, as the case may be, the estimated maximum amount that would be payable under these commitments, calculated as of December 31, 2019 , would be approximately $ 117.6 million . Of this total, we have accrued a liability of $ 4.5 million representing the estimated amount we will have to pay due to insufficient forecasted volumes at particular connection points. +At December 31, 2019 , we have various firm transportation agreements for gas and oil pipeline capacity with end dates ranging from 2020 - 2028 under which we will have to pay an estimated $ 64.0 million over the remaining terms of the agreements. These agreements were entered into to support our residue gas and oil marketing efforts, and we believe we have sufficient reserves that will utilize this firm transportation. +All of the noted commitments were routine and made in the ordinary course of our business. +96 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +Litigation +In the ordinary course of business, we are involved with various litigation matters. When a loss contingency exists, we assess whether it is probable that an asset has been impaired or a liability has been incurred and, if so, we determine if the amount of loss can be reasonably estimated, all in accordance with guidance established by the FASB, and adjust our accruals accordingly. Though some of the related claims may be significant, the resolution of them, we believe, individually or in the aggregate, would not have a material adverse effect on our financial condition or results of operations after consideration of current accruals. +11. RELATED PARTY TRANSACTIONS +Helmerich & Payne, Inc. (“H&P”) provides contract drilling services to Cimarex. Cimarex incurred drilling costs of approximately $ 72.8 million , $ 80.1 million , and $ 52.6 million related to these services during the years ended December 31, 2019 , 2018 , and 2017 , respectively. The amount incurred in 2019 is included in the short-term lease costs disclosed in Note 10. Hans Helmerich, a director of Cimarex, is Chairman of the Board of Directors of H&P. +12. SUPPLEMENTAL CASH FLOW INFORMATION +Years Ended December 31, +(in thousands) +2019 +2018 +2017 +Cash paid during the period for: +Interest expense (net of capitalized amounts of $49,944, $19,969, and $23,113, respectively) (1) +$ +50,601 +$ +45,357 +$ +52,245 +Income taxes +$ +1,364 +$ +— +$ +3 +Cash received for income tax refunds +$ +2,033 +$ +760 +$ +111 +________________________________________ +(1) +The year ended December 31, 2019 includes $ 17.6 million in interest paid upon the redemption of Resolute’s senior notes and credit facility on March 1, 2019. +97 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +13. ACQUISITIONS AND DIVESTITURES +On August 31, 2018 , we closed on the divestiture of oil and gas properties principally located in Ward County, Texas for which we received $ 534.6 million in net cash proceeds in 2018 as adjusted for customary closing adjustments to reflect an effective date of April 1, 2018 and transaction costs. This divestiture did not significantly alter the relationship between capitalized costs and proved reserves, therefore, in accordance with the full cost method of accounting, no gain or loss was recognized. +On March 1, 2019 , we completed the acquisition of Resolute Energy Corporation, an independent oil and gas company focused on the acquisition and development of unconventional oil and gas properties in the Delaware Basin area of the Permian Basin of west Texas. The principal factors considered by management in making this acquisition included: (i) our expectation that Resolute’s assets’ attractive returns are competitive with those in our existing portfolio, (ii) the opportunity to apply our experience and learnings from already operating in this area to generating productivity gains from Resolute’s properties, (iii) the ability to increase our acreage position in the Delaware Basin, and (iv) the expectation that the acquisition will be financially accretive. +We acquired 100 % of the outstanding common shares and voting interests of Resolute in a cash and stock transaction. The acquisition date fair value of the consideration transferred totaled $ 820.3 million , which consisted of cash, common stock, and a newly created series of preferred stock (see Note 5 for more information on the preferred stock) as follows: +(in thousands) +Fair Value of Consideration Transferred +Cash +$ +325,677 +Common stock (5,652 shares issued) +413,015 +Preferred stock (63 shares issued) +81,620 +$ +820,312 +The fair value of the common stock issued as part of the consideration was determined on the basis of the closing market price of Cimarex common stock on the acquisition date. The fair value of the preferred stock issued as part of the consideration was determined using a multiple probability simulation model. +Preliminary Purchase Price Allocation +The Resolute acquisition has been accounted for as a business combination, using the acquisition method. The following table presents the preliminary allocation of the Resolute purchase price to the identifiable assets acquired and liabilities assumed based on the fair values at the acquisition date, with any excess of the purchase price over the estimated fair value of the identifiable net assets acquired recorded to goodwill. The table also presents the adjustments to the preliminary purchase price allocation recorded through December 31, 2019 . The most significant adjustment was made to reduce the fair value of the unproved oil and gas properties acquired by $ 30.3 million based on the finalization of the quantity of acres acquired. The tax effect of this adjustment reduced the related deferred tax liability by $ 6.9 million . The completion of the final Resolute tax returns provided the underlying tax basis of Resolute’s assets and liabilities and net operating losses and resulted in a reduction of the deferred tax liability of $ 24.4 million . The remaining adjustments were related to finalization of some working capital balances. The offset to all of the adjustments is goodwill. The purchase price allocation remains preliminary as certain data necessary to finalize pre-acquisition working capital balances is not yet available. We expect to complete the purchase price allocation during the 12 -month period following the acquisition date, during which time the value of the assets and liabilities may be revised as appropriate. +98 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +The following table sets forth the preliminary purchase price allocation: +(in thousands) +March 1, 2019 +Adjustments +December 31, 2019 +Cash +$ +41,236 +$ +— +$ +41,236 +Accounts receivable +50,739 +11,463 +62,202 +Other current assets +13,280 +( 1,260 +) +12,020 +Proved oil and gas properties +692,600 +— +692,600 +Unproved oil and gas properties +1,054,200 +( 30,314 +) +1,023,886 +Fixed assets +5,355 +( 32 +) +5,323 +Goodwill +107,341 +( 10,708 +) +96,633 +Other assets +142 +— +142 +Current liabilities +( 202,735 +) +( 486 +) +( 203,221 +) +Long-term debt +( 870,000 +) +— +( 870,000 +) +Deferred income taxes +( 62,409 +) +31,337 +( 31,072 +) +Asset retirement obligation +( 9,437 +) +— +( 9,437 +) +Total identifiable net assets +$ +820,312 +$ +— +$ +820,312 +In connection with the acquisition, we assumed, and immediately repaid, $ 870.0 million principal amount of long-term debt consisting of $ 600.0 million of senior notes and $ 270.0 million of credit facility borrowings. On March 1, 2019 , we repaid Resolute’s credit facility borrowings, delivered a notice of optional redemption of Resolute’s senior notes for an April 1, 2019 redemption date, and irrevocably deposited with a trustee the full amount of funds to repay the aggregate outstanding senior notes principal balance plus accrued and unpaid interest, incurring a $ 4.3 million loss on early extinguishment of debt. The cash consideration transferred and the repayment of Resolute’s long-term debt was funded using cash on hand and borrowings on our Credit Facility. We subsequently repaid the borrowings on our Credit Facility using the net proceeds from the March 8, 2019 issuance of $ 500.0 million aggregate principal amount of 4.375 % senior unsecured notes (see Note 3 for more information on our debt issuance). +Goodwill of $ 96.6 million has been recognized principally as a result of recording net deferred tax liabilities arising from the difference between the tax basis and the purchase price allocated to Resolute’s assets and liabilities, and anticipated opportunities for cost savings through administrative and operational synergies. Goodwill is not expected to be deductible for tax purposes. +Acquisition-related costs incurred were $ 11.4 million , with $ 8.4 million expensed in 2019 and $ 3.0 million expensed in 2018. These costs, which were comprised primarily of advisory and legal fees, are included in the Other operating expense, net line item on our Consolidated Statements of Operations and Comprehensive Income (Loss). +The results of Resolute’s operations have been included in our consolidated financial statements since the March 1, 2019 acquisition date. The amount of revenue and direct operating expenses resulting from the acquisition included in our Consolidated Statements of Operations and Comprehensive Income (Loss) from March 1, 2019 through December 31, 2019 is $ 203.6 million and $ 51.0 million , respectively. +99 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +Pro Forma Financial Information (Unaudited) +The following supplemental pro forma information for the years ended December 31, 2019 and 2018 has been prepared to give effect to the Resolute acquisition as if it had occurred on January 1, 2018. The information below reflects pro forma adjustments based on available information and certain assumptions that we believe are reasonable, including (i) the depletion of the combined company’s proved oil and gas properties, (ii) the capitalization of interest expense, and (iii) the estimated tax impacts of the pro forma adjustments. Additionally, pro forma earnings were adjusted to exclude acquisition-related costs incurred by Cimarex of $ 11.4 million and transaction-related costs incurred by Resolute of $ 66.6 million . The pro forma results of operations do not include any cost savings or other synergies that may result from the acquisition or any estimated costs that have been or will be incurred by Cimarex to integrate the Resolute assets. The pro forma financial data has not been adjusted to reflect any other acquisitions or dispositions made during the periods presented as their results were not deemed material. +The pro forma information is not necessarily indicative of the results that might have occurred had the transaction actually taken place on January 1, 2018 and is not intended to be a projection of future results. Future results may vary significantly from the results reflected in the following pro forma information because of normal production declines, changes in commodity prices, future acquisitions and divestitures, future development and exploration activities, and other factors. +Years Ended December 31, +(in thousands, except per share information) +2019 +2018 +Revenue +$ +2,416,105 +$ +2,667,561 +Net (loss) income +$ +( 139,553 +) +$ +872,140 +Net (loss) income per common share: +Basic +$ +( 1.47 +) +$ +8.65 +Diluted +$ +( 1.47 +) +$ +8.65 +100 +Table of Contents +CIMAREX ENERGY CO. +SUPPLEMENTAL INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED) +Oil and Gas Reserve Information— Proved reserve quantities are based on estimates prepared by Cimarex in accordance with guidelines established by the Securities and Exchange Commission (“SEC”). +Reserve definitions comply with definitions of Rule 4-10(a) (1)-(32) of Regulation S-X of the SEC. All of our reserve estimates are maintained by our internal Corporate Reservoir Engineering group, which is comprised of engineers and engineering technicians. The objectives and management of this group are separate from and independent of the exploration and production functions of our company. The technical employee primarily responsible for overseeing the reserve estimation process is our Vice President of Corporate Engineering. This individual graduated from the Colorado School of Mines with a Bachelor of Science degree in Engineering and has more than 25 years of practical experience in reserve evaluation. He has been directly involved in the annual reserve reporting process of Cimarex since 2002 and has served in his current role for the past 15 years. +DeGolyer and MacNaughton, an independent petroleum engineering consulting firm, performed an independent evaluation of our estimated net reserves representing greater than 80% of the total future net revenue discounted at 10% attributable to the total interests owned by Cimarex as of December 31, 2019 . The individual primarily responsible for overseeing the evaluation is a Senior Vice President with DeGolyer and MacNaughton and a Registered Professional Engineer in the State of Texas with over 35 years of experience in oil and gas reservoir studies and reserves evaluations. +Proved reserves are those quantities of oil, gas, and NGLs which, by analysis of geosciences and engineering data, can be estimated with reasonable certainty to be economically producible—from a given date forward, from known reservoirs, and under existing economic conditions, operating methods, and government regulations—prior to the time at which contracts providing the right to operate expire, unless evidence indicates that renewal is reasonably certain, regardless of whether deterministic or probabilistic methods are used for the estimation. The project to extract the hydrocarbons must have commenced or the operator must be reasonably certain that it will commence the project within a reasonable time. +There are numerous uncertainties inherent in estimating quantities of proved reserves and projecting future rates of production and the timing of development expenditures. The estimation of our proved reserves employs one or more of the following: production trend extrapolation, analogy, volumetric assessment, and material balance analysis. Techniques including review of production and pressure histories, analysis of electric logs and fluid tests, and interpretations of geologic and geophysical data are also involved in this estimation process. +The following table summarizes the trailing twelve-month index prices used in the reserves estimates for 2019 , 2018 , and 2017 . These prices are prior to adjustments for fixed and determinable amounts under provisions in existing contracts, location, grade, and quality. +December 31, +2019 +2018 +2017 +Gas price per Mcf +$ +2.58 +$ +3.10 +$ +2.98 +Oil price per Bbl +$ +55.67 +$ +65.56 +$ +51.34 +NGL price per Bbl +$ +13.27 +$ +21.03 +$ +19.09 +101 +Table of Contents +CIMAREX ENERGY CO. +SUPPLEMENTAL INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED) +The following table sets forth our estimates of our proved, proved developed, and proved undeveloped oil, gas, and NGL reserves as of December 31, 2019 , 2018 , 2017 , and 2016 and changes in our proved reserves for the years ended December 31, 2019 , 2018 , and 2017 . All of our proved reserves are located entirely within the U.S. +Gas +(MMcf) +Oil +(MBbls) +NGL +(MBbls) +Total +(MBOE) +Total proved reserves: +December 31, 2016 +1,471,420 +105,878 +130,633 +481,748 +Revisions of previous estimates +(39,749 +) +(1,225 +) +(2,099 +) +(9,951 +) +Extensions and discoveries +363,774 +53,464 +42,692 +156,786 +Purchases of reserves +642 +42 +78 +227 +Production +(187,468 +) +(20,861 +) +(17,374 +) +(69,479 +) +Sales of reserves +(984 +) +(60 +) +(70 +) +(294 +) +December 31, 2017 +1,607,635 +137,238 +153,860 +559,037 +Revisions of previous estimates +(132,577 +) +(4,348 +) +3,777 +(22,667 +) +Extensions and discoveries +342,810 +53,763 +47,614 +158,512 +Purchases of reserves +3 +— +— +1 +Production +(205,837 +) +(24,710 +) +(21,994 +) +(81,010 +) +Sales of reserves +(20,713 +) +(15,405 +) +(3,821 +) +(22,678 +) +December 31, 2018 +1,591,321 +146,538 +179,436 +591,195 +Revisions of previous estimates +(180,632 +) +(8,516 +) +(12,038 +) +(50,661 +) +Extensions and discoveries +247,406 +41,193 +36,834 +119,261 +Purchases of reserves +129,435 +22,628 +18,818 +63,019 +Production +(251,567 +) +(31,463 +) +(28,254 +) +(101,645 +) +Sales of reserves +(3,818 +) +(610 +) +(328 +) +(1,574 +) +December 31, 2019 +1,532,145 +169,770 +194,468 +619,595 +Proved developed reserves: +December 31, 2016 +1,144,720 +92,032 +99,176 +381,994 +December 31, 2017 +1,334,510 +114,116 +126,227 +462,761 +December 31, 2018 +1,398,729 +116,339 +151,566 +501,027 +December 31, 2019 +1,358,329 +138,783 +166,552 +531,722 +Proved undeveloped reserves: +December 31, 2016 +326,700 +13,846 +31,457 +99,754 +December 31, 2017 +273,125 +23,122 +27,633 +96,276 +December 31, 2018 +192,592 +30,199 +27,870 +90,168 +December 31, 2019 +173,816 +30,987 +27,916 +87,873 +Year-end 2019 proved reserves increased approximately 5% from year-end 2018 proved reserves, to 619.6 MMBOE. Proved gas reserves were 1.53 Tcf, proved oil reserves were 169.8 MMBbls, and proved NGL reserves were 194.5 MMBbls. Our reserves in the Permian Basin accounted for 68% of total proved reserves, with nearly all of the remainder in the Mid-Continent. +During 2019 , we added 119.3 MMBOE of proved reserves through extensions and discoveries, primarily in the Permian Basin where we added 99.9 MMBOE, with the remaining 19.4 MMBOE in additions being in the Mid-Continent. Additionally, we added 63.0 MMBOE from purchases of reserves, primarily through the Resolute acquisition (see Note 13 to the Consolidated Financial Statements for further information on the acquisition). We had net negative +102 +Table of Contents +CIMAREX ENERGY CO. +SUPPLEMENTAL INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED) +revisions of 50.7 MMBOE, which consisted of 47.2 MMBOE in downward price revisions and 7.0 MMBOE related to increases in operating expenses. In addition, 13.6 MMBOE was associated with the removal of PUD reserves whose development will likely be delayed beyond five years of initial disclosure. These negative revisions were partially offset by net positive technical revisions of 17.1 MMBOE primarily related to better than expected performance from wells with initial production in late 2018 and positive adjustments to PUD reserves converted to proved developed reserves during 2019. +During 2018 , we added 158.5 MMBOE of proved reserves through extensions and discoveries, primarily in Permian Basin and Mid-Continent where we added 120.3 MMBOE and 38.0 MMBOE, respectively. In addition, we had net negative revisions of 22.7 MMBOE. The revisions included decreases of 38.6 MMBOE for the removal of PUD reserves whose development will likely be delayed beyond five years of initial disclosure and 7.7 MMBOE related to increases in operating expenses. These decreases were partially offset by increases of 2.7 MMBOE in price-related revisions and 20.9 MMBOE of net technical revisions. The majority of the technical revisions were related to better than expected performance from wells with initial production in late 2017 and positive adjustments to PUD reserves converted to proved developed reserves during 2018. +During 2017 , we added 156.8 MMBOE of proved reserves through extensions and discoveries, primarily in Permian Basin and Mid-Continent where we added 109.6 MMBOE and 47.2 MMBOE, respectively. In addition, we had net negative revisions of 10.0 MMBOE. The revisions included decreases of 41.5 MMBOE for the removal of PUD reserves whose development will likely be delayed beyond five years of initial disclosure and 7.3 MMBOE related to increases in operating expenses. These decreases were partially offset by increases of 31.2 MMBOE in price-related revisions and 7.6 MMBOE of net technical revisions related primarily to better than expected performance from wells with initial production in late 2016. +At December 31, 2019 , we had PUD reserves of 87.9 MMBOE, down 2.3 MMBOE, or 3% , from 90.2 MMBOE of PUD reserves at December 31, 2018 . Changes in our PUD reserves during 2019 are summarized in the table below. +PUD Reserves +(MMBOE) +PUD reserves at December 31, 2018 +90.2 +Converted to developed +(59.2 +) +Additions +71.0 +Net revisions +(14.1 +) +PUD reserves at December 31, 2019 +87.9 +During 2019 , we invested $399.5 million to develop and convert 66% of our 2018 PUD reserves to proved developed reserves. During 2018 , we invested $264.5 million to develop and convert 30% of our 2017 PUD reserves to proved developed reserves. During 2017 , we invested $69.5 million to develop and convert 10% of our 2016 PUD reserves to proved developed reserves. +During 2019 , all of our 71.0 MMBOE of PUD reserve additions occurred in the Permian Basin. At December 31, 2019 , 92% of our PUD reserves were in the Permian Basin, while the remainder were in our western Oklahoma Cana area. During 2019 , we had net negative PUD reserve revisions of 14.1 MMBOE. Of this total, 13.6 MMBOE was for the removal of PUD reserves whose development will likely be delayed beyond five years of initial disclosure. We have no PUD reserves that have remained undeveloped for five years or more after initial disclosure and we have no PUD reserves whose scheduled development is beyond five years of initial disclosure. +103 +Table of Contents +CIMAREX ENERGY CO. +SUPPLEMENTAL INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED) +Costs Incurred— The following table sets forth the capitalized costs incurred in our oil and gas production, exploration, and development activities. +Years Ended December 31, +(in thousands) +2019 +2018 +2017 +Costs incurred during the year: +Acquisition of properties +Proved +$ +695,450 +$ +62 +$ +938 +Unproved +1,083,230 +102,666 +135,565 +Exploration +2,321 +6,341 +11,804 +Development +1,181,605 +1,487,453 +1,140,548 +Oil and gas expenditures +2,962,606 +1,596,522 +1,288,855 +Property sales +(35,320 +) +(581,799 +) +(11,680 +) +2,927,286 +1,014,723 +1,277,175 +Asset retirement obligation, net +3,874 +(2,004 +) +9,416 +$ +2,931,160 +$ +1,012,719 +$ +1,286,591 +Aggregate Capitalized Costs— The table below reflects the aggregate capitalized costs relating to our oil and gas producing activities at December 31, 2019 . +(in thousands) +December 31, 2019 +Proved properties +$ +20,678,334 +Unproved properties and properties under development, not being amortized +1,255,908 +21,934,242 +Less-accumulated depreciation, depletion, amortization, and impairments +(16,723,544 +) +Net oil and gas properties +$ +5,210,698 +Costs Not Being Amortized— The following table summarizes oil and gas property costs not being amortized at December 31, 2019 , by year that the costs were incurred. +(in thousands) +December 31, 2019 +2019 +$ +1,019,651 +2018 +74,923 +2017 +76,491 +2016 and prior +84,843 +$ +1,255,908 +Of the costs not being amortized, $158.6 million ( 13% ) relates to unevaluated wells in progress and $69.2 million ( 5% ) is capitalized interest. The remaining $1.03 billion ( 82% ) is for land and seismic expenditures, most of which were for costs invested in Permian Basin ( $970.9 million ) and Mid-Continent ( $48.0 million ). The majority of the Permian Basin balance stems from the Resolute acquisition. On a quarterly basis, we evaluate excluded costs for inclusion in the costs to be amortized. Significant unproved properties are evaluated individually. Unproved properties that are not considered individually significant are aggregated for evaluation purposes and related costs are transferred to the costs to be amortized quarterly based on the application of historical factors. We expect to include these costs in the amortization computation as we continue with our exploration and development plans. +104 +Table of Contents +CIMAREX ENERGY CO. +SUPPLEMENTAL INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED) +Oil and Gas Operations— The following table contains direct revenue and cost information relating to our oil and gas exploration and production activities for the periods indicated. We have no long-term supply or purchase agreements with governments or authorities in which we act as producer. Income tax expense related to our oil and gas operations is computed using the effective tax rate for the period, with the 2017 effective tax rate adjusted to remove the impact of the reduction in the federal statutory rate. +Years Ended December 31, +(in thousands, except per BOE) +2019 +2018 +2017 +Oil, gas, and NGL revenues from production +$ +2,321,921 +$ +2,297,645 +$ +1,874,003 +Less operating costs and income taxes: +Impairment of oil and gas properties +618,693 +— +— +Depletion +817,099 +538,919 +399,328 +Asset retirement obligation +8,586 +7,142 +15,624 +Production +339,941 +296,189 +263,349 +Transportation, processing, and other operating +238,259 +211,463 +248,124 +Taxes other than income +148,953 +125,169 +89,864 +Income tax expense +26,318 +252,840 +313,066 +2,197,849 +1,431,722 +1,329,355 +Results of operations from oil and gas producing activities +$ +124,072 +$ +865,923 +$ +544,648 +Depletion rate per BOE +$ +8.04 +$ +6.65 +$ +5.75 +Standardized Measure of Future Net Cash Flows— The Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil and Gas Reserves (“Standardized Measure”) is calculated in accordance with guidance provided by the FASB. The Standardized Measure does not purport, nor should it be interpreted, to present the fair value of a company’s proved oil and gas reserves. Fair value would require, among other things, consideration of expected future economic and operating conditions, varying price and cost assumptions, and risks inherent in reserve estimates. +Under the Standardized Measure, future cash inflows are based upon the forecasted future production of year-end proved reserves. Future cash inflows are then reduced by estimated future production and development costs to determine net pre-tax cash flow. Future income taxes are computed by applying the statutory tax rate to the excess of pre-tax cash flow over our tax basis in the associated oil and gas properties. Tax credits and permanent differences are also considered in the future income tax calculation. Future net cash flow after income taxes is discounted using a 10% annual discount rate to arrive at the Standardized Measure. +The following summary sets forth our Standardized Measure. +December 31, +(in thousands) +2019 +2018 +2017 +Future cash inflows +$ +11,726,488 +$ +14,050,367 +$ +11,967,325 +Future production costs +(4,619,438 +) +(4,889,601 +) +(4,360,599 +) +Future development costs +(814,397 +) +(1,017,318 +) +(948,735 +) +Future income tax expenses +(578,675 +) +(1,303,762 +) +(882,519 +) +Future net cash flows +5,713,978 +6,839,686 +5,775,472 +10% annual discount for estimated timing of cash flows +(2,084,952 +) +(2,824,499 +) +(2,490,471 +) +Standardized measure of discounted future net cash flows +$ +3,629,026 +$ +4,015,187 +$ +3,285,001 +105 +Table of Contents +CIMAREX ENERGY CO. +SUPPLEMENTAL INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED) +The estimates of cash flows shown above are based upon the unweighted trailing twelve-month average first-day-of-the-month benchmark prices. See table above under Oil and Gas Reserve Information for prices used in determining the Standardized Measure. Prices are market driven and will fluctuate due to supply and demand factors, seasonality, and geopolitical and economic factors. +The following are the principal sources of change in the Standardized Measure. +Years Ended December 31, +(in thousands) +2019 +2018 +2017 +Standardized Measure, beginning of period +$ +4,015,187 +$ +3,285,001 +$ +1,892,618 +Sales, net of production costs +(1,594,768 +) +(1,660,649 +) +(1,267,229 +) +Net change in sales prices and in production costs related to future production +(1,267,223 +) +377,178 +855,024 +Extensions and discoveries, net of future production and development costs +758,685 +1,738,993 +1,443,577 +Changes in estimated future development costs +35,940 +194,523 +298,819 +Previously estimated development costs incurred during the period +640,292 +335,954 +78,398 +Revisions of quantity estimates +(304,217 +) +96,783 +(65,376 +) +Accretion of discount +473,919 +372,482 +212,192 +Change in income taxes +404,681 +(284,186 +) +(210,519 +) +Purchases of reserves in place +568,897 +— +2,255 +Sales of reserves in place +(18,330 +) +(300,592 +) +(1,666 +) +Change in production rates and other +(84,037 +) +(140,300 +) +46,908 +Standardized Measure, end of period +$ +3,629,026 +$ +4,015,187 +$ +3,285,001 +106 +Table of Contents +CIMAREX ENERGY CO. +SUPPLEMENTAL QUARTERLY FINANCIAL DATA (UNAUDITED) +The tables below summarize our quarterly financial data for 2019 and 2018 . The sum of the individual quarterly earnings (loss) per common share amounts may not agree with year-to-date earnings (loss) per common share amounts because each quarter’s computation is based on the number of shares outstanding at the end of the applicable quarter using the two-class method. +Quarter +2019 +First +Second +Third +Fourth +(in thousands, except per share data) +Revenues +$ +576,957 +$ +546,463 +$ +582,305 +$ +657,244 +Expenses, net +550,641 +437,154 +458,458 +1,041,335 +Net income (loss) +$ +26,316 +$ +109,309 +$ +123,847 +$ +(384,091 +) +Earnings (loss) per share to common stockholders: +Basic +$ +0.26 +$ +1.07 +$ +1.21 +$ +(3.87 +) +Diluted +$ +0.26 +$ +1.07 +$ +1.21 +$ +(3.87 +) +In the course of preparing our year-end 2019 oil and gas reserve report, we determined that the September 30, 2019 present value of estimated future net cash flows from proved oil and gas reserves discounted at 10% should have included the cash flows from reserve volumes associated with skim oil and drip liquids produced from our wells and recovered from saltwater disposal facilities and gathering systems at that date. This error caused us to incorrectly report an impairment of oil and gas properties at September 30, 2019. +Expenses, net, Net income (loss), and Earnings (loss) per share to common stockholders for the third quarter 2019 in the table above have been revised from amounts previously reported in our September 30, 2019 Form 10-Q. The revised amounts in the table above reflect the elimination of a full cost ceiling impairment of $108.9 million originally recorded in the third quarter 2019. We recognized a full cost ceiling impairment of $618.7 million in the fourth quarter 2019. +After considering the guidance in Staff Accounting Bulletin (“SAB”) No. 99, Materiality , and Accounting Standards Codification 250, Accounting Changes and Error Corrections , we evaluated the materiality of this amount quantitatively and qualitatively and concluded that the error was not material to the company’s third quarter 2019 interim period financial statements. The unaudited interim period consolidated financial statements as of and for the three and nine-months ended September 30, 2019, will be revised in accordance with SAB No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements, in order to reflect this correction when the company files its third quarter 2020 Form 10-Q. +Quarter +2018 +First +Second +Third +Fourth +(in thousands, except per share data) +Revenues +$ +567,134 +$ +556,274 +$ +591,488 +$ +624,121 +Expenses, net +380,816 +415,277 +443,134 +307,939 +Net income +$ +186,318 +$ +140,997 +$ +148,354 +$ +316,182 +Earnings per share to common stockholders: +Basic +$ +1.96 +$ +1.48 +$ +1.56 +$ +3.32 +Diluted +$ +1.96 +$ +1.48 +$ +1.56 +$ +3.32 +107 +Table of Contents +ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE +None. +ITEM 9A. CONTROLS AND PROCEDURES +EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES +Cimarex’s management, under the supervision and with the participation of the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), have evaluated the effectiveness of Cimarex’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (Exchange Act)) as of December 31, 2019 . Disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods required by the U.S. Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to management, including the CEO and CFO, to allow timely decisions regarding required disclosures. Based on this evaluation, Cimarex’s CEO and CFO concluded that due to the material weakness in our internal control over financial reporting described below, the Company’s disclosure controls and procedures were not effective as of December 31, 2019 . +MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING +Cimarex’s management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. The Company’s internal control over financial reporting also includes those policies and procedures that: +(1) +pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets; +(2) +provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements for external purposes in accordance with generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of management and directors; and +(3) +provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of assets that could have a material effect on the consolidated financial statements. +Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of the effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +A material weakness is a deficiency, or combination of deficiencies in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. +108 +Table of Contents +As of December 31, 2019 , Cimarex’s management assessed the effectiveness of internal control over financial reporting based on the criteria set forth in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, the Company’s CEO and CFO have concluded that a material weakness in internal control over financial reporting existed as of December 31, 2019 as described below: +The Company did not have an effective process and control in place to periodically evaluate the quantitative effect associated with the inclusion or exclusion of certain inputs, such as skim oil and drip liquids, in the Company’s oil and gas reserve database used in the ceiling test impairment calculations, depletion calculations, and the preparation of the related disclosures included in the supplemental information on oil and gas producing activities (unaudited). The material weakness resulted from an ineffective risk assessment process to identify and assess changes in the Company’s operations and their impact on the Company’s processes and controls governing preparation of the oil and gas reserve database. +This resulted in the correction of an immaterial misstatement to previously reported impairment expense, and the related balance sheet accounts as described in the supplemental quarterly financial data (unaudited) to the consolidated financial statements as of and for the three year period ended December 31, 2019 in this Form 10-K. However, this control deficiency created a reasonable possibility that a material misstatement to the consolidated financial statements would not have been prevented or detected on a timely basis, and therefore the Company concluded that the deficiency represented a material weakness in internal control over financial reporting and that internal control over financial reporting was not effective as of December 31, 2019 . +The Company’s independent registered public accounting firm, KPMG LLP, has audited the effectiveness of internal control over financial reporting and has issued an adverse report on the effectiveness of our internal control over financial reporting as of December 31, 2019. KPMG LLP’s report is included later in this Item 9A in this Form 10-K. +MANAGEMENT’S REMEDIATION PLAN +In response to the material weakness identified in Management’s Report on Internal Control over Financial Reporting, we have developed a plan with oversight from the Audit Committee of the Board of Directors to remediate the material weakness. The remediation efforts being implemented include the following: +• +Performance of a quarterly evaluation of the quantitative effect associated with the inclusion or exclusion of certain inputs in the Company’s oil and gas reserve database. +• +Revision and communication of controls, policies and procedures relating to identifying and assessing changes that could potentially impact the system of internal control governing preparation of the oil and gas reserve database. +CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING +Other than the identification of the material weakness described above, there was no change in our internal control over financial reporting that occurred during our most recent fiscal quarter ended December 31, 2019 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. +109 +Table of Contents +Report of Independent Registered Public Accounting Firm +To the Stockholders and Board of Directors +Cimarex Energy Co.: +Opinion on Internal Control Over Financial Reporting +We have audited Cimarex Energy Co. and subsidiaries’ (the Company) internal control over financial reporting as of December 31, 2019 , based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. +In our opinion, because of the effect of the material weakness, described below, on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of December 31, 2019 , based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. +We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2019 and 2018 , the related consolidated statements of operations and comprehensive income (loss), stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2019 , and the related notes (collectively, the consolidated financial statements), and our report dated February 26, 2020 expressed an unqualified opinion on those consolidated financial statements. +A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. A material weakness related to an ineffective process and control to periodically evaluate the quantitative effect associated with the inclusion or exclusion of certain inputs, such as skim oil and drip liquids, in the Company’s oil and gas reserve database used in the ceiling test impairment calculations, depletion calculations, and the preparation of the related disclosures included in the supplemental information on oil and gas producing activities (unaudited) resulting from an ineffective risk assessment process to identify and assess changes in the Company’s operations and their impact on the Company’s processes and controls governing preparation of the oil and gas reserve database has been identified and included in management’s assessment. The material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2019 consolidated financial statements, and this report does not affect our report on those consolidated financial statements. +Basis for Opinion +The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. +Definition and Limitations of Internal Control Over Financial Reporting +A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. +Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +KPMG LLP +Denver, Colorado +February 26, 2020 +110 +Table of Contents +ITEM 9B. OTHER INFORMATION +None. +111 +Table of Contents +PART III +ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE +Information concerning the directors of Cimarex required under this item is incorporated by reference from the Cimarex Energy Co. definitive Proxy Statement for the May 6, 2020 Annual Meeting of Shareholders. The Proxy Statement will be filed with the Securities and Exchange Commission no later than 120 days subsequent to December 31, 2019 . The executive officers of Cimarex as of February 26, 2020 were: +Name +Age +Office +Thomas E. Jorden +62 +Chairman of the Board, Chief Executive Officer and President +Joseph R. Albi +61 +Executive Vice President — Operations, Chief Operating Officer +Stephen P. Bell +65 +Executive Vice President — Business Development +G. Mark Burford +52 +Senior Vice President and Chief Financial Officer +Francis B. Barron +57 +Senior Vice President — General Counsel +John A. Lambuth +57 +Senior Vice President — Exploration +Christopher H. Clason +53 +Vice President and Chief Human Resources Officer +Gary R. Abbott +47 +Vice President — Corporate Engineering +Timothy A. Ficker +52 +Vice President — Controller, Chief Accounting Officer, and Assistant Secretary +There are no family relationships by blood, marriage, or adoption among any of the above executive officers. All executive officers are elected annually by the board of directors to serve for one year or until a successor is elected and qualified. There is no arrangement or understanding between any of the officers and any other person pursuant to which he or she was selected as an executive officer. +THOMAS E. JORDEN was elected Chairman of the Board effective August 14, 2012 after being named President and Chief Executive Officer effective September 30, 2011. Since December 8, 2003, Mr. Jorden served as Executive Vice President of Exploration and had served in a similar capacity since September 30, 2002. Prior to September 2002, Mr. Jorden was with Key Production Company, Inc., where he served as Vice President of Exploration (October 1999 to September 2002) and Chief Geophysicist (November 1993 to September 1999). Prior to joining Key, Mr. Jorden was with Union Pacific Resources. +JOSEPH R. ALBI was named Executive Vice President and Chief Operating Officer effective September 30, 2011. Mr. Albi served as Executive Vice President of Operations since March 1, 2005. Since December 8, 2003, Mr. Albi served as Senior Vice President of Corporate Engineering. From September 30, 2002 to December 8, 2003, he served as Vice President of Engineering. From June 1994 to September 2002, Mr. Albi was with Key Production Company, Inc. where he served as Vice President of Engineering and Manager of Engineering. +STEPHEN P. BELL was named Executive Vice President, Business Development effective September 13, 2012. Since September 2002, Mr. Bell served as Senior Vice President of Business Development and Land. Prior to its merger with Cimarex, Mr. Bell was with Key Production Company, Inc. since February 1994. In September 1999, he was appointed Senior Vice President, Business Development and Land. From February 1994 to September 1999, he served as Vice President, Land. +G. MARK BURFORD was named Senior Vice President and Chief Financial Officer in March 2019. Mr. Burford was appointed Vice President and Chief Financial Officer in September 2015 and Vice President, Capital Markets and Planning in December 2010. Mr. Burford joined Cimarex in April 2005 as Director of Capital Markets. Prior to joining Cimarex, he was Director of Investor Relations for Whiting Petroleum and Tom Brown. His experience also includes equity research with Petrie Parkman & Co., an investment banking firm and public accounting. +112 +Table of Contents +FRANCIS B. BARRON joined Cimarex as Senior Vice President, General Counsel in July 2013. From February 2004 until July 2013, Mr. Barron served in various capacities at Bill Barrett Corporation, a publicly traded, Denver-based oil and gas exploration and development company, including as Executive Vice President, General Counsel, and Secretary. He also served as Chief Financial Officer from November 2006 until March 2007. Prior to February 2004, Mr. Barron was a partner at the Denver, Colorado office of the law firm of Patton Boggs LLP as well as a partner at Bearman Talesnick & Clowdus Professional Corporation. Mr. Barron’s practice included corporate, securities, and business law for publicly traded oil and gas companies. +JOHN A. LAMBUTH was named Senior Vice President of Exploration in December 2015. Prior to his promotion, he served as the Company’s Vice President of Exploration since September 2012 and Chief Geophysicist, a position he held since joining Cimarex in 2004. Mr. Lambuth began his career in 1985 with Shell Oil Co., where he held various positions in exploration and in research and development. Immediately prior to joining Cimarex, he spent three years as onshore Exploration Manager of El Paso Energy Company. +CHRISTOPHER H. CLASON joined Cimarex as Vice President and Chief Human Resources Officer in April 2019. From February 2016 until April 2019, Mr. Clason was Director of MBA Career Management and Employer Relations at the Marriott School of Business at Brigham Young University. Prior to his work in higher education, he was Senior Vice President and Chief Human Resources Officer at ProBuild LLC, a Devonshire Investors company. From 2001 until 2014, Mr. Clason held various global HR executive leadership roles at Honeywell International, including Vice President Human Resources and Communications at Honeywell Aerospace. His background includes extensive international experience at Citigroup and early career work at Chevron. +GARY R. ABBOTT was named Vice President of Corporate Engineering March 1, 2005. Since January 2002, Mr. Abbott served as manager, Corporate Reservoir Engineering. From April 1999 to January 2002, Mr. Abbott was a senior engineer with Key Production Company, Inc. +TIMOTHY A. FICKER was appointed Vice President, Controller, Chief Accounting Officer, and Assistant Secretary in December 2016 to be effective in February 2017 and previously served as the Company’s Controller since September 2016. Prior to joining Cimarex, he was the Chief Financial Officer of Alcova Management LLC, Venoco, Inc., and Infinity Energy Resources Inc. Mr. Ficker previously served as an audit partner in KPMG LLP’s energy audit practice in Denver and as an audit partner for Arthur Andersen LLP, where he served clients primarily in the energy industry. +113 +Table of Contents +ITEM 11. EXECUTIVE COMPENSATION +Information required under this item is incorporated by reference from the Cimarex Energy Co. definitive Proxy Statement for the May 6, 2020 Annual Meeting of Shareholders. The Proxy Statement will be filed with the Securities and Exchange Commission no later than 120 days subsequent to December 31, 2019 . +ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS +The following table sets forth information with respect to the equity compensation plans available to directors, officers, and employees of the company at December 31, 2019 : +Plan Category +(a) +Number of securities +to be issued upon +exercise of +outstanding options, +warrants, and rights +(b) +Weighted-average +exercise price of +outstanding options, +warrants, and rights +(c) +Number of securities +remaining available +for future issuance +under equity +compensation plans +(excluding securities reflected in column (a)) +Equity compensation plans approved by security holders +495,538 +$ +87.17 +3,744,357 +Equity compensation plans not approved by security holders +— +— +— +Total +495,538 +$ +87.17 +3,744,357 +The remaining information required under this item is incorporated by reference from the Cimarex Energy Co. definitive Proxy Statement for the May 6, 2020 Annual Meeting of Shareholders. The Proxy Statement will be filed with the Securities and Exchange Commission no later than 120 days subsequent to December 31, 2019 . +ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE +Information required under this item is incorporated by reference from the Cimarex Energy Co. definitive Proxy Statement for the May 6, 2020 Annual Meeting of Shareholders. The Proxy Statement will be filed with the Securities and Exchange Commission no later than 120 days subsequent to December 31, 2019 . +ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES +Information required under this item is incorporated by reference from the Cimarex Energy Co. definitive Proxy Statement for the May 6, 2020 Annual Meeting of Shareholders. The Proxy Statement will be filed with the Securities and Exchange Commission no later than 120 days subsequent to December 31, 2019 . +114 +Table of Contents +PART IV +ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES +Page +(a) (1) +The following financial statements are included in Item 8 to this 10-K: +Consolidated Balance Sheets as of December 31, 2019 and 2018 +66 +Consolidated Statements of Operations and Comprehensive Income (Loss) for the years ended December 31, 2019, 2018, and 2017 +67 +Consolidated Statements of Cash Flows for the years ended December 31, 2019, 2018, and 2017 +68 +Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2019, 2018, and 2017 +69 +Notes to Consolidated Financial Statements +70 +(2 +) +Financial statement schedules—None +(3 +) +Exhibits: +Exhibits not incorporated by reference to a prior filing are designated by an asterisk (*) and are filed herewith; all exhibits not so designated are incorporated by reference to a prior SEC filing as indicated. All management contracts or compensatory plans or arrangements are designated by a plus sign (+). +Exhibit +Title +2.1 +Agreement and Plan of Merger dated as of November 18, 2018, by and among Cimarex Energy Co., CR Sub 1 Inc., CR Sub 2 LLC and Resolute Energy Corporation (filed as Exhibit 2.1 to Registrant’s Form 8-K (Commission File No. 001-31446) dated November 20, 2018 and incorporated herein by reference). +3.1 +Amended and Restated Certificate of Incorporation of Cimarex Energy Co. (filed as Exhibit 3.1 to Registrant’s Form 8-K (Commission File No. 001-31446) dated June 7, 2005 and incorporated herein by reference). +3.2 +Amended and Restated By-laws of Cimarex Energy Co. dated November 11, 2015 (filed as Exhibits 3.1 and 3.2 to the Current Report on Form 8-K filed on November 12, 2015 (Commission File No. 001-31446) and incorporated herein by reference). +4.1 +Specimen Certificate of Cimarex Energy Co. common stock (filed as Exhibit 4.3 to Registration Statement on Form S-3 filed September 17, 2012 (Registration No. 333-183939) and incorporated herein by reference). +4.2 +Debt Securities Indenture dated as of April 5, 2012, by and among Cimarex Energy Co. and U.S. Bank National Association, as trustee included as Exhibit 4.1 to Registrant’s Current Report on Form 8-K filed on April 5, 2012 (Commission File No. 001-31446) and incorporated herein by reference. +4.3 +First Supplemental Indenture dated as of April 5, 2012, by and among Cimarex Energy Co., the Subsidiary Guarantors party thereto and U.S. Bank National Association, as trustee included as Exhibit 4.2 to Registrant’s Current Report on Form 8-K filed on April 5, 2012 (Commission File No. 001-31446) and incorporated herein by reference. +115 +Table of Contents +Exhibit +Title +4.4 +Form of 5.875% Senior Notes due 2022 included in Exhibit 4.2 to the Registrant’s Current Report on Form 8-K filed on April 5, 2012 (Commission File No. 001-31446) and incorporated herein by reference. +4.5 +Indenture dated as of June 4, 2014, by and between Cimarex Energy Co. and U.S. Bank National Association, as trustee included as Exhibit 4.1 to Registrant’s Current Report on Form 8-K filed on June 4, 2014 (Commission File No. 001-31446) and incorporated herein by reference. +4.6 +First Supplemental Indenture dated as of June 4, 2014, by and among Cimarex Energy Co., the Subsidiary Guarantors party thereto and U.S. Bank National Association, as trustee included as Exhibit 4.2 to Registrant’s Current Report on Form 8-K filed on June 4, 2014 (Commission File No. 001-31446) and incorporated herein by reference. +4.7 +Form of 4.375% Senior Notes due 2024 included in Exhibit 4.2 to the Registrant’s Current Report on Form 8-K filed on June 4, 2014 (Commission File No. 001-31446) and incorporated herein by reference. +4.8 +Form of Indenture by and among Cimarex Energy Co. and U.S. Bank National Association, as trustee (filed as Exhibit 4.7 to Registration Statement on Form S-3 filed September 21, 2015 (Registration No. 333-183939) and incorporated herein by reference). +4.9 +Indenture dated as of April 10, 2017, by and between Cimarex Energy Co. and U.S. Bank National Association, as trustee included as Exhibit 4.1 to Registrant’s Current Report on Form 8-K filed on April 10, 2017 (Commission File No. 001-31446) and incorporated herein by reference. +4.10 +First Supplemental Indenture dated as of April 10, 2017, by and between Cimarex Energy Co. and U.S. Bank National Association, as trustee included as Exhibit 4.2 to Registrant’s Current Report on Form 8-K filed on April 10, 2017 (Commission File No. 001-31446) and incorporated herein by reference. +4.11 +Form of 3.90% Senior Notes due 2027 included in Exhibit 4.2 to the Registrant’s Current Report on Form 8-K filed on April 10, 2017 (Commission File No. 001-31446) and incorporated herein by reference. +4.12 +Certificate of Designations of 8⅛% Series A Cumulative Perpetual Convertible Preferred Stock of Cimarex Energy Co., dated February 28, 2019 (filed on March 1, 2019 as Exhibit 3.1 to the Current Report on Form 8-K (Commission File No. 001-31446) and incorporated herein by reference). +4.13 +Second Supplemental Indenture dated as of March 8, 2019, by and between Cimarex Energy Co. and U.S. Bank National Association, as trustee (filed on March 8, 2019 as Exhibit 4.2 to the Current Report on Form 8-K (Commission File No. 001-31446) and incorporated herein by reference). +4.14 +Form of 4.375% Senior Notes due 2029 (filed on March 8, 2019 as Exhibit 4.3 to the Current Report on Form 8-K (Commission File No. 001-31446) and incorporated herein by reference). +4.15 +Description of Registrant’s Securities * +116 +Table of Contents +Exhibit +Title +10.1 +Credit Agreement dated as of July 14, 2011, among Cimarex, the Administrative Agent, the Co-Syndication Agents, the Co-Documentation Agents and the Lenders filed on July 18, 2011 (Commission File No. 001-31446) as Exhibit 10.l to the Registrant’s Current Report on Form 8-K and incorporated herein by reference. +10.2 +First Amendment to Credit Agreement dated as of July 19, 2012, among Cimarex, the Guarantors, the Administrative Agent, and the Lenders filed on May 5, 2014 (Commission File No. 001-31446) as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K and incorporated herein by reference. +10.3 +Second Amendment to Credit Agreement dated as of May 1, 2014, among Cimarex, the Guarantors, the Administrative Agent, and the Lenders filed on May 5, 2014 (Commission File No. 001-31446) as Exhibit 10.2 to the Registrant’s Current Report on Form 8-K and incorporated herein by reference. +10.4 +Employment Agreement, dated October 25, 1993, by and between Thomas E. Jorden and Key Production Company, Inc. (filed as Exhibit 10.7 to the Registration Statement on Form S-4 dated May 9, 2002 (Registration No. 333-87948) and incorporated herein by reference). + +10.5 +Amendment to Employment Agreement effective January 1, 2009 between Cimarex Energy Co. and Thomas E. Jorden (filed as Exhibit 10.11 to the Annual Report on Form 10-K for the year ended December 31, 2008 filed on February 27, 2009 (Commission File No. 001-31446) and incorporated herein by reference). + +10.6 +Employment Agreement, dated February 2, 1994, by and between Stephen P. Bell and Key Production Company, Inc. (filed as Exhibit 10.8 to the Registration Statement on Form S-4 dated May 9, 2002 (Registration No. 333-87948) and incorporated herein by reference). + +10.7 +Amendment to Employment Agreement effective January 1, 2009 between Cimarex Energy Co. and Stephen P. Bell (filed as Exhibit 10.13 to the Annual Report on Form 10-K for the year ended December 31, 2008 filed on February 27, 2009 (Commission File No. 001-31446) and incorporated herein by reference). + +10.8 +Employment Agreement, dated March 11, 1994, by and between Joseph R. Albi and Key Production Company, Inc. (filed as Exhibit 10.9 to the Registration Statement on Form S-4 dated May 9, 2002 (Registration No. 333-87948) and incorporated herein by reference). + +10.9 +Amendment to Employment Agreement effective January 1, 2009 between Cimarex Energy Co. and Joseph R. Albi (filed as Exhibit 10.15 to the Annual Report on Form 10-K for the year ended December 31, 2008 filed on February 27, 2009 (Commission File No. 001-31446) and incorporated herein by reference). + +10.10 +Amended and Restated 2002 Stock Incentive Plan of Cimarex Energy Co. effective January 1, 2009 (filed as Exhibit 10.16 to the Annual Report on Form 10-K for the year ended December 31, 2008 filed on February 27, 2009 (Commission File No. 001- 31446) and incorporated herein by reference). + +10.11 +2011 Equity Incentive Plan adopted May 18, 2011 (filed as Appendix A to the Definitive Proxy Statement 14-A filed on March 23, 2011 (Commission File No. 001-31446) and incorporated herein by reference). + +117 +Table of Contents +Exhibit +Title +10.12 +Form of Notice of Grant of Award of Performance Stock and Award Agreement (filed as Exhibit 10.2 to Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2011 filed on August 4, 2011 (Commission File no. 001-31446) and incorporated herein by reference). + +10.13 +Form of Notice of Grant of Restricted Stock and Award Agreement (filed as Exhibit 10.3 to Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2011 filed on August 4, 2011 (Commission File no. 001-31446) and incorporated herein by reference). + +10.14 +Form of Notice of Grant of Nonqualified Stock Option and Award Agreement (filed as Exhibit 10.4 to Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2011 filed on August 4, 2011 (Commission File no. 001-31446) and incorporated herein by reference). + +10.15 +Form of Notice of Grant and Award Agreement (Other Stock Award with performance conditions) (filed as Exhibit 10.15 to the Annual Report on Form 10-K for the year ended December 31, 2013 filed on February 26, 2014 (Commission File No. 001-31446) and incorporated herein by reference). + +10.16 +2014 Equity Incentive Plan adopted May 15, 2014 (filed as Appendix A to the Definitive Proxy Statement 14-A filed on April 1, 2014 (Commission File No. 001-31446) and incorporated herein by reference. + +10.17 +Form of Notice of Grant of Restricted Stock (Director) and Award Agreement (filed as Exhibit 10.1 to Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014 filed on August 6, 2014 (Commission File No. 001-31446) and incorporated herein by reference). + +10.18 +Form of Notice of Grant of Nonqualified Stock Option and Award Agreement (filed as Exhibit 10.2 to Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014 filed on August 6, 2014 (Commission File No. 001-31446) and incorporated herein by reference). + +10.19 +Form of Notice of Grant of Restricted Stock and Award Agreement (filed as Exhibit 10.3 to Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014 filed on August 6, 2014 (Commission File No. 001-31446) and incorporated herein by reference). + +10.20 +Form of Notice of Grant of Restricted Stock and Award Agreement (Performance Award) (filed as Exhibit 10.4 to Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014 filed on August 6, 2014 (Commission File No. 001-31446) and incorporated herein by reference). + +10.21 +Form of Notice of Grant of Restricted Stock and Award Agreement (Performance Award) (filed as Exhibit 10.23 to the Annual Report on Form 10-K for the year ended December 31, 2014 filed on February 25, 2015 (Commission File No. 001-31446) and incorporated herein by reference). + +10.22 +Deferred Compensation Plan for Nonemployee Directors adopted May 19, 2004, as amended and restated effective January 1, 2009 (filed as Exhibit 10.18 to the Annual Report on Form 10-K for the year ended December 31, 2008 filed on February 27, 2009 (Commission File No. 001-31446) and incorporated herein by reference). + +10.23 +Cimarex Energy Co. Supplemental Savings Plan (amended and restated, effective January 1, 2009) (filed as Exhibit 10.19 to the Annual Report on Form 10-K for the year ended December 31, 2008 filed on February 27, 2009 (Commission File No. 001- 31446) and incorporated herein by reference). + +118 +Table of Contents +Exhibit +Title +10.24 +Cimarex Energy Co. Change in Control Severance Plan dated effective April 1, 2005, amended and restated effective January 1, 2009 (filed as Exhibit 10.20 to the Annual Report on Form 10-K for the year ended December 31, 2008 filed on February 27, 2009 (Commission File No. 001-31446) and incorporated herein by reference). + +10.25 +Amendment to Cimarex Energy Co. Change in Control Severance Plan dated effective March 19, 2013 (filed as Exhibit 10.1 to the Current Report on Form 8-K filed on March 20, 2013 (Commission File No. 001- 31446) and incorporated herein by reference). + +10.26 +Form of Indemnification Agreement between Cimarex Energy Co. and each of its executive officers and directors (filed as Exhibit 10.20 to the Annual Report on Form 10-K for the year ended December 31, 2012 filed on February 26, 2013 (Commission File No. 001-31446) and incorporated herein by reference). + +10.27 +Credit Agreement Dated as of October 16, 2015, by and among Cimarex, the Administrative Agent, the Syndication Agent, the Documentation Agents, and the Lenders (filed on October 19, 2015 as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (Commission File No. 001-31446) and incorporated herein by reference). +10.28 +Form of Notice of Grant of Restricted Stock (Director) and Award Agreement (filed as Exhibit 10.2 to Registrant’s Form 8-K (Commission File No. 001-31446) dated November 2, 2015 and incorporated herein by reference). + +10.29 +Form of Notice of Grant of Restricted Stock (Director) and Award Agreement (filed as Exhibit 10.1 to Registrant’s Quarterly Report on Form 10-Q filed on August 9, 2017 (Commission File No. 001-31446) and incorporated herein by reference). + +10.30 +Purchase and Sale Agreement dated May 23, 2018 between Cimarex Energy Co., Prize Energy Resources, Inc., and Magnum Hunter Production, Inc. (collectively, as “Seller”) and Callon Petroleum Operating Company as Buyer (filed as Exhibit 10.1 to Registrant’s Current Report on Form 8-K filed on May 24, 2018 (Commission File No. 001-31446) and incorporated herein by reference). +10.31 +Form of Notice of Grant of Restricted Stock and Award Agreement (Performance Award) (filed as Exhibit 10.35 to the Annual Report on Form 10-K for the year ended December 31, 2018 filed on February 20, 2019 (Commission File No. 001-31446) and incorporated herein by reference). + +10.32 +Amended and Restated Credit Agreement Dated as of February 5, 2019, by and among Cimarex, as Borrower, the Administrative Agent, the Syndication Agent, the Co-Documentation Agents, the Lenders, and the Lead Arrangers and Bookrunners (filed on February 7, 2019 as Exhibit 10.1 to the Current Report on Form 8-K (Commission File No. 001-31446) and incorporated herein by reference). +10.33 +Voting Agreement, dated as of November 18, 2018, by and among Cimarex Energy Co. and Monarch Alternative Capital LP, MDRA GP LP and Monarch GP LLC (filed as Exhibit 10.1 to Registrant’s Form 8-K (Commission File No. 001-31446) dated November 20, 2018 and incorporated herein by reference). +10.34 +Voting Agreement, dated as of November 18, 2018, by and among Cimarex Energy Co., John C. Goff and certain other related entities thereto (filed as Exhibit 10.2 to Registrant’s Form 8-K (Commission File No. 001-31446) dated November 20, 2018 and incorporated herein by reference). +119 +Table of Contents +Exhibit +Title +10.35 +Voting Agreement, dated as of November 18, 2018, by and among Cimarex Energy Co. and RR Advisors, LLC (filed as Exhibit 10.3 to Registrant’s Form 8-K (Commission File No. 001-31446) dated November 20, 2018 and incorporated herein by reference). +10.36 +Voting Agreement, dated as of November 18, 2018, by and among Cimarex Energy Co. and Richard Betz (filed as Exhibit 10.4 to Registrant’s Form 8-K (Commission File No. 001-31446) dated November 20, 2018 and incorporated herein by reference). +10.37 +Voting Agreement, dated as of November 18, 2018, by and among Cimarex Energy Co. and Nicholas J. Sutton (filed as Exhibit 10.5 to Registrant’s Form 8-K (Commission File No. 001-31446) dated November 20, 2018 and incorporated herein by reference). +10.38 +Voting Agreement, dated as of November 18, 2018, by and among Cimarex Energy Co. and Theodore Gazulis (filed as Exhibit 10.6 to Registrant’s Form 8-K (Commission File No. 001-31446) dated November 20, 2018 and incorporated herein by reference). +10.39 +Amended and Restated Credit Agreement Dated as of February 5, 2019, by and among Cimarex, as Borrower, the Administrative Agent, the Syndication Agent, the Co-Documentation Agents, the Lenders, and the Lead Arrangers and Bookrunners (filed on February 7, 2019 as Exhibit 10.1 to the Current Report on Form 8-K (Commission File No. 001-31446) and incorporated herein by reference). +10.40 +Form of Notice of Grant of Restricted Stock (Director) and Award Agreement (filed on May 29, 2019 as Exhibit 10.2 to the Current Report on Form 8-K (Commission File No. 001-31446) and incorporated herein by reference). + +10.41 +2019 Equity Incentive Plan (filed on May 30, 2019 as Exhibit 99.1 to the Registration Statement on Form S-8 (Commission File No. 001-31446) and incorporated herein by reference). + +10.42 +Form of Notice of Grant of Restricted Stock and Award Agreement (filed on August 5, 2019 as Exhibit 10.4 to the Quarterly Report on Form 10-Q (Commission File No. 001-31446) and incorporated herein by reference). + +10.43 +Form of Notice of Grant of Nonqualified Stock Option and Award Agreement (filed on August 5, 2019 as Exhibit 10.5 to the Quarterly Report on Form 10-Q (Commission File No. 001-31446) and incorporated herein by reference). + +10.44 +Director Emeritus Agreement dated September 30, 2019 between Cimarex Energy Co. and Michael J. Sullivan (filed on September 23, 2019 as Exhibit 10.1 to the Current Report on Form 8-K (Commission File No. 001-31446) and incorporated herein by reference). + +14.1 +Revised Code of Business Conduct and Ethics for Directors, Officers, and Employees dated August 30, 2016 (filed as Exhibit 14.1 and 14.2 to the Current Report on Form 8-K filed September 1, 2016 (Commission File No. 001-31446) and incorporated herein by reference). +21.1 +Significant subsidiaries of the Registrant. * +23.1 +Consent of KPMG LLP. * +120 +Table of Contents +Exhibit +Title +23.2 +Consent of DeGolyer and MacNaughton. * +24.1 +Power of Attorney of directors of the Registrant. * +31.1 +Certification of Thomas E. Jorden, Chief Executive Officer of Cimarex Energy Co., pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. * +31.2 +Certification of G. Mark Burford, Chief Financial Officer of Cimarex Energy Co., pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. * +32.1 +Certification of Thomas E. Jorden, Chief Executive Officer of Cimarex Energy Co., pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. * +32.2 +Certification of G. Mark Burford, Chief Financial Officer of Cimarex Energy Co., pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. * +99.1 +Letter dated January 28, 2020 from DeGolyer and MacNaughton, independent petroleum engineering consulting firm, reporting the results of its audit of Cimarex reserves as of December 31, 2019 of certain selected properties. * +101.INS +XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. +101.SCH +Inline XBRL Taxonomy Extension Schema Document. +101.CAL +Inline XBRL Taxonomy Extension Calculation Linkbase Document. +101.LAB +Inline XBRL Taxonomy Extension Label Linkbase Document. +101.PRE +Inline XBRL Taxonomy Extension Presentation Linkbase Document. +101.DEF +Inline XBRL Taxonomy Extension Definition Linkbase Document. +104 +Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) +ITEM 16. FORM 10-K SUMMARY +None. +121 +Table of Contents +SIGNATURE +Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. +Date: February 26, 2020 +CIMAREX ENERGY CO. +By: +/s/ Thomas E. Jorden +Thomas E. Jorden +Chairman of the Board, Chief Executive Officer, and President +Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. +Signature +Title +Date +/s/ Thomas E. Jorden +Chairman of the Board, Director, Chief Executive Officer, +Thomas E. Jorden +and President (Principal Executive Officer) +February 26, 2020 +* +Director, Executive Vice President — Operations, +Attorney-in-Fact +Chief Operating Officer +February 26, 2020 +Joseph R. Albi +/s/ G. Mark Burford +Senior Vice President and Chief Financial Officer +G. Mark Burford +(Principal Financial Officer) +February 26, 2020 +/s/ Timothy A. Ficker +Vice President, Controller, Chief Accounting Officer +Timothy A. Ficker +(Principal Accounting Officer) +February 26, 2020 +* +Attorney-in-Fact +Director +February 26, 2020 +Paul N. Eckley +* +Attorney-in-Fact +Director +February 26, 2020 +Hans Helmerich +* +Attorney-in-Fact +Director +February 26, 2020 +Harold R. Logan, Jr. +* +Attorney-in-Fact +Director +February 26, 2020 +Kathleen A. Hogenson +* +Attorney-in-Fact +Director +February 26, 2020 +Floyd R. Price +* +Attorney-in-Fact +Director +February 26, 2020 +Monroe W. Robertson +* +Attorney-in-Fact +Director +February 26, 2020 +Lisa A. Stewart +* +Attorney-in-Fact +Director +February 26, 2020 +Frances M. Vallejo +*By: +/s/ G. Mark Burford +Senior Vice President and Chief Financial Officer +G. Mark Burford Attorney-in-Fact +(Principal Financial Officer) +February 26, 2020 +122 \ No newline at end of file diff --git a/raw/filings/0001168054/2019/0001168054-20-000004/filing_metadata.csv b/raw/filings/0001168054/2019/0001168054-20-000004/filing_metadata.csv new file mode 100644 index 0000000000000000000000000000000000000000..f94699147563a95e09e60a623322cca620dcb752 --- /dev/null +++ b/raw/filings/0001168054/2019/0001168054-20-000004/filing_metadata.csv @@ -0,0 +1,2 @@ +cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing +0001168054,XEC,CIMAREX ENERGY CO,10-K,2020-02-26,2019-12-31,2020-02-26T21:10:37.000Z,0001168054-20-000004,a12311910kxec.htm,10-K,15590995,1,1,https://www.sec.gov/Archives/edgar/data/1168054/000116805420000004/a12311910kxec.htm,https://www.sec.gov/Archives/edgar/data/1168054/000116805420000004/,2019,2019,1 diff --git a/raw/filings/0001168054/2019/0001168054-20-000004/item1.txt b/raw/filings/0001168054/2019/0001168054-20-000004/item1.txt new file mode 100644 index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391 diff --git a/raw/filings/0001168054/2019/0001168054-20-000004/item13.txt b/raw/filings/0001168054/2019/0001168054-20-000004/item13.txt new file mode 100644 index 0000000000000000000000000000000000000000..5511d8e3e2e31a251165c97e648f6f68ab0aa4fa --- /dev/null +++ b/raw/filings/0001168054/2019/0001168054-20-000004/item13.txt @@ -0,0 +1,2 @@ +ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE +Information required under this item is incorporated by reference from the Cimarex Energy Co. definitive Proxy Statement for the May 6, 2020 Annual Meeting of Shareholders. The Proxy Statement will be filed with the Securities and Exchange Commission no later than 120 days subsequent to December 31, 2019 . \ No newline at end of file diff --git a/raw/filings/0001168054/2019/0001168054-20-000004/item9a.txt b/raw/filings/0001168054/2019/0001168054-20-000004/item9a.txt new file mode 100644 index 0000000000000000000000000000000000000000..84cdc4b57c5f3feb1affd6140e63fccb64913cad --- /dev/null +++ b/raw/filings/0001168054/2019/0001168054-20-000004/item9a.txt @@ -0,0 +1,48 @@ +ITEM 9A. CONTROLS AND PROCEDURES +EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES +Cimarex’s management, under the supervision and with the participation of the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), have evaluated the effectiveness of Cimarex’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (Exchange Act)) as of December 31, 2019 . Disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods required by the U.S. Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to management, including the CEO and CFO, to allow timely decisions regarding required disclosures. Based on this evaluation, Cimarex’s CEO and CFO concluded that due to the material weakness in our internal control over financial reporting described below, the Company’s disclosure controls and procedures were not effective as of December 31, 2019 . +MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING +Cimarex’s management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. The Company’s internal control over financial reporting also includes those policies and procedures that: +(1) +pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets; +(2) +provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements for external purposes in accordance with generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of management and directors; and +(3) +provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of assets that could have a material effect on the consolidated financial statements. +Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of the effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +A material weakness is a deficiency, or combination of deficiencies in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. +108 +Table of Contents +As of December 31, 2019 , Cimarex’s management assessed the effectiveness of internal control over financial reporting based on the criteria set forth in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, the Company’s CEO and CFO have concluded that a material weakness in internal control over financial reporting existed as of December 31, 2019 as described below: +The Company did not have an effective process and control in place to periodically evaluate the quantitative effect associated with the inclusion or exclusion of certain inputs, such as skim oil and drip liquids, in the Company’s oil and gas reserve database used in the ceiling test impairment calculations, depletion calculations, and the preparation of the related disclosures included in the supplemental information on oil and gas producing activities (unaudited). The material weakness resulted from an ineffective risk assessment process to identify and assess changes in the Company’s operations and their impact on the Company’s processes and controls governing preparation of the oil and gas reserve database. +This resulted in the correction of an immaterial misstatement to previously reported impairment expense, and the related balance sheet accounts as described in the supplemental quarterly financial data (unaudited) to the consolidated financial statements as of and for the three year period ended December 31, 2019 in this Form 10-K. However, this control deficiency created a reasonable possibility that a material misstatement to the consolidated financial statements would not have been prevented or detected on a timely basis, and therefore the Company concluded that the deficiency represented a material weakness in internal control over financial reporting and that internal control over financial reporting was not effective as of December 31, 2019 . +The Company’s independent registered public accounting firm, KPMG LLP, has audited the effectiveness of internal control over financial reporting and has issued an adverse report on the effectiveness of our internal control over financial reporting as of December 31, 2019. KPMG LLP’s report is included later in this Item 9A in this Form 10-K. +MANAGEMENT’S REMEDIATION PLAN +In response to the material weakness identified in Management’s Report on Internal Control over Financial Reporting, we have developed a plan with oversight from the Audit Committee of the Board of Directors to remediate the material weakness. The remediation efforts being implemented include the following: +• +Performance of a quarterly evaluation of the quantitative effect associated with the inclusion or exclusion of certain inputs in the Company’s oil and gas reserve database. +• +Revision and communication of controls, policies and procedures relating to identifying and assessing changes that could potentially impact the system of internal control governing preparation of the oil and gas reserve database. +CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING +Other than the identification of the material weakness described above, there was no change in our internal control over financial reporting that occurred during our most recent fiscal quarter ended December 31, 2019 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. +109 +Table of Contents +Report of Independent Registered Public Accounting Firm +To the Stockholders and Board of Directors +Cimarex Energy Co.: +Opinion on Internal Control Over Financial Reporting +We have audited Cimarex Energy Co. and subsidiaries’ (the Company) internal control over financial reporting as of December 31, 2019 , based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. +In our opinion, because of the effect of the material weakness, described below, on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of December 31, 2019 , based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. +We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2019 and 2018 , the related consolidated statements of operations and comprehensive income (loss), stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2019 , and the related notes (collectively, the consolidated financial statements), and our report dated February 26, 2020 expressed an unqualified opinion on those consolidated financial statements. +A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. A material weakness related to an ineffective process and control to periodically evaluate the quantitative effect associated with the inclusion or exclusion of certain inputs, such as skim oil and drip liquids, in the Company’s oil and gas reserve database used in the ceiling test impairment calculations, depletion calculations, and the preparation of the related disclosures included in the supplemental information on oil and gas producing activities (unaudited) resulting from an ineffective risk assessment process to identify and assess changes in the Company’s operations and their impact on the Company’s processes and controls governing preparation of the oil and gas reserve database has been identified and included in management’s assessment. The material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2019 consolidated financial statements, and this report does not affect our report on those consolidated financial statements. +Basis for Opinion +The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. +Definition and Limitations of Internal Control Over Financial Reporting +A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. +Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +KPMG LLP +Denver, Colorado +February 26, 2020 +110 +Table of Contents \ No newline at end of file diff --git a/raw/filings/0001168054/2019/0001168054-20-000004/rp_note.txt b/raw/filings/0001168054/2019/0001168054-20-000004/rp_note.txt new file mode 100644 index 0000000000000000000000000000000000000000..2f39fc8828fade4ccbf10589d39f4baec4eabf95 --- /dev/null +++ b/raw/filings/0001168054/2019/0001168054-20-000004/rp_note.txt @@ -0,0 +1,2 @@ +11. RELATED PARTY TRANSACTIONS +Helmerich & Payne, Inc. (“H&P”) provides contract drilling services to Cimarex. Cimarex incurred drilling costs of approximately $ 72.8 million , $ 80.1 million , and $ 52.6 million related to these services during the years ended December 31, 2019 , 2018 , and 2017 , respectively. The amount incurred in 2019 is included in the short-term lease costs disclosed in Note 10. Hans Helmerich, a director of Cimarex, is Chairman of the Board of Directors of H&P. \ No newline at end of file diff --git a/raw/filings/0001168054/2019/0001168054-20-000004/rpt_disclosure.txt b/raw/filings/0001168054/2019/0001168054-20-000004/rpt_disclosure.txt new file mode 100644 index 0000000000000000000000000000000000000000..946df11dabbe53b03bef29222b90bd5bd3fc9110 --- /dev/null +++ b/raw/filings/0001168054/2019/0001168054-20-000004/rpt_disclosure.txt @@ -0,0 +1,38 @@ +Review of related party transactions +Independent Lead Director +Non-hedging and non-pledging policies +Diverse Board skills and experience +Clawback policy +Annual Board and committee self-evaluations +Management and Director stock ownership guidelines +Periodic consultant review of Board skills +No tax gross-ups +Annual equity grants to Directors +Proxy access +Annual Board education +Active shareholder engagement +Board refreshment efforts with five new directors since 2012 +Increased gender and ethnic diversity of Board +As +highlighted above, the Company is proposing declassifying the Board and provide that all directors be elected annually beginning with our 2024 annual meeting. This proposal is an outcome of our +shareholder engagement efforts, and demonstrates our commitment to enhancing our corporate governance policies. +In +addition, to support the Company's elevated focus on environmental and safety performance, our Board of Directors established a new Environmental, Health and Safety Committee. The committee has +oversight of the Company's approach to health, safety and environmental (HSE) policies and programs and key HSE risks, as well as overseeing our corporate disclosures. +Shareholder Engagement +Cimarex's relationships with its shareholders are an important part of our corporate governance profile, and we recognize the value of taking +their views into account. Engagement with shareholders helps us understand the larger context and the impact of our operations, learn about expectations for our performance, assess emerging issues +that may affect our business or other aspects of our operations, and shape corporate and governance policies. +At +the 2020 Annual Meeting of Shareholders, 96% of the votes cast were in favor of the advisory vote to approve executive compensation. 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31, 2020 +OR +☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 +For the transition period from _______________ to _______________ +Commission file number 001-31446 +CIMAREX ENERGY CO . +(Exact name of registrant as specified in its charter) +Delaware 45-0466694 +(State or other jurisdiction of +incorporation or organization) (I.R.S. Employer +Identification No.) +1700 Lincoln Street, Suite 3700 Denver Colorado 80203 +(Address of principal executive offices) (Zip Code) +( 303 ) 295-3995 +(Registrant’s telephone number) +Securities registered pursuant to Section 12(b) of the Act: +Title of each class Trading Symbol(s) Name of each exchange on which registered +Common Stock ($0.01 par value) XEC New York Stock Exchange +Securities Registered Pursuant to Section 12(g) of the Act: None +Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. +Yes ☒ No ☐ +Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒ +Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐ +Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐ +Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. +Large accelerated filer ☒ Accelerated filer ☐ Non-accelerated filer ☐ Smaller reporting company ☐ +Emerging Growth Company ☐ +If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ +Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒ +Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒ +Aggregate market value of the voting stock held by non-affiliates of Cimarex Energy Co. as of June 30, 2020 was approximately $ 2.75 billion. +Number of shares of Cimarex Energy Co. common stock outstanding as of January 31, 2021 was 102,807,656 . +Documents Incorporated by Reference: Portions of the Registrant’s Proxy Statement for its 2021 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K. +Table of Contents +TABLE OF CONTENTS +DESCRIPTION +Item Page +Glossary +Part I +1. & 2. +Business and Properties +7 +1A. +Risk Factors +19 +1B. +Unresolved Staff Comments +34 +3. +Legal Proceedings +34 +4. +Mine Safety Disclosures +34 +Part II +5. +Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities +35 +6. +Selected Financial Data +37 +7. +Management’s Discussion and Analysis of Financial Condition and Results of Operations +38 +7A. +Quantitative and Qualitative Disclosures About Market Risk +62 +8. +Financial Statements and Supplementary Data +64 +9. +Changes i n and Disagreements with Accountants on Accounting and Financial Disclosure +111 +9A. +Controls and Procedures +111 +9B. +Other Information +114 +Part III +10. +Directors, Executive Officers and Corporate Governance +115 +11. +Executive Compensation +117 +12. +Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters +117 +13. +Certain Relationships and Related Transactions, and Director Independence +117 +14. +Principal Account ant Fees and Services +117 +Part IV +15. +Exhibit and Financial Statement Schedules +118 +16. +Form 10-K Summary +124 +2 +Table of Contents +GLOSSARY +Bbls— Barrels (of oil or natural gas liquids) +Bcf— Billion cubic feet (of natural gas) +BOE— Barrels of oil equivalent +GAAP— Generally accepted accounting principles in the U.S. +Gross Acres or Gross Wells— The total acres or wells in which a working interest is owned. +MBbls— Thousand barrels +MBOE— Thousand barrels of oil equivalent +Mcf— Thousand cubic feet +MMBbls— Million barrels +MMBtu— Million British thermal units +MMBOE— Million barrels of oil equivalent +MMcf— Million cubic feet +Net Acres or Net Wells— The sum of the fractional working interest owned in gross acres or gross wells expressed in whole numbers and fractions of whole numbers. +Net Production— Gross production multiplied by net revenue interest +NGL or NGLs— Natural gas liquids +PUD— Proved undeveloped +Tcf— Trillion cubic feet +Energy equivalent is determined using the ratio of one barrel of crude oil, condensate, or NGL to six Mcf of natural gas. +3 +Table of Contents +PART I +CAUTIONARY INFORMATION ABOUT FORWARD-LOOKING STATEMENTS +Throughout this Form 10-K, we make statements that may be deemed “forward-looking” statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. In particular, in our Management’s Discussion and Analysis of Financial Condition and Results of Operations, we provide projections of our 2021 capital expenditures. All statements, other than statements of historical facts, that address activities, events, outcomes, and other matters that Cimarex plans, expects, intends, assumes, believes, budgets, predicts, forecasts, projects, estimates, or anticipates (and other similar expressions) will, should, or may occur in the future are forward-looking statements. These forward-looking statements are based on management’s current belief, based on currently available information, as to the outcome and timing of future events. When considering forward-looking statements, you should keep in mind the risk factors and other cautionary statements in this Form 10-K for the year ended December 31, 2020. All the risks disclosed in this Form 10-K may be amplified by the COVID-19 pandemic and its unpredictable nature. Forward-looking statements include statements with respect to, among other things: +• Fluctuations in the price we receive for our oil, gas, and NGL production, including local market price differentials, which may be exacerbated by the demand destruction resulting from the highly transmissible and pathogenic coronavirus known as severe acute respiratory syndrome coronavirus 2 (SARS-CoV-2) that causes the disease known as COVID-19; +• Disruptions to the availability of workers and contractors due to illness and stay-at-home orders related to the COVID-19 pandemic; +• Cost and availability of gathering, pipeline, refining, transportation and other midstream and downstream activities and our ability to sell oil, gas, and NGLs, which may be negatively impacted by the COVID-19 pandemic and other risks and lead to a lack of any available markets; +• Availability of supply chains and critical equipment and supplies, which may be negatively impacted by the COVID-19 pandemic and other risks; +• Higher than expected costs and expenses, including the availability and cost of services and materials, which may be negatively impacted by the COVID-19 pandemic; +• Compliance with environmental and other regulations, including new regulations that may result from the recent change in federal and state administrations and legislatures; +• Legislative or regulatory changes, including initiatives related to hydraulic fracturing, emissions, and disposal of produced water, which may be negatively impacted by the recent change in Presidential administration or legislatures; +• The ability to receive drilling and other permits or approvals and rights-of-way in a timely manner (or at all), which may be negatively impacted by the impact of COVID-19 restrictions on regulatory employees who process and approve permits, other approvals and rights-of-way and which may be restricted by new Presidential and Secretarial orders and regulation and legislation; +• Reductions in the quantity of oil, gas, and NGLs sold and prices received because of decreased demand and/or curtailments in production relating to mechanical, transportation, storage, capacity, marketing, weather, the COVID-19 pandemic, or other problems; +• Declines in the SEC PV10 value of our oil and gas properties resulting in full cost ceiling test impairments to the carrying values of our oil and gas properties; +• The effectiveness of our internal control over financial reporting; +4 +Table of Contents +• Success of the company’s risk management activities; +• Availability of financing and access to capital markets; +• Estimates of proved reserves, exploitation potential, or exploration prospect size; +• Greater than expected production decline rates; +• Timing and amount of future production of oil, gas, and NGLs; +• Cybersecurity threats, technology system failures, and data security issues; +• The inability to transport, process, and store oil and gas; +• Hedging activities and the viability of our hedging counterparties, many of whom have been negatively impacted by the COVID-19 pandemic; +• Economic and competitive conditions; +• Lack of available insurance; +• Cash flow and anticipated liquidity; +• Continuing compliance with the financial covenant contained in our amended and restated credit agreement; +• The loss of certain federal income tax deductions; +• Litigation; +• Environmental liabilities; +• New federal regulations regarding species or habitats; +• Exploration and development opportunities that we pursue may not result in economic, productive oil and gas properties; +• Drilling of wells; +• Development drilling and testing results; +• Performance of acquired properties and newly drilled wells; +• Ability to obtain industry partners to jointly explore certain prospects, and the willingness and ability of those partners to meet capital obligations when requested; +• Unexpected future capital expenditures; +• Amount, nature, and timing of capital expenditures; +• Proving up undeveloped acreage and maintaining production on leases; +• Unforeseen liabilities associated with acquisitions and dispositions; +• Establishing valuation allowances against our net deferred tax assets; +5 +Table of Contents +• Potential payments for failing to meet minimum oil, gas, NGL, or water delivery or sales commitments; +• Increased financing costs due to a significant increase in interest rates; +• Risks associated with concentration of operations in one major geographic area; +• Availability and cost of capital; +• Title to properties; +• Ability to complete property sales or other transactions; and +• Other factors discussed in the company’s reports filed with the Securities and Exchange Commission (“SEC”). +We caution you that these forward-looking statements are subject to all of the risks and uncertainties, many of which are beyond our control, incident to the exploration for and development, production, and sale of oil, gas, and NGLs. +These risks include, but are not limited to, commodity price volatility, demand, capacity, inflation, lack of availability of goods and services, environmental risks, drilling and other operating risks, regulatory changes, the uncertainty inherent in estimating proved oil and gas reserves and in projecting future rates of production, production type curves, well spacing, timing of development expenditures, and other risks described herein. Many of these risks can be exacerbated by epidemics and pandemics including the current COVID-19 pandemic. +Reservoir engineering is a subjective process of estimating underground accumulations of oil and gas that cannot be measured in an exact way. The accuracy of any reserve estimate depends on the quality of available data and the interpretation of such data by our engineers. As a result, estimates made by different engineers often vary from one another. In addition, the results of drilling, testing, and production activities may justify revisions of estimates that were made previously. If significant, such revisions could change the timing of future production and development drilling. Accordingly, reserve estimates are generally different from the quantities of oil and gas that are ultimately recovered. +Risk factors related to acquisitions, including our acquisition of Resolute Energy Corporation in 2019, include, among others: unknown liabilities related to the acquired properties or entities; the risk that problems may arise in successfully integrating the businesses of the companies, which may result in the combined company not operating as effectively and efficiently as expected; the risk that the combined company may be unable to achieve synergies or other anticipated benefits of the transaction; or it may take longer than expected to achieve those synergies or benefits, and other important factors, such as expenses related to integration, that could cause actual results to differ materially from those projected. +Should one or more of the risks or uncertainties described above or elsewhere in this Annual Report on Form 10-K for the year ended December 31, 2020 cause our underlying assumptions to be incorrect, our actual results and plans could differ materially from those expressed in any forward-looking statements. +All forward-looking statements, express or implied, included in or incorporated by reference into this Form 10-K and attributable to Cimarex are qualified in their entirety by this cautionary statement. This cautionary statement should also be considered in connection with any subsequent written or oral forward-looking statements that Cimarex or persons acting on its behalf may issue. Cimarex does not undertake any obligation to update any forward-looking statements to reflect events or circumstances after the date of filing this Form 10-K with the SEC, except as required by law. +6 +Table of Contents +ITEMS 1 AND 2. BUSINESS AND PROPERTIES +General +Cimarex Energy Co., a Delaware corporation formed in 2002, is an independent oil and gas exploration and production company. Our operations are located entirely within the United States of America, mainly in Texas, New Mexico, and Oklahoma. Currently our operations are focused in two main areas: the Permian Basin and the Mid-Continent. Our Permian Basin region encompasses west Texas and southeast New Mexico. Our Mid-Continent region consists of Oklahoma and the Texas Panhandle. On our website — www.cimarex.com — you will find our annual reports, proxy statements, and all of our Securities and Exchange Commission (“SEC”) filings, which we make available free of charge. Information contained on our website is not incorporated by reference into this Annual Report. Throughout this Form 10-K we use the terms “Cimarex,” “company,” “we,” “our,” and “us” to refer to Cimarex Energy Co. and its subsidiaries. +Our principal business objective is to increase shareholder value through the profitable growth of our proved reserves and production while seeking to minimize our impact on the communities in which we operate for the long-term. Our strategy centers on maximizing cash flow from producing properties for reinvestment in exploration and development activities and for providing cash returns to shareholders through dividends and debt reduction. We consider merger and acquisition opportunities that enhance our competitive position and we occasionally divest non-strategic assets. Key elements to our approach include: +• Maintaining a strong financial position; +• Investing in a diversified portfolio of drilling opportunities; +• Evaluating projects based on rate-of-return and rank investment decisions; +• Tracking predicted versus actual results in a centralized exploration management system to provide feedback to improve results; +• Attracting quality employees and maintaining integrated teams of geoscientists, landmen, and engineers; and +• Maximizing profitability. +Conservative use of leverage has long been the key to our financial strategy. We believe that low leverage coupled with strong full-cycle returns enables us to better withstand volatility in commodity prices and provide competitive returns and growth to shareholders. See Item 5 Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities — Stock Performance Graph and Item 6 Selected Financial Data for additional financial and operating information for fiscal years 2016 - 2020. +7 +Table of Contents +Proved Oil and Gas Reserves +Our December 31, 2020 total proved reserves decreased 14% from prior year-end. Proved undeveloped reserves as a percentage of total proved reserves increased to 16% from 14% a year ago. During 2020, we added 56.6 MMBOE of new reserves through extensions and discoveries and had net negative revisions that totaled 52.4 MMBOE. These revisions consisted primarily of 70.3 MMBOE in downward price revisions and 10.0 MMBOE associated with the removal of PUD reserves whose development will likely be delayed beyond five years of initial disclosure, partially offset by 30.7 MMBOE in positive revisions related to decreases in operating expenses. The change in our proved reserves is as follows: +Proved Reserves +(MBOE) +Reserves at December 31, 2019 619,595 +Revisions of previous estimates (52,430) +Extensions and discoveries 56,575 +Production (92,412) +Sales of reserves (307) +Reserves at December 31, 2020 531,021 +A breakdown by commodity of our proved oil and gas reserves follows: +December 31, +2020 2019 2018 +Proved reserves: +Gas (MMcf) 1,362,842 1,532,145 1,591,321 +Oil (MBbls) 144,063 169,770 146,538 +NGL (MBbls) 159,818 194,468 179,436 +Total (MBOE) 531,021 619,595 591,195 +Percent developed 84 % 86 % 85 % +The following table summarizes our estimated proved oil and gas reserves by region as of December 31, 2020. +Gas +(MMcf) Oil +(MBbls) NGL +(MBbls) Total +(MBOE) % of +Total Proved +Reserves +Mid-Continent 570,578 17,491 56,130 168,717 32 % +Permian Basin 790,750 126,327 103,606 361,725 68 % +Other 1,514 245 82 579 — % +1,362,842 144,063 159,818 531,021 100 % +See SUPPLEMENTAL INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED) in Item 8 for further information regarding our reserves. +8 +Table of Contents +Production Volumes, Prices, and Costs +All of our oil and gas assets are located in the United States of America. We have varying levels of ownership interests in our properties consisting of working, royalty, and overriding royalty interests. Operated wells account for approximately 87% of our proved reserves. +Our 2020 production volumes totaled 252.5 MBOE per day, a 9% decrease from 2019, and were comprised of 42% gas, 30% oil, and 28% NGLs. The following table presents our total and average daily production volumes by region. +Total Production Volumes Average Daily Production Volumes +Years Ended December 31, Gas +(MMcf) Oil +(MBbls) NGL +(MBbls) Total +(MBOE) Gas +(MMcf) Oil +(MBbls) NGL +(MBbls) Total +(MBOE) +2020 +Permian Basin 148,227 24,810 17,831 67,345 405.0 67.8 48.7 184.0 +Mid-Continent 84,016 3,219 7,700 24,922 229.6 8.8 21.0 68.1 +Other 382 58 23 145 1.0 0.1 0.1 0.4 +Total company 232,625 28,087 25,554 92,412 635.6 76.7 69.8 252.5 +2019 +Permian Basin 145,612 26,376 18,973 69,618 398.9 72.3 52.0 190.8 +Mid-Continent 105,515 5,033 9,263 31,882 289.1 13.8 25.4 87.3 +Other 440 54 18 145 1.2 0.1 — 0.4 +Total company 251,567 31,463 28,254 101,645 689.2 86.2 77.4 278.5 +2018 +Permian Basin 92,593 19,104 11,499 46,035 253.7 52.3 31.5 126.1 +Mid-Continent 112,697 5,530 10,474 34,787 308.8 15.2 28.7 95.3 +Other 547 76 21 188 1.4 0.2 0.1 0.5 +Total company 205,837 24,710 21,994 81,010 563.9 67.7 60.3 221.9 +9 +Table of Contents +At December 31, 2020, we had three fields that contained 15% or more of our total proved reserves. These fields were Watonga-Chickasha in the Cana area of the Mid-Continent, Dixieland in the Permian Basin in Reeves County, Texas, and Ford West in the Permian Basin in Culberson County, Texas. At December 31, 2020, the Watonga-Chickasha, Dixieland, and Ford West fields contained approximately 29%, 22%, and 16%, respectively, of our total proved reserves. At December 31, 2019, these same three fields contained 15% or more of our total proved reserves. At December 31, 2018, we had two fields that contained 15% or more of our total proved reserves, the Watonga-Chickasha and Ford West fields. Production for these fields is presented in the following table. +Total Production Volumes Average Daily Production Volumes +Years Ended December 31, Gas +(MMcf) Oil +(MBbls) NGL +(MBbls) Total +(MBOE) Gas +(MMcf) Oil +(MBbls) NGL +(MBbls) Total +(MBOE) +2020 +Watonga-Chickasha 70,434 2,917 7,201 21,858 192.4 8.0 19.7 59.7 +Dixieland 45,463 8,478 5,397 21,453 124.2 23.2 14.7 58.6 +Ford West 42,832 4,485 5,095 16,719 117.0 12.3 13.9 45.7 +2019 +Watonga-Chickasha 90,148 4,643 8,689 28,357 247.0 12.7 23.8 77.7 +Dixieland 42,658 8,938 5,934 21,982 116.9 24.5 16.3 60.2 +Ford West 41,087 5,042 5,212 17,102 112.6 13.8 14.3 46.9 +2018 +Watonga-Chickasha 96,043 5,072 9,809 30,889 263.1 13.9 26.9 84.6 +Dixieland 11,940 2,902 1,538 6,430 32.7 7.9 4.2 17.6 +Ford West 30,976 3,777 3,823 12,763 84.9 10.3 10.5 35.0 +10 +Table of Contents +The following table presents the average commodity prices received and production cost per unit of production by region. +Average Realized Price Production Cost (per BOE) +Years Ended December 31, Gas +(per Mcf) Oil +(per Bbl) NGL +(per Bbl) +2020 +Permian Basin $ 0.69 $ 35.66 $ 9.64 $ 3.14 +Mid-Continent $ 1.67 $ 34.97 $ 12.60 $ 2.92 +Other $ 1.98 $ 41.15 $ 9.42 $ 6.13 +Total company $ 1.05 $ 35.59 $ 10.53 $ 3.09 +2019 +Permian Basin $ 0.49 $ 52.55 $ 12.62 $ 3.47 +Mid-Continent $ 1.95 $ 53.89 $ 15.47 $ 3.04 +Other $ 2.44 $ 56.52 $ 15.70 $ 9.59 +Total company $ 1.11 $ 52.77 $ 13.55 $ 3.34 +2018 +Permian Basin $ 1.69 $ 54.95 $ 22.84 $ 4.37 +Mid-Continent $ 2.23 $ 62.31 $ 21.67 $ 2.69 +Other $ 2.97 $ 58.40 $ 26.46 $ 7.63 +Total company $ 1.99 $ 56.61 $ 22.28 $ 3.66 +Acquisitions and Divestitures +We consider property acquisitions, divestitures, and occasional mergers to enhance our competitive position. Moreover, sales of non-strategic assets are a source of liquidity that we can use to supplement funding of capital expenditures and acquisitions of strategic assets. +On September 30, 2020, we closed on the sale of certain water infrastructure assets in Eddy County, New Mexico, for which we received net cash proceeds of $68.7 million during 2020, as adjusted for customary closing adjustments and transaction costs. See Note 13 to the Consolidated Financial Statements for further information on this divestiture. +On March 1, 2019, we completed the acquisition of Resolute Energy Corporation (“Resolute”), an independent oil and gas company focused on the acquisition and development of unconventional oil and gas properties in the Delaware Basin area of the Permian Basin of west Texas. This acquisition expanded our footprint in Reeves County, Texas on acreage complementary to our existing Reeves County position. We paid $325.7 million in cash and issued common and preferred stock valued at an aggregate of $494.6 million, for total consideration transferred of $820.3 million. In addition, we assumed $870.0 million of Resolute’s long-term debt, which we immediately repaid. See Note 13 to the Consolidated Financial Statements for further information on this acquisition. +11 +Table of Contents +Exploration and Development Overview +Cimarex has one reportable segment, exploration and production. Our exploration and production activities take place primarily in two areas: the Permian Basin and the Mid-Continent. Almost all of our exploration and development (“E&D”) capital is allocated between these two areas. +A summary of our 2020 exploration and development activity and capital investments is as follows: +Capital Investment Gross Productive Wells Completed Net +Productive Wells Completed +(in thousands) +Exploration and development: +Permian Basin $ 503,304 92 48.1 +Mid-Continent 40,825 57 2.9 +Other 727 — — +544,856 149 51.0 +Saltwater disposal/Midstream 32,297 +Total capital investment $ 577,153 +The Permian Basin encompasses west Texas and southeast New Mexico. Cimarex’s Permian Basin efforts are located in the western half of the Permian Basin known as the Delaware Basin. In 2020, our development activity primarily focused on the Wolfcamp shale formation in Culberson and Reeves Counties in Texas and Lea and Eddy Counties in New Mexico. The Wolfcamp is being developed with horizontal wells primarily using two-mile laterals. +The Permian Basin produced 184.0 MBOE per day in 2020, which was 73% of our total company production. Total production from the region decreased 3% in 2020 from 2019. In 2020, we invested $503.3 million, or 92%, of our total E&D investment, in the Permian Basin. +12 +Table of Contents +Our Mid-Continent region consists of Oklahoma and the Texas Panhandle. Our activity in 2020 in the Mid-Continent was focused in the Woodford shale and the Meramec horizon, both in Oklahoma. +During 2020, production from the Mid-Continent averaged 68.1 MBOE per day, or 27% of total company production. Total production from the region decreased 22% in 2020 as compared to 2019. In 2020, we invested $40.8 million, or 8% of our total E&D investment, in the Mid-Continent. +Drilling Activity +In 2020, we completed or participated in the completion of 149 gross (51.0 net) productive wells, of which we operated 61 gross (47.6 net) wells. At year-end, we were in the process of drilling or participating in 10 gross (4.3 net) wells and there were 77 gross (39.6 net) wells waiting on completion. +We completed the following number of development wells in the years indicated in the table below. During these years, we completed no exploratory wells. +Wells Completed +2020 2019 2018 +Gross Net Gross Net Gross Net +Development +Productive 149 51.0 289 90.2 349 122.1 +Dry 2 1.5 2 1.9 — — +Total 151 52.5 291 92.1 349 122.1 +At December 31, 2020, we owned an interest in 10,061 gross (2,765 net) productive oil and gas wells. We had working interests in the following number of productive wells by region as of December 31, 2020: +Gas Oil +Gross Net Gross Net +Mid-Continent 3,876 1,449 869 175 +Permian Basin 705 310 4,495 827 +Other 103 3 13 1 +4,684 1,762 5,377 1,003 +13 +Table of Contents +Acreage +The following table sets forth the gross and net acres of both developed and undeveloped leases held by Cimarex as of December 31, 2020. +Acreage +Undeveloped Developed Total +Gross Net Gross Net Gross Net +Mid-Continent +Kansas 16,822 16,782 — — 16,822 16,782 +Oklahoma 156,179 47,624 774,542 306,849 930,721 354,473 +Texas 22,544 9,317 108,536 52,676 131,080 61,993 +195,545 73,723 883,078 359,525 1,078,623 433,248 +Permian Basin +New Mexico 123,460 49,306 175,144 120,106 298,604 169,412 +Texas 45,962 26,971 222,445 134,233 268,407 161,204 +169,422 76,277 397,589 254,339 567,011 330,616 +Other +Arizona 2,097,841 2,097,841 17,212 17,207 2,115,053 2,115,048 +California 383,487 383,487 — — 383,487 383,487 +Colorado 38,092 18,767 43,459 1,642 81,551 20,409 +Gulf of Mexico 20,000 11,000 26,345 6,381 46,345 17,381 +Nevada 1,007,167 1,007,167 440 1 1,007,607 1,007,168 +New Mexico 1,640,153 1,634,459 18,538 2,436 1,658,691 1,636,895 +Texas 6,487 2,616 10,831 4,866 17,318 7,482 +Utah 66,380 58,933 42,458 1,445 108,838 60,378 +Wyoming 79,640 18,557 51,947 3,980 131,587 22,537 +Other 235,647 182,286 21,770 4,827 257,417 187,113 +5,574,894 5,415,113 233,000 42,785 5,807,894 5,457,898 +5,939,861 5,565,113 1,513,667 656,649 7,453,528 6,221,762 +The table below summarizes by year and region our undeveloped acreage expirations in the next five years. In most cases, the drilling of a commercial well will hold the acreage beyond the expiration. +Acreage +2021 2022 2023 2024 2025 +Gross Net Gross Net Gross Net Gross Net Gross Net +Mid-Continent 8,074 6,583 3,101 1,946 1,233 465 420 330 — — +Permian Basin 10,835 4,878 4,394 1,978 960 960 40 40 — — +Other 124,148 120,590 34,413 31,592 6,840 5,729 1,302 1,241 — — +143,057 132,051 41,908 35,516 9,033 7,154 1,762 1,611 — — +% of total undeveloped acreage 2.4 2.4 0.7 0.6 0.2 0.1 — — — — +At December 31, 2020, we had no proved undeveloped reserves booked on undeveloped acreage that were scheduled for development beyond the expiration dates of the undeveloped acreage. +14 +Table of Contents +Title to Oil and Gas Properties +We undertake title examination and perform curative work at the time we lease undeveloped acreage, prepare for the drilling of a prospect, or acquire proved properties. We believe title to our properties is good and defensible, and is in accordance with industry standards. Nevertheless, we are involved in title disputes from time to time that result in litigation. Our oil and gas properties are subject to customary royalty interests, liens incidental to operating agreements, tax liens, and other burdens and minor encumbrances, easements, and restrictions. +Competition +The oil and gas industry is highly competitive, particularly for prospective undeveloped leases and purchases of proved reserves. There is also competition for rigs and related equipment used to drill for and produce oil and gas, however, to a lesser extent in the current market environment. Our competitive position also is highly dependent on our ability to recruit and retain geological, geophysical, and engineering expertise. We compete for prospects, proved reserves, oil-field services, and qualified oil and gas professionals with major and diversified energy companies and other independent operators that have larger financial, human, and technological resources than we do. +We compete with integrated, independent, and other energy companies for the sale and transportation of our oil, gas, and NGLs to marketing companies and end users. The oil and gas industry competes with other energy industries that supply fuel and power to industrial, commercial, and residential consumers. Many of these competitors have greater financial and human resources than we do. The effect of these competitive factors cannot be predicted. +Proved Reserves Estimation Procedures +Proved oil and gas reserve quantities are based on estimates prepared by Cimarex in accordance with the SEC’s rules for reporting oil and gas reserves. Our reserve definitions conform with definitions of Rule 4-10(a) (1)-(32) of Regulation S-X of the SEC. All of our reserve estimates are maintained by our internal Corporate Reservoir Engineering group, which is comprised of engineers and engineering technicians. The objectives and management of this group are separate from and independent of the exploration and production functions of the company. The primary objective of our Corporate Reservoir Engineering group is to maintain accurate forecasts on all properties of the company through ongoing monitoring and timely updates of operating and economic parameters (production forecasts, prices and regional differentials, operating expenses, ownership, etc.) in accordance with guidelines established by the SEC. This separation of function and responsibility is a key internal control. +Cimarex engineers are responsible for estimates of proved reserves. Corporate engineers interact with the exploration and production departments to ensure all available engineering and geologic data is taken into account prior to establishing or revising an estimate. After preparing the reserves update, the corporate engineers review their recommendations with the Vice President of Corporate Engineering. After approval from the Vice President of Corporate Engineering, the revisions are entered into our reserves database by the engineering technician. +During the course of the year, the Vice President of Corporate Engineering presents summary reserves information to senior management and to our Board of Directors for their review. From time to time, the Vice President of Corporate Engineering also will confer with senior management, including the Chief Executive Officer, regarding specific reserves-related issues. In addition, Corporate Reservoir Engineering maintains a set of basic guidelines and procedures to ensure that critical checks and reviews of the reserves database are performed on a regular basis. +Together, these internal controls are designed to promote a comprehensive, objective, and accurate reserves estimation process. As an additional confirmation of the reasonableness of our internal estimates, DeGolyer and MacNaughton, an independent petroleum engineering consulting firm, performed an independent evaluation of our estimated net reserves representing greater than 80% of the total future net revenue discounted at 10% attributable to the total interests owned by Cimarex as of December 31, 2020. The individual primarily responsible for overseeing +15 +Table of Contents +the review is a Senior Vice President with DeGolyer and MacNaughton and a Registered Professional Engineer in the State of Texas with over 10 years of experience in oil and gas reservoir studies and reserves evaluations. +The technical employee primarily responsible for overseeing the oil and gas reserves estimation process is Cimarex’s Vice President of Corporate Engineering. This individual graduated from the Colorado School of Mines with a Bachelor of Science degree in Engineering and has more than 26 years of practical experience in oil and gas reservoir evaluation. He has been directly involved in the annual reserves reporting process of Cimarex since 2002 and has served in his current role for the past 16 years. +Marketing +Our oil and gas production is sold under an assortment of short-term and long-term arrangements at market-responsive prices. We sell our oil at prices tied to NYMEX pricing with customary adjustments for quality and location. Our gas sales are tied to either monthly or daily index pricing and we sell the majority of our NGLs at prices tied to monthly index prices less an applicable transportation and fractionation cost. +We sell our oil, gas, and NGLs to a broad portfolio of customers, including major energy companies, pipeline companies, local distribution companies, and other end-users. In 2020, we made sales to two customers that each amounted to 10% or more of our consolidated revenues for 2020. Sales to those two customers accounted for 26% and 23%, respectively, of our consolidated revenues for 2020. If any one of our major customers were to stop purchasing our production, we believe there are a number of other purchasers to whom we could sell our production. If multiple significant customers were to discontinue purchasing our production, we believe there could be some initial challenges, but we have ample alternative markets to handle any sales disruption. +We regularly monitor the credit worthiness of all our customers and may require parent company guarantees, letters of credit, or prepayments when deemed necessary. Historically, losses associated with uncollectible receivables have not been significant. +Government Regulation +Oil and gas production and transportation is subject to extensive federal, state, and local laws and regulations. Compliance with existing laws often is difficult and costly, but has not had a significant adverse effect on our operations or financial condition. In recent years, we have been most directly impacted by federal and state environmental regulations and energy conservation rules. We are also impacted by federal and state regulation of pipelines and other oil and gas transportation systems. +The states in which we conduct operations establish requirements for drilling permits, the method of developing fields, the size of well spacing units, drilling density within productive formations and the unitization or pooling of properties. In addition, state conservation laws include requirements for waste prevention, establish limits on the maximum rate of production from wells, generally prohibit the venting or flaring of natural gas, and impose certain requirements regarding the ratability of production. +Environmental Regulation . Various federal, state, and local laws regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, directly impact oil and gas exploration, development, and production operations, which consequently impact our operations and costs. These laws and regulations govern, among other things, emissions into the atmosphere, discharges of pollutants into waters, underground injection of waste water, the generation, storage, transportation, and disposal of waste materials, and protection of public health, natural resources, and wildlife. These laws and regulations may impose substantial liabilities for noncompliance and for any contamination resulting from our operations and may require the suspension or cessation of operations in affected areas. +Cimarex is committed to environmental protection and believes we are in material compliance with applicable environmental laws and regulations. We obtain permits for our facilities and operations in accordance with the applicable laws and regulations. There are no known issues that have a significant adverse effect on the +16 +Table of Contents +permitting process or permit compliance status of any of our facilities or operations. Expenditures are required to comply with environmental regulations. These costs are a normal, recurring expense of operations and not an extraordinary cost of compliance with current government regulations. +We do not anticipate that we will be required under current environmental laws and regulations to expend amounts that will have a material adverse effect on our financial position or operations. However, due to continuing changes in these laws and regulations, we are unable to predict with any reasonable degree of certainty any potential delays in development plans that could arise, or our future costs of complying with governmental requirements. We maintain levels of insurance customary in the industry to limit our financial exposure in the event of a substantial environmental claim resulting from sudden, unanticipated and accidental discharges of oil, produced water, or other substances as well as additional coverage for certain other pollution events. +Gas Gathering and Transportation . The Federal Energy Regulatory Commission (“FERC”) requires interstate gas pipelines to provide open access transportation. FERC also enforces the prohibition of market manipulation by any entity, and the facilitation of the sale or transportation of natural gas in interstate commerce. Interstate pipelines have implemented these requirements, providing us with additional market access and more fairly applied transportation services and rates. FERC continues to review and modify its open access and other regulations applicable to interstate pipelines. +Under the Natural Gas Policy Act (“NGPA”), natural gas gathering facilities are expressly exempt from FERC jurisdiction. What constitutes “gathering” under the NGPA has evolved through FERC decisions and judicial review of such decisions. We believe that our gathering systems meet the test for non-jurisdictional “gathering” systems under the NGPA and that our facilities are not subject to federal regulations. Although exempt from FERC oversight, our natural gas gathering systems and services may receive regulatory scrutiny by state and federal agencies regarding the safety and operating aspects of the transportation and storage activities of these facilities. +In addition to using our own gathering facilities, we may use third-party gathering services or interstate transmission facilities (owned and operated by interstate pipelines) to ship our gas to markets. +Additional proposals and proceedings that might affect the oil and gas industry are pending before the U.S. Congress, FERC, Bureau of Land Management (“BLM”), U.S. Environmental Protection Agency (“EPA”), state legislatures, state agencies, local governments, and the courts. We cannot predict when or whether any such proposals may become effective and what effect they will have on our operations. +We do not anticipate that compliance with existing federal, state, and local laws, rules, or regulations will have a material adverse effect upon our capital expenditures, earnings, or competitive position. +Federal and State Income and Other Local Taxation +Cimarex and the petroleum industry in general are affected by both federal and state income tax laws, as well as other local tax regulations involving ad valorem, personal property, franchise, severance, and other excise taxes. We have considered the effects of these provisions on our operations and do not anticipate that they will cause any material undisclosed impact on our capital expenditures, earnings, or competitive position. +Human Capital Resources +As of December 31, 2020, Cimarex employed 747 highly talented and committed individuals across our field operations and business offices. Our employee base was reduced in 2020 by approximately 24% from December 31, 2019 as a result of a voluntary early retirement incentive program we offered to employees who met certain eligibility criteria in the first quarter of 2020 and an involuntary reduction in workforce program we carried out in the third quarter of 2020. These programs were initiated to ensure the size of our workforce is consistent with our expected future activity levels. +17 +Table of Contents +Fostering a healthy culture built upon transparency, trust, collaboration, and results is an area of emphasis for Cimarex leadership. Key areas of Cimarex Human Capital focus are: +Health and Safety +The health and safety of every Cimarex employee is our top priority. In 2020, Cimarex hired a third-party to conduct an extensive safety assessment so that we could determine key areas of focus and improvement. The assessment results have helped us direct our efforts to improve our safety record from positive to “best in class”. We created an Executive Safety Council made up of senior operational leadership to take action and continue building our safety culture. Throughout COVID-19, Cimarex has implemented policies and practices to keep our offices and field operations free from transmission of the virus. The Cimarex COVID-19 task force was formed in February 2020 and meets weekly to actively manage decisions and communication. We have provided significant remote work flexibility and extensive use of video conferencing technology, have eliminated in-person group gatherings, limited all business-related travel to essential only, and have implemented office and field employee protocols requiring masks, physical distancing, and cleaning. +Leadership Development, Succession Planning, and Talent Management +The CEO and Chief Human Resources Officer are critically focused on the next generation of Cimarex’s senior leadership. Formal and informal development, mentoring, and coaching of high potential staff is a recognized role for all of our executive leaders. We also expose our Board of Directors to Cimarex’s high potential future leaders which facilitates more informed discussions during our annual succession planning. We consistently refresh our talent base with a robust college internship and full-time recruiting program. We continued our full scale college recruiting program in 2020 during the COVID-19 downturn and enabled all of our interns to work and be mentored remotely. +Compensation and Benefits +Cimarex’s compensation programs are intended to attract, retain, and motivate top talent and reward great results with top pay. We align short and long-term incentives of our executives and the broader workforce with both company results and shareholder interests. Cimarex also provides top-notch health care and retirement benefits so that our employees can focus on excellence in their work. For example, Cimarex contributes more than 90% of the total cost of employee health care benefits. +Diversity and Inclusion +Cimarex is working to become more diverse and inclusive so that every employee can contribute to their fullest potential and can confidently share ideas that drive value. Through a thorough regular pay equity analysis we ensure that all employees are paid equitably. The Cimarex Board of Directors contains diverse backgrounds and perspectives, in addition to gender and ethnic diversity. Female employees constitute 29% of our total workforce and in 2019, female leaders at Cimarex initiated a women’s network which expanded in 2020 and now includes formal mentoring. We currently are defining 2021 objectives to improve our hiring, development, and promotion of ethnic minorities. +Executive Officers of the Registrant +See Part III, Item 10, Directors, Executive Officers and Corporate Governance for information regarding our executive officers as of February 23, 2021. +18 +Table of Contents +ITEM 1A. RISK FACTORS +The following risks and uncertainties, together with other information set forth in this Form 10-K for the year ended December 31, 2020, should be carefully considered by current and future investors in our securities. These risks and uncertainties are not the only ones we face. There are unknown risks and uncertainties, or risks we currently deem immaterial, that also may impair our business operations or financial condition, which in turn could negatively impact the value of our securities. While many of the risks below relate to the COVID-19 pandemic, given the unpredictable and unprecedented nature of the pandemic, it is impossible to identify all potential risks and estimate the ultimate adverse impact on our business. The COVID-19 pandemic, and mutations of the virus or other outbreaks of communicable diseases, may amplify the risks disclosed in this Form 10-K. These risk factors speak only as of the filing date of this Form 10-K and are subject to change without notice as we cannot predict all risks relating to this quickly evolving set of events. +Outbreaks of communicable diseases could adversely affect our business, financial condition, and results of operations. +Global or national health concerns, including a widespread outbreak of contagious diseases, can negatively impact the global economy, reduce demand and lower pricing for oil, gas, and NGLs, lead to operational disruptions and limit our ability to execute our business plan, which could materially and adversely affect our business, financial condition, and results of operations. For example, the current COVID-19 pandemic, including the measures being taken to address and limit its spread, have adversely affected the economies and financial markets of many countries, resulting in an economic downturn that has negatively impacted, and may continue to negatively impact, global demand and prices for oil, gas, and NGLs. If the COVID-19 outbreak worsens, we also may experience further disruptions to the commodities markets, as well as disruptions to the equipment supply chains and the availability of our workforce as well as the workforces of contractors and regulators, any of which could adversely affect our ability to conduct our business and operations. The numerous uncertainties regarding the COVID-19 pandemic, such as the ultimate geographic spread, duration, and severity of the outbreak, the impact of mutations of the virus, and governmental restrictions and business closures, prevent us from being able to fully assess potential impacts on our business and operations. However, these uncertainties could materially and adversely affect our business, financial condition, and results of operations. +The adoption of climate change legislation or regulations restricting emission of greenhouse gases, investor pressure concerning climate-related disclosures, and lawsuits could result in increased operating costs and reduced demand for the oil and gas we produce as well as reductions in the availability of capital. +Studies have found that emission of certain gases, commonly referred to as greenhouse gases (“GHGs”), impact the earth’s climate. The U.S. Congress and various states have been evaluating, and in some cases implementing, climate-related legislation and other regulatory initiatives that restrict emissions of GHGs. On January 20, 2021, President Biden’s first day in office, he signed an executive order on climate action and reconvened an interagency working group to establish interim and final social costs of three GHGs: carbon dioxide, nitrous oxide, and methane. Carbon dioxide is released during the combustion of fossil fuels, including oil, natural gas, and NGLs, and methane is a primary component of natural gas. The Biden administration stated it will use updated social cost figures to inform federal regulations and major agency actions and to justify aggressive climate action as the United States moves toward a “100% clean energy” economy with net-zero GHG emissions. These actions could result in increased costs and reduced demand for our products. Also on January 20, 2021, the Acting Secretary of the Interior issued an order suspending for 60 days the authority for Department Bureaus and Offices to, among other things, grant rights-of-way or easements, which are necessary for pipelines and roads used in oil, gas, and NGL production, and to issue new permits to drill. During this 60-day period, these permits, which were typically approved at the regional office level, can only be approved by the Secretary of Interior, Deputy Secretary, Solicitor, or various Assistant Secretaries. These new requirements may lead to delays in obtaining approvals necessary for our operations. +19 +Table of Contents +In December 2009, the EPA published its findings that emissions of GHGs present an endangerment to public health and the environment because emissions of such gases are contributing to the warming of the earth’s atmosphere and other climatic changes. Based on these findings, the EPA adopted regulations under existing provisions of the Federal Clean Air Act that establish Prevention of Significant Deterioration (“PSD”) and Title V permit reviews for GHG emissions from certain large stationary sources. Facilities required to obtain PSD and/or Title V permits under EPA’s GHG Tailoring Rule for their GHG emissions also may be required to meet “Best Available Control Technology” standards that will be established by the states or, in some cases, by the EPA on a case-by-case basis. The EPA has also adopted rules requiring the monitoring and reporting of GHG emissions from specified sources in the United States, including, among others, certain oil and gas production facilities on an annual basis, which includes certain of our operations. In recent proposed rulemaking, EPA is widening the scope of annual GHG reporting to include not only activities associated with completion and workover of gas wells with hydraulic fracturing and activities associated with oil and gas production operations, but also completions and workovers of oil wells with hydraulic fracturing, gathering and boosting systems, and transmission pipelines. +While the U.S. Congress has considered legislation to reduce emissions of GHGs in recent years, it has not adopted any significant GHG legislation. This is expected to change with the Democratic Party now in control of the House of Representatives, the Senate, and the office of the President. In the absence of federal GHG legislation, a number of state and regional efforts have emerged, aimed at tracking and/or reducing GHG emissions through cap-and-trade programs, which typically require major sources of GHG emissions, such as electric power plants, to acquire and surrender emission allowances in return for emitting GHGs. Any future laws or regulations that require reporting of, or otherwise limit emissions of, GHGs from our equipment and operations could require us to both develop and implement new practices aimed at reducing GHG emissions, such as emissions control technologies, and monitor and report GHG emissions associated with our operations, any of which could increase our operating costs and could adversely affect demand for the oil and gas that we produce. At this time, it is not possible to quantify the impact of such future laws and regulations on our business. +Several policy makers and political candidates have made, or expressed support for, a variety of more comprehensive proposals, such as cap-and-trade or carbon tax programs, as well as the more sweeping “green new deal” resolutions the U.S. Congress introduced in early 2019. As generally proposed, the “green new deal” includes (i) a cap-and-trade program capping overall GHG emissions on an economy-wide basis and requiring major sources of GHG emissions or major fuel producers to acquire and surrender emission allowances and (ii) a carbon tax, which would impose taxes based on emissions from our operations and the downstream uses of our products. The “green new deal” calls for a 10-year national mobilization effort to, among other things, transition 100% of the U.S. power demand to zero-emission sources and overhaul the U.S. transportation systems so that GHG emissions are eliminated as much as is technologically feasible. The enactment of any such legislation would have a material adverse effect on our business and operations. +We are subject to various climate-related risks. +The following is a summary of potential climate-related risks that could adversely affect us: +Transition Risks . Transition risks are related to the transition to a lower-carbon economy and include policy and legal, technology, and market risks. +Policy and Legal Risks . Policy risks include actions that seek to lessen activities that contribute to adverse effects of climate change or to promote adaptation to climate change. These policy actions could be accelerated by the recent change from a Republican to a Democratic party in control of Congress and the Presidency. Examples of policy actions that would increase the costs of our operations or lower demand for our oil and gas include implementing carbon-pricing mechanisms, shifting energy use toward lower emission sources, adopting energy-efficiency solutions, encouraging greater water efficiency measures, and promoting more sustainable land-use practices. Policy actions also may include restrictions or bans on oil and gas activities, like the January 2021 Presidential and Secretarial orders, and the potential banning of hydraulic fracturing, which could lead to write-downs or impairments of our assets. Legal risks include potential lawsuits claiming failure to mitigate impacts of climate change, failure to adapt to climate change, and the insufficiency of disclosure around material financial risks. +20 +Table of Contents +Furthermore, claims have been made against certain energy companies alleging that GHG emissions from oil, gas, and NGL operations constitute a public nuisance under federal and state law. Private individuals or public entities also could attempt to enforce environmental laws and regulations against us and could seek personal injury and property damages or other remedies. While we are currently not a party to any such litigation, unfavorable rulings against us in any such case could significantly impact our operations and could have an adverse impact on our financial condition. +Technology Risks . Technological improvements or innovations that support the transition to a lower-carbon, more energy efficient economic system may have a significant impact on Cimarex. The development and use of emerging technologies in renewable energy, battery storage, and energy efficiency may lower demand for oil and gas, resulting in lower prices and revenues, and higher costs. In addition, many automobile manufacturers have announced plans to shift production from internal combustion engine to electric powered vehicles, and states and foreign countries have announced bans on sales of internal combustion engine vehicles beginning as early as 2025, which would reduce demand for oil. +Market Risks . Markets could be affected by climate change through shifts in supply and demand for certain commodities, especially carbon-intensive commodities such as oil and gas and other products dependent on oil and gas. Lower demand for our oil and gas production could result in lower prices and lower revenues. Market risk also may take the form of limited access to capital as investors shift investments to less carbon-intensive industries and alternative energy industries. In addition, investment advisers, banks, and certain sovereign wealth, pension, and endowment funds recently have been promoting divestment of investments in fossil fuel companies and pressuring lenders to limit funding to companies engaged in the extraction, production, and sale of oil and gas. In October 2020, JP Morgan Chase & Co. announced that it was adopting a financing commitment that is aligned to the goals of the Paris climate accord of 2015 (the “Paris Agreement”). Other banks have made climate-related pledges for various causes, such as stopping the financing of Arctic drilling and coal companies. These initiatives by activists and banks, including certain banks in our credit facility, could interfere with our business activities, operations, and ability to access capital. +Reputation Risk . Climate change is a potential source of reputational risk, which is tied to changing customer or community perceptions of an organization’s contribution to, or detraction from, the transition to a lower-carbon economy. These changing perceptions could lower demand for our oil and gas production, resulting in lower prices and lower revenues as consumers avoid carbon-intensive industries, and could also pressure banks and investment managers to shift investments and reduce lending as described above. +Physical Risks . Potential physical risks resulting from climate change may be event driven (including increased severity of extreme weather events, such as hurricanes, droughts, or floods) or longer-term shifts in climate patterns that may cause sea level rise or chronic heat waves. Potential physical risks may cause direct damage to assets and indirect impacts such as supply chain disruption and also could include changes in water availability, sourcing, and quality, which could impact drilling and completions operations. These physical risks could cause increased costs, production disruptions, lower revenues, and substantially increase the cost or limit the availability of insurance. +Our hydraulic fracturing activities are subject to risks that could negatively impact our operations and profitability. +We use hydraulic fracturing for the completion of almost all of our wells. Hydraulic fracturing is a process that involves pumping fluid and proppant at high pressure into a hydrocarbon bearing formation to create and hold open fractures. Those fractures enable gas or oil to move through the formation’s pores to the well bore. Typically, the fluid used in this process is primarily water. In areas where hydraulic fracturing is necessary for successful development, the demand for water may exceed the supply. A lack of readily available water or a significant increase in the cost of water could cause delays or increased completion costs. +21 +Table of Contents +Certain federal agencies have asserted regulatory authority over aspects of the hydraulic fracturing process. The EPA, for example, has issued regulations under the federal Clean Air Act establishing performance standards for oil and gas activities, including standards for the capture of air emissions released during hydraulic fracturing. In 2016, the EPA finalized regulations that prohibit the discharge of wastewater from hydraulic fracturing operations to publicly owned wastewater treatment plants and issued a report finding that certain aspects of hydraulic fracturing, such as water withdrawals and wastewater management practices, could impact water resources. The BLM previously finalized regulations to regulate hydraulic fracturing on federal lands but subsequently issued a repeal of those regulations in 2017. States in which we operate also have adopted, or have stated intentions to adopt, laws or regulations that mandate further restrictions on hydraulic fracturing, such as imposing more stringent permitting, disclosure and well-construction requirements on hydraulic fracturing operations and establishing standards for the capture of air emissions released during hydraulic fracturing. In addition to states, local land use restrictions, such as city ordinances, may restrict drilling in general or hydraulic fracturing in particular. +Moreover, as stated above, policy makers have proposed implementing stricter restrictions on hydraulic fracturing, including banning the process outright. For example, it is expected that the Biden administration will attempt to limit or prohibit hydraulic fracturing on federal lands, which would adversely impact our operations in the Permian Basin, as well as other areas where we operate under federal leases. As of December 31, 2020, approximately 3% of our total net leasehold resides on federal lands, and approximately 31% of our total net leasehold in the Permian Basin is located on federal lands. Although it is not possible at this time to predict the outcome of any restrictive proposals, any new restrictions on hydraulic fracturing that may be imposed in areas in which we conduct business could potentially result in increased compliance costs, delays or cessation in development or other restrictions on our operations. +Any of the above factors could have a material adverse effect on our financial position, results of operations, or cash flows and could make it more difficult, costly or impossible for us to perform hydraulic fracturing to stimulate production from future wells. Restrictions on hydraulic fracturing also could reduce the amount of oil and gas that we are ultimately able to produce from our reserves +Oil, gas, and NGL prices fluctuate due to a number of factors beyond our control, creating a component of uncertainty in our development plans and overall operations. Declines in prices adversely affect our financial results and rate of growth in proved reserves and production. +Oil, gas, and NGL markets are volatile. We cannot predict future prices. The prices we receive for our production heavily influence our revenue, profitability, access to capital, and future rate of growth. The prices we receive depend on numerous factors beyond our control. These factors include, but are not limited to, changes in domestic and global supply and demand for oil, gas, and NGLs, the level of domestic and global oil, gas, and NGL exploration and production activity, pipeline capacity constraints limiting takeaway and increasing basis differentials, geopolitical instability, the actions of the Organization of the Petroleum Exporting Countries (“OPEC”) and other cooperating countries, global or national health concerns including the outbreak of pandemic or contagious diseases such as COVID-19, weather conditions, technological advances affecting energy consumption, governmental regulations and taxes, changes in administrations and legislative control at federal and state levels, and the price and technological advancement of alternative fuels. Demand for oil, gas, and NGLs has severely diminished because of the COVID-19 pandemic, and the resulting restrictions on and closure of factories and businesses, significant travel restrictions and stay-at-home orders, causing lower commodity prices. Oil prices also can decrease if OPEC increases supply, as it did in the first quarter of 2020 at a time when global demand was decreasing. If any of these conditions persist, our financial results could be adversely affected by the reduction in production revenues, and our inability to collect amounts owed by purchasers of our production. +Our proved oil and gas reserves and production volumes will decrease unless we replace those reserves with new discoveries or acquisitions. Accordingly, for the foreseeable future, we expect to make capital investments for the exploration and development of new oil and gas reserves. Historically, we have paid for these types of capital expenditures with cash flow provided by our production operations, our revolving credit facility, and proceeds from the sale of senior notes or equity. Low commodity prices reduce our cash flow, and the amount of oil and gas that we can economically produce and may cause us to curtail, delay, or defer certain exploration and +22 +Table of Contents +development projects. Moreover, low commodity prices may impact our ability to raise additional debt or equity capital to fund acquisitions. +If commodity prices remain at current levels or decline further, we will be required to take additional write-downs of the carrying value of our oil and gas properties. +Accounting rules require that we periodically review the carrying value of our oil and gas properties for possible impairment. We recognized ceiling test impairments totaling $1.64 billion during the year ended December 31, 2020 and $618.7 million during the year ended December 31, 2019. The impairments resulted primarily from the impact of decreases in the trailing twelve-month average prices for oil, gas, and NGLs utilized in determining the estimated future net cash flows from proved reserves. If commodity pricing conditions stay at current levels or decline further, we may incur further ceiling test impairments in future quarters. Because the ceiling calculation uses trailing twelve-month average commodity prices, the effect of declining prices is a lower ceiling value each quarter. This results in ongoing impairments each quarter until prices stabilize or improve. Impairment charges do not affect cash flow from operating activities, but do adversely affect our net income and various components of our balance sheet. +Ineffective internal controls could impact our business and financial results. +Our internal control over financial reporting may not prevent or detect misstatements because of its inherent limitations, including the possibility of human error, the circumvention or overriding of controls, or fraud. Even effective internal controls can provide only reasonable assurance with respect to the preparation and fair presentation of financial statements. If we fail to maintain the adequacy of our internal controls, including any failure to implement required new or improved controls, or if we experience difficulties in their implementation, our business and financial results could be harmed, and we could fail to meet our financial reporting obligations. +U.S. or global financial markets may impact our business and financial condition. +A credit crisis or other turmoil in the U.S. or global financial system may have a negative impact on our business and our financial condition. Our ability to access the capital markets may be restricted at a time when we would like, or need, to raise financing. This could have an impact on our flexibility to react to changing economic and business conditions. Deteriorating economic conditions, including those resulting from the COVID-19 pandemic, could have a negative impact on our lenders, our hedging counterparties, the purchasers of our oil and gas production, and the working interest owners in properties we operate, causing them to fail to meet their obligations to us. +Failure to economically replace oil and gas reserves could negatively affect our financial results and future rate of growth; exploration and development involves numerous risks. +In order to replace the reserves depleted by production and to maintain or increase our total proved reserves and overall production levels, we must either locate and develop new oil and gas reserves or acquire proved reserves from others. This requires significant capital expenditures and can impose reinvestment risk for us, as we may not be able to continue to replace our reserves economically. While we occasionally may seek to acquire proved reserves, our main business strategy is to grow through exploration and drilling. Without successful exploration and development, our reserves, production, and revenues could decline rapidly, which would negatively impact the results of our operations. +Exploration and development involves numerous risks, including new governmental regulations and the risk that we will not discover any commercially productive oil or gas reservoirs. Additionally, it can be unprofitable, not only from drilling dry holes but also from drilling productive wells that do not return a profit because of insufficient reserves or declines in commodity prices. +23 +Table of Contents +Our drilling operations may be curtailed, delayed, or canceled for many reasons. Factors, in addition to those enumerated above, include unforeseen poor drilling conditions, title problems, unexpected pressure irregularities, equipment failures, accidents, adverse weather conditions, and the cost of, or shortages or delays in the availability of, drilling and completion services could negatively impact our drilling operations. +Our proved reserve estimates may be inaccurate and future net cash flows are uncertain. +Estimates of total proved oil and gas reserves (consisting of proved developed and proved undeveloped reserves) and associated future net cash flow depend on a number of variables and assumptions. Refer to CAUTIONARY INFORMATION ABOUT FORWARD-LOOKING STATEMENTS in Part I of this report. Among others, changes in any of the following factors may cause actual results to vary considerably from our estimates: +• oil, gas, and NGL prices; +• timing of development expenditures; +• amount of required capital expenditures and associated economics; +• recovery efficiencies, decline rates, drainage areas, and reservoir limits; +• anticipated reservoir and production characteristics and interpretations of geologic and geophysical data; +• production rates, reservoir pressure, unexpected water encroachment, and other subsurface conditions; +• governmental regulation; +• access to assets restricted by local government action; +• operating costs; +• property, severance, excise, and other taxes incidental to oil and gas operations; +• workover and remediation costs; and +• federal and state income taxes. +Our proved oil and gas reserve estimates are prepared by Cimarex engineers in accordance with guidelines established by the SEC. DeGolyer and MacNaughton, an independent petroleum engineering consulting firm, performed an independent evaluation of our estimated net reserves representing greater than 80% of the total future net revenue discounted at 10%, as of December 31, 2020. +The cash flow amounts referred to in this filing should not be construed as the current market value of our proved reserves. In accordance with SEC guidelines, the estimated discounted net cash flow from proved reserves is based on the average of the previous twelve months’ first-day-of-the-month prices and costs as of the date of the estimate, whereas actual future prices and costs may be materially different. +24 +Table of Contents +The inability to obtain rights-of-way from federal agencies may lead to our inability to transport our oil, gas, and NGLs from drilled wells for which we have spent drilling and completion capital and deprive us of revenues from sales of those products. +The inability for us or our third party gatherers to obtain rights-of-way to build gathering lines to move our produced oil, gas, and NGLs from our wells to markets could prevent us from receiving production revenues after expending capital on drilling and completing those wells. This is of particular concern on federal lands for the reasons noted above in, “ The adoption of climate change legislation or regulations restricting emission of greenhouse gases, investor pressure concerning climate-related disclosures, and lawsuits could result in increased operating costs and reduced demand for the oil and gas we produce as well as reductions in the availability of capital .” The Biden administration’s restrictions may lead to delays in obtaining approvals necessary for our operations and lead to losses. +We may be subject to information technology system failures, network disruptions, and breaches in data security and our business, financial position, results of operations, and cash flows could be negatively affected by such security threats and disruptions. +As an oil and gas producer, we face various cybersecurity threats. Cyberattacks are becoming more sophisticated and include, but are not limited to, malicious software, attempts to gain unauthorized access to data and systems, and other electronic security breaches that could lead to disruptions in critical systems, unauthorized release of confidential or otherwise protected information, and corruption of data, and “ransomware” attacks where data is locked unless a payment is made, any of which could have an adverse effect on our reputation, business, financial condition, results of operations, or cash flows. While we have not suffered any material losses relating to such attacks, there can be no assurance that we will not suffer such losses in the future. +We rely heavily on our information systems, and the availability and integrity of these systems are essential for us to conduct our business and operations. In addition to cyberattacks, other information system failures and network disruptions could have a material adverse effect on our ability to conduct our business. We could experience system failures due to power or telecommunications failures, human error, natural disasters, fire, sabotage, hardware or software malfunction or defects, computer viruses, intentional acts of vandalism or terrorism and similar acts or occurrences. Such system failures could result in the unanticipated disruption of our operations, communications, or processing of transactions, as well as loss of, or damage to, sensitive information, facilities, infrastructure and systems essential to our business and operations, the failure to meet regulatory standards and the reporting of our financial results, and other disruptions to our operations, which, in turn, could have a material adverse effect on our business, financial position, results of operations, and cash flows. +A cyberattack involving our information systems and related infrastructure, or those of our business associates, could disrupt our business and negatively impact our operations in a variety of ways, including but not limited to: +• unauthorized access to seismic data, reserves information, or other strategic or proprietary information could have a negative impact on our ability to compete for oil and gas resources; +• data corruption or operational disruption of production-related infrastructure could result in a loss of production, or an accidental discharge; +• a cyberattack on a vendor or service provider could result in supply chain disruptions, which could delay or halt our major development projects; +• a cyberattack on third-party gathering, pipeline, or rail transportation systems could delay or prevent us from transporting and marketing our production, resulting in a loss of revenues; and +• a cyberattack on our accounting or accounts payable systems could expose us to liability to employees and third parties if their personal identifying information is obtained. +25 +Table of Contents +These events could damage our reputation and lead to monetary losses, or a loss of business, which could have a material adverse effect on our financial condition, results of operations, or cash flows. +While management has taken steps to address these concerns by implementing network security and internal control measures to monitor and mitigate security threats and to increase security for our information, facilities, and infrastructure, our implementation of such procedures and controls may result in increased costs, and there can be no assurance that a system failure or data security breach will not occur and have a material adverse effect on our business, financial condition, and results of operations. In addition, as cybersecurity threats continue to evolve, we may be required to expend additional resources to continue to modify or enhance our protective measures or to investigate or remediate any cybersecurity or information technology infrastructure vulnerabilities. With large numbers of employees (industry-wide and at Cimarex) working remotely during the COVID-19 pandemic, there may be heightened vulnerability to cyberattacks. +Our business depends on oil and gas pipeline and transportation facilities, some of which are owned by others. +In addition to the existence of adequate markets, our oil and gas production depends in large part on the proximity and capacity of pipeline systems, as well as storage, processing, transportation, and fractionation facilities, most of which are owned by third parties. Oil, refined products, and gas storage reached historically high levels due to reduced demand from the COVID-19 pandemic, which places price pressure across all commodities. We do not anticipate the inability to transport our commodities; however, should that occur, our production could be curtailed, which would impact drilling plans. Curtailments of production could lead to payment being required where we fail to deliver oil, gas, and NGLs to meet minimum volume commitments. These availability and capacity issues are more likely to occur in remote areas with less established infrastructure, such as our Delaware Basin area where we have significant oil and gas production. Any of these availability or capacity issues, whether resulting from the COVID-19 pandemic, construction delays, government restrictions, such as occurred with the revocation of the permit for the Keystone XL Pipeline on the first day of the Biden administration, weather, fire, or other reasons, could negatively affect our operations and revenues. +Commodity price derivative transactions may limit our potential gains and involve other risks. +To limit our exposure to price risk, we enter into derivative agreements from time to time. Commodity price derivatives limit volatility and increase the predictability of a portion of our cash flow. These transactions also limit our potential gains when oil and gas prices exceed the prices established by the derivatives. +In certain circumstances, derivative transactions may expose us to the risk of financial loss, including instances in which: +• the counterparties to our derivative agreements fail to perform; +• there is a sudden unexpected event that materially increases oil and gas prices; or +• there is a widening of price basis differentials between delivery points for our production and the delivery point assumed in the derivative agreement. +Because we account for derivative contracts under mark-to-market accounting, during periods we have derivative transactions in place, we expect continued volatility in derivative gains and losses on our statement of operations as changes occur in the relevant price indexes. +26 +Table of Contents +Competition in our industry is intense and many of our competitors have greater financial and technological resources. +We operate in the competitive area of oil and gas exploration and production. Many of our competitors are large, well-established companies that have larger operating staffs and greater capital resources. These competitors may be willing to pay more for exploratory prospects and productive oil and gas properties. They may also be able to define, evaluate, bid for, and purchase a greater number of properties and prospects than our financial or human resources permit. +Because our activity is concentrated in areas of heavy industry competition, there is heightened demand for personnel, equipment, power, services, facilities, and resources, resulting in higher costs than in other areas. Such intense competition also could result in delays in securing, or the inability to secure, the personnel, equipment, power, services, resources, or facilities necessary for our development activities, which could negatively impact our production volumes. In remote areas vendors also can charge higher rates due to the inability to attract employees to those areas and the vendors’ ability to deploy their resources in easier-to-access areas. +Our business involves many operating risks that may result in substantial losses for which insurance may be unavailable or inadequate. +Our operations are subject to hazards and risks inherent in drilling for oil and gas, such as fires, natural disasters, explosions, formations with abnormal pressures, casing collapses, uncontrollable flows of underground gas, blowouts, surface cratering, pipeline ruptures, and cement failures. Other risks include theft, vandalism, and environmental hazards such as gas leaks, oil and produced water spills, and discharges of toxic gases. Any of these risks can cause substantial losses or costs resulting from: +• injury or loss of life; +• damage to, loss of, or destruction of, property and equipment; +• pollution and other environmental damages; +• regulatory investigations, civil litigation, and penalties; +• damage to our reputation; and +• suspension of our operations. +In addition, our liability for environmental hazards may include conditions created by the previous owners of properties that we purchase or lease. +We maintain insurance coverage against some, but not all, potential losses. We do not believe that insurance coverage for all losses or damages that could occur is available at a reasonable cost. Losses could occur for uninsurable or uninsured risks, or in amounts in excess of our existing insurance coverage. The occurrence of an event that is not fully covered by our insurance could harm our financial condition and results of operations. The cost of insurance may increase, and the availability of insurance may decrease, as a result of climate change or other factors. +We may not be able to generate enough cash flow to meet our debt obligations. +As of December 31, 2020, our long-term debt consisted of $750 million of 4.375% senior notes due in 2024, $750 million of 3.90% senior notes due in 2027, and $500 million of 4.375% senior notes due in 2029. In addition to interest expense and principal on our long-term debt, we have demands on our cash resources including, among others, capital expenditures, operating expenses, and contractual commitments. +27 +Table of Contents +Our ability to pay the principal and interest on our long-term debt and to satisfy our other liabilities will depend upon future performance and our ability to repay or refinance our debt as it becomes due. Our future operating performance and ability to refinance will be affected by economic and capital market conditions, results of operations, and other factors, many of which are beyond our control. The current COVID-19 pandemic initially resulted in limited availability of public debt markets. Our ability to meet our debt service obligations also may be impacted by changes in prevailing interest rates, as borrowing under our existing revolving credit facility bears interest at floating rates. +We may not generate sufficient cash flow from operations. Without sufficient cash flow, there may not be adequate future sources of capital to enable us to service our indebtedness or to fund our other liquidity needs. Our cash flow has been impacted by the reduced commodity prices and lower production resulting from diminished demand caused by the COVID-19 pandemic. If we are unable to service our indebtedness and fund our operating costs, we will be forced to adopt alternative strategies that may include: +• reducing or delaying capital expenditures; +• seeking additional debt financing or equity capital; +• selling assets; or +• restructuring or refinancing debt. +We may be unable to complete any such strategies on satisfactory terms, if at all. Our inability to generate sufficient cash flows to satisfy our debt obligations or contractual commitments, or to refinance our indebtedness on commercially reasonable terms, would materially and adversely affect our financial condition and results of operations. +The instruments governing our indebtedness contain various covenants limiting the discretion of our management in operating our business. +The indenture governing our senior notes and our credit agreement contain various restrictive covenants that may limit management’s discretion in certain respects. In particular, these agreements may limit our ability to, among other things: +• create certain liens; or +• consolidate, merge, or transfer all, or substantially all, of our assets and our restricted subsidiaries. +In addition, our revolving credit agreement requires us to maintain a total debt-to-capitalization ratio (as defined in the credit agreement) of not more than 65%. While we were in compliance with this covenant at December 31, 2020, net losses in the future driven by ceiling test impairments could cause us to exceed this ratio. +If we fail to comply with the restrictions in the indenture governing our senior notes or the agreement governing our credit facility or any other subsequent financing agreements, a default may allow the creditors, if the agreements so provide, to accelerate the related indebtedness as well as any other indebtedness to which a cross-acceleration or cross-default provision applies. In addition, lenders may be able to terminate any commitments they had made to make available further funds. +28 +Table of Contents +Certain federal income tax deductions currently available with respect to oil and gas exploration and development may be limited or eliminated as a result of future legislation. +On December 22, 2017, the United States enacted H.R.1, commonly referred to as the Tax Cuts and Jobs Act or U.S. Tax Reform. H.R.1, among other things, includes changes to U.S. federal tax rates, imposes new limitations on the utilization of net operating losses and the deductibility of interest and executive compensation, allows for the expensing of capital expenditures, and eliminates the corporate Alternative Minimum Tax. In addition, various proposals have been made recommending the elimination of certain key U.S. federal income tax incentives currently available to oil and gas exploration and production companies. While the tax law changes approved in December 2017 did not eliminate any of these incentives, new legislation may be introduced in Congress which would implement many of these proposals. These changes include, but are not limited to: (i) the repeal of the percentage depletion allowance for oil and gas properties; (ii) the elimination of current deductions for intangible drilling and development costs; and (iii) an extension of the amortization period for certain geological and geophysical expenditures. It is unclear, however, whether any such changes will be enacted or how soon such changes could be effective. +The passage of this legislation or any other similar change in U.S. federal income tax law could eliminate or postpone certain tax deductions that are currently available with respect to oil and gas exploration and development, and any such change could have an adverse effect on our financial position, results of operations, and cash flows, including the payment of cash taxes earlier than expected. +We are involved in various legal proceedings, the outcome of which could have an adverse effect on our liquidity. +In the normal course of business, we are involved with various lawsuits and related disputed claims, including but not limited to claims concerning title, validity of leases, royalty payments, environmental issues, personal injuries, labor issues, and contractual issues. Although we currently believe the resolution of these lawsuits and claims, individually or in the aggregate, would not have a material adverse effect on our financial condition or results of operations, our assessment of our current litigation and other legal proceedings could change with the discovery of facts not presently known to us or as a result of determinations by judges, juries, or other finders of fact that are not in accord with our evaluation of the possible liability or outcome of such proceedings. Therefore, there can be no assurance that outcomes of future legal proceedings would not have an adverse effect on our liquidity and capital resources. +We are subject to complex laws and regulations that can adversely affect the cost, manner, and feasibility of doing business. +As an owner, lessee, or operator of oil and gas properties, we are subject to various complex, stringent, and constantly evolving environmental laws and regulations. Our operations inherently create the risk of environmental liability to the government and private parties stemming from our use, generation, handling, and disposal of water and waste materials, as well as the release of hydrocarbons or other substances into the air, soil, or water. The environmental laws and regulations to which we are subject impose numerous obligations applicable to our operations, including: the acquisition of permits before conducting regulated activities associated with drilling for and producing oil and gas; the restriction of types, quantities, and concentration of materials that can be released into the environment; the limitation or prohibition of drilling activities on certain lands lying within wilderness, wetlands, waters of the United States, and other protected areas; the application of specific health and safety criteria addressing worker protection; and the imposition of substantial liabilities for pollution resulting from our operations. Numerous governmental authorities, such as the EPA and analogous state agencies have the power to enforce compliance with these laws and regulations and the permits issued under them. Such enforcement actions often involve taking difficult and costly compliance measures or corrective actions. Failure to comply with these laws and regulations may result in the assessment of sanctions, including administrative, civil, or criminal penalties, the imposition of investigatory or remedial obligations, and the issuance of orders limiting or prohibiting some or all of our operations. In addition, we may experience delays in obtaining, or be unable to obtain, required permits (for the reasons described elsewhere in these Risk Factors), which may delay or interrupt our operations and limit our growth and revenue. These permits and other regulatory approvals also may be negatively impacted by COVID-19 +29 +Table of Contents +restrictions on regulatory employees responsible for regulatory approvals. +Liabilities under certain environmental laws can be joint and several and may in some cases be imposed regardless of fault on our part such as where we own a working interest in a property operated by another party. We also could be held liable for damages or remediating lands or facilities previously owned or operated by others regardless of whether such contamination resulted from our own actions and regardless if we were in compliance with all applicable law at the time. Further, claims for damages to persons or property, including natural resources, may result from the environmental, health, and safety impacts of our operations. Because these environmental risks generally are not fully insurable and can result in substantial costs, such liabilities could have a material adverse effect on both our financial condition and operations. +Our financial condition and results of operations may be materially adversely affected if we incur costs and liabilities due to a failure to comply with environmental regulations or a release of hazardous substances into the environment. +Our operations are subject to environmental laws and regulations relating to the management and release of hazardous substances, pollutants, solid and hazardous wastes, and petroleum hydrocarbons. These laws generally regulate the generation, storage, treatment, discharge, transportation, and disposal of pollutants and solid and hazardous waste and may impose strict and, in some cases, joint and several liability for the investigation and remediation of affected areas where hazardous substances may have been released or disposed. The most significant of these environmental laws are as follows: +• The Comprehensive Environmental Response, Compensation, and Liability Act, as amended, referred to as “CERCLA” or the “Superfund law,” and comparable state laws, which imposes liability on generators, transporters, and arrangers of hazardous substances at sites where hazardous substance releases have occurred or are threatening to occur; +• The Oil Pollution Act of 1990 (“OPA”), under which owners and operators of onshore facilities and pipelines, lessees or permittees of an area in which an offshore facility is located, and owners and operators of vessels are liable for removal costs and damages that result from a discharge of oil into navigable waters of the United States; +• The Resource Conservation and Recovery Act (“RCRA”), as amended, and comparable state statutes, which governs the treatment, storage, and disposal of solid waste; +• The Federal Water Pollution Control Act, as amended, also known as the Clean Water Act (“CWA”), which governs the discharge of pollutants, including natural gas wastes, into federal and state waters; +• The Safe Drinking Water Act (“SDWA”), which governs the disposal of wastewater in underground injection wells; and +• The Clean Air Act (“CAA”) which governs the emission of pollutants into the air. +We believe we are in substantial compliance with the above requirements and related state and local laws and regulations. We also believe we hold all necessary and up-to-date permits, registrations, and other authorizations required under such laws and regulations. Although the current costs of managing our wastes as they presently are classified are reflected in our budget, any legislative or regulatory reclassification of oil and gas exploration and production wastes could increase our costs to manage and dispose of such wastes and have a material adverse effect on our financial condition and operations. +30 +Table of Contents +Federal regulatory initiatives relating to the protection of threatened or endangered species could result in increased costs and additional operating restrictions or delays. +The Federal Endangered Species Act (“ESA”) was established to protect endangered and threatened species. Pursuant to the ESA, if a species is listed as threatened or endangered, restrictions may be imposed on activities adversely affecting that species’ habitat. The U.S. Fish and Wildlife Service (“FWS”) may designate critical habitat and suitable habitat areas it believes are necessary for survival of a threatened or endangered species. A critical habitat or suitable habitat designation could result in further material restrictions to federal land use and may materially delay or prohibit land access for oil and gas development. Similar protections are offered to migratory birds under the Migratory Bird Treaty Act. We conduct operations on federal oil and gas leases in areas where certain species are currently listed as threatened or endangered, or could be listed as such, under the ESA. Operations in areas where threatened or endangered species or their habitat are known to exist may require us to incur increased costs to implement mitigation or protective measures and also may restrict or preclude our drilling activities in those areas or during certain seasons, such as breeding and nesting seasons. +On March 27, 2014, the FWS announced the listing of the lesser prairie chicken, whose habitat is over a five-state region, including Texas, New Mexico, and Oklahoma, where we conduct operations, as a threatened species under the ESA. Listing of the lesser prairie chicken as a threatened species imposes restrictions on disturbances to critical habitat by landowners and drilling companies that would harass, harm, or otherwise result in a “taking” of this species. However, the FWS also announced a final rule that will limit regulatory impacts on landowners and businesses from the listing if those landowners and businesses have entered into certain range-wide conservation planning agreements, such as those developed by the Western Association of Fish and Wildlife Agencies (“WAFWA”), pursuant to which such parties agreed to take steps to protect the lesser prairie chicken’s habitat and to pay a mitigation fee if its actions harm the lesser prairie chicken’s habitat. We entered into a voluntary Candidate Conservation Agreement (“CCA”) with the WAFWA, whereby we agreed to take certain actions and limit certain activities, such as limiting drilling on certain portions of our acreage during nesting seasons, in an effort to protect the lesser prairie chicken. +On February 9, 2018, the FWS announced the listing of the Texas Hornshell, a freshwater mussel species in areas including New Mexico and Texas where we operate in the Permian Basin, as an endangered species. In March 2018, we entered into a CCA concerning voluntary conservation actions with respect to the Texas Hornshell. +Participating in CCAs could result in increased costs to us from species protection measures, time delays or limitations on drilling activities, which costs, delays, or limitations may be significant. Listing petitions continue to be filed with the FWS which could impact our operations. Many non-governmental organizations (“NGOs”) work closely with the FWS regarding the listing of many species, including species with broad and even nationwide ranges. The listing of the Mexican Long Nosed bat, whose habitat includes the Permian Basin where we operate, and the Dunes Sagebrush Lizard in the Permian Basin, are examples of the NGOs’ influence on ESA listing decisions. +On December 1 2020, the FWS announced the petitioning of the Peppered Chub to be listed as endangered or threatened under the ESA. The Peppered Chub is a freshwater fish that historically was found in the South Canadian, Cimarron, and Arkansas rivers within New Mexico, Texas, Oklahoma, and Kansas. Cimarex has operations near the South Canadian river in Oklahoma that could be impacted if the Peppered Chub is either listed as threatened or endangered under the ESA or if the FWS declares the basins of the South Canadian river to be critical habitat. The increase in endangered species listings, such as the Peppered Chub, may limit our ability to explore for or produce oil and gas in certain areas and increase our costs. +31 +Table of Contents +We have been an early entrant into new or emerging resource plays. As a result, our drilling results in these areas are uncertain. The value of our undeveloped acreage may decline and we may incur impairment charges if drilling results are unsuccessful. +New or emerging oil and gas resource plays have limited or no production history. Consequently, in those new areas it is difficult to predict our future drilling costs and results, so our drilling, completing, and operating costs may be higher than initially expected and our production may be lower than initially expected. The value of our undeveloped acreage also may decline if our results are unsuccessful, and, as a result, we may have to impair the carrying value of our undeveloped acreage. +Many of our properties are in areas that may have been partially depleted or drained by offset wells and certain of our wells may be adversely affected by actions other operators may take when drilling, completing, or operating wells that they own. +Many of our properties are in areas that may have been partially depleted or drained by earlier offset drilling. We have no control over offsetting operators, who could take actions, such as drilling and completing additional wells, which could adversely affect our operations. When a new well is completed and produced, the pressure differential in the vicinity of the wellbore causes the migration of reservoir fluids toward the new wellbore (and potentially away from existing wellbores), which could cause a depletion of our proved reserves and may inhibit our ability to further develop our proved reserves. The possibility for these impacts may increase with respect to wells that we shut in as a response to lower commodity prices or the lack of pipeline and storage capacity such as occurred during the COVID-19 pandemic. In addition, completion operations and other activities conducted on other nearby wells could cause us, in order to protect our existing wells, to shut in production for indefinite periods of time. Shutting in our wells and damage to our wells from offset completions could result in increased costs and could adversely affect the reserves and re-commenced production from such shut in wells. +Our limited ability to influence operations and associated costs on non-operated properties could result in economic losses that are partially beyond our control. +For the year ended December 31, 2020, other companies operated approximately 12% of our net production. Our success in properties operated by others depends upon a number of factors outside of our control. These factors include timing and amount of capital expenditures, the operator’s expertise and financial resources, approval of other participants in drilling wells, selection of technology, and maintenance of safety and environmental standards. Our dependence on the operator and other working interest owners for these projects could prevent the realization of our targeted returns on capital in drilling or acquisition activities. +Our acquisition activities may not be successful, which may hinder our replacement of reserves and adversely affect our results of operations. +The successful acquisition of properties requires an assessment of several factors, including: +• geological risks and recoverable reserves; +• future oil and gas prices and their appropriate market differentials; +• operating costs; and +• potential environmental risks and other liabilities. +The accuracy of these assessments is inherently uncertain. In connection with these assessments, we perform a review of the subject properties we believe to be generally consistent with industry practices. Our review will not reveal all existing or potential problems nor will it permit us to become sufficiently familiar with the properties to fully assess their deficiencies and capabilities. Inspections will not likely be performed on every well or facility, and structural and environmental problems are not necessarily observable even when an inspection is +32 +Table of Contents +undertaken. Furthermore, the seller may be unwilling or unable, such as in a corporate acquisition like our acquisition of Resolute, to provide effective contractual protection against all or part of the identified problems. +On March 1, 2019, we completed the acquisition of Resolute. There can be no assurance that we will be able to successfully develop Resolute’s assets or otherwise realize the expected benefits of the acquisition of Resolute. In addition, our business may be negatively impacted if Resolute has liabilities that were not disclosed. +We may lose leases if production is not established within the time periods specified in the leases or if we do not maintain production in paying quantities. +We could lose leases under certain circumstances if we do not maintain production in paying quantities or meet other lease requirements, and the amounts we spent for those leases could be lost. As we shut in wells in response to lower commodity prices or a lack of pipeline and storage capacity as a result of the COVID-19 pandemic, we may face claims that we are not complying with lease provisions. As noted above, the Biden administration also may impose new restrictions and regulations affecting our ability to drill, conduct hydraulic fracturing operations, and obtain necessary rights-of-way on federal lands, which could, in turn, result in the loss of federal leases. The combined net acreage expiring in the next three years represents approximately 3.1% of our total net undeveloped acreage at December 31, 2020. At that date, we had leases representing 132,051 net acres expiring in 2021, 35,516 net acres expiring in 2022, and 7,154 net acres expiring in 2023. Our actual drilling activities may materially differ from those presently identified, which could adversely affect our business. +Our disposition activities may be subject to factors beyond our control, and in certain cases we may retain unforeseen liabilities for certain matters . +We regularly sell non-strategic assets in order to increase capital resources available for other strategic assets and to create organizational and operational efficiencies. We also occasionally sell interests in strategic assets for the purpose of accelerating the development of and increasing efficiencies in such strategic assets. Various factors could materially affect our ability to dispose of such assets, including the approvals of governmental agencies or third parties, and the availability of purchasers willing to acquire the assets with terms we deem acceptable. +Sellers at times retain certain liabilities or agree to indemnify buyers for certain matters related to the sold assets. The magnitude of any such retained liability or indemnification obligation is difficult to quantify at the time of the transaction and ultimately could be material. Also, as is typical in divestiture transactions, third parties may be unwilling to release us from guarantees or other credit support provided prior to the sale of the divested assets. As a result, after a divestiture, we may remain secondarily liable for the obligations guaranteed or supported to the extent that the buyer of the assets fails to perform these obligations. In addition, with respect to offshore assets, if purchasers declare bankruptcy, the United States Department of Interior may pursue former owners for decommissioning expenses, which can be substantial. See Note 8 to the Consolidated Financial Statements for further discussion regarding our asset retirement obligations. +Competition for experienced technical personnel may negatively impact our operations. +Our exploratory and development drilling success depends, in part, on our ability to attract and retain experienced professional personnel. The loss of any key executives or other key personnel could have a material adverse effect on our operations. As we continue to develop our asset base and the scope of our operations, our future profitability will depend on our ability to attract and retain qualified personnel, particularly individuals with a strong background in geology, geophysics, engineering, and operations. +33 +Table of Contents +ITEM 1B. UNRESOLVED STAFF COMMENTS +None. +ITEM 3. LEGAL PROCEEDINGS +The information set forth under the heading “Litigation” in Note 10 to the Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K, is incorporated by reference in response to this item. +ITEM 4. MINE SAFETY DISCLOSURES +Not applicable. +34 +Table of Contents +PART II +ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES +Our $0.01 par value common stock trades on the New York Stock Exchange (“NYSE”) under the symbol XEC. A cash dividend was paid to our common stockholders in each quarter of 2020. Future dividend payments will depend on the company’s level of earnings, financial requirements, and other factors considered relevant by the Board of Directors. +The closing price of Cimarex stock as reported on the NYSE on January 29, 2021, was $42.18. At January 31, 2021, Cimarex’s 102,807,656 shares of outstanding common stock were held by approximately 1,174 stockholders of record. +Issuer Purchases of Equity Securities +The following table sets forth information regarding repurchases of our common stock during the year ended December 31, 2020. The shares repurchased represent shares of our common stock that employees elected to surrender to satisfy their tax withholding obligations upon the vesting of shares of restricted stock. Cimarex does not consider this a share buyback program. +Period Total number of shares purchased Average price paid per share Total number of shares purchased as part of publicly announced plans or programs Maximum number of shares that may yet be purchased under the plans or programs +January 1-31, 2020 — $ — — — +February 1-29, 2020 — — — — +March 1-31, 2020 12,199 13.56 — — +April 1-30, 2020 1,160 20.53 — — +May 1-31, 2020 — — — — +June 1-30, 2020 — — — — +July 1-31, 2020 94,245 24.57 — — +August 1-31, 2020 — — — — +September 1-30, 2020 — — — — +October 1-31, 2020 — — — — +November 1-30, 2020 1,468 31.25 — — +December 1-31, 2020 52,620 36.21 — — +Total 161,692 $ 26.73 — — +35 +Table of Contents +Stock Performance Graph +The following graph shows the cumulative five-year total return on Cimarex Energy Co.’s common stock relative to the cumulative total returns of the S&P 500 index, the Dow Jones US Exploration & Production index, and the S&P Oil & Gas Exploration & Production index. The graph tracks the performance of a $100 investment in our common stock and in each of the indexes (with the reinvestment of all dividends) from December 31, 2015 to December 31, 2020. The stock price performance included in this graph is not necessarily indicative of future stock price performance. +COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN* +Among Cimarex Energy Co., the S&P 500 Index, +the Dow Jones US Exploration & Production Index, and the S&P Oil & Gas Exploration & Production Index +* $100 invested on 12/31/15 in stock or index, including reinvestment of dividends. Fiscal year ending December 31. +A tabular presentation of the data in the above graph is provided below. +2015 2016 2017 2018 2019 2020 +Cimarex Energy Co. $ 100.00 $ 152.64 $ 137.42 $ 69.88 $ 60.39 $ 44.43 +S&P 500 $ 100.00 $ 111.96 $ 136.40 $ 130.42 $ 171.49 $ 203.04 +Dow Jones US Exploration & Production $ 100.00 $ 124.48 $ 126.10 $ 103.69 $ 115.51 $ 76.64 +S&P Oil & Gas Exploration & Production $ 100.00 $ 132.86 $ 124.48 $ 100.20 $ 112.25 $ 72.49 +36 +Table of Contents +ITEM 6. SELECTED FINANCIAL DATA +The selected financial data set forth below should be read in conjunction with the Consolidated Financial Statements and accompanying notes thereto provided in Item 8 of this report. +Years Ended December 31, +2020 2019 2018 2017 2016 +(in thousands, except per share amounts) +Operating results: +Oil, gas, and NGL sales $ 1,512,688 $ 2,321,921 $ 2,297,645 $ 1,874,003 $ 1,221,218 +Total revenues (1) $ 1,558,595 $ 2,362,969 $ 2,339,017 $ 1,918,249 $ 1,257,345 +Net (loss) income (2) $ (1,967,458) $ (124,619) $ 791,851 $ 494,329 $ (408,803) +Earnings (loss) per common share: +Basic $ (19.73) $ (1.33) $ 8.32 $ 5.19 $ (4.38) +Diluted $ (19.73) $ (1.33) $ 8.32 $ 5.19 $ (4.38) +Cash dividends declared per common share $ 0.88 $ 0.80 $ 0.68 $ 0.32 $ 0.32 +Cash flow data: +Net cash provided by operating activities $ 904,167 $ 1,343,966 $ 1,550,994 $ 1,096,564 $ 625,849 +Net cash used by investing activities $ (578,875) $ (1,577,882) $ (1,085,618) $ (1,265,897) $ (692,410) +Net cash used by financing activities $ (146,869) $ (472,028) $ (65,244) $ (83,009) $ (59,945) +December 31, +2020 2019 2018 2017 2016 +(in thousands, except proved reserves amounts) +Balance sheet data: +Cash and cash equivalents (3) $ 273,145 $ 94,722 $ 800,666 $ 400,534 $ 652,876 +Oil and gas properties, net (2) (3) $ 3,436,669 $ 5,210,698 $ 3,715,330 $ 3,241,530 $ 2,354,267 +Goodwill (3) $ — $ 716,865 $ 620,232 $ 620,232 $ 620,232 +Total assets (2) (3) $ 4,621,989 $ 7,140,029 $ 6,062,084 $ 5,042,639 $ 4,237,724 +Deferred income tax (asset) liability $ (20,472) $ 338,424 $ 334,473 $ 101,618 $ (55,835) +Long-term obligations: +Long-term debt (principal) (4) $ 2,000,000 $ 2,000,000 $ 1,500,000 $ 1,500,000 $ 1,500,000 +Operating and finance leases (5) $ 154,436 $ 202,921 $ — $ — $ — +Other $ 229,794 $ 197,056 $ 200,564 $ 206,249 $ 184,444 +Redeemable preferred stock (3) $ 36,781 $ 81,620 $ — $ — $ — +Stockholders’ equity (2) $ 1,553,454 $ 3,576,141 $ 3,329,786 $ 2,568,278 $ 2,042,989 +Proved Reserves: +Oil (MBbls) 144,063 169,770 146,538 137,238 105,878 +Gas (Bcf) 1,363 1,532 1,591 1,608 1,471 +NGL (MBbls) 159,818 194,468 179,436 153,860 130,633 +Total (MBOE) 531,021 619,595 591,195 559,037 481,748 +37 +Table of Contents +________________________________________ +(1) Effective January 1, 2018, we adopted the provisions of Accounting Standards Codification 606, Revenue from Contracts with Customers (“ASC 606”), utilizing the modified retrospective approach. Because we utilized the modified retrospective approach, there was no impact to prior periods’ reported amounts. Application of ASC 606 has no impact on our net income or cash flows from operations; however, certain costs classified as Transportation, processing, and other operating in the Consolidated Statements of Operations and Comprehensive Income (Loss) under prior accounting standards are now reflected as deductions from revenue. +(2) During 2020, 2019, and 2016, we recorded non-cash full cost ceiling test impairments of our oil and gas properties totaling $1.64 billion, $618.7 million, and $757.7 million, respectively. +(3) We acquired Resolute Energy Corporation on March 1, 2019. Consideration for this acquisition included $284.4 million in cash, net of cash acquired, and $81.6 million in preferred stock. The final purchase price allocation included $1.72 billion to oil and gas properties and $94.2 million to goodwill. We concluded that goodwill was fully impaired at March 31, 2020 and recorded a $714.4 million impairment at that time. During 2020, we repurchased some of the preferred stock. See Notes 1, 2, and 13 to the Consolidated Financial Statements for further information regarding goodwill, the preferred stock, and the acquisition. +(4) On March 8, 2019, we issued $500.0 million aggregate principal amount of 4.375% senior unsecured notes due March 15, 2029 at 99.862% of par to yield 4.392% per annum. See Note 3 to the Consolidated Financial Statements for further information regarding our debt. +(5) Effective January 1, 2019, we began accounting for leases in accordance with Accounting Standards Update 2016-02, Leases (“Topic 842”), which requires lessees to recognize lease liabilities and right-of-use assets on the balance sheet for contracts that provide lessees with the right to control the use of identified assets for periods of greater than 12 months. Prior to January 1, 2019, we accounted for leases in accordance with ASC Topic 840, Leases , under which operating leases were not recorded on the balance sheet. See Note 10 to the Consolidated Financial Statements for further information regarding our leases and their financial statement impacts. +ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS +The following discussion and analysis should be read in conjunction with our Consolidated Financial Statements included in Item 8 of this report and also with RISK FACTORS in Item 1A of this report. This discussion also includes forward-looking statements. Refer to CAUTIONARY INFORMATION ABOUT FORWARD-LOOKING STATEMENTS in Part I of this report for important information about these types of statements. Discussion and analysis regarding 2020 and 2019 is provided below. For discussion and analysis regarding 2018, see Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2019 as previously filed with the SEC. +OVERVIEW +Cimarex is an independent oil and gas exploration and production company. Our operations are located entirely within the United States of America, mainly in Texas, New Mexico, and Oklahoma. Currently our operations are focused in two main areas: the Permian Basin and the Mid-Continent. Our Permian Basin region encompasses west Texas and southeast New Mexico. Our Mid-Continent region consists of Oklahoma and the Texas Panhandle. +Our principal business objective is to increase shareholder value through the profitable growth of our proved reserves and production while seeking to minimize our impact on the communities in which we operate for the long-term. Our strategy centers on maximizing cash flow from producing properties for reinvestment in exploration and development activities and for providing cash returns to shareholders through dividends and debt reduction. We consider merger and acquisition opportunities that enhance our competitive position and we occasionally divest non-strategic assets. +38 +Table of Contents +On March 1, 2019, we completed the acquisition of Resolute Energy Corporation (“Resolute”), an independent oil and gas company focused on the acquisition and development of unconventional oil and gas properties in the Delaware Basin area of the Permian Basin of west Texas. See Note 13 to the Consolidated Financial Statements for more information on the acquisition. +We believe that detailed technical analysis, operational focus, and a disciplined capital investment process mitigate risk and position us to continue to achieve profitable increases in proved reserves and production. Our drilling inventory and limited long-term commitments provide the flexibility to respond quickly to industry volatility. Our investments are generally funded with cash flow provided by operating activities together with cash on hand, bank borrowings, sales of non-strategic assets, and, from time to time, public financing based on our monitoring of capital markets and our balance sheet. +In the first quarter of 2020, the highly transmissible and pathogenic coronavirus known as severe acute respiratory syndrome coronavirus 2 (SARS-CoV-2) that causes the disease known as COVID-19 began to spread globally. In February 2020, we created a multi-disciplinary task force to address the potential impacts of COVID-19 on our employees and operations. The task force developed health and safety protocols to protect employees and augmented our business interruption plans to address potential impacts on our business from COVID-19. +Market Conditions +The oil and gas industry is cyclical and commodity prices can fluctuate significantly. We expect this volatility to persist. Commodity prices are affected by many factors outside of our control, including changes in market supply and demand, inventory storage levels, weather conditions, and other factors. Local market prices for oil and gas can be impacted by pipeline capacity constraints limiting takeaway and increasing basis differentials. +The reduction in economic activity from the COVID-19 pandemic resulted in unprecedented demand destruction and inventory increases for oil and natural gas liquids. In addition, in early March 2020, members of the Organization of the Petroleum Exporting Countries (“OPEC”) and other countries failed to reach an agreement on oil production limits and Saudi Arabia unilaterally reduced the sales price of its oil and announced that it would increase its oil production. As a result of these actions and the COVID-19 pandemic, WTI oil prices dropped from an average of $57.53 per barrel in January 2020 to $16.70 per barrel in April 2020. Since April 2020, average WTI oil prices have risen to $47.07 per barrel in December 2020. The oil price improvement and or stabilization has coincided with some recovery of global economic activity, lower supply from major oil producing countries, and moderating inventory levels. +In response to the decline in oil prices in the second quarter 2020, we took immediate steps to reduce our capital investment, including releasing all but one drilling rig by mid-May and deferring well completion activity. This resulted in a reduction in exploration, development, and acquisition capital expenditures from $255.9 million in the first quarter of 2020 to $83.8 million in the second quarter of 2020, $80.5 million in the third quarter of 2020, and $136.5 million in the fourth quarter of 2020. As a result, total exploration, development, and acquisition capital expenditures for 2020 were $556.7 million. This level of capital expenditures was less than our cash flow from operating activities, which has allowed us to build our cash balance and not incur any incremental borrowings this year. With the subsequent improvement in oil prices, we exited 2020 running five drilling rigs and completing wells with one completion crew. +39 +Table of Contents +The table below presents average NYMEX prices and our company-wide average realized prices and basis differentials for 2020 and 2019. The average NYMEX and realized prices have declined for all products, while the average basis differentials have improved. +Years Ended December 31, Variance Between +2020 / 2019 +2020 2019 +Average NYMEX price +Oil — per barrel $ 39.40 $ 57.03 (31)% +Gas — per Mcf $ 2.08 $ 2.63 (21)% +Average realized price +Oil — per barrel $ 35.59 $ 52.77 (33)% +Gas — per Mcf $ 1.05 $ 1.11 (5)% +NGL — per barrel $ 10.53 $ 13.55 (22)% +Average price differential +Oil — per barrel $ (3.81) $ (4.26) 11% +Gas — per Mcf $ (1.03) $ (1.52) 32% +The average price differentials that we realized in our two primary areas of operation are shown in the table below for the periods indicated. +Average Price Differentials +Year Fourth +Quarter Third +Quarter Second +Quarter First +Quarter +2020 +Oil +Permian Basin +$ (3.74) $ (2.79) $ (2.71) $ (8.12) $ (2.00) +Mid-Continent +$ (4.43) $ (0.99) $ (5.06) $ (9.53) $ (2.02) +Total Company +$ (3.81) $ (2.57) $ (2.99) $ (8.28) $ (1.99) +Gas +Permian Basin +$ (1.39) $ (1.34) $ (1.15) $ (1.09) $ (1.85) +Mid-Continent +$ (0.41) $ (0.36) $ (0.31) $ (0.31) $ (0.57) +Total Company +$ (1.03) $ (0.98) $ (0.84) $ (0.80) $ (1.40) +2019 +Oil +Permian Basin +$ (4.48) $ (2.18) $ (3.76) $ (5.80) $ (6.90) +Mid-Continent +$ (3.14) $ (2.05) $ (3.72) $ (4.39) $ (2.17) +Total Company +$ (4.26) $ (2.16) $ (3.74) $ (5.58) $ (6.03) +Gas +Permian Basin +$ (2.14) $ (1.67) $ (1.83) $ (3.10) $ (1.91) +Mid-Continent +$ (0.68) $ (0.74) $ (0.66) $ (0.86) $ (0.46) +Total Company +$ (1.52) $ (1.31) $ (1.35) $ (2.14) $ (1.24) +40 +Table of Contents +Pipeline expansion projects in the Permian Basin and reduced drilling activity and production have eased take away constraints and improved price differentials. However, if pipeline projects are delayed, production increases faster than capacity increases, or the basin experiences pipeline disruptions or other constraints, differentials could potentially worsen. Our revenue, profitability, and future growth are highly dependent on the prices we receive for our oil and gas production and can be adversely affected by realized price decreases. +Summary of Operating and Financial Results for the year ended December 31, 2020 as compared to the year ended December 31, 2019 +• Total daily production volumes decreased 9% to 252.5 MBOE per day. +• Oil volumes decreased 11% to 76.7 MBbls per day. +• Gas volumes decreased 8% to 635.6 MMcf per day. +• NGL volumes decreased 10% to 69.8 MBbls per day. +• Total production revenue decreased 35% to $1.51 billion. +• Year-end proved reserves decreased 14% to 531.0 MMBOE, as compared to 619.6 MMBOE at year-end 2019. +• Exploration and development capital investments were $544.9 million, as compared to $1.24 billion in 2019. +• Cash flow provided by operating activities decreased 33% to $904.2 million. +• Net loss of $1.97 billion ($19.73 per diluted share) as compared to a net loss of $124.6 million ($1.33 per diluted share) in 2019. +All of the above results were impacted by the demand destruction and lower prices in 2020 that occurred primarily due to the COVID-19 pandemic. Further discussion of these results is provided below. +41 +Table of Contents +Proved Reserves +Our proved reserves by region at December 31, 2020 and 2019 were as follows: +December 31, 2020 +Gas +(MMcf) Oil +(MBbls) NGL +(MBbls) Total +(MBOE) +Permian Basin 790,750 126,327 103,606 361,725 +Mid-Continent 570,578 17,491 56,130 168,717 +Other 1,514 245 82 579 +1,362,842 144,063 159,818 531,021 +December 31, 2019 +Gas +(MMcf) Oil +(MBbls) NGL +(MBbls) Total +(MBOE) +Permian Basin 870,208 147,662 130,007 422,703 +Mid-Continent 660,161 21,848 64,377 196,252 +Other 1,776 260 84 640 +1,532,145 169,770 194,468 619,595 +Year-end 2020 proved reserves decreased approximately 14% to 531.0 MMBOE, compared to 619.6 MMBOE at year-end 2019. At December 31, 2020, proved gas reserves were 1.36 Tcf, proved oil reserves were 144.1 MMBbls, and proved NGL reserves were 159.8 MMBbls. Reserves in the Permian Basin accounted for 68% of our total proved reserves with nearly all of the remainder in our Mid-Continent region. See SUPPLEMENTAL INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED) in Item 8 for a more detailed discussion regarding year-over-year changes in our proved reserves. +The process of estimating quantities of oil, gas, and NGL reserves is complex. Judgment and interpretation are required in the evaluation of all available geological, geophysical, engineering, and economic data. Although every reasonable effort is made to ensure that our reserve estimates represent the most accurate assessments possible, subjective decisions and available data for our various fields make these estimates generally less precise than other estimates included in financial statement disclosures. See Proved Reserves Estimation Procedures in Items 1 and 2 for a discussion of our reserve estimation process and Item 1A RISK FACTORS , which includes a discussion of factors that affect our proved reserves estimates. +42 +Table of Contents +RESULTS OF OPERATIONS +Revenues +Our revenues are derived from sales of our oil, gas, and NGL production. Increases or decreases in our revenues, profitability, and future production growth are highly dependent on the commodity prices we receive. Prices are market driven and we expect that future prices will continue to fluctuate due to supply and demand factors, availability of transportation, seasonality, and geopolitical, economic, and other factors. +Production volumes and realized prices were lower for all products during the year ended December 31, 2020 as compared to the year ended December 31, 2019. Subsequent to the first quarter of 2020, we reduced our drilling and completion activities and curtailed or shut in production in certain areas as a result of the unprecedented demand destruction and resulting severe price decreases for oil stemming from the COVID-19 pandemic. Prices improved in the latter part of the year. The following table shows our production revenues by product for 2020 and 2019 as well as the change in revenues due to changes in prices and volumes. +Years Ended +December 31, Price / Volume Variance +Production Revenue (in thousands) +2020 2019 Variance Between +2020 / 2019 Price Volume Total +Oil sales $ 999,682 $ 1,660,210 $ (660,528) (40) % $ (482,534) $ (177,994) $ (660,528) +Gas sales 243,932 278,776 (34,844) (12) % (13,958) (20,886) (34,844) +NGL sales 269,074 382,935 (113,861) (30) % (77,172) (36,689) (113,861) +$ 1,512,688 $ 2,321,921 $ (809,233) (35) % $ (573,664) $ (235,569) $ (809,233) +43 +Table of Contents +The table below presents our production volumes by commodity, our average realized commodity prices, and certain major U.S. index prices. The sale of our Permian Basin oil production is typically tied to the WTI Midland benchmark price and the sale of our Mid-Continent oil production is typically tied to the WTI Cushing benchmark price. During 2020 and 2019, 88% and 84%, respectively, of our oil production was in the Permian Basin. Our realized prices do not include settlements of commodity derivative contracts. +Years Ended +December 31, Variance Between +2020 / 2019 +2020 2019 +Oil +Total volume — MBbls 28,087 31,463 (3,376) (11) % +Total volume — MBbls per day 76.7 86.2 (9.5) (11) % +Percentage of total production 30 % 31 % +Average realized price — per barrel $ 35.59 $ 52.77 $ (17.18) (33) % +Average WTI Midland price — per barrel $ 39.71 $ 55.53 $ (15.82) (28) % +Average WTI Cushing price — per barrel $ 39.40 $ 57.03 $ (17.63) (31) % +Gas +Total volume — MMcf 232,625 251,567 (18,942) (8) % +Total volume — MMcf per day 635.6 689.2 (53.6) (8) % +Percentage of total production 42 % 41 % +Average realized price — per Mcf $ 1.05 $ 1.11 $ (0.06) (5) % +Average Henry Hub price — per Mcf $ 2.08 $ 2.63 $ (0.55) (21) % +NGL +Total volume — MBbls 25,554 28,254 (2,700) (10) % +Total volume — MBbls per day 69.8 77.4 (7.6) (10) % +Percentage of total production 28 % 28 % +Average realized price — per barrel $ 10.53 $ 13.55 $ (3.02) (22) % +Total +Total production — MBOE 92,412 101,645 (9,233) (9) % +Total production — MBOE per day 252.5 278.5 (26.0) (9) % +Average realized price — per BOE $ 16.37 $ 22.84 $ (6.47) (28) % +Our 2020 daily production volumes were 252.5 MBOE, a 9% decrease from 2019. This decrease is the result of our intentional reduction in capital spending and curtailing and shutting in production in certain areas due to the demand destruction caused primarily by the COVID-19 pandemic. See Production Volumes, Prices, and Costs and Exploration and Development Overview in Items 1 and 2 of this report for production information by region and a discussion of our drilling activities. +44 +Table of Contents +Other Revenues +Gas gathering and other is revenue earned when we transport, process, and market some third-party gas that is associated with our equity gas. Gas marketing is comprised of the fees we earn when we act as agent under short-term sales and supply agreements and market and sell gas for other working interest owners, net of the related expenses. Gas marketing also includes net pipeline settlements incurred as a result of these activities. The table below reflects revenues from third-party gas gathering and other and our net marketing margin for marketing other working interest owners’ gas for the periods indicated. +Years Ended December 31, Variance +Between +2020 / 2019 +Gas Gathering and Marketing Revenues (in thousands) +2020 2019 +Gas gathering and other $ 47,842 $ 42,454 $ 5,388 +Gas marketing $ (1,935) $ (1,406) $ (529) +Fluctuations in revenues from gas gathering and gas marketing activities are primarily a function of increases and decreases in volumes, commodity prices, and gathering rate charges. +Operating Costs and Expenses +Costs associated with producing oil and gas are substantial. Among other factors, some of these costs vary with commodity prices, some trend with the volume of production, some are a function of the number of wells we own, some depend on the prices charged by service companies, and some fluctuate based on a combination of the foregoing. +Total operating costs and expenses of $3.84 billion in 2020 were 55% higher than the $2.48 billion incurred in 2019. The primary reasons for the increase were: (i) the $1.64 billion in ceiling test impairments incurred in 2020, which was $1.02 billion greater than the ceiling test impairment incurred in 2019 and (ii) the $714.4 million impairment of goodwill incurred during 2020, partially offset by (iii) the $186.2 million decrease in depreciation, depletion, and amortization in 2020. The following table shows our operating costs and expenses for the years indicated and a discussion of the operating costs and expenses follows. +Years Ended December 31, Variance +Between +2020 / 2019 Per BOE +Operating Costs and Expenses +(in thousands, except per BOE) +2020 2019 2020 2019 +Impairment of oil and gas properties $ 1,638,329 $ 618,693 $ 1,019,636 N/A N/A +Depreciation, depletion, and amortization 695,954 882,173 (186,219) $ 7.53 $ 8.68 +Asset retirement obligation 14,653 8,586 6,067 $ 0.16 $ 0.08 +Impairment of goodwill 714,447 — 714,447 N/A N/A +Production 285,324 339,941 (54,617) $ 3.09 $ 3.34 +Transportation, processing, and other operating 213,366 238,259 (24,893) $ 2.31 $ 2.34 +Gas gathering and other 23,591 23,294 297 $ 0.26 $ 0.23 +Taxes other than income 79,699 148,953 (69,254) $ 0.86 $ 1.47 +General and administrative 111,005 95,843 15,162 $ 1.20 $ 0.94 +Stock-based compensation 29,895 26,398 3,497 $ 0.32 $ 0.26 +Loss on derivative instruments, net 35,534 76,850 (41,316) N/A N/A +Other operating expense, net 839 19,305 (18,466) N/A N/A +$ 3,842,636 $ 2,478,295 $ 1,364,341 +45 +Table of Contents +Impairment of Oil and Gas Properties +We use the full cost method of accounting for our oil and gas operations. Under this method, we are required to perform quarterly ceiling test calculations to test our oil and gas properties for possible impairment. If the net capitalized cost of our oil and gas properties, as adjusted for income taxes, exceeds the ceiling limitation, the excess is charged to expense. The ceiling limitation is equal to the sum of: (i) the present value discounted at 10% of estimated future net revenues from proved reserves, (ii) the cost of properties not being amortized, and (iii) the lower of cost or estimated fair value of unproven properties included in the costs being amortized, as adjusted for income taxes. We currently do not have any unproven properties that are being amortized. Estimated future net revenues are determined based on trailing twelve-month average commodity prices and estimated proved reserve quantities, operating costs, and capital expenditures. +The quarterly ceiling test is primarily impacted by commodity prices, changes in estimated reserve quantities, reserves produced, overall exploration and development costs, depletion expense, and deferred taxes. If pricing conditions decline, or if there is a negative impact on one or more of the other components of the calculation, we may incur a full cost ceiling test impairment. The calculated ceiling limitation is not intended to be indicative of the fair market value of our proved reserves or future results. Impairment charges do not affect cash flow from operating activities, but do adversely affect our net income and various components of our balance sheet. Any impairment of oil and gas properties is not reversible at a later date. +During 2020, we recognized ceiling test impairments totaling $1.64 billion. The impairments resulted primarily from the impact of decreases in the 12-month average trailing prices for oil, gas, and NGLs as well as significant basis differentials utilized in determining the estimated future net cash flows from proved reserves. We may recognize additional ceiling test impairments in the future. +Depreciation, Depletion, and Amortization +Depreciation, depletion, and amortization (“DD&A”) consisted of the following for the periods indicated: +Years Ended December 31, Variance +Between +2020 / 2019 Per BOE +DD&A Expense (in thousands, except per BOE) +2020 2019 2020 2019 +Depletion $ 625,481 $ 817,099 $ (191,618) $ 6.77 $ 8.04 +Depreciation 70,473 65,074 5,399 0.76 0.64 +$ 695,954 $ 882,173 $ (186,219) $ 7.53 $ 8.68 +Depletion of our producing properties is computed using the units-of-production method. The economic life of each producing well depends upon the estimated proved reserves for that well, which in turn depend upon the assumed realized sales price for future production. Therefore, fluctuations in oil and gas prices will impact the level of proved reserves used in the calculation. Higher prices generally have the effect of increasing reserves, which reduces depletion expense. Conversely, lower prices generally have the effect of decreasing reserves, which increases depletion expense. The cost of replacing production also impacts our depletion expense. In addition, changes in estimates of reserve quantities, estimates of operating and future development costs, reclassifications of properties from unproved to proved, and impairments of oil and gas properties will also impact depletion expense. Our depletion expense decreased during 2020 as compared to 2019 primarily due to a decrease in our depletable basis mostly resulting from ceiling test impairments recognized at December 31, 2019, March 31, 2020, June 30, 2020, and September 30, 2020. In addition, our depletion expense decreased as a result of a decrease in our production resulting from a reduction in drilling and completion activity subsequent to the first quarter 2020 and curtailment or shut in of production in certain areas stemming from the demand destruction caused by the COVID-19 pandemic. These causes for decreased depletion expense were partially offset by a decrease in our reserves, primarily due to a decrease in the trailing twelve month prices used to calculate reserves, which increased depletion expense. +46 +Table of Contents +Fixed assets consist primarily of gas gathering and plant facilities, water infrastructure, vehicles, airplanes, office furniture, and computer equipment and software. These items are recorded at cost and are depreciated on the straight-line method based on expected lives of the individual assets, which range from 3 to 30 years. Also included in our depreciation expense is the depreciation of the right-of-use asset associated with our finance lease gathering system. The increase in depreciation expense during 2020 as compared to 2019 is primarily due to increased depreciation on our gathering and plant facilities due to ongoing expenditures on this infrastructure and projects being placed into service. +Asset Retirement Obligation +Asset retirement obligation expense is typically primarily comprised of accretion expense. In periods subsequent to the initial measurement of an asset retirement obligation liability at present value, a period-to-period increase in the carrying amount of the liability is recognized as accretion expense, which represents the effect of the passage of time on the amount of the liability. Also included in asset retirement obligation expense are gains and losses recognized on the settlement of asset retirement obligation liabilities. Accretion expense for the year ended December 31, 2020, also included $4.9 million to increase our estimated asset retirement obligation liability to decommission certain offshore properties in the Gulf of Mexico in which we were a prior lessee. As a result of the current lessee defaulting on its obligation to decommission the properties, in 2018 the Bureau of Safety and Environmental Enforcement ordered us and other prior lessees to decommission all wells, pipelines, platforms, and facilities related to the properties. +Impairment of Goodwill +We concluded that goodwill was impaired at March 31, 2020 and expensed the entire balance of $714.4 million at that time. See Note 1 to the Consolidated Financial Statements for additional information regarding the impairment of goodwill. +Production +Production expense generally consists of costs for labor, equipment, maintenance, saltwater disposal, compression, power, treating, and miscellaneous other costs (lease operating expense). Production expense also includes well workover activity necessary to maintain production from existing wells. Production expense consisted of lease operating expense and workover expense as follows: +Years Ended December 31, Variance +Between +2020 / 2019 Per BOE +Production Expense (in thousands, except per BOE) +2020 2019 2020 2019 +Lease operating expense $ 244,397 $ 273,092 $ (28,695) $ 2.65 $ 2.68 +Workover expense 40,927 66,849 (25,922) 0.44 0.66 +$ 285,324 $ 339,941 $ (54,617) $ 3.09 $ 3.34 +Lease operating expense decreased 11%, or $28.7 million, in 2020 compared to 2019. The decrease is primarily related to the reduction in activity and our cost saving efforts such as our initiative to reduce the use of outside labor, our voluntary early retirement incentive program and involuntary reduction in workforce, delaying non-essential work, shutting in wells, and decreasing drilling and completion, which has led to fewer wells coming online. +Workover expense decreased 39%, or $25.9 million, during 2020 as compared to 2019. We had fewer workover projects during 2020 as compared to 2019 as a result of a concerted effort to reduce activity and delay non-essential work. +47 +Table of Contents +Transportation, Processing, and Other Operating +Transportation, processing, and other operating costs principally consist of expenditures to prepare and transport production from the wellhead, including gathering, fuel, compression, and processing costs. Costs vary by region and will fluctuate with increases or decreases in production volumes, contractual fees, and changes in fuel and compression costs, and the structure of sales contracts. If the sales contract transfers control of the product at the wellhead, transportation and processing costs are included as a reduction in the revenue we record and are not included in transportation, processing, and other operating costs. Transportation, processing, and other operating costs in 2020 were 10%, or $24.9 million, lower than in 2019 primarily due to a decrease in production volumes. +Gas Gathering and Other +Gas gathering and other includes costs associated with operating our gas gathering and processing infrastructure, including product costs and operating and maintenance expenses. A portion of these costs are reclassified to Transportation, processing, and other expense and Production expense in order to reflect an allocation of the costs incurred to operate our gas gathering facilities as a cost of transporting our equity share of gas produced and operating our wells. Gas gathering and other in 2020 was minimally higher than in 2019. +Taxes Other than Income +Taxes other than income consist of production (or severance) taxes, ad valorem taxes, and other taxes. State and local taxing authorities assess these taxes, with production taxes being based on the volume or value of production and ad valorem taxes being based on the value of properties. The following table presents taxes other than income for the years indicated. +Years Ended December 31, Variance +Between +2020 / 2019 +Taxes Other than Income (in thousands) +2020 2019 +Production $ 64,075 $ 111,819 $ (47,744) +Ad valorem 14,500 36,291 (21,791) +Other 1,124 843 281 +$ 79,699 $ 148,953 $ (69,254) +Taxes other than income as a percentage of production revenue 5.3 % 6.4 % +Taxes other than income decreased 46%, or $69.3 million, in 2020 as compared to 2019. Production taxes make up the majority of our taxes other than income and they decreased primarily due to decreases in oil and NGL prices. Ad valorem taxes also decreased primarily due to decreased valuations based on decreased commodity prices. Other taxes other than income are comprised of franchise and consumer use and sales taxes. +48 +Table of Contents +General and Administrative +General and administrative (“G&A”) expense consists primarily of salaries and related benefits, office rent, legal and consulting fees, systems costs, and other administrative costs incurred. Our G&A expense is reported net of amounts reimbursed to us by working interest owners of the oil and gas properties we operate and net of amounts capitalized pursuant to the full cost method of accounting. The amount of expense capitalized varies and depends on whether the cost incurred can be directly identified with acquisition, exploration, and development activities. The percentage of gross G&A capitalized was 34% and 44% during 2020 and 2019, respectively. In response to low oil prices and demand destruction in 2020, we reduced our acquisition, exploration, and development activities and, therefore, the percentage of gross G&A capitalized decreased from 2019. The table below shows our G&A costs. +Years Ended December 31, Variance +Between +2020 / 2019 +General and Administrative Expense (in thousands) +2020 2019 +Gross G&A $ 168,815 $ 170,757 $ (1,942) +Less amounts capitalized to oil and gas properties (57,810) (74,914) 17,104 +G&A expense $ 111,005 $ 95,843 $ 15,162 +G&A expense increased 16%, or $15.2 million, in 2020 as compared to 2019. This increase is primarily due to $28.7 million in severance expense, none of which was capitalized, associated with the voluntary early retirement incentive program that we offered to employees who met certain eligibility criteria in the first quarter of 2020 and the involuntary reduction in workforce program that we carried out in the third quarter of 2020. These programs reduced our headcount by approximately 24% from December 31, 2019 and we expect G&A expense related to salaries and wages to be lower in future periods as a result. The increase in G&A expense due to the severance expense was partially offset by decreases in salaries and wages, health insurance, annual bonus, consulting, and travel expenses. +Stock-based Compensation +Stock-based compensation expense consists of charges resulting from the amortization of the cost of restricted stock and stock option awards, net of amounts capitalized to oil and gas properties. We have recognized stock-based compensation cost as follows: +Years Ended December 31, Variance +Between +2020 / 2019 +Stock-based Compensation Expense (in thousands) +2020 2019 +Restricted stock awards: +Performance stock awards $ 17,338 $ 21,590 $ (4,252) +Service-based stock awards 26,014 25,611 403 +43,352 47,201 (3,849) +Stock option awards 1,460 1,903 (443) +Total stock-based compensation cost 44,812 49,104 (4,292) +Less amounts capitalized to oil and gas properties (14,917) (22,706) 7,789 +Stock-based compensation expense $ 29,895 $ 26,398 $ 3,497 +Periodic stock-based compensation expense will fluctuate based on the grant date fair value of awards, the number of awards, the requisite service period of the awards, employee forfeitures, and the timing of the awards. Our acco unting policy is to account for forfeitures in compensation cost when they occur. The amount capitalized to oil and gas properties decreased as a percentage of total stock-based compensation cost in 2020 as compared to 2019 due to reduced acquisition, exploration, and development activities in 2020 as a result of the low oil prices and demand destruction experienced in 2020 stemming from the COVID-19 pandemic and OPEC and other countries’ actions. The decreased capitalization caused the overall stock-based compensation expense to increase. +49 +Table of Contents +Loss on Derivative Instruments, Net +Net gains and losses on our derivative instruments are a function of fluctuations in the underlying commodity index prices as compared to the contracted prices and the monthly cash settlements (if any) of the instruments. We have elected not to designate our derivatives as hedging instruments for accounting purposes and, therefore, we do not apply hedge accounting treatment to our derivative instruments. Consequently, changes in the fair value of our derivative instruments and cash settlements on the instruments are included as a component of operating costs and expenses as either a net gain or loss on derivative instruments. Cash settlements of our contracts are included in cash flows from operating activities in our statements of cash flows. The following table presents the components of “Loss on derivative instruments, net” for the years indicated. See Note 4 to the Consolidated Financial Statements for additional information regarding our derivative instruments. +Years Ended December 31, Variance +Between +2020 / 2019 +Loss on Derivative Instruments, Net (in thousands) +2020 2019 +Decrease (increase) in fair value of derivative instruments, net: +Gas contracts $ 56,475 $ (13,114) $ 69,589 +Oil contracts 98,306 76,833 21,473 +154,781 63,719 91,062 +Cash (receipts) payments on derivative instruments, net: +Gas contracts (15,476) (40,114) 24,638 +Oil contracts (103,771) 53,245 (157,016) +(119,247) 13,131 (132,378) +Loss on derivative instruments, net $ 35,534 $ 76,850 $ (41,316) +Other Operating Expense, Net +Other operating expense, net decreased $18.5 million in 2020 as compared to 2019. This expense is typically comprised primarily of litigation settlements and allowance for credit losses adjustments. Other operating expense, net in 2019 included $10.0 million in litigation settlements and $8.4 million in acquisition-related costs incurred to effect the Resolute acquisition. The acquisition-related costs consisted primarily of advisory and legal fees. +Other Income and Expense +Years Ended December 31, Variance +Between +2020 / 2019 +Other Income and Expense (in thousands) +2020 2019 +Interest expense $ 92,914 $ 93,386 $ (472) +Capitalized interest (50,030) (56,232) 6,202 +Loss on early extinguishment of debt — 4,250 (4,250) +Other, net (540) (5,741) 5,201 +$ 42,344 $ 35,663 $ 6,681 +The majority of our interest expense relates to interest on the borrowings under our senior unsecured notes, with such interest totaling $83.9 million and $79.9 million during 2020 and 2019, respectively. Also included in interest expense is interest expense on our Credit Facility borrowings, the amortization of debt issuance costs and discounts, interest expense on our finance lease, and miscellaneous interest expense. See LIQUIDITY AND CAPITAL RESOURCES Long-Term Debt below for further information regarding our debt. The $4.3 million +50 +Table of Contents +loss on early extinguishment of debt incurred during 2019 was associated with the $600.0 million of 8.5% senior notes due May 1, 2020 that we acquired with Resolute on March 1, 2019 and elected to immediately repay. +We capitalize interest on non-producing leasehold costs, the in-progress costs of drilling and completing wells, and constructing midstream assets. Capitalized interest will fluctuate based primarily on the amount of costs subject to interest capitalization and based on the rates applicable to borrowings outstanding during the period. The amount of costs subject to interest capitalization was lower in 2020 as compared to 2019, primarily due to the decrease in the balance of non-producing leasehold costs as a result of transfers to proved properties as well as due to a decrease in the in-progress costs of drilling and completing wells and constructing midstream assets due to decreased activity in 2020. +Other, net includes interest income of $0.7 million and $3.3 million in 2020 and 2019, respectively. The decrease in interest income in 2020 is primarily due to the decrease in our investable cash balance after acquiring Resolute on March 1, 2019. Other components of Other, net include miscellaneous income and expense items that vary from period to period, including gain or loss related to the sale or value of oil and gas well equipment and supplies, gain or loss on miscellaneous fixed asset sales, and income and expense associated with other non-operating activities. +Income Tax Benefit +The components of our provision for income taxes and our combined federal and state effective income tax rates were as follows: +Years Ended December 31, Variance +Between +2020 / 2019 +Income Tax Benefit (in thousands) +2020 2019 +Current tax (benefit) expense $ (31) $ 532 $ (563) +Deferred tax benefit (358,896) (26,902) (331,994) +$ (358,927) $ (26,370) $ (332,557) +Combined federal and state effective income tax rate 15.4 % 17.5 % +Our combined federal and state effective tax rates, as shown above, differ from the statutory rate primarily due to state income taxes, non-deductible expenses, changes in tax laws and tax rates enacted in the period, and changes in valuation allowances. See Note 9 to the Consolidated Financial Statements for further information regarding our income taxes. +LIQUIDITY AND CAPITAL RESOURCES +Overview +With the volatility in commodity prices and recognizing the U.S. oil volume growth impact on the overall world oil supply and demand balance, we have adjusted our approach to our reinvestment rates to target 70 to 80% of operating cash flow. With this investment approach, we will have 20 to 30% of cash flow available to increase cash on our balance sheet, which we plan to initially target to reduce debt and continue to fund and increase our regular common stock cash dividend. +We strive to maintain an adequate liquidity level to address volatility and risk. Sources of liquidity include our cash flow from operations, cash on hand, available borrowing capacity under our revolving credit facility, and proceeds from sales of non-strategic assets. +51 +Table of Contents +Our liquidity is highly dependent on the prices we receive for the oil, gas, and NGLs we produce. The prices we receive are determined by prevailing market conditions and greatly influence our revenue, cash flow, profitability, access to capital, and future rate of growth. See RESULTS OF OPERATIONS Revenues above for further information regarding the impact realized prices have had on our 2020 earnings. +We address volatility in commodity prices primarily by maintaining flexibility in our capital investment program. We have a balanced and abundant drilling inventory and limited long-term commitments, which enable us to respond quickly to industry volatility. In response to the decline in oil prices in the second quarter of 2020, we took immediate steps to reduce our capital investment, including releasing all but one drilling rig by mid-May 2020 and deferring well completion activity. As a result, total exploration, development, and acquisition capital expenditures for 2020 were $556.7 million. This level of capital expenditures was less than our cash flow from operating activities, which has allowed us to build our cash balance and not incur any incremental borrowings this year. With the subsequent improvement in oil prices, we exited 2020 running five drilling rigs and completing wells with one completion crew. See Capital Expenditures below for information regarding our 2020 capital expenditures and our projected 2021 expenditures. +We periodically use derivative instruments to mitigate volatility in commodity prices. At December 31, 2020, we had derivative contracts covering a portion of our 2021 and 2022 production. Depending on changes in oil and gas futures markets and management’s view of underlying supply and demand trends, we may increase or decrease our derivative positions from current levels. See Note 4 to the Consolidated Financial Statements for information regarding our derivative instruments. +Cash and cash equivalents at December 31, 2020 were $273.1 million. At December 31, 2020, our long-term debt consisted of $2.0 billion of senior unsecured notes, with $750 million 4.375% notes due in 2024, $750 million 3.90% notes due in 2027, and $500 million 4.375% notes due in 2029. At December 31, 2020, we had no borrowings and $2.5 million in letters of credit outstanding under our credit facility, leaving an unused borrowing availability of $1.248 billion. See Long-Term Debt below for more information regarding our debt. +In December 2020, we paid $43.0 million to repurchase 55% of the outstanding shares of our preferred stock and we may, from time to time, seek to repurchase additional shares of our outstanding preferred stock through cash repurchases and/or exchanges for equity securities, privately negotiated transactions, or otherwise. Such activities, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions, and other factors. See Note 2 to the Consolidated Financial Statements for information regarding our preferred stock. +We expect our operating cash flow and other capital resources to be adequate to meet our needs for planned capital expenditures, working capital, debt service, and dividends declared for the next twelve months. +Analysis of Cash Flow Changes +The following table presents the totals of the major cash flow classification categories from our Consolidated Statements of Cash Flows for the periods indicated. +Years Ended December 31, +(in thousands) 2020 2019 +Net cash provided by operating activities $ 904,167 $ 1,343,966 +Net cash used by investing activities $ (578,875) $ (1,577,882) +Net cash used by financing activities $ (146,869) $ (472,028) +52 +Table of Contents +Net cash provided by operating activities in 2020 was $904.2 million, down $439.8 million, or 33%, from $1.34 billion in 2019. The decrease resulted primarily from a decrease in revenues due to the price collapses and demand destruction seen in 2020 as a result of the COVID-19 pandemic and actions of OPEC and other countries. This decrease was partially offset by: (i) increased cash inflows for settlements of derivative instruments, (ii) decreased overall operating expenses (e.g. production, taxes other than income, and transportation, processing, and other operating expenses) primarily as a result of decreased activity, production, and revenues, and (iii) a decreased investment in working capital. See RESULTS OF OPERATIONS above for more information regarding the changes in revenue and operating expenses. +Net cash used by investing activities was $578.9 million and $1.58 billion in 2020 and 2019, respectively. The majority of our cash flows used by investing activities are for oil and gas capital expenditures, which totaled $594.8 million and $1.25 billion in 2020 and 2019, respectively. Our 2020 oil and gas capital expenditures decreased as compared to 2019 due to deliberate actions taken by us to reduce our capital investment in response to the decline in oil prices and demand experienced in 2020. Net cash used by investing activities also includes net cash outflows for oil and gas property acquisitions, which were minimal in 2020 at $11.9 million, but in 2019 included the $325.7 million cash portion of the consideration paid for the Resolute acquisition, net of the $41.2 million in cash acquired with Resolute. Our other capital expenditures, which are primarily for midstream assets, were $44.3 million and $73.7 million in 2020 and 2019, respectively, with 2020 decreasing due to the overall decrease in capital investments in 2020. Included in net cash used by investing activities are proceeds from other asset sales, which are generally for the divestiture of non-strategic oil and gas properties and totaled $72.1 million and $30.0 million in 2020 and 2019, respectively. Proceeds from other asset sales in 2020 included net cash proceeds of $68.7 million from the sale of certain water infrastructure assets in Eddy County, New Mexico. +Net cash used by financing activities was $146.9 million and $472.0 million in 2020 and 2019, respectively. During 2020, we paid $43.0 million to repurchase some of our outstanding preferred stock. During 2020, we borrowed and repaid an aggregate of $172.0 million on our credit facility to meet cash requirements as needed. During 2020, we amended our credit facility, paying $1.5 million in financing costs. During 2019, we issued $500.0 million aggregate principal amount of 4.375% senior unsecured notes due March 15, 2029 at 99.862% of par for proceeds of $499.3 million, paying $4.6 million in underwriting fees and financing costs. Additionally in 2019, we borrowed and repaid an aggregate of $2.12 billion on our credit facility to assist in funding the Resolute acquisition and thereafter to meet cash requirements as needed. In connection with the acquisition of Resolute, we assumed $870.0 million in principal amount of long-term debt that we immediately repaid, incurring a redemption fee of $4.3 million. During 2019, we amended our credit facility, paying $3.0 million in financing costs. Net cash used by financing activities during both years included: (i) the payment of dividends, (ii) the payment of income tax withholdings made on behalf of our employees upon the net settlement of equity-classified stock awards, and (iii) finance lease payments. During 2020 and 2019, we declared cash dividends on both our common and preferred stock quarterly, paying them in the quarter following declaration. During 2020, we paid one $0.20 per share dividend and three $0.22 per share dividends on our common stock and four $20.3125 per share dividends on our preferred stock, totaling $93.0 million. During 2019, we paid one $0.18 per share dividend and three $0.20 per share dividends on our common stock and three $20.3125 per share dividends on our preferred stock, totaling $81.7 million. Future dividend payments will depend on our level of earnings, financial requirements, and other factors considered relevant by our Board of Directors. We paid employee income tax withholdings on the net settlement of equity-classified stock awards totaling $4.5 million and $5.2 million in 2020 and 2019, respectively. We paid finance lease payments of $4.8 million and $3.9 million in 2020 and 2019, respectively. +53 +Table of Contents +Capital Expenditures +The following table presents capitalized expenditures for oil and gas property acquisition, exploration, and development activities. +Years Ended December 31, +(in thousands) 2020 2019 +Acquisitions: +Proved $ 11,878 $ 695,450 +Unproved — 1,025,376 +11,878 1,720,826 +Exploration and development: +Land and seismic 48,468 60,175 +Exploration and development 496,388 1,181,605 +544,856 1,241,780 +Total acquisition, exploration, and development capital expenditures $ 556,734 $ 2,962,606 +Amounts in the table above are presented on an accrual basis. Oil and gas capital expenditures and acquisitions of oil and gas properties in the Consolidated Statements of Cash Flows reflect activities on a cash basis. +On March 1, 2019, we completed the acquisition of Resolute. The fair value of the proved and unproved properties recorded in the purchase price allocation for this acquisition was $1.72 billion. +Our 2020 total capital expenditures were originally forecast to range from $1.25-$1.35 billion, with the majority expected to be invested in the Permian Basin. In response to the decline in oil prices in the second quarter 2020, we took immediate steps to reduce our capital investment, including releasing all but one drilling rig by mid-May and deferring well completion activity. This resulted in total acquisition, exploration, and development capital expenditures for 2020 of $556.7 million. Approximately 92% of our 2020 exploration and development expenditures were in the Permian Basin and 8% were in the Mid-Continent. During 2020, we completed or participated in the completion of 149 gross (51.0 net) productive wells, of which we operated 61 gross (47.6 net) wells. With the subsequent improvement in oil prices, we exited 2020 running five drilling rigs and completing wells with one completion crew. See Items 1 and 2 of this report for further information regarding our oil and gas properties. +In 2020, the level of our capital expenditures was less than our cash flow from operating activities, which allowed us to build our cash balance and not incur any incremental borrowings. We intend to fund our 2021 capital investment program with cash flow from operating activities and potential sales of non-strategic assets. The timing of capital expenditures and the receipt of cash flows do not necessarily match, which may cause us to borrow and repay funds under our credit facility from time-to-time. Based on current economic conditions, our 2021 total capital expenditures are projected to range from $650 million to $750 million. This includes drilling and completion capital of approximately $500 million to $600 million, investments in saltwater disposal/midstream infrastructure of approximately $40 million, and investments in other, including capitalized G&A and non-producing leasehold, of approximately $110 million. Over 90% of our planned 2021 drilling and completion capital is expected to be invested in the Permian Basin, with the remainder in the Mid-Continent. We regularly review our capital expenditures throughout the year and will adjust our investments based on increases or decreases in our cash flow. See Long-Term Debt — Bank Debt below for further information regarding our credit facility. +54 +Table of Contents +We have made, and will continue to make, expenditures to comply with environmental and safety regulations and requirements. These costs are considered a normal recurring cost of our ongoing operations. While we expect pending legislation and regulations to increase the cost of business, we do not anticipate that we will be required to expend amounts that will have a material adverse effect on our financial position or operations, nor are we aware of any pending legislative or regulatory changes that would have a material impact. However, compliance with new legislation and regulations could increase our costs and negatively affect demand for oil or gas and result in a material adverse effect on our financial position or operations. See Item 1A RISK FACTORS for a description of risks related to current and potential future environmental and safety regulations and requirements that could adversely affect our operations and financial condition. +Long-Term Debt +Long-term debt at December 31, 2020 and 2019 consisted of the following: +December 31, 2020 December 31, 2019 +(in thousands) +Principal Unamortized Debt +Issuance Costs and Discounts (1) Long-term +Debt, net Principal Unamortized Debt +Issuance Costs and Discounts (1) Long-term +Debt, net +4.375% notes due 2024 $ 750,000 $ (2,672) $ 747,328 $ 750,000 $ (3,535) $ 746,465 +3.90% notes due 2027 750,000 (5,541) 744,459 750,000 (6,289) 743,711 +4.375% notes due 2029 500,000 (4,488) 495,512 500,000 (4,930) 495,070 +Total long-term debt $ 2,000,000 $ (12,701) $ 1,987,299 $ 2,000,000 $ (14,754) $ 1,985,246 +________________________________________ +(1) The 4.375% notes due 2024 were issued at par , therefore, the amounts shown in the table are for unamortized debt issuance costs only. At December 31, 2020, the unamortized debt issuance costs and discount related to the 3.90% notes due 2027 were $4.3 million and $1.3 million, respectively. At December 31, 2020, the unamortized debt issuance costs and discount related to the 4.375% notes due 2029 were $3.9 million and $0.6 million, respectively. At December 31, 2019, the unamortized debt issuance costs and discount related to the 3.90% notes due 2027 were $4.8 million and $1.5 million, respectively. At December 31, 2019, the unamortized debt issuance costs and discount related to the 4.375% notes due 2029 were $4.3 million and $0.6 million, respectively. +Bank Debt +On June 3, 2020, we entered into the First Amendment to Amended and Restated Credit Agreement (the “First Amendment”) dated as of February 5, 2019 for our senior unsecured revolving credit facility (“Credit Facility”). The Credit Facility has aggregate commitments of $1.25 billion with an option for us to increase the aggregate commitments to $1.5 billion, and matures on February 5, 2024. There is no borrowing base subject to the discretion of the lenders based on the value of our proved reserves under the Credit Facility. The First Amendment, among other things: (i) allows up to $3.5 billion of non-cash impairment charge add-backs to Shareholders’ Equity for covenant calculation purposes, (ii) institutes traditional anti-cash hoarding provisions (if borrowings are outstanding under the Credit Facility) at a consolidated cash threshold of $175.0 million, (iii) reduces the priority lien debt basket from 15% of Consolidated Net Tangible Assets (as defined in the credit agreement) to a $50.0 million cap, and (iv) adds an acknowledgement and consent to European Union bail-in legislation. As of December 31, 2020, we had no bank borrowings outstanding under the Credit Facility, but did have letters of credit of $2.5 million outstanding, leaving an unused borrowing availability of $1.248 billion. During the year ended December 31, 2020, we borrowed and repaid an aggregate of $172.0 million on the Credit Facility to meet cash requirements as needed. +55 +Table of Contents +At our option, borrowings under the Credit Facility may bear interest at either (a) LIBOR (or an alternate rate determined by the administrative agent for the Credit Facility in accordance with the Credit Facility when LIBOR is no longer available) plus 1.125 - 2.0% based on the credit rating for our senior unsecured long-term debt, or (b) a base rate (as defined in the credit agreement) plus 0.125 - 1.0%, based on the credit rating for our senior unsecured long-term debt. Unused borrowings are subject to a commitment fee of 0.125 - 0.35%, based on the credit rating for our senior unsecured long-term debt. +The Credit Facility contains representations, warranties, covenants, and events of default that are customary for investment grade, senior unsecured bank credit agreements, including a financial covenant for the maintenance of a defined total debt-to-capitalization ratio of no greater than 65%. As of December 31, 2020, we were in compliance with all of the financial and non-financial covenants. +At December 31, 2020 and 2019, we had $4.3 million and $4.0 million, respectively, of unamortized debt issuance costs associated with our Credit Facility, which were recorded as assets and included in “Other assets” in our Consolidated Balance Sheets. During the year ended December 31, 2020, we incurred $1.5 million in fees paid to the lenders and third-party costs for the First Amendment. The debt issuance costs are being amortized to interest expense ratably over the life of the Credit Facility. +Senior Notes +On March 8, 2019, we issued $500 million aggregate principal amount of 4.375% senior unsecured notes at 99.862% of par to yield 4.392% per annum. The notes are due March 15, 2029 and interest is payable semiannually on March 15 and September 15. The effective interest rate on these notes, including the amortization of debt issuance costs and discount, is 4.50%. +In April 2017, we issued $750 million aggregate principal amount of 3.90% senior unsecured notes at 99.748% of par to yield 3.93% per annum. These notes are due May 15, 2027 and interest is payable semiannually on May 15 and November 15. The effective interest rate on these notes, including the amortization of debt issuance costs and discount, is 4.01%. +In June 2014, we issued $750 million aggregate principal amount of 4.375% senior unsecured notes at par. These notes are due June 1, 2024 and interest is payable semiannually on June 1 and December 1. The effective interest rate on these notes, including the amortization of debt issuance costs, is 4.50%. +Our senior unsecured notes are governed by indentures containing certain covenants, events of default, and other restrictive provisions with which we were in compliance as of December 31, 2020. +56 +Table of Contents +Working Capital Analysis +At December 31, 2020, we had a working capital deficit of $2.9 million, a change of $134.2 million, or 98% from a working capital deficit of $137.1 million at December 31, 2019. Our working capital deficit decreased primarily as a result of the following: +Working Capital Increases +• Cash and cash equivalents increased by $178.4 million as a result of maintaining capital expenditures at a level below our cash flows from operations in order to increase cash on our balance sheet, which we plan to use to initially target debt reduction and continue to fund and increase our regular common stock cash dividend. +• Operations-related accounts payable and accrued liabilities decreased by $153.4 million, primarily due to decreases in: (i) revenue payable due to declines in revenues, (ii) taxes other than income accruals due to decreased prices causing lower production and ad valorem taxes, (iii) trade accounts payable due to decreased activity, and (iv) current asset retirement obligations due to changes in the estimated timing of retirement activities. +• Exploration and development and midstream capital accruals decreased by $66.6 million as a result of our decision to reduce capital expenditures in response to the decline in oil prices and demand. +Working Capital Decreases +• A decrease of $139.8 million from a net current derivative asset to a net current derivative liability. The fair value of derivative instruments fluctuates based on changes in the underlying price indices as compared to the contracted prices included in the derivative instruments. +• Accounts receivable decreased by $116.1 million, primarily due to declines in prices lowering our oil and gas sales receivable. +• Oil and gas well equipment and supplies decreased by $10.7 million. +Accounts receivable are a major component of our working capital and include amounts due from a diverse group of companies comprised of major energy companies, pipeline companies, local distribution companies, and other end-users. We conduct credit analyses prior to making any sales to new customers or increasing credit for existing customers and may require parent company guarantees, letters of credit, or prepayments when deemed necessary. For properties we operate, we have the right to realize amounts due to us from non-operators by netting the non-operators’ share of production revenues from those properties. We routinely assess the recoverability of all material accounts receivable and accrue a reserve to the allowance for credit losses based on our estimation of expected losses over the life of the receivables. Historically, losses associated with uncollectible receivables have not been significant. However, most of our accounts receivable balances are uncollateralized and result from transactions with other companies in the oil and gas industry. Concentration of customers may impact our overall credit risk because our customers may be similarly affected by changes in economic or other conditions within the industry, such as those currently impacting the industry as a result of the COVID-19 pandemic and low commodity prices. +57 +Table of Contents +Dividends +A quarterly cash dividend has been paid on our common stock every quarter since the first quarter of 2006. During 2020, our Board of Directors declared four cash dividends of $0.22 per common share, totaling approximately $90.0 million. During 2020, our Board of Directors declared four cash dividends of $20.3125 per preferred share, totaling approximately $4.9 million. Future dividend payments will depend on our level of earnings, financial requirements, and other factors considered relevant by our Board of Directors. See Note 2 to the Consolidated Financial Statements for further information regarding our stock. +Off-Balance Sheet Arrangements +We may enter into off-balance sheet arrangements and transactions that can give rise to material off-balance sheet obligations. As of December 31, 2020, our material off-balance sheet arrangements consisted of operating lease agreements for equipment used in connection with our exploration and development activities with lease terms at commencement of 12 months or less. As an accounting policy, we have elected not to apply the recognition requirements of Topic 842 to these leases. As such, we have not recorded any lease liabilities associated with these leases. +Contractual Obligations and Material Commitments +At December 31, 2020, we had the following contractual obligations and material commitments: +Payments Due by Period +Contractual obligations +(in thousands) +Total 1/1/21 - 12/31/21 1/1/22 - 12/31/23 1/1/24 - 12/31/25 1/1/26 and Thereafter +Long-term debt - principal (1) $ 2,000,000 $ — $ — $ 750,000 $ 1,250,000 +Long-term debt - interest (1) 490,967 81,868 167,875 118,656 122,568 +Operating leases (2) 101,749 27,255 31,736 23,687 19,071 +Unconditional purchase obligations (3) 18,903 7,854 6,167 4,882 — +Derivative liabilities 163,147 145,398 17,749 — — +Asset retirement obligation (4) 177,867 12,272 — (4) — (4) — (4) +Other long-term liabilities (5) 49,318 4,460 11,028 10,324 23,506 +$ 3,001,951 $ 279,107 $ 234,555 $ 907,549 $ 1,415,145 +________________________________________ +(1) The interest payments presented above include the accrued interest payable on our long-term debt as of December 31, 2020 as well as future payments calculated using the long-term debt’s fixed rates, stated maturity dates, and principal amounts outstanding as of December 31, 2020. See Note 3 to the Consolidated Financial Statements for additional information regarding our debt. +(2) Operating leases include the estimated remaining contractual payments under lease agreements as of December 31, 2020. These lease agreements are primarily comprised of leases for commercial real estate, which consists primarily of office space, and compressor equipment. +(3) Of the total unconditional purchase obligations, $2.3 million represents obligations for the purchase of sand for well completions and $16.6 million represents obligations for firm transportation agreements for gas pipeline capacity. +(4) We have excluded the presentation of the timing of the cash flows associated with our $165.6 million long-term asset retirement obligations because we cannot make a reasonably reliable estimate of the future period of cash settlement. The long-term asset retirement obligation is included in the total asset retirement obligation presented. +(5) Other long-term liabilities include contractual obligations associated with our employee supplemental savings plan, gas balancing liabilities, and other miscellaneous liabilities. All of these liabilities are accrued on our +58 +Table of Contents +Consolidated Balance Sheet. The current portion associated with these long-term liabilities is also presented in the table above. +The following discusses various commercial commitments that we have made that may include potential future cash payments if we fail to meet various performance obligations. These are not reflected in the table above, unless otherwise noted. +At December 31, 2020, we had estimated commitments of approximately: (i) $224.2 million to finish drilling, completing, or performing other work on wells and various other infrastructure projects in progress and (ii) $4.3 million to finish midstream construction in progress. +At December 31, 2020, we had firm sales contracts to deliver approximately 470.3 Bcf of gas over the next 10.5 years. If we do not deliver this gas, our estimated financial commitment, calculated using the January 2021 index prices, would be approximately $908.1 million. The value of this commitment will fluctuate due to price volatility and actual volumes delivered. However, we believe no material financial commitment will be due based on our current proved reserves and production levels and our ability to make market purchases to fulfill these volumetric obligations. +In connection with gas gathering and processing agreements, we have volume commitments over the next 8.0 years. If we do not deliver the committed gas or NGLs, as applicable, the estimated maximum amount that would be payable under these commitments, calculated as of December 31, 2020, would be approximately $640.7 million. However, we believe no material financial commitment will be due based on our current proved reserves and production levels from which we can fulfill these volumetric obligations. +We have minimum volume delivery commitments associated with agreements to reimburse connection costs to various pipelines. If we do not deliver this gas or oil, as applicable, the estimated maximum amount that would be payable under these commitments, calculated as of December 31, 2020, would be approximately $104.7 million. Of this total, we have accrued a liability of $4.3 million representing the estimated amount we will have to pay due to insufficient forecasted volumes at particular connection points. This accrual is reflected in the table above in Other long-term liabilities. +We have minimum volume water delivery commitments associated with a water services agreement, which ends in 2030, that was entered into in connection with the sale of certain water infrastructure assets in Eddy County, New Mexico (see Note 13 to the Consolidated Financial Statements for further information regarding this sale). If the water volumes are not delivered by us or third parties, the estimated maximum amount that would be payable by us under this commitment, calculated as of December 31, 2020, would be approximately $64.1 million. However, we believe no material financial commitment will be due based on our forecasted volumes of water delivery and potential delivery of water volumes by third parties. +All of the noted commitments were routine and made in the ordinary course of our business. +Taking into account current commodity prices and anticipated levels of production, we believe that our net cash flow generated from operations and our other capital resources will be adequate to meet future obligations. +59 +Table of Contents +CRITICAL ACCOUNTING POLICIES AND ESTIMATES +Discussion and analysis of our financial condition and results of operation are based on our Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses. We analyze and base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Changes in facts and circumstances or additional information may result in revised estimates, and actual results may differ from these estimates. +Our significant accounting policies are described in Note 1 to our Consolidated Financial Statements. We have identified the following policies as being of particular importance to the portrayal of our financial position and results of operations and which require the application of significant judgment by management. +Oil and Gas Reserves +The process of estimating quantities of oil and gas reserves is complex, requiring judgment and interpretation in the evaluation of all available geological, geophysical, engineering and economic data. The data for a given field may also change substantially over time due to numerous factors including, but not limited to, additional development activity, evolving production history, and continual reassessment of the viability of production under varying economic conditions. As a result, material revisions to existing reserve estimates may occur from time to time. Although every reasonable effort is made to ensure that our reserve estimates represent the most accurate assessments possible, subjective decisions and available data for our various fields make these estimates generally less precise than other estimates included in financial statement disclosures. +At year-end 2020, 16% of our total proved reserves are categorized as proved undeveloped reserves. Our engineers review and revise these reserve estimates regularly, as new information becomes available. +We use the units-of-production method to amortize the cost associated with our oil and gas properties. Changes in estimates of reserve quantities and commodity prices will cause corresponding changes in depletion expense, or in some cases, a full cost ceiling impairment charge. See Full Cost Accounting below for further information regarding the ceiling limitation calculation. See SUPPLEMENTAL INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED) in Item 8 for additional reserve data. +Full Cost Accounting +We use the full cost method of accounting for our oil and gas operations. All costs associated with property acquisition, exploration, and development activities are capitalized. Exploration and development costs include dry hole costs, geological and geophysical costs, direct overhead related to exploration and development activities, and other costs incurred for the purpose of finding oil and gas reserves. Salaries and benefits paid to employees directly involved in the acquisition, exploration, and development of properties, as well as other internal costs that can be directly identified with acquisition, exploration, and development activities, are also capitalized. Under the full cost method of accounting, no gain or loss is recognized upon the disposition of oil and gas properties unless such disposition would significantly alter the relationship between capitalized costs and proved reserves. Expenditures for maintenance and repairs are charged to production expense in the period incurred. +Under the full cost method of accounting, we are required to perform quarterly ceiling test calculations to test our oil and gas properties for possible impairment. If the net capitalized cost of our oil and gas properties, as adjusted for income taxes, exceeds the ceiling limitation, the excess is charged to expense. The ceiling limitation is equal to the sum of: (i) the present value discounted at 10% of estimated future net revenues from proved reserves, (ii) the cost of properties not being amortized, and (iii) the lower of cost or estimated fair value of unproven properties included in the costs being amortized, as adjusted for income taxes. We currently do not have any unproven properties that are being amortized. Estimated future net revenues are determined based on trailing +60 +Table of Contents +twelve-month average commodity prices and estimated proved reserve quantities, operating costs, and capital expenditures. +The quarterly ceiling test is primarily impacted by commodity prices, changes in estimated reserve quantities, reserves produced, overall exploration and development costs, depletion expense, and deferred taxes. If pricing conditions decline, or if there is a negative impact on one or more of the other components of the calculation, we may incur a full cost ceiling test impairment. The calculated ceiling limitation is not intended to be indicative of the fair market value of our proved reserves or future results. Impairment charges do not affect cash flow from operating activities, but do adversely affect our net income and various components of our balance sheet. Any impairment of oil and gas properties is not reversible at a later date. +Depletion of proved oil and gas properties is computed on the units-of-production method, whereby capitalized costs, including future development costs and asset retirement costs, are amortized over total estimated proved reserves. Changes in our estimate of proved reserve quantities and impairment of oil and gas properties will cause corresponding changes in depletion expense in periods subsequent to these changes. +The capitalized costs of unproved properties, including those in wells in progress, are excluded from the costs being amortized. We do not have major development projects that are excluded from costs being amortized. On a quarterly basis, we evaluate excluded costs for inclusion in the costs to be amortized. Significant unproved properties are evaluated individually. Unproved properties that are not considered individually significant are aggregated for evaluation purposes and related costs are transferred to the costs to be amortized quarterly based on the application of historical factors. +Income Taxes +Our oil and gas exploration and production operations are subject to taxation on income in numerous jurisdictions. We record deferred tax assets and liabilities to account for the expected future tax consequences of events that have been recognized in our financial statements and our tax returns. We routinely assess the realizability of our deferred tax assets. Numerous judgments and assumptions are inherent in this assessment, including the determination of future taxable income, which is affected by factors such as future operating conditions (particularly as related to prevailing oil and gas prices) and changing tax laws. If we conclude that it is more likely than not that some portion or all of the deferred tax assets will not be realized, the tax asset would be reduced by a valuation allowance. +We regularly assess and, if required, establish accruals for tax contingencies that could result from assessments of additional tax by taxing jurisdictions where the company operates. See Note 9 to the Consolidated Financial Statements for additional information regarding our income taxes. +61 +Table of Contents +ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK +We are exposed to market risk including the risk of loss arising from adverse changes in commodity prices and interest rates. +Price Fluctuations +Our major market risk is pricing applicable to our oil, gas, and NGL production. The prices we receive for our production are based on prevailing market conditions and are influenced by many factors that are beyond our control. Pricing for oil, gas, and NGL production has been volatile and unpredictable. During 2020, our total production revenue was comprised of 66% oil sales, 16% gas sales, and 18% NGL sales. The following table shows how hypothetical changes in the realized prices we receive for our commodity sales may have impacted revenue for the period indicated. See MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS— Market Conditions for further information regarding prices. +Impact on Revenue +Change in Realized Price Year Ended +December 31, 2020 +(in thousands) +Oil ± $1.00 per barrel ± $28,087 +Gas ± $0.10 per Mcf ± $23,263 +NGL ± $1.00 per barrel ± $25,554 +± $76,904 +We periodically enter into financial derivative contracts to hedge a portion of our price risk associated with our future oil and gas production. At December 31, 2020, we had oil and gas derivatives covering a portion of our 2021 and 2022 production, which were recorded as current and non-current assets and liabilities on our Consolidated Balance Sheet. At December 31, 2020, our oil and gas derivatives had a gross asset fair value of $9.2 million and a gross liability fair value of $163.1 million. See Note 4 to the Consolidated Financial Statements for additional information regarding our derivative instruments. +While these contracts limit the downside risk of adverse price movements, they may also limit future cash flow from favorable price movements. The following table shows how a hypothetical ± 10% change in the underlying forward prices used to calculate the fair value of our derivatives may have impacted the fair value as of December 31, 2020. +Impact on Fair Value +Change in Forward Price December 31, 2020 +(in thousands) +Oil -10% $ 71,853 +Oil +10% $ (74,237) +Gas -10% $ 23,760 +Gas +10% $ (24,515) +62 +Table of Contents +Interest Rate Risk +At December 31, 2020, our long-term debt consisted of $750 million of 4.375% senior unsecured notes that mature on June 1, 2024, $750 million of 3.90% senior unsecured notes that mature on May 15, 2027, and $500 million of 4.375% senior unsecured notes that mature on March 15, 2029. Because all of our outstanding long-term debt is at a fixed rate, we consider our interest rate exposure to be minimal. See Note 3 and Note 5 to the Consolidated Financial Statements for additional information regarding our debt. +63 +Table of Contents +ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA +CIMAREX ENERGY CO. +INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTAL SCHEDULES +Page +Report of Independent Registered Public Accounting Firm +65 +Consolidated Balance Sheets as of December 31, 2020 and 2019 +67 +Consolidated Statements of Operations and Comprehensive Income (Loss) for the years ended December 31, 2020, 2019, and 2018 +68 +Consolidated Statements of Cash Flows for the years ended December 31, 2020, 2019, and 2018 +69 +Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2020, 2019, and 2018 +70 +Notes to Consolidated Financial Statements +Note 1 — Basis of Presentation and Summary of Significant Accounting Policies +71 +Note 2 — Capital Stock +76 +Note 3 — Long-Term Debt +78 +Note 4 — Derivative Instruments +80 +Note 5 — Fair Value Measurements +85 +Note 6 — Stock-Based and Other Compensation +86 +Note 7 — Earnings (Loss) per Share +91 +Note 8 — Asset Retirement Obligations +92 +Note 9 — Income Taxes +93 +Note 10 — Commitments and Contingencies +95 +Note 11 — Related Party Transactions +100 +Note 12 — Supplemental Cash Flow Information +100 +Note 13 — Acquisitions and Divestitures +101 +Supplemental Information to Consolidated Financial Statements +Supplemental Information on Oil and Gas Producing Activities (Unaudited) +104 +Supplemental Quarterly Financial Data (Unaudited) +110 +All other supplemental information and schedules have been omitted because they are not applicable or the information required is shown in the consolidated financial statements or related notes thereto. +64 +Table of Contents +Report of Independent Registered Public Accounting Firm +To the Stockholders and Board of Directors Cimarex Energy Co.: +Opinion on the Consolidated Financial Statements +We have audited the accompanying consolidated balance sheets of Cimarex Energy Co. and subsidiaries (the Company) as of December 31, 2020 and 2019, the related consolidated statements of operations and comprehensive income (loss), stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2020, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2020, in conformity with U.S. generally accepted accounting principles. +We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 23, 2021 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting. +Change in Accounting Principle +As discussed in Note 1 to the consolidated financial statements, the Company has changed its method of accounting for leases as of January 1, 2019 due to the adoption of Financial Accounting Standards Board Accounting Standards Codification Topic 842, Leases. +Basis for Opinion +These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. +Critical Audit Matter +The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. +65 +Table of Contents +Impact of estimated oil and gas reserves related to proved oil and gas properties on depletion expense and the ceiling test calculation +As discussed in Note 1 to the consolidated financial statements, the Company calculates depletion expense for its proved oil and gas properties using the units-of-production method whereby capitalized costs, including estimated future development costs and asset retirement costs, are amortized over total estimated proved reserves. The Company is required to perform a ceiling test calculation on a quarterly basis, and the applicable ceiling limitation is equal to the sum of: (1) the present value discounted at 10% of estimated future net revenues from proved reserves, (2) the cost of properties not being amortized, and (3) the lower of cost or estimated fair value of unproven properties included in the costs being amortized, as adjusted for income taxes. If the net capitalized cost of oil and gas properties, as adjusted for income taxes, exceeds the ceiling limitation, the excess is charged to expense. For the year ended December 31, 2020, the Company recorded depletion expense related to proved oil and gas properties of $625.5 million and recorded ceiling test impairments of $1,638.3 million. The Company’s internal Corporate Reservoir Engineering group prepares estimates of the Company’s proved oil and gas reserves. The Company also engages an independent petroleum engineering consulting firm to perform an independent evaluation of a portion of those proved oil and gas reserve estimates. +We identified the impact of the estimate of proved oil and gas reserves used in the determination of depletion expense and the ceiling test calculation as a critical audit matter. There is a high degree of subjectivity in evaluating the estimate of proved oil and gas reserves as auditor judgment was required to evaluate the assumptions used by the Company related to forecasts of production, future operating costs and future development costs, and oil and gas prices inclusive of market differentials. +The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the process for estimating oil and gas reserves for proved oil and gas properties, including controls over the development of the forecasts of production, future operating costs and future development costs, and oil and gas prices. We evaluated (1) the professional qualifications of the internal Corporate Reservoir Engineering group as well as the engineer assigned to the Company by the independent petroleum engineering consulting firm engaged by the Company, (2) the knowledge, skills, and ability of the Company’s internal Corporate Reservoir Engineering group and the independent petroleum engineering consulting firm and the engineer assigned to the Company and (3) the objectivity of the independent petroleum engineering consulting firm and the engineer assigned to the Company. We assessed the methodology used by the Company’s internal Corporate Reservoir Engineering group to estimate proved oil and gas reserves and the methodology used by the independent petroleum engineering consulting firm to evaluate those reserve estimates for consistency with industry and regulatory standards. We evaluated the assumptions of forecasts of production, future operating costs and future development costs used by the Company’s internal Corporate Reservoir Engineering group by comparing them to the Company’s historical actual results. We evaluated the oil and gas prices used by the Company’s internal Corporate Reservoir Engineering group by comparing them to publicly available prices and tested the relevant market differentials. We read the findings of the Company’s independent petroleum engineering consulting firm in connection with our evaluation of the Company’s reserve estimates. We analyzed the depletion expense calculation for compliance with regulatory standards, and recalculated it. We also analyzed the ceiling test impairment calculation for compliance with regulatory standards. In addition, we performed a calculation of the ceiling test impairment and compared our results with the Company’s results. +/s/ KPMG LLP +We have served as the Company’s auditor since 2002. +Denver, Colorado +February 23, 2021 +66 +Table of Contents +CIMAREX ENERGY CO. +CONSOLIDATED BALANCE SHEETS +(in thousands, except share and per share information) +December 31, +2020 2019 +Assets +Current assets: +Cash and cash equivalents $ 273,145 $ 94,722 +Accounts receivable, net of allowance: +Trade 49,650 57,879 +Oil and gas sales 271,141 384,707 +Gas gathering, processing, and marketing 11,694 5,998 +Oil and gas well equipment and supplies 37,150 47,893 +Derivative instruments 6,848 17,944 +Prepaid expenses 7,113 10,759 +Other current assets 597 1,584 +Total current assets 657,338 621,486 +Oil and gas properties at cost, using the full cost method of accounting: +Proved properties 21,281,840 20,678,334 +Unproved properties and properties under development, not being amortized 1,142,183 1,255,908 +22,424,023 21,934,242 +Less—accumulated depreciation, depletion, amortization, and impairment ( 18,987,354 ) ( 16,723,544 ) +Net oil and gas properties 3,436,669 5,210,698 +Fixed assets, net of accumulated depreciation of $ 455,815 and $ 389,458 , respectively +436,101 519,291 +Goodwill — 716,865 +Derivative instruments 2,342 580 +Deferred income taxes 20,472 — +Other assets 69,067 71,109 +$ 4,621,989 $ 7,140,029 +Liabilities, Redeemable Preferred Stock, and Stockholders’ Equity +Current liabilities: +Accounts payable: +Trade $ 21,902 $ 36,280 +Gas gathering, processing, and marketing 22,388 12,740 +Accrued liabilities: +Exploration and development 50,014 112,228 +Taxes other than income 29,051 54,446 +Other 201,784 252,304 +Derivative instruments 145,398 16,681 +Revenue payable 130,637 207,939 +Operating leases 59,051 66,003 +Total current liabilities 660,225 758,621 +Long-term debt: +Principal 2,000,000 2,000,000 +Less—unamortized debt issuance costs and discounts ( 12,701 ) ( 14,754 ) +Long-term debt, net 1,987,299 1,985,246 +Deferred income taxes — 338,424 +Asset retirement obligation 165,595 154,045 +Derivative instruments 17,749 1,018 +Operating leases 134,705 184,172 +Other liabilities 66,181 60,742 +Total liabilities 3,031,754 3,482,268 +Commitments and contingencies (Note 10) +Redeemable preferred stock - 8.125 % Series A Cumulative Perpetual Convertible Preferred Stock, $ 0.01 par value, 28,165 shares authorized and issued and 62,500 shares authorized and issued, respectively (Note 2) +36,781 81,620 +Stockholders’ equity: +Common stock, $ 0.01 par value, 200,000,000 shares authorized, 102,866,806 and 102,144,577 shares issued, respectively +1,029 1,021 +Additional paid-in capital 3,211,562 3,243,325 +(Accumulated deficit) retained earnings ( 1,659,137 ) 331,795 +Total stockholders’ equity 1,553,454 3,576,141 +$ 4,621,989 $ 7,140,029 +See accompanying notes to Consolidated Financial Statements. +67 +Table of Contents +CIMAREX ENERGY CO. +CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) +(in thousands, except per share information) +Years Ended December 31, +2020 2019 2018 +Revenues: +Oil sales $ 999,682 $ 1,660,210 $ 1,398,813 +Gas and NGL sales 513,006 661,711 898,832 +Gas gathering and other 47,842 42,454 41,180 +Gas marketing ( 1,935 ) ( 1,406 ) 192 +1,558,595 2,362,969 2,339,017 +Costs and expenses: +Impairment of oil and gas properties 1,638,329 618,693 — +Depreciation, depletion, and amortization 695,954 882,173 590,473 +Asset retirement obligation 14,653 8,586 7,142 +Impairment of goodwill 714,447 — — +Production 285,324 339,941 296,189 +Transportation, processing, and other operating 213,366 238,259 211,463 +Gas gathering and other 23,591 23,294 28,327 +Taxes other than income 79,699 148,953 125,169 +General and administrative 111,005 95,843 77,843 +Stock-based compensation 29,895 26,398 22,895 +Loss (gain) on derivative instruments, net 35,534 76,850 ( 85,959 ) +Other operating expense, net 839 19,305 18,507 +3,842,636 2,478,295 1,292,049 +Operating (loss) income ( 2,284,041 ) ( 115,326 ) 1,046,968 +Other (income) and expense: +Interest expense 92,914 93,386 68,224 +Capitalized interest ( 50,030 ) ( 56,232 ) ( 20,855 ) +Loss on early extinguishment of debt — 4,250 — +Other, net ( 540 ) ( 5,741 ) ( 22,908 ) +(Loss) income before income tax ( 2,326,385 ) ( 150,989 ) 1,022,507 +Income tax (benefit) expense ( 358,927 ) ( 26,370 ) 230,656 +Net (loss) income $ ( 1,967,458 ) $ ( 124,619 ) $ 791,851 +Earnings (loss) per share to common stockholders: +Basic $ ( 19.73 ) $ ( 1.33 ) $ 8.32 +Diluted $ ( 19.73 ) $ ( 1.33 ) $ 8.32 +Comprehensive (loss) income: +Net (loss) income $ ( 1,967,458 ) $ ( 124,619 ) $ 791,851 +Other comprehensive (loss) income: +Change in fair value of investments, net of tax of $ 0 , $( 222 ), and $( 425 ), respectively +— ( 755 ) ( 1,444 ) +Total comprehensive (loss) income $ ( 1,967,458 ) $ ( 125,374 ) $ 790,407 +See accompanying notes to Consolidated Financial Statements. +68 +Table of Contents +CIMAREX ENERGY CO. +CONSOLIDATED STATEMENTS OF CASH FLOWS +(in thousands) +Years Ended December 31, +2020 2019 2018 +Cash flows from operating activities: +Net (loss) income $ ( 1,967,458 ) $ ( 124,619 ) $ 791,851 +Adjustments to reconcile net (loss) income to net cash provided by operating activities: +Impairment of oil and gas properties 1,638,329 618,693 — +Depreciation, depletion, and amortization 695,954 882,173 590,473 +Asset retirement obligation 14,653 8,586 7,142 +Impairment of goodwill 714,447 — — +Deferred income taxes ( 358,896 ) ( 26,902 ) 233,280 +Stock-based compensation 29,895 26,398 22,895 +Loss (gain) on derivative instruments, net 35,534 76,850 ( 85,959 ) +Settlements on derivative instruments 119,247 ( 13,131 ) ( 24,429 ) +Loss on early extinguishment of debt — 4,250 — +Changes in non-current assets and liabilities 7,189 ( 2,797 ) ( 1,779 ) +Other, net 15,305 14,639 105 +Changes in operating assets and liabilities: +Accounts receivable 116,492 65,128 5,421 +Other current assets 5,134 ( 739 ) ( 1,957 ) +Accounts payable and other current liabilities ( 161,658 ) ( 184,563 ) 13,951 +Net cash provided by operating activities 904,167 1,343,966 1,550,994 +Cash flows from investing activities: +Oil and gas capital expenditures ( 594,796 ) ( 1,245,457 ) ( 1,540,305 ) +Acquisition of oil and gas properties ( 11,878 ) ( 288,781 ) ( 26,278 ) +Other capital expenditures ( 44,302 ) ( 73,693 ) ( 103,459 ) +Sales of oil and gas assets 69,983 28,945 580,652 +Sales of other assets 2,118 1,104 3,772 +Net cash used by investing activities ( 578,875 ) ( 1,577,882 ) ( 1,085,618 ) +Cash flows from financing activities: +Borrowings of long-term debt 172,000 2,619,310 — +Repayments of long-term debt ( 172,000 ) ( 2,990,000 ) — +Financing, underwriting, and debt redemption fees ( 1,566 ) ( 11,798 ) ( 100 ) +Finance lease payments ( 4,842 ) ( 3,869 ) — +Dividends paid ( 92,976 ) ( 81,709 ) ( 55,243 ) +Repurchase of redeemable preferred stock ( 43,029 ) — — +Employee withholding taxes paid upon the net settlement of equity-classified stock awards ( 4,456 ) ( 5,229 ) ( 12,142 ) +Proceeds from exercise of stock options — 1,267 2,241 +Net cash used by financing activities ( 146,869 ) ( 472,028 ) ( 65,244 ) +Net change in cash and cash equivalents 178,423 ( 705,944 ) 400,132 +Cash and cash equivalents at beginning of period 94,722 800,666 400,534 +Cash and cash equivalents at end of period $ 273,145 $ 94,722 $ 800,666 +See accompanying notes to Consolidated Financial Statements. +69 +Table of Contents +CIMAREX ENERGY CO. +CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY +(in thousands, except per share information) +Additional Paid-in Capital Retained +Earnings (Accumulated Deficit) Accumulated +Other Comprehensive Income (Loss) Total Stockholders’ Equity +Common Stock +Shares Amount +Balance, December 31, 2017 95,437 $ 954 $ 2,764,384 $ ( 199,259 ) $ 2,199 $ 2,568,278 +Dividends paid on stock awards subsequently forfeited — — 34 18 — 52 +Dividends declared on common stock ($ 0.68 per share) +— — ( 15,196 ) ( 49,725 ) — ( 64,921 ) +Net income — — — 791,851 — 791,851 +Unrealized change in fair value of investments, net of tax — — — — ( 1,444 ) ( 1,444 ) +Issuance of restricted stock awards 593 6 ( 6 ) — — — +Common stock reacquired and retired ( 139 ) — ( 12,142 ) — — ( 12,142 ) +Restricted stock forfeited or canceled and retired ( 168 ) ( 2 ) 2 — — — +Exercise of stock options 33 — 2,241 — — 2,241 +Stock-based compensation — — 45,871 — — 45,871 +Balance, December 31, 2018 95,756 958 2,785,188 542,885 755 3,329,786 +Dividends paid on stock awards subsequently forfeited — — 8 18 — 26 +Dividends declared on common stock ($ 0.80 per share) +— — 61 ( 81,411 ) — ( 81,350 ) +Dividends declared on redeemable preferred stock ($ 81.25 per share) +— — — ( 5,078 ) — ( 5,078 ) +Net loss — — — ( 124,619 ) — ( 124,619 ) +Issuance of stock for Resolute Energy acquisition (Note 13) 5,652 56 412,959 — — 413,015 +Unrealized change in fair value of investments, net of tax — — — — ( 755 ) ( 755 ) +Issuance of restricted stock awards 946 9 ( 9 ) — — — +Common stock reacquired and retired ( 105 ) ( 1 ) ( 5,228 ) — — ( 5,229 ) +Restricted stock forfeited or canceled and retired ( 133 ) ( 1 ) 1 — — — +Exercise of stock options 29 — 1,267 — — 1,267 +Stock-based compensation — — 49,078 — — 49,078 +Balance, December 31, 2019 102,145 1,021 3,243,325 331,795 — 3,576,141 +Dividends paid on stock awards subsequently forfeited — — 32 124 — 156 +Dividends declared on common stock ($ 0.88 per share) +— — ( 67,658 ) ( 22,329 ) — ( 89,987 ) +Dividends declared on redeemable preferred stock ($ 81.25 per share) +— — ( 3,592 ) ( 1,269 ) — ( 4,861 ) +Return from repurchase of redeemable preferred stock — — 1,810 — — 1,810 +Net loss — — — ( 1,967,458 ) — ( 1,967,458 ) +Issuance of restricted stock awards 1,159 13 ( 13 ) — — — +Common stock reacquired and retired ( 162 ) ( 2 ) ( 4,454 ) — — ( 4,456 ) +Restricted stock forfeited or canceled and retired ( 275 ) ( 3 ) 3 — — — +Stock-based compensation — — 42,109 — — 42,109 +Balance, December 31, 2020 102,867 $ 1,029 $ 3,211,562 $ ( 1,659,137 ) $ — $ 1,553,454 +See accompanying notes to Consolidated Financial Statements. +70 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES +Cimarex Energy Co., a Delaware corporation, is an independent oil and gas exploration and production company. Our operations are located entirely within the United States of America, mainly in Texas, New Mexico, and Oklahoma. +Basis of Presentation +Our Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP. Our significant accounting policies are discussed below. The accounts of Cimarex and its subsidiaries are presented in the accompanying Consolidated Financial Statements. All intercompany accounts and transactions were eliminated in consolidation. Certain amounts in the prior year financial statements have been reclassified to conform to the 2020 financial statement presentation. +Segment Information +We have determined that our business is comprised of only one segment because our gathering, processing, and marketing activities are ancillary to our oil and gas production operations. +Use of Estimates +The preparation of our financial statements in conformity with GAAP requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses. Areas of significance requiring the use of management’s judgments include the estimation of proved oil and gas reserves used in calculating depletion, the estimation of future net revenues used in computing ceiling test limitations, the estimation of future abandonment obligations used in recording asset retirement obligations, and the assessment of goodwill. Estimates and judgments also are required in determining allowances for credit losses, impairments of unproved properties and other assets, valuation of deferred tax assets, fair value measurements, lease liabilities, and contingencies. We analyze our estimates and base them on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. +The process of estimating quantities of oil and gas reserves is complex, requiring judgment and interpretation in the evaluation of all available geological, geophysical, engineering, and economic data. The data for a given field may also change substantially over time as a result of numerous factors including, but not limited to, additional development activity, evolving production history, and continual reassessment of the viability of production under varying economic conditions. As a result, material revisions to existing reserve estimates may occur from time to time. Although every reasonable effort is made to ensure that our reserve estimates represent the most accurate assessments possible, subjective decisions, and available data for our various fields make these estimates generally less precise than other estimates included in financial statement disclosures. +Cash and Cash Equivalents +Cash and cash equivalents consist of cash in banks and investments readily convertible into cash, which have original maturities of three months or less. Cash equivalents are stated at cost, which approximates market value. +Oil and Gas Well Equipment and Supplies +Our oil and gas well equipment and supplies are valued at the lower of cost and net realizable value, where net realizable value is based on estimated selling prices in the ordinary course of business, less reasonably +71 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +predictable costs of completion, disposal, and transportation. Declines in the price of oil and gas well equipment and supplies in future periods could cause us to recognize impairments on these assets. An impairment would not affect cash flow from operating activities, but would adversely affect our net income and stockholders’ equity. +Oil and Gas Properties +We use the full cost method of accounting for our oil and gas operations. All costs associated with property acquisition, exploration, and development activities are capitalized. Exploration and development costs include dry hole costs, geological and geophysical costs, direct overhead related to exploration and development activities, and other costs incurred for the purpose of finding oil and gas reserves. Salaries and benefits paid to employees directly involved in the acquisition, exploration, and development of properties, as well as other internal costs that can be directly identified with acquisition, exploration and development activities, are also capitalized. Under the full cost method of accounting, no gain or loss is recognized upon the disposition of oil and gas properties unless such disposition would significantly alter the relationship between capitalized costs and proved reserves. Expenditures for maintenance and repairs are charged to production expense in the period incurred. +Under the full cost method of accounting, we are required to perform quarterly ceiling test calculations to test our oil and gas properties for possible impairment. If the net capitalized cost of our oil and gas properties, as adjusted for income taxes, exceeds the ceiling limitation, the excess is charged to expense. The ceiling limitation is equal to the sum of: (i) the present value discounted at 10 % of estimated future net revenues from proved reserves, (ii) the cost of properties not being amortized, and (iii) the lower of cost or estimated fair value of unproven properties included in the costs being amortized, as adjusted for income taxes. We currently do not have any unproven properties that are being amortized. Estimated future net revenues are determined based on trailing twelve-month average commodity prices and estimated proved reserve quantities, operating costs, and capital expenditures. +During the years ended December 31, 2020 and 2019, we recognized ceiling test impairments totaling $ 1.64 billion and $ 618.7 million, respectively. The impairments resulted primarily from the impact of decreases in the 12-month average trailing prices for oil, natural gas, and NGLs as well as significant basis differentials utilized in determining the estimated future net cash flows from proved reserves. We did no t recognize a ceiling test impairment during the year ended December 31, 2018 because the net capitalized cost of our oil and gas properties, as adjusted for income taxes, did not exceed the ceiling limitation. The quarterly ceiling test is primarily impacted by commodity prices, changes in estimated reserve quantities, reserves produced, overall exploration and development costs, depletion expense, and deferred taxes. If pricing conditions decline, or if there is a negative impact on one or more of the other components of the calculation, we may incur full cost ceiling test impairments in future quarters. The calculated ceiling limitation is not intended to be indicative of the fair market value of our proved reserves or future results. Impairment charges do not affect cash flow from operating activities, but do adversely affect our net income and various components of our balance sheet. Any impairment of oil and gas properties is not reversible at a later date. +Depletion of proved oil and gas properties is computed on the units-of-production method, whereby capitalized costs, including future development costs and asset retirement costs, are amortized over total estimated proved reserves. Changes in our estimate of proved reserve quantities and impairment of oil and gas properties will cause corresponding changes in depletion expense in periods subsequent to these changes. +The capitalized costs of unproved properties, including those in wells in progress, are excluded from the costs being amortized. We do not have major development projects that are excluded from costs being amortized. On a quarterly basis, we evaluate excluded costs for inclusion in the costs to be amortized. Significant unproved properties are evaluated individually. Unproved properties that are not considered individually significant are aggregated for evaluation purposes and related costs are transferred to the costs to be amortized quarterly based on the application of historical factors. +72 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +Fixed Assets +Fixed assets consist primarily of gas gathering and plant facilities, water infrastructure, vehicles, airplanes, office furniture, and computer equipment and software. These items are recorded at cost and are depreciated on the straight-line method based on expected lives of the individual assets, which range from 3 to 30 years. Also included in Fixed assets are operating lease right-of-use assets. See Note 10 for additional information regarding our leases. +Goodwill +Goodwill represents the excess of the purchase price of business combinations over the fair value of the net assets acquired and is tested for impairment at least annually. In performing the goodwill test, we compare the fair value of our reporting unit with its carrying amount. If the carrying amount of the reporting unit exceeds its fair value, an impairment charge is recognized in the amount of this excess, limited to the total amount of goodwill allocated to that reporting unit. We evaluate our goodwill for impairment in the fourth quarter of each year and whenever events or changes in circumstances indicate the possibility that goodwill may be impaired. Based upon our assessment as of October 31, 2019, goodwill was not impaired. However, during the three months ended March 31, 2020 the company’s market capitalization declined significantly, caused by macroeconomic and geopolitical conditions including the collapse of oil prices driven by surplus supply and decreased demand caused by the COVID-19 pandemic. In addition, the uncertainty related to oil demand significantly impacted our investment and operating decisions. As a result, we concluded that a triggering event had occurred and we performed an interim quantitative impairment test for goodwill as of March 31, 2020. As a result of that quantitative impairment test, which utilized quoted market prices for our common stock as a basis for determining the fair value of our reporting unit, we concluded that goodwill was fully impaired at March 31, 2020. +The following table reflects components of the change in the carrying amount of goodwill for the year ended December 31, 2020: +(in thousands) Year Ended +December 31, 2020 +Goodwill balance at January 1, 2020 $ 716,865 +Resolute acquisition purchase price adjustments (Note 13) ( 2,418 ) +Impairment ( 714,447 ) +Goodwill balance at December 31, 2020 $ — +Revenue Recognition +Oil, Gas, and NGL Sales +Revenue is recognized from the sales of oil, gas, and NGLs when the customer obtains control of the product, when we have no further obligations to perform related to the sale, and when collectability is probable. All of our sales of oil, gas, and NGLs are made under contracts with customers, which typically include variable consideration based on monthly pricing tied to local indices and monthly volumes delivered. The nature of our contracts with customers does not require us to constrain that variable consideration or to estimate the amount of transaction price attributable to future performance obligations for accounting purposes. As of December 31, 2020, we had open contracts with customers with terms of one month to multiple years, as well as “evergreen” contracts that renew on a periodic basis if not canceled by us or the customer. Performance obligations under our contracts with customers are typically satisfied at a point-in-time through monthly delivery of oil, gas, and/or NGLs. Our contracts with customers typically require payment within one month of delivery. +73 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +Our gas is sold under various contracts. Under these contracts the gas and its components, including residue gas and NGLs, may be sold to a single purchaser or separate purchasers. Regardless of the contract, we are compensated for the value of the residue gas and NGLs at current market prices for each product. Depending on the specific contract terms, certain gathering, treating, transportation, processing, and other charges may be deducted against the prices we receive for the products. Our oil typically is sold at specific delivery points under contract terms that are common in our industry. +Gas Gathering +When we transport, process, and/or market third-party gas associated with our equity gas, we recognize revenue for the fees charged to third-parties for such services. +Gas Marketing +When we market and sell gas for other working interest owners, we act as agent under short-term sales and supply agreements and may earn a fee for such services. Revenues from such services are recognized as gas is delivered. +Gas Imbalances +Revenue from the sale of gas is recorded on the basis of gas actually sold by or for us. If our aggregate sales volumes for a well are greater (or less) than our proportionate share of production from the well, a liability (or receivable) is established to the extent there are insufficient proved reserves available to make-up the overproduced (or underproduced) imbalance. Imbalances have not been significant in the periods presented. +General and Administrative Expenses +General and administrative expenses are reported net of amounts reimbursed to us by other working interest owners of the oil and gas properties we operate and net of amounts capitalized pursuant to the full cost method of accounting. General and administrative expense for the year ended December 31, 2020 included $ 28.7 million in severance expense associated with the voluntary early retirement incentive program that we offered to employees who met certain eligibility criteria in the first quarter of 2020 and the involuntary reduction in workforce program that we carried out in the third quarter of 2020. All of the expense for these programs was recognized in 2020. The remaining liability for these programs at December 31, 2020 is $ 11.3 million. The majority of this amount will be paid out in 2021, with the final payments expected to be made in 2022. +Derivatives +Our derivative contracts are recorded on the balance sheet at fair value. Our firm sales contracts qualify for the normal purchase and normal sale exception. Contracts that qualify for this treatment do not require mark-to-market accounting treatment. See Note 4 for additional information regarding our derivative instruments. +Income Taxes +We record deferred tax assets and liabilities to account for the expected future tax consequences of events that have been recognized in the financial statements and tax returns. We classify all deferred tax assets and liabilities as non-current. We routinely assess the realizability of our deferred tax assets. Numerous judgments and assumptions are inherent in this assessment, including the determination of future taxable income, which is affected by factors such as future operating conditions (particularly as related to prevailing oil and gas prices) and changing tax laws. If we conclude that it is more likely than not that some or all of the deferred tax assets will not be realized, the tax asset is reduced by a valuation allowance. We regularly assess and, if required, establish accruals for tax +74 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +contingencies that could result from assessments of additional tax by taxing jurisdictions where the company operates. See Note 9 for additional information regarding our income taxes. +Contingencies +A provision for contingencies is charged to expense when the loss is probable and the cost can be reasonably estimated. Determining when expenses should be recorded for these contingencies and the appropriate amounts for accrual is a complex estimation process that includes subjective judgment. In many cases, this judgment is based on interpretation of laws and regulations, which can be interpreted differently by regulators and/or courts of law. We closely monitor known and potential legal, environmental, and other contingencies and determine when we should record losses for these items based on information available to us. See Note 10 for additional information regarding our contingencies. +Asset Retirement Obligations +We recognize the present value of the fair value of liabilities for retirement obligations associated with tangible long-lived assets in the period in which there is a legal obligation associated with the retirement of such assets and the amount can be reasonably estimated. The liability includes costs related to the plugging and abandonment of wells, the removal of facilities and equipment, and site restorations. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset and are depleted or depreciated as applicable. Subsequent to initial measurement at present value, a period-to-period increase in the carrying amount of the liability is recognized as accretion expense, which represents the effect of the passage of time on the amount of the liability. If the fair value of a recorded asset retirement obligation changes, a revision is recorded to both the asset retirement obligation and the asset retirement capitalized cost. The current portion of our asset retirement obligations is recorded in “Accrued liabilities — Other” in the accompanying Consolidated Balance Sheets and cash payments for settlements of retirement obligations are classified as cash used in operating activities in the accompanying Consolidated Statements of Cash Flows. See Note 8 for additional information regarding our asset retirement obligations. +Stock-based Compensation +We grant various types of stock-based awards including equity-classified awards such as stock options, restricted stock (including awards with service-based vesting and market condition-based vesting provisions), restricted stock units, and liability-classified awards such as cash-settled phantom stock. We recognize compensation cost related to equity-classified awards based on the estimated grant date fair value of the awards. The grant date fair value of stock option awards is determined using the Black-Scholes option pricing model. The grant date fair value of service-based restricted stock and units is the closing market price of our common stock on the grant date. The grant date fair value of the market condition-based restricted stock incorporates the effect of the market condition using a multiple probability simulation model. Compensation cost related to equity-classified awards is recognized ratably over the applicable vesting period. We recognize compensation cost related to liability-classified awards over the applicable vesting period based on an estimated fair value that is remeasured each reporting period using a multiple probability simulation model. To the extent compensation cost relates to employees directly involved in oil and gas acquisition, exploration, and development activities, such amounts are capitalized to oil and gas properties. Amounts not capitalized to oil and gas properties are recognized as stock-based compensation expense. See Note 6 for additional information regarding our stock-based compensation. +75 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +Earnings (Loss) per Share +We calculate earnings (loss) per share recognizing that unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents are “participating securities” and, therefore, should be included in computing earnings per share using the two-class earnings allocation method. The two-class method is an earnings allocation formula that determines earnings per share for each class of common stock and participating security according to dividends declared (or accumulated) and participation rights in undistributed earnings. Our unvested share-based payment awards, consisting of restricted stock and units, qualify as participating securities. Our participating securities do not have a contractual obligation to share in the losses of the entity and, therefore, net losses are not allocated to them. See Note 7 for additional information regarding our earnings per share. +Lease Accounting +In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, Leases (“Topic 842”). The FASB subsequently issued various ASUs that provided additional implementation guidance. Topic 842 requires lessees to recognize lease liabilities and right-of-use assets on the balance sheet for contracts that provide lessees with the right to control the use of identified assets for a period of time. The scope of Topic 842 excludes leases to explore for or use minerals, oil, natural gas, and similar nonregenerative resources. We adopted Topic 842 effective January 1, 2019, using the modified retrospective method applied to all leases that existed on that date, which resulted in the recognition of lease liabilities of $ 276.9 million and right-of-use assets of $ 265.0 million. In connection with adoption we made use of the following practical expedients, which are provided in Topic 842: +• a package of practical expedients to not reassess: 1) whether expired or existing contracts are or contain a lease, 2) lease classification for expired or existing leases, and 3) initial direct costs for existing leases; +• an election not to apply the recognition requirements in Topic 842 to short-term leases (a lease that at commencement date has a lease term of 12 months or less and does not contain a purchase option that the company is reasonably certain to exercise); +• a practical expedient that permits combining lease and nonlease components in a contract and accounting for the combination as a lease (elected by asset class); and +• a practical expedient to not reassess certain land easements in existence prior to January 1, 2019. +2. CAPITAL STOCK +Authorized capital stock consists of 200 million shares of common stock and 15 million shares of preferred stock. At December 31, 2020, there were 102.9 million shares of common stock and 28.2 thousand shares of preferred stock outstanding. +Redeemable Preferred Stocks +In February 2019, our Board of Directors created a new series of preferred stock, par value $ 0.01 per share, designated as 8.125 % Series A Cumulative Perpetual Convertible Preferred Stock (the “Preferred Stock”) and authorized 62.5 thousand shares. In March 2019, in conjunction with the Resolute acquisition (see Note 13), we issued all of these shares of Preferred Stock. Prior to this issuance, we had not issued any preferred stock. +Holders of the Preferred Stock are entitled to receive, when, as, and if declared by the Board out of funds of Cimarex legally available for payment, cumulative cash dividends at the annual rate of 8.125 % of each share’s liquidation preference of $ 1,000 . Dividends on the Preferred Stock are payable quarterly in arrears and accumulate +76 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +from the most recent date as to which dividends have been paid. In the event of any liquidation, winding up, or dissolution of Cimarex, whether voluntary or involuntary, each holder will be entitled to receive in respect of its shares and to be paid out of the assets of Cimarex legally available for distribution to its stockholders, after satisfaction of liabilities to Cimarex’s creditors and any senior stock (of which there is currently none) and before any payment or distribution is made to holders of junior stock (including common stock), the liquidation preference of $ 1,000 per share, with the total liquidation preference at December 31, 2020 being $ 28.2 million in the aggregate. Each holder has the right at any time, at its option, to convert any or all of such holder’s shares of Preferred Stock at an initial conversion rate of 8.0421 shares of fully paid and nonassessable shares of our common stock and $ 471.40 in cash per share of Preferred Stock. The initial conversion rate of 8.0421 adjusts upon the occurrence of certain events, including the payment of cash dividends to common shareholders, and is 8.38732 as of December 31, 2020. Additionally, at any time on or after October 15, 2021, we shall have the right, at our option, if the closing sale price of our common stock meets certain criteria, to elect to cause all, and not part, of the outstanding shares of Preferred Stock to be automatically converted into that number of shares of Cimarex common stock for each share of Preferred Stock equal to the conversion rate in effect on the mandatory conversion date as such terms are defined in the Certificate of Designations for the Preferred Stock and $ 471.40 in cash per share of Preferred Stock. We also have the right at any time to repurchase shares of Preferred Stock through privately negotiated transactions. As a result of the cash redemption features included in the Preferred Stock conversion option, with such conversion not solely within our control, the instruments are classified as “Redeemable preferred stock” in temporary equity on the Consolidated Balance Sheets. +In December 2020, we repurchased 34.3 thousand shares of Preferred Stock, leaving 28.2 thousand shares of 8.125 % Series A Cumulative Perpetual Convertible Preferred Stock authorized and issued at December 31, 2020. The book value of the repurchased shares exceeded the aggregate amount Cimarex paid to repurchase the shares by $ 1.8 million. That amount has been treated as a return from the holders of the Preferred Stock and recorded as an increase to additional paid-in capital (similar to the treatment of dividends declared, which are recorded as a reduction of additional paid-in capital). +Dividends +Common Stock +A quarterly cash dividend has been paid on our common stock every quarter since the first quarter of 2006. In each quarter of 2020, a $ 0.22 per common share dividend was declared. In each quarter of 2019 a $ 0.20 per common share dividend was declared. A dividend of $ 0.18 per common share was declared in both the third and fourth quarters of 2018 and a dividend of $ 0.16 per common share was declared in both the first and second quarters of 2018. Dividends are paid in the quarter following the quarter of declaration. At December 31, 2020, we had dividends payable to common stockholders of $ 22.9 million that was included in “Accrued liabilities — Other”. Dividends declared are recorded as a reduction of retained earnings to the extent retained earnings are available at the close of the period prior to the date of the declared dividend. Dividends in excess of retained earnings are recorded as a reduction of additional paid-in capital. Nonforfeitable dividends paid on stock awards that subsequently forfeit are reclassified out of retained earnings or additional paid-in capital, as applicable, to compensation expense in the period in which the stock award forfeitures occur. Dividends accrued and unpaid on performance stock awards that are canceled upon completion of the vesting period due to the market condition not being met, are reversed out of retained earnings or additional paid-in capital, as applicable, in the period in which the stock award cancellations occur. Future dividend payments will depend on our level of earnings, financial requirements, and other factors considered relevant by our Board of Directors. +77 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +Preferred Stock +In each quarter of 2020 and 2019 our Board of Directors declared a cash dividend of $ 20.3125 per share of Preferred Stock. Dividends are paid in the quarter following the quarter of declaration. At December 31, 2020, we had dividends payable to preferred stockholders of $ 0.6 million that was included in “Accrued liabilities — Other”. +3. LONG-TERM DEBT +Long-term debt at December 31, 2020 and 2019 consisted of the following: +December 31, 2020 December 31, 2019 +(in thousands) Principal Unamortized +Debt +Issuance Costs and Discounts (1) Long-term +Debt, net Principal Unamortized +Debt +Issuance Costs and Discounts (1) Long-term +Debt, net +4.375 % notes due 2024 +$ 750,000 $ ( 2,672 ) $ 747,328 $ 750,000 $ ( 3,535 ) $ 746,465 +3.90 % notes due 2027 +750,000 ( 5,541 ) 744,459 750,000 ( 6,289 ) 743,711 +4.375 % notes due 2029 +500,000 ( 4,488 ) 495,512 500,000 ( 4,930 ) 495,070 +Total long-term debt $ 2,000,000 $ ( 12,701 ) $ 1,987,299 $ 2,000,000 $ ( 14,754 ) $ 1,985,246 +________________________________________ +(1) The 4.375 % notes due 2024 were issued at par , therefore, the amounts shown in the table are for unamortized debt issuance costs only. At December 31, 2020, the unamortized debt issuance costs and discount related to the 3.90 % notes due 2027 were $ 4.3 million and $ 1.3 million, respectively. At December 31, 2020, the unamortized debt issuance costs and discount related to the 4.375 % notes due 2029 were $ 3.9 million and $ 0.6 million, respectively. At December 31, 2019, the unamortized debt issuance costs and discount related to the 3.90 % notes due 2027 were $ 4.8 million and $ 1.5 million, respectively. At December 31, 2019, the unamortized debt issuance costs and discount related to the 4.375 % notes due 2029 were $ 4.3 million and $ 0.6 million, respectively. +Bank Debt +On June 3, 2020, we entered into the First Amendment to Amended and Restated Credit Agreement (the “First Amendment”) dated as of February 5, 2019 for our senior unsecured revolving credit facility (“Credit Facility”). The Credit Facility has aggregate commitments of $ 1.25 billion with an option for us to increase the aggregate commitments to $ 1.5 billion, and matures on February 5, 2024. There is no borrowing base subject to the discretion of the lenders based on the value of our proved reserves under the Credit Facility. The First Amendment, among other things: (i) allows up to $ 3.5 billion of non-cash impairment charge add-backs to Shareholders’ Equity for covenant calculation purposes, (ii) institutes traditional anti-cash hoarding provisions (if borrowings are outstanding under the Credit Facility) at a consolidated cash threshold of $ 175.0 million, (iii) reduces the priority lien debt basket from 15 % of Consolidated Net Tangible Assets (as defined in the credit agreement) to a $ 50.0 million cap, and (iv) adds an acknowledgement and consent to European Union bail-in legislation. As of December 31, 2020, we had no bank borrowings outstanding under the Credit Facility, but did have letters of credit of $ 2.5 million outstanding, leaving an unused borrowing availability of $ 1.248 billion. During the year ended December 31, 2020, we borrowed and repaid an aggregate of $ 172.0 million on the Credit Facility to meet cash requirements as needed. +78 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +At our option, borrowings under the Credit Facility may bear interest at either (a) LIBOR (or an alternate rate determined by the administrative agent for the Credit Facility in accordance with the Credit Facility when LIBOR is no longer available) plus 1.125 - 2.0 % based on the credit rating for our senior unsecured long-term debt, or (b) a base rate (as defined in the credit agreement) plus 0.125 - 1.0 %, based on the credit rating for our senior unsecured long-term debt. Unused borrowings are subject to a commitment fee of 0.125 - 0.35 %, based on the credit rating for our senior unsecured long-term debt. +The Credit Facility contains representations, warranties, covenants, and events of default that are customary for investment grade, senior unsecured bank credit agreements, including a financial covenant for the maintenance of a defined total debt-to-capitalization ratio of no greater than 65 %. As of December 31, 2020, we were in compliance with all of the financial covenants. +At December 31, 2020 and 2019, we had $ 4.3 million and $ 4.0 million, respectively, of unamortized debt issuance costs associated with our Credit Facility, which were recorded as assets and included in “Other assets” in our Consolidated Balance Sheets. During the year ended December 31, 2020, we incurred $ 1.5 million in fees paid to the lenders and third-party costs for the First Amendment. The debt issuance costs are being amortized to interest expense ratably over the life of the Credit Facility. +Senior Notes +On March 8, 2019, we issued $ 500.0 million aggregate principal amount of 4.375 % senior unsecured notes at 99.862 % of par to yield 4.392 % per annum. The notes are due March 15, 2029 and interest is payable semiannually on March 15 and September 15. The effective interest rate on these notes, including the amortization of debt issuance costs and discount, is 4.50 %. +In April 2017, we issued $ 750.0 million aggregate principal amount of 3.90 % senior unsecured notes at 99.748 % of par to yield 3.93 % per annum. These notes are due May 15, 2027 and interest is payable semiannually on May 15 and November 15. The effective interest rate on these notes, including the amortization of debt issuance costs and discount, is 4.01 %. +In June 2014, we issued $ 750.0 million aggregate principal amount of 4.375 % senior unsecured notes at par. These notes are due June 1, 2024 and interest is payable semiannually on June 1 and December 1. The effective interest rate on these notes, including the amortization of debt issuance costs, is 4.50 %. +Our senior unsecured notes are governed by indentures containing certain covenants, events of default, and other restrictive provisions with which we were in compliance as of December 31, 2020. +79 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +4. DERIVATIVE INSTRUMENTS +We periodically use derivative instruments to mitigate volatility in commodity prices. While the use of these instruments limits the downside risk of adverse price changes, their use may also limit future cash flow from favorable price changes. Depending on changes in oil and gas futures markets and management’s view of underlying supply and demand trends, we may increase or decrease our derivative positions from current levels. +As of December 31, 2020, we have entered into oil and gas collars, oil basis swaps, and oil “roll differential” swaps. Under our collars, we receive the difference between the published index price and a floor price if the index price is below the floor price or we pay the difference between the ceiling price and the index price if the index price is above the ceiling price. No amounts are paid or received if the index price is between the floor and the ceiling prices. By using a collar, we have fixed the minimum and maximum prices we can receive on the underlying production. Our basis swaps are settled based on the difference between a published index price plus or minus a fixed differential, as applicable, and the applicable local index price under which the underlying production is sold. By using a basis swap, we have fixed the differential between the published index price and certain of our physical pricing points. For our Permian oil production, the basis swaps fix the price differential between the WTI NYMEX (Cushing, Oklahoma) price and the WTI Midland price. For our Permian and Mid-Continent gas production, the contract prices in our collars are consistent with the index prices used to sell our production. Our roll differential swaps are settled based on the difference between the monthly roll differential and a fixed price per Bbl. The monthly roll differential is calculated as the sum of 2/3 of the difference in the WTI NYMEX closing settlement price for the first nearby month futures contract minus the second nearby month futures contract and 1/3 of the difference in the WTI NYMEX calendar month average price and the physical crude oil delivery month price. The following tables summarize our outstanding derivative contracts as of December 31, 2020: +Oil Collars First +Quarter Second +Quarter Third +Quarter Fourth +Quarter Total +2021: +WTI (1) +Volume (Bbls) 3,600,000 3,094,000 3,680,000 3,680,000 14,054,000 +Weighted Avg Price - Floor $ 38.06 $ 34.62 $ 34.65 $ 34.65 $ 35.52 +Weighted Avg Price - Ceiling $ 46.45 $ 43.28 $ 44.37 $ 44.37 $ 44.66 +2022: +WTI (1) +Volume (Bbls) 2,340,000 1,729,000 920,000 — 4,989,000 +Weighted Avg Price - Floor $ 37.31 $ 38.16 $ 40.00 $ — $ 38.10 +Weighted Avg Price - Ceiling $ 48.41 $ 49.56 $ 49.19 $ — $ 48.95 +________________________________________ +(1) The index price for these collars is West Texas Intermediate (“WTI”) as quoted on the New York Mercantile Exchange (“NYMEX”). +80 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +Gas Collars First +Quarter Second +Quarter Third +Quarter Fourth +Quarter Total +2021: +PEPL (1) +Volume (MMBtu) 9,000,000 9,100,000 8,280,000 8,280,000 34,660,000 +Weighted Avg Price - Floor $ 1.83 $ 1.89 $ 2.00 $ 2.00 $ 1.93 +Weighted Avg Price - Ceiling $ 2.23 $ 2.28 $ 2.42 $ 2.42 $ 2.33 +Perm EP (2) +Volume (MMBtu) 6,300,000 7,280,000 6,440,000 6,440,000 26,460,000 +Weighted Avg Price - Floor $ 1.50 $ 1.62 $ 1.86 $ 1.86 $ 1.71 +Weighted Avg Price - Ceiling $ 1.79 $ 1.92 $ 2.22 $ 2.22 $ 2.03 +Waha (3) +Volume (MMBtu) 8,100,000 9,100,000 8,280,000 8,280,000 33,760,000 +Weighted Avg Price - Floor $ 1.52 $ 1.61 $ 1.82 $ 1.82 $ 1.69 +Weighted Avg Price - Ceiling $ 1.83 $ 1.93 $ 2.17 $ 2.17 $ 2.03 +2022: +PEPL (1) +Volume (MMBtu) 5,400,000 1,820,000 — — 7,220,000 +Weighted Avg Price - Floor $ 2.13 $ 2.40 — — $ 2.20 +Weighted Avg Price - Ceiling $ 2.55 $ 2.86 — — $ 2.63 +Perm EP (2) +Volume (MMBtu) 3,600,000 1,820,000 — — 5,420,000 +Weighted Avg Price - Floor $ 2.13 $ 2.40 — — $ 2.22 +Weighted Avg Price - Ceiling $ 2.53 $ 2.88 — — $ 2.65 +Waha (3) +Volume (MMBtu) 5,400,000 1,820,000 — — 7,220,000 +Weighted Avg Price - Floor $ 1.98 $ 2.40 — — $ 2.09 +Weighted Avg Price - Ceiling $ 2.39 $ 2.86 — — $ 2.50 +________________________________________ +(1) The index price for these collars is Panhandle Eastern Pipe Line, Tex/OK Mid-Continent Index (“PEPL”) as quoted in Platt’s Inside FERC. +(2) The index price for these collars is El Paso Natural Gas Company, Permian Basin Index (“Perm EP”) as quoted in Platt’s Inside FERC. +(3) The index price for these collars is Waha West Texas Natural Gas Index (“Waha”) as quoted in Platt’s Inside FERC. +81 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +Oil Basis Swaps First +Quarter Second +Quarter Third +Quarter Fourth +Quarter Total +2021: +WTI Midland (1) +Volume (Bbls) 2,790,000 3,003,000 3,220,000 3,220,000 12,233,000 +Weighted Avg Differential (2) $ 0.03 $ ( 0.02 ) $ ( 0.08 ) $ ( 0.08 ) $ ( 0.04 ) +2022: +WTI Midland (1) +Volume (Bbls) 1,980,000 1,365,000 644,000 — 3,989,000 +Weighted Avg Differential (2) $ 0.25 $ 0.31 $ 0.38 $ — $ 0.29 +________________________________________ +(1) The index price we pay under these basis swaps is WTI Midland as quoted by Argus Americas Crude. +(2) The index price we receive under these basis swaps is WTI as quoted on the NYMEX plus or minus, as applicable, the weighted average differential shown in the table. +Oil Roll Differential Swaps First +Quarter Second +Quarter Third +Quarter Fourth +Quarter Total +2021: +WTI (1) +Volume (Bbls) 630,000 1,001,000 1,656,000 1,656,000 4,943,000 +Weighted Avg Price $ ( 0.24 ) $ ( 0.22 ) $ ( 0.10 ) $ ( 0.10 ) $ ( 0.14 ) +2022: +WTI (1) +Volume (Bbls) 1,620,000 1,001,000 644,000 — 3,265,000 +Weighted Avg Price $ ( 0.10 ) $ ( 0.01 ) $ 0.10 $ — $ ( 0.03 ) +________________________________________ +(1) The index price used to determine the settlement “roll” is WTI as quoted on the NYMEX. +82 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +Derivative Gains and Losses +Net gains and losses on our derivative instruments are a function of fluctuations in the underlying commodity index prices as compared to the contracted prices and the monthly cash settlements (if any) of the instruments. We have elected not to designate our derivatives as hedging instruments for accounting purposes and, therefore, we do not apply hedge accounting treatment to our derivative instruments. Consequently, changes in the fair value of our derivative instruments and cash settlements on the instruments are included as a component of operating costs and expenses as either a net gain or loss on derivative instruments. Cash settlements of our contracts are included in cash flows from operating activities in our statements of cash flows. The following table presents the components of “Loss (gain) on derivative instruments, net” for the periods indicated. +Years Ended December 31, +(in thousands) 2020 2019 2018 +Decrease (increase) in fair value of derivative instruments, net: +Gas contracts $ 56,475 $ ( 13,114 ) $ 15,742 +Oil contracts 98,306 76,833 ( 126,130 ) +154,781 63,719 ( 110,388 ) +Cash (receipts) payments on derivative instruments, net: +Gas contracts ( 15,476 ) ( 40,114 ) ( 13,794 ) +Oil contracts ( 103,771 ) 53,245 38,223 +( 119,247 ) 13,131 24,429 +Loss (gain) on derivative instruments, net $ 35,534 $ 76,850 $ ( 85,959 ) +83 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +Derivative Fair Value +Our derivative contracts are carried at their fair value on our balance sheet using Level 2 inputs and are subject to master netting arrangements, which allow us to offset recognized asset and liability fair value amounts on contracts with the same counterparty. Our accounting policy is to not offset asset and liability positions in our balance sheets. +The following tables present the amounts and classifications of our derivative assets and liabilities as of December 31, 2020 and 2019, as well as the potential effect of netting arrangements on our recognized derivative asset and liability amounts. +December 31, 2020 +(in thousands) Balance Sheet Location Asset Liability +Oil contracts Current assets — Derivative instruments $ 5,425 $ — +Gas contracts Current assets — Derivative instruments 1,423 — +Gas contracts Non-current assets — Derivative instruments 2,342 — +Oil contracts Current liabilities — Derivative instruments — 106,507 +Gas contracts Current liabilities — Derivative instruments — 38,891 +Oil contracts Non-current liabilities — Derivative instruments — 12,526 +Gas contracts Non-current liabilities — Derivative instruments — 5,223 +Total gross amounts presented in the balance sheet 9,190 163,147 +Less: gross amounts not offset in the balance sheet ( 8,863 ) ( 8,863 ) +Net amount $ 327 $ 154,284 +December 31, 2019 +(in thousands) Balance Sheet Location Asset Liability +Oil contracts Current assets — Derivative instruments $ 1,624 $ — +Gas contracts Current assets — Derivative instruments 16,320 — +Oil contracts Non-current assets — Derivative instruments 580 — +Oil contracts Current liabilities — Derivative instruments — 16,681 +Oil contracts Non-current liabilities — Derivative instruments — 824 +Gas contracts Non-current liabilities — Derivative instruments — 194 +Total gross amounts presented in the balance sheet 18,524 17,699 +Less: gross amounts not offset in the balance sheet ( 9,865 ) ( 9,865 ) +Net amount $ 8,659 $ 7,834 +We are exposed to financial risks associated with our derivative contracts from non-performance by our counterparties. We mitigate our exposure to any single counterparty by contracting with a number of financial institutions, each of which has a high credit rating and is a member of our bank credit facility. Our member banks do not require us to post collateral for our derivative liability positions, nor do we require our counterparties to post collateral for our benefit. In the future we may enter into derivative instruments with counterparties outside our bank group to obtain competitive terms and to spread counterparty risk. +84 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +5. FAIR VALUE MEASUREMENTS +Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Authoritative accounting guidance has established a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. This hierarchy consists of three broad levels. Level 1 inputs are the highest priority and consist of unadjusted quoted prices in active markets for identical assets and liabilities. Level 2 inputs are other than quoted prices that are observable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable. +The following table provides fair value measurement information for certain assets and liabilities as of December 31, 2020 and 2019. +December 31, 2020 December 31, 2019 +(in thousands) Book Value Fair Value Book Value Fair Value +Financial Assets (Liabilities): +4.375 % Notes due 2024 +$ ( 750,000 ) $ ( 818,025 ) $ ( 750,000 ) $ ( 792,225 ) +3.90 % Notes due 2027 +$ ( 750,000 ) $ ( 826,575 ) $ ( 750,000 ) $ ( 778,050 ) +4.375 % Notes due 2029 +$ ( 500,000 ) $ ( 567,250 ) $ ( 500,000 ) $ ( 530,400 ) +Derivative instruments — assets $ 9,190 $ 9,190 $ 18,524 $ 18,524 +Derivative instruments — liabilities $ ( 163,147 ) $ ( 163,147 ) $ ( 17,699 ) $ ( 17,699 ) +Assessing the significance of a particular input to the fair value measurement requires judgment, including the consideration of factors specific to the asset or liability. The fair value (Level 1) of our fixed rate notes was based on quoted market prices. The fair value of our derivative instruments (Level 2) was estimated using discounted cash flow and option pricing models. These models use certain observable variables including forward prices, volatility curves, interest rates, and credit ratings and spreads. The fair value estimates are adjusted relative to non-performance risk as appropriate. See Note 4 for further information on the fair value of our derivative instruments. +Other Financial Instruments +The carrying amounts of our cash, cash equivalents, accounts receivable, accounts payable, and accrued liabilities approximate fair value because of the short-term maturities and/or liquid nature of these assets and liabilities. Included in “Accrued liabilities — Other” at December 31, 2020 are: (i) accrued operating expenses (e.g. production, transportation, and midstream expenses) of approximately $ 67.4 million and (ii) accrued general and administrative costs of approximately $ 46.8 million, which consisted primarily of $ 34.1 million in regular payroll-related costs and $ 11.3 million in voluntary early retirement incentive program and involuntary reduction in workforce severance accruals. Included in “Accrued liabilities — Other” at December 31, 2019 are: (i) accrued operating expenses (e.g. production, transportation, and midstream expenses) of approximately $ 74.7 million and (ii) accrued general and administrative costs, primarily payroll-related, of approximately $ 43.3 million. +Most of our accounts receivable balances are uncollateralized and result from transactions with other companies in the oil and gas industry. Concentration of customers may impact our overall credit risk because our customers may be similarly affected by changes in economic or other conditions within the industry. We conduct credit analyses prior to making any sales to new customers or increasing credit for existing customers and may require parent company guarantees, letters of credit, or prepayments when deemed necessary. For properties we operate, we have the right to realize amounts due to us from non-operators by netting the non-operators’ share of production revenues from those properties. +85 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +We routinely assess the recoverability of all material accounts receivable and accrue a reserve to the allowance for credit losses based on our estimation of expected losses over the life of the receivables. At December 31, 2020 and 2019, the allowance for credit losses totaled $ 2.6 million and $ 3.6 million, respectively. +Major Customers +In each of the years ended December 31, 2020, 2019, and 2018, we made sales to two customers that each amounted to 10% or more of our consolidated revenues for the respective year. Sales to those two customers accounted for 26 % and 23 %, respectively, of our consolidated revenues in 2020, 29 % and 25 %, respectively, of our consolidated revenues in 2019, and 21 % and 23 %, respectively, of our consolidated revenues in 2018. +If any one of our major customers were to stop purchasing our production, we believe there are a number of other purchasers to whom we could sell our production. If multiple significant customers were to discontinue purchasing our production, we believe there could be some initial challenges, but we have ample alternative markets to handle any sales disruption. +6. STOCK-BASED AND OTHER COMPENSATION +Equity Incentive Plan +Our 2019 Equity Incentive Plan (the “2019 Plan”) was approved by stockholders in May 2019. Outstanding awards under previous plans were not impacted, but no additional awards will be made under the previous plans. A total of 6.3 million shares of common stock may be issued under the 2019 Plan, including shares available from the previous plans. The 2019 Plan provides for grants of options, stock appreciation rights, restricted stock, restricted stock units, performance stock units, cash awards, and other stock-based awards. +Stock-based Compensation Cost +We have recognized stock-based compensation cost as shown below. Historical amounts may not be representative of future amounts as the value of future awards may vary from historical amounts. +Years Ended December 31, +(in thousands) 2020 2019 2018 +Restricted stock awards: +Performance stock awards $ 17,338 $ 21,590 $ 23,083 +Service-based stock awards 26,014 25,611 20,385 +43,352 47,201 43,468 +Stock option awards 1,460 1,903 2,456 +Total stock-based compensation cost 44,812 49,104 45,924 +Less amounts capitalized to oil and gas properties ( 14,917 ) ( 22,706 ) ( 23,029 ) +Stock-based compensation expense $ 29,895 $ 26,398 $ 22,895 +Periodic stock-based compensation expense will fluctuate based on the grant date fair value of awards, the number of awards, the requisite service period of the awards, employee forfeitures, and the timing of the awards. Our acco unting policy is to account for forfeitures in compensation cost when they occur. To the extent compensation cost relates to employees directly involved in oil and gas acquisition, exploration, and development activities, such amounts are capitalized to oil and gas properties. The amount capitalized to oil and gas properties decreased as a percentage of total stock-based compensation cost in 2020 as compared to 2019 and 2018 due to reduced acquisition, exploration, and development activities in 2020 as a result of the low oil prices and demand +86 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +destruction experienced in 2020 stemming from the COVID-19 pandemic and OPEC and other countries’ actions. The decreased capitalization caused the overall stock-based compensation expense to increase. +Restricted Stock +The following table provides information about restricted stock awards granted during the last three years. +Years Ended December 31, +2020 2019 2018 +Number +of Shares Weighted +Average +Grant Date +Fair Value Number +of Shares Weighted +Average +Grant Date +Fair Value Number +of Shares Weighted +Average +Grant Date +Fair Value +Performance stock awards 311,974 $ 29.84 264,393 $ 47.66 123,533 $ 90.26 +Service-based stock awards 846,918 $ 35.54 681,988 $ 45.88 469,438 $ 81.29 +Total restricted stock awards 1,158,892 $ 34.01 946,381 $ 46.38 592,971 $ 83.16 +Performance stock awards are granted to eligible executives and are subject to service and market condition-based vesting determined by our stock price performance relative to defined peer groups’ stock price performance. The performance stock awards granted in 2018 and 2019 are equity-classified awards and after three years of continued service, an executive will be entitled to vest in 0 % to 200 % of the award depending on our stock price performance, with the vested amount paid in shares. For the performance stock awards granted in 2020, after three years of continued service, an executive will be entitled to vest in 0 % to 200 % of the award depending on our stock price performance, with the vested amount up to 100 % paid in shares and any vested amount above 100 % paid in cash. The share-settled portion of these awards are equity-classified awards and the cash-settled portion of these awards are liability-classified awards. +We recognize compensation cost related to the equity-classified portion of performance stock awards ratably over the applicable vesting period based on the estimated grant date fair value of the awards, which is calculated using a multiple probability simulation model incorporating the effect of the market condition. We recognize compensation cost related to the liability-classified portion of performance stock awards over the applicable vesting period based on an estimated fair value that is remeasured each reporting period using a multiple probability simulation model incorporating the effect of the market condition. In accordance with Internal Revenue Code Section 162(m), certain of the amounts awarded may not be deductible for tax purposes. +Service-based stock awards are granted to eligible employees and non-employee directors and have vesting schedules ranging from one to five years . The majority of our service-based stock awards cliff vest five years from the grant date. We recognize compensation cost for the service-based stock awards based upon the grant date fair value of the award, which is the closing market price of our common stock on the grant date. Such costs are recognized ratably over the applicable vesting period. +87 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +The following table provides information on restricted stock activity during the year. +Service-based Performance +(subject to market conditions) +Number of +Shares Weighted +Average +Grant Date +Fair Value Number of +Shares Weighted +Average +Grant Date +Fair Value +Outstanding as of January 1, 2020 1,639,069 $ 74.51 664,977 $ 72.99 +Vested ( 237,616 ) $ 94.23 ( 205,746 ) $ 82.83 +Granted 846,918 $ 35.54 311,974 $ 29.84 +Canceled (1) — $ — ( 119,521 ) $ 89.46 +Forfeited ( 155,450 ) $ 78.43 — $ — +Outstanding as of December 31, 2020 2,092,921 $ 56.21 651,684 $ 46.20 +________________________________________ +(1) These performance shares were canceled since the market condition was not satisfied as of the end of the performance period. +The total vest date market value of restricted stock that vested during the years ended December 31, 2020, 2019, and 2018 was $ 12.0 million, $ 15.1 million, and $ 34.1 million, respectively. +Unrecognized compensation cost related to equity-classified unvested restricted stock at December 31, 2020 was approximately $ 84.2 million. We expect to recognize this cost over a weighted average period of 2.6 years. As of December 31, 2020, the fair value of the unvested liability-classified performance stock awards was $ 3.5 million and the associated vested liability was $ 70 thousand. The vested liability is included in “Other liabilities”. +Restricted Units +As of December 31, 2020 and 2019, we had 8,838 restricted units outstanding. These represent restricted units held by a non-employee director who has elected to defer payment of common stock represented by the units until termination of his service on the Board of Directors. +Stock Options +Options outstanding as of December 31, 2020 expire seven years from the grant date and have service-based vesting whereby the awards vest in increments of one-third, generally on each of the first three anniversary dates of the grant. The exercise price for an option under the 2019 Plan and the plan in effect immediately prior to the 2019 Plan, is at least equal to the closing price of our common stock on the date of grant. The previous plans provided that all grants have an exercise price of the average of the high and low prices of our common stock on the date of grant. +We recognize compensation cost related to options based on the estimated grant date fair value of the award and it is recognized ratably over the applicable vesting period. We estimate the grant date fair value using the Black-Scholes option pricing model. Expected volatilities are based on the historical volatility of our common stock. We also use historical data to estimate the expected years until exercise. We use U.S. Treasury bond rates in effect at the grant date for our risk-free interest rates. +88 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +The following table provides information regarding options granted during the last three years, including the assumptions used to determine the fair value of those options. +Years Ended December 31, +2020 2019 2018 +Options granted 194,900 132,900 92,050 +Weighted average grant date fair value $ 12.61 $ 12.14 $ 26.71 +Weighted average exercise price $ 34.06 $ 42.78 $ 83.28 +Total fair value (in thousands) $ 2,458 $ 1,613 $ 2,458 +Expected years until exercise 4.9 4.9 5.0 +Expected stock volatility 53.9 % 37.1 % 34.7 % +Dividend yield 2.6 % 1.9 % 0.9 % +Risk-free interest rate 0.4 % 1.4 % 2.7 % +The following table provides information regarding outstanding stock options as of December 31, 2020 and changes during the year. +Number of Options Weighted +Average +Exercise +Price Weighted +Average +Remaining +Term Aggregate +Intrinsic +Value +(in thousands) +Outstanding as of January 1, 2020 495,538 $ 87.17 +Exercised — $ — +Granted 194,900 $ 34.06 +Canceled ( 107,025 ) $ 94.29 +Forfeited ( 36,036 ) $ 55.69 +Outstanding as of December 31, 2020 547,377 $ 68.94 4.6 years $ 711 +Exercisable as of December 31, 2020 271,827 $ 99.38 3.0 years $ — +The following table provides information regarding options exercised and the grant date fair value of options vested. +Years Ended December 31, +(in thousands) 2020 2019 2018 +Cash received from option exercises $ — $ 1,267 $ 2,241 +Intrinsic value of options exercised $ — $ 425 $ 1,030 +Grant date fair value of options vested $ 1,855 $ 2,262 $ 2,547 +89 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +The following table provides information regarding non-vested stock options as of December 31, 2020 and changes during the year. +Number of Options Weighted +Average +Grant Date +Fair Value Weighted +Average +Exercise +Price +Non-vested as of January 1, 2020 208,255 $ 17.60 $ 58.47 +Vested ( 91,569 ) $ 20.26 $ 66.47 +Granted 194,900 $ 12.61 $ 34.06 +Forfeited ( 36,036 ) $ 16.74 $ 55.69 +Non-vested as of December 31, 2020 275,550 +As of December 31, 2020, there was $ 3.2 million of unrecognized compensation cost related to non-vested stock options. We expect to recognize that cost over a weighted average period of 2.2 years. +Other Compensation +We maintain and sponsor a contributory 401(k) plan for our employees. Employer contributions related to the plan were $ 8.2 million, $ 8.7 million, and $ 13.1 million for 2020, 2019, and 2018, respectively. Employer discretionary contributions were included in the 2018 amount. No such employer discretionary contributions were accrued for 2020 or 2019. +90 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +7. EARNINGS (LOSS) PER SHARE +The calculations of basic and diluted net earnings (loss) per common share under the two-class method are presented below. Earnings (loss) per share are based on actual figures rather than the rounded figures presented. +Year Ended December 31, 2020 +(in thousands, except per share information) Income (Numerator) Shares (Denominator) Per-Share Amount +Net loss $ ( 1,967,458 ) +Plus: return from repurchase of redeemable preferred stock 1,810 +Less: dividends attributable to participating securities (1) ( 1,808 ) +Less: redeemable preferred stock dividends ( 4,861 ) +Basic loss per share +Loss available to common stockholders ( 1,972,317 ) 99,952 $ ( 19.73 ) +Effects of dilutive securities +Dilutive securities (2) — — +Diluted loss per share +Loss available to common stockholders and assumed conversions $ ( 1,972,317 ) 99,952 $ ( 19.73 ) +Year Ended December 31, 2019 +(in thousands, except per share information) Income (Numerator) Shares (Denominator) Per-Share Amount +Net loss $ ( 124,619 ) +Less: dividends attributable to participating securities (1) ( 1,519 ) +Less: redeemable preferred stock dividends ( 5,078 ) +Basic loss per share +Loss available to common stockholders ( 131,216 ) 98,789 $ ( 1.33 ) +Effects of dilutive securities +Dilutive securities (2) — — +Diluted loss per share +Loss available to common stockholders and assumed conversions $ ( 131,216 ) 98,789 $ ( 1.33 ) +Year Ended December 31, 2018 +(in thousands, except per share information) Income (Numerator) Shares (Denominator) Per-Share Amount +Net income $ 791,851 +Less: dividends and net income attributable to participating securities ( 11,087 ) +Basic earnings per share +Income available to common stockholders 780,764 93,793 $ 8.32 +Effects of dilutive securities +Dilutive securities (2) 3 27 +Diluted earnings per share +Income available to common stockholders and assumed conversions $ 780,767 93,820 $ 8.32 +91 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +________________________________________ +(1) Participating securities do not have a contractual obligation to share in the losses of the entity, therefore, net losses are not attributable to participating securities. +(2) Inclusion of certain potential common shares would have an anti-dilutive effect, therefore, these shares were excluded from the calculations of diluted earnings (loss) per share. Excluded from the calculation for the year ended December 31, 2020 were 547.4 thousand potential common shares from the assumed exercise of employee stock options, 512.4 thousand potential common shares from the assumed conversion of the Preferred Stock, and 8.8 thousand potential common shares from the assumed vesting of incremental shares of unvested restricted stock units. Excluded from the calculation for the year ended December 31, 2019 were 491.1 thousand potential common shares from the assumed exercise of employee stock options, 426.4 thousand potential common shares from the assumed conversion of the Preferred Stock, and 37.4 thousand potential common shares from the assumed vesting of incremental shares of unvested restricted stock awards. Excluded from the calculation for the year ended December 31, 2018 were 392.8 thousand potential common shares from assumed exercise of employee stock options. See Note 2 for further information regarding our Preferred Stock and Note 6 for further information regarding our stock awards. +8. ASSET RETIREMENT OBLIGATIONS +The following table reflects the components of the change in the carrying amount of the asset retirement obligation for the years ended December 31, 2020 and 2019. +(in thousands) 2020 2019 +Asset retirement obligation at January 1, $ 181,869 $ 166,904 +Liabilities incurred 4,491 21,511 +Liability settlements and disposals ( 21,922 ) ( 19,595 ) +Accretion expense 7,485 7,499 +Revisions of estimated liabilities 5,944 5,550 +Asset retirement obligation at December 31, 177,867 181,869 +Less current obligation 12,272 27,824 +Long-term asset retirement obligation $ 165,595 $ 154,045 +Liabilities incurred during the year ended December 31, 2019 included $ 9.4 million for the Resolute acquisition. +92 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +9. INCOME TAXES +The components of our provision for income taxes were as follows: +Years Ended December 31, +(in thousands) 2020 2019 2018 +Current taxes: +Federal benefit $ ( 198 ) $ — $ ( 3,007 ) +State expense 167 532 383 +( 31 ) 532 ( 2,624 ) +Deferred taxes: +Federal (benefit) expense ( 323,597 ) ( 24,055 ) 211,717 +State (benefit) expense ( 35,299 ) ( 2,847 ) 21,563 +( 358,896 ) ( 26,902 ) 233,280 +$ ( 358,927 ) $ ( 26,370 ) $ 230,656 +Federal income tax expense (benefit) for the years presented differs from the amounts that would be provided by applying the U.S. federal income tax rate, primarily due to the effect of state income taxes, non-deductible expenses, changes in tax laws and tax rates enacted in the period, and changes in valuation allowances. Reconciliations of the income tax (benefit) expense calculated at the federal statutory rate of 21% to the total income tax (benefit) expense are as follows: +Years Ended December 31, +(in thousands) 2020 2019 2018 +Provision at statutory rate $ ( 488,541 ) $ ( 31,708 ) $ 214,726 +Effect of state taxes ( 29,467 ) ( 1,717 ) 18,795 +Acquisition-related costs — 1,318 — +Tax credits and other permanent differences 1,365 2,548 1,583 +Change in valuation allowance, net ( 4,221 ) — ( 1,376 ) +Stock-based compensation 11,903 3,189 ( 3,072 ) +Goodwill impairment 150,034 — — +Income tax (benefit) expense $ ( 358,927 ) $ ( 26,370 ) $ 230,656 +93 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +The components of net deferred taxes are as follows: +December 31, +(in thousands) 2020 2019 +Assets: +Stock-based compensation and other accrued amounts $ 59,659 $ 31,521 +Net operating loss and other carryforwards, net of valuation allowance 456,613 454,743 +Credit carryforward, net of valuation allowance 4,223 3,936 +520,495 490,200 +Liabilities: +Property, plant and equipment ( 500,023 ) ( 828,624 ) +Net deferred tax assets (liabilities) $ 20,472 $ ( 338,424 ) +On March 1, 2019, we completed the acquisition of Resolute. For federal income tax purposes, the acquisition was a tax-free merger whereby Cimarex acquired carryover tax basis in Resolute’s tax assets and liabilities. See Note 13 for more information regarding the purchase price allocation. The net deferred tax liability recorded in connection with the acquisition includes certain deferred tax assets net of valuation allowances. The acquired tax attributes include federal net operating loss, capital loss, and enhanced oil recovery tax credit carryforwards. +Since the acquisition resulted in a greater than 50 % ownership change in Resolute, the tax attributes Cimarex acquired from Resolute are subject to limitation pursuant to Section 382 of the Internal Revenue Code. Our ability to utilize the Resolute net operating losses (“NOLs”) and other tax attributes acquired is limited to an annual amount calculated at acquisition plus any net unrealized built-in gains recognized within five years of the ownership change. The annual limitation amount is $ 19.6 million. The estimated net unrealized built-in gain at December 31, 2019 of $ 253.9 million was increased to $ 291.0 million at December 31, 2020, pursuant to filed returns and changes in estimates. As of December 31, 2019, the acquired Resolute federal NOLs were reduced by a $ 57.6 million valuation allowance. As a result of the increase in the estimated net unrealized built-in gain and the utilization of $ 13.5 million of Resolute’s Section 382 limited tax attributes in Cimarex’s 2019 federal income tax return, the valuation allowance was reduced to $ 34.0 million at December 31, 2020. A full valuation allowance remains on the Resolute acquired capital loss carryforward of $ 67.2 million and enhanced oil recovery credit carryforwards of $ 4.0 million to reflect the expected tax effect of the Section 382 limitation. The Resolute federal NOLs will begin to expire in 2033. +At December 31, 2020, we had a U.S. net tax operating loss carryforward (including Resolute) of approximately $ 1.997 billion, $ 1.773 billion of which is subject to expiration in years 2032 through 2037 and $ 224.4 million of which is not subject to expiration. We believe that the carryforward, net of valuation allowance, will be utilized before it expires. At December 31, 2020, we recorded a $ 1.7 million increase to the valuation allowance related to state net operating losses. The total valuation allowance on state net operating losses at December 31, 2020 was $ 120.7 million since it is not more likely than not that these additional state net operating losses will be utilized before they expire. We also had enhanced oil recovery and marginal well credits of $ 4.2 million at December 31, 2020. +When assessing the need for a valuation allowance against a deferred tax asset, both positive and negative evidence is considered when determining the ability to utilize our deferred tax assets. Based on our estimate of the timing of future reversals of existing taxable temporary differences, our estimate of future taxable income exclusive of reversing temporary differences and carryforwards, the length of time before the deferred tax assets associated with the net operating loss carryovers begin to expire, and tax planning strategies that could be implemented to accelerate taxable amounts to utilize expiring carryovers, we believe it is more likely than not that the benefit from +94 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +the deferred tax asset recorded in the financial statements will be realized. We will continue to assess all available positive and negative evidence to estimate whether sufficient future taxable income will be generated in order to utilize the deferred tax assets. Additional valuation allowances may be required in future periods if additional losses are incurred or other circumstances change. +At December 31, 2020 and 2019, we had no unrecognized tax benefits that would impact our effective rate and we have made no provisions for interest or penalties related to uncertain tax positions. The tax years 2017 through 2019 remain open to examination by the Internal Revenue Service of the United States. We file tax returns with various state taxing authorities which remain open to examination for tax years 2016 through 2019. We do not anticipate the need for any significant income tax payments in the near term. +10. COMMITMENTS AND CONTINGENCIES +Lease Commitments +Effective January 1, 2019, we began accounting for leases in accordance with Topic 842, which requires lessees to recognize lease liabilities and right-of-use assets on the balance sheet for contracts that provide lessees with the right to control the use of identified assets for periods of greater than 12 months. Prior to January 1, 2019, we accounted for leases in accordance with ASC Topic 840, Leases , under which operating leases were not recorded on the balance sheet. +Real Estate Leases +We have operating leases for office space in various locations that provide us the right to control the use of the specified office space over the term of the contract. These leases require us to make monthly “base rent” payments, as well as “additional payments” for our share of operating expenses and taxes incurred by the landlord. At our option, the terms of these leases can be renewed for varying periods, and in some cases may be terminated early at our option. As of December 31, 2020, these leases had remaining lease terms ranging from 3.4 to 5.7 years. These leases do not contain residual value guarantees, options to purchase the underlying office space, or terms or covenants that impose restrictions on our ability to pay dividends, incur debt, or enter into additional leases. We have no subleases of office space. +Lease liabilities associated with our real estate leases were recorded at the present value of the estimated future lease payments, after considering the following: +• “Base rent” payments are considered fixed lease payments, while “additional payments” are considered variable lease payments. +• At commencement of each real estate lease we were not reasonably certain to exercise the option to renew or terminate such lease. +• The discount rate used to calculate each lease liability was based on our incremental borrowing rate, which was estimated utilizing trading metrics for our senior unsecured notes as adjusted using relevant market factors to develop a synthetic secured yield curve. +• As an accounting policy we have elected not to separate nonlease components from lease components for our real estate class of assets. +• Where applicable, we determined that the effect of accounting for the right to use land separately from other lease components would be insignificant. +95 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +Production-Related Leases +We have operating leases for equipment used in connection with our oil and gas production operations, including well-head compressors, pipeline compressors, and artificial lift mechanisms. These leases provide us the right to control the use of explicitly or implicitly identified equipment during the term of the contract. These leases often include an “evergreen” provision that allows the contract term to continue on a month-to-month basis following expiration of the initial term stated in the contract. As of December 31, 2020, these leases had remaining lease terms ranging from one month to 10.4 years. These leases require us to make monthly payments of fixed amounts, which cover the cost of renting the equipment and, in some cases, the cost of maintaining the leased equipment. These leases do not typically require us to make variable lease payments. These leases do not contain residual value guarantees, options to purchase the underlying equipment, or terms or covenants that impose restrictions on our ability to pay dividends, incur debt, or enter into additional leases. We have no subleases of production-related equipment. +Lease liabilities associated with our production-related operating leases were recorded at the present value of the estimated future lease payments, after considering the following: +• For leases with an evergreen provision, the term of the lease was determined to be the noncancellable period in the contract plus the period beyond the noncancellable period that we believe it is reasonably certain we will need the equipment for operational purposes, limited to the point in time at which both we and the lessor each have the right to terminate the lease without permission from the other party with no more than an insignificant penalty. +• The discount rate used to calculate each lease liability was based on our incremental borrowing rate, which was estimated utilizing trading metrics for our senior unsecured notes as adjusted using relevant market factors to develop a synthetic secured yield curve. +• As an accounting policy, we have elected not to separate nonlease components from lease components for our production-related class of assets. +We have one finance lease, which results from a gathering agreement (the “Gathering Agreement”) on a gathering system. Under terms of the Gathering Agreement, we have the option to acquire a portion of the underlying gathering system upon termination of the Gathering Agreement. We make monthly payments under the Gathering Agreement based on the volume of oil gathered and a gathering rate per barrel, which is adjusted periodically. As of December 31, 2020, this lease had a remaining term of 4.7 years. +Exploration and Development-Related Leases +We have operating leases for equipment used in connection with our exploration and development activities, including drilling rigs, pressure pumping equipment, directional drilling tools, well-control devices, and various pieces of support equipment. These leases provide us the right to control the use of explicitly or implicitly identified equipment during the term of the contract. As of December 31, 2020, these leases had remaining lease terms of 12 months or less. These leases typically require us to make payments in amounts based on the usage of the underlying equipment. These leases do not contain residual value guarantees, options to purchase the underlying equipment, or terms or covenants that impose restrictions on our ability to pay dividends, incur debt, or enter into additional leases. We have no subleases of exploration and development-related equipment. +As an accounting policy, we have elected not to apply the recognition requirements of Topic 842 to our exploration and development-related class of assets with lease terms at commencement of 12 months or less. As such, we have not recorded any lease liabilities associated with our exploration and development-related leases. In addition, as an accounting policy we have elected not to separate nonlease components from lease components for our exploration and development-related class of assets. +96 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +Balance Sheet Presentation +The following tables present the amounts and classifications of our estimated right-of-use assets, net and lease liabilities as of December 31, 2020 and 2019: +December 31, +(in thousands) Balance Sheet Location 2020 2019 +Operating lease right-of-use assets Non-current assets — Fixed assets, net $ 185,118 $ 240,263 +Finance lease right-of-use asset Non-current assets — Other assets 25,052 24,849 +Total right-of-use assets $ 210,170 $ 265,112 +December 31, +(in thousands) Balance Sheet Location 2020 2019 +Operating lease liabilities — current Current liabilities — Operating leases $ 59,051 $ 66,003 +Operating lease liabilities — non-current Non-current liabilities — Operating leases 134,705 184,172 +Finance lease liability — current Current liabilities — Accrued liabilities — Other 7,099 7,328 +Finance lease liability — non-current Non-current liabilities — Other liabilities 19,731 18,749 +Total lease liabilities $ 220,586 $ 276,252 +Lease Cost and Cash Flows +The following table summarizes estimated total lease cost, which includes amounts recognized in income and amounts capitalized for the indicated periods: +Years Ended December 31, +(in thousands) 2020 2019 +Finance lease cost: +Amortization of right-of-use asset $ 5,286 $ 4,385 +Interest on lease liability 1,663 1,719 +Operating lease cost: +Production expense (1) 19,914 20,965 +Transportation, processing, and other operating (1) 21,386 17,264 +Gas gathering and other expense (1) 991 5,607 +General and administrative expense (2) 12,701 12,421 +Short-term lease cost (3) 235,840 539,110 +Total lease cost $ 297,781 $ 601,471 +________________________________________ +(1) Operating lease cost in the table above is composed of costs incurred under production-related leases. These costs are included in the indicated captions on the Consolidated Statements of Operations and Comprehensive Income (Loss). +(2) Operating lease cost in the table above is composed of costs incurred under real estate leases. A majority of these costs are included in the indicated caption on the Consolidated Statements of Operations and Comprehensive Income (Loss). A portion of these costs are capitalized as part of proved properties on the +97 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +Consolidated Balance Sheets. These costs include variable lease costs of $ 3.2 million and $ 3.1 million for the years ended December 31, 2020 and 2019, respectively. +(3) Short-term lease cost in the table above is composed of costs incurred under leases with terms of 12 months or less for right-of-use assets used in exploration and development activities. Payments under such leases are typically based on usage of the underlying right-of-use asset and, therefore, are also variable lease costs. These costs are capitalized as part of proved properties on the Consolidated Balance Sheets. +The following table summarizes estimated cash paid for our leases for the indicated periods: +Years Ended December 31, +(in thousands) 2020 2019 +Cash paid for amounts included in the measurement of lease liabilities: +Financing cash outflows from finance lease $ 4,842 $ 3,869 +Operating cash outflows from operating leases $ 53,066 $ 54,044 +Cash paid for short-term leases and variable lease payments: +Operating cash outflows from operating leases $ 3,169 $ 3,103 +Investing cash outflows from operating leases $ 235,024 $ 551,325 +During the years ended December 31, 2020 and 2019, we recognized $ 42.7 million and $ 91.7 million, respectively, in right-of-use assets in connection with new operating leases entered into during the period. +The following table presents the weighted-average remaining lease terms and discount rates of our leases as of the indicated dates: +December 31, +2020 2019 +Weighted-average remaining lease term (in years): +Finance lease 4.7 5.9 +Operating leases 3.9 4.1 +Weighted-average discount rate: +Finance lease 6.3 % 5.7 % +Operating leases 5.0 % 3.9 % +98 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +Lease Liability Maturity Analysis +The following table reflects the undiscounted future cash flows utilized in the calculation of the lease liabilities recorded at December 31, 2020: +December 31, 2020 +(in thousands) Operating Leases Finance Lease +January 1, 2021 — December 31, 2021 $ 67,330 $ 7,618 +January 1, 2022 — December 31, 2022 61,595 6,666 +January 1, 2023 — December 31, 2023 41,567 6,340 +January 1, 2024 — December 31, 2024 21,259 6,015 +January 1, 2025 — December 31, 2025 8,438 3,829 +Remaining periods 14,695 — +Total undiscounted future cash flows 214,884 30,468 +Less effects of discounting ( 21,128 ) ( 3,638 ) +Lease liabilities recognized $ 193,756 $ 26,830 +Other Commitments +At December 31, 2020, we had estimated commitments of approximately: (i) $ 224.2 million to finish drilling, completing, or performing other work on wells and various other infrastructure projects in progress and (ii) $ 4.3 million to finish midstream construction in progress. +At December 31, 2020, we had firm sales contracts to deliver approximately 470.3 Bcf of gas over the next 10.5 years. If we do not deliver this gas, our estimated financial commitment, calculated using the January 2021 index prices, would be approximately $ 908.1 million. The value of this commitment will fluctuate due to price volatility and actual volumes delivered. +In connection with gas gathering and processing agreements, we have volume commitments over the next 8.0 years. If we do not deliver the committed gas or NGLs, as applicable, the estimated maximum amount that would be payable under these commitments, calculated as of December 31, 2020, would be approximately $ 640.7 million. +We have minimum volume delivery commitments associated with agreements to reimburse connection costs to various pipelines. If we do not deliver this gas or oil, as applicable, the estimated maximum amount that would be payable under these commitments, calculated as of December 31, 2020, would be approximately $ 104.7 million. Of this total, we have accrued a liability of $ 4.3 million representing the estimated amount we will have to pay due to insufficient forecasted volumes at particular connection points. +At December 31, 2020, we have various firm transportation agreements for gas pipeline capacity with end dates ranging from 2021 - 2025 under which we will have to pay an estimated $ 16.6 million over the remaining terms of the agreements. +We have minimum volume water delivery commitments associated with a water services agreement, which ends in 2030, that was entered into in connection with the sale of certain water infrastructure assets in Eddy County, New Mexico (see Note 13). If we do not deliver the water volumes, the estimated maximum amount that would be payable under this commitment, calculated as of December 31, 2020, would be approximately $ 64.1 million. +All of the noted commitments were routine and made in the ordinary course of our business. +99 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +Litigation +In the ordinary course of business, we are involved with various litigation matters. When a loss contingency exists, we assess whether it is probable that an asset has been impaired or a liability has been incurred and, if so, we determine if the amount of loss can be reasonably estimated, all in accordance with authoritative accounting guidance, and adjust our accruals accordingly. Though some of the related claims may be significant, we believe the resolution of them, individually or in the aggregate, would not have a material adverse effect on our financial condition or results of operations after consideration of current accruals. +11. RELATED PARTY TRANSACTIONS +Helmerich & Payne, Inc. (“H&P”) provides contract drilling services to Cimarex. Cimarex incurred drilling costs of approximately $ 24.9 million, $ 72.8 million, and $ 80.1 million related to these services during the years ended December 31, 2020, 2019, and 2018, respectively. The amounts incurred in the years ended December 31, 2020 and 2019 are included in the short-term lease costs disclosed in Note 10. Hans Helmerich, a director of Cimarex, is Chairman of the Board of Directors of H&P. +12. SUPPLEMENTAL CASH FLOW INFORMATION +Years Ended December 31, +(in thousands) 2020 2019 2018 +Cash paid during the period for: +Interest expense (net of capitalized amounts of $ 48,306 , $ 49,944 , and $ 19,969 , respectively) (1) +$ 41,407 $ 50,601 $ 45,357 +Income taxes $ 300 $ 1,364 $ — +Cash received for income tax refunds $ 2,118 $ 2,033 $ 760 +________________________________________ +(1) The year ended December 31, 2019 includes $ 17.6 million in interest paid upon the redemption of Resolute’s senior notes and credit facility on March 1, 2019. +100 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +13. ACQUISITIONS AND DIVESTITURES +On August 31, 2018, we closed on the divestiture of oil and gas properties principally located in Ward County, Texas for which we received $ 534.6 million in net cash proceeds in 2018, as adjusted for customary closing adjustments to reflect an effective date of April 1, 2018 and transaction costs. This divestiture did not significantly alter the relationship between capitalized costs and proved reserves, therefore, in accordance with the full cost method of accounting, no gain or loss was recognized. +On September 30, 2020, we closed on the sale of certain water infrastructure assets in Eddy County, New Mexico, for which we received net cash proceeds of $ 68.7 million during 2020, as adjusted for customary closing adjustments and transaction costs. We will be entitled to additional future cash payments from the buyer upon the delivery of certain rights-of-way and if water volumes delivered by Cimarex or third parties meet certain thresholds during the 10 years following the date of sale. See Note 10 for more information on this sale. +On March 1, 2019, we completed the acquisition of Resolute Energy Corporation, an independent oil and gas company focused on the acquisition and development of unconventional oil and gas properties in the Delaware Basin area of the Permian Basin of west Texas. The principal factors considered by management in making this acquisition included: (i) our expectation that Resolute’s assets’ returns would be competitive with those in our existing portfolio, (ii) the opportunity to apply our experience and learnings from already operating in this area to generating productivity gains from Resolute’s properties, (iii) the ability to increase our acreage position in the Delaware Basin, and (iv) the expectation that the acquisition would be financially accretive. +We acquired 100 % of the outstanding common shares and voting interests of Resolute in a cash and stock transaction. The acquisition date fair value of the consideration transferred totaled $ 820.3 million, which consisted of cash, common stock, and a newly created series of preferred stock (see Note 2 for more information on the preferred stock) as follows: +(in thousands) Fair Value of Consideration Transferred +Cash $ 325,677 +Common stock ( 5,652 shares issued) +413,015 +Preferred stock ( 63 shares issued) +81,620 +$ 820,312 +The fair value of the common stock issued as part of the consideration was determined on the basis of the closing market price of Cimarex common stock on the acquisition date. The fair value of the preferred stock issued as part of the consideration was determined using a multiple probability simulation model. +101 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +Purchase Price Allocation +The Resolute acquisition has been accounted for as a business combination, using the acquisition method. The following table presents the allocation of the Resolute purchase price to the identifiable assets acquired and liabilities assumed based on the fair values at the acquisition date, with any excess of the purchase price over the estimated fair value of the identifiable net assets acquired recorded to goodwill. The table also presents the adjustments made to the purchase price allocation during the 12-month period following the acquisition date. The purchase price allocation was finalized during the three months ended March 31, 2020. The most significant adjustment was made to reduce the fair value of the unproved oil and gas properties acquired by $ 30.3 million based on the finalization of the quantity of acres acquired. The tax effect of this adjustment reduced the related deferred income taxes by $ 6.9 million. The completion of the final Resolute tax returns provided the underlying tax basis of Resolute’s assets and liabilities and net operating losses and resulted in a reduction of the deferred tax liability of $ 24.4 million. The remaining adjustments were related to finalization of working capital balances. The offset to all of the adjustments was goodwill. +The following table sets forth the purchase price allocation: +(in thousands) March 1, 2019 Adjustments March 1, 2020 +Cash $ 41,236 $ — $ 41,236 +Accounts receivable 50,739 11,521 62,260 +Other current assets 13,280 ( 1,176 ) 12,104 +Proved oil and gas properties 692,600 — 692,600 +Unproved oil and gas properties 1,054,200 ( 30,314 ) 1,023,886 +Fixed assets 5,355 ( 32 ) 5,323 +Goodwill 107,341 ( 13,126 ) 94,215 +Other assets 142 — 142 +Current liabilities ( 202,735 ) 1,790 ( 200,945 ) +Long-term debt ( 870,000 ) — ( 870,000 ) +Deferred income taxes ( 62,409 ) 31,337 ( 31,072 ) +Asset retirement obligation ( 9,437 ) — ( 9,437 ) +Total identifiable net assets $ 820,312 $ — $ 820,312 +In connection with the acquisition, we assumed, and immediately repaid, $ 870.0 million principal amount of long-term debt consisting of $ 600.0 million of senior notes and $ 270.0 million of credit facility borrowings. On March 1, 2019, we repaid Resolute’s credit facility borrowings, delivered a notice of optional redemption of Resolute’s senior notes for an April 1, 2019 redemption date, and irrevocably deposited with a trustee the full amount of funds to repay the aggregate outstanding senior notes principal balance plus accrued and unpaid interest, incurring a $ 4.3 million loss on early extinguishment of debt. The cash consideration transferred and the repayment of Resolute’s long-term debt were funded using cash on hand and borrowings on our Credit Facility. We subsequently repaid the borrowings on our Credit Facility using the net proceeds from the March 8, 2019 issuance of $ 500.0 million aggregate principal amount of 4.375 % senior unsecured notes. +Goodwill of $ 94.2 million was recognized in the purchase price allocation principally as a result of recording net deferred tax liabilities arising from the difference between the tax basis and the purchase price allocated to Resolute’s assets and liabilities, and anticipated opportunities for cost savings through administrative and operational synergies. We concluded that goodwill was impaired at March 31, 2020 (see Note 1 for more information regarding the goodwill impairment). +102 +Table of Contents +CIMAREX ENERGY CO. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +Acquisition-related costs incurred were $ 11.4 million, with $ 8.4 million expensed in 2019 and $ 3.0 million expensed in 2018. These costs, which were comprised primarily of advisory and legal fees, are included in the “Other operating expense, net” line item on our Consolidated Statements of Operations and Comprehensive Income (Loss). +Pro Forma Financial Information (Unaudited) +The results of Resolute’s operations have been included in our consolidated financial statements since the March 1, 2019 acquisition date. The following supplemental pro forma information for the years ended December 31, 2019 and 2018 has been prepared to give effect to the Resolute acquisition as if it had occurred on January 1, 2018. The information below reflects pro forma adjustments based on available information and certain assumptions that we believe are reasonable, including (i) the depletion of the combined company’s proved oil and gas properties, (ii) the capitalization of interest expense, and (iii) the estimated tax impacts of the pro forma adjustments. Additionally, pro forma earnings were adjusted to exclude acquisition-related costs incurred by Cimarex and Resolute. The pro forma results of operations do not include any cost savings or other synergies that may result from the acquisition or any estimated costs that have been or will be incurred by Cimarex to integrate the Resolute assets. The pro forma financial data has not been adjusted to reflect any other acquisitions or dispositions made during the periods presented as their results were not deemed material. +The pro forma information is not necessarily indicative of the results that might have occurred had the transaction actually taken place on January 1, 2018 and is not intended to be a projection of future results. Future results may vary significantly from the results reflected in the following pro forma information because of normal production declines, changes in commodity prices, future acquisitions and divestitures, future development and exploration activities, and other factors. +Years Ended December 31, +(in thousands, except per share information) 2019 2018 +Revenue $ 2,416,105 $ 2,667,561 +Net (loss) income $ ( 139,553 ) $ 872,140 +Net (loss) income per common share: +Basic $ ( 1.47 ) $ 8.65 +Diluted $ ( 1.47 ) $ 8.65 +103 +Table of Contents +CIMAREX ENERGY CO. +SUPPLEMENTAL INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED) +Oil and Gas Reserve Information— Proved reserve quantities are based on estimates prepared by Cimarex in accordance with guidelines established by the Securities and Exchange Commission (“SEC”). +Reserve definitions comply with definitions of Rule 4-10(a) (1)-(32) of Regulation S-X of the SEC. All of our reserve estimates are maintained by our internal Corporate Reservoir Engineering group, which is comprised of engineers and engineering technicians. The objectives and management of this group are separate from and independent of the exploration and production functions of our company. The technical employee primarily responsible for overseeing the reserve estimation process is our Vice President of Corporate Engineering. This individual graduated from the Colorado School of Mines with a Bachelor of Science degree in Engineering and has more than 26 years of practical experience in reserve evaluation. He has been directly involved in the annual reserve reporting process of Cimarex since 2002 and has served in his current role for the past 16 years. +DeGolyer and MacNaughton, an independent petroleum engineering consulting firm, performed an independent evaluation of our estimated net reserves representing greater than 80% of the total future net revenue discounted at 10% attributable to the total interests owned by Cimarex as of December 31, 2020. The individual primarily responsible for overseeing the evaluation is a Senior Vice President with DeGolyer and MacNaughton and a Registered Professional Engineer in the State of Texas with over 10 years of experience in oil and gas reservoir studies and reserves evaluations. +Proved reserves are those quantities of oil, gas, and NGLs which, by analysis of geosciences and engineering data, can be estimated with reasonable certainty to be economically producible—from a given date forward, from known reservoirs, and under existing economic conditions, operating methods, and government regulations—prior to the time at which contracts providing the right to operate expire, unless evidence indicates that renewal is reasonably certain, regardless of whether deterministic or probabilistic methods are used for the estimation. The project to extract the hydrocarbons must have commenced or the operator must be reasonably certain that it will commence the project within a reasonable time. +There are numerous uncertainties inherent in estimating quantities of proved reserves and projecting future rates of production and the timing of development expenditures. The estimation of our proved reserves employs one or more of the following: production trend extrapolation, analogy, volumetric assessment, and material balance analysis. Techniques including review of production and pressure histories, analysis of electric logs and fluid tests, and interpretations of geologic and geophysical data are also involved in this estimation process. +The following table summarizes the trailing twelve-month index prices used in the reserves estimates for 2020, 2019, and 2018. These prices are prior to adjustments for fixed and determinable amounts under provisions in existing contracts, location, grade, and quality. +December 31, +2020 2019 2018 +Gas price per Mcf $ 1.99 $ 2.58 $ 3.10 +Oil price per Bbl $ 39.54 $ 55.67 $ 65.56 +104 +Table of Contents +CIMAREX ENERGY CO. +SUPPLEMENTAL INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED) +The following table sets forth our estimates of our proved, proved developed, and proved undeveloped oil, gas, and NGL reserves as of December 31, 2020, 2019, 2018, and 2017 and changes in our proved reserves for the years ended December 31, 2020, 2019, and 2018. All of our proved reserves are located entirely within the United States of America. +Gas +(MMcf) Oil +(MBbls) NGL +(MBbls) Total +(MBOE) +Total proved reserves: +December 31, 2017 1,607,635 137,238 153,860 559,037 +Revisions of previous estimates (132,577) (4,348) 3,777 (22,667) +Extensions and discoveries 342,810 53,763 47,614 158,512 +Purchases of reserves 3 — — 1 +Production (205,837) (24,710) (21,994) (81,010) +Sales of reserves (20,713) (15,405) (3,821) (22,678) +December 31, 2018 1,591,321 146,538 179,436 591,195 +Revisions of previous estimates (180,632) (8,516) (12,038) (50,661) +Extensions and discoveries 247,406 41,193 36,834 119,261 +Purchases of reserves 129,435 22,628 18,818 63,019 +Production (251,567) (31,463) (28,254) (101,645) +Sales of reserves (3,818) (610) (328) (1,574) +December 31, 2019 1,532,145 169,770 194,468 619,595 +Revisions of previous estimates (43,504) (19,692) (25,488) (52,430) +Extensions and discoveries 107,322 22,269 16,419 56,575 +Purchases of reserves — — — — +Production (232,625) (28,087) (25,554) (92,412) +Sales of reserves (496) (197) (27) (307) +December 31, 2020 1,362,842 144,063 159,818 531,021 +Proved developed reserves: +December 31, 2017 1,334,510 114,116 126,227 462,761 +December 31, 2018 1,398,729 116,339 151,566 501,027 +December 31, 2019 1,358,329 138,783 166,552 531,722 +December 31, 2020 1,190,907 112,785 135,901 447,170 +Proved undeveloped reserves: +December 31, 2017 273,125 23,122 27,633 96,276 +December 31, 2018 192,592 30,199 27,870 90,168 +December 31, 2019 173,816 30,987 27,916 87,873 +December 31, 2020 171,935 31,278 23,917 83,851 +Year-end 2020 proved reserves decreased approximately 14% from year-end 2019 proved reserves, to 531.0 MMBOE. Proved gas reserves were 1.36 Tcf, proved oil reserves were 144.1 MMBbls, and proved NGL reserves were 159.8 MMBbls. Our reserves in the Permian Basin accounted for 68% of total proved reserves, with nearly all of the remainder in the Mid-Continent. +During 2020, we added 56.6 MMBOE of proved reserves through extensions and discoveries, primarily in the Permian Basin where we added 47.8 MMBOE, with the remaining 8.8 MMBOE in additions being in the Mid-Continent. We had net negative revisions of 52.4 MMBOE, which consisted of 70.3 MMBOE in downward price +105 +Table of Contents +CIMAREX ENERGY CO. +SUPPLEMENTAL INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED) +revisions, 10.0 MMBOE associated with the removal of PUD reserves whose development will likely be delayed beyond five years of initial disclosure, and 2.8 MMBOE in net negative technical revisions primarily related to offset completion impacts. These negative revisions were partially offset by 30.7 MMBOE in positive revisions related to decreases in operating expenses. +During 2019, we added 119.3 MMBOE of proved reserves through extensions and discoveries, primarily in the Permian Basin and Mid-Continent where we added 99.9 MMBOE and 19.4 MMBOE, respectively. Additionally, we added 63.0 MMBOE from purchases of reserves, primarily through the Resolute acquisition (see Note 13 to the Consolidated Financial Statements for further information on the acquisition). We had net negative revisions of 50.7 MMBOE, which consisted of 47.2 MMBOE in downward price revisions and 7.0 MMBOE related to increases in operating expenses. In addition, 13.6 MMBOE was associated with the removal of PUD reserves whose development will likely be delayed beyond five years of initial disclosure. These negative revisions were partially offset by net positive technical revisions of 17.1 MMBOE primarily related to better than expected performance from wells with initial production in late 2018 and positive adjustments to PUD reserves converted to proved developed reserves during 2019. +During 2018, we added 158.5 MMBOE of proved reserves through extensions and discoveries, primarily in the Permian Basin and Mid-Continent where we added 120.3 MMBOE and 38.0 MMBOE, respectively. In addition, we had net negative revisions of 22.7 MMBOE. The revisions included decreases of 38.6 MMBOE for the removal of PUD reserves whose development will likely be delayed beyond five years of initial disclosure and 7.7 MMBOE related to increases in operating expenses. These decreases were partially offset by increases of 2.7 MMBOE in price-related revisions and 20.9 MMBOE of net technical revisions. The majority of the technical revisions were related to better than expected performance from wells with initial production in late 2017 and positive adjustments to PUD reserves converted to proved developed reserves during 2018. +At December 31, 2020, we had PUD reserves of 83.9 MMBOE, down 4.0 MMBOE, or 5%, from 87.9 MMBOE of PUD reserves at December 31, 2019. Changes in our PUD reserves during 2020 are summarized in the table below. +PUD Reserves +(MMBOE) +PUD reserves at December 31, 2019 87.9 +Converted to developed (30.5) +Additions 40.5 +Net revisions (14.0) +PUD reserves at December 31, 2020 83.9 +During 2020, we invested $154.9 million to develop and convert 35% of our 2019 PUD reserves to proved developed reserves. During 2019, we invested $399.5 million to develop and convert 66% of our 2018 PUD reserves to proved developed reserves. During 2018, we invested $264.5 million to develop and convert 30% of our 2017 PUD reserves to proved developed reserves. +During 2020, our 40.5 MMBOE of PUD reserve additions consisted of 33.8 MMBOE added in the Permian Basin and 6.7 MMBOE added in Mid-Continent. At December 31, 2020, 90% of our PUD reserves were in the Permian Basin, while the remainder were in our western Oklahoma Cana area. During 2020, we had net negative PUD reserve revisions of 14.0 MMBOE. Of this total, 10.0 MMBOE was for the removal of PUD reserves whose development will likely be delayed beyond five years of initial disclosure and the majority of the remainder was due to downward price revisions. We have no PUD reserves that have remained undeveloped for five years or more after initial disclosure and we have no PUD reserves whose scheduled development is beyond five years of initial disclosure. +106 +Table of Contents +CIMAREX ENERGY CO. +SUPPLEMENTAL INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED) +Costs Incurred— The following table sets forth our costs incurred for property acquisition, exploration, and development activities. +Years Ended December 31, +(in thousands) 2020 2019 2018 +Acquisition of properties +Proved $ 11,878 $ 695,450 $ 62 +Unproved 46,946 1,083,230 102,666 +Exploration 1,522 2,321 6,341 +Development 496,388 1,181,605 1,487,453 +$ 556,734 $ 2,962,606 $ 1,596,522 +Aggregate Capitalized Costs— The table below reflects the aggregate capitalized costs relating to our oil and gas producing activities at December 31, 2020. +(in thousands) December 31, 2020 +Proved properties $ 21,281,840 +Unproved properties and properties under development, not being amortized 1,142,183 +22,424,023 +Less—accumulated depreciation, depletion, amortization, and impairment (18,987,354) +Net oil and gas properties $ 3,436,669 +Costs Not Being Amortized— The following table summarizes oil and gas property costs not being amortized at December 31, 2020, by year that the costs were incurred. +(in thousands) December 31, 2020 +2020 $ 197,861 +2019 827,418 +2018 65,770 +2017 and prior 51,134 +$ 1,142,183 +Of the costs not being amortized, $151.4 million (13%) relates to unevaluated wells in progress and $98.3 million (9%) is capitalized interest. The remaining $892.5 million (78%) is for land and seismic expenditures, most of which were for costs invested in Permian Basin ($852.6 million) and Mid-Continent ($39.3 million). The majority of the Permian Basin balance stems from the Resolute acquisition. On a quarterly basis, we evaluate excluded costs for inclusion in the costs to be amortized. Significant unproved properties are evaluated individually. Unproved properties that are not considered individually significant are aggregated for evaluation purposes and related costs are transferred to the costs to be amortized quarterly based on the application of historical factors. We expect to include these costs in the amortization computation as we continue with our exploration and development plans. +107 +Table of Contents +CIMAREX ENERGY CO. +SUPPLEMENTAL INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED) +Oil and Gas Operations— The following table contains direct revenue and cost information relating to our oil and gas exploration and production activities for the periods indicated. We have no long-term supply or purchase agreements with governments or authorities in which we act as producer. Income tax expense related to our oil and gas operations is computed using the effective tax rate for the period, with the 2020 effective tax rate adjusted to remove the goodwill impairment not deductible for tax purposes and the change in valuation allowance. +Years Ended December 31, +(in thousands, except per BOE) 2020 2019 2018 +Oil, gas, and NGL revenues from production $ 1,512,688 $ 2,321,921 $ 2,297,645 +Less operating costs and income taxes: +Impairment of oil and gas properties 1,638,329 618,693 — +Depletion 625,481 817,099 538,919 +Asset retirement obligation 14,653 8,586 7,142 +Production 285,324 339,941 296,189 +Transportation, processing, and other operating 213,366 238,259 211,463 +Taxes other than income 79,699 148,953 125,169 +Income tax (benefit) expense (295,716) 26,318 252,840 +2,561,136 2,197,849 1,431,722 +Results of operations from oil and gas producing activities $ (1,048,448) $ 124,072 $ 865,923 +Depletion rate per BOE $ 6.77 $ 8.04 $ 6.65 +Standardized Measure of Future Net Cash Flows— The Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil and Gas Reserves (“Standardized Measure”) is calculated in accordance with guidance provided by the FASB. The Standardized Measure does not purport, nor should it be interpreted, to present the fair value of a company’s proved oil and gas reserves. Fair value would require, among other things, consideration of expected future economic and operating conditions, varying price and cost assumptions, and risks inherent in reserve estimates. +Under the Standardized Measure, future cash inflows are based upon the forecasted future production of year-end proved reserves. Future cash inflows are then reduced by estimated future production and development costs to determine net pre-tax cash flow. Future income taxes are computed by applying the statutory tax rate to the excess of pre-tax cash flow over our tax basis in the associated oil and gas properties. Tax credits and permanent differences are also considered in the future income tax calculation. Future net cash flow after income taxes is discounted using a 10% annual discount rate to arrive at the Standardized Measure. +The following summary sets forth our Standardized Measure. +December 31, +(in thousands) 2020 2019 2018 +Future cash inflows $ 7,167,623 $ 11,726,488 $ 14,050,367 +Future production costs (3,193,242) (4,619,438) (4,889,601) +Future development costs (525,714) (814,397) (1,017,318) +Future income tax expenses (66,555) (578,675) (1,303,762) +Future net cash flows 3,382,112 5,713,978 6,839,686 +10% annual discount for estimated timing of cash flows (1,129,593) (2,084,952) (2,824,499) +Standardized measure of discounted future net cash flows $ 2,252,519 $ 3,629,026 $ 4,015,187 +108 +Table of Contents +CIMAREX ENERGY CO. +SUPPLEMENTAL INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED) +The estimates of cash flows shown above are based upon the unweighted trailing twelve-month average first-day-of-the-month benchmark prices. See table above under Oil and Gas Reserve Information for prices used in determining the Standardized Measure. Prices are market driven and will fluctuate due to supply and demand factors, seasonality, and geopolitical, economic, and other factors. +The following are the principal sources of change in the Standardized Measure. +Years Ended December 31, +(in thousands) 2020 2019 2018 +Standardized measure, beginning of period $ 3,629,026 $ 4,015,187 $ 3,285,001 +Sales, net of production costs (934,299) (1,594,768) (1,660,649) +Net change in sales prices and in production costs related to future production (1,465,206) (1,267,223) 377,178 +Extensions and discoveries, net of future production and development costs 261,090 758,685 1,738,993 +Changes in estimated future development costs 130,440 35,940 194,523 +Previously estimated development costs incurred during the period 306,225 640,292 335,954 +Revisions of quantity estimates (273,738) (304,217) 96,783 +Accretion of discount 394,835 473,919 372,482 +Change in income taxes 283,764 404,681 (284,186) +Purchases of reserves in place — 568,897 — +Sales of reserves in place (3,838) (18,330) (300,592) +Change in production rates and other (75,780) (84,037) (140,300) +Standardized measure, end of period $ 2,252,519 $ 3,629,026 $ 4,015,187 +109 +Table of Contents +CIMAREX ENERGY CO. +SUPPLEMENTAL QUARTERLY FINANCIAL DATA (UNAUDITED) +The tables below summarize our quarterly financial data for 2020 and 2019. The sum of the individual quarterly earnings (loss) per common share amounts may not agree with year-to-date earnings (loss) per common share amounts because each quarter’s computation is based on the number of shares outstanding at the end of the applicable quarter using the two-class method. +Quarter +2020 First Second Third Fourth +(in thousands, except per share data) +Revenues $ 472,830 $ 249,383 $ 401,659 $ 434,723 +Expenses, net 1,247,112 1,174,530 694,399 410,012 +Net (loss) income $ (774,282) $ (925,147) $ (292,740) $ 24,711 +Earnings (loss) per share to common stockholders: +Basic $ (7.77) $ (9.28) $ (2.94) $ 0.25 +Diluted $ (7.77) $ (9.28) $ (2.94) $ 0.25 +Quarter +2019 First Second Third Fourth +(in thousands, except per share data) +Revenues $ 576,957 $ 546,463 $ 582,305 $ 657,244 +Expenses, net 550,641 437,154 458,458 1,041,335 +Net income (loss) $ 26,316 $ 109,309 $ 123,847 $ (384,091) +Earnings (loss) per share to common stockholders: +Basic $ 0.26 $ 1.07 $ 1.21 $ (3.87) +Diluted $ 0.26 $ 1.07 $ 1.21 $ (3.87) +110 +Table of Contents +ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE +None. +ITEM 9A. CONTROLS AND PROCEDURES +EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES +Cimarex’s management, under the supervision and with the participation of the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), has evaluated the effectiveness of Cimarex’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange Act”)) as of December 31, 2020. Based on that evaluation, the CEO and CFO concluded that the disclosure controls and procedures are effective in providing reasonable assurance that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods required by the U.S. Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to management, including the CEO and CFO, to allow timely decisions regarding required disclosures. +MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING +Cimarex’s management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. The Company’s internal control over financial reporting also includes those policies and procedures that: +(1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets; +(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements for external purposes in accordance with generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of management and directors; and +(3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of assets that could have a material effect on the consolidated financial statements. +Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of the effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +As of December 31, 2020, Cimarex’s management assessed the effectiveness of internal control over financial reporting based on the criteria set forth in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on that assessment, management concluded that the internal control over financial reporting was effective as of December 31, 2020. +The Company’s independent registered public accounting firm, KPMG LLP, that audited the consolidated financial statements included in Item 8 of this Form 10-K has also audited the Company’s internal control over financial reporting as of December 31, 2020 and has issued an attestation report. KPMG LLP’s attestation report on the Company’s internal control over financial reporting is included later in this Item 9A of this Form 10-K. +111 +Table of Contents +CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING +There was no change in our internal control over financial reporting that occurred during our most recent fiscal quarter ended December 31, 2020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. +112 +Table of Contents +Report of Independent Registered Public Accounting Firm +To the Stockholders and Board of Directors +Cimarex Energy Co.: +Opinion on Internal Control Over Financial Reporting +We have audited Cimarex Energy Co. and subsidiaries’ (the Company) internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. +We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2020 and 2019, the related consolidated statements of operations and comprehensive income (loss), stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2020, and the related notes (collectively, the consolidated financial statements), and our report dated February 23, 2021 expressed an unqualified opinion on those consolidated financial statements. +Basis for Opinion +The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. +Definition and Limitations of Internal Control Over Financial Reporting +A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. +Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +/s/ KPMG LLP +Denver, Colorado +February 23, 2021 +113 +Table of Contents +ITEM 9B. OTHER INFORMATION +None. +114 +Table of Contents +PART III +ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE +Information concerning the directors of Cimarex required under this item is incorporated by reference from the Cimarex Energy Co. definitive Proxy Statement for the May 12, 2021 Annual Meeting of Shareholders. The Proxy Statement will be filed with the Securities and Exchange Commission no later than 120 days subsequent to December 31, 2020. The executive officers of Cimarex as of February 23, 2021 were: +Name Age Office +Thomas E. Jorden 63 Chairman of the Board, Chief Executive Officer, and President +Stephen P. Bell 66 Executive Vice President — Business Development +G. Mark Burford 53 Senior Vice President and Chief Financial Officer +Francis B. Barron 58 Senior Vice President — General Counsel +John A. Lambuth 58 Executive Vice President — Exploration +Christopher H. Clason 54 Senior Vice President and Chief Human Resources Officer +Thomas F. McCoy 58 Senior Vice President — Production +Blake A. Sirgo 38 Vice President — Operations +Gary R. Abbott 48 Vice President — Corporate Engineering +Timothy A. Ficker 53 Vice President — Controller, Chief Accounting Officer, and Assistant Secretary +There are no family relationships by blood, marriage, or adoption among any of the above executive officers. All executive officers are elected annually by the board of directors to serve for one year or until a successor is elected and qualified. There is no arrangement or understanding between any of the officers and any other person pursuant to which the officer was selected as an executive officer. +THOMAS E. JORDEN was elected Chairman of the Board effective August 14, 2012 after being named President and Chief Executive Officer effective September 30, 2011. Since December 8, 2003, Mr. Jorden served as Executive Vice President of Exploration and had served in a similar capacity since September 30, 2002. Prior to September 2002, Mr. Jorden was with Key Production Company, Inc., where he served as Vice President of Exploration (October 1999 to September 2002) and Chief Geophysicist (November 1993 to September 1999). Prior to joining Key, Mr. Jorden was with Union Pacific Resources. +STEPHEN P. BELL was named Executive Vice President, Business Development effective September 13, 2012. Since September 2002, Mr. Bell served as Senior Vice President of Business Development and Land. Prior to its merger with Cimarex, Mr. Bell was with Key Production Company, Inc. since February 1994. In September 1999, he was appointed Senior Vice President, Business Development and Land. From February 1994 to September 1999, he served as Vice President, Land. +G. MARK BURFORD was named Senior Vice President and Chief Financial Officer in March 2019. Mr. Burford was appointed Vice President and Chief Financial Officer in September 2015 and Vice President, Capital Markets and Planning in December 2010. Mr. Burford joined Cimarex in April 2005 as Director of Capital Markets. Prior to joining Cimarex, he was Director of Investor Relations for Whiting Petroleum and Tom Brown. His experience also includes equity research with Petrie Parkman & Co., an investment banking firm, and public accounting. +115 +Table of Contents +FRANCIS B. BARRON joined Cimarex as Senior Vice President, General Counsel in July 2013. From February 2004 until July 2013, Mr. Barron served in various capacities at Bill Barrett Corporation, a publicly traded, Denver-based oil and gas exploration and development company, including as Executive Vice President, General Counsel, and Secretary. He also served as Chief Financial Officer from November 2006 until March 2007. Prior to February 2004, Mr. Barron was a partner at the Denver, Colorado office of the law firm of Patton Boggs LLP as well as a partner at Bearman Talesnick & Clowdus Professional Corporation. Mr. Barron’s practice included corporate, securities, and business law for publicly traded oil and gas companies. +JOHN A. LAMBUTH was named Executive Vice President of Exploration in February 2020. He served as Senior Vice President of Exploration from December 2015 until February 2020. He previously served as Vice President of Exploration beginning September 2012 and Chief Geophysicist, a position he held since joining Cimarex in 2004. Mr. Lambuth began his career in 1985 with Shell Oil Co., where he held various positions in exploration and in research and development. Immediately prior to joining Cimarex, he spent three years as onshore Exploration Manager of El Paso Energy Company. +CHRISTOPHER H. CLASON was named Senior Vice President and Chief Human Resources Officer in February 2020. Mr. Clason joined Cimarex as Vice President and Chief Human Resources Officer in April 2019. From February 2016 until April 2019, Mr. Clason was Director of MBA Career Management and Employer Relations at the Marriott School of Business at Brigham Young University. Prior to his work in higher education, he was Senior Vice President and Chief Human Resources Officer at ProBuild LLC, a Devonshire Investors company. From 2001 until 2014, Mr. Clason held various global HR executive leadership roles at Honeywell International, including Vice President Human Resources and Communications at Honeywell Aerospace. His background includes extensive international experience at Citigroup and early career work at Chevron. +THOMAS F. McCOY was named Senior Vice President of Production in February 2020. He previously served as Vice President of Production beginning in August 2013. He joined Cimarex as Gulf Coast Engineering Manager in 2003, and later served as Chief Reservoir Engineer and as Mid-Continent Exploration Manager. Prior to joining Cimarex, Mr. McCoy was with Vintage Petroleum Company and began his career in 1987 with Phillips Petroleum Company. Mr. McCoy holds a B.S. and M.S. in Petroleum Engineering from the University of Tulsa. +BLAKE A. SIRGO was named Vice President of Operations in February 2020. He previously served as Vice President Operations Resources from November 2018 to February 2020, Permian Division Production Manager from 2016 to November 2018, and in various engineering and production manager positions since joining Cimarex in 2008. Mr. Sirgo began his career in 2005 with Occidental Petroleum as a facilities engineer. Mr. Sirgo holds a Bachelor’s in Mechanical Engineering from the University of Texas. +GARY R. ABBOTT was named Vice President of Corporate Engineering March 1, 2005. Since January 2002, Mr. Abbott served as manager, Corporate Reservoir Engineering. From April 1999 to January 2002, Mr. Abbott was a senior engineer with Key Production Company, Inc. +TIMOTHY A. FICKER was appointed Vice President, Controller, Chief Accounting Officer, and Assistant Secretary in December 2016 to be effective in February 2017 and previously served as the Company’s Controller since September 2016. Prior to joining Cimarex, he was the Chief Financial Officer of Alcova Management LLC, Venoco, Inc., and Infinity Energy Resources Inc. Mr. Ficker previously served as an audit partner in KPMG LLP’s energy audit practice in Denver and as an audit partner for Arthur Andersen LLP, where he served clients primarily in the energy industry. +116 +Table of Contents +ITEM 11. EXECUTIVE COMPENSATION +Information required under this item is incorporated by reference from the Cimarex Energy Co. definitive Proxy Statement for the May 12, 2021 Annual Meeting of Shareholders. The Proxy Statement will be filed with the Securities and Exchange Commission no later than 120 days subsequent to December 31, 2020. +ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS +The following table sets forth information with respect to the equity compensation plans available to directors, officers, and employees of the company at December 31, 2020: +Plan Category (a) +Number of securities +to be issued upon +exercise of +outstanding options, +warrants, and rights (b) +Weighted-average +exercise price of +outstanding options, +warrants, and rights (c) +Number of securities +remaining available +for future issuance +under equity +compensation plans +(excluding securities reflected in column (a)) +Equity compensation plans approved by security holders 547,377 $ 68.94 1,674,858 +Equity compensation plans not approved by security holders — — — +Total 547,377 $ 68.94 1,674,858 +The remaining information required under this item is incorporated by reference from the Cimarex Energy Co. definitive Proxy Statement for the May 12, 2021 Annual Meeting of Shareholders. The Proxy Statement will be filed with the Securities and Exchange Commission no later than 120 days subsequent to December 31, 2020. +ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE +Information required under this item is incorporated by reference from the Cimarex Energy Co. definitive Proxy Statement for the May 12, 2021 Annual Meeting of Shareholders. The Proxy Statement will be filed with the Securities and Exchange Commission no later than 120 days subsequent to December 31, 2020. +ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES +Information required under this item is incorporated by reference from the Cimarex Energy Co. definitive Proxy Statement for the May 12, 2021 Annual Meeting of Shareholders. The Proxy Statement will be filed with the Securities and Exchange Commission no later than 120 days subsequent to December 31, 2020. +117 +Table of Contents +PART IV +ITEM 15. EXHIBIT AND FINANCIAL STATEMENT SCHEDULES +Page +(a) (1) The following financial statements are included in Item 8 to this 10-K: +Consolidated Balance Sheets as of December 31, 20 20 an d 20 19 +67 +Consolidated Statements of Operations and Comprehensive Income (Loss) for the years ended December 31, 2020, 2019, and 2018 +68 +Consolidated Statements of Cash Flows for the years ended December 31, 2020, 2019, and 2018 +69 +Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2020, 2019, and 2018 +70 +Notes to Consolidated Financial Statements +71 +(2) +Financial statement schedules—None +(3) +Exhibits: +Exhibits not incorporated by reference to a prior filing are designated by an asterisk (*) and are filed herewith; all exhibits not so designated are incorporated by reference to a prior SEC filing as indicated. All management contracts or compensatory plans or arrangements are designated by a plus sign (+). +Exhibit Title +2.1 +Agreement and Plan of Merger dated as of November 18, 2018, by and among Cimarex Energy Co., CR Sub 1 Inc., CR Sub 2 LLC and Resolute Energy Corporation (filed as Exhibit 2.1 to Registrant’s Form 8-K (Commission File No. 001-31446) dated November 20, 2018 and incorporated herein by reference). +3.1 +Amended and Restated Certificate of Incorporation of Cimarex Energy Co. (filed as Exhibit 3.1 to Registrant’s Form 8-K (Commission File No. 001-31446) dated June 7, 2005 and incorporated herein by reference). +3.2 +Amended and Restated By-laws of Cimarex Energy Co. dated November 11, 2015 (filed as Exhibits 3.1 and 3.2 to the Current Report on Form 8-K filed on November 12, 2015 (Commission File No. 001-31446) and incorporated herein by reference). +4.1 +Specimen Certificate of Cimarex Energy Co. common stock (filed as Exhibit 4.3 to Registration Statement on Form S-3 filed September 17, 2012 (Registration No. 333-183939) and incorporated herein by reference). +4.2 +Debt Securities Indenture dated as of April 5, 2012, by and among Cimarex Energy Co. and U.S. Bank National Association, as trustee included as Exhibit 4.1 to Registrant’s Current Report on Form 8-K filed on April 5, 2012 (Commission File No. 001-31446) and incorporated herein by reference. +4.3 +First Supplemental Indenture dated as of April 5, 2012, by and among Cimarex Energy Co., the Subsidiary Guarantors party thereto and U.S. Bank National Association, as trustee included as Exhibit 4.2 to Registrant’s Current Report on Form 8-K filed on April 5, 2012 (Commission File No. 001-31446) and incorporated herein by reference. +118 +Table of Contents +Exhibit Title +4.4 +Form of 5.875% Senior Notes due 2022 included in Exhibit 4.2 to the Registrant’s Current Report on Form 8-K filed on April 5, 2012 (Commission File No. 001-31446) and incorporated herein by reference. +4.5 +Indenture dated as of June 4, 2014, by and between Cimarex Energy Co. and U.S. Bank National Association, as trustee included as Exhibit 4.1 to Registrant’s Current Report on Form 8-K filed on June 4, 2014 (Commission File No. 001-31446) and incorporated herein by reference. +4.6 +First Supplemental Indenture dated as of June 4, 2014, by and among Cimarex Energy Co., the Subsidiary Guarantors party thereto and U.S. Bank National Association, as trustee included as Exhibit 4.2 to Registrant’s Current Report on Form 8-K filed on June 4, 2014 (Commission File No. 001-31446) and incorporated herein by reference. +4.7 +Form of 4.375% Senior Notes due 2024 included in Exhibit 4.2 to the Registrant’s Current Report on Form 8-K filed on June 4, 2014 (Commission File No. 001-31446) and incorporated herein by reference. +4.8 +Form of Indenture by and among Cimarex Energy Co. and U.S. Bank National Association, as trustee (filed as Exhibit 4.7 to Registration Statement on Form S-3 filed September 21, 2015 (Registration No. 333-183939) and incorporated herein by reference). +4.9 +Indenture dated as of April 10, 2017, by and between Cimarex Energy Co. and U.S. Bank National Association, as trustee included as Exhibit 4.1 to Registrant’s Current Report on Form 8-K filed on April 10, 2017 (Commission File No. 001-31446) and incorporated herein by reference. +4.10 +First Supplemental Indenture dated as of April 10, 2017, by and between Cimarex Energy Co. and U.S. Bank National Association, as trustee included as Exhibit 4.2 to Registrant’s Current Report on Form 8-K filed on April 10, 2017 (Commission File No. 001-31446) and incorporated herein by reference. +4.11 +Form of 3.90% Senior Notes due 2027 included in Exhibit 4.2 to the Registrant’s Current Report on Form 8-K filed on April 10, 2017 (Commission File No. 001-31446) and incorporated herein by reference. +4.12 +Certificate of Designations of 8⅛% Series A Cumulative Perpetual Convertible Preferred Stock of Cimarex Energy Co., dated February 28, 2019 (filed on March 1, 2019 as Exhibit 3.1 to the Current Report on Form 8-K (Commission File No. 001-31446) and incorporated herein by reference). +4.13 +Second Supplemental Indenture dated as of March 8, 2019, by and between Cimarex Energy Co. and U.S. Bank National Association, as trustee (filed on March 8, 2019 as Exhibit 4.2 to the Current Report on Form 8-K (Commission File No. 001-31446) and incorporated herein by reference). +4.14 +Form of 4.375% Senior Notes due 2029 (filed on March 8, 2019 as Exhibit 4.3 to the Current Report on Form 8-K (Commission File No. 001-31446) and incorporated herein by reference). +4.15 +Description of Registrant’s Securities * +10.1 +Credit Agreement dated as of July 14, 2011, among Cimarex, the Administrative Agent, the Co-Syndication Agents, the Co-Documentation Agents and the Lenders filed on July 18, 2011 (Commission File No. 001-31446) as Exhibit 10.l to the Registrant’s Current Report on Form 8-K and incorporated herein by reference. +119 +Table of Contents +Exhibit Title +10.2 +First Amendment to Credit Agreement dated as of July 19, 2012, among Cimarex, the Guarantors, the Administrative Agent, and the Lenders filed on May 5, 2014 (Commission File No. 001-31446) as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K and incorporated herein by reference. +10.3 +Second Amendment to Credit Agreement dated as of May 1, 2014, among Cimarex, the Guarantors, the Administrative Agent, and the Lenders filed on May 5, 2014 (Commission File No. 001-31446) as Exhibit 10.2 to the Registrant’s Current Report on Form 8-K and incorporated herein by reference. +10. 4 +Amended and Restated 2002 Stock Incentive Plan of Cimarex Energy Co. effective January 1, 2009 (filed as Exhibit 10.16 to the Annual Report on Form 10-K for the year ended December 31, 2008 filed on February 27, 2009 (Commission File No. 001- 31446) and incorporated herein by reference). + +10. 5 +2011 Equity Incentive Plan adopted May 18, 2011 (filed as Appendix A to the Definitive Proxy Statement 14-A filed on March 23, 2011 (Commission File No. 001-31446) and incorporated herein by reference). + +10. 6 +Form of Notice of Grant of Award of Performance Stock and Award Agreement (filed as Exhibit 10.2 to Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2011 filed on August 4, 2011 (Commission File no. 001-31446) and incorporated herein by reference). + +10. 7 +Form of Notice of Grant of Restricted Stock and Award Agreement (filed as Exhibit 10.3 to Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2011 filed on August 4, 2011 (Commission File no. 001-31446) and incorporated herein by reference). + +10. 8 +Form of Notice of Grant of Nonqualified Stock Option and Award Agreement (filed as Exhibit 10.4 to Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2011 filed on August 4, 2011 (Commission File no. 001-31446) and incorporated herein by reference). + +10. 9 +Form of Notice of Grant and Award Agreement (Other Stock Award with performance conditions) (filed as Exhibit 10.15 to the Annual Report on Form 10-K for the year ended December 31, 2013 filed on February 26, 2014 (Commission File No. 001-31446) and incorporated herein by reference). + +10.1 0 +2014 Equity Incentive Plan adopted May 15, 2014 (filed as Appendix A to the Definitive Proxy Statement 14-A filed on April 1, 2014 (Commission File No. 001-31446) and incorporated herein by reference. + +10.1 1 +Form of Notice of Grant of Restricted Stock (Director) and Award Agreement (filed as Exhibit 10.1 to Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014 filed on August 6, 2014 (Commission File No. 001-31446) and incorporated herein by reference). + +10.1 2 +Form of Notice of Grant of Nonqualified Stock Option and Award Agreement (filed as Exhibit 10.2 to Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014 filed on August 6, 2014 (Commission File No. 001-31446) and incorporated herein by reference). + +10.1 3 +Form of Notice of Grant of Restricted Stock and Award Agreement (filed as Exhibit 10.3 to Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014 filed on August 6, 2014 (Commission File No. 001-31446) and incorporated herein by reference). + +120 +Table of Contents +Exhibit Title +10. 14 +Form of Notice of Grant of Restricted Stock and Award Agreement (Performance Award) (filed as Exhibit 10.4 to Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014 filed on August 6, 2014 (Commission File No. 001-31446) and incorporated herein by reference). + +10. 15 +Form of Notice of Grant of Restricted Stock and Award Agreement (Performance Award) (filed as Exhibit 10.23 to the Annual Report on Form 10-K for the year ended December 31, 2014 filed on February 25, 2015 (Commission File No. 001-31446) and incorporated herein by reference). + +10. 16 +Deferred Compensation Plan for Nonemployee Directors adopted May 19, 2004, as amended and restated effective January 1, 2009 (filed as Exhibit 10.18 to the Annual Report on Form 10-K for the year ended December 31, 2008 filed on February 27, 2009 (Commission File No. 001-31446) and incorporated herein by reference). + +10. 17 +Cimarex Energy Co. Supplemental Savings Plan (amended and restated, effective January 1, 2009) (filed as Exhibit 10.19 to the Annual Report on Form 10-K for the year ended December 31, 2008 filed on February 27, 2009 (Commission File No. 001- 31446) and incorporated herein by reference). + +10. 18 +Cimarex Energy Co. Change in Control Severance Plan dated effective April 1, 2005, amended and restated effective January 1, 2009 (filed as Exhibit 10.20 to the Annual Report on Form 10-K for the year ended December 31, 2008 filed on February 27, 2009 (Commission File No. 001-31446) and incorporated herein by reference). + +10. 19 +Amendment to Cimarex Energy Co. Change in Control Severance Plan dated effective March 19, 2013 (filed as Exhibit 10.1 to the Current Report on Form 8-K filed on March 20, 2013 (Commission File No. 001- 31446) and incorporated herein by reference). + +10.2 0 +Form of Indemnification Agreement between Cimarex Energy Co. and each of its executive officers and directors (filed as Exhibit 10.20 to the Annual Report on Form 10-K for the year ended December 31, 2012 filed on February 26, 2013 (Commission File No. 001-31446) and incorporated herein by reference). + +10.2 1 +Credit Agreement Dated as of October 16, 2015, by and among Cimarex, the Administrative Agent, the Syndication Agent, the Documentation Agents, and the Lenders (filed on October 19, 2015 as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (Commission File No. 001-31446) and incorporated herein by reference). +10.2 2 +Form of Notice of Grant of Restricted Stock (Director) and Award Agreement (filed as Exhibit 10.2 to Registrant’s Form 8-K (Commission File No. 001-31446) dated November 2, 2015 and incorporated herein by reference). + +10.2 3 +Form of Notice of Grant of Restricted Stock (Director) and Award Agreement (filed as Exhibit 10.1 to Registrant’s Quarterly Report on Form 10-Q filed on August 9, 2017 (Commission File No. 001-31446) and incorporated herein by reference). + +10. 2 4 +Purchase and Sale Agreement dated May 23, 2018 between Cimarex Energy Co., Prize Energy Resources, Inc., and Magnum Hunter Production, Inc. (collectively, as “Seller”) and Callon Petroleum Operating Company as Buyer (filed as Exhibit 10.1 to Registrant’s Current Report on Form 8-K filed on May 24, 2018 (Commission File No. 001-31446) and incorporated herein by reference). +121 +Table of Contents +Exhibit Title +10. 2 5 +Form of Notice of Grant of Restricted Stock and Award Agreement (Performance Award) (filed as Exhibit 10.35 to the Annual Report on Form 10-K for the year ended December 31, 2018 filed on February 20, 2019 (Commission File No. 001-31446) and incorporated herein by reference). + +10. 2 6 +Amended and Restated Credit Agreement Dated as of February 5, 2019, by and among Cimarex, as Borrower, the Administrative Agent, the Syndication Agent, the Co-Documentation Agents, the Lenders, and the Lead Arrangers and Bookrunners (filed on February 7, 2019 as Exhibit 10.1 to the Current Report on Form 8-K (Commission File No. 001-31446) and incorporated herein by reference). +10. 2 7 +Voting Agreement, dated as of November 18, 2018, by and among Cimarex Energy Co. and Monarch Alternative Capital LP, MDRA GP LP and Monarch GP LLC (filed as Exhibit 10.1 to Registrant’s Form 8-K (Commission File No. 001-31446) dated November 20, 2018 and incorporated herein by reference). +10. 2 8 +Voting Agreement, dated as of November 18, 2018, by and among Cimarex Energy Co., John C. Goff and certain other related entities thereto (filed as Exhibit 10.2 to Registrant’s Form 8-K (Commission File No. 001-31446) dated November 20, 2018 and incorporated herein by reference). +10. 2 9 +Voting Agreement, dated as of November 18, 2018, by and among Cimarex Energy Co. and RR Advisors, LLC (filed as Exhibit 10.3 to Registrant’s Form 8-K (Commission File No. 001-31446) dated November 20, 2018 and incorporated herein by reference). +10.3 0 +Voting Agreement, dated as of November 18, 2018, by and among Cimarex Energy Co. and Richard Betz (filed as Exhibit 10.4 to Registrant’s Form 8-K (Commission File No. 001-31446) dated November 20, 2018 and incorporated herein by reference). +10.3 1 +Voting Agreement, dated as of November 18, 2018, by and among Cimarex Energy Co. and Nicholas J. Sutton (filed as Exhibit 10.5 to Registrant’s Form 8-K (Commission File No. 001-31446) dated November 20, 2018 and incorporated herein by reference). +10.3 2 +Voting Agreement, dated as of November 18, 2018, by and among Cimarex Energy Co. and Theodore Gazulis (filed as Exhibit 10.6 to Registrant’s Form 8-K (Commission File No. 001-31446) dated November 20, 2018 and incorporated herein by reference). +10.3 3 +Amended and Restated Credit Agreement, dated February 5, 2019, among the Company, as borrower, JPMorgan Chase Bank, N.A., as administrative agent, Wells Fargo Bank, N.A., as syndication agent, the co-documentation agents party thereto, J.P. Morgan Chase Bank, N.A. and Wells Fargo Securities, LLC, as lead arrangers and bookrunners, and the lenders party thereto. (filed as Exhibit 10.1 to the Current Report on Form 8-K filed February 7, 2019 (Commission File No. 001-31446) and incorporated herein by reference). +10. 3 4 +Form of Notice of Grant of Restricted Stock (Director) and Award Agreement (filed on May 29, 2019 as Exhibit 10.2 to the Current Report on Form 8-K (Commission File No. 001-31446) and incorporated herein by reference). + +10. 3 5 +2019 Equity Incentive Plan (filed on May 30, 2019 as Exhibit 99.1 to the Registration Statement on Form S-8 (Commission File No. 001-31446) and incorporated herein by reference). + +10. 3 6 +Form of Notice of Grant of Restricted Stock and Award Agreement (filed on August 5, 2019 as Exhibit 10.4 to the Quarterly Report on Form 10-Q (Commission File No. 001-31446) and incorporated herein by reference). + +122 +Table of Contents +Exhibit Title +10. 3 7 +Form of Notice of Grant of Nonqualified Stock Option and Award Agreement (filed on August 5, 2019 as Exhibit 10.5 to the Quarterly Report on Form 10-Q (Commission File No. 001-31446) and incorporated herein by reference). + +10. 3 8 +Director Emeritus Agreement dated September 30, 2019 between Cimarex Energy Co. and Michael J. Sullivan (filed on September 23, 2019 as Exhibit 10.1 to the Current Report on Form 8-K (Commission File No. 001-31446) and incorporated herein by reference). + +10. 39 +Form of Severance Compensation Agreement (filed as Exhibit 10.1 to the Current Report on Form 8-K filed March 13, 2020 (Commission File No. 001-31446) and incorporated herein by reference) . + +10. 4 0 +Form of Notice of Grant of Performance Stock Units and Award Agreement (Performance Award) (filed as Exhibit 10.2 to the Current Report on Form 8-K filed March 13, 2020 (Commission File No. 001-31446) and incorporated herein by reference) . + +10. 4 1 +Form of Amendment to Severance Compensation Agreement (filed as Exhibit 10.2 to the Current Report on Form 8-K/A filed May 12, 2020 (Commission File No. 001-31446) and incorporated herein by reference) . + +10. 4 2 +First Amendment to Amended and Restated Credit Agreement, dated June 3, 2020, among the Company, as borrower, JPMorgan Chase Bank, N.A., as administrative agent, Wells Fargo Bank, N.A., as syndication agent, the co-documentation agents party thereto, J.P. Morgan Chase Bank, N.A. and Wells Fargo Securities, LLC, as lead arrangers and bookrunners, and the lenders party thereto. (filed as Exhibit 10.1 to the Current Report on Form 8-K/A filed June 4, 2020 (Commission File No. 001-31446) and incorporated herein by reference). +10. 4 3 +Succession Agreement dated July 1, 2020 between Cimarex Energy Co. and Joseph R. Albi (filed as Exhibit 10.1 to the Current Report on Form 8-K/A filed July 2, 2020 (Commission File No. 001-31446) and incorporated herein by reference) . + +10.44 +Form of Notice of Grant of Performance Stock Units and Award Agreement (Performance Award). + * +14.1 +Revised Code of Business Conduct and Ethics for Directors, Officers, and Employees dated August 30, 2016 (filed as Exhibit 14.1 and 14.2 to the Current Report on Form 8-K filed September 1, 2016 (Commission File No. 001-31446) and incorporated herein by reference). +21.1 +Significant subsidiaries of the Registrant. * +23.1 +Consent of KPMG LLP. * +23.2 +Consent of DeGolyer and MacNaughton. * +24.1 +Power of Attorney of directors of the Registrant. * +31.1 +Certification of Thomas E. Jorden, Chief Executive Officer of Cimarex Energy Co., pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. * +123 +Table of Contents +Exhibit Title +31.2 +Certification of G. Mark Burford, Chief Financial Officer of Cimarex Energy Co., pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. * +32.1 +Certification of Thomas E. Jorden, Chief Executive Officer of Cimarex Energy Co., pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. * +32.2 +Certification of G. Mark Burford, Chief Financial Officer of Cimarex Energy Co., pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. * +99.1 +Letter dated January 2 0 , 202 1 from DeGolyer and MacNaughton, independent petroleum engineering consulting firm, reporting the results of its audit of Cimarex reserves as of December 31, 20 20 of certain selected properties. * +101.INS XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. +101.SCH Inline XBRL Taxonomy Extension Schema Document. +101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document. +101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document. +101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document. +101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document. +104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) +ITEM 16. FORM 10-K SUMMARY +None. +124 +Table of Contents +SIGNATURE +Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. +Date: February 23, 2021 +CIMAREX ENERGY CO. +By: /s/ Thomas E. Jorden +Thomas E. Jorden +Chairman of the Board, Chief Executive Officer, and President +Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. +Signature Title Date +/s/ Thomas E. Jorden Chairman of the Board, Director, Chief Executive Officer, +Thomas E. Jorden and President (Principal Executive Officer) February 23, 2021 +/s/ G. Mark Burford Senior Vice President and Chief Financial Officer +G. Mark Burford (Principal Financial Officer) February 23, 2021 +/s/ Timothy A. Ficker Vice President, Controller, Chief Accounting Officer +Timothy A. Ficker (Principal Accounting Officer) February 23, 2021 +* +Attorney-in-Fact Director February 23, 2021 +Joseph R. Albi +* +Attorney-in-Fact Director February 23, 2021 +Paul N. Eckley +* +Attorney-in-Fact Director February 23, 2021 +Hans Helmerich +* +Attorney-in-Fact Director February 23, 2021 +Kathleen A. Hogenson +* +Attorney-in-Fact Director February 23, 2021 +Harold R. Logan, Jr. +* +Attorney-in-Fact Director February 23, 2021 +Floyd R. Price +* +Attorney-in-Fact Director February 23, 2021 +Monroe W. Robertson +* +Attorney-in-Fact Director February 23, 2021 +Lisa A. Stewart +* +Attorney-in-Fact Director February 23, 2021 +Frances M. Vallejo +*By: /s/ G. Mark Burford Senior Vice President and Chief Financial Officer +G. Mark Burford Attorney-in-Fact +(Principal Financial Officer) February 23, 2021 +125 \ No newline at end of file diff --git a/raw/filings/0001168054/2020/0001168054-21-000008/filing_metadata.csv b/raw/filings/0001168054/2020/0001168054-21-000008/filing_metadata.csv new file mode 100644 index 0000000000000000000000000000000000000000..a76b97ee95fd627f29291d6d7ed3831b41b0113c --- /dev/null +++ b/raw/filings/0001168054/2020/0001168054-21-000008/filing_metadata.csv @@ -0,0 +1,2 @@ +cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing +0001168054,XEC,CIMAREX ENERGY CO,10-K,2021-02-23,2020-12-31,2021-02-23T20:45:10.000Z,0001168054-21-000008,xec-20201231.htm,10-K,13890994,1,1,https://www.sec.gov/Archives/edgar/data/1168054/000116805421000008/xec-20201231.htm,https://www.sec.gov/Archives/edgar/data/1168054/000116805421000008/,2020,2020,1 diff --git a/raw/filings/0001168054/2020/0001168054-21-000008/item1.txt b/raw/filings/0001168054/2020/0001168054-21-000008/item1.txt new file mode 100644 index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391 diff --git a/raw/filings/0001168054/2020/0001168054-21-000008/item13.txt b/raw/filings/0001168054/2020/0001168054-21-000008/item13.txt new file mode 100644 index 0000000000000000000000000000000000000000..d8e3e5c164af9e5ee82ea30e93f12f64c3be24e0 --- /dev/null +++ b/raw/filings/0001168054/2020/0001168054-21-000008/item13.txt @@ -0,0 +1,2 @@ +ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE +Information required under this item is incorporated by reference from the Cimarex Energy Co. definitive Proxy Statement for the May 12, 2021 Annual Meeting of Shareholders. The Proxy Statement will be filed with the Securities and Exchange Commission no later than 120 days subsequent to December 31, 2020. \ No newline at end of file diff --git a/raw/filings/0001168054/2020/0001168054-21-000008/item9a.txt b/raw/filings/0001168054/2020/0001168054-21-000008/item9a.txt new file mode 100644 index 0000000000000000000000000000000000000000..9ad0390d7e91afbe68500723204d5914ad093b5d --- /dev/null +++ b/raw/filings/0001168054/2020/0001168054-21-000008/item9a.txt @@ -0,0 +1,34 @@ +ITEM 9A. CONTROLS AND PROCEDURES +EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES +Cimarex’s management, under the supervision and with the participation of the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), has evaluated the effectiveness of Cimarex’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange Act”)) as of December 31, 2020. Based on that evaluation, the CEO and CFO concluded that the disclosure controls and procedures are effective in providing reasonable assurance that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods required by the U.S. Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to management, including the CEO and CFO, to allow timely decisions regarding required disclosures. +MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING +Cimarex’s management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. The Company’s internal control over financial reporting also includes those policies and procedures that: +(1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets; +(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements for external purposes in accordance with generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of management and directors; and +(3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of assets that could have a material effect on the consolidated financial statements. +Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of the effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +As of December 31, 2020, Cimarex’s management assessed the effectiveness of internal control over financial reporting based on the criteria set forth in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on that assessment, management concluded that the internal control over financial reporting was effective as of December 31, 2020. +The Company’s independent registered public accounting firm, KPMG LLP, that audited the consolidated financial statements included in Item 8 of this Form 10-K has also audited the Company’s internal control over financial reporting as of December 31, 2020 and has issued an attestation report. KPMG LLP’s attestation report on the Company’s internal control over financial reporting is included later in this Item 9A of this Form 10-K. +111 +Table of Contents +CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING +There was no change in our internal control over financial reporting that occurred during our most recent fiscal quarter ended December 31, 2020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. +112 +Table of Contents +Report of Independent Registered Public Accounting Firm +To the Stockholders and Board of Directors +Cimarex Energy Co.: +Opinion on Internal Control Over Financial Reporting +We have audited Cimarex Energy Co. and subsidiaries’ (the Company) internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. +We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2020 and 2019, the related consolidated statements of operations and comprehensive income (loss), stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2020, and the related notes (collectively, the consolidated financial statements), and our report dated February 23, 2021 expressed an unqualified opinion on those consolidated financial statements. +Basis for Opinion +The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. +Definition and Limitations of Internal Control Over Financial Reporting +A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. +Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +/s/ KPMG LLP +Denver, Colorado +February 23, 2021 +113 +Table of Contents \ No newline at end of file diff --git a/raw/filings/0001168054/2020/0001168054-21-000008/rp_note.txt b/raw/filings/0001168054/2020/0001168054-21-000008/rp_note.txt new file mode 100644 index 0000000000000000000000000000000000000000..4f79d1a07a9b092db6242ecac306c1901133393c --- /dev/null +++ b/raw/filings/0001168054/2020/0001168054-21-000008/rp_note.txt @@ -0,0 +1,2 @@ +11. RELATED PARTY TRANSACTIONS +Helmerich & Payne, Inc. (“H&P”) provides contract drilling services to Cimarex. Cimarex incurred drilling costs of approximately $ 24.9 million, $ 72.8 million, and $ 80.1 million related to these services during the years ended December 31, 2020, 2019, and 2018, respectively. The amounts incurred in the years ended December 31, 2020 and 2019 are included in the short-term lease costs disclosed in Note 10. Hans Helmerich, a director of Cimarex, is Chairman of the Board of Directors of H&P. \ No newline at end of file diff --git a/raw/filings/0001168054/2020/0001168054-21-000008/rpt_disclosure.txt b/raw/filings/0001168054/2020/0001168054-21-000008/rpt_disclosure.txt new file mode 100644 index 0000000000000000000000000000000000000000..946df11dabbe53b03bef29222b90bd5bd3fc9110 --- /dev/null +++ b/raw/filings/0001168054/2020/0001168054-21-000008/rpt_disclosure.txt @@ -0,0 +1,38 @@ +Review of related party transactions +Independent Lead Director +Non-hedging and non-pledging policies +Diverse Board skills and experience +Clawback policy +Annual Board and committee self-evaluations +Management and Director stock ownership guidelines +Periodic consultant review of Board skills +No tax gross-ups +Annual equity grants to Directors +Proxy access +Annual Board education +Active shareholder engagement +Board refreshment efforts with five new directors since 2012 +Increased gender and ethnic diversity of Board +As +highlighted above, the Company is proposing declassifying the Board and provide that all directors be elected annually beginning with our 2024 annual meeting. This proposal is an outcome of our +shareholder engagement efforts, and demonstrates our commitment to enhancing our corporate governance policies. +In +addition, to support the Company's elevated focus on environmental and safety performance, our Board of Directors established a new Environmental, Health and Safety Committee. The committee has +oversight of the Company's approach to health, safety and environmental (HSE) policies and programs and key HSE risks, as well as overseeing our corporate disclosures. +Shareholder Engagement +Cimarex's relationships with its shareholders are an important part of our corporate governance profile, and we recognize the value of taking +their views into account. Engagement with shareholders helps us understand the larger context and the impact of our operations, learn about expectations for our performance, assess emerging issues +that may affect our business or other aspects of our operations, and shape corporate and governance policies. +At +the 2020 Annual Meeting of Shareholders, 96% of the votes cast were in favor of the advisory vote to approve executive compensation. In addition to the advisory vote, as part of our regular +shareholder +20 +2021 +Notice +of +Annual +Meeting +and +Proxy +Statement +Table of Contents \ No newline at end of file